<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 6, 1998
REGISTRATION NO. 333-51159
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
POST EFFECTIVE AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
CBT GROUP PUBLIC LIMITED COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
---------------
<TABLE>
<S> <C> <C>
REPUBLIC OF IRELAND 7372 NOT APPLICABLE
(STATE OF INCORPORATION) (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
1005 HAMILTON COURT
MENLO PARK, CALIFORNIA 94025
(650) 614-5900
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
JAMES J. BUCKLEY
PRESIDENT AND CHIEF EXECUTIVE OFFICER
CBT GROUP PLC
1005 HAMILTON COURT
MENLO PARK, CALIFORNIA 94025
(650) 614-5900
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
---------------
COPIES TO:
<TABLE>
<S> <C>
Alan K. Austin Jeffrey L. Wade
Steven V. Bernard Andrews & Kurth L.L.P.
James C. Creigh 2170 Buckthorne Place
Wilson Sonsini Goodrich & Rosati Suite 150
Professional Corporation The Woodlands, Texas 77380
650 Page Mill Road (713) 220-4801
Palo Alto, California 94304
(650) 493-9300
</TABLE>
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
Upon Consummation of the Merger described herein.
---------------
If the only securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
EXPLANATORY NOTE
This Post Effective Amendment No. 2 contains no exhibits and is being filed
solely to restate the Proxy Statement/Prospectus originally filed on April 28,
1998, as amended by Post Effective Amendment No. 1, filed on July 2, 1998.
On May 29, 1998, the merger of Merger Sub with and into ForeFront was
consummated. Pursuant to the Merger, each issued and outstanding share of
ForeFront Common Stock was converted into the right to receive 0.3137 CBT ADSs
and each option, warrant and other right to acquire ForeFront Common Stock was
assumed by CBT and became an equivalent right with respect to CBT ADSs, on the
same terms as the original option warrant or right, adjusted to reflect the
Exchange Ratio.
CBT elected not to incorporate information by reference into the
Registration Statement. CBT is eligible to file on Form S-3 and to incorporate
information by reference on a prospective basis. This Post Effective Amendment
No. 2 is being filed to add prospective incorporation by reference so that the
Registration Statement will remain current for the issuance of Ordinary Shares
represented by CBT ADSs that may be issued in the future upon exercise of
options, warrants and other rights that CBT assumed in connection with the
Merger. Capitalized terms used and not defined in this Explanatory Note have
the meaning set forth in the Proxy Statement/Prospectus included in this
Registration Statement.
1. The Proxy Statement/Prospectus is hereby restated as follows:
<PAGE>
"THE FOREFRONT GROUP, INC.
1360 POST OAK BOULEVARD
SUITE 2050
HOUSTON, TEXAS 77056
MAY 1, 1998
Dear Stockholder:
The ForeFront Group, Inc. ("ForeFront") has entered into an Agreement and
Plan of Reorganization (the "Reorganization Agreement") with CBT Group PLC
("CBT") and a wholly-owned subsidiary of CBT, providing for the acquisition of
ForeFront by CBT. Pursuant to the Reorganization Agreement, a special meeting
of stockholders (the "Special Meeting") of ForeFront will be held at The Four
Oaks Place Tenant Conference Room, 1300 Post Oak Boulevard, Houston Texas on
May 28, 1998 at 9:00 a.m. local time.
At the Special Meeting, you will be asked to consider and vote upon a
proposal to approve and adopt the Reorganization Agreement, which provides for
the merger of ForeFront with a wholly owned subsidiary of CBT (the "Merger").
Upon consummation of the Merger, ForeFront will become a wholly owned
subsidiary of CBT and each outstanding share of ForeFront's common stock will
be converted into 0.3137 American Depositary Shares of CBT (the "Exchange
Ratio"). The Merger is described more fully in the accompanying Proxy
Statement/Prospectus.
After careful consideration, the ForeFront Board of Directors has
unanimously approved the Reorganization Agreement. In addition, the Board has
received an opinion from Piper Jaffray Inc. (a copy of which is included in
the accompanying Proxy Statement/Prospectus) that the Exchange Ratio is fair,
from a financial point of view, to ForeFront's stockholders. YOUR BOARD OF
DIRECTORS BELIEVES THAT THE PROPOSED MERGER AND THE TRANSACTIONS CONTEMPLATED
THEREBY ARE IN THE BEST INTERESTS OF FOREFRONT AND ITS STOCKHOLDERS, AND
UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" THE MERGER.
In the materials accompanying this letter you will find a Notice of Special
Meeting of Stockholders, a Proxy Statement/Prospectus relating to the proposal
to be voted upon at the Special Meeting and a Proxy Card. Stockholders are
urged to review carefully the information contained in the accompanying Proxy
Statement/Prospectus, in particular the information under the captions "Risk
Factors," "The Special Meeting--Recommendations of ForeFront Board of
Directors," "Approval of the Merger and Related Transactions--ForeFront's
Reasons for the Merger" and "--Material Contacts and Board Deliberations"
prior to voting on the proposal.
All stockholders are cordially invited to attend the Special Meeting in
person. If you attend the Special Meeting, you may vote in person if you wish
even though you have previously returned your completed proxy card. Whether or
not you plan to attend the Special Meeting, it is important that your shares
be represented and voted at the Special Meeting, regardless of the number of
shares you hold. Approval of the Merger requires the affirmative vote of the
holders of a majority of the outstanding shares of ForeFront's common stock.
Therefore, please complete, sign and date, and return your completed proxy
card in the enclosed envelope. Please do not send in the stock certificate(s)
for your ForeFront common stock at this time.
On behalf of the Board, I thank you for your support and ask you to vote in
favor of the Merger.
Sincerely,
David Sikora
President and Chief Executive
Officer
YOUR PROXY IS IMPORTANT -- PLEASE VOTE PROMPTLY
<PAGE>
THE FOREFRONT GROUP, INC.
1360 POST OAK BOULEVARD
SUITE 2050
HOUSTON, TEXAS 77056
----------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 28, 1998
----------------
TO THE STOCKHOLDERS OF THE FOREFRONT GROUP, INC.:
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders (the "Special
Meeting") of The ForeFront Group, Inc., a Delaware corporation ("ForeFront"),
will be held on May 28, 1998 at 9:00 a.m., local time, at The Four Oaks Place
Tenant Conference Room, 1300 Post Oak Boulevard, Houston, Texas:
1. To approve and adopt the Agreement and Plan of Reorganization (the
"Reorganization Agreement"), dated as of March 16, 1998, among ForeFront,
CBT Group PLC, a public limited company organized under the laws of the
Republic of Ireland ("CBT"), and Rockets Acquisition Corp., a Delaware
corporation and wholly-owned subsidiary of CBT ("Merger Sub"), and approve
the merger of Merger Sub with and into ForeFront pursuant to which
ForeFront will become a wholly-owned subsidiary of CBT and each outstanding
share of ForeFront common stock will be converted into 0.3137 American
Depositary Shares of CBT.
2. To transact such other business as may properly come before the
Special Meeting or any adjournments or postponements thereof.
Information relating to the above proposal is set forth in the attached
Proxy Statement/Prospectus. Stockholders of record at the close of business on
April 20, 1998 are entitled to notice of, and to vote at, the Special Meeting
and any adjournments or postponements thereof. Approval and adoption of the
Reorganization Agreement and approval of the Merger requires the affirmative
vote of the holders of a majority of the shares of ForeFront's common stock
outstanding on the record date. All stockholders are cordially invited to
attend the Special Meeting in person.
By order of the Board of Directors,
Jeffrey R. Harder
Secretary
Houston, Texas
May 1, 1998
WHETHER OR NOT YOU EXPECT TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE,
DATE AND SIGN THE ENCLOSED PROXY CARD AND MAIL IT PROMPTLY IN THE ENCLOSED
ENVELOPE IN ORDER TO ASSURE REPRESENTATION OF YOUR SHARES. NO POSTAGE IS
NECESSARY IF THE PROXY CARD IS MAILED IN THE UNITED STATES.
<PAGE>
[LOGO OF FOREFRONT] [LOGO OF CBT SYSTEMS (TM)]
THE FOREFRONT GROUP, INC.
PROXY STATEMENT
--------------
CBT GROUP PLC
PROSPECTUS
--------------
CBT Group PLC, a public limited company organized under the laws of the
Republic of Ireland ("CBT"), The ForeFront Group, Inc., a Delaware corporation
("ForeFront"), and Rockets Acquisition Corp., a Delaware corporation and
wholly-owned subsidiary of CBT ("Merger Sub"), have entered into an Agreement
and Plan of Reorganization, dated as of March 16, 1998 (the "Reorganization
Agreement"). In accordance with the Reorganization Agreement, Merger Sub will
merge into ForeFront, ForeFront will become a wholly-owned subsidiary of CBT
and all outstanding shares of common stock of ForeFront, par value $0.01 per
share ("ForeFront Common Stock"), will be converted into American Depositary
Shares of CBT ("CBT ADSs") (all such actions being referred to herein
collectively as the "Merger"). A conformed copy of the Reorganization
Agreement is attached as Annex A to this Proxy Statement/Prospectus and is
incorporated herein by reference.
Upon consummation of the Merger (i) each issued and outstanding share of
ForeFront Common Stock (other than shares owned by CBT, ForeFront, Merger Sub
or any direct or indirect wholly-owned subsidiary of CBT or ForeFront) will be
converted into 0.3137 CBT ADSs (the "Exchange Ratio") and each outstanding
option, warrant or other right to acquire ForeFront Common Stock will be
assumed by CBT and will become an equivalent right with respect to CBT ADSs,
on the same terms as the original option, warrant or right, adjusted to
reflect the Exchange Ratio; and (ii) all shares of ForeFront Common Stock will
cease to be outstanding and will be canceled and retired and will cease to
exist, and each holder of a certificate formerly representing shares of
ForeFront Common Stock will thereafter cease to have any rights with respect
thereto, except the right to receive CBT ADSs.
This Proxy Statement/Prospectus is being furnished to stockholders of
ForeFront in connection with the solicitation of proxies by the ForeFront
Board of Directors (the "ForeFront Board") for use at the special meeting of
ForeFront stockholders to be held on May 28, 1998, at The Four Oaks Place
Tenant Conference Room, 1300 Post Oak Boulevard, Houston, Texas commencing at
9:00 a.m., local time, and at any adjournment or postponement thereof (the
"Special Meeting").
CBT ADSs are quoted on the Nasdaq National Market ("Nasdaq") under the
symbol "CBTSY." It is a condition of the obligations of CBT and ForeFront to
consummate the Merger that the CBT ADSs to be issued in the Merger be approved
for listing on Nasdaq. Following consummation of the Merger, ForeFront Common
Stock will be removed from registration under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and will no longer be quoted on Nasdaq.
On March 16, 1998, the last full trading day prior to the public
announcement of the execution and delivery of the Reorganization Agreement,
the closing sale prices of CBT ADSs and ForeFront Common Stock on Nasdaq were
$50.00 per share and $13.38 per share, respectively. On April 24, 1998, the
closing sale prices of CBT ADSs and ForeFront Common Stock were $50.63 per
share and $15.56 per share, respectively.
Because the Exchange Ratio is fixed, changes in the market price of CBT ADSs
will affect the dollar value of CBT ADSs to be received by stockholders of
ForeFront in the Merger. ForeFront stockholders are encouraged to obtain
current market quotations for CBT ADSs and ForeFront Common Stock prior to the
Special Meeting.
This Proxy Statement/Prospectus constitutes the Prospectus of CBT with
respect to up to 641,405 Ordinary Shares of CBT (the "Ordinary Shares") that
are represented by the CBT ADSs to be issued in the Merger in exchange for
outstanding shares of ForeFront Common Stock. See "Description of CBT Capital
Stock."
--------------
THE SECURITIES TO BE ISSUED PURSUANT TO THIS PROXY STATEMENT/PROSPECTUS HAVE
NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE
COMMISSION (THE "SEC") OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SEC OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
--------------
THE ABOVE MATTERS ARE DISCUSSED IN DETAIL IN THIS PROXY STATEMENT/PROSPECTUS.
THE PROPOSED MERGER IS A COMPLEX TRANSACTION. FOREFRONT STOCKHOLDERS ARE URGED
TO READ AND CONSIDER CAREFULLY THIS PROXY STATEMENT/PROSPECTUS IN ITS ENTIRETY,
INCLUDING THE MATTERS REFERRED TO BEGINNING ON PAGE 12 UNDER "RISK FACTORS."
--------------
This Proxy Statement/Prospectus and the accompanying proxy card are first
being mailed to stockholders of ForeFront on or about May 1, 1998.
The date of this Proxy Statement/Prospectus is April 27, 1998.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ENFORCEMENT OF CIVIL LIABILITIES UNDER UNITED STATES FEDERAL SECURITIES
LAWS.................................................................... 1
AVAILABLE INFORMATION.................................................... 1
SUMMARY.................................................................. 2
The Companies.......................................................... 2
The Special Meeting.................................................... 3
Risk Factors........................................................... 4
Fairness Opinion....................................................... 4
Interests of Certain Persons in the Merger............................. 4
Federal Income Tax Treatment........................................... 4
Regulatory Matters..................................................... 4
Accounting Treatment................................................... 4
No Appraisal Rights.................................................... 5
The Merger............................................................. 5
Comparative Market Price Data.......................................... 8
Comparative Per Share Data............................................. 9
Selected Historical Financial Data..................................... 10
Selected Unaudited Pro Forma Financial Information..................... 11
RISK FACTORS............................................................. 12
Risks Related to the Merger............................................ 12
Risks Related to CBT's Business........................................ 13
Risks Related to ForeFront's Business.................................. 17
SPECIAL MEETING.......................................................... 21
Date, Time and Place of Special Meeting................................ 21
Purpose................................................................ 21
Record Date and Outstanding Shares..................................... 21
Vote Required.......................................................... 21
Voting of Proxies...................................................... 21
Solicitation of Proxies; Expenses...................................... 22
Recommendation of ForeFront Board of Directors......................... 22
INDUSTRY BACKGROUND...................................................... 23
BUSINESS OF CBT.......................................................... 24
General................................................................ 24
Recent Developments.................................................... 25
The CBT Solution....................................................... 25
CBT's Strategy......................................................... 26
CBT Products........................................................... 27
Research and Development............................................... 29
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Development and Marketing Alliances.................................... 30
Customers.............................................................. 30
Backlog................................................................ 30
Intellectual Property and Licenses..................................... 31
Competition............................................................ 31
Sales, Marketing and Customer Support.................................. 32
Employees.............................................................. 32
Foreign Operations..................................................... 32
Properties............................................................. 33
Legal Proceedings...................................................... 33
SELECTED CONSOLIDATED FINANCIAL DATA OF CBT.............................. 34
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OF CBT.................................................... 35
Overview............................................................... 35
Recent Developments.................................................... 35
Results of Operations.................................................. 36
Liquidity and Capital Resources........................................ 40
DIRECTORS AND EXECUTIVE OFFICERS OF CBT.................................. 41
Executive Compensation................................................. 43
Meetings of the CBT Board and Committees............................... 45
Compensation of Directors.............................................. 46
Employment Contracts and Arrangements.................................. 46
Certain Relationships and Related Transactions......................... 46
BUSINESS OF FOREFRONT.................................................... 48
Overview............................................................... 48
The ForeFront Solution................................................. 48
ForeFront's Growth Strategy............................................ 49
Products............................................................... 50
Product Development.................................................... 51
Development and Marketing Alliances.................................... 52
Customers.............................................................. 52
Sales, Marketing and Customer Support.................................. 52
Competition............................................................ 53
Intellectual Property and Licenses..................................... 53
Employees.............................................................. 54
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Properties............................................................. 54
Legal Proceedings...................................................... 54
SELECTED CONSOLIDATED FINANCIAL DATA OF FOREFRONT........................ 55
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OF FOREFRONT.............................................. 56
Overview............................................................... 56
Results of Operations.................................................. 57
Liquidity and Capital Resources........................................ 60
New Accounting Pronouncements.......................................... 61
SECURITY OWNERSHIP OF MANAGEMENT AND PRINCIPAL STOCKHOLDERS OF
FOREFRONT............................................................... 62
COMPARATIVE MARKET PRICE DATA............................................ 64
APPROVAL OF THE MERGER AND RELATED TRANSACTIONS.......................... 66
CBT's Reasons for the Merger........................................... 66
ForeFront's Reasons for the Merger..................................... 66
Background of the Merger............................................... 67
Opinion of ForeFront Financial Advisor................................. 68
Interests of Certain Persons in the Merger............................. 73
Governmental and Regulatory Matters.................................... 75
Accounting Treatment................................................... 75
No Appraisal Rights.................................................... 76
TERMS OF THE MERGER...................................................... 77
Effective Time......................................................... 77
Manner and Basis for Converting Shares................................. 77
Treatment of Employee Equity Benefit Plans............................. 78
Stock Ownership Following the Merger................................... 78
Effect of the Merger................................................... 78
Representations and Warranties......................................... 78
Conduct of ForeFront's Business Prior to the Merger.................... 79
Conduct of CBT's Business Prior to the Merger.......................... 80
Control of Each Party's Operations..................................... 80
No Solicitation........................................................ 80
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Conditions to the Merger................................................ 82
Termination of the Reorganization Agreement............................. 83
Effect of Termination................................................... 83
Break-Up Fees........................................................... 84
Indemnification and Insurance........................................... 84
Affiliate Agreements.................................................... 85
CERTAIN TAX CONSEQUENCES.................................................. 86
General................................................................. 86
United States Federal Income Tax Consequences of the Merger............. 86
Taxation of CBT......................................................... 88
Taxation of ADS Holders................................................. 88
DESCRIPTION OF CBT CAPITAL STOCK.......................................... 92
Ordinary Shares......................................................... 92
American Depositary Shares.............................................. 92
DESCRIPTION OF FOREFRONT CAPITAL STOCK.................................... 100
Common Stock............................................................ 100
Preferred Stock......................................................... 100
Outstanding Options, Warrants and Other Rights to Acquire ForeFront
Common Stock........................................................... 100
Transfer Agent and Registrar............................................ 100
Delaware Business Combination Statute................................... 100
COMPARISON OF STOCKHOLDER RIGHTS.......................................... 101
LEGAL MATTERS............................................................. 110
EXPERTS................................................................... 110
UNAUDITED PRO FORMA FINANCIAL INFORMATION................................. 111
CBT: INDEX TO FINANCIAL STATEMENTS........................................ F-1
FOREFRONT: INDEX TO FINANCIAL STATEMENTS.................................. F-25
</TABLE>
<TABLE>
<C> <S>
Annex A Agreement and Plan of Reorganization, dated as of March 16, 1998,
among CBT, ForeFront and Merger Sub
Annex B Fairness Opinion of Piper Jaffray Inc.
</TABLE>
<PAGE>
ENFORCEMENT OF CIVIL LIABILITIES
UNDER UNITED STATES FEDERAL SECURITIES LAWS
CBT is a public limited company incorporated under the laws of the Republic
of Ireland. Certain of CBT's directors and officers and experts named herein
are non-residents of the United States, and a significant portion of the
assets of CBT and such persons are located outside the United States. As a
result, it may not be possible for investors to effect service of process
within the United States upon such persons or to enforce against them in
United States courts judgments predicated upon the civil liability provisions
of the laws of the United States, including the Federal securities laws. CBT
has been advised that there is doubt as to the enforceability against such
persons in the Republic of Ireland, whether in original actions or in actions
for the enforcement of judgments in United States courts, of civil liabilities
predicated solely upon the laws of the United States, including the Federal
securities laws.
AVAILABLE INFORMATION
CBT and ForeFront are subject to the information reporting requirements of
the Exchange Act, and in accordance therewith file reports, proxy statements
and other information with the SEC. Such reports, proxy statements and other
information may be inspected and copied at the public reference facilities
maintained by the SEC at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the SEC's regional offices located at Seven
World Trade Center, Suite 1300, New York, New York 10048, and at Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511.
Copies of such material may be obtained by mail from the Public Reference
Section of the SEC at Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, at prescribed rates. The SEC also maintains a Web site that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the SEC at the address
http://www.sec.gov. CBT ADSs and ForeFront Common Stock are quoted on Nasdaq,
and such reports, proxy statements and other information can also be inspected
at the offices of the National Association of Securities Dealers, Inc. at 1735
K Street, N.W., Washington, DC 20006.
CBT has filed with the SEC a registration statement on Form S-4 (herein
referred to, together with all amendments and exhibits, as the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities
Act"). This Proxy Statement/Prospectus does not contain all of the information
set forth in the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the SEC. For further information,
reference is hereby made to the Registration Statement. Copies of the
Registration Statement and the exhibits and schedules are available as
described above.
This Proxy Statement/Prospectus contains trademarks of CBT and ForeFront and
may contain trademarks of others.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents filed by CBT with the SEC pursuant to the Exchange
Act are incorporated herein by reference:
(a) The Company's Annual Report on Form 10-K for the year ended December
31, 1997;
(b) The Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998;
(c) The Company's Current Report on Form 8-K dated June 12, 1998; and
(d) The description of the Ordinary Shares contained in the Company's
Registration Statement on Form 8-A filed on March 9, 1995 and Amendment No. 1
thereto on Form 8-A/A filed on April 10, 1995.
All documents filed by CBT pursuant to Sections 13(a), 13(c) 14 and 15(d) of
the Exchange Act after the date of the Registration Statement and prior to the
filing of a post-effective amendment which indicates that all securities
offered hereby have been sold or which deregisters all such securities then
remaining unsold shall be deemed to be incorporated by reference in the
Registration Statement and to be a part hereof from the date of filing such
documents. Statements contained in the foregoing documents incorporated by
reference shall be deemed to be modified or superseded hereby to the extent
that statements contained in this Proxy Statement/Prospectus, or in any
subsequently filed documents that are amendments hereto or that are
incorporated herein by reference, shall modify or replace such statements.
CBT will furnish without charge to each person, including any beneficial
owner, to whom this Proxy Statement/Prospectus is delivered, upon the request
of such person, a copy of any of the documents incorporated by reference
herein, except for the exhibits to such documents (unless such exhibits are
specifically incorporated by reference into such documents). Requests for such
copies, or requests for additional information regarding CBT should be
directed to CBT at 1005 Hamilton Court, Menlo Park, CA 94025; attn: General
Counsel. The telephone number at such location is (650) 614-5900.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS
IN CONNECTION WITH THE SOLICITATION OF PROXIES OR THE OFFERING OF SECURITIES
MADE HEREBY, AND, IF GIVEN, ANY SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY CBT, FOREFRONT OR ANY OTHER PERSON.
THIS PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OR THE SOLICITATION OF A PROXY,
IN ANY JURISDICTION TO OR FROM ANY PERSON WHOM IT IS NOT LAWFUL TO MAKE ANY
SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS
PROXY STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION OF SECURITIES HEREUNDER SHALL
CREATE UNDER ANY CIRCUMSTANCES ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE
IN THE AFFAIRS OF CBT OR FOREFRONT SINCE THE DATE HEREOF, OR THAT INFORMATION
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
1
<PAGE>
SUMMARY
Other than statements of historical fact, statements made in this Proxy
Statement/Prospectus, including statements as to the benefits expected to
result from the Merger and as to future financial performance and the analyses
performed by the financial advisor to ForeFront, are forward-looking statements
within the meaning of Section 27A of the Securities Act and Section 21E of the
Exchange Act. Actual results could differ materially from those anticipated in
such forward-looking statements as a result of certain factors, including those
set forth in "Risk Factors" below, which ForeFront stockholders should
carefully review.
The following contains a summary of certain information contained elsewhere
in this Proxy Statement/Prospectus. This summary does not contain a complete
statement of all material elements of the proposal to be voted on and is
qualified in its entirety by the more detailed information appearing elsewhere
in this Proxy Statement/Prospectus and in the information and documents annexed
hereto.
THE COMPANIES
CBT
CBT is a leading provider of interactive software designed to meet the
information technology ("IT") education and training needs of businesses and
organizations worldwide. CBT develops, publishes and markets a comprehensive
library of 558 software titles at the end of 1997 covering a range of
client/server, mainframe, Internet and intranet technologies. CBT's products
are used by 1,576 of the world's leading corporations to train employees to
develop and apply mission-critical technologies in the workplace. CBT works
with leading software companies, including Cisco Systems, Inc. ("Cisco"),
Informix Corporation ("Informix"), Lotus Development Corporation ("Lotus"),
Marimba, Inc. ("Marimba"), Microsoft Corporation ("Microsoft"), Netscape
Communications Corporation ("Netscape"), Novell, Inc. ("Novell"), Oracle
Corporation ("Oracle"), SAP America, Inc. ("SAP"), Sybase, Inc. ("Sybase") and
the IBM-Netscape-Sun Microsystems, Inc. collaborative Java education effort to
develop and market vendor-specific training. CBT has also formed the Internet
Security Training Consortium with Check Point Software Technologies, Inc.
("Check Point"), Cisco, IBM, Intel Corporation, the Javasoft business unit of
Sun Microsystems, Inc., Lotus, Netscape, Network Associates, Inc. (formerly
McAfee Associates, Inc.) ("Network Associates"), RSA Data Security, Inc.
("RSA"), Security Dynamics Technologies, Inc. ("Security Dynamics") and
VeriSign, Inc. ("Verisign"), to address the Internet security training needs of
enterprises worldwide.
CBT's registered office is located at Beech Hill, Clonskeagh, Dublin 4,
Ireland, and its telephone number at that address from the United States is
(011) 353-1-283-0077. The address of CBT's United States subsidiary, CBT
Systems USA, Ltd., is 1005 Hamilton Court, Menlo Park, California 94025 and its
telephone number at that address is (650) 614-5900.
ForeFront
ForeFront is a leading provider of interactive software designed to meet the
IT education and training needs of network professionals, personal computer
("PC") technicians, Web masters/managers and other IT professionals. ForeFront
develops and markets high-quality, cost-effective computer-based training
products on CD-ROMs, which enable IT professionals to conveniently prepare for
technical certification exams. Each of ForeFront's products is designed to
provide comprehensive training in the subject matter necessary to obtain
technical certifications. In addition to computer-based training 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. ForeFront also
develops and markets off-line browsing and metasearching products for use on
the Internet.
ForeFront sells its computer-based training products through telesales
primarily to individual IT professionals as career advancement tools. ForeFront
believes that its highly-refined prospecting and 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
2
<PAGE>
full-time telesales representatives. ForeFront 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. ForeFront has sold its
computer-based training and PC/Network products to more than 60,000 customers
and has generated over 600,000 customer prospects from its marketing efforts to
date.
ForeFront's executive offices are located at 1360 Post Oak Boulevard, Suite
2050, Houston, Texas 77056, and its telephone number is (713) 961-1101.
Merger Sub
Merger Sub is a corporation recently organized by CBT for the purpose of
effecting the Merger. It has no material assets and has not engaged in any
activities except in connection with the Merger. Merger Sub's executive offices
are located at 1005 Hamilton Court, Menlo Park, California 94025, and its
telephone number is (650) 614-5900.
THE SPECIAL MEETING
Time, Date, Place and Purpose
The Special Meeting will be held at The Four Oaks Place Tenant Conference
Room, 1300 Post Oak Boulevard, Houston, Texas, on May 28, 1998 at 9:00 a.m.,
local time. The purpose of the Special Meeting is to allow ForeFront
stockholders to consider and vote upon a proposal to approve and adopt the
Reorganization Agreement and approve the Merger. ForeFront stockholders will
also consider and vote upon any other matters that may properly come before the
Special Meeting. See "Special Meeting--Date, Time and Place of Special Meeting"
and "--Purpose."
Record Date and Vote Required
Only ForeFront stockholders of record at the close of business on April 20,
1998 (the "Record Date") are entitled to notice of and to vote at the Special
Meeting. Pursuant to the Delaware General Corporation Law ("DGCL") and the
ForeFront Certificate of Incorporation (the "ForeFront Certificate"), the
affirmative vote of the holders of a majority of ForeFront Common Stock
outstanding as of the Record Date is required to approve and adopt the
Reorganization Agreement and to approve the Merger. Certain directors and
executive officers of ForeFront and their affiliates (who, as of the Record
Date, beneficially owned approximately 23% of the outstanding shares of
ForeFront Common Stock), have entered into agreements with CBT that obligate
them to vote all shares of ForeFront Common Stock they hold in favor of the
proposal to approve and adopt the Reorganization Agreement and approve the
Merger.
As of the Record Date, there were approximately 258 stockholders of record of
ForeFront Common Stock and 6,876,609 shares of ForeFront Common Stock
outstanding, with each share entitled to one vote on the matter to be acted
upon at the Special Meeting. See "Special Meeting--Vote Required."
Recommendation of ForeFront Board of Directors.
The ForeFront Board has unanimously approved the Reorganization Agreement and
the transactions contemplated thereby and has determined that the Merger is
fair to and in the best interests of ForeFront and its stockholders. AFTER
CAREFUL CONSIDERATION, THE FOREFRONT BOARD UNANIMOUSLY RECOMMENDS THAT
FOREFRONT STOCKHOLDERS VOTE "FOR" THE PROPOSAL TO APPROVE AND ADOPT THE
REORGANIZATION AGREEMENT AND APPROVE THE MERGER. Stockholders should read this
Proxy Statement/Prospectus carefully prior to voting. See "Special Meeting--
Recommendation of ForeFront Board of Directors," "Approval of the Merger and
Related Transactions--ForeFront's Reasons For the Merger," and "--Material
Contacts and Board Deliberations."
3
<PAGE>
RISK FACTORS
See "Risk Factors" for a discussion of certain risks pertaining to the Merger
and the businesses of CBT and ForeFront.
FAIRNESS OPINION
Piper Jaffray Inc. ("Piper Jaffray") has delivered to the ForeFront Board its
written opinion, dated March 13, 1998, to the effect that, as of such date, the
Exchange Ratio (as defined below) was fair from a financial point of view to
the holders of ForeFront Common Stock. The full text of the opinion of Piper
Jaffray, which sets forth assumptions made and matters considered, is attached
as Annex B to this Proxy Statement/Prospectus and is incorporated herein by
reference. Holders of ForeFront Common Stock are urged to, and should, read
such opinion in its entirety. See "Approval of the Merger and Related
Transactions--Opinion of ForeFront Financial Advisor" and Annex B hereto.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the ForeFront Board with respect to the
Reorganization Agreement, ForeFront stockholders should be aware that certain
executive officers of ForeFront have interests in the Merger that are in
addition to the interests of holders of ForeFront Common Stock generally. In
particular, David Sikora, the President and Chief Executive Officer of
ForeFront, will be paid a change of control payment upon consummation of the
Merger and may be paid additional amounts if he is terminated without cause
following the Merger. In addition, certain stock options will vest upon
consummation of the Merger. See "Approval of the Merger and Related
Transactions--Interests of Certain Persons in the Merger."
FEDERAL INCOME TAX TREATMENT
The Merger is intended to qualify as a reorganization under Section 368(a) of
the Internal Revenue Code of 1986, as amended (the "Code"), in which case no
gain or loss generally will be recognized by the holders of ForeFront Common
Stock on the exchange of their shares of ForeFront Common Stock solely for CBT
ADSs. As a condition to the consummation of the Merger, CBT and ForeFront will
have received opinions from their respective tax counsel that the Merger will
constitute a reorganization under Section 368(a) of the Code. However, all
ForeFront stockholders are urged to consult their own tax advisors. See
"Certain Tax Consequences," and "Terms of the Merger--Conditions to the
Merger."
REGULATORY MATTERS
Consummation of the Merger is subject to compliance with the Hart-Scott-
Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"). The
notifications required under the HSR Act have been furnished to the Federal
Trade Commission (the "FTC") and the Antitrust Division of the Department of
Justice (the "Antitrust Division") and the parties have received early
termination of the specified waiting period under the HSR Act for the Merger.
The Merger also must satisfy the requirements of the federal and certain state
and Canadian securities laws. See "Approval of the Merger and Related
Transactions--Governmental and Regulatory Matters."
ACCOUNTING TREATMENT
The Merger is intended to qualify as a "pooling-of-interests" for financial
reporting purposes in accordance with generally accepted accounting principles.
Consummation of the Merger is conditioned upon (i) receipt by CBT of a letter
from its independent auditors dated as of a date within two business days of
the closing of the Merger (the "Closing Date") to the effect that such
accountants concur with the conclusion of CBT management
4
<PAGE>
that pooling-of-interests accounting for the Merger is appropriate and (ii)
receipt by ForeFront of a letter from its independent auditors dated as of a
date within two business days of the Closing Date to the effect that such
auditors concur with conclusion of ForeFront management that no conditions
exist relating to ForeFront that would preclude CBT from accounting for the
Merger as a pooling-of-interests. See "Approval of the Merger and Related
Transactions--Accounting Treatment" and "Terms of the Merger--Conditions to the
Merger."
NO APPRAISAL RIGHTS
ForeFront stockholders are not entitled to appraisal rights in connection
with the Merger under the DGCL.
THE MERGER
Terms of the Merger; Exchange Ratio
At the Effective Time (as defined below), Merger Sub will merge with and into
ForeFront and ForeFront will become a wholly-owned subsidiary of CBT. Once the
Merger is consummated, Merger Sub will cease to exist as a corporation and
ForeFront will remain as a wholly-owned subsidiary of CBT (the "Surviving
Corporation"). As a result of the Merger, each outstanding share of ForeFront
Common Stock, other than shares owned by ForeFront, CBT, Merger Sub or any
direct or indirect wholly-owned subsidiary of CBT or ForeFront, will be
converted into 0.3137 CBT ADSs, and each outstanding option or other right with
respect to ForeFront Common Stock under various stock option plans, each
outstanding warrant to purchase ForeFront Common Stock, and each outstanding
exchangeable share that is exchangeable for shares of ForeFront Common Stock
will be assumed by CBT and will become an equivalent option or right with
respect to CBT ADSs, as adjusted to reflect the Exchange Ratio.
On March 16, 1998, the last full trading day prior to the public announcement
of the execution and delivery of the Reorganization Agreement, the closing
prices per CBT ADS and per share of ForeFront Common Stock on Nasdaq were
$50.00 and $13.38, respectively. On April 24, 1998, the closing prices per CBT
ADS and per share of ForeFront Common Stock on Nasdaq were $50.63 and $15.56,
respectively. See "Comparative Market Price Data." Because the Exchange Ratio
is fixed, changes in the market price of CBT ADSs will affect the value of the
CBT ADSs to be received by stockholders of ForeFront in the Merger. ForeFront
stockholders are encouraged to obtain current market quotations for CBT ADSs
and ForeFront Common Stock prior to the Special Meeting.
Effective Time of the Merger
The Merger will become effective upon the filing of a Certificate of Merger
(the "Certificate of Merger") with the Delaware Secretary of State or at such
later time as may be agreed in writing by CBT, ForeFront and Merger Sub and
specified in the Certificate of Merger (the "Effective Time"). Assuming all
conditions to the Merger are met or waived prior thereto, it is currently
anticipated that the closing date of the Merger (the "Closing Date") and
Effective Time will be on May 29, 1998. See "Terms of the Merger--Effective
Time."
Exchange of ForeFront Stock Certificates
Promptly after the Effective Time, CBT, acting through The Bank of New York
as its exchange agent (the "Exchange Agent"), will deliver to each ForeFront
stockholder of record as of the Effective Date by United States mail at its
address of record a letter of transmittal with instructions to be used by such
stockholder in surrendering certificates that, prior to the Merger, represented
shares of ForeFront Common Stock. CERTIFICATES SHOULD NOT BE SURRENDERED BY
FOREFRONT STOCKHOLDERS UNTIL THEY RECEIVE THE LETTER OF TRANSMITTAL FROM THE
EXCHANGE AGENT, AND THEN ONLY IN ACCORDANCE WITH THE TERMS OF THE LETTER OF
TRANSMITTAL.
5
<PAGE>
Form S-8 Registration Statement
As soon as reasonably practical (and in any event within twenty days) after
the Effective Time, CBT will file a registration statement on Form S-8 under
the Securities Act to register the CBT Ordinary Shares represented by the CBT
ADSs issuable upon exercise of ForeFront options that will be assumed by CBT.
See "Terms of the Merger--Manner and Basis for Converting Shares."
Stock Ownership Following the Merger
Based upon the capitalization of ForeFront as of the close of business on the
Record Date, an aggregate of approximately 2,157,192 CBT ADSs will be issued to
ForeFront stockholders in the Merger and CBT will assume options, warrants and
other rights to acquire up to approximately 1,058,000 additional CBT ADSs.
Based upon the number of CBT ADSs issued and outstanding as of the Record Date,
and after giving effect to the issuance of CBT ADSs as described in the
previous sentence and the exercise of all options, warrants and other rights to
acquire ForeFront Common Stock assumed by CBT, the former holders of ForeFront
Common Stock and options, warrants and other rights to acquire ForeFront Common
Stock would hold, and have voting power with respect to, approximately 7.96% of
CBT's total equivalent ADSs outstanding. The foregoing numbers of shares and
percentages are subject to change to reflect any changes in the capitalization
of either CBT or ForeFront subsequent to the dates indicated and prior to the
Effective Time, and there can be no assurance as to the actual capitalization
of CBT or ForeFront at the Effective Time or CBT at any time following the
Effective Time.
Board of Directors; Management Following the Merger
The Board of Directors of the Surviving Corporation will consist of the
directors of Merger Sub immediately prior to the Effective Time. The officers
of Merger Sub immediately prior to the Effective Time will be the officers of
the Surviving Corporation, until their successors are duly elected.
Conduct of Business Prior to the Merger
Pursuant to the Reorganization Agreement, ForeFront has agreed that until the
earlier of the termination of the Reorganization Agreement pursuant to its
terms and the Effective Time, subject to certain exceptions and except to the
extent that CBT consents in writing, ForeFront will carry on its business, in
all material respects, in the usual, regular and ordinary course, and in
compliance with all applicable laws and regulations, pay its debts and taxes
when due subject to good faith disputes over such debts or taxes, pay or
perform other material obligations when due, and use its reasonable best
efforts consistent with past practices and policies: (i) to preserve intact its
present business organization, (ii) to keep available the services of its
present officers and employees, and (iii) to preserve its relationships with
customers, suppliers, distributors, licensors, licensees and others with which
it has business dealings. In addition, subject to certain exceptions, ForeFront
has agreed that, without the prior written consent of CBT, it will not perform
or engage in certain activities in the conduct of its business and the business
of its subsidiaries. See "Terms of the Merger--Conduct of ForeFront's Business
Prior to the Merger."
No Solicitation
Under the terms of the Reorganization Agreement, except under certain limited
circumstances, ForeFront has agreed that it will not: (i) solicit any alternate
acquisition proposal, (ii) participate in any discussions or negotiations with
any other parties with respect to an alternate acquisition proposal, or (iii)
provide any non-public information concerning ForeFront to any other parties in
connection with any alternate acquisition proposal. See "Terms of the Merger--
No Solicitation."
6
<PAGE>
Conditions to the Merger
Consummation of the Merger is subject to certain conditions, including: (i)
the effectiveness of the Registration Statement, (ii) approval and adoption of
the Reorganization Agreement and approval of the Merger by the stockholders of
ForeFront at the Special Meeting, (iii) the absence of any law or order
prohibiting consummation of the Merger, (iv) receipt by CBT and ForeFront of
legal opinions that the Merger will constitute a reorganization within the
meaning of Section 368(a) of the Code, (v) receipt by CBT of a letter from its
independent accountants dated as of a date within two business days of the
Closing Date to the effect that such accountants concur with CBT management's
conclusion that pooling-of-interests accounting for the Merger is appropriate
and receipt by ForeFront of a letter from its independent auditors dated as of
a date within two business days of the Closing Date to the effect that such
auditors concur with ForeFront management's conclusion that no conditions exist
relating to ForeFront that would preclude CBT from accounting for the Merger as
a pooling-of-interests, (vi) subject to certain materiality thresholds, the
accuracy of the representations and warranties made by each party in the
Reorganization Agreement, (vii) subject to certain materiality thresholds,
performance of all covenants required by the Reorganization Agreement, and
(viii) the absence of a material adverse effect with regard to either CBT or
ForeFront. See "Terms of the Merger--Conditions to the Merger."
Termination; Fees
The Reorganization Agreement may be terminated under certain circumstances.
ForeFront has agreed that if the Merger is not consummated under certain
circumstances, it will pay CBT a sum of $5.075 million. See "Terms of the
Merger--Termination of the Reorganization Agreement" and "--Break Up Fees."
Affiliate Agreements
Each director and certain officers of ForeFront have entered into agreements
restricting sales, dispositions or other transactions that reduce their risk of
investment in respect of the shares of ForeFront Common Stock held by them
prior to the Merger and the CBT ADSs received by them in the Merger so as to
comply with the requirements of applicable federal securities laws and to help
ensure that the Merger will be treated as a pooling of interests for accounting
and financial reporting purposes. Certain persons who may be deemed affiliates
of CBT have entered into agreements restricting sales, dispositions or other
transactions that reduce their risk of investment with respect of the CBT
ordinary shares or CBT ADSs held by them so as to help ensure that the Merger
will be treated as a pooling of interests for accounting and financial
reporting purposes.
7
<PAGE>
COMPARATIVE MARKET PRICE DATA
CBT ADSs and ForeFront Common Stock are traded on Nasdaq under the symbols
"CBTSY" and "FFGI," respectively. The following table sets forth the high and
low closing prices per share of such securities as reported on Nasdaq, based on
published financial sources, since CBT's initial public offering on April 13,
1995 and ForeFront's initial public offering on December 18, 1995. No cash
dividends have been paid on the CBT ADSs or ForeFront Common Stock. The per
share information presented below and elsewhere in this Proxy
Statement/Prospectus has been adjusted to reflect two two-for-one splits of the
CBT ADSs, which occurred on May 15, 1996 and March 9, 1998.
<TABLE>
<CAPTION>
FOREFRONT
CBT ADSS COMMON STOCK
------------- -------------
HIGH LOW HIGH LOW
------ ------ ------ ------
<S> <C> <C> <C> <C>
1995:
Second Quarter................................... $10.75 $ 5.50
Third Quarter.................................... 12.50 9.44
Fourth Quarter................................... 13.85 11.10 $ 8.63 $ 8.25
1996:
First Quarter.................................... 18.38 10.75 10.09 6.50
Second Quarter................................... 25.13 17.00 20.75 7.50
Third Quarter.................................... 27.13 19.63 13.88 8.94
Fourth Quarter................................... 29.38 22.38 10.88 5.00
1997:
First Quarter.................................... 35.25 19.07 7.00 2.88
Second Quarter................................... 31.63 20.00 4.25 2.00
Third Quarter.................................... 40.13 28.63 8.88 2.13
Fourth Quarter................................... 41.19 30.25 10.75 4.75
1998:
First Quarter.................................... 51.75 36.00 15.38 7.69
Second Quarter (through April 24, 1998).......... 54.75 49.75 17.13 15.13
</TABLE>
Set forth below are the last reported sale prices of CBT ADSs and ForeFront
Common Stock on March 16, 1998, the last trading day prior to the execution of
the Reorganization Agreement, and on April 24, 1998, the last trading day prior
to the date of the Proxy Statement/Prospectus, as well as the equivalent pro
forma sale prices of ForeFront Common Stock on such dates, as determined by
multiplying the Exchange Ratio by the CBT ADS price.
<TABLE>
<CAPTION>
FOREFRONT FOREFRONT
CBT ADSS COMMON STOCK EQUIVALENT
-------- ------------ ----------
<S> <C> <C> <C>
March 16, 1998................................. $50.00 $13.38 $15.69
April 24, 1998................................. $50.63 $15.56 $15.88
</TABLE>
FOREFRONT STOCKHOLDERS ARE URGED TO OBTAIN CURRENT MARKET INFORMATION FOR CBT
ADSS AND FOREFRONT COMMON STOCK. NO ASSURANCE CAN BE GIVEN AS TO THE MARKET
PRICES OF CBT ADSS OR FOREFRONT COMMON STOCK AT THE EFFECTIVE TIME.
8
<PAGE>
COMPARATIVE PER SHARE DATA
The following table shows actual ("historical") per share information and
information as if the companies had been combined for the periods shown ("pro
forma combined"), calculated by applying the Exchange Ratio. The historical
data is based on the historical consolidated financial statements and related
notes of each of CBT and ForeFront included elsewhere in this document. You
should read this data together with the historical financial statements of CBT
and ForeFront and related notes thereto. The data presented does not indicate
what ForeFront/CBT's future results of operations will be or the actual results
that would have occurred if the Merger had occurred at the beginning of the
periods indicated. No adjustment has been included for any anticipated cost
savings or other synergies. See "Unaudited Pro Forma Financial Information."
<TABLE>
<CAPTION>
FOREFRONT
CBT FOREFRONT
CBT FOREFRONT PRO FORMA PRO FORMA
HISTORICAL HISTORICAL COMBINED(1) EQUIVALENT
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Book value per equivalent
ADS/share(2):
December 31, 1997.............. $2.55 $ 1.00 $2.58 $0.81
Net Income (loss) per equivalent
ADS/share:
Year ended December 31, 1997... $0.58 $(0.63) $0.45 $0.14
Year ended December 31, 1996... $0.33 $(1.22) $0.12 $0.04
Year ended December 31, 1995... $0.20 $(0.12) $0.18 $0.06
Basic earnings per equivalent
ADS/share:
Year ended December 31, 1997... $0.58 $(0.63) $0.45 $0.14
Year ended December 31, 1996... $0.33 $(1.22) $0.12 $0.04
Year ended December 31, 1995... $0.20 $(0.12) $0.18 $0.06
Diluted earnings per equivalent
ADS/share:
Year ended December 31, 1997... $0.53 $(0.63) $0.41 $0.13
Year ended December 31, 1996... $0.30 $(1.22) $0.11 $0.03
Year ended December 31, 1995... $0.17 $(0.12) $0.15 $0.05
</TABLE>
- --------
(1) See "--Selected Unaudited Pro Forma Financial Information."
(2) Figures in the "CBT Historical," "ForeFront CBT Pro Forma Combined" and
"ForeFront Pro Forma Equivalent" columns are per equivalent ADS. Figures in
the "ForeFront Historical" column are per share of ForeFront Common Stock.
No cash dividends have ever been declared or paid with respect to CBT
Ordinary Shares or ForeFront Common Stock. See "Comparative Market Price Data."
9
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
Selected Historical Financial Data of CBT
The selected historical financial data of CBT set forth below comes from the
Selected Consolidated Financial Data of CBT as they appear herein for each of
the five fiscal years in the period ended December 31, 1997.
<TABLE>
<CAPTION>
YEAR ENDED AND AT DECEMBER 31,
-----------------------------------------
1997 1996 1995 1994 1993
------ ------- ------- ------- ------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Revenues........................... $118.6 $ 73.6 $ 49.3 $ 34.5 $ 22.7
Net income......................... $ 22.2 $ 11.8 $ 6.0 $ 2.6 $ 0.5
Net Income per equivalent ADS:
Basic............................ $ 0.58 $ 0.33 $ 0.20 $ 0.11 $ 0.02
Diluted.......................... $ 0.53 $ 0.30 $ 0.17 $ 0.09 $ 0.02
Dividends per equivalent ADS....... -- -- -- -- --
Total assets....................... $131.3 $ 87.0 $ 68.7 $ 19.1 $ 13.1
Redeemable convertible preferred
shares............................ -- -- -- $ 4.7 $ 2.7
Long-term debt..................... -- -- $ 0.8 $ 0.8 $ 2.3
Shareholders' equity (deficit)..... $101.0 $ 61.2 $ 46.3 $ (5.7) $ (4.6)
Selected Historical Financial Data of ForeFront
The selected historical financial data of ForeFront set forth below comes
from the Selected Consolidated Financial Data of ForeFront as they appear
herein for each of the five fiscal years in the period ended December 31, 1997.
<CAPTION>
YEAR ENDED AND AT DECEMBER 31,
-----------------------------------------
1997 1996 1995 1994 1993
------ ------- ------- ------- ------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Revenues........................... $ 18.4 $ 13.8 $ 6.1 $ 4.7 $ 3.7
Net income (loss).................. $ (4.1) $ (7.3) $ (0.5) $ (0.8) $ 0.1
Net Income per equivalent share:
Basic............................ $(0.63) $ (1.22) $ (0.12) $ (0.24) $ 0.03
Diluted.......................... $(0.63) $ (1.22) $ (0.12) $ (0.24) $ 0.03
Dividends per equivalent share..... -- -- -- -- --
Total assets....................... $ 10.0 $ 9.6 $ 14.0 $ 1.0 $ 2.4
Long-term debt..................... -- -- -- -- --
Stockholders' equity............... $ 6.7 $ 7.0 $ 12.8 $ 0.5 $ 2.1
</TABLE>
10
<PAGE>
SELECTED UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following presents selected unaudited pro forma financial information of
CBT and ForeFront combined as if the Merger had occurred for the periods
indicated. The Merger is intended to be treated as a pooling-of- interests for
accounting and financial reporting purposes. You should read this together with
the consolidated financial statements and accompanying notes of CBT and
ForeFront included herein and the unaudited pro forma condensed combined
financial statements and accompanying discussion and notes set forth under
"Unaudited Pro Forma Financial Information" included herein. The pro forma
amounts in the table below are presented for your information and do not
indicate what the financial position or the results of operations of the
combined company would have been had the Merger occurred as of the dates or for
the periods presented. The pro forma amounts also do not indicate what the
financial position or future results of operations of the combined company will
be. No adjustment has been included in the pro forma amounts for any
anticipated cost savings or other synergies. See "Unaudited Pro Forma Financial
Information."
<TABLE>
<CAPTION>
YEAR ENDED AND AT DECEMBER 31,
-----------------------------------------
1997 1996 1995 1994 1993
-------- ------- ------- ------- -------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CBT--FOREFRONT PRO FORMA COMBINED
Revenues........................... $ 137.0 $ 87.4 $ 55.4 $ 39.2 $ 26.4
Net income......................... $ 18.1 $ 4.5 $ 5.6 $ 1.8 $ 0.6
Net Income per equivalent ADS:
Basic............................ $ 0.45 $ 0.12 $ 0.18 $ 0.07 $ 0.02
Diluted.......................... $ 0.41 $ 0.11 $ 0.15 $ 0.06 $ 0.02
Dividends per equivalent ADS....... -- -- -- -- --
Total assets....................... $ 141.3 $ 96.6 $ 82.7 $ 20.1 $ 15.5
Redeemable convertible preferred
shares............................ -- -- -- $ 4.7 $ 2.7
Long-term debt..................... -- -- $ 0.8 $ 0.8 $ 2.3
Shareholders' equity (deficit)..... $ 107.7 $ 68.2 $ 59.1 $ (5.2) $ (2.5)
</TABLE>
11
<PAGE>
RISK FACTORS
This Proxy Statement/Prospectus contains forward-looking statements within
the meaning of Section 27A of the Securities Act and Section 21E of the
Exchange Act. Actual results could differ materially from those projected in
the forward-looking statements as a result of the risk factors set forth below
and elsewhere in this Proxy Statement/Prospectus. The following factors should
be considered carefully by holders of ForeFront Common Stock in evaluating
whether to approve and adopt the Reorganization Agreement and approve the
Merger. These factors should be considered in conjunction with the other
information included or incorporated by reference in this Proxy
Statement/Prospectus, including in conjunction with forward-looking statements
made herein. For periods following the Merger, references to CBT should be
considered to refer to CBT and its subsidiaries, including ForeFront, unless
the context otherwise requires.
RISKS RELATED TO THE MERGER
Uncertainty Relating to Integration. The successful combination of CBT and
ForeFront, including the successful operation of ForeFront as an autonomous
subsidiary of CBT, will require substantial effort from each company. The
diversion of the attention of management and any difficulties encountered in
the transition process could have an adverse impact on CBT's ability to
realize the full benefits of the Merger. The successful combination of the two
companies will also require coordination of their research and development and
sales and marketing efforts. In addition, the process of combining the two
organizations could cause the interruption of, or a loss of momentum in,
ForeFront's activities.
Certain key executives of ForeFront will not continue with the combined
company over the long term following the Merger. The employment of David
Sikora, President and Chief Executive Officer of ForeFront, and Michael
Kaplan, President of ForeFront Direct, Inc., will terminate at the Effective
Time, although Mr. Kaplan has agreed to continue as a consultant with CBT for
four months thereafter. There can be no assurance that the loss of these two
executives will not disrupt the integration of the two companies or prevent
CBT from realizing any of the anticipated benefits of the Merger. In addition,
options previously granted to other key executives of ForeFront will
accelerate at the Effective Time. There can be no assurance that CBT will be
able to retain these other key executives or ForeFront's key management,
technical, sales and customer support personnel, or that it will realize any
of the anticipated benefits of the Merger. See "Approval of the Merger and
Related Transactions--Interests of Certain Persons in the Merger."
Effect of Merger on Customers and Partners. Certain of ForeFront's existing
customers or strategic partners may view themselves as competitors of CBT, and
therefore determine that the Merger is competitively disadvantageous to them.
As a consequence, ForeFront's relationship with these customers or strategic
partners could be adversely affected. In addition, CBT's relationships with
certain of its customers that compete with ForeFront may be adversely affected
by the Merger, which could adversely affect the ability of CBT to continue
relationships with such customers after the Merger.
Risks Associated with Fixed Exchange Ratio. As a result of the Merger, each
outstanding share of ForeFront Common Stock will be converted into 0.3137 CBT
ADSs. Because the Exchange Ratio is fixed and will not increase or decrease
due to fluctuations in the market price of either CBT ADSs or ForeFront Common
Stock, the specific value of the consideration to be received by ForeFront
stockholders in the Merger will depend on the market price of CBT ADSs at the
Effective Time. In the event that the market price of CBT ADSs decreases or
increases prior to the Effective Time, the market value at the Effective Time
of CBT ADSs to be received by ForeFront stockholders in the Merger would
correspondingly decrease or increase. The market prices of CBT ADSs and
ForeFront Common Stock as of a recent date are set forth herein under
"Summary--Comparative Market Price Data." ForeFront stockholders are advised
to obtain recent market quotations for CBT ADSs and ForeFront Common Stock.
CBT ADSs and ForeFront Common Stock historically have been subject to
substantial price volatility. No assurance can be given as to the market
prices of CBT ADSs or ForeFront Common Stock at any time before the Effective
Time or as to the market price of CBT ADSs at any time thereafter. See
"Comparative Market Price Data" and "Comparison of Stockholder Rights."
12
<PAGE>
Differences in Shareholder Rights between United States and Irish
Corporations. CBT is incorporated under the laws of the Republic of Ireland.
The rights of holders of Ordinary Shares and, therefore, certain of the rights
of CBT ADS holders, are governed by Irish law including the Companies Acts of
the Republic of Ireland, by CBT's Memorandum and Articles of Association
(collectively, the "CBT Charter") and certain laws of the European Union.
These rights differ in certain respects from the rights of stockholders in
typical United States corporations. In particular, Irish law significantly
limits the circumstances under which stockholders of Irish corporations may
bring derivative actions. See "Comparison of Stockholder Rights."
RISKS RELATED TO CBT'S BUSINESS
Fluctuations in Operating Results. CBT 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 CBT ADSs. Although
CBT was profitable in each of the last sixteen quarters, there can be no
assurance that such profitability will continue in the future or that the
levels of profitability will not vary significantly among quarterly periods.
CBT's operating results may fluctuate as a result of many factors, including
timing and effect of mergers and acquisitions, size and timing of orders and
shipments, mix of sales between products developed solely by CBT and products
developed through development and marketing alliances, royalty rates, the
announcement, introduction and acceptance of new products, product
enhancements and technologies by CBT and its competitors, mix of sales between
CBT's field sales force, its other direct sales channels and its indirect
sales channels, competitive conditions in the industry, loss of significant
customers, delays in availability of existing or new products, spending
patterns of CBT's customers, currency fluctuations and general economic
conditions.
CBT'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, CBT 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 CBT's results of
operations. In addition, CBT hired additional employees in 1997 and the first
two months of 1998. This increase in employee expense could have a negative
impact on CBT's operating margins during 1998.
Foreign Currency Impact. With more than a quarter of CBT's revenues outside
the United States, sales were negatively impacted in 1997 due to the continued
strength of the United States dollar against other major currencies. At
current exchange rates, CBT anticipates quarter to quarter comparisons could
continue to be negatively impacted by currency adjustments through fiscal
1998.
Competition. The IT education and training market is highly fragmented and
competitive, and CBT expects this competition to increase. CBT expects that
because of the lack of significant barriers to entry into this market, new
competitors may enter the market in the future. In addition, larger companies
are competing with CBT in the IT education and training market through the
acquisition of CBT's competitors, and CBT expects this trend to continue. Such
competitors may also include publishing companies and vendors of application
software, including those vendors with whom CBT has formed development and
marketing alliances.
CBT competes primarily with third-party suppliers of instructor-led IT
education and training and internal training departments and with other
suppliers of IT education and training, including several other companies that
produce interactive software training. To a lesser extent, CBT also competes
with consultants, value-added resellers and network integrators. Certain of
these value-added resellers also market products competitive with those of
CBT. CBT expects that as organizations increase their dependence on outside
suppliers of training, CBT will face increasing competition from these other
suppliers as IT education and training managers more frequently compare
training products provided by outside suppliers.
Many of CBT's current and potential competitors have substantially greater
financial, technical, sales, marketing and other resources, as well as greater
name recognition, than CBT. In addition, the IT education and training market
is characterized by significant price competition, and CBT expects that it
will face increasing
13
<PAGE>
price pressures from competitors as IT managers demand more value for their
training budgets. Accordingly, there can be no assurance that CBT will be able
to provide products that compare favorably with new instructor-led techniques
or other interactive training software or that competitive pressures will not
require CBT to reduce its prices significantly.
Developing Market. The market for IT education and training is rapidly
evolving. New methods of delivering interactive education software are being
developed and offered in the marketplace, including intranet and Internet
deployment systems. Many of these new delivery and training management systems
will involve new and different business models and contracting mechanisms. In
addition, multimedia and other product functionality features are being added
to the educational software. Accordingly, CBT's future success will depend
upon, among other factors, the extent to which CBT is able to develop and
implement products which address these emerging market requirements. There can
be no assurance that CBT will be successful in meeting changing market needs.
In particular, CBT has announced and shipped in 1997 its next generation
education deployment and management system, CBT Campus. If CBT Campus were to
fail to secure market acceptance, sales of CBT courseware, and CBT's operating
results, could be materially adversely affected.
Seasonality. The software industry generally, and CBT in particular, are
subject to seasonal revenue fluctuations, based in part on customers' annual
budgetary cycles and in part on the annual nature of sales quotas. These
seasonal trends have in the past caused, and in the future are expected to
continue to cause, revenues in the first quarter of a year to be less, perhaps
substantially so, than revenues for the immediately preceding fourth quarter.
In addition, CBT has in past years (as well as in 1998) added significant
headcount in the sales and marketing and research and development functions in
the first quarter, and to a lesser extent, the second quarter. Because these
headcount additions do not immediately contribute significant revenues, CBT's
operating margins in the earlier part of the year tend to be significantly
lower than in the later parts of the year. There can be no assurance, however,
that operating margins in the fourth quarter will meet CBT's expectations.
Many software companies also experience a seasonal downturn in demand during
the summer months. There can be no assurance that these or other seasonal
trends will not have a material adverse effect on CBT's results of operations.
Management of Expanding Operations and Acquisitions. CBT has recently
experienced rapid expansion of its operations, which has placed, and is
expected to continue to place, significant demands on CBT's administrative,
operational and financial personnel and systems. CBT'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. In particular, CBT
requires significant improvement in its order entry and fulfillment and
management information systems in order to support its expanded operations. If
CBT is unable to respond to and manage changing business conditions, its
business and results of operations could be materially adversely affected.
As a result of the consummation of the acquisitions of PTS in late 1995, CLS
and NTT in May 1996, ALA and Benelux in February 1997, Scholars in August 1997
and MidEast (each as defined in "Business of CBT--General") in December 1997,
CBT's operating expenses have increased. In addition, if the Merger is
consummated, CBT expects that operating expenses will increase as a result of
such transaction. There can be no assurance that the integration of these
businesses can be successfully completed in a timely fashion, or at all, or
that the revenues from the acquired businesses will be sufficient to support
the costs associated with those businesses, without adversely affecting CBT's
operating margins. Any failure to complete successfully the integration in a
timely fashion or to generate sufficient revenues from the acquired businesses
could have a material adverse effect on CBT's business and results of
operations.
CBT regularly evaluates acquisition opportunities and is likely to make
acquisitions in the future. Future acquisitions by CBT 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 CBT's results
of operations. Product and technology acquisitions entail numerous risks,
including difficulties in the assimilation of acquired operations,
technologies and products, diversion of
14
<PAGE>
management's attention to other business concerns, risks of entering markets
in which CBT has no or limited prior experience and potential loss of key
employees of acquired companies. CBT's management has had limited experience
in assimilating acquired organizations and products into CBT's operations. No
assurance can be given as to the ability of CBT to integrate successfully any
operations, personnel or products that have been acquired or that might be
acquired in the future, and the failure of CBT to do so could have a material
adverse effect on CBT's results of operations.
Dependence on Key Personnel. CBT'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, including additional management personnel.
In particular, the loss of certain senior management personnel or other key
employees could have a material adverse effect on CBT's business. In addition,
CBT depends on writers, programmers and graphic artists, as well as third-
party content providers. CBT expects to continue to hire additional product
development, sales and marketing, information services and accounting staff.
However, there can be no assurance that CBT will be successful in attracting,
retaining or motivating key personnel. The inability to hire and retain
qualified personnel or the loss of the services of key personnel could have a
material adverse effect on CBT's current business, new product development
efforts and future business prospects.
Risk of Increasing Taxes. Certain of CBT's subsidiaries have significant
operations and generate significant taxable income in Ireland, and certain of
CBT's Irish subsidiaries are taxed at rates substantially lower than tax rates
in effect in the United States and in other countries in which the Company has
operations. The extent of the tax benefit could vary from period to period,
and there can be no assurance that CBT's tax situation will not change.
Dependence on Development and Marketing Alliances. CBT has entered into
development and marketing alliances with Microsoft, Oracle, IBM/Sun
Microsystems/Netscape Java Consortium, Netscape, IBM/Lotus, Cisco, Informix,
Novell, SAP America, Asymetrix, Marimba and Sybase/Powersoft under which it is
currently developing courses. CBT believes that an increasing portion of its
revenues in the future may be attributable to products developed through its
alliances. There can be no assurance that any of these parties will continue
to cooperate with CBT, that CBT will be able to successfully develop courses
for its development and marketing alliances in a timely fashion or at all, or
that CBT will be able to negotiate additional alliances in the future on
acceptable terms or at all. There can be no assurance that the marketing
efforts of CBT's partners will not disrupt CBT's direct sales efforts. In
addition, CBT's development and marketing partners could pursue their existing
or alternative training programs in preference to and in competition with
those being developed with CBT. In the event CBT is not able to maintain or
expand its current development and marketing alliances or enter into new
development and marketing alliances, CBT's operating results and financial
condition could be materially adversely affected. Furthermore, CBT is required
to pay royalties to its development and marketing partners on products
developed with them, which reduces CBT's gross margins. CBT expects that cost
of revenues may fluctuate from period to period in the future based upon many
factors, including the mix of titles licensed (between titles developed
exclusively by CBT and royalty-bearing titles developed pursuant to
development and marketing alliances) and the timing of expenses associated
with development and marketing alliances. In addition, the collaborative
nature of the development process under these alliances may result in longer
development times and less control over the timing of product introductions
than for courses developed solely by CBT.
Dependence on New Products. The subject matter of CBT'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, CBT believes that its future success will
depend in large part upon 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 CBT 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 CBT were unable, due to
resource, technological or other constraints, to anticipate and respond
adequately to changes in customers' software technology and preferences, CBT's
business and results of operations would be materially adversely affected.
15
<PAGE>
Moreover, software products as complex as those offered by CBT may contain
undetected errors or fail when first introduced or upon release of new
versions of CBT's products. There can be no assurance that, despite testing by
CBT and by current and potential customers, errors will not be found in new
products after commencement of commercial shipments, resulting in a loss of or
delay in market acceptance.
Operations Outside the United States. CBT's products are marketed throughout
the world, and sales outside the United States have represented a significant
portion of CBT's revenues. CBT expects that international operations will
continue to account for a significant portion of its revenues and intends to
continue to expand its operations outside of the United States. In addition,
CBT's corporate headquarters and its research and development organization are
located outside the United States. Operations outside the United States are
subject to inherent risks, including fluctuations in exchange rates,
difficulties or delays in developing and supporting non-English language
versions of CBT's products, political and economic conditions in various
jurisdictions, unexpected changes in regulatory requirements, tariffs and
other trade barriers, difficulties in staffing and managing foreign subsidiary
operations, longer accounts receivables payment cycles and potentially adverse
tax consequences. There can be no assurance that such factors will not have a
material adverse effect on CBT's future operations outside the United States.
Currency Fluctuations. CBT's consolidated financial statements are prepared
in United States dollars, although several of CBT's subsidiaries have
functional currencies other than the United States dollar, and a significant
portion of CBT's and its subsidiaries' revenues, costs and assets are
denominated in currencies other than their respective functional currencies.
Fluctuations in exchange rates may have a material adverse effect on CBT's
results of operations, particularly its operating margins, and could also
result in exchange losses. The impact of future exchange rate fluctuations on
CBT's results of operations cannot be accurately predicted. To date, CBT has
not sought to hedge the risks associated with fluctuations in exchange rates,
but may undertake such transactions to hedge specific currency risks in the
future. There can be no assurance that CBT's results of operations will not be
materially adversely affected by exchange rate fluctuations or that any
hedging techniques implemented by CBT would be successful in eliminating or
reducing the effects of currency fluctuations.
Risks Associated with Intellectual Property. CBT 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 CBT's courseware or technology
without authorization, or to develop similar courseware or technology
independently. Furthermore, the laws of certain countries in which CBT sells
its products do not protect CBT's software and intellectual property rights to
the same extent as do the laws of the United States. CBT generally does not
include in its software any mechanisms to prevent or inhibit unauthorized use,
but generally requires the execution of a license agreement which restricts
copying and use of CBT's products. If unauthorized copying or misuse of CBT's
products were to occur to any substantial degree, CBT's business and results
of operations could be materially adversely affected. There can be no
assurance that CBT's means of protecting its proprietary rights will be
adequate or that CBT's competitors will not independently develop similar
technology.
There can be no assurance that third parties will not claim CBT's current or
future products infringe the proprietary rights of others. CBT 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 CBT
to enter into royalty or licensing agreements. Such royalty or license
agreements, if required, may not be available on terms acceptable to CBT or at
all.
Volatility of Stock Price. The initial public offering of the CBT ADSs was
completed in April 1995, and there can be no assurance that a viable public
market for the CBT ADSs will be sustained. The market price of the CBT ADSs
has fluctuated significantly since CBT's initial public offering. CBT believes
that factors such as announcements of developments related to CBT's business,
announcements of new products or enhancements by CBT or its competitors, sales
of the CBT ADSs into the public market, developments in CBT's relationships
16
<PAGE>
with its customers, partners and distributors, shortfalls or changes in
revenues, gross margins, earnings or losses or other financial results from
analysts' expectations, regulatory developments, fluctuations in results of
operations and general conditions in CBT's market or the markets served by
CBT's customers or the economy could cause the price of the CBT ADSs to
fluctuate, perhaps substantially. In addition, in recent years the stock
market in general, and the market for shares of small capitalization and
technology stocks in particular, have experienced extreme price fluctuations,
which have often been unrelated to the operating performance of affected
companies. Many companies in the software industry, including CBT, have
recently experienced historic highs in the market price of their equity
securities. There can be no assurance that the market price of the CBT ADSs
will not decline substantially from such historic highs, or otherwise continue
to experience significant fluctuations in the future, including fluctuations
that are unrelated to CBT's performance.
Year 2000 Risk. CBT is aware of the issues associated with the programming
code in existing computer systems as the millennium (year 2000) approaches.
The "Year 2000" issue is pervasive and complex, as virtually every computer
operation will be affected in the same way by the rollover of the two digit
year value to 00. The issue is whether computer systems will properly
recognize date sensitive information when the year changes to 2000. Systems
that do not properly recognize such information could generate erroneous data
or cause a system to fail.
CBT is assessing both the internal readiness of its computer systems and the
compliance of its software sold to customers for handling the year 2000. CBT
expects to implement successfully the systems and programming changes
necessary to address year 2000 issues, and does not believe that the cost of
such actions will have a material effect on CBT's results of operations or
financial condition. There can be no assurance, however, that there will not
be a delay in, or increased costs associated with, the implementation of such
changes, and CBT's ability to implement such changes could have an adverse
effect on future results or operations. With the exception of CBT's DOS-based
courseware and its WinTracs administrative tracking tool, CBT is satisfied
that the software it supplies to its customers is year 2000 compliant and it
is not dependant on its customers implementing the systems and programming
changes necessary to handle the year 2000.
CBT is utilizing both internal and external resources to identify, correct
or reprogram, and test the systems for year 2000 compliance. It is anticipated
that all reprogramming, except for CBT products which will no longer be
available beginning December 31, 1999, will be complete by June 30, 1999,
allowing adequate time for testing. This process includes getting
confirmations for CBT's primary vendors that plans are being developed or are
already in place to address processing transactions in the year 2000. However,
there can be no assurance that the systems of other companies on which CBT's
systems rely also will be timely converted or that any such failure to convert
by another company would not have an adverse effect on CBT's systems.
RISKS RELATED TO FOREFRONT'S BUSINESS
Limited Operating History; Accumulated Deficit. ForeFront commenced
operations in 1992 and completed an initial public offering of its Common
Stock in December 1995. ForeFront'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. ForeFront made several
acquisitions in 1996 to supplement its line of Internet content management
products and to expand it sales and marketing capabilities. In mid-1997,
ForeFront repositioned its business to focus on the marketing and sale of
computer-based training products to IT professionals through the telesales
organization it acquired in 1996. Accordingly, ForeFront has only a limited
operating history on which an evaluation of its business and prospects can be
based. Although ForeFront was profitable in its fiscal quarters ended
September 30, 1997 (excluding one-time charges), December 31, 1997 and March
31, 1998, 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, ForeFront had an accumulated deficit of
approximately $16.4 million.
17
<PAGE>
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 ForeFront Common
Stock. ForeFront'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 ForeFront
and its competitors; competitive conditions in the industry; delays in
availability of existing or new products; spending patterns of ForeFront's
customers; the number of selling days in each quarter; and general economic
conditions. ForeFront's expense levels are based in significant part on its
expectations regarding future revenues and are fixed to a larger extent in the
short term. Accordingly, ForeFront 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 ForeFront's results of operations.
Growth Strategy; Dependence on New Products. ForeFront'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 ForeFront 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 ForeFront. There can be no assurance that
ForeFront will be able to successfully implement its growth strategy, and the
failure to do so would have a material adverse effect on ForeFront's business
and results of operations.
ForeFront presently maintains a relatively limited library of computer-based
training 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 computer-based training products.
Furthermore, the subject matter of ForeFront'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, ForeFront 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 ForeFront 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 ForeFront were unable, due to
resource, technological or other constraints, to anticipate and respond
adequately to changes in customers' software technology and preferences,
ForeFront's business and results of operations would be materially adversely
affected.
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. ForeFront'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 ForeFront
will be successful in meeting the changing market needs.
Rapid Technological Change. ForeFront'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, ForeFront must continually anticipate and adapt its products to
emerging desktop and computer network platforms and environments. ForeFront
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 ForeFront were unable to anticipate and
respond to changes in computer technology, its business and results of
operations would be materially and adversely affected.
18
<PAGE>
Management of Expanding Operations and Acquisitions. ForeFront has recently
experienced rapid expansion of its operations, which has placed, and is
expected to continue to place, significant demands on ForeFront's
administrative, operational and financial personnel and systems. ForeFront'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 ForeFront 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 the acquisition of Lan Professional Inc. ("LanTec") in
September 1997, ForeFront'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 ForeFront's operating
margins. Any failure to successfully complete integrating in a timely fashion
or to generate sufficient revenues from the acquired business could have a
material adverse effect on ForeFront's business and results of operations.
ForeFront regularly evaluates acquisition opportunities and is likely to
make acquisitions in the future in the event the Merger is not consummated.
Future acquisitions by ForeFront 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 ForeFront'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, risk of entering markets in which ForeFront has no or
limited prior experience and the loss of key employees of acquired companies.
In addition, ForeFront 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. ForeFront's management has had limited experience in
assimilating acquired organizations and products into ForeFront's operations.
No assurance can be given as to the ability of ForeFront 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
ForeFront to do so could have a material adverse effect on ForeFront's results
of operations.
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 ForeFront attempts to monitor marketing trends and respond
accordingly, ForeFront may not be able to anticipate and successfully respond
to such trends on a timely basis. Furthermore, ForeFront 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 ForeFront's targeted market or in generating responses from
prospective customers would have a material adverse effect on ForeFront's
business and results of operations.
The success of ForeFront'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 ForeFront be unable to
attract a sufficient number of new employees, or if ForeFront'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 adversely affected.
Risks of Development and Marketing Alliances. ForeFront 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 ForeFront will be
able to do so on terms acceptable to ForeFront, on a timely basis, if at all,
or that any such alliances would be successful. In addition, ForeFront's
alliance partners could pursue their existing or alternative training programs
in preference to and in competition with those being developed with ForeFront
or licensing
19
<PAGE>
arrangements with competitors of ForeFront. Furthermore, ForeFront could be
required to pay royalties to any such alliance partners on products developed
with or licensed from them, which would reduce ForeFront'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
ForeFront.
Dependence on Key Personnel. ForeFront's future success depends in larger
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 ForeFront's
business and results of operations.
International Operations. ForeFront 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.
20
<PAGE>
SPECIAL MEETING
DATE, TIME AND PLACE OF SPECIAL MEETING
The Special Meeting will be held at The Four Oaks Place Tenant Conference
Room, 1300 Post Oak Boulevard, Houston Texas, on May 28, 1998 at 9:00 a.m.,
local time.
PURPOSE
The purpose of the Special Meeting is to consider and vote upon a proposal
to approve and adopt the Reorganization Agreement and approve the Merger.
ForeFront stockholders will also consider and vote upon any other matters that
may properly come before the Special Meeting.
RECORD DATE AND OUTSTANDING SHARES
Only ForeFront stockholders of record on the Record Date are entitled to
notice of, and to vote at, the Special Meeting. As of the Record Date, there
were approximately 246 stockholders of record and approximately 6,876,609
shares of ForeFront Common Stock issued and outstanding.
This Proxy Statement/Prospectus is being mailed on or about May 1, 1998 to
all stockholders of record of ForeFront as of the Record Date.
VOTE REQUIRED
Pursuant to the DGCL and the ForeFront Certificate, the affirmative vote of
the holders of a majority of ForeFront Common Stock outstanding as of the
Record Date is required to approve and adopt the Reorganization Agreement and
approve the Merger. Each ForeFront stockholder of record on the Record Date
will be entitled to cast one vote per share on the proposal to be acted upon
at the Special Meeting. As of the Record Date, the directors and executive
officers of ForeFront and their affiliates held approximately 23% of the
outstanding shares of ForeFront Common Stock. See "Security Ownership of
Management and Principal Stockholders of ForeFront."
The presence, in person or by proxy, of at least a majority of the
outstanding shares of ForeFront Common Stock entitled to vote at the Special
Meeting is necessary to constitute a quorum for the transaction of business.
Abstentions will be counted for purposes of determining a quorum. For purposes
of obtaining the required vote of a majority of the outstanding shares of
ForeFront Common Stock for approval and adoption of the Reorganization
Agreement and approval of the Merger, abstentions and broker non-votes will
have the effect of votes against the proposal.
Certain directors and executive officers of ForeFront have entered into
agreements with CBT that obligate them to vote all shares of ForeFront Common
Stock they hold in favor of the proposal to approve and adopt the
Reorganization Agreement and approve the Merger.
VOTING OF PROXIES
Each of the persons named in the proxy is an officer of ForeFront. All
shares of ForeFront Common Stock that are entitled to vote and are represented
at the Special Meeting by properly executed proxies received prior to or at
the Special Meeting and not duly and timely revoked will be voted at the
Special Meeting in accordance with the instructions indicated on such proxies.
IF NO SUCH INSTRUCTIONS ARE INDICATED, SUCH PROXIES WILL BE VOTED "FOR" THE
PROPOSAL TO APPROVE AND ADOPT THE REORGANIZATION AGREEMENT AND TO APPROVE THE
MERGER. The ForeFront Board knows of no other matters to be presented at the
Special Meeting other than as described in this Proxy Statement/Prospectus. If
any other matters are properly presented at the Special Meeting, including a
motion to adjourn or postpone the Special Meeting for the purpose of
soliciting additional proxies, the persons named in the enclosed proxy will
have discretion to vote on such matters in accordance with their best
judgement.
21
<PAGE>
Execution of a proxy does not in any way affect a stockholder's right to
attend the Special Meeting and vote in person. Any proxy may be revoked by a
stockholder at any time before it is exercised by delivering a written
revocation or a later-dated proxy to the Secretary of ForeFront, or by
attending the Special Meeting and voting in person. Any written notice of
revocation or subsequent proxy should be sent so as to be delivered to
ForeFront at 1360 Post Oak Boulevard, Suite 2050, Houston, Texas 77056,
Attention: Secretary, or hand-delivered to the Secretary of ForeFront, in each
case at or before the taking of the vote at the Special Meeting.
SOLICITATION OF PROXIES; EXPENSES
All costs of soliciting proxies will be borne by ForeFront. Brokers,
custodians and fiduciaries will be requested to forward proxy soliciting
material to the owners of stock held in their names, and ForeFront will
reimburse them for their reasonable out-of-pocket costs. In addition, proxies
may also be solicited by directors, officers and employees of ForeFront
personally or by mail, telephone or telegraph following the original
solicitation. Such persons will not receive additional compensation for such
solicitation. ForeFront has retained Corporate Investor Communications, Inc.,
an independent proxy solicitation firm, to assist in soliciting proxies at an
estimated fee of $4,500 plus reimbursement of reasonable expenses.
RECOMMENDATION OF FOREFRONT BOARD OF DIRECTORS
The ForeFront Board has unanimously approved the Reorganization Agreement
and the transactions contemplated thereby and has determined that the Merger
is fair to and in the best interests of ForeFront stockholders. AFTER CAREFUL
CONSIDERATION, THE FOREFRONT BOARD UNANIMOUSLY RECOMMENDS THAT FOREFRONT
STOCKHOLDERS VOTE "FOR" THE PROPOSAL TO APPROVE AND ADOPT THE REORGANIZATION
AGREEMENT AND APPROVE THE MERGER.
22
<PAGE>
INDUSTRY BACKGROUND
Business organizations continue to be dependent upon computer systems in
order to remain competitive in their markets. This trend has resulted in
significant growth in IT education and training. According to International
Data Corporation ("IDC"), the 1996 worldwide and United States markets for IT
education and training were approximately $16.4 billion and $8.0 billion,
respectively, compared to $11.0 billion and $4.4 billion, respectively, in
1992. According to IDC, the factors driving these markets include (i) the
shift by organizations from legacy mainframe systems to new client/server
technologies, driving corporate information services ("IS") groups to seek
additional IT education and training; (ii) business requirements that IS staff
be certified in certain technologies in order to assure performance and
productivity; (iii) corporate downsizing, resulting in increased training
requirements for employees who perform multiple job tasks that require
knowledge of varied software applications and technologies; (iv) the
proliferation of computers and networks throughout all levels of
organizations, increasing the number of employees who need training in
client/server and Internet/intranet technologies; and (v) the continuous
introduction and evolution of client/server and Internet/intranet
technologies, contributing to the need for continuing education.
Traditionally, organizations have primarily fulfilled their requirements for
IT education and training through instructor-led training from external
vendors or internal training departments. Instructor-led training, however,
has a number of limitations. Instructor-led training typically requires
employees to leave their desks for prolonged periods, often to attend classes
at off-site locations. Such training is also difficult to tailor to
individuals' training needs, cannot be easily reviewed and assessed by IS
managers and may not offer a cost-effective training solution. The limitations
of instructor-led training, combined with constrained IS budgets, larger
numbers of employees requiring training and the greater breadth of training
needed per employee, have prompted organizations to consider alternative
training methodologies. IDC estimates that the instructor-led training market
will see a decline in share from 79% in 1996 to 62.5% in 2001 and further
estimates that technology-based training will experience a 1996-2001
compounded annual growth rate of 30% versus 7.3% growth for instructor-led
training.
The proliferation of computers throughout organizations and the increasing
multimedia capabilities of computers are supporting the emergence of
interactive IT education and training software. According to IDC, the United
States market for interactive IT education and training software, including
multimedia software and electronic performance support systems, was $928
million in 1996, compared to $749 million in 1995, representing a 24%
compounded annual growth rate year over year. CBT believes that as businesses
seek out alternative methods of training employees, there is a significant
market opportunity for software that can meet businesses' needs for
productive, flexible and cost-effective IT education and training.
Although interactive IT education and training software programs have been
available for many years, they currently account for only a small portion of
the overall market for IT training. Accordingly, CBT's future success will
depend upon, among other factors, the extent to which companies continue to
adopt interactive education and training programs. There can be no assurance
that the use of interactive education and training software programs will
become widespread or that CBT's products will achieve commercial success.
The need for IT professionals is substantial and continues to grow. The
Information Technology Association of America estimated that approximately
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.
23
<PAGE>
BUSINESS OF CBT
GENERAL
CBT is a leading provider of interactive education software designed to meet
the IT education and training needs of businesses and organizations worldwide.
CBT develops, publishes and markets a comprehensive library of 558 software
titles at the end of 1997 covering a range of client/server, mainframe,
Internet and intranet technologies. CBT's products are used by 1,576 of the
world's leading corporations to train employees to develop and apply mission-
critical technologies in the workplace. CBT works with leading software
companies, including Cisco, Informix, Lotus, Marimba, Microsoft, Netscape,
Novell, Oracle, SAP, Sybase and the IBM-Netscape-Sun Microsystems, Inc.
collaborative Java education effort to develop and market vendor-specific
training. CBT has also formed the Internet Security Training Consortium with
Check Point, Cisco, IBM, Intel Corporation, the Javasoft business unit of Sun
Microsystems, Inc., Lotus, Netscape, Network Associates, RSA, Security
Dynamics, and VeriSign to address the Internet security training needs of
enterprises worldwide.
CBT was initially formed to act as a holding company for investment purposes
and acquired a controlling interest in a number of companies in a variety of
business areas. In November 1990, CBT acquired its United States subsidiary,
CBT Systems USA, Ltd. (effective as of April 3, 1995 CBT Systems USA, Ltd. was
merged with and into its parent, Thornton Holdings, Ltd. which subsequently
changed its name to CBT Systems USA, Ltd.) ("CBT USA").
In September 1991, CBT acquired its Irish and U.K. subsidiaries, including
CBT Systems Limited ("CBT Ireland") and CBT Systems UK Limited ("CBT UK") and
sold or dissolved its other unrelated investment businesses. In January 1994,
CBT acquired CBT Systems Africa (Proprietary) Ltd. ("CBT South Africa") for
the purpose of establishing a direct sales presence in Southern Africa. In
August 1995, CBT incorporated CBT Finance Limited ("CBT Finance") under the
laws of the Cayman Islands for the purpose of investing certain of CBT's
funds.
In November 1995, CBT completed a merger with Personal Training Systems
("PTS"), a provider of end-user and consumer interactive educational software,
for an aggregate of 424,228 of its ADSs. On May 31, 1996, CBT acquired CLS
Consult, Gesellschaft fur Beratung, Management und Beteiligung mbH ("CLS"), a
German limited liability company, and New Technology Training Ltd., an
Ontario, Canada corporation ("NTT"). CLS is a developer and marketer of
interactive education software for SAP client/server applications, and NTT's
primary business had been to act as CBT's exclusive distributor in Canada. CBT
issued a total of 72,932 Ordinary Shares to the former shareholders of CLS and
NTT in connection with the acquisitions. On February 28, 1997, CBT completed
the acquisitions of Applied Learning Limited, a company organized under the
laws of Tasmania, Australia ("ALA") and CBT Systems Benelux B.V., a
Netherlands limited liability company ("Benelux"). ALA was an Australian
distributor of interactive education software and had been CBT's exclusive
distributor in Australia and New Zealand; and Benelux had been CBT's exclusive
distributor in the Netherlands, Belgium, and Luxembourg. CBT issued the
equivalent of 103,611 Ordinary Shares to the former shareholders of ALA and
Benelux in connection with the acquisitions. On August 31, 1997, CBT completed
the acquisition of Ben Watson Associates Ltd., a New Brunswick, Canada
corporation carrying on business under the registered business name
Scholars.com ("Scholars"). Scholars is a provider of online IT certification
training. CBT issued a total of 9,408 Ordinary Shares to the sole shareholder
of Scholars in connection with the acquisition. On December 1, 1997, CBT
completed the acquisition of CBT Systems Middle East Limited, a Bahamian
company ("MidEast"). MidEast had been CBT's exclusive distributor in the
Middle East and a non-exclusive distributor in India. CBT issued a total of
64,500 Ordinary Shares to the former shareholders of MidEast in connection
with the acquisition.
The acquisition of each of Scholars, ALA, Benelux, PTS, CLS, NTT and Mid
East was accounted for as a "pooling-of-interests" in accordance with United
States generally accepted accounting principles. In compliance
24
<PAGE>
with such principles, CBT's operating results have been restated to include
the results of Scholars, ALA, Benelux, PTS, CLS, NTT and Mid East as if the
acquisitions had occurred at the beginning of the first period presented or
subsequent date of incorporation of the pooled entity as applicable.
Since September 1991, substantially all of CBT's revenues and operating
expenses have been attributable to developing and selling interactive IT
education and training software.
CBT was incorporated in the Republic of Ireland on August 8, 1989. CBT's
registered office is located at Beech Hill, Clonskeagh, Dublin 4, Ireland, and
its telephone number at that address from the United States is (011) 353-1-
283-0077. The address of CBT USA is 1005 Hamilton Court, Menlo Park,
California 94025 and its telephone number at that address is (650) 614-5900.
For additional information about CBT's business, see the consolidated
financial statements of CBT and related notes thereto included herein.
RECENT DEVELOPMENTS
On March 9, 1998, CBT effected a two-for-one split of its issued and
outstanding ADSs, whereby each issued and outstanding ADS is now represented
by one-fourth of one Ordinary Share and each issued and outstanding Ordinary
Share that is deposited with The Bank of New York, as Depositary (the
"Depositary"), is represented by four ADSs. Unless stated otherwise, all
references herein to CBT ADSs are on a post-split basis.
In December 1996, CBT and Street Technologies, Inc. ("Street Technologies"),
a developer of technology to "stream" multimedia and other large data files to
permit real-time delivery over local and wide area networks, corporate
intranets and the Internet, entered into an agreement pursuant to which the
companies would work together to deploy CBT's interactive education software
over corporate intranets and the Internet. As part of the agreement, CBT
acquired a 12.5% ownership interest in Street Technologies and Street
Technologies agreed that its license will be exclusive to CBT within a defined
group of companies. In December 1997, CBT exchanged its 12.5% ownership
interest in Street Technologies, and $300,000 in cash, for a perpetual license
of Street Technologies' deployment tools.
THE CBT SOLUTION
CBT's solutions include a comprehensive library of 558 interactive software
titles at the end of 1997 designed to meet business' and organizations' IT
education and training needs. CBT's courseware may be used on networked and
standalone PCs and may be deployed over intranets via CBT's intranet
deployment product, CBTWeb, and the Internet via CBT's Internet deployment
product, CBTWeb Plus. The courseware titles are organized into curricula and
are designed to cover specific aspects of client/server, mainframe, Internet
and intranet technologies. Each curriculum provides comprehensive training in
an area of technology such as client/server concepts, operating systems,
networking, graphical user interfaces and database design. In addition, CBT
has developed network-based administration and assessment tools designed to
allow IS and human resource managers to track employee usage and performance
of CBT courseware.
CBT has developed or is developing, both independently and through
development and marketing alliances, titles focused on vendor-specific
products including Microsoft Windows NT, Oracle Database Administrator 7.3 and
8.0 and Developer 2000, SAP's R/3 3.0, Netscape Navigator, Javascript and
LiveWire, IBM/Lotus Notes, Informix Online Dynamic Server, Cisco Router
Configuration curricula, Novell NetWare, Sybase/Powersoft PowerBuilder, and
Marimba Castanet. In addition, CBT has developed courseware titles in
conjunction with IBM, Sun Microsystems and Netscape for the Java Education
World Tour and has developed or is developing titles for COBOL on MVS, AIX,
OS/390 and the Internet Security Courseware Consortium, which titles will
include Concept, Platform, Web Server, and Security Technology curricula.
In September 1997, CBT and Asymetrix Corporation, a leading provider of
online learning solutions, entered into a strategic partnership to provide
organizations with a powerful and easy-to-use tool for creating their own
customized computer-based courseware. The companies are developing Toolbook II
for CBT Systems
25
<PAGE>
which will incorporate the CBT user interface, navigation, and overall look
and feel with the power and flexibility of ToolBook II. This will allow
companies to create their own new customized courseware with the same look and
feel that distinguishes CBT library of interactive education software. As with
CBT's standard courseware, content developed using ToolBook II for CBT will be
deployable over LANs, WANs, intranets, or on stand-alone PCs.
Also in September 1997, CBT announced that it had acquired Scholars, a
pioneering leader in Internet-based training, offering the services of online
mentors as a resource for students taking CBT courseware to help them pass
vendor certification exams. Scholars focuses on integrating Internet
technologies with proven learning methodologies to deliver Internet-based,
certification-level mentoring services to students worldwide. CBT pairs its
Microsoft and Novell approved interactive courseware with a team of vendor-
certified mentors, known as Learning Advisors, to provide flexible, self-paced
study via the Internet. This learning model extends the advantages of online
learning by having Learning Advisors available to students twelve hours a day,
seven days a week. This methodology enables students to receive personalized
assistance as they need it through online chats, E-mail, and newsgroups.
CBT's solutions offer many advantages to both end-users and administrators
over traditional instructor-led training. CBT's courseware allows employees 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. CBT software is interactive,
allowing users to practice and test skills as they learn. The courseware also
incorporates sophisticated graphics and simulation technologies to demonstrate
many of the concepts introduced.
In addition, CBT's products are designed to allow administrators to leverage
their training budgets by tailoring training programs to their organization's
needs and tracking training usage and effectiveness. Organizations that invest
in the CBT solution can offer CBT's training software across a network,
corporate intranet or the Internet to all employees. CBT licenses its
courseware primarily through one, two or three year license agreements that
provide access to its library of titles, which allows customers to build
tailored training solutions. Under these license agreements, customers are
able to exchange and update their courses on an annual basis as their internal
training needs evolve or as technologies advance. In addition, using CBT's
administrative software, IS and human resource administrators can design and
monitor training programs for each employee.
CBT'S STRATEGY
CBT has entered into alliances with Checkpoint, Cisco, Informix, Lotus,
Marimba, Microsoft, Netscape, Network Associates, Novell, Oracle, RSA Data
Security, SAP, Security Dynamics, Sybase, Verisign and the IBM/Sun
Microsystems/Netscape collaborative Java education effort to develop and
market product-specific training. In addition, CBT has developed relationships
with Checkpoint Software Technologies, Inc., Network Associates, Inc., RSA
Data Security, Inc., Security Dynamics Technologies, Inc. and VeriSign, Inc.
as a result of its formation of the Internet Security Curriculum Consortium.
CBT markets its software to Fortune 3000 companies and other major United
States and international organizations primarily through a direct sales force.
CBT has increased sales to smaller corporate customers through distributors
and its telesales organization.
As of December 31, 1997, CBT had approximately 1,576 corporate customers
worldwide, including the following companies or their affiliates: Alcatel
Business Systems Corporation, American Management Systems, AT&T, The Bear
Stearns Companies, Inc., Bell Atlantic Corporation, Blue Cross Blue Shield
Mutual of Ohio, British Airways, Cambridge Technology Partners, Compaq
Computer Corporation, Computer Sciences Corporation, CTG, Dell Computer
Corporation, Electronic Data Systems Corporation, GTE Data Services,
International Business Machines Corporation, MCI Communications, Inc.,
MedPartners, Inc., Price Waterhouse LLP, Reuters plc, Sprint Corporation,
Tandem Computers, Unisys Corporation, The University of California System, the
United States Air Force and Wells Fargo & Company.
26
<PAGE>
CBT's objective is to maintain and expand its market position through the
following strategies:
Offer a Broad Library to its Customers. CBT offers its customers a broad
product library of 558 software titles at the end of 1997 which it believes
has created a competitive barrier to entry. In 1997, CBT also delivered 120
titles in German and French, and plans to deliver more translated titles in
Japanese, Spanish, Portuguese and other languages. CBT's strategy is to
continue to expand its product library to allow CBT to sign larger initial
contracts and support incremental sales to its customer base over time.
Leverage Proprietary Development Technologies and Processes. CBT has created
a proprietary development engine and a streamlined development process to
assist CBT in bringing its products to market in a relatively short time-frame
and at a relatively low cost. In addition, CBT's technology generally supports
a common product architecture, resulting in products which have a recognizable
and consistent interface and are easier to support. CBT plans to continue
investing significant resources in research and development to further enhance
its underlying development engine and to accelerate the growth of its product
library.
Build Alliances with Key IT Vendors. CBT's strategy is to enter into
development and marketing alliances with key IT vendors to produce and
distribute vendor-specific authorized training programs. To date, CBT has
entered into alliances with Cisco, Informix, Lotus, Marimba, Microsoft,
Netscape, Network Associates, Novell, Oracle, RSA Data Security, SAP, Security
Dynamics, Sybase, Verisign and the IBM/Sun Microsystems/Netscape collaborative
Java education effort. CBT believes these alliances provide a number of
competitive advantages, including access to partners' product development
plans, source material and distribution channels.
Expand Channels of Distribution. CBT has primarily targeted Fortune 3000
companies and other major United States and international organizations
primarily through its direct sales force. During 1997, CBT began marketing its
software to educational institutions and governmental agencies through a
direct sales force. CBT's strategy is to expand its telesales organization and
its channels of indirect sales in order to reach organizations which could not
otherwise be effectively targeted by its direct sales force and to accelerate
its market penetration worldwide. CBT's indirect sales channels are currently
comprised of distributors, resellers and training organizations. Over the long
term, CBT intends to continue to explore electronic distribution through on-
line services, the Internet and corporate intranets.
Capitalize on Multimedia Technologies. CBT's current products include
multimedia elements such as rich graphics, interactive text and simulations,
and can be delivered on networked and standalone PCs. CBT's strategy is to
enhance its products over time as its customers adopt enterprise-wide systems
which have the capability to handle the requirements of more advanced
multimedia elements such as sound, video and complex animation. In this
regard, CBT has entered into a licensing and development relationship with
Street Technologies pursuant to which CBT will have the ability to deliver
such rich data types over the Internet, corporate intranets and LANs.
Serve Emerging Internet/Intranet Market Opportunity. CBT believes that
Internet technologies, including the Internet itself and the use of these
technologies to create enterprise-wide intranets, is radically altering the
way certain critical computing activities are performed. As the Internet and
intranets emerge as one computing platform, CBT believes that new education
and training needs will emerge as well. CBT will seek to build upon its
current activities in order to build a franchise around Internet and intranet
education opportunities.
CBT PRODUCTS
CBT's product library has grown from 44 titles at December 31, 1992 to 558
titles at December 31, 1997, encompassing over 2,200 hours of IT education and
training. In general, CBT'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. CBT
interactive training typically provides the user with anywhere from four to
eight hours of instruction per individual title. Students may also use the
courses to pre-test their capabilities in order to position themselves
properly within the course and to train only in relevant areas. At the end of
the course, students may take a test to measure accurately their mastery of
the course content. The results of this test may be viewed by a central
administrator using CBT's administrative program or exported to a standard
database or spreadsheet.
27
<PAGE>
CBT has developed an enterprise-wide network-based administrative software
program designed to allow a central administrator to audit the use of each
course, track employee performance and create specialized curricula for
employees by granting access to selected courses.
CBT licenses its products primarily through license agreements under which
customers may use the delivered products for a period of one, two or three
years. The license agreement format allows customers to exchange courses on
each anniversary date where the agreement is for more than one year. In order
to increase the number of titles or gain access to the library at a time other
than the specified dates, the customer may enter into a new license agreement
or upgrade the existing license agreement. Volume and multi-year discounts
encourage customers to expand license agreements as their needs grow and as
they become more familiar with CBT's product library. CBT's pricing varies
primarily based on the number of users, the number of titles selected and the
length of the contract.
CBT's strategy is to develop comprehensive curricula, each of which provides
training in areas related to client/server, mainframe and Internet and
intranet technologies. CBT's courses are generally compatible with Windows-
based desktop PCs and netBIOS LANs, and most of CBT's recently developed
courses are based on native Windows implementations. All of CBT's courses are
available for delivery on floppy disk or PC CD-ROM for installation on servers
or standalone workstations.
In addition to its continued support of traditional LAN environments, CBT
has developed a number of products which address the emerging Internet and
corporate markets. CBTWeb is an intranet deployment system which allows users
to download CBT courseware titles across an intranet. Access to these titles
is gained through a standard browser. CBTWeb enables customers to access and
manage CBT courses over an intranet via internally managed web servers. Using
CBTWeb, learners can choose to either download CBT courseware or interact with
it in real time over an intranet using CBT Systems' LivePlay capability. The
downloaded courseware contains a utility to send the student records back to a
central administrator so that the student progress may be monitored. CBTWeb
Plus is a turnkey training solution that enables customers to benefit from
Internet-based deployment of CBT's entire library of titles without the need
to install server-side software on their own network. CBTWeb Plus is an
externally hosted version of CBTWeb that allows customers to have their CBT
courseware managed over the Internet from an external site. CBTWeb Plus is
designed to relieve customers of any network infrastructure or security
issues, and minimizes human resource requirements, while providing the highest
level of deployment flexibility since each student receives CBT's training
from his or her preferred location. Additionally, training administrators and
IS managers are assured that students receive the most up-to-date curricula
since the CBTWeb Plus servers are maintained by CBT and are continuously
updated with the latest courseware at CBT's centralized courseware Development
Center in Dublin, Ireland.
In July 1997, CBT announced the release of CBTCampus, CBT's next-generation
training management and deployment architecture. Coupled with CBT's library of
titles, CBTCampus provides CBT's customers with a modular, fully integrated,
and extensible solution for delivering sophisticated interactive technology
training wherever and however it's needed, whether running over an intranet or
across a LAN. CBTCampus features a university campus metaphor as an easy-to-
navigate student interface, which can be accessed either as a Windows client
application or a web browser plug-in. Behind this intuitive interface is a
suite of sophisticated technologies that creates a seamless integrated
learning environment for students and administrators. CBTCampus was designed
to give high-performance results across a full range of environments. It
provides powerful deployment flexibility regardless of an organization's mix
of networked systems, and will enable students to access courses seamlessly
over an intranet or the Internet, over a LAN, or on their stand-alone desktop
or laptop computers.
The market for IT education and training is rapidly evolving. New methods of
delivering interactive education software are being developed and offered in
the marketplace, including intranet and Internet deployment systems. Many of
these new delivery systems will involve new and different business models and
contracting mechanisms. In addition, multimedia and other product
functionality features are being added to the educational software.
Accordingly, CBT's future success will depend upon, among other factors, the
extent to
28
<PAGE>
which CBT is able to develop and implement products which address these
emerging market requirements. There can be no assurance that CBT will be
successful in meeting changing market needs. Failure to develop and implement
products which address these emerging market requirements could have a
material adverse affect on CBT's business and results of operations.
Moreover, software products as complex as those offered by CBT may contain
undetected errors or fail when first introduced or upon release of new
versions of CBT's products. There can be no assurance that, despite testing by
CBT and by current and potential customers, errors will not be found in new
products after commencement of commercial shipments, resulting in a loss of or
delay in market acceptance.
The subject matter of CBT'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, CBT
believes that its future success will depend in large part upon 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 CBT
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 CBT were unable, due to resource, technological or other
constraints, to anticipate and respond adequately to changes in customers'
software technology and preferences, CBT's business and results of operations
would be materially adversely affected.
RESEARCH AND DEVELOPMENT
CBT believes that the development of an effective training product requires
the convergence of source material, instructional design and computer
technology. The first step in developing a new training program is to obtain
content through subject matter experts, existing courses, including self-study
courses, and product reference materials, including product manuals. The CBT
development team then writes a script for the program which includes a
structure covering all of the relevant concepts, tasks to be completed,
interactive features and tests to measure achievement and to reinforce the
lesson. During the development of a script for a new program, CBT's
developers, working with animators, simulation programmers and graphic
designers, simultaneously plan and develop the course elements. These elements
are then integrated into a single program. The program is then tested to
ensure that each course delivers the desired education and training.
The core of CBT's product development is its product development engine--an
environment comprising CBT proprietary software and off-the-shelf tools--which
has been optimized for the creation of interactive software training programs.
CBT believes that its product development engine provides a competitive
advantage by allowing CBT to create modular courses, identify and change
portions of a course without rewriting the entire course, port courses more
easily across operating systems and enhance the multimedia content of its
courses more quickly and efficiently. CBT's technology generally supports a
common product architecture, resulting in products that have a recognizable
and consistent interface and are easier to support. CBT's goal is to continue
to enhance its product development engine to meet CBT's future development
needs, including ensuring that its courseware is able to incorporate a wide
variety of multimedia elements.
CBT performs substantially all of its research and development activities
and develops substantially all of its courses at its Dublin, Ireland
development facility. From time to time, CBT subcontracts outside development
services to develop portions of particular courses. In addition, all products
produced using these outside developers remain the sole property of CBT.
During 1995, 1996 and 1997, research and development expenses totaled
approximately $6.6 million, $11.5 million and $19.1 million, respectively.
During 1997, CBT's research and development staff grew from 221 to 272
employees. CBT intends to continue to make substantial investments in research
and development.
29
<PAGE>
DEVELOPMENT AND MARKETING ALLIANCES
CBT'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. To date, CBT has formed alliances with Checkpoint, Cisco, Informix,
Lotus, Marimba, Microsoft, Netscape, Network Associates, Novell, Oracle, RSA
Data Security, SAP, Security Dynamics, Sybase, Verisign and the IBM/Sun
Microsystems/Netscape collaborative Java education effort. CBT believes its
development and marketing alliances offer it a number of competitive
advantages, including early access to the vendor's software engineers and
technical advisors for assistance in developing courses on new products. With
the approval of the development partner, products developed under the
relationship can be identified as "authorized" by that software vendor, which
CBT believes improves the marketability of such courses. In addition, these
alliances may result in additional distribution channels for CBT, by allowing
each party to distribute courses to its respective customer base. In some of
these alliances, the software vendor has contributed financial resources
toward the development of specified courses. CBT has recognized the revenue
from such development payments on a percentage of completion basis as products
are produced or, where required in the contract, as CBT has met specified
milestones. CBT believes that these alliances also provide significant
benefits to the software vendors by allowing them to achieve additional market
penetration generated by increasing the base of trained users.
CBT believes that an increasing proportion of its revenues in the future may
be attributable to products developed through its alliances. There can be no
assurance that any of these parties will continue to cooperate with CBT, that
CBT will be able to develop successfully courses for its development and
marketing alliances in a timely fashion or at all, or that CBT will be able to
negotiate additional alliances in the future on acceptable terms or at all.
There can be no assurance that the marketing efforts of CBT's partners will
not disrupt CBT's direct sales efforts. In addition, CBT's development and
marketing partners could pursue their existing or alternative training
programs in preference to and in competition with those being developed with
CBT. In the event that CBT is not able to maintain or expand its current
development and marketing alliances or enter into new development and
marketing alliances, CBT's operating results and financial condition could be
materially adversely affected. Furthermore, CBT is required to pay royalties
to its development and marketing partners on products developed with them,
which reduces CBT's gross margins. CBT expects that cost of revenues may
fluctuate from period to period in the future based upon many factors,
including the mix of titles licensed (between titles developed exclusively by
CBT and royalty-bearing titles developed pursuant to development and marketing
alliances) and the timing of expenses associated with development and
marketing alliances. In addition, the collaborative nature of the development
process under these alliances may result in longer development times and less
control over the timing of product introductions than for courses developed
solely by CBT.
CUSTOMERS
CBT primarily licenses its courses to Fortune 3000 companies and other major
United States and international organizations in a wide range of industries,
including manufacturing, transportation, telecommunications, utilities,
banking, healthcare, securities, computers and insurance. CBT also licenses
its courseware to educational institutions and governmental agencies. CBT
markets its courseware through its direct sales organization to approximately
1,576 corporate customers worldwide and through its telesales organization to
approximately 2,174 customers worldwide. CBT also distributes its courses
through a number of resellers. No customer accounted for more than 5% of
revenues in 1997.
BACKLOG
CBT generates a substantial portion of its revenue through multi-year
license agreements. The initial annual license fee is generally recognized at
the time of delivery of products. Subsequent annual license fees are
recognized on the anniversary date of such delivery, or if the customer
exchanges courses at the anniversary date, upon delivery of the exchanged
courses. Backlog at any given date represents the amount of all license fees
under current agreements which have not yet been recognized as revenue.
Although CBT's license
30
<PAGE>
agreements are noncancellable by their terms, there can be no assurance that
any customer will fulfill the contractual obligations under its agreement.
Cancellation, reduction or delay in orders by or shipments to any of these
customers could have a material adverse effect on CBT's business and results
of operations.
The amount and timing of the recognition of revenue associated with this
backlog can vary depending on the timing of future deliveries of products and
amendments to customers' license agreements. CBT had backlog of approximately
$27.1 million, $60.3 million and $110 million as of December 31, 1995, 1996
and 1997, respectively. Approximately 35% of CBT's backlog as of December 31,
1997 was concentrated among seven customers.
INTELLECTUAL PROPERTY AND LICENSES
CBT 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 CBT's courseware or technology without authorization, or to develop
similar courseware or technology independently. Furthermore, the laws of
certain countries in which CBT sells its products do not protect CBT's
software and intellectual property rights to the same extent as do the laws of
the United States. CBT generally does not include in its software any
mechanisms to prevent or inhibit unauthorized use, but generally requires the
execution of a license agreement which restricts copying and use of CBT's
products. If unauthorized copying or misuse of CBT's products were to occur to
any substantial degree, CBT's business and results of operations could be
materially adversely affected. There can be no assurance that CBT's means of
protecting its proprietary rights will be adequate or that CBT's competitors
will not independently develop similar technology.
There can be no assurance that third parties will not claim that CBT's
current or future products infringe on the proprietary rights of others. CBT
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 CBT to enter into royalty or licensing agreements. Such royalty or
license agreements, if required, may not be available on terms acceptable to
CBT, or at all.
COMPETITION
The IT education and training market is highly fragmented and competitive,
and CBT expects this competition to increase. CBT expects that because of the
lack of significant barriers to entry into the IT education and training
market, new competitors may enter the market in the future. In addition,
larger companies are competing with CBT in the IT education and training
market through the acquisition of CBT's competitors, and CBT expects this
trend to continue. Such competitors may also include publishing companies and
vendors of application software, including those vendors with whom CBT has
formed development and marketing alliances.
CBT competes primarily with third-party suppliers of instructor-led IT
education and training and internal training departments. To a lesser extent,
CBT also competes with other suppliers of IT education and training, including
several other companies that produce interactive software training,
consultants, value-added resellers and network integrators. Certain of these
value-added resellers also market products competitive with those of CBT. CBT
expects that as organizations increase their dependence on outside suppliers
of training, CBT will face increasing competition from these other suppliers
as IT education and training managers more frequently compare training
products provided by outside suppliers.
Many of CBT's current and potential competitors have substantially greater
financial, technical, sales, marketing and other resources, as well as greater
name recognition, than CBT. In addition, the IT education and training market
is characterized by significant price competition, and CBT expects that it
will face increasing price pressures from competitors as IS managers demand
more value for their training budgets. Accordingly,
31
<PAGE>
there can be no assurance that CBT will be able to provide products that
compare favorably with new instructor-led techniques or other interactive
training software or that competitive pressures will not require CBT to reduce
its prices significantly.
SALES, MARKETING AND CUSTOMER SUPPORT
Direct Sales and Support. At December 31, 1997, CBT employed 286 direct
sales and support people worldwide, of which 151 were located in the United
States. CBT's telesales organization, which CBT established in December 1995
to focus on sales of CBT courseware to smaller corporate customers and end-
users as well as to work with CBT's alliance partners' channel efforts,
employed 48 people worldwide, of which 39 were located in the United States,
at December 31, 1997. CBT plans to continue to build the telesales
organization in 1998.
Indirect Sales. In order to accelerate worldwide market penetration, CBT is
broadening its sales strategy by expanding its indirect sales channels, which
include resellers, development partners, and industry catalogs circulated by
leading IT distributors. The indirect sales channels give CBT access to a more
diverse client base which CBT believes cannot be targeted cost-effectively
through its direct sales force.
CBT's marketing partners also generally have the right to resell products
developed under their alliances with CBT.
EMPLOYEES
As of December 31, 1997, CBT had a total of 702 full-time employees, of whom
334 were engaged in sales, marketing and customer support, 96 in management,
administration and finance and 272 in product development. On December 31,
1997, 242 employees were located in the United States, 276 in the Republic of
Ireland, 48 in the United Kingdom, 28 in Germany, 35 in Canada, 49 in
Australia, 13 in the Benelux countries, 6 in the Middle East and 10 in South
Africa. None of CBT's employees is subject to a collective bargaining
agreement, and CBT has not experienced any work stoppages. CBT believes that
its employee relations are good.
CBT'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 attract, motivate and retain highly qualified employees,
including management personnel. In particular, the loss of certain senior
management personnel or other key employees could have a material adverse
effect on CBT's business. In addition, CBT depends on writers, programmers and
graphic artists, as well as third-party content providers. CBT expects to
continue to hire additional product development, sales and marketing, IS and
accounting staff. However, there can be no assurance that CBT will be
successful in attracting, retaining or motivating key personnel. The inability
to hire and retain qualified personnel or the loss of the services of key
personnel could have a material adverse effect upon CBT's current business,
new product development efforts and future business prospects.
FOREIGN OPERATIONS
In 1997, CBT's products were marketed in over 20 countries, and sales
outside the United States represented approximately 40%, 33% and 30% of CBT's
revenues in 1995, 1996 and 1997, respectively. CBT expects that international
operations will continue to account for a significant portion of its revenues
and intends to continue to expand its operations outside of the United States.
In addition, CBT's research and development organization is located outside
the United States. Operations outside the United States are subject to
inherent risks, including fluctuations in exchange rates, difficulties or
delays in developing and supporting non-English language versions of CBT's
products, political and economic conditions in various jurisdictions,
unexpected changes in regulatory requirements, tariffs and other trade
barriers, difficulties in staffing and managing foreign subsidiary operations,
longer accounts receivable payment cycles and potentially adverse tax
consequences. There can be no assurance that such factors will not have a
material adverse effect on CBT's future operations outside of the United
States.
CBT's consolidated financial statements are prepared in dollars, while
several of CBT's subsidiaries have functional currencies other than the
dollar, and a significant portion of CBT's revenues, costs and assets are
32
<PAGE>
denominated in currencies other than their respective functional currencies.
Fluctuations in exchange rates may have a material adverse affect on CBT's
results of operations, particularly its operating margins, and could also
result in exchange losses. As a result of currency fluctuations, CBT
recognized exchange losses of $161,000 in 1995, and exchange gains of $4,000
and $112,000 in 1996 and 1997, respectively. The impact of future exchange
rate fluctuations on CBT's results of operations cannot be accurately
predicted. To date, CBT has not sought to hedge the risks associated with
fluctuations in exchange rates, but may undertake such transactions in the
future. There can be no assurance that any hedging techniques implemented by
CBT will be successful or that CBT's results of operations will not be
materially adversely affected by exchange rate fluctuations.
Certain of CBT's subsidiaries have significant operations and generate
significant taxable income in the Republic of Ireland, and certain of CBT's
Irish subsidiaries are taxed at rates substantially lower than tax rates in
effect in the United States and in other countries in which CBT has
operations. If such subsidiaries were no longer to qualify for such tax rates
or if the tax laws were rescinded or changed, CBT's operating results could be
materially adversely affected. In addition, if tax authorities were to
challenge successfully the manner in which profits are recognized among CBT's
subsidiaries, CBT's taxes could increase, and its cash flow and results of
operations could be materially adversely affected.
PROPERTIES
CBT conducts its operations primarily out of its facilities in Menlo Park,
California, and Dublin, Ireland. CBT currently occupies approximately 25,000
square feet at its United States headquarters. In Dublin, Ireland, CBT
currently leases two properties, one of which comprises approximately 25,000
square feet and houses CBT's main product development center, and the other
comprises approximately 8,000 square feet containing CBT's fulfillment
operations, including disk duplication, packaging and delivery. CBT has also
entered into a lease for approximately 25,000 square feet in Scottsdale,
Arizona. This will serve as a second site for CBT's growing telesales
organization as well as serve as the United States location for Scholars.
CBT also leases sales office space in a number of countries including the
United Kingdom, Australia, the Middle East, the Benelux countries, Canada,
Germany and South Africa and throughout the United States.
LEGAL PROCEEDINGS
In April 1990, Patrick J. McDonagh, a director of CBT, transferred certain
securities of Datacode Electronics Ltd. ("Datacode") to CBT. Certain other
shareholders of Datacode have alleged that the transfer had the effect of
depriving them of certain benefits and have claimed that they are owed 21,126
of CBT's Ordinary Shares. On September 14, 1995, a complaint was filed with
the High Court of Ireland against CBT and certain of its then officers and
former officers. CBT believes that the plaintiff's allegations are entirely
without merit and intends to contest the complaint vigorously.
33
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA OF CBT
The following selected consolidated financial data for each of the five
years in the period ended December 31, 1997 and at December 31, 1993, 1994,
1995, 1996 and 1997 relates to CBT's continuing IT education and training
business and should be read in conjunction with the consolidated financial
statements and related notes thereto in "Management's Discussion and Analysis
of Financial Condition and Results of Operations of CBT." The results of
operations for each of the three years in the period ended December 31, 1997
and the balance sheets as at December 31, 1997 and 1996 are derived from the
audited consolidated financial statements of CBT, which have been prepared in
accordance with United States generally accepted accounting principles
("US GAAP"). The data at December 31, 1993, 1994 and 1995 and for the years
ended December 1993 and 1994 is derived from audited consolidated financial
statements of CBT prepared in accordance with US GAAP not included herein. The
consolidated statements of operations data for any particular period are not
necessarily indicative of the results of operations for any future period,
including CBT's fiscal year ending December 31, 1998.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------
1993 1994 1995 1996 1997
------- ------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues...................... $22,735 $34,500 $ 49,342 $ 73,566 $118,639
Cost of revenues.............. 5,198 8,424 11,288 12,770 19,475
------- ------- -------- -------- --------
Gross profit.................. 17,537 26,076 38,054 60,796 99,164
Operating Expenses:
Research and development.... 3,148 3,603 6,597 11,481 19,068
Sales and marketing......... 10,085 14,856 20,282 30,382 47,035
General and administrative.. 2,329 2,854 4,325 6,379 8,012
Amortization of acquired
intangibles................ 558 604 -- -- --
Costs of acquisitions....... -- -- 198 596 1,534
------- ------- -------- -------- --------
Total operating expenses.. 16,120 21,917 31,402 48,838 75,649
------- ------- -------- -------- --------
Income from operations........ 1,417 4,159 6,652 11,958 23,515
Other income (expense), net... (224) (539) 801 2,300 2,598
------- ------- -------- -------- --------
Income before provision for
income taxes................. 1,193 3,620 7,453 14,258 26,113
Provision for income taxes.... (737) (1,038) (1,424) (2,419) (3,916)
------- ------- -------- -------- --------
Net income.................... 456 2,582 6,029 11,839 22,197
======= ======= ======== ======== ========
Net income per equivalent
ADS--Diluted................. $ 0.02 $ 0.09 $ 0.17 $ 0.30 $ 0.53
======= ======= ======== ======== ========
ADSs used in computing per
equivalent ADS amounts....... 22,452 29,944 35,366 39,912 41,708
======= ======= ======== ======== ========
<CAPTION>
DECEMBER 31,
----------------------------------------------
1993 1994 1995 1996 1997
------- ------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and short-term invest-
ments........................ $ 3,558 $ 4,656 $ 47,863 $ 47,819 $ 64,915
Working capital............... (2,720) (1,798) 43,459 46,248 79,142
Total assets.................. 13,162 19,149 68,722 87,028 131,321
Long-term debt, excluding cur-
rent portion................. 2,257 787 787 -- --
Redeemable convertible pre-
ferred shares................ 2,666 4,736 -- -- --
Shareholders' equity (defi-
cit)......................... (4,562) (5,724) 46,299 61,231 100,979
</TABLE>
34
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF CBT
The following discussion should be read in conjunction with the consolidated
financial statements and related notes thereto, which have been restated to
reflect the acquisitions of ALA, Benelux, Scholars and MidEast.
Important Note About Forward Looking Statements. The following discussion
contains forward looking statements within the meaning of Section 27A of the
Securities Act and Section 21E of the Exchange Act. Predictions of future
events are inherently uncertain. Actual events could differ materially from
those predicted in the forward looking statements as a result of the risks set
forth in the following discussion, and in particular, the risks discussed
above under the caption "Risk Factors."
OVERVIEW
CBT is a leading provider of interactive software generally designed to meet
businesses' IT education and training needs. CBT develops, publishes and
markets a broad library of over 558 software titles focused on client/server,
Internet and corporate intranet technologies and delivered on networked and
standalone PCs and over corporate intranets.
CBT derives revenues primarily from license agreements under which customers
license CBT's titles for periods of one, two or three years. The license
agreement format generally allows the customer to exchange titles for other
titles in CBT's library on an annual basis if the agreement is for more than
one year. The initial annual license fee is generally recognized as revenue at
the time of delivery of products, and subsequent annual license fees are
generally recognized on the anniversary of each delivery date. Although CBT's
license agreements are noncancellable by their terms, there can be no
assurance that any customer will fulfill the contractual obligations under its
agreement. Cancellation, reduction or delay in orders by or shipments to any
of these customers could have a material adverse effect on CBT's business and
results of operations. In addition, CBT derives revenues from sales of its
courses, primarily through its direct sales and telesales organizations and
resellers.
In recent years, CBT has entered into several development and marketing
alliances with key vendors of client/server, internet/intranet and enterprise
software, under which CBT develops titles for training on specific products.
Under certain of its development and marketing alliances, CBT's partners have
agreed to fund certain product development costs. CBT recognizes such funding
as revenues on a percentage of completion basis, and the costs associated with
such revenues are reflected as cost of revenues. These agreements have the
effect of shifting expenses associated with developing certain new products
from research and development to cost of revenues. CBT expects that cost of
revenues may fluctuate from period to period in the future based upon many
factors, including, but not limited to, the timing of expenses associated with
development and marketing alliances. CBT does not expect funding from
development partners to contribute significantly to revenues in future years.
RECENT DEVELOPMENTS
In December 1996, CBT and Street Technologies, a developer of technology to
"stream" multimedia and other large data files to permit real-time delivery
over local and wide area networks, corporate intranets and the Internet,
entered into an agreement pursuant to which the companies would work together
to deploy CBT's interactive education software over corporate intranets and
the Internet. As part of the agreement, CBT acquired a 12.5% ownership
interest in Street Technologies and Street Technologies agreed that its
license will be exclusive to CBT within a defined group of companies. In
December 1997, CBT exchanged its 12.5% ownership interest in Street
Technologies, and $300,000 in cash, for a perpetual license of Street
Technologies' deployment tools.
35
<PAGE>
On March 9, 1998, CBT effected a two-for-one split of its issued and
outstanding ADSs, whereby each issued and outstanding ADS is now represented
by one-fourth of one Ordinary Share and each issued and outstanding Ordinary
Share that is deposited with The Bank of New York, as Depositary (the
"Depositary"), is represented by four ADSs. Unless stated otherwise, all
references herein to CBT ADSs are on a post-split basis.
RESULTS OF OPERATIONS
The following table sets forth certain consolidated statement of operations
data as a percentage of revenues for the three years in the period ended
December 31, 1997:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Revenues.......................................... 100% 100% 100%
Cost of revenues.................................. 22.9 17.4 16.4
-------- -------- --------
Gross profit...................................... 77.1 82.6 83.6
Operating expenses:
Research and development........................ 13.4 15.6 16.1
Sales and marketing............................. 41.1 41.3 39.6
General and administrative...................... 8.7 8.7 6.8
Costs of acquisitions........................... 0.4 0.8 1.3
-------- -------- --------
Total operating expenses...................... 63.6 66.4 63.8
-------- -------- --------
Income from operations............................ 13.5 16.2 19.8
Other income, net................................. 1.6 3.1 2.2
-------- -------- --------
Income before provision for income taxes.......... 15.1 19.3 22.0
Provision for income taxes........................ (2.9) (3.2) (3.3)
-------- -------- --------
Net income........................................ 12.2% 16.1% 18.7%
======== ======== ========
</TABLE>
Revenues. Revenues increased from $49.3 million in 1995 to $73.6 million in
1996 and to $118.6 million in 1997. The increases in revenues during these
periods were primarily attributable to an increase in the number of available
courses, strong customer contract renewals and upgrades and expanded marketing
and distribution efforts. Approximately 0.8%, 0.8% and 0.4% of revenues in
1995, 1996 and 1997, respectively, were attributable to development revenues
derived from agreements with CBT's development partners. CBT does not expect
funding from development partners to contribute significantly to revenues in
future years.
Revenues in the United States increased from $29.4. million (or 60% of
revenues) in 1995 to $49.3 million (or 67% of revenues) in 1996 and to $83.6
million (or 71% of revenues) in 1997. The increases in 1996 and 1997 were
primarily the result of significant increases in the number of sales and
related personnel employed in the United States, an increase in the number of
available courses and an expansion of CBT's customer base. While revenues in
the United States increased significantly in absolute terms over these
periods, CBT's sales and marketing expenses and general and administrative
expenses in the United States also increased rapidly as CBT hired and expanded
its staff to support the United States sales growth.
Revenues in Europe were $9.0 million (or 18% of revenues) in 1995, $14.3
million (or 19% of revenues) in 1996, and $20.3 million (or 17% of revenues)
in 1997, respectively. Revenues from outside the United States and Europe
(principally from Australia, Canada and South Africa and also Middle East in
1997) were $10.9 million (or 22% of revenues) in 1995, $10.0 million (or 14%
of revenues) in 1996, and $14.7 million (or 12% of revenues) in 1997,
respectively. Because a significant portion of CBT's business is conducted
outside the United States, CBT is subject to numerous risks of doing business
in other countries, including risks related to currency fluctuations.
No customer accounted for more than 5% of revenues in 1995, 1996 or 1997.
However, approximately 35% of CBT's backlog at December 31, 1997 was
concentrated among seven customers, compared to 35% among nine customers at
December 31, 1996. Backlog at any given date represents the amount of all
license fees under
36
<PAGE>
current agreements which have not yet been recognized as revenues. Although
CBT's license agreements are noncancellable by their terms, there can be no
assurance that any customer will fulfill the contractual obligations under its
agreement. Cancellation, reduction or delay in orders by or shipments to any
of these or other customers could have a material adverse effect on CBT's
business and results of operations.
Cost of Revenues
Cost of revenues includes the cost of materials (such as CD-ROMs, diskettes,
packaging and documentation), royalties to third parties, the portion of
development costs associated with funded development projects and fulfillment
costs.
Gross margins increased from 77.1% in 1995 to 82.6% in 1996 and to 83.6% in
1997. The increase in gross margins in 1996 and 1997 is primarily due to the
inclusion in cost of revenues for 1995 of certain costs CLS Consult GmbH,
CBT's German subsidiary, had incurred in developing its SAP interactive
training software. CLS, which was in an earlier stage of development in 1995,
outsourced a substantial portion of its product development to third parties,
and the associated expenses have been included in cost of revenues for 1995.
During 1996 and 1997, these activities were conducted at CLS, and no royalties
were therefore payable. Accordingly, these expenses are included in research
and development expenses for 1996 and 1997. The inclusion of these development
costs in cost of revenues had the corresponding effect of reducing research
and development expenses in 1995.
The inclusion of ALA also impacted gross margins in 1995 and 1996. Gross
margins were lower in 1997 principally as a result of royalty payments to
third party providers which were higher than the average royalty payments paid
by CBT. In 1997, the previously outsourced products for resale were replaced
by CBT product.
CBT expects that cost of revenues may fluctuate from period to period in the
future based upon many factors, including the mix of titles licensed (between
titles developed exclusively by CBT and royalty-bearing titles developed
pursuant to development and marketing alliances) and the timing of expenses
associated with development and marketing alliances.
Research and Development Expenses. Research and development expenses consist
primarily of salaries and benefits, occupancy expenses, fees paid to outside
consultants and travel expenses. Research and development expenses increased
in absolute terms and as a percentage of revenues from $6.6 million (or 13.4%
of revenues) in 1995 to $11.5 million (or 15.6% of revenues) in 1996 and to
$19.1 million (or 16.1% of revenues) in 1997, principally as a result of an
increase in research and development personnel employed to expand and enhance
CBT's library of software products. In addition, approximately $245,000,
$803,000 and $442,000 of development expenses incurred in connection with
development and marketing alliances were charged to cost of revenues in 1995,
1996 and 1997, respectively. CBT believes that significant investment in
research and development is required to remain competitive in the IT education
and training market, and CBT therefore expects research and development
expenses to continue to increase in future periods.
Software development costs are accounted for in accordance with the
Statement of Financial Accounting Standards No. 86, under which CBT is
required to capitalize software development costs after technological
feasibility has been established. To date, development costs after
establishment of technological feasibility have been immaterial, and all
software development costs have been expensed as incurred.
Sales and Marketing Expenses. Sales and marketing expenses consist primarily
of salaries and commissions, occupancy expenses, advertising and promotional
expenses and travel expenses. These expenses increased in absolute terms from
$20.3 million (or 41.1% of revenues) in 1995 to $30.4 million (or 41.3% of
revenues) in 1996 and to $47.0 million (or 39.6% of revenues) in 1997. The
increase in absolute terms of sales and marketing expenses is primarily
attributable to an increase in the number of sales and sales support
personnel. Commission costs have also increased in absolute terms along with
the increases in revenues during these periods. CBT also increased
significantly advertising and promotional expenses in each of 1996 and 1997.
37
<PAGE>
The decrease in sales and marketing expenses as a percentage of revenues from
1996 to 1997 was principally due to more rapid increases in revenues than in
associated expenses. CBT expects to increase sales and marketing expenses in
the future to support expansion of its sales and marketing efforts.
General and Administrative Expenses. General and administrative expenses
increased in absolute terms from $4.3 million (or 8.7% of revenues) in 1995 to
$6.4 million (or 8.7% of revenues) in 1996 and to $8.0 million (or 6.8% of
revenues) in 1997. The increases in absolute terms were primarily due to
increased staffing to support expanding operations. The decrease as a
percentage of revenues from 1996 to 1997 was principally due to more rapid
increases in revenues than in associated expenses. CBT anticipates that
general and administrative expenses will increase in future periods due to
increases in staffing and infrastructure.
Other Income, Net. Other income, net, comprises interest expense, interest
income and exchange gains and losses. CBT recognized other income, net, of
approximately $1 million, $2.3 million and $2.5 million in 1995, 1996 and
1997, respectively. The increases in other income in 1996 and 1997 were
primarily the result of interest received on proceeds deposited from CBT's
initial and secondary public offerings in 1995. In addition, CBT recognized an
exchange loss of $161,000 in 1995, and exchange gains of $4,000 and $112,000
in 1996 and 1997, respectively.
CBT's consolidated financial statements are prepared in dollars, although
several of CBT's subsidiaries have functional currencies other than the
dollar, and a significant portion of CBT's and its subsidiaries' revenues,
costs and assets are denominated in currencies other than their respective
functional currencies. Fluctuations in exchange rates may have a material
adverse effect on CBT's results of operations, particularly its operating
margins, and could result in exchange losses. The impact of future exchange
rate fluctuations on CBT's results of operations cannot be accurately
predicted. To date, CBT has not sought to hedge the risks associated with
fluctuations in the exchange rate, but may undertake such transactions in the
future. There can be no assurance that any hedging techniques implemented by
CBT would be successful in eliminating or reducing the effects of currency
fluctuations.
Provision for Income Taxes. CBT operates as a holding company with operating
subsidiaries in several countries, and each subsidiary is taxed based on the
laws of the jurisdiction in which it operates. Because taxes are incurred at
the subsidiary level, and one subsidiary's tax losses cannot be used to offset
the taxable income of subsidiaries in other tax jurisdictions, CBT's
consolidated effective tax rate may increase to the extent that CBT reports
tax losses in some subsidiaries and taxable income in others.
CBT has significant operations and generates a majority of its taxable
income in the Republic of Ireland, and certain of CBT's Irish operating
subsidiaries are taxed at rates substantially lower than tax rates in effect
in the United States and other countries in which CBT has operations. One
Irish subsidiary currently qualifies for a 10% tax rate and another Irish
subsidiary is income tax exempt. If such subsidiaries were no longer to
qualify for such tax rates or if the tax laws were rescinded or changed, CBT's
operating results could be materially adversely affected. The standard rate of
Irish corporation tax on both trading and non-trading income presently (from
January 1, 1998) is 32%. The 10% incentive rate referred to above applies in
respect of income derived from certain activities carried out in the Republic
of Ireland. The incentive rate will continue up to December 31, 2010. From
January 1, 2006 it has been confirmed by the Government of Ireland in an
announcement by the Irish Minister for Finance on December 3, 1997 that the
corporation tax rate will be 12.5% on trading income and 25% on non-trading
income. Moreover, because CBT incurs income tax in several countries, an
increase in the profitability of CBT in one or more of these countries could
result in a higher overall tax rate. In addition, if tax authorities were to
challenge successfully the manner in which profits are recognized among CBT's
subsidiaries, CBT's taxes could increase and its cash flow and net income
could be materially adversely affected.
CBT's provision for income taxes was $1.4 million, $2.4 million and $3.9
million for each of 1995, 1996 and 1997, respectively.
The effective tax rate for CBT was 19.1%, 17.0% and 15.0% in 1995, 1996 and
1997, respectively. The decrease in the effective tax rate from 1995 to 1996
and to 1997 was principally the result of losses incurred by
38
<PAGE>
pooled entities in both 1995 and 1996 which were not available to offset
taxable income earned in other jurisdictions.
Quarterly Results of Operations. The following table sets forth certain
unaudited statement of operations data for each of CBT's last eight quarters.
This unaudited quarterly financial information has been prepared on a basis
consistent with the annual information presented elsewhere in this Proxy
Statement/Prospectus and, in management's opinion, reflects all adjustments
(consisting only of normal recurring accruals) necessary for a fair
presentation of the information presented. The operating results for any
quarter are not necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
QUARTERS ENDED
--------------------------------------------------------------------------
MAR 31, JUNE 30, SEPT 30, DEC 31, MAR 31, JUNE 30, SEPT 30, DEC 31,
1996 1996 1996 1996 1997 1997 1997 1997
------- -------- -------- ------- ------- -------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $15,000 $16,370 $18,755 $23,441 $22,575 $25,589 $30,412 $40,063
Cost of revenues........ 2,659 2,889 3,160 4,062 3,798 4,351 4,862 6,464
------- ------- ------- ------- ------- ------- ------- -------
Gross profit............ 12,341 13,481 15,595 19,379 18,777 21,238 25,550 33,599
Operating expenses
Research and
development........... 2,319 2,596 2,914 3,652 3,743 4,227 4,941 6,157
Sales and marketing.... 6,854 7,136 7,756 8,636 9,435 10,336 12,094 15,170
General and
administrative........ 1,264 1,708 1,374 2,033 1,707 1,837 2,005 2,463
Costs of acquisitions.. -- 596 -- -- 926 -- 242 366
------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses............. 10,437 12,036 12,044 14,321 15,811 16,400 19,282 24,156
------- ------- ------- ------- ------- ------- ------- -------
Income from operations.. 1,904 1,445 3,551 5,058 2,966 4,838 6,268 9,443
Other income, net....... 520 549 567 664 488 606 680 824
------- ------- ------- ------- ------- ------- ------- -------
Income before provision
for income taxes....... 2,424 1,994 4,118 5,722 3,454 5,444 6,948 10,267
Provision for income
taxes.................. (402) (382) (645) (990) (518) (817) (1,042) (1,539)
------- ------- ------- ------- ------- ------- ------- -------
Net income.............. 2,022 1,612 3,473 4,732 2,936 4,627 5,906 8,728
======= ======= ======= ======= ======= ======= ======= =======
Diluted net income per
equivalent ADS(1)...... $ 0.05 $ 0.04 $ 0.09 $ 0.12 $ 0.07 $ 0.11 $ 0.14 $ 0.21
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
(1) Diluted net income per equivalent ADS gives effect to the two-for-one
splits of the CBT ADSs effected in May 1996 and March 1998. Diluted net
income per ordinary share was $0.21, $0.16, $0.35 and $0.47 for the
quarters ended March 31, 1996, June 30, 1996, September 30, 1996 and
December 31, 1996, respectively, and $0.29, $0.45, $0.56 and $0.82 for the
quarters ended March 31, 1997, June 30, 1997, September 30, 1997 and
December 31, 1997, respectively.
The following table sets forth, as a percentage of revenues, certain line
items in CBT's statement of operations for the periods indicated.
<TABLE>
<CAPTION>
QUARTERS ENDED
-------------------------------------------------------------------
MAR 31, JUNE 30, SEPT 30, DEC 31, MAR 31, JUNE 30, SEPT 30, DEC 31,
1996 1996 1996 1996 1997 1997 1997 1997
------- -------- -------- ------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ 100% 100% 100% 100% 100% 100% 100% 100%
Cost of revenues........ 17.7 17.7 16.9 17.3 16.8 17.0 16.0 16.1
---- ---- ---- ---- ---- ---- ---- ----
Gross profit............ 82.3 82.3 83.1 82.7 83.2 83.0 84.0 83.9
Operating expenses
Research and
development.......... 15.5 15.9 15.5 15.6 16.6 16.5 16.2 15.4
Sales and marketing... 45.7 43.6 41.4 36.8 41.8 40.4 39.8 37.9
General and
administrative....... 8.4 10.4 7.3 8.7 7.6 7.2 6.6 6.2
Costs of
acquisitions......... -- 3.6 -- -- 4.1 -- 0.8 0.9
---- ---- ---- ---- ---- ---- ---- ----
Total operating
expenses........... 69.6 73.5 64.2 61.1 70.1 64.1 63.4 60.4
---- ---- ---- ---- ---- ---- ---- ----
Income from operations.. 12.7 8.8 18.9 21.6 13.1 18.9 20.6 23.5
Other income, net....... 3.5 3.4 3.0 2.8 2.2 2.4 2.2 2.1
---- ---- ---- ---- ---- ---- ---- ----
Income before provision
for income taxes....... 16.2 12.2 21.9 24.4 15.3 21.3 22.8 25.6
Provision for income
taxes.................. (2.7) (2.4) (3.4) (4.2) (2.3) (3.2) (3.4) (3.8)
---- ---- ---- ---- ---- ---- ---- ----
Net income.............. 13.5% 9.8% 18.5% 20.2% 13.0% 18.1% 19.4% 21.8%
==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
39
<PAGE>
CBT's growth in revenues over the last eight quarters has been primarily
attributable to an increase in the number of available courses in CBT's
library, an increase in the number of customers and increases in sales to
existing customers, as well as CBT's expanded marketing and distribution
efforts in the United States, and to a lesser extent, the United Kingdom.
CBT's revenues historically have been highest in the fourth quarter of each
year. Sales in the fourth quarter represented 32% and 34% of total revenues in
1996 and 1997, respectively. Sales in this fourth quarter increased more
rapidly than expenses and, accordingly, net income in the fourth quarter of
1996 and 1997 represented approximately 40% and 39%, respectively, of total
net income for such years. There can be no assurance that CBT will continue to
experience significant increases in revenues and profitability in the fourth
quarter of future years. Any failure to do so would have a material adverse
effect on CBT's operating results for the year as a whole.
In each quarter of 1996, gross margins were lower than the comparable
quarter in 1997 principally as a result of the inclusion in cost of revenues
on a quarterly basis of certain costs which ALA had incurred in outsourcing
product for resale. In 1997, the previously outsourced products for resale
were replaced by CBT product and the corresponding cost of revenues was lower.
During 1997, CBT hired a number of employees, particularly sales and
marketing personnel, which resulted in an increase in sales and marketing
expenses for the year. CBT also added a significant number of research and
development personnel. As a result of these increases, as well as continued
hiring in other departments, CBT expects operating expenses in future periods
to be significantly higher than in prior periods. CBT anticipates that it will
continue this hiring in the first half of 1998, which will reduce operating
margins, particularly in the first and second quarters.
LIQUIDITY AND CAPITAL RESOURCES
Cash and short-term investments were $47.9 million, $47.8 million and $64.9
million in 1995, 1996 and 1997, respectively. The decrease from 1995 to 1996
was due to CBT's investment in Street Technologies and a significant increase
in purchases of property and equipment which was partially offset by an
increase in cash provided by operating activities and from the issuance of
Ordinary Shares. The increase from 1996 to 1997 was from the exercise of
options and by cash provided by operating activities which was offset by
purchases of property, equipment and fixtures. Net cash provided by operating
activities increased from $4.5 million in 1995 to $11.0 million in 1996 and
decreased to $4.6 million in 1997. The increased cash flow from operations in
1996 was primarily attributable to net income of $11.8 million in 1996. The
decrease in net cash provided by operating activities in 1997 was primarily
due to a significant increase in accounts receivable in 1997.
Capital expenditures were approximately $1.9 million in 1995, $6.4 million
in 1996 and $5.3 million in 1997. Although CBT currently has no material
capital commitments, it expects that it will continue to spend more in 1998,
primarily as a result of setting up new facilities and to continuing to
upgrade the capabilities of its computer equipment as well as improvements to
its information systems.
Cash requirements are expected to continue to increase in order to fund: (i)
personnel and salary costs, (ii) research and development costs, (iii)
investment in additional equipment and facilities and (iv) working capital
requirements.
CBT believes that its existing cash and short-term investments will be
sufficient to meet its cash requirements for at least the next twelve months.
CBT may from time to time consider the acquisition of complementary
businesses, products or technologies, which may require additional financing.
The foregoing statement regarding CBT's expectations for continued liquidity
is a forward-looking statement, and actual results may differ materially
depending on a variety of factors, including variable operating results or
presently unexpected uses of cash such as mergers and acquisitions.
Effects of Recent Accounting Pronouncements. In February 1997, The Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings per Share", and Statement No. 129,
"Disclosure of Information about Capital Structure," which have been adopted
in CBT's year ended December 31, 1997. See Note 2 of Notes to the CBT
Consolidated Financial Statements for the effect of Statement No. 128. The
introduction of Statement No. 129 had no impact on CBT in 1997.
40
<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS OF CBT
Certain information about the directors and executive officers of CBT, and
their respective ages and positions as of December 31, 1997, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
William G. McCabe....... 41 Chairman of the Board
James J. Buckley........ 47 Chief Executive Officer, President and Director
John P. Hayes........... 44 Group Financial Controller and Director
Gregory M. Priest....... 34 Director
Patrick J. McDonagh..... 46 Director
John M. Grillos......... 56 Director
Richard Y. Okumoto...... 45 Vice President, Finance and Chief Financial Officer
William B. Lewis........ 42 Vice President, North American Sales
Jeffrey N. Newton....... 43 Vice President, Business Development
Gregory G. Olson........ 44 Vice President, Marketing
Barry D. Stockwell...... 49 Vice President, Strategic Partners
William A. Beamish...... 43 Vice President, Product Strategy and Development
Elizabeth K. Roemer..... 45 Vice President and General Counsel
</TABLE>
William G. McCabe has been Chairman of the Board of CBT since September
1991. From September 1991 to December 1996, Mr. McCabe also served as Chief
Executive Officer of CBT.
James J. Buckley has been President and Chief Operating Officer of CBT since
September 1996. In October 1996, Mr. Buckley was elected to serve as a
director of CBT, and in December 1996 he was elected Chief Executive Officer
of CBT. Prior to joining CBT, Mr. Buckley served as President, Apple Americas
and Senior Vice President of Apple Computer, Inc. from November 1995 to April
1996; President, Apple USA from October 1993 to November 1995; and Vice
President and General Manager for Apple USA's Higher Education Division from
April 1992 to October 1993. Mr. Buckley also served in various sales,
marketing and managerial positions at Apple Computer, Inc. during his tenure
there.
John P. Hayes has been Group Financial Controller and a director of CBT
since 1991. From 1987 to 1991, Mr. Hayes served as Financial Controller of
CBT.
Gregory M. Priest has been a director of CBT since June 1996. Since February
1998, Mr. Priest has been President and Chief Executive Officer of
KnowledgeWell, Limited, ("KnowledgeWell"), a developer and marketer of
interactive education software for business and professional areas other than
information technology. From December 1995 to January 1998, Mr. Priest served
as Vice President, Finance, Chief Financial Officer and Assistant Secretary of
CBT. Prior to joining CBT, Mr. Priest was an attorney with Wilson Sonsini
Goodrich & Rosati, Professional Corporation, a private law firm representing
technology companies, where he was elected to the partnership in 1995. From
June 1989 to July 1990, Mr. Priest served as a law clerk to Justice Thurgood
Marshall of the United States Supreme Court.
Patrick J. McDonagh was a founding member of CBT and has been a director of
CBT since September 1989. He has not taken an active role in CBT's management
since 1991 and is currently a private investor.
John M. Grillos has been a director of CBT since February 1994. Mr. Grillos
is a Partner of ITech Partners, L.P., a venture capital partnership focused on
very early stage information technology companies. Mr. Grillos has been
employed by BancAmerica Robertson Stephens, an investment banking firm, in its
venture capital group, since 1988.
Richard Y. Okumoto has been Vice President, Finance and Chief Financial
Officer of CBT since February 1, 1998. From February 1993 to January 1998, Mr.
Okumoto served as Executive Vice President and Chief Financial Officer for
Credence Systems Corporation.
41
<PAGE>
William B. Lewis has been Vice President, North American Sales of CBT since
March 1997. From January 1996 until March 1997, Mr. Lewis served as CBT's Area
Vice President of Sales for the southern region and served as Regional Vice
President of Sales for the southern region from January 1994 to January 1996.
Mr. Lewis joined CBT as a sales manager for the southern region in April 1992
and served in that capacity until January 1994.
Jeffrey N. Newton has been Vice President, Business Development of CBT since
March 1997. From January 1996 until March 1997, Mr. Newton served as CBT's
Area Vice President of Sales for the northern region and served as Regional
Vice President of Sales for the northern region from January 1994 to January
1996. Mr. Newton joined CBT as a sales manager for the northern region in
April 1992 and served in that capacity until January 1994.
Gregory G. Olson has been Vice President, Marketing of CBT since December
1996. Prior to joining CBT, Mr. Olson served as Manager, Direct Marketing and
Advertising for Apple Computer, Inc.'s America's Division from December 1995
to December 1996. Mr. Olson also served as Manager, Direct Marketing and
Advertising for Apple Computer, Inc. in the United States from June 1994 to
December 1995 and held various marketing and advertising managerial positions
with Apple Computer, Inc. from July 1989 to June 1994.
Barry D. Stockwell has been Vice President, Strategic Partners of CBT since
November 1997. From June 1993 to October 1997, Mr. Stockwell held various
positions with Silicon Graphics, Inc., including Director of OEM Marketing and
Director of Strategic Partner Management. From October 1991 to June 1993, Mr.
Stockwell was Manager of Strategic Business Development for NEXT Software,
Inc.
William A. Beamish has been Vice President, Product Strategy and Development
of CBT since 1993. Mr. Beamish joined CBT Systems Ltd. ("CBT Ireland") in 1985
as a design consultant. He became head of product development in 1988 and
Development Center Manager in 1990. As of April 1, 1998, Mr. Beamish became a
consultant to CBT and resigned his office as Vice President, Product Strategy
and Development. Mr. Beamish has agreed to provide consulting services to CBT
through December 31, 1998 to assist in the transition.
Elizabeth K. Roemer has been Vice President and General Counsel of CBT since
January 1998. From 1983 until January 1998, Ms. Roemer held various legal
positions with Pacific Telesis Group, including Senior Counsel and Assistant
Secretary.
Executive officers of CBT are elected by the CBT Board on an annual basis
and serve until their successors have been duly elected. There are no family
relationships among the directors or executive officers of CBT.
42
<PAGE>
EXECUTIVE COMPENSATION
The following table discloses, for the year ended December 31, 1997 (the
"Last Fiscal Year"), compensation earned by each individual serving as CBT's
Chief Executive Officer and each of the four other most highly compensated
executive officers for the Last Fiscal Year (collectively, the "Named
Executive Officers") and compensation earned by the Named Executive Officers
for the fiscal years ended December 31, 1996 and 1995:
ANNUAL COMPENSATION AND LONG-TERM COMPENSATION
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
--------------------------------------- ------------------------------
OPTIONS TO
NAME AND PRINCIPAL OTHER ANNUAL PURCHASE ADS ALL OTHER
POSITION YEAR SALARY(1) BONUS COMPENSATION(2) EQUIVALENTS(#) COMPENSATION(3)
------------------ ---- --------- -------- --------------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
James J. Buckley(4)..... 1997 $385,000 $ -- $ -- -- $ --
President, Chief Execu- 1996 125,618 50,000 -- 970,000 --
tive
Officer and Director
William B. Lewis(5)..... 1997 215,000 75,000 139,047 70,000 --
Vice President, North 1996 72,000 118,000 -- 72,000 --
American Sales
Jeffrey N. Newton(6).... 1997 223,000 57,000 86,086 70,000 --
Vice President, 1996 72,000 116,000 -- 80,000 --
Business Development
Gregory M. Priest(7).... 1997 180,000 177,200 -- 90,000 --
Vice President, 1996 125,000 89,250 -- 10,000 --
Finance, Chief 1995 5,208 -- -- 320,000 --
Financial Officer and
Director
William G. McCabe(8).... 1997 250,000 -- -- -- 30,362
Chairman of the Board 1996 120,000 380,000 -- 200,000 31,800
1995 120,000 410,000 -- 250,000 32,080
</TABLE>
- --------
(1) Salary includes amount deferred pursuant to CBT's 401(k) plan.
(2) Includes $139,047 and $86,086 paid in 1997 to Messrs. Lewis and Newton,
respectively, for relocation expenses.
(3) Includes $32,080 paid to Mr. McCabe in 1995, $31,800 paid to Mr. McCabe in
1996 and $30,362 paid to Mr. McCabe in 1997 pursuant to a defined
contribution pension scheme.
(4) Mr. Buckley joined CBT in September 1996 as President and Chief Operating
Officer. In December 1996, Mr. Buckley became the Chief Executive Officer
of CBT. Consequently, Mr. Buckley's 1996 compensation information is from
September 1996 through December 1996.
(5) Mr. Lewis became Area Vice President of Sales for the southern region in
January 1996 and Vice President, North American Sales in March 1997.
(6) Mr. Newton became Area Vice President of Sales for the northern region in
January 1996 and Vice President, Business Development in March 1997.
(7) Mr. Priest was elected an executive officer of CBT in December 1995, and
resigned as an executive officer of CBT effective January 31, 1998.
(8) Mr. McCabe was the Chairman of the Board, Chief Executive Officer and
President until September 1996, when he resigned as President. Mr. McCabe
is compensated for his management services pursuant to a consulting
agreement (the "Consulting Agreement") with a third-party consulting firm.
Amounts are paid by CBT Systems Limited to the consulting firm, which
separately compensates its employees, including Mr. McCabe. CBT has not
reviewed any agreement between the consulting firm and its employees with
respect to compensation amounts. See "Certain Relationships and Related
Transactions."
43
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table provides information with respect to options granted
during the Last Fiscal Year to the Named Executive Officers:
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
NUMBER OF PERCENT OF AT ASSUMED ANNUAL RATES OF
EQUIVALENT ADSS TOTAL OPTIONS EXERCISE STOCK PRICE APPRECIATION
OVER WHICH GRANTED TO PRICE PER FOR OPTION TERM(1)
OPTIONS WERE EMPLOYEES IN LAST EQUIVALENT EXPIRATION ---------------------------
NAME GRANTED(2)(3) FISCAL YEAR ADS(4) DATE 5% 10%
---- --------------- ----------------- ---------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
James J. Buckley........ -- -- $ -- -- -- --
William B. Lewis........ 70,000 4.7% $20.25 3/18/07 $ 891,458 $ 2,259,130
Jeffrey N. Newton....... 70,000 4.7% $20.25 3/18/07 $ 891,458 $ 2,259,130
Gregory M. Priest....... 90,000 6.1% $20.25 3/18/07 $ 1,146,160 $ 2,904,595
William G. McCabe....... -- -- $ -- -- -- --
</TABLE>
- --------
(1) Potential realizable value assumes that the share price (based on the fair
market value of the ADSs) increases from the date of grant until the end
of the option term (10 years) at the annual rate specified (5% and 10%).
If the price of the ADSs were to increase at such rates from the price at
December 31, 1997, the last trading day of the Last Fiscal Year ($41.06
per ADS) over the next ten years, the resulting ADS price at 5% and 10%
appreciation would be approximately $67 and $107, respectively. The
assumed annual rates of appreciation are specified in SEC rules and do not
represent CBT's estimate or projection of future share price. CBT does not
necessarily agree that this method can properly determine the value of an
option.
(2) All options in this table were granted under the 1994 Plan or 1990 Share
Option Scheme (the "1990 Plan"). The options expire ten years from the
date of grant, subject to earlier termination in the event of the
optionee's cessation of service with CBT. The 1994 Plan and the 1990 Plan
are currently administered by the Stock Option Committee of the CBT Board,
which has broad discretion and authority to amend outstanding options and
to reprice options, whether through an exchange of options or an amendment
thereto.
(3) Unless otherwise indicated, options generally vest over four years such
that 1/4th of the equivalent ADSs subject to the option vest on each of
the first and second anniversary of the respective date of grant and
1/48th vest each month thereafter.
(4) Options were granted at an exercise price equal to the fair market value
of CBT's ADSs, as determined by reference to the closing price of the ADSs
as reported on Nasdaq on the last trading day prior to the date of grant.
44
<PAGE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
The following table provides information with respect to option exercises in
the fiscal year ended December 31, 1997 by the Named Executive Officers and
the value of such officers' unexercised options at December 31, 1997:
<TABLE>
<CAPTION>
NUMBER OF EQUIVALENT ADSS
SUBJECT TO UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL YEAR- IN-THE-MONEY OPTIONS AT
EQUIVALENT END FISCAL YEAR END(3)
ADSS ACQUIRED VALUE ------------------------- -------------------------
NAME ON EXERCISE(1) REALIZED(2) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- -------------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
James J. Buckley........ 140,000 $ 2,234,856 101,770 313,230 $ 4,363,397 $13,431,302
William B. Lewis........ 272,716 $ 6,755,555 6,332 95,820 $ 442,769 $ 5,486,329
Jeffrey N. Newton....... 253,108 $ 6,036,687 6,664 103,738 $ 434,087 $ 5,559,365
Gregory M. Priest....... 84,876 $ 1,711,995 3,546 124,586 $ 208,839 $ 6,580,523
William G. McCabe....... 1,145,000 $36,276,113 277,498 -- $17,645,926 --
</TABLE>
- --------
(1) Employees of CBT, including the Named Executive Officers, have a choice of
acquiring either Ordinary Shares or ADSs representing such Ordinary Shares
upon exercise of options.
(2) Market value of underlying shares based on the closing price of the ADSs
on Nasdaq on the date of exercise, minus the exercise price.
(3) Market value of shares underlying in-the-money share options based on the
closing price of $41.06 per ADS on Nasdaq on December 31, 1997 (the last
trading day of the Last Fiscal Year), minus the exercise price.
MEETINGS OF THE CBT BOARD AND COMMITTEES
The CBT Board, which has an Audit Committee, Compensation Committee, Stock
Option Committee and Non-Officer Stock Option Committee, held a total of four
meetings during the Last Fiscal Year. No incumbent director attended fewer
than seventy-five percent (75%) of the meetings of the CBT Board and
committees thereof on which such director served during the Last Fiscal Year.
The Audit Committee currently consists of Messrs. McDonagh and Grillos.
During the Last Fiscal Year, the Audit Committee held two meetings. The Audit
Committee oversees actions taken by CBT's independent auditors, and recommends
the engagement of auditors.
The Stock Option Committee currently consists of Messrs. McDonagh and
Grillos. During the Last Fiscal Year, the Stock Option Committee did not hold
any formal meetings but took several actions by unanimous written consent. The
Stock Option Committee administers CBT's employee share option plans, grants
share options to officers of CBT and grants share options to non-officers of
CBT in excess of 10,000 shares per grant.
In January 1996, the CBT Board established the Non-Officer Stock Option
Committee which consists of Messrs. McCabe and Hayes. During the Last Fiscal
Year, the Non-Officer Stock Option Committee did not hold any formal meetings
but took several actions by unanimous written consent. The Non-Officer Stock
Option Committee grants share options which are less than 10,000 shares per
grant to non-officers of CBT.
The Compensation Committee currently consists of Messrs. McCabe, Grillos and
McDonagh. During the Last Fiscal Year, the Compensation Committee did not hold
any formal meetings but took several actions by unanimous written consent. The
Compensation Committee reviews and approves the compensation of executives of
CBT and makes recommendations to the CBT Board with respect to standards for
setting compensation levels.
The CBT Board does not have a Nominating Committee or any committee
performing similar functions.
45
<PAGE>
COMPENSATION OF DIRECTORS
No director receives any cash compensation for his services as a member of
the CBT Board, although each director is reimbursed for his expenses in
attending CBT Board and related committee meetings. Directors who serve on
committees of the CBT Board receive no additional compensation.
EMPLOYMENT CONTRACTS AND ARRANGEMENTS
On July 24, 1996, CBT entered into an agreement with James J. Buckley
pursuant to which Mr. Buckley became the President and Chief Operating Officer
of CBT, effective as of September 1, 1996. In accordance with the terms of Mr.
Buckley's agreement, Mr. Buckley receives an annual base salary of $385,000
and a targeted bonus of approximately $150,000, subject to the achievement of
certain performance objectives. In addition, Mr. Buckley received an option to
purchase an aggregate of 970,000 equivalent ADSs at an exercise price equal to
the fair market value of the ADSs on such date. The ADSs subject to the option
vest over four years, with the initial 25% vesting after one year and
remainder on a monthly basis thereafter.
On January 2, 1996, CBT entered into an Employment Agreement with Gregory M.
Priest, pursuant to which Mr. Priest became Vice President, Finance and Chief
Financial Officer of CBT and also agreed that Mr. Priest would be nominated to
serve as a director of CBT. Under the terms of the agreement, Mr. Priest
received during the Last Fiscal Year an annual minimum base salary of
$180,000.
Mr. Priest also received a bonus of $177,200 in the Last Fiscal Year, based
upon the satisfaction of certain performance goals for CBT. Mr. Priest
resigned his position as an executive officer of CBT effective January 31,
1998.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Approximately 9% of the CBT (Technology) Limited ("CBT T") outstanding share
capital, representing a special non-voting class, is owned by Stargazer
Productions ("Stargazer"), an unlimited company which is wholly owned by
certain officers and key employees of CBT. CBT T has in the past and may in
the future declare and pay dividends to Stargazer, and Stargazer may pay
dividends to its shareholders out of such amounts. Any such dividends would be
treated as compensation expense by CBT and would be included in CBT's
operating expenses under US GAAP.
In February 1996, Gregory M. Priest, a director of CBT and former Vice
President, Finance and Chief Financial Officer of CBT, received an interest-
free loan from CBT in the amount of $125,000 with principal payable in four
annual installments, commencing in February 1997. As of the date hereof,
$62,500 remains outstanding under the loan. The largest amount outstanding
under the loan during the Last Fiscal Year was $125,000.
CBT and Mr. Priest entered into a Consulting Agreement effective February 1,
1998, pursuant to which Mr. Priest has agreed to provide certain consulting
services to CBT, initially including the transition to Mr. Priest's successor
as Chief Financial Officer. Mr. Priest resigned his position as Chief
Financial Officer effective January 31, 1998. Pursuant to the Consulting
Agreement, Mr. Priest is paid on an hourly basis in accordance with a schedule
of hourly rates, and previously granted stock options continue to vest. Mr.
Priest's agreement contains customary provisions regarding confidentiality and
assignment of intellectual property. Mr. Priest continues to serve as a
director of CBT.
CBT Systems Limited ("CBT Ireland") has entered into a consulting agreement
(the "Consulting Agreement") with a third-party consulting firm pursuant to
which the consulting firm provides certain management services to CBT Ireland,
including those of Messrs. McCabe, Beamish and Hayes. Messrs. McCabe, Beamish
and Hayes were employees of the consulting firm during 1997. Amounts paid by
CBT Ireland under the Consulting Agreement are paid to the consulting firm and
Messrs. McCabe, Beamish and Hayes are separately compensated by the consulting
firm. During 1997, CBT Ireland accrued amounts in the aggregate of $1.4
million due to the consulting firm.
46
<PAGE>
CBT and KnowledgeWell entered into a Software License Agreement (the
"License Agreement") in October 1997, pursuant to which CBT granted
KnowledgeWell a non-exclusive license to use certain of its technology in the
development of interactive education software. The License Agreement
explicitly forbids any use by KnowledgeWell of CBT's technology within CBT's
information technology market area. In exchange, KnowledgeWell has agreed to
maintain functional compatibility of KnowledgeWell's products with CBT's
products. KnowledgeWell is also required to pay CBT an annual licensing fee.
The License Agreement also contains customary provisions involving the
provision of product updates and the protection of confidential information.
Messrs. McCabe and Priest are Chairman of the Board, and President, Chief
Executive Officer, and director, respectively, of KnowledgeWell and Chairman
of the Board and director, respectively, of CBT. The License Agreement was
unanimously approved by the disinterested directors of CBT.
47
<PAGE>
BUSINESS OF FOREFRONT
OVERVIEW
ForeFront 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. ForeFront develops and markets
high-quality, cost-effective computer-based training products on CD-ROMs which
enable IT professionals to conveniently prepare for technical certification
exams. Each of ForeFront's products is designed to provide comprehensive
training in the subject matter necessary to obtain technical certifications.
In addition to computer-based training 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. ForeFront also develops and markets off-line
browsing and metasearching products for use on the Internet.
ForeFront sells its computer-based training products through telesales
primarily to individual IT professionals as career advancement tools.
ForeFront believes that its highly-refined prospecting and 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. ForeFront 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. ForeFront has sold its computer-
based training and PC/Network products to more than 60,000 customers and has
generated over 600,000 customer prospects from its marketing efforts to date.
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. ForeFront
believes that its computer-based training 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.
ForeFront's computer-based training 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. ForeFront's courses also
contain test questions designed to permit users to assess their capabilities
and review their progress.
ForeFront's computer-based training 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.
ForeFront believes that its products significantly reduce the costs to its
customers of obtaining technical certification in comparison to traditional
instructor-led formats.
48
<PAGE>
FOREFRONT'S GROWTH STRATEGY
ForeFront's growth strategy has incorporated the following elements:
Broaden Computer-Based Training Product Line. ForeFront currently offers
IT professionals a variety of computer-based training products designed to
offer a convenient, comprehensive and interactive method of facilitating
training and performance enhancement in key segments of the IT market.
ForeFront has been engaged in efforts to broaden its line of computer-based
training 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 computer-based training products.
ForeFront believes that its access to the products of CBT as a result of
the Merger will provide an effective means to implement this strategy.
Leverage Proprietary Direct Marketing and Sales Systems. ForeFront has
created and refined proprietary direct marketing and sales processes to
maximize the sale of its computer-based training and PC/Network products.
Currently, ForeFront's primary telesales operation in Clearwater, Florida
employs 136 direct sales representatives responsible for generating United
States sales. In October 1997, ForeFront opened its European telesales
operation in Dublin, Ireland, which currently employs 36 direct sales
representatives and provides evidence of ForeFront's ability to replicate
its proprietary sales and marketing methodologies in other markets.
ForeFront 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 ForeFront's relationships with its existing
customers and customer prospects.
Expand into New Related Markets. ForeFront currently sells products to
individual IT professionals (including IT services managers, PC
technicians, MIS managers and network professionals, among others) and to
small businesses. ForeFront'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 ForeFront'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,
ForeFront has obtained new products primarily through acquiring development
companies and negotiating license agreements. In September 1997, ForeFront
acquired LanTec in order to own the titles it had previously been licensing
and to enable it to develop computer-based training products internally.
ForeFront believes that the Merger will provide an effective means to
implement its historic strategy of seeking strategic acquisitions of
companies and negotiate new license agreements to complement its existing
line of computer-based training products, accelerate time to market, and
expand its research and development capabilities.
Build Alliances with Key IT Vendors. ForeFront has been engaged in
efforts to pursue and enter into development and marketing alliances with
key IT vendors to produce and distribute vendor-specific authorized
training programs. ForeFront believes that its access through CBT to such
alliances should provide it with the benefit of the competitive advantages
of such arrangements, including access to the partner's product development
plans and source material, facilitating the launch of computer-based
training 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, ForeFront
believes that new education and training needs will emerge. ForeFront will
seek to use its Internet expertise to capitalize on expanding Internet and
intranet education opportunities.
49
<PAGE>
There can, however, be no assurance that ForeFront will be successful in
implementing any of the foregoing elements of its growth strategy. See "Risks
Factors--Risks Related to ForeFront's Business--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."
PRODUCTS
Computer-Based Training Products. The following table outlines the nine
separate certification programs for IT professionals currently marketed and
sold by ForeFront, and the subject matter of the various modules incorporated
in each:
<TABLE>
<CAPTION>
CERTIFICATION MODULES
------------- -------
<C> <S>
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)
. Implementing and Supporting Microsoft Windows
MCP Self-Study Course 95
MCP Self-Study Course . Implementing and Supporting Microsoft Windows
NT Workstation 3.51
. Implementing and Supporting Microsoft Windows
MCP Self-Study Course NT Server 3.51
. Implementing and Supporting Microsoft Windows
MCP Self-Study Course 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>
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.
ForeFront's courses also contain test questions designed to permit users to
assess their capabilities and review their progress.
Each of ForeFront's computer-based training 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 ForeFront to offer a fully-integrated product
to small to mid-sized companies, with centralized reporting, monitoring and
evaluation.
50
<PAGE>
ForeFront's current computer-based training products are focused on the
following categories of IT professionals: network professionals and PC
technicians. ForeFront believes that the Merger will provide it access to
additional products aimed at the intermediate and advanced level IT
professionals that it would otherwise be required to develop, license or
acquire. In addition, ForeFront plans to expand into markets for other IT
professionals that it does not presently fully serve: Web masters/managers,
database managers, computer programmers, enterprise application managers and
general end-users. If the Merger is not consummated, there can be no assurance
that ForeFront will be able to successfully develop or negotiate the license
or acquisition of new products on a timely basis and on terms satisfactory to
ForeFront, if at all. See "Risk Factors--Risks Related to ForeFront's
Business--Growth Strategy; Dependence on New Products."
ForeFront's courses are generally compatible with Windows-based desktop PCs
and LANs. At present, all of ForeFront'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. ForeFront 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. ForeFront believes that its access to
CBT's products and development capabilities as a result of the Merger will
enhance its ability to respond to these changes. See "Risk Factors--Risks
Related to ForeFront's Business--Growth Strategy; Dependence on New Products"
and "--Rapid Technological Change."
PC/Network Products. In addition to computer-based training 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. ForeFront also continues to develop
and market its line of Internet content management products, including
WebWhacker, WebSeeker and WebPrinter. Following ForeFront's 1997 repositioning
of its business to focus on computer-based training applications, ForeFront
consolidated all Internet product development, sales and marketing at its Blue
Squirrel division located in Salt Lake City, Utah. ForeFront sold the rights
to certain Internet printing technology in September 1997 to Hewlett-Packard
Company for a net gain of approximately $1.9 million, and may out-license or
sell some or all of its remaining Internet content management products in the
future. However, ForeFront intends to retain the rights to use the technology
to develop methods of delivering education and training products over the
Internet.
PRODUCT DEVELOPMENT
ForeFront believes that it must continue to invest in product development to
remain competitive in the computer-based training 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 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, ForeFront's
developers, working with animators, simulation programmers and graphic
designers, simultaneously plan and develop graphics, animations and
simulations.
51
<PAGE>
ForeFront develops substantially all of its internally-developed courses at
its development facility in Ottawa, Canada. From time to time, ForeFront
contracts with third parties to develop portions of particular courses,
although ForeFront retains complete control over all phases of such
development. All products produced by outside developers remain the sole
property of ForeFront. ForeFront has explored the possibility of licensing
content from publishers of text-based training material to shorten the
development cycle for its computer-based training products. If ForeFront were
successful in doing so, ForeFront would likely be required to pay royalties to
the publishers of such content. There can be no assurance, however, that
ForeFront will be successful in acquiring such content on favorable terms or
at all or that such an arrangement would in fact expedite development of
computer-based training products. See "Risk Factors--Risks Related to
ForeFront's Business--Growth Strategy; Dependence on New Products" and "--
Management of Expanding Operations and Acquisitions."
DEVELOPMENT AND MARKETING ALLIANCES
ForeFront'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. ForeFront
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
ForeFront'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. ForeFront 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.
ForeFront 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 ForeFront will be able to do so on terms acceptable to
ForeFront, on a timely basis, if at all, or that any such alliances would be
successful. See "Risk Factors--Risks Related to ForeFront's Business--Risks of
Development and Marketing Alliances."
CUSTOMERS
ForeFront licenses its computer-based training 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. ForeFront 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. ForeFront
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. ForeFront 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.
ForeFront has also recently commenced site licenses of its computer-based
training titles for use by a specified number of users. With the introduction
of the Student Manager product, ForeFront is endeavoring to capitalize on the
substantial opportunity to sell site licenses to small to mid-size
organizations.
SALES, MARKETING AND CUSTOMER SUPPORT
Sales. ForeFront'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 ForeFront's
revenues in 1996 and 1997, respectively. ForeFront also distributes its
courses through a small number of resellers and international distributors.
ForeFront'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, ForeFront 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.
52
<PAGE>
ForeFront's telesales operation in Clearwater, Florida was developed and
refined over a seven-year period from the inception of AllMicro, Inc.
("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 ForeFront'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 ForeFront's sales office in Dublin, Ireland in October 1997
has demonstrated ForeFront's ability to replicate this system and the more
than doubling of the sales force in 1997 (from 65 to 136 representatives) in
the United States demonstrates ForeFront's ability to grow the system.
Marketing. ForeFront 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, ForeFront
employs a variety of direct marketing activities to generate leads, including
direct mail, advertising and related activities such as trade shows.
Customer Support. ForeFront currently provides e-mail and telephone support
to its customers, and is evaluating a fee-based support system for customers
who purchase computer-based training products to support their efforts to
obtain certification.
COMPETITION
The IT education and training market is highly fragmented, extremely
competitive, and lacks meaningful barriers to entry. ForeFront competes
primarily with third-party suppliers of computer-based training 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, ForeFront also competes with consultants, value-added resellers,
network integrators, applications software vendors and publishing companies.
Many of ForeFront's current and potential competitors have substantially
greater financial, technical, sales, marketing and other resources as well as
greater name recognition than ForeFront. Certain of ForeFront's competitors in
the computer-based training market possess comprehensive libraries of
computer-based training products that have substantially greater scope than
ForeFront's line of computer-based training products. In addition, the IT
education and training market is characterized by significant price
competition, and ForeFront expects that it will face increasing price
pressures from competitors in the future. Accordingly, there can be no
assurance that ForeFront 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
ForeFront to reduce its prices significantly.
INTELLECTUAL PROPERTY AND LICENSES
ForeFront 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 ForeFront's courseware or technology without authorization or to
develop similar courseware or technology independently. Furthermore, the laws
of certain countries in which ForeFront sells its products do not protect
ForeFront's software and intellectual property rights to the same extent as do
the laws of the United States. ForeFront 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 ForeFront's products were to occur to any substantial degree,
ForeFront's business and results of operations could be materially and
adversely affected. There can be no assurance that ForeFront's means of
protecting its proprietary rights will be adequate or that ForeFront's
competitors will not independently develop similar technology. There can be no
assurance that third parties will not claim that ForeFront's current or future
products
53
<PAGE>
infringe the proprietary rights of others. ForeFront 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 ForeFront
to enter into license agreements under which ForeFront would pay royalties or
fees to third parties or modify or discontinue sales of products subject to
such claim, at costs to ForeFront which could be substantial.
EMPLOYEES
As of January 31, 1998, ForeFront 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 ForeFront's employees is subject
to a collective bargaining agreement, and ForeFront has not experienced any
work stoppages. ForeFront believes that its employee relations are good.
PROPERTIES
ForeFront's executive offices are located in Houston, Texas, where ForeFront
leases approximately 2,800 square feet of office space. All of ForeFront'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. ForeFront's research and development activities are
conducted in Ottawa, Canada, where it leases approximately 6,000 square feet.
ForeFront also leases approximately 2,400 square feet in Salt Lake City, Utah,
where ForeFront's Internet product efforts are directed. ForeFront's leases
expire or are terminable at ForeFront's option at varying times through 2002.
ForeFront 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.
LEGAL PROCEEDINGS
ForeFront is a party to claims arising in the ordinary course of business.
ForeFront management does not believe that the ultimate resolution of these
claims will have a material adverse effect on ForeFront's results of
operations or financial position.
54
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA OF FOREFRONT
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The selected consolidated financial data of ForeFront for each of the three
years in the period ended December 31, 1997 are derived from the audited
consolidated financial statements of ForeFront. The selected consolidated
financial data of ForeFront for each of the two years in the period ended
December 31, 1994 are derived from the unaudited consolidated financial
statements of ForeFront. 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 of ForeFront" and
ForeFront's Consolidated Financial Statements, including the Notes thereto,
included herein.
<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 li-
censes................. 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 in-
come (loss) per
share(1)............... 3,135,538 3,548,967 3,647,930 6,002,427 6,547,041
<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
ForeFront's Consolidated Financial Statements and Note 2 thereto.
55
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF FOREFRONT
The following section contains forward-looking statements within the meaning
of Section 27A of the Securities Act and Section 21E of the Exchange Act. 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 ForeFront
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 below 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
ForeFront that the objectives and plans of ForeFront 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 Proxy Statement/Prospectus. Historical results are not necessarily
indicative of trends in operating results for any future period.
OVERVIEW
ForeFront 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. ForeFront develops and markets
high-quality, cost-effective computer-based training 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 ForeFront's products is designed to
provide comprehensive training in the subject matter necessary to obtain
technical certifications. In addition to computer-based training 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. ForeFront also
develops and markets off-line browsing and metasearching products for use on
the Internet.
During 1997, ForeFront's computer-based training products accounted for 61%
of ForeFront's revenues and PC/Network utilities represented 25% of revenues.
ForeFront's Internet content management products accounted for the remaining
14% of ForeFront's 1997 revenues. The computer-based training 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
ForeFront's net revenues during the year ended December 31, 1996 or 1997.
ForeFront derived approximately 90% of its 1997 revenue from its telesales
operations in Clearwater, Florida and Dublin, Ireland which currently employ
more than 170 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, ForeFront also markets certain of its products through alliances with
other computer software companies and publishers that incorporate bundled
versions of ForeFront'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 ForeFront's acquisition of LanTec in
September 1997, ForeFront no longer pays royalties on its computer-based
training 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
ForeFront'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.
56
<PAGE>
Interest income consists primarily of interest earned on cash and cash
equivalents. The gain on sale of assets is attributable to ForeFront's sale of
certain Internet-printing technology during 1997.
ForeFront acquired AllMicro on July 22, 1996 pursuant to a merger in which
ForeFront issued 1,056,152 shares of ForeFront Common Stock. The AllMicro
merger was accounted for as a pooling-of-interests. Accordingly, the
consolidated financial statements of ForeFront 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, ForeFront acquired LanTec for
$1.8 million in cash and securities exchangeable for 557,413 shares of
ForeFront Common Stock. The acquisition was accounted for under the purchase
method and, accordingly, the operating results of LanTec are included in
ForeFront's operating results since the date of acquisition.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain financial
data for ForeFront 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. ForeFront'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, ForeFront's revenues were derived primarily through its direct sales
channel and through OEM agreements. For 1997, revenues were generated
primarily from ForeFront'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
ForeFront's increased focus on computer-based training 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. ForeFront'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 ForeFront and the mix of products sold. As a result of the LanTec
acquisition in September 1997, ForeFront no longer pays royalties on all of
its computer-based training products acquired from LanTec and expects to
continue to increase its gross margins in the future; however, to the extent
ForeFront 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
57
<PAGE>
commissions, and advertising relating to computer-based training products as
well as pre- committed advertising contracts for Internet content management
products that were entered into prior to ForeFront's reorganization in April
1997. Future selling and marketing costs relating to ForeFront's Internet
products will be reduced as a result of ForeFront's reorganization; however,
ForeFront expects to increase its sales and marketing staff and related
expenses relating to computer-based training products in accordance with the
targeted revenue goals and expectations of management. This increase will
include expenses for ForeFront Europe Limited, ForeFront'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 ForeFront has been in the sales
and marketing functions relating to computer-based training and PC/Network
utility products while general and administrative personnel costs have not
increased significantly.
Research and Development Expenses. ForeFront'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 ForeFront's
reorganization in April 1997, which included a reduction in personnel and
related expenses for ForeFront's Internet content management products as
contrasted with an increase in such personnel during the same period in 1996
when ForeFront 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. ForeFront 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 computer-based training products as a result
of ForeFront's acquisition of LanTec, which will serve as the center of
ForeFront'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, ForeFront agreed to release 100,128 shares of its Common
Stock from escrow in April 1998 in termination of an earn-out obligation
relating to a 1996 acquisition. As a result, ForeFront recorded additional
acquired research and development expenses of $447,000 during the second
quarter of 1997. During September 1997, ForeFront acquired LanTec in exchange
for $1.8 million in cash and securities exchangeable for 557,413 shares of
ForeFront's Common Stock. ForeFront 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 ForeFront's acquisitions of Blue Squirrel, Inc.
("Blue Squirrel") and BookMaker Corporation ("BookMaker"). ForeFront 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 ForeFront's
continued use of cash proceeds during 1997 that were raised in December 1995
on the completion of ForeFront's initial public offering.
Gain on Sale of Assets. During September 1997, ForeFront sold certain
Internet printing technology to Hewlett-Packard and recorded a one-time gain
of $1,869,000 (net of closing costs).
Income Taxes. ForeFront 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
ForeFront's net
58
<PAGE>
deferred tax assets of $2.9 million at December 31, 1997. See Note 3 of Notes
to ForeFront's 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
deferred tax asset until ForeFront can establish that it becomes more likely
than not that ForeFront 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
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.
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 ForeFront's
products. No customer accounted for more than 10% of ForeFront'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 ForeFront's historical consolidated financial
statements. The impact of the pooling-of-interests resulted in increasing
ForeFront's consolidated net revenues by approximately $5,800,000 and
$4,600,000 for the years ended December 31, 1995 and 1996, respectively. If
ForeFront 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
ForeFront 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, ForeFront
acquired the assets of Blue Squirrel, a Utah-based company, and during June
1996, ForeFront acquired the assets of BookMaker, a California-based company.
ForeFront 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.
59
<PAGE>
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 ForeFront's initial
public offering in December 1995 and resulting cash proceeds.
Income Taxes. ForeFront 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 ForeFront's net deferred tax assets of $2.2 million at
December 31, 1996 (see Note 3 of Notes to ForeFront's Consolidated Financial
Statements). The net deferred tax asset (before applying the valuation
allowance) is composed primarily of the estimated tax effect of tax NOL
carryforwards and other temporary differences. Management believes it is not
appropriate to record a deferred tax asset until ForeFront can establish that
it becomes more likely than not that ForeFront 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 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.
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
ForeFront'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, ForeFront 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, ForeFront
would have had net income of $608,000 for the third quarter of 1997.
LIQUIDITY AND CAPITAL RESOURCES
ForeFront 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.
60
<PAGE>
ForeFront believes that funds provided by operations will be sufficient to
meet its needs for working capital and capital expenditures and ForeFront's
anticipated needs to fund growth for the foreseeable future. An element of
ForeFront's growth strategy is to pursue strategic acquisitions. ForeFront may
be required to seek external financing sources to pursue such acquisitions.
There can be no assurance that ForeFront 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. ForeFront adopted the provisions of SFAS No. 128 in 1997. Such adoption
did not have an effect on ForeFront's financial position or results of
operations; however, the effect on net loss per share is disclosed in
ForeFront'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. ForeFront adopted the
provisions of SFAS No. 129 in 1997. Such adoption did not have a material
impact on ForeFront's financial position, results of operations or cash flows.
61
<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT AND
PRINCIPAL STOCKHOLDERS OF FOREFRONT
The following table sets forth certain information regarding beneficial
ownership of ForeFront Common Stock as of the Record Date (except as otherwise
noted) by: (i) each director of ForeFront, (ii) ForeFront's Chief Executive
Officer and each of the four other most highly compensated executive officers
of ForeFront during the fiscal year ended December 31, 1997, (iii) all
directors and executive officers of ForeFront as a group, and (iv) all those
known by ForeFront to be beneficial owners of more than five percent of
outstanding shares of ForeFront Common Stock. This table is based on
information provided to ForeFront or filed with the SEC by ForeFront's
directors, executive officers and principal stockholders.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF PERCENTAGE OF
BENEFICIAL OUTSTANDING
OWNERSHIP OF COMMON STOCK
BENEFICIAL OWNER COMMON STOCK(1) OWNED(2)
---------------- --------------- -------------
<S> <C> <C>
William S. Farish(3)............................ 645,323 9.31%
William S. Farish & Company
1100 Louisiana, Suite 1200
Houston, Texas 77002
Evan B. Pappas(4)............................... 386,470 5.62%
938 Brunswick Dr.
Sugar Land, Texas 77478
David Sikora(5)................................. 675,884 8.98%
Ernest D. Rapp(6)............................... 113,122 1.62%
Jeffrey R. Harder(7)............................ 129,583 1.85%
Michael Kaplan(8)............................... 847,052 11.97%
G. Anthony Gorry(9)............................. 222,363 3.22%
Stephen J. Banks(10)............................ 113,702 1.65%
Grant Dove(11).................................. 50,000 *
Terry W. Ward(12)............................... 651,467 9.38%
All directors and executive officers as a group
(8) persons)(13)............................... 2,803,173 34.65%
</TABLE>
- --------
* Represents less than 1% of ForeFront Common Stock outstanding.
(1) Beneficial ownership is determined in accordance with the rules of the
SEC. In computing the number of shares beneficially owned by a person and
the percentage ownership of that person, shares of ForeFront Common Stock
subject to options or warrants held by that person that are currently
exercisable or exercisable within 60 days of the Record Date 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) Based on shares of ForeFront Common Stock outstanding as of the Record
Date.
(3) 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. Such share numbers also include warrants to
purchase 48,664 shares of ForeFront Common Stock held by W.S. Farish &
Company, warrants to purchase 1,776 shares of ForeFront Common Stock held
by Mr. Farish, and warrants to purchase 1,332 shares of ForeFront Common
Stock held by William S. Farish, Jr.
(4) Includes 2,726 shares which may be acquired by Mr. Pappas on exercise of
outstanding warrants.
(5) Includes 648,683 shares which may be acquired by Mr. Sikora on exercise
of outstanding stock options.
(6) Includes 112,657 shares which may be acquired by Mr. Rapp on exercise of
outstanding stock options.
(7) Includes 122,325 shares which may be acquired by Mr. Harder on exercise
of outstanding stock options.
(8) Includes 200,000 shares which may be acquired by Mr. Kaplan on exercise
of outstanding stock options.
62
<PAGE>
(9) Includes 37,201 shares which may be acquired by Dr. Gorry on exercise of
outstanding stock options.
(10) 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) 15,000 shares which may be acquired by Mr. Banks on
exercise of outstanding stock options.
(11) 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) 40,000 shares
which may be acquired by Mr. Dove on exercise of outstanding stock
options.
(12) Includes (i) 544,763 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) 15,000 shares which may be acquired by Mr.
Ward on exercise of outstanding stock options. Such share numbers also
include warrants to purchase 48,664 shares of ForeFront 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 ForeFront Common
Stock held by Mr. Ward.
(13) 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
1,240,842 shares which may be acquired on exercise of outstanding stock
options and stock purchase warrants.
63
<PAGE>
COMPARATIVE MARKET PRICE DATA
CBT ADSs and ForeFront Common Stock are traded on Nasdaq under the symbols
"CBTSY" and "FFGI," respectively. The following table sets forth the high and
low closing prices per share of such securities as reported on Nasdaq, based
on published financial sources, since CBT's initial public offering on April
13, 1995 and ForeFront's initial public offering on December 18, 1995. No cash
dividends have been paid on the CBT ADSs or ForeFront Common Stock. The per
share information presented below and elsewhere in this Proxy
Statement/Prospectus has been adjusted to reflect two two-for-one splits of
the CBT ADSs, which occurred on May 15, 1996 and March 9, 1998.
<TABLE>
<CAPTION>
FOREFRONT
CBT ADSS COMMON STOCK
------------- ------------
HIGH LOW HIGH LOW
------ ------ ------ -----
<S> <C> <C> <C> <C>
1995:
Second Quarter................................. $10.75 $ 5.50
Third Quarter.................................. 12.50 9.44
Fourth Quarter................................. 13.85 11.10 $ 8.63 $8.25
1996:
First Quarter.................................. 18.38 10.75 10.09 6.50
Second Quarter................................. 25.13 17.00 20.75 7.50
Third Quarter.................................. 27.13 19.63 13.88 8.94
Fourth Quarter................................. 29.38 22.38 10.88 5.00
1997:
First Quarter.................................. 35.25 19.07 7.00 2.88
Second Quarter................................. 31.63 20.00 4.25 2.00
Third Quarter.................................. 40.13 28.63 8.88 2.13
Fourth Quarter................................. 41.19 30.25 10.75 4.75
1998:
First Quarter.................................. 51.75 36.00 15.38 7.69
Second Quarter (through April 24, 1998)........ 54.75 49.75 17.13 15.13
</TABLE>
Set forth below are the last reported sale prices of CBT ADSs and ForeFront
Common Stock on March 16, 1998, the last trading day prior to the execution of
the Reorganization Agreement, and on April 24, 1998, the last trading day
prior to the date of the Proxy Statement/Prospectus, as well as the equivalent
pro forma sale prices of ForeFront Common Stock on such dates, as determined
by multiplying the Exchange Ratio by the CBT ADS price.
<TABLE>
<CAPTION>
FOREFRONT FOREFRONT
CBT ADSS COMMON STOCK EQUIVALENT
-------- ------------ ----------
<S> <C> <C> <C>
March 16, 1998.............................. $50.00 $13.38 $15.69
April 24, 1998.............................. $50.63 $15.56 $15.88
</TABLE>
FOREFRONT STOCKHOLDERS ARE URGED TO OBTAIN CURRENT MARKET INFORMATION FOR
CBT ADSS AND FOREFRONT COMMON STOCK. NO ASSURANCE CAN BE GIVEN AS TO THE
MARKET PRICES OF CBT ADSS OR FOREFRONT COMMON STOCK AT THE EFFECTIVE TIME.
Dividends. CBT has never declared or paid any dividends on its Ordinary
Shares. CBT currently intends to retain all future earnings to finance future
operations and therefore does not anticipate paying any dividends in the
foreseeable future. Under the Companies Acts of the Republic of Ireland,
dividends may only be paid out of the profits of CBT legally available for
distribution.
64
<PAGE>
ForeFront has never declared or paid a cash dividend on its Common Stock. It
is the present policy of the ForeFront Board to retain all earnings to support
operations and to finance expansion of ForeFront's business. Therefore,
ForeFront does not anticipate declaring or paying dividends on the ForeFront
Common Stock in the foreseeable future. The declaration and payment of cash
dividends in the future will be at discretion of the ForeFront Board and will
depend on ForeFront's earnings, financial condition, capital needs and other
factors deemed pertinent by the ForeFront Board, including limitations, if
any, on the payment of dividends under state law and any then-existing credit
agreement.
65
<PAGE>
APPROVAL OF THE MERGER AND RELATED TRANSACTIONS
Other than statements of historical fact, the statements made in this
section, including statements about the benefits expected to result from the
Merger and about future financial performance and the analyses performed by
ForeFront's financial advisor, are forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act. Actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including those set
forth in "Risk Factors" and elsewhere in this Proxy Statement/Prospectus.
CBT'S REASONS FOR THE MERGER
CBT's management believes that the Merger will benefit CBT for the following
reasons:
. potential revenue synergies, including the ability to market CBT's
products through ForeFront's direct marketing and telesales distribution
channels; and
. potential cost synergies, through consolidation and integration of
certain distribution, sales, development and administrative operations
and functions.
FOREFRONT'S REASONS FOR THE MERGER
The ForeFront Board has unanimously approved the Reorganization Agreement
and the transactions contemplated thereby and has determined that the Merger
is fair to, and in the best interests of, ForeFront and its stockholders. In
reaching its determination, the ForeFront Board consulted with ForeFront's
management, as well as its legal counsel and financial advisor, and considered
the following material factors:
. the opportunity the Merger affords ForeFront's stockholders to reduce
their exposure to the risks inherent in ForeFront's reliance on a
limited number of products, and the difficulties in competing against
larger companies with more diversified product lines and greater
financial resources;
. the Merger will allow holders of ForeFront Common Stock to retain an
equity interest in the combined company, to achieve greater liquidity
than could be achieved by continuing to hold ForeFront Common Stock, and
to participate in the potential growth of CBT;
. potential revenue synergies, including the ability to market CBT's
products through ForeFront's direct marketing and telesales distribution
channels;
. potential cost synergies, through consolidation and integration of
certain distribution, sales, development and administrative operations
and functions;
. information concerning the financial performance and condition, business
operations and prospects of each of CBT and ForeFront;
. the desire of ForeFront to gain greater market strength and market
recognition with its customer base by combining with a larger company;
. the Exchange Ratio and recent trading prices for ForeFront Common Stock
and CBT ADSs;
. the likelihood that the Merger will be consummated, including the terms
and conditions of the Reorganization Agreement, and the limited
conditions to the consummation of the Merger;
. the expectation that the Merger will be nontaxable to the stockholders
of ForeFront for federal income tax purposes; and
. the oral opinion of Piper Jaffray delivered March 13, 1998 (subsequently
confirmed in a written opinion dated March 13, 1998) that as of such
date the Exchange Ratio was fair from a financial point of view, to the
holders of ForeFront Common Stock. (See "Approval of the Merger and
Related Transactions--Opinion of ForeFront's Financial Advisor").
66
<PAGE>
The ForeFront Board also considered the following potentially negative
material factors in its deliberations concerning the Merger: (i) the loss of
control over the future operations of ForeFront following the Merger; (ii) the
risk that the benefits sought to be achieved in the Merger may not be
achieved; and (iii) the other risks described above under "Risk Factors."
After reviewing these potentially negative factors, the ForeFront Board
concluded that they were outweighed by the positive factors described above
and accordingly determined that the Merger is fair to, and in the best
interests of, ForeFront and its stockholders.
In view of the wide variety of factors considered by the ForeFront Board, it
did not find it practicable to quantify, or otherwise attempt to assign
relative weights to the specific factors considered in making its
determination. Consequently, the ForeFront Board did not quantify the
assumptions and results of its analysis in reaching its determination that the
Merger is fair to, and in the best interests of, ForeFront and its
stockholders. THE FOREFRONT BOARD UNANIMOUSLY RECOMMENDS THAT FOREFRONT
STOCKHOLDERS VOTE "FOR" THE PROPOSAL TO APPROVE AND ADOPT THE REORGANIZATION
AGREEMENT AND APPROVE THE MERGER.
BACKGROUND OF THE MERGER
In mid-1997, ForeFront began seeking new products to sell through its
rapidly growing telesales marketing operations as a part of a shift in its
strategic focus emphasizing sales of computer-based training products. During
the remainder of 1997 and the first part of 1998, ForeFront engaged in
discussions with a number of parties, including CBT, regarding ForeFront's
potential acquisition of rights to market and sell such products. In its
pursuit of such products, ForeFront acquired LanTec in September 1997 to
obtain ownership of the computer-based training products it had previously
licensed from LanTec and to enable it to develop computer-based training
products internally, but continued to pursue the possibility of acquiring a
broader library of such products to satisfy its strategic objectives. On
February 6, 1998, ForeFront engaged Piper Jaffray to assist it in evaluating
various alternatives to achieve those objectives.
In February 1998, James J. Buckley, the President and Chief Executive
Officer of CBT, contacted David Sikora, the President and Chief Executive
Officer of ForeFront, to set up a meeting to discuss potential relationships
between CBT and ForeFront. On February 24, 1998, Mr. Buckley met with Mr.
Sikora to discuss a potential business combination of CBT and ForeFront. Mr.
Buckley and Mr. Sikora discussed the operations and business objectives of the
two companies and the potential benefits of a business combination. At the
conclusion of the meeting, Mr. Buckley expressed his intention to discuss the
matter further with the CBT Board.
On February 25, 1998, Mr. Buckley contacted Mr. Sikora to express CBT's
interest in submitting a proposal for a business combination transaction
between the two companies, and requested that Mr. Sikora meet with him the
following day to discuss the possibility of such a transaction. On February
26, 1998, Mr. Sikora, Jeffrey R. Harder, ForeFront's Vice President of
Corporate Development and General Counsel, and Kyle R. Crowe of Piper Jaffray
met with Mr. Buckley, Richard Y. Okumoto, CBT's Vice President, Finance and
Chief Financial Officer, and Elizabeth K. Roemer, CBT's Vice President and
General Counsel, and were subsequently joined by William G. McCabe, the
Chairman of the CBT Board. At the meeting, Mr. Buckley advised Mr. Sikora of
CBT's intention to submit a proposal for a business combination transaction
the following day.
On February 26, 1998, the CBT Board authorized CBT management to submit a
proposal for a possible business combination with ForeFront.
On February 27, 1998, the ForeFront Board held a meeting to consider a
possible business combination. At the meeting, the ForeFront Board received a
proposal for such a transaction submitted by CBT. After discussions with
representatives of Piper Jaffray and outside legal counsel, the ForeFront
Board authorized ForeFront management to conduct further discussions with CBT.
Following the meeting, Mr. Sikora and Mr. Buckley engaged in further
discussions regarding CBT's proposal and modifications to the proposal. On the
evening of February 27, 1998, Mr. Sikora reconvened the ForeFront Board by
telephone. The ForeFront Board discussed the modified proposal and authorized
ForeFront management to proceed with negotiations toward a definitive
Reorganization Agreement substantially on the terms discussed in the
telephonic ForeFront Board meeting.
67
<PAGE>
From March 3, 1998 to March 13, 1998, CBT representatives and ForeFront
representatives discussed and conducted various due diligence procedures and
analyses, discussed employee issues such as retention, compensation, benefits
and communications, and negotiated the terms of the Reorganization Agreement
and the ancillary documents.
In a meeting held on March 13, 1998, Mr. Sikora provided the ForeFront Board
with a copy of the most current draft of the definitive Reorganization
Agreement between ForeFront and CBT. In addition, Mr. Harder and
representatives of Piper Jaffray described to the ForeFront Board the results
of the due diligence performed by Piper Jaffray and outside legal counsel on
CBT, and outside legal counsel described the material terms of the transaction
and the nature and status of the remaining unresolved issues. At this meeting,
Piper Jaffray provided its oral opinion to the ForeFront Board to the effect
that the Exchange Ratio was fair from a financial point of view to the holders
of ForeFront Common Stock. The ForeFront Board thereafter unanimously approved
the Reorganization Agreement.
On March 14, 1998, CBT representatives and ForeFront representatives
continued negotiations regarding the terms of the Reorganization Agreement and
the ancillary documents. On March 15, 1998, Mr. Buckley and Mr. Sikora
discussed certain unresolved issues in connection with the proposed
transaction. In a telephone meeting on March 16, 1998, the CBT Board
unanimously approved the Reorganization Agreement.
In a telephone meeting held on the morning of March 16, 1998, Mr. Sikora,
together with representatives of Piper Jaffray and outside legal counsel,
provided the ForeFront Board with an update of the status of negotiations
between ForeFront and CBT on a definitive agreement. Following final
discussions with CBT, Mr. Sikora reconvened the ForeFront Board, together with
representatives of Piper Jaffray and outside legal counsel, in a telephone
meeting held on the afternoon of March 16, 1998, at which time the ForeFront
Board unanimously reaffirmed its approval of the Reorganization Agreement.
The Reorganization Agreement was finalized and executed on behalf of CBT,
ForeFront and Merger Sub on March 16, 1998.
ForeFront and CBT USA subsequently entered into a separate license agreement
pursuant to which ForeFront has the right to market certain CBT products on
terms and conditions consistent with CBT's existing reseller agreements.
OPINION OF FOREFRONT FINANCIAL ADVISOR
On February 6, 1998, ForeFront and Piper Jaffray executed an engagement
letter (the "Piper Jaffray Engagement Letter") pursuant to which Piper Jaffray
was engaged to act as ForeFront's financial advisor in connection with the
Merger. Pursuant to the Piper Jaffray Engagement Letter, ForeFront retained
Piper Jaffray to provide financial advisory and investment banking services in
connection with a possible strategic transaction, including a potential
strategic combination, and to render an opinion as to the fairness of any such
transaction, from a financial point of view, to the holders of ForeFront
Common Stock. See "Background of the Merger."
At a meeting of the Board of Directors of ForeFront held on March 13, 1998,
Piper Jaffray gave a presentation on the financial terms of the Merger and
rendered its oral opinion, which opinion was subsequently confirmed in writing
(the "Piper Jaffray Opinion"), that as of March 13, 1998 and based on the
matters described therein, the Exchange Ratio was fair, from a financial point
of view, to the holders of ForeFront Common Stock. The Exchange Ratio was
determined through negotiations between Piper Jaffray and the senior
management of ForeFront and the senior management of CBT. Piper Jaffray does
not admit that it is an "expert" within the meaning of the term "expert" as
used in the Securities Act or the rules and regulations promulgated
thereunder, or that its opinion constitutes a report or valuation within the
meaning of Section 11 of the Securities Act and the rules and regulations
promulgated thereunder.
The full text of the Piper Jaffray Opinion, which sets forth, among other
things, assumptions made, matters considered and limitations on the review
undertaken, is attached hereto as Annex B and is incorporated herein by
reference. Stockholders of ForeFront are urged to read the Piper Jaffray
Opinion in its entirety. The Piper Jaffray Opinion was prepared for the
benefit and use of the ForeFront Board in its consideration of the Merger and
does not constitute a recommendation to stockholders of ForeFront as to how
they should vote at the Meeting
68
<PAGE>
in connection with the Merger. The Piper Jaffray Opinion does not address the
relative merits of the Merger and any other transactions or business
strategies discussed by the ForeFront Board as alternatives to the
Reorganization Agreement or, except with respect to the fairness of the
Exchange Ratio from a financial point of view to the holders of ForeFront
Common Stock, the underlying business decision of the ForeFront Board to
proceed with or effect the Merger. The summary of the Piper Jaffray Opinion
set forth in this Proxy Statement/Prospectus is qualified in its entirety by
reference to the full text of the Piper Jaffray Opinion.
In connection with the preparation of the Piper Jaffray Opinion, Piper
Jaffray, among other things, (i) reviewed the draft dated March 13, 1998 of
the Reorganization Agreement; (ii) reviewed the draft Annual Report on Form
10-K for ForeFront for the year ended December 31, 1997 and the Annual Reports
for the years December 31, 1995 and December 31, 1996; (iii) reviewed the
Quarterly Reports on Form 10-Q for ForeFront for the periods ended March 31,
1997, June 30, 1997 and September 30, 1997; (iv) reviewed the earnings release
issued by ForeFront for the year ended December 31, 1997; (v) reviewed the
earnings release issued by CBT for the year ended December 31, 1997; (vi)
reviewed the Annual Reports on Form 10-K for CBT for the two years ended
December 31, 1996; (vii) reviewed the Quarterly Reports on Form 10-Q for CBT
for the periods ended March 31, 1997, June 30, 1997 and September 30, 1997;
(viii) reviewed a draft of CBT's audited financial statements for the year
ended December 31, 1997; (ix) reviewed certain financial forecasts prepared by
ForeFront's management ("Financial Forecasts"); (x) visited the headquarters
of ForeFront and conducted discussions with members of senior management of
ForeFront, including ForeFront's President and Chief Executive Officer, its
Chief Financial Officer, and its Vice President--Corporate Development and
General Counsel; (xi) visited the headquarters of CBT and conducted
discussions with members of senior management of CBT, including CBT's
Chairman, its President and Chief Executive Officer, its Vice President,
Finance and Chief Financial Officer, its Vice President, Business Development
and its Vice President and General Counsel; (xii) reviewed the historical
prices and trading activity for ForeFront Common Stock and CBT ADSs; (xiii)
performed a discounted cash flow analysis on the Financial Forecasts; (xiv)
reviewed the financial terms, to the extent publicly available, of certain
comparable merger and acquisition transactions which Piper Jaffray deemed
relevant; (xv) compared certain financial data of ForeFront and CBT with
certain financial and securities data of companies deemed similar to ForeFront
and CBT or representative of the business sector in which they operate; and
(xvi) reviewed such other financial data, performed such other analyses and
considered such other information as Piper Jaffray deemed necessary and
appropriate under the circumstances.
In conducting its review and arriving at the Piper Jaffray Opinion, Piper
Jaffray relied upon and assumed the accuracy and completeness of the financial
statements and other information provided by ForeFront and CBT or otherwise
made available to Piper Jaffray and did not assume responsibility
independently to verify such information. Piper Jaffray further relied upon
the assurances of ForeFront's and CBT's management that the information
provided was prepared on a reasonable basis in accordance with industry
practice and with respect to financial planning data provided by ForeFront,
reflected the best currently available estimates and good faith judgments of
ForeFront's management as to the expected future financial performance of
ForeFront and that ForeFront was not aware of any information or facts that
would make the information provided to Piper Jaffray incomplete or misleading.
With respect to CBT, Piper Jaffray was not provided any financial planning
data or internal projections regarding CBT's financial prospects and Piper
Jaffray relied exclusively on published reports prepared by financial
analysts, as supported by Piper Jaffray's discussions with CBT's management.
Without limiting the generality of the foregoing, for the purpose of the Piper
Jaffray Opinion, Piper Jaffray assumed that neither ForeFront nor CBT was a
party to any pending transaction, including external financing,
recapitalizations, acquisitions or merger discussions, other than the Merger
or in the ordinary course of business. Piper Jaffray also assumed that the
Merger would be free of Federal tax to ForeFront, CBT, and the holders of
ForeFront Common Stock and that the Merger would be accounted for as a
pooling-of-interests under generally accepted accounting principles. In
arriving at the Piper Jaffray Opinion, Piper Jaffray assumed that all the
necessary regulatory approvals and consents required for the Merger would be
obtained in a manner that would not change the purchase price for ForeFront.
In arriving at the Piper Jaffray Opinion, Piper Jaffray did not perform any
appraisals or valuations of specific assets or liabilities of ForeFront or CBT
and was not furnished with any such appraisals or valuations. Without
69
<PAGE>
limiting the generality of the foregoing, Piper Jaffray did not undertake any
independent analysis of any pending or threatened litigation, possible
unasserted claims or other contingent liabilities, to which ForeFront, CBT or
any of their respective affiliates was a party or may be subject and, at
ForeFront's direction and with its consent, the Piper Jaffray Opinion made no
assumption concerning and therefore did not consider, the possible assertion
of claims, outcomes or damages arising out of any such matters. Although
developments following the date of the Piper Jaffray Opinion may affect the
Piper Jaffray Opinion, Piper Jaffray assumed no obligation to update, revise
or reaffirm the Piper Jaffray Opinion.
The following is a summary of the material financial analyses performed by
Piper Jaffray in connection with rendering the Piper Jaffray Opinion:
Comparable Company Analysis. Piper Jaffray compared certain financial
information and valuation ratios relating to ForeFront to corresponding
publicly-available data and ratios from a group of selected publicly traded
companies deemed comparable to ForeFront. The comparable companies selected
included six publicly traded companies involved in the training and education
of IT professionals, including: ARIS Corporation, CBT, Computer Learning
Centers, Inc., Learning Tree International, Inc., New Horizons Worldwide,
Inc., and Wave Technologies, Inc.
The analysis, with respect to ForeFront, produced multiples of selected
valuation data based upon closing stock prices of the comparable companies as
of February 13, 1998, which were then compared to the equity value of
ForeFront of $15.80 per share implied by the Exchange Ratio. The multiples
included in the analysis were: (i) market price per share to earnings per
share recorded over the latest twelve months of the comparable companies
ranging from 30.1x to 89.2x, with a mean and median of 49.7x and 42.9x,
respectively, and a ratio which is not meaningful for ForeFront; (ii) market
price per share to 1998 calendar earnings per share estimates of the
comparable companies ranging from 13.2x to 64.6x, with a mean and median of
32.9x and 27.0x, respectively, and for management estimates for ForeFront
falling within that range; (iii) market price per share to 1999 calendar
earnings per share estimates of the comparable companies ranging from 22.9x to
45.6x, with a mean and median of 32.5x and 29.1x, respectively, and for
management estimates for ForeFront falling within that range; (iv) market
capitalization of the selected company, plus such company's debt, less such
company's cash ("Company Value") to revenue recorded over the latest twelve
months for comparable companies ranging from 0.8x to 18.1x, with a mean and
median of 5.2x and 2.8x, respectively, and a ratio of 7.6x for ForeFront; and
(v) Company Value to calendar 1998 revenue estimate for comparable companies
ranging from 1.7x to 12.8x, with a mean and median of 5.0x and 2.7x,
respectively, and for management estimates for ForeFront falling within that
range. Company Value for ForeFront was based upon the implied purchase price
per share multiplied by the number of fully-diluted shares outstanding, plus
outstanding debt less cash held. Earnings estimates for comparable companies
were based on consensus earnings per share estimates taken from First Call, an
investor service that monitors earnings estimates for publicly traded
companies.
Comparable Transaction Analysis. Using publicly available information, Piper
Jaffray analyzed the ratio of Company Value to revenue recorded over the last
twelve months, the ratio of Company Value to operating income recorded over
the last twelve months and the ratio of the product of the total number of
shares of ForeFront outstanding, on a fully diluted basis multiplied by the
implied value of $15.80 per share (the "Equity Value") to net income over the
last twelve months, involving two separate Comparable Transaction Analyses.
The first set of Comparable Transaction Analysis was based on seven publicly
traded and privately held companies involved in the training and education of
IT professionals, including: Mastering, Inc./Platinum Technology, Inc.
(Pending); ITI Education Corporation/Edutrek International, Inc. (Pending);
ELS Educational Services, Inc./Berlitz International (August 1997); National
Education Corp./Harcourt General, Inc. (July 1997); American Research
Group/Global Knowledge Network, Inc. (January 1997); Westcott Communications,
Inc./K-III Communications Corporation (June 1996); and Drake Prometric/Sylvan
Learning Systems, Inc. (September 1995). An analysis of the comparable
transactions produced multiples of selected valuation data with respect to the
purchased companies as follows: Company Value to revenues recorded over the
last twelve months ranging from 1.4x to 4.3x, with a mean and a median of 2.7x
and 2.9x, respectively, and a multiple of 7.6x for ForeFront,
70
<PAGE>
Company Value to operating income over the last twelve months ranging from
13.0x to 36.7x, with a mean and a median of 22.2x and 18.8x, respectively, and
a multiple which was not meaningful for ForeFront and Equity Value to net
income over the last twelve months ranging from 18.6x to 75.8x, with a mean
and median of 42.3x and 34.4x, respectively, and a multiple which was not
meaningful for ForeFront. Estimated multiples paid in the comparable
transactions were based on information obtained from public filings, public
company disclosures, press releases, industry and popular press reports,
databases and other sources.
The second set of Comparable Transaction Analysis was based on 18 publicly
traded companies with SIC 7372, Prepackaged Software, including: Technology
Modeling Associates, Inc./Avant! Corporation (January 1998); National Health
Enhancement Systems/HBO & Company (December 1997); Unison Software,
Inc./Tivoli Systems, Inc. (IBM Corporation) (December 1997); Visigenic
Software, Inc./Borland International, Inc. (November 1997); DIGEX,
Inc./Intermedia Communications, Inc. (July 1997); Maxis, Inc./Electronic Arts,
Inc. (July 1997); Fractal Design Corporation/MetaTools, Inc. (May 1997);
Softdesk, Inc./Autodesk, Inc. (April 1997); Datalogix International/Oracle
Corporation (January 1997); Edmark Corporation/IBM Corporation (December
1996); Meta Software, Inc./Avant! Corporation (October 1996); Davidson &
Associates, Inc./CUC International, Inc. (July 1996); Sierra On-Line, Inc./CUC
International, Inc. (July 1996); MECC/Softkey International, Inc. (May 1996);
TGV Software, Inc./Cisco Systems, Inc. (March 1996); Microtec Research,
Inc./Mentor Graphics Corporation (February 1996); Legent Corporation/Computer
Associates International, Inc. (November 1995); and Wavefront Technologies,
Inc./Silicon Graphics, Inc. (June 1995). An analysis of the comparable
transactions produced multiples of selected valuation data with respect to the
purchased companies as follows: Company Value to revenues recorded over the
last twelve months ranging from 1.3x to 8.6x, with a mean and a median of 4.4x
and 3.9x, respectively, and a multiple of 7.6x for ForeFront, Company Value to
operating income over the last twelve months ranging from 16.3x to 52.0x, with
a mean and a median of 33.3x and 31.6x, respectively, and a multiple which was
not meaningful for ForeFront and Equity Value to net income over the last
twelve months ranging from 25.6x to 69.7x, with a mean and median of 45.4x and
45.4x, respectively, and a multiple which was not meaningful for ForeFront.
Estimated multiples paid in the comparable transactions were based on
information obtained from public filings, public company disclosures, press
releases, industry and popular press reports, databases and other sources.
No company, transaction or business used in the Comparable Company Analysis
or Comparable Transaction Analysis as a comparison is identical to ForeFront
or the Merger. Accordingly, an analysis of the results of the foregoing is not
entirely mathematical; rather it involves complex considerations and judgments
concerning differences in financial and operating characteristics and other
factors that could affect the acquisition, public trading and other values of
the comparable companies, comparable transactions or the business segment,
company or transactions to which they are being compared.
Premiums Paid Analysis. Piper Jaffray reviewed comparable pooling-of-
interests transactions of companies involved in the IT industry, as well as
certain other transactions to determine the premiums paid, represented by the
difference between the transaction values and the market prices for the target
companies one day, one week and one month prior to the announcement (each, an
"Announcement") of such comparable transaction. This analysis indicated
premiums as follows: (i) one day before the Announcement, premiums ranging
from -10.6% to 92.0%, with a mean and a median of 32.3% and 30.3%,
respectively, and a premium for ForeFront of 26.4%; (ii) one week before the
Announcement, premiums ranging from -8.6% to 99.3%, with a mean and a median
of 38.7% and 40.4%, respectively, and a premium for ForeFront of 40.4%; and
(iii) one month before the Announcement, premiums ranging from 1.0% to 146.7%,
with a mean and a median of 52.4% and 43.0%, respectively and a premium for
ForeFront of 42.0%. Estimated premiums paid in the comparable transactions
were based on information obtained from public filings, public company
disclosures, press releases, industry and popular press reports, databases and
other sources.
Pro Forma Earnings Analysis--No Synergy Adjustments. Piper Jaffray analyzed
pro forma effects resulting from the impact of the Merger on the projected EPS
of the combined company for the calendar years 1998 and 1999, per Company
management estimates for ForeFront and research analyst estimates for CBT,
71
<PAGE>
without taking into account certain operating cost synergies that the combined
company may realize following consummation of the Merger. The results of the
pro forma earnings analysis suggested that the Merger could be non-dilutive to
the combined company's EPS in the calendar years 1998 and 1999. The actual
results achieved by the combined company after the Merger may vary from
projected results and the variations may be material.
Pro Forma Earnings Analysis--Synergy Adjustments. Piper Jaffray analyzed pro
forma effects resulting from the impact of the Merger on the projected EPS of
the combined company for the calendar years 1998 and 1999, per Company
management estimates for ForeFront and research analyst estimates for CBT
after taking into account certain operating cost synergies that the combined
company may realize following consummation of the Merger. The results of the
pro forma earnings analysis suggested that the Merger could be non-dilutive to
the combined company's EPS in the calendar years 1998 and 1999. The actual
results achieved by the combined company after the Merger may vary from
projected results and the variations may be material.
Contribution Analysis. Piper Jaffray analyzed the respective contributions
of ForeFront and CBT to the estimated total revenues, operating income, pre-
tax income and net income for the years ended December 31, 1998 and 1999 per
management estimates for ForeFront, documents filed with the Securities and
Exchange Commission by CBT and other publicly available information and
research analyst estimates with respect to CBT. The analysis indicated that
(i) in calendar year 1998, CBT would contribute approximately 85.3% of total
revenues, approximately 87.8% of operating income, approximately 87.8% of pre-
tax income and approximately 90.4% of net income, and ForeFront would
contribute approximately 14.7% of total revenues, approximately 12.2% of
operating income, approximately 12.2% of pre-tax income and approximately 9.6%
of net income, of the combined company, (ii) in calendar year 1999, CBT would
contribute approximately 85.7% of total revenues, approximately 88.3% of
operating income, approximately 87.9% of pre-tax income and approximately
90.5% of net income, and ForeFront would contribute approximately 14.3% of
total revenues, approximately 11.7% of operating income, approximately 12.1%
of pre-tax income and approximately 9.5% of net income, of the combined
company.
Discounted Cash Flow Analysis. Piper Jaffray estimated the present value of
the projected future cash flows of ForeFront on a stand-alone basis using
internal financial planning data prepared by management of ForeFront for the
years ending December 31, 1998 through December 31, 2002. Piper Jaffray
applied terminal value multiples of forecasted 2002 earnings before interest
and taxes of 16.0x, 17.0x and 18.0x. In all cases, Piper Jaffray used a range
of discount rates from 21% to 25%. This analysis yielded a range of estimated
present values of ForeFront's equity value from $11.73 per share to $14.56 per
share, compared to the ForeFront equity value of $15.80 per share implied by
the Exchange Ratio based on the closing price of CBT ADSs on March 13, 1998.
Other Factors and Comparative Analyses. In rendering its opinion, Piper
Jaffray considered certain other factors and conducted certain other
comparative analyses, including, among other things, a review of: (i) the
history of trading prices and volume for ForeFront Common Stock from December
29, 1995 through March 13, 1998, and CBT ADSs from April 13, 1995 through
March 13, 1998; and (ii) selected published analysts' reports on each of
ForeFront and CBT, including analysts' estimates as to the earnings growth
potential of ForeFront and CBT.
While the foregoing summary describes certain analyses and factors that
Piper Jaffray deemed material in its presentation to the ForeFront Board, it
is not a comprehensive description of all analyses and factors considered by
Piper Jaffray. The preparation of a fairness opinion is a complex process that
involves various determinations as to the most appropriate and relevant
methods of financial analysis and the application of these methods to the
particular circumstances and, therefore, such an opinion is not readily
susceptible to summary description. Piper Jaffray believes that its analyses
must be considered as a whole and that selecting portions of its analyses and
of the factors considered by it, without considering all analyses and factors,
would create an incomplete view of the evaluation process underlying the Piper
Jaffray Opinion. Several analytical methodologies were employed and no one
method of analysis should be regarded as critical to the overall conclusion
reached by Piper Jaffray. Each analytical technique has inherent strengths and
weaknesses, and the nature of the available information may further affect the
value of particular techniques. The conclusions reached by Piper Jaffray are
based on all analyses and factors taken as a whole and also on application of
Piper Jaffray's own experience and
72
<PAGE>
judgment. Such conclusions may involve significant elements of subjective
judgment and qualitative analysis. Piper Jaffray therefore gives no opinion as
to the value or merit standing alone of any one or more parts of the analysis
it performed. In performing its analyses, Piper Jaffray considered general
economic, market and financial conditions and other matters, many of which are
beyond the control of ForeFront and CBT. The analyses performed by Piper
Jaffray are not necessarily indicative of actual values or future results,
which may be significantly more or less favorable than those suggested by such
analyses. Accordingly, analyses relating to the value of a business do not
purport to be appraisals or to reflect the prices at which the business
actually may be purchased. Furthermore, no opinion is being expressed as to
the prices at which CBT ADSs may trade at any future time.
ForeFront engaged Piper Jaffray pursuant to the Piper Jaffray Engagement
Letter on February 6, 1998. The Piper Jaffray Engagement Letter provides that,
for its services, Piper Jaffray is entitled to receive, contingent upon
consummation of the Merger, a fee equal to the following: (i) three percent of
the first $10 million of the aggregate consideration paid to ForeFront and/or
its stockholders in connection with the Merger; (ii) two percent of the second
$10 million aggregate consideration paid to ForeFront and/or its stockholders
in connection with the Merger and (iii) one percent of the remaining aggregate
consideration in excess of $20 million paid to ForeFront and/or its
stockholders in connection with the Merger; provided that in no event shall
Piper Jaffray's fee be less than $600,000. A payment of $300,000 (which
constitutes part of Piper Jaffray's fee equal to a percentage of the total
sale price described above) became due and payable to Piper Jaffray upon
delivery of its fairness opinion to the ForeFront Board. The remainder of the
Piper Jaffray fee is due and payable upon consummation of the Merger.
ForeFront has also agreed to reimburse Piper Jaffray for its out of pocket
expenses and to indemnify and hold harmless Piper Jaffray and its affiliates
and any person, director, employee or agent acting on behalf of Piper Jaffray
or any of its affiliates, or any person controlling Piper Jaffray or its
affiliates for certain losses, claims, damages, expenses and liabilities
relating to or arising out of services provided by Piper Jaffray as financial
advisor to ForeFront. The terms of the fee arrangement with Piper Jaffray,
which ForeFront and Piper Jaffray believe are customary in transactions of
this nature, were negotiated at arm's length between ForeFront and Piper
Jaffray, and the ForeFront Board was aware of such fee arrangements.
Piper Jaffray was retained based on Piper Jaffray's experience as a
financial advisor in connection with mergers and acquisitions and in
securities valuations generally, as well as Piper Jaffray's investment banking
relationship with ForeFront and familiarity with ForeFront's business and its
market.
Piper Jaffray is a nationally recognized investment banking firm. As part of
its investment banking business, Piper Jaffray is frequently engaged in the
valuation of businesses and their securities in connection with mergers and
acquisitions, negotiated underwritings, secondary distributions of securities,
private placements and other purposes. Piper Jaffray may actively trade the
equity securities of ForeFront and CBT for its own account and for the
accounts of its customers and, accordingly, may at any time hold a long or
short position in such securities. Piper Jaffray regularly publishes research
reports regarding the IT training industry and the business and securities of
publicly traded companies in the IT training industry.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the ForeFront Board with respect to the
Reorganization Agreement and the Merger, ForeFront stockholders should be
aware that certain executive officers of ForeFront have certain interests in
the Merger that are in addition to the interests of holders of ForeFront
Common Stock generally. The ForeFront Board has considered these interests,
among other matters, in approving the Reorganization Agreement and the Merger.
Stock Options. At the Effective Time, each outstanding option issued
pursuant to the ForeFront Amended and Restated 1992 Stock Option Plan (the
"1992 Plan"), 1996 Non-Employee Directors' Stock Option Plan (the "Directors'
Plan") and Amended and Restated 1996 Stock Option Plan (the "1996 Plan")
(collectively the "ForeFront Stock Option Plans") will be assumed by CBT. Each
option so assumed will continue to have, and be subject to, the same terms and
conditions set forth in the stock option plan under which it was issued and
the
73
<PAGE>
stock option agreement by which it is evidenced, except that each option will
be or become exercisable for CBT ADSs rather than shares of ForeFront Common
Stock (as adjusted to reflect the Exchange Ratio). See "Terms of the Merger--
Treatment of Employee Equity Benefit Plans." The 1992 and 1996 Plans and all
option agreements under the Directors' Plan contain terms which provide that
vesting of all options covered by such plans or agreements will accelerate
upon a change of control of ForeFront. The Merger will constitute such a
change of control.
As of the Record Date, certain executive officers and directors of ForeFront
owned outstanding options and warrants to purchase or otherwise acquire up to
an aggregate of 1,639,075 shares of ForeFront Common Stock. Assuming that the
Merger is consummated on May 28, 1998, the following table shows the number of
unvested options that would be held by each director and executive officer of
ForeFront immediately prior to the consummation of the Merger, the vesting of
which would be accelerated as a result of the Merger.
<TABLE>
<CAPTION>
OPTIONS WHOSE VESTING
WOULD ACCELERATE
IMMEDIATELY UPON
CONSUMMATION OF THE
MERGER
BENEFICIAL OWNER (# OF SHARES)
---------------- ---------------------
<S> <C>
Executive Officers of ForeFront:
David Sikora....................................... 57,030
Ernest D. Rapp..................................... 88,156
Jeffrey R. Harder.................................. 72,294
Sunil Sethi........................................ 75,000
Michael Kaplan..................................... 0
Outside Directors of ForeFront:
G. Anthony Gorry................................... 0
Stephen J. Banks................................... 0
Grant Dove......................................... 0
Terry W. Ward...................................... 0
All directors and executive officers as a group (8
persons)............................................ 292,480
</TABLE>
Employment Arrangements. CBT has entered into employment agreements with
each of Messrs. Rapp and Kaplan, which will become effective only at the
Effective Time. Upon becoming effective, these agreements will supersede all
prior employment agreements between ForeFront and each of Messrs. Rapp and
Kaplan, except with respect to certain option vesting provisions contained in
the existing employment agreements between ForeFront and each of Messrs. Rapp
and Kaplan and except for certain severance benefits granted in Mr. Rapp's
existing employment agreement with ForeFront.
Pursuant to Mr. Rapp's employment agreement, Mr. Rapp will serve as a
consultant to CBT for a period of six months following the Effective Time at a
monthly salary of $12,500. In addition, if Mr. Rapp successfully executes
plans to integrate the operations of CBT and ForeFront, and to accelerate the
deployment of ForeFront's telemarketing processes and procedures into CBT's
sales facilities, CBT will pay Mr. Rapp bonuses of $50,000 and $25,000,
respectively. Following the initial term of Mr. Rapp's employment agreement,
CBT will offer Mr. Rapp employment on certain specified conditions at CBT's
executive offices. If CBT does not offer Mr. Rapp employment or if Mr. Rapp
does not accept such offer of employment, then CBT will pay Mr. Rapp the
severance payment to which Mr. Rapp is entitled pursuant to his existing
employment agreement with ForeFront. In addition, if Mr. Rapp accepts CBT's
offer of employment and is thereafter terminated without cause (as defined in
Mr. Rapp's employment agreement) within 15 months of commencing such
employment, CBT will pay Mr. Rapp a severance payment equal to six months
salary under Mr. Rapp's employment agreement with CBT.
Pursuant to Mr. Kaplan's employment agreement, Mr. Kaplan will serve as a
consultant to CBT for a period of four months following the Effective Time at
a monthly salary of $20,833 for each of the first three months and $10,416 for
the fourth month of the employment agreement. Mr. Kaplan's employment
agreement also
74
<PAGE>
provides that Mr. Kaplan will be eligible for a $25,000 bonus after his
completion of four months employment under the agreement. After the four month
term of Mr. Kaplan's employment agreement, Mr. Kaplan will be available to CBT
on a consulting basis on terms to be agreed upon by the parties. Mr. Kaplan's
employment agreement also provides that for a period of one year following his
termination of employment under his employment agreement Mr. Kaplan will not
participate in certain businesses that compete with CBT or solicit any
employee, customer or supplier of CBT.
Sikora Severance Benefits. Under ForeFront's employment agreement with Mr.
Sikora, Mr. Sikora will be paid a change of control payment equal to the sum
of his annual base salary of $200,000, his maximum annual bonus of $150,000,
any expense reimbursement incurred and any other benefits accrued but unpaid
upon consummation of the Merger. In addition, ForeFront will pay Mr. Sikora a
bonus of $25,000 if the Merger is consummated. Mr. Sikora's agreement also
provides that Mr. Sikora will receive his annual base salary of $200,000 and
continued medical insurance benefits for twelve months in the event the
Company terminates his employment with the Company for other than Cause (as
defined in Mr. Sikora's employment agreement). As of the Record Date, Mr.
Sikora held options to purchase 57,030 shares of ForeFront Common Stock, the
vesting of which will accelerate upon the Merger, assuming that the Merger is
consummated. Mr. Sikora's agreement also provides that if he is terminated
without Cause, his options shall remain exercisable for a period of five years
after the date of termination.
Indemnification and Insurance. Pursuant to the Reorganization Agreement, CBT
agreed that, after the Effective Time, it will cause the Surviving Corporation
to provide certain indemnification and liability insurance benefits to certain
indemnified parties, including directors and executive officers of ForeFront.
Such obligations of the Surviving Corporation will be guaranteed by CBT's
principal United States subsidiary. See "Terms of the Merger--Indemnification
and Insurance."
GOVERNMENTAL AND REGULATORY MATTERS
Under the HSR Act, and the rules promulgated thereunder by the FTC, the
Merger cannot be consummated until notifications have been given to the FTC
and the Antitrust Division and the specified waiting period has expired or
terminated early. The notifications required under the HSR Act have been
furnished to the FTC and the Antitrust Division and the parties have received
early termination of the specified waiting period under the HSR Act for the
Merger. At any time before or after consummation of the Merger, and
notwithstanding the early termination of the applicable waiting periods under
the HSR Act and other applicable antitrust laws, the Antitrust Division, the
FTC or any state or foreign governmental authority could take such action
under the antitrust laws as it deems necessary or desirable in the public
interest. Such action could include seeking to enjoin the consummation of the
Merger or seeking divestiture of ForeFront or businesses of CBT or ForeFront
by CBT. Private parties may also seek to take legal action under the antitrust
laws under certain circumstances.
Based on information available to them, CBT and ForeFront believe that the
Merger will be effected in compliance with federal, state and foreign
antitrust laws. However, there can be no assurance that a challenge to the
consummation of the Merger on antitrust grounds will not be made or that, if
such a challenge were made, CBT and ForeFront would prevail. The Merger also
must satisfy the requirements of the federal and certain state and Canadian
securities laws.
ACCOUNTING TREATMENT
The Merger is intended to qualify as a "pooling-of-interests" for accounting
and financial reporting purposes in accordance with generally accepted
accounting principles. This accounting method would permit the recorded assets
and liabilities of both CBT and ForeFront to be carried forward to the
consolidated financial statements of CBT at their recorded historical amounts.
Consummation of the Merger is conditioned upon: (i) receipt by CBT of a letter
from its independent accountants dated as of a date within two business days
prior to the Closing Date to the effect that such accountants concur with CBT
management's conclusion that pooling-of-interests accounting for the Merger is
appropriate and (ii) receipt by ForeFront of a letter from its independent
75
<PAGE>
auditors dated as of a date within two business days prior to the Closing Date
to the effect that such auditors concur with ForeFront management's conclusion
that no conditions exist relating to ForeFront that would preclude CBT from
accounting for the Merger as a pooling-of-interests.
NO APPRAISAL RIGHTS
ForeFront stockholders are not entitled to appraisal rights in connection
with the Merger under the DGCL.
76
<PAGE>
TERMS OF THE MERGER
The following is a summary of the material provisions of the Reorganization
Agreement, a copy of which is attached as Annex A to this Proxy
Statement/Prospectus and is incorporated herein by reference. HOWEVER, THE
FOLLOWING IS NOT A COMPLETE STATEMENT OF ALL PROVISIONS OF THE REORGANIZATION
AGREEMENT AND RELATED AGREEMENTS. STATEMENTS MADE IN THIS PROXY
STATEMENT/PROSPECTUS WITH RESPECT TO THE TERMS OF THE MERGER AND SUCH RELATED
AGREEMENTS ARE QUALIFIED IN THEIR RESPECTIVE ENTIRETIES BY REFERENCE TO THE
MORE DETAILED INFORMATION SET FORTH IN THE REORGANIZATION AGREEMENT AND SUCH
RELATED AGREEMENTS.
EFFECTIVE TIME
Subject to the provisions of the Reorganization Agreement, CBT, ForeFront
and Merger Sub shall cause the Merger to be consummated by filing a
Certificate of Merger with the Delaware Secretary of State in accordance with
the relevant provisions of Delaware law as soon as practicable on or after the
Closing Date (the time of such filing (or such later time as may be agreed in
writing by the parties and specified in the Certificate of Merger) being the
"Effective Time" of the Merger). The closing of the Merger (the "Closing")
will take place at the offices of Wilson Sonsini Goodrich & Rosati at a time
and date to be specified by the parties within two business days, but no
earlier than May 28, 1998, after satisfaction or waiver of the conditions set
forth in the Reorganization Agreement, or at such other date, time and
location as CBT, Merger Sub and ForeFront may agree. The Closing is currently
anticipated to occur on or about May 29, 1998.
MANNER AND BASIS FOR CONVERTING SHARES
At the Effective Time, by virtue of the Merger and without any action on the
part of Merger Sub, ForeFront or the holders of any of the following
securities, each share of ForeFront Common Stock issued and outstanding
immediately prior to the Effective Time (other than any shares of ForeFront
Common Stock owned by CBT, ForeFront, Merger Sub or any direct or indirect
wholly-owned subsidiary of CBT or ForeFront) will be canceled and extinguished
and automatically converted into 0.3137 of CBT ADSs.
Each share of ForeFront Common Stock owned by CBT, ForeFront, Merger Sub or
any direct or indirect wholly-owned subsidiary of CBT or ForeFront immediately
prior to the Effective Time shall be canceled and extinguished without any
conversion thereof.
At the Effective Time, all options to purchase ForeFront Common Stock then
outstanding under the ForeFront Stock Option Plans will be assumed by CBT. See
"--Treatment of Employee Equity Benefit Plans." At the Effective Time, each
outstanding warrant to acquire shares of ForeFront Common Stock and each
outstanding exchangeable share of ForeFront Canada Ltd. that is exchangeable
for shares of ForeFront Common Stock will be assumed by CBT and become
exchangeable for CBT ADSs on the same terms and conditions, adjusted to
reflect the Exchange Ratio, that governed such warrants and exchangeable
shares prior to the Effective Time.
Each share of Common Stock, $0.01 par value per share, of Merger Sub issued
and outstanding immediately prior to the Effective Time will be converted into
one validly issued, fully paid and nonassessable share of Common Stock, $0.01
par value per share, of the Surviving Corporation. Each certificate evidencing
ownership of shares of Merger Sub Common Stock will continue to evidence
ownership of such shares of capital stock of the Surviving Corporation.
The Exchange Ratio will be adjusted to reflect appropriately the effect of
any stock split, reverse stock split, stock dividend (including any dividend
or distribution of securities convertible into CBT ADSs or ForeFront Common
Stock), reorganization, recapitalization, reclassification or other like
change with respect to CBT ADSs or ForeFront Common Stock occurring or having
a record date on or after the date of the Reorganization Agreement and prior
to the Effective Time.
77
<PAGE>
Promptly after the Effective Time, CBT, acting through the Exchange Agent,
will deliver to each holder of record as of the Effective Time of a
certificate or certificates which immediately prior to the Effective Date
represented outstanding shares of ForeFront Common Stock a letter of
transmittal with instructions to be used by such holder in surrendering such
certificates in exchange for American Depositary Receipts ("ADRs")
representing CBT ADSs. CERTIFICATES SHOULD NOT BE SURRENDERED BY FOREFRONT
STOCKHOLDERS UNTIL SUCH HOLDERS RECEIVE THE LETTER OF TRANSMITTAL FROM THE
EXCHANGE AGENT, AND THEN ONLY IN ACCORDANCE WITH THE TERMS OF THE LETTER OF
TRANSMITTAL.
TREATMENT OF EMPLOYEE EQUITY BENEFIT PLANS
Stock Options. At the Effective Time, each Option outstanding pursuant to
the ForeFront Stock Option Plans, whether or not exercisable, will be assumed
by CBT and will continue to have, and be subject to, the same terms and
conditions set forth in the stock option plan under which it was issued and
the stock option agreement by which it is evidenced (including, to the extent
permissible, with respect to the status as an "incentive stock option" under
Section 422 of the Code), except that each Option will be or become
exercisable for CBT ADSs rather than ForeFront Common Stock, as adjusted to
reflect the Exchange Ratio. See "Approval of the Merger and Related
Transactions--Interests of Certain Persons" for a discussion of certain
Options held by directors and executive officers.
Form S-8 Filing. CBT has agreed to file with the SEC, as soon as reasonably
practical and in any event within twenty days after the Effective Time, a
registration statement on Form S-8 to register the Ordinary Shares represented
by the CBT ADSs issuable as the result of the assumption of the Options.
STOCK OWNERSHIP FOLLOWING THE MERGER
Based upon the capitalization of ForeFront as of the close of business on
the Record Date, an aggregate of approximately 2,157,192 CBT ADSs will be
issued to ForeFront stockholders in the Merger and CBT will assume options,
warrants and exchangeable shares to acquire up to approximately 1,058,000
additional CBT ADSs. Based upon the number of shares of CBT ADSs issued and
outstanding as of the Record Date, and after giving effect to the issuance of
CBT ADSs as described in the previous sentence and the exercise of all
options, warrants and exchangeable shares to purchase ForeFront Common Stock
assumed by CBT, the former ForeFront security holders would hold, and have
voting power with respect to, approximately 7.96% of the total issued and
outstanding CBT ADSs. The foregoing numbers of shares and percentages are
subject to change to reflect any changes in the capitalization of either CBT
or ForeFront subsequent to the dates indicated and prior to the Effective
Time, and there can be no assurance as to the actual capitalization of CBT or
ForeFront at the Effective Time or CBT at any time following the Effective
Time.
EFFECT OF THE MERGER
Once the Merger is consummated, Merger Sub will cease to exist as a
corporation, and ForeFront will remain as the Surviving Corporation.
Pursuant to the Reorganization Agreement, the Certificate of Incorporation
of Merger Sub in effect immediately prior to the Effective Time will become
the Certificate of Incorporation of the Surviving Corporation and the Bylaws
of Merger Sub will become the Bylaws of the Surviving Corporation. The Board
of Directors of the Surviving Corporation will consist of the directors who
are serving as directors of Merger Sub immediately prior to the Effective
Time. The officers of Merger Sub immediately prior to the Effective Time will
be the officers of the Surviving Corporation, until their successors are duly
elected.
REPRESENTATIONS AND WARRANTIES
Pursuant to the Reorganization Agreement, each of ForeFront, CBT and Merger
Sub made certain representations and warranties relating to its respective
business and various other matters. None of such representations and
warranties will survive the Merger.
78
<PAGE>
CONDUCT OF FOREFRONT'S BUSINESS PRIOR TO THE MERGER
Pursuant to the Reorganization Agreement, ForeFront has agreed that, until
the earlier of the termination of the Reorganization Agreement pursuant to its
terms and the Effective Time, subject to certain exceptions, and except to the
extent that CBT consents in writing, ForeFront will carry on its business, in
all material respects, in the usual, regular and ordinary course, and in
compliance with all applicable laws and regulations, pay its debts and taxes
when due subject to good faith disputes over such debts or taxes, pay or
perform other material obligations when due, and use its reasonable best
efforts consistent with past practices and policies (i) to preserve intact its
present business organization, (ii) to keep available the services of its
present officers and employees, and (iii) to preserve its relationships with
customers, suppliers, distributors, licensors, licensees, and others with
which it has business dealings.
In addition, except as permitted by the terms of the Reorganization
Agreement, and subject to certain exceptions, until the earlier of the
termination of the Reorganization Agreement pursuant to its terms and the
Effective Time, ForeFront has agreed not to do any of the following or permit
its subsidiaries to do any of the following without the prior written consent
of CBT:
(a) Waive any stock repurchase rights, accelerate, amend or change the
period of exercisability of options or restricted stock, or reprice options
granted under any employee, consultant or director stock plans or authorize
cash payments in exchange for any options granted under any of such plans;
(b) Grant any severance or termination pay to any officer or employee
except payments in amounts consistent with policies and past practices or
pursuant to written agreements outstanding, or policies existing, on the
date of the Reorganization Agreement and as previously disclosed in writing
or made available to CBT, or adopt any new severance plan;
(c) Transfer or license to any person or entity or otherwise extend,
amend or modify in any material respect any rights (including without
limitation distribution rights) to its intellectual property or products,
or enter into grants to future patent rights, other than non-exclusive
licenses and distribution rights in the ordinary course of business and
consistent with past practice;
(d) Declare or pay any dividends on or make any other distributions
(whether in cash, stock, equity securities or property) in respect of any
capital stock or split, combine or reclassify any capital stock or issue or
authorize the issuance of any other securities in respect of, in lieu of or
in substitution for any capital stock;
(e) Repurchase or otherwise acquire, directly or indirectly, any shares
of its capital stock, except repurchases of unvested shares at cost in
connection with the termination of the employment relationship with any
employee pursuant to agreements in effect as of the date of the
Reorganization Agreement;
(f) Issue, grant, deliver, sell, authorize or propose the issuance,
delivery or sale of, any shares of capital stock or any securities
convertible into shares of capital stock, or subscriptions, rights,
warrants or options to acquire any shares of capital stock or any
securities convertible into shares of capital stock, or enter into other
agreements or commitments of any character obligating it to issue any such
shares or convertible securities, other than the issuance, delivery and/or
sale of shares of ForeFront Common Stock pursuant to the exercise of
options, warrants and exchangeable shares therefor outstanding as of the
date of the Reorganization Agreement, and shares of ForeFront Common Stock
issuable to participants in the ForeFront Employee Stock Purchase Program
consistent with the terms thereof;
(g) Cause, permit or propose any amendments to any charter document or
bylaw (or similar governing instruments of any subsidiaries);
(h) Acquire or agree to acquire by merging or consolidating with, or by
purchasing any equity interest in or a material portion of the assets of,
or by any other manner, any business or any corporation, partnership
interest, association or other business organization or division thereof,
or otherwise acquire or agree to acquire any assets which are material,
individually or in the aggregate, to its business or enter into any
material joint ventures, strategic partnerships or alliances;
79
<PAGE>
(i) Sell, lease, license, encumber or otherwise dispose of any properties
or assets which are material, individually or in the aggregate, to its
business, except in the ordinary course of business consistent with past
practice or lend funds to any third party (other than intracompany loans in
the ordinary course of business);
(j) Incur any indebtedness for borrowed money (other than (i) in
connection with the financing of ordinary course trade payables; (ii)
pursuant to existing credit facilities in the ordinary course of business;
(iii) in connection with leasing activities in the ordinary course of
business or guarantee any indebtedness of any person for borrowed money
(except that ForeFront may guarantee any indebtedness of any of its
subsidiaries, and any such subsidiary may guarantee any indebtedness of
ForeFront or of any other subsidiary of ForeFront), or issue or sell any
debt securities or warrants or rights to acquire debt securities of
ForeFront or guarantee any debt securities of others;
(k) Adopt or amend any employee benefit plan or employee stock purchase
or employee stock option plan, enter into any employment contract (other
than offer letters and letter agreements with employees who are terminable
"at will" or as required by law), pay any special bonus or special
remuneration to any director or employee or increase the salaries or wage
rates of its officers or employees other than in the ordinary course of
business, consistent with past practice, or change in any material respect
any management policies or procedures (including those relating to hiring);
(l) Make any payments outside of the ordinary course of business for
purposes of settling any dispute;
(m) Take any action that could interfere with CBT's ability to account
for the Merger as a pooling-of- interests whether or not otherwise
permitted by the Reorganization Agreement;
(n) Agree in writing or otherwise to take any of the foregoing actions;
or
(o) Other than in the ordinary course of business, make or change any
material tax election, adopt or change any accounting method with respect
to taxes, file any material tax return or any amendment thereto, enter into
any closing agreement, settle any claim or assessment with respect to taxes
or consent to any extension or waiver of the limitation period applicable
to any tax claim or assessment.
CONDUCT OF CBT'S BUSINESS PRIOR TO THE MERGER
Pursuant to the Reorganization Agreement, CBT has agreed that, until the
earlier of the termination of the Reorganization Agreement pursuant to its
terms and the Effective Time, subject to certain exceptions, and except to the
extent that ForeFront consents, CBT will not (i) declare, accrue, set aside or
pay any dividend or any other distribution in respect of any shares of its
capital stock; (ii) repurchase, redeem or otherwise reacquire any shares of
its capital stock in an extraordinary manner; (iii) amend or permit the
adoption of any amendments to the CBT Charter; (iv) become a party to any
recapitalization other than a merger, consolidation, acquisition or similar
transaction with any unaffiliated third party, or (v) take any action that
would interfere with its ability to account for the Merger as a pooling-of-
interests. CBT also agrees that it will promptly notify ForeFront of any
material event involving CBT's business or operations.
CONTROL OF EACH PARTY'S OPERATIONS
Under the Reorganization Agreement, CBT and ForeFront have agreed that
nothing contained in the Reorganization Agreement will give either party,
directly or indirectly, the right to control or direct the operations of the
other party. CBT and ForeFront further agreed that each of CBT and ForeFront
will exercise, consistent with the terms and conditions of the Reorganization
Agreement, complete control and supervision over its respective operations.
NO SOLICITATION
Under the terms of the Reorganization Agreement, ForeFront has agreed that
until the earlier of the Effective Time and termination of the Reorganization
Agreement pursuant to its terms, it and its subsidiaries will not, and it will
instruct its directors, officers, employees, representatives, investment
bankers, agents and
80
<PAGE>
affiliates not to, directly or indirectly (i) solicit or knowingly encourage
submission of, any Acquisition Proposal (as defined below) by any person,
entity or group (other than CBT and its affiliates, agents and
representatives), or (ii) participate in any discussions or negotiations with,
or disclose or provide access to any non-public information concerning
ForeFront or any of its subsidiaries to, or otherwise assist or facilitate, or
enter into any Agreement or understanding with, any person, entity or group
(other than CBT and its affiliates, agents and representatives), in connection
with any Acquisition Proposal with respect to ForeFront. An "Acquisition
Proposal" means any proposal or offer for (i) any merger, consolidation, sale
of substantial assets or similar transactions involving ForeFront or any of
its subsidiaries (other than sales of assets or inventory in the ordinary
course of business or as permitted under the terms of the Reorganization
Agreement), (ii) sale by ForeFront of any shares of capital stock of ForeFront
except as may be permitted by the Reorganization Agreement, (iii) the
acquisition by any person (including without limitation by way of a tender
offer or an exchange offer) of beneficial ownership or a right to acquire
beneficial ownership of, or the formation of any "group" (as defined under
Section 13(d) of the Exchange Act and the rules and regulations thereunder)
which beneficially owns, or has the right to acquire beneficial ownership of,
15% or more of the then outstanding shares of capital stock of ForeFront, or
(iv) any public announcement of a proposal, plan or intention to do any of the
foregoing or any Agreement to engage in any of the foregoing. Pursuant to the
Reorganization Agreement, ForeFront further agreed to cease any and all
activities, discussions or negotiations with any parties conducted prior to
the date of the Reorganization Agreement with respect to any Acquisition
Proposal. In addition, ForeFront agreed that it will (i) notify CBT within 24
hours if it receives any Acquisition Proposal or written inquiry or any
written request for information or access in connection with a potential
Acquisition Proposal, and (ii) as promptly as practicable notify CBT of the
significant terms and conditions of any such Acquisition Proposal and any
material modification thereto. In addition, subject to the other provisions of
the section of the Reorganization Agreement summarized here, ForeFront agreed
that, from and after the date of the Reorganization Agreement until the
earlier of the Effective Time and termination of the Reorganization Agreement
pursuant to its terms, ForeFront and its subsidiaries will not, and will
instruct their respective directors, officers, employees, representatives,
investment bankers, agents and affiliates not to, directly or indirectly, make
or authorize any public statement, recommendation or solicitation in support
of any Acquisition Proposal made by any person, entity or group (other than
CBT or any of its affiliates); provided, however, that CBT and ForeFront have
agreed that nothing contained in the Reorganization Agreement will prohibit
the ForeFront Board from taking and disclosing to ForeFront's stockholders a
position with respect to a tender offer pursuant to Rules 14d-9 and 14e-2
promulgated under the Exchange Act.
Notwithstanding the foregoing, prior to the Effective Time, to the extent
the ForeFront Board determines, in good faith, after consultation with outside
legal counsel, that the Board's fiduciary duties under applicable law require
it to do so, ForeFront may participate in discussions or negotiations with,
and furnish information and afford access to any person, entity or group after
such person, entity or group has delivered to ForeFront in writing, an
unsolicited bona fide Acquisition Proposal that the ForeFront Board
determines, in its good faith reasonable judgment after consultation with its
independent financial advisors, (i) would (if consummated in accordance with
its terms) result in a transaction more favorable than the Merger to the
stockholders of ForeFront, (ii) for which financing, to the extent required,
is committed or appears reasonably likely to be obtained, and (iii) is
reasonably likely to be consummated (a "Superior Proposal"). In addition, in
connection with a possible Acquisition Proposal, ForeFront may refer any third
party to the provision of the Reorganization Agreement described here or make
a copy of the provision available to a third party. In the event ForeFront
receives a Superior Proposal, nothing contained in the Reorganization
Agreement will prevent the ForeFront Board from recommending such Superior
Proposal to its stockholders, if the Board determines, in good faith, after
consultation with outside legal counsel, that such action is required by its
fiduciary duties under applicable law; in such case, the Board of Directors of
ForeFront may withdraw, modify or refrain from making its recommendation
concerning the Merger, and, to the extent it does so, ForeFront may refrain
from soliciting proxies to secure the vote of its stockholders as may
otherwise be required by the Reorganization Agreement; provided, however, that
ForeFront (i) shall provide CBT at least 24 hours prior notice of any
ForeFront Board meeting at which the ForeFront Board is reasonably expected to
contemplate a Superior Proposal, and (ii) shall not recommend to its
stockholders a Superior Proposal for a period of not less than 48 hours after
CBT receives
81
<PAGE>
a copy of such Superior Proposal (or a description of the significant terms
and conditions thereof, if not in writing); and, provided further, that,
unless the Reorganization Agreement is terminated, subject to applicable laws,
nothing in the provision summarized in this paragraph limits ForeFront's
obligation to hold and convene the Special Meeting (regardless of whether the
recommendation of the Board of Directors of ForeFront shall have been
withdrawn, modified or not yet made) or to provide the ForeFront stockholders
with material information relating to such meeting. In addition,
notwithstanding anything to the contrary contained in the Reorganization
Agreement, the ForeFront Board may withdraw or modify in a manner adverse to
CBT its recommendation regarding approval and adoption of the Reorganization
Agreement and approval of the Merger or refrain from making such a
recommendation to the extent that the ForeFront Board determines, in good
faith, after consultation with outside legal counsel, that compliance with its
fiduciary duties under applicable law would require it to do so.
ForeFront has agreed not to provide any non-public information to a third
party unless (i) ForeFront provides such non-public information pursuant to a
nondisclosure Agreement with terms regarding the protection of confidential
information at least as restrictive as such terms in an existing non-
disclosure agreement entered into by CBT and ForeFront in connection with the
Merger; and (ii) such non-public information has been previously delivered to
CBT.
CONDITIONS TO THE MERGER
The respective obligations of each party to the Reorganization Agreement to
effect the Merger are subject to the satisfaction at or prior to the Closing
Date of the following conditions: (i) the Reorganization Agreement shall have
been approved and adopted, and the Merger shall have been duly approved, by
the requisite vote under applicable law, by ForeFront stockholders; (ii) the
SEC shall have declared the Registration Statement of which this Proxy
Statement/Prospectus is a part effective and no stop order suspending the
effectiveness of the Registration Statement or any part thereof shall have
been issued and no proceeding for that purpose, and no similar proceeding in
respect of this Proxy Statement/Prospectus, shall have been initiated or
threatened in writing by the SEC or state regulatory authorities; (iii) no
governmental entity shall have enacted, issued, promulgated, enforced or
entered any statute, rule, regulation, executive order, decree, injunction or
other order (whether temporary, preliminary or permanent) which is in effect
and which has the effect of making the Merger illegal or otherwise prohibiting
consummation of the Merger and all waiting periods, if any, under the HSR Act
relating to the transactions contemplated hereby will have expired or
terminated early, (iv) CBT and ForeFront shall each have received
substantially identical written opinions from their respective tax counsel
(Wilson Sonsini Goodrich & Rosati and Andrews & Kurth LLP, respectively), in
form and substance reasonably satisfactory to them, to the effect that the
Merger will constitute a Reorganization, and such opinions shall not have been
withdrawn; provided, however, that, if the counsel to either CBT or ForeFront
does not render such opinion, this condition shall nonetheless be deemed to be
satisfied with respect to such party if counsel to the other party renders
such opinion to such party, and (v) the CBT ADSs issuable to ForeFront
stockholders in the Merger and such other shares required to be reserved for
issuance in connection with the Merger have been authorized for listing on
Nasdaq upon official notice of issuance.
In addition, the obligation of ForeFront to consummate and effect the Merger
is subject to the satisfaction at or prior to the Closing Date of each of the
following conditions, any of which may be waived, in writing, exclusively by
ForeFront: (i) subject to certain materiality thresholds, the representations
and warranties of CBT and Merger Sub contained in the Reorganization Agreement
shall have been true and correct on and as of the date of the Reorganization
Agreement and such representations and warranties shall be true and correct on
and as of the Closing Date except for changes contemplated by the
Reorganization Agreement and except in such cases where the failure to be so
true and correct would not have a material adverse effect on CBT; (ii) CBT and
Merger Sub shall have performed or complied in all material respects with all
agreements and covenants required by the Reorganization Agreement to be
performed or complied with by them on or prior to the Closing Date; (iii) no
event having a material adverse effect with respect to CBT shall have occurred
since the date of the Reorganization Agreement; and (iv) ForeFront shall have
received the legal opinion of Wilson Sonsini Goodrich
82
<PAGE>
& Rosati, in form and substance reasonably acceptable to it, regarding certain
legal matters in connection with the Merger.
Further, the obligations of CBT and Merger Sub to consummate and effect the
Merger are subject to the satisfaction at or prior to the Closing Date of each
of the following conditions, any of which may be waived, in writing,
exclusively by CBT: (i) subject to certain materiality thresholds, the
representations and warranties of ForeFront contained in the Reorganization
Agreement shall have been true and correct on and as of the date of the
Reorganization Agreement and such representations and warranties shall be true
and correct on and as of the Closing Date except for changes contemplated by
the Reorganization Agreement and except in such cases where the failure to be
so true and correct would not have a material adverse effect on ForeFront;
(ii) ForeFront shall have performed or complied in all material respects with
all agreements and covenants required by the Reorganization Agreement to be
performed or complied with by it on or prior to the Closing Date; (iii) no
event having a material adverse effect with respect to ForeFront shall have
occurred since the date of the Reorganization Agreement; (iv) certain officers
of ForeFront shall have entered into employment agreements with CBT; (v) CBT
shall have received from Arthur Andersen LLP, independent auditors for
ForeFront, and Ernst & Young, Chartered Accountants for CBT, respectively,
letters dated within two business days prior to the Effective Time regarding
their concurrence with the conclusions of CBT management and ForeFront
management, respectively, as to the appropriateness of pooling of interest
accounting for the Merger; (vi) ForeFront shall have obtained certain consents
required as a result of the Merger; and (viii) CBT shall have received the
legal opinion of Andrews & Kurth L.L.P., in form and substance reasonably
acceptable to it, regarding certain legal matters in connection with the
Merger.
TERMINATION OF THE REORGANIZATION AGREEMENT
The Reorganization Agreement provides that it may be terminated at any time
prior to the Effective Time (i) by mutual written consent of CBT and ForeFront
duly authorized by the Boards of Directors of CBT and ForeFront; (ii) by
either ForeFront or CBT if the Merger is not consummated by July 31, 1998 for
any reason, provided that the right to terminate the Reorganization Agreement
as provided in this clause (ii) is not available to any party whose failure to
act has been a principal cause of or resulted in the failure of the Merger to
occur on or before such date and such action or failure to act constitutes a
breach of the Reorganization Agreement; (iii) by either ForeFront or CBT if a
governmental entity issues an order, decree or ruling or taken any other
action, in any case having the effect of permanently restraining, enjoining or
otherwise prohibiting the Merger, which order, decree, ruling or other action
is final and nonappealable; (iv) by either ForeFront or CBT if the required
approvals of the stockholders of ForeFront contemplated by the Reorganization
Agreement shall not have been obtained by reason of the failure to obtain the
required vote at a meeting of ForeFront stockholders duly convened therefor or
at any adjournment thereof (provided that ForeFront may not terminate the
Reorganization Agreement pursuant to this provision if the failure to obtain
ForeFront stockholder approval was caused by the action or failure to act of
ForeFront and such action or failure to act constitutes a breach by ForeFront
of the Reorganization Agreement); (v) by CBT at any time prior to the approval
of the Merger by ForeFront's stockholders, if the ForeFront Board accepts or
recommends a Superior Proposal to the stockholders of ForeFront; (vi) by CBT,
if the ForeFront Board withholds, withdraws or modifies in a manner adverse to
CBT its recommendation in favor of adoption and approval of the Reorganization
Agreement and approval of the Merger; (vii) by ForeFront, upon a breach of any
representation, warranty, covenant or agreement on the part of CBT set forth
in the Reorganization Agreement, or if any such representation or warranty of
CBT shall have become untrue, subject to certain materiality thresholds and
cure provisions; or (viii) by CBT, upon a breach of any representation,
warranty, covenant or agreement on the part of ForeFront set forth in the
Reorganization Agreement, or if any such representation or warranty of
ForeFront shall have become inaccurate, subject to certain materiality
thresholds and cure provisions.
EFFECT OF TERMINATION
If the Reorganization Agreement is terminated by CBT or ForeFront as
described above, the Reorganization Agreement will be of no further force or
effect, except that certain provisions contained therein, including those
83
<PAGE>
discussed below relating to the "break-up" fee payable by ForeFront to CBT
under certain circumstances, will survive such termination, and ForeFront, CBT
and Merger Sub will remain liable for certain breaches of the Reorganization
Agreement occurring prior to such termination.
BREAK-UP FEES
ForeFront has agreed that if either (i) the ForeFront Board shall have
withheld, withdrawn or modified in a manner adverse to CBT its recommendation
in favor of adoption and approval of the Reorganization Agreement and approval
of the Merger and at that time there shall not have been since the date of the
Reorganization Agreement a material adverse effect on CBT and CBT shall not
have materially breached the Reorganization Agreement, or (ii) the ForeFront
Board recommends a Superior Proposal to the ForeFront stockholders, then
ForeFront shall pay to CBT an amount equal to $5.075 million within three
business days following the earlier to occur of the termination of the
Reorganization Agreement and a Negative Vote (as defined below).
ForeFront has also agreed that, if no payment is required pursuant to the
provision of the Reorganization Agreement summarized in the preceding
paragraph, and if (i) the vote of ForeFront stockholders approving and
adopting the Reorganization Agreement and approving the Merger is not obtained
by reason of the failure to obtain the required vote at a meeting of
stockholders duly convened therefor or at any adjournment thereof (a "Negative
Vote"), and (ii) prior to such Negative Vote there was an Acquisition Proposal
(as defined below) with respect to ForeFront which was publicly disclosed and
was not withdrawn prior to such Negative Vote, and (iii) within twelve months
following such Negative Vote, ForeFront enters into a definitive Agreement
with respect to a ForeFront Acquisition (as defined below) or the ForeFront
Board recommends to the ForeFront stockholders that they accept a tender or
exchange offer, not by ForeFront or its subsidiaries, for 25% or more of the
ForeFront Common Stock, then, provided that there has not been a material
adverse effect on CBT prior to the ForeFront Negative Vote and provided that
CBT shall not have materially breached the Reorganization Agreement, ForeFront
will pay to CBT an amount equal to $5.075 million within three business days
following, as the case may be, consummation of a ForeFront Acquisition
(regardless of the timing of the consummation and with whom such ForeFront
Acquisition is consummated) or consummation of such tender or exchange offer.
For purposes of the foregoing, "ForeFront Acquisition" means any transaction
or series of related transactions involving (i) any merger, consolidation,
sale of substantial assets (including capital stock of subsidiaries) having a
fair market value in excess of 30% of the fair market value of all the assets
of ForeFront and its subsidiaries immediately prior to such sale; (ii) any
sale by ForeFront of shares of capital stock of ForeFront which upon issuance
would represent more than 30% or more of the outstanding shares of capital
stock of ForeFront (provided that a public offering of equity or convertible
securities will not be deemed to be a ForeFront Acquisition); or (iii) the
acquisition by any person (including without limitation by way of a tender
offer or an exchange offer) or the formation of any "group" that beneficially
owns, or has the right to acquire beneficial ownership of, 30% or more of the
then outstanding shares of capital stock of ForeFront.
CBT and ForeFront have agreed that payment of the fees described in the
preceding two paragraphs will not be in lieu of damages incurred in the event
of breach of the Reorganization Agreement.
Except as set forth above, CBT and ForeFront have agreed that all fees and
expenses incurred in connection with the Reorganization Agreement and the
transactions contemplated thereby will be paid by the party incurring such
expenses whether or not the Merger is consummated, except that CBT and
ForeFront will share equally all fees and expenses, other than attorneys' and
accountants fees and expenses, incurred in connection with the printing and
filing of this Proxy Statement/Prospectus.
INDEMNIFICATION AND INSURANCE
Pursuant to the Reorganization Agreement, CBT has agreed that all rights to
indemnification and the advancement of defense costs existing in favor of the
directors and officers of ForeFront for acts and omissions occurring prior to
the Effective Time, as provided in ForeFront Certificate or Bylaws as in
effect as of the date of the Reorganization Agreement will survive the Merger
and be the obligation of and observed by the Surviving
84
<PAGE>
Corporation for a period of not less than six years. At the Effective Time,
CBT will cause its wholly-owned subsidiary, CBT USA, to enter into a guarantee
agreement to guarantee the performance of Surviving Corporation. In addition,
CBT agreed that from the Effective Time until December 20, 1999, the Surviving
Corporation will maintain in effect, for the benefit of the current directors
and officers of ForeFront with respect to acts or omissions occurring prior to
the Effective Time, the existing policy of directors' and officers' liability
insurance maintained by ForeFront as of the date of the Reorganization
Agreement subject to certain conditions.
AFFILIATE AGREEMENTS
Each director of ForeFront and those officers of ForeFront who may be deemed
affiliates of ForeFront have entered into agreements restricting sales,
dispositions or other transactions reducing their risk of investment in
respect of the shares of ForeFront Common Stock held by them prior to the
Merger and the CBT ADSs received by them in the Merger so as to comply with
the requirements of applicable federal securities laws and to help ensure that
the Merger will be treated as a pooling-of-interests for accounting and
financial reporting purposes.
Certain persons who may be deemed affiliates of CBT have entered into
agreements restricting sales, dispositions or other transactions reducing
their risk of investment in respect of the CBT ADSs held by them so as to help
ensure that the Merger will be treated as a pooling-of-interests for
accounting and financial reporting purposes.
The CBT ADSs issued to affiliates of ForeFront in the Merger will be subject
to Rule 145 promulgated under the Securities Act. Pursuant to Rule 145, the
CBT ADSs or other equity securities of CBT that affiliates of ForeFront may
acquire in connection with the Merger may be disposed of only in conformity
with the provisions of Rule 145. In addition, the CBT ADSs to be issued to
such individuals will be issued pursuant to the restricted ADR facility
established by CBT for, among other things, CBT ADSs held by its affiliates or
issued to affiliates of other entities in connection with transactions subject
to Rule 145.
85
<PAGE>
CERTAIN TAX CONSEQUENCES
GENERAL
The following discussion summarizes the material United States federal
income tax and Irish tax considerations relevant to the exchange of shares of
ForeFront Common Stock for CBT ADSs pursuant to the Merger that are generally
applicable to holders of ForeFront Common Stock as well as certain United
States federal income tax and Irish tax consequences of ownership of CBT ADSs.
It is included for general information purposes only and does not purport to
be a complete description of all potential tax consequences affecting the
decision whether to vote to approve the Merger. This discussion is based on
currently existing provisions of the Code, existing and proposed Treasury
Regulations thereunder, current administrative rulings and court decisions and
Irish tax law, all of which are subject to change. Any such change, which may
or may not be retroactive, could alter the consequences to CBT, ForeFront or
ForeFront's stockholders as described herein.
ForeFront stockholders should be aware that this discussion does not deal
with all federal income tax considerations that may be relevant to particular
ForeFront stockholders in light of their particular circumstances, such as
stockholders who are dealers in securities, banks and insurance companies or
tax-exempt organizations, who are subject to the alternative minimum tax
provisions of the Code, who are non-United States persons, who own (actually
or constructively) 5% or more of either the total voting power or total value
of all capital stock of CBT before or immediately after the Merger, who are
residents of Ireland or engaged in a trade or business in Ireland through a
permanent establishment, who acquired their shares in connection with stock
option or stock purchase plans or in other compensatory transactions, who do
not hold their ForeFront Common Stock as capital assets, or who hold their
shares as a hedge or as part of a hedging, straddle, conversion or other risk
reduction transaction. In addition, the following discussion does not address
the tax consequences of the Merger under foreign (other than Irish), state or
local tax laws, the tax consequences of transactions effectuated prior or
subsequent to, or concurrently with, the Merger (whether or not any such
transactions are undertaken in connection with the Merger). ACCORDINGLY,
FOREFRONT STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE
SPECIFIC TAX CONSEQUENCES TO THEM OF THE MERGER, INCLUDING THE APPLICABLE
FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES AND ANY INFORMATION
REPORTING REQUIREMENTS ASSOCIATED WITH THE MERGER.
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
As a condition to consummation of the Merger, Andrews & Kurth L.L.P.,
counsel to ForeFront, and Wilson Sonsini Goodrich & Rosati P.C., counsel to
CBT, will each render an opinion (collectively, the "Tax Opinions") to
ForeFront and CBT, respectively, to the effect that, for federal income tax
purposes, the Merger will qualify as a reorganization within the meaning of
Section 368(a) of the Code (a "Reorganization"). The Tax Opinions will neither
bind the IRS nor preclude the IRS from adopting a contrary position. In
addition, the Tax Opinions will be subject to certain assumptions and
qualifications and will be based on the truth and accuracy of certain
representations made by CBT, Merger Sub and ForeFront, including
representations in certificates delivered to counsel by the respective
managements of CBT, Merger Sub and ForeFront. If the representations are
inaccurate, the opinions of counsel could be adversely affected. No ruling has
been or will be sought from the IRS with respect to any tax matters relating
to the Merger and the opinions of counsel will not be binding upon the IRS or
any court.
SPECIAL FEDERAL INCOME TAX RULES APPLICABLE TO THE MERGER. Special federal
income tax rules will apply to the Merger because CBT is a foreign
corporation. Under section 367 of the Code and the regulations thereunder, the
receipt of CBT ADSs by a ForeFront stockholder is not taxable if all of the
following conditions are satisfied.
(i) In the Merger, ForeFront's United States stockholders receive 50% or
less of both the total voting power and total value of the stock of CBT;
86
<PAGE>
(ii) Immediately following the Merger, 50% or less of each of the total
voting power and total value of the stock of CBT is owned by United States
persons who are either ForeFront officers or directors or ForeFront
stockholders that own, directly or by attribution from related persons, 5%
or more of either the total voting power or total value of the stock of
ForeFront immediately before the Merger;
(iii) CBT or an affiliate has been engaged in an active trade or business
for at least 36 months immediately prior to the Merger, neither ForeFront
nor CBT intend to substantially dispose of or discontinue such trade or
business, and the fair market value of CBT is at least equal to the fair
market value of ForeFront;
(iv) The ForeFront stockholder does not own, directly or by attribution
from related persons, at least 5% of the total voting power or total value
of the stock of CBT immediately following the Merger; and
(v) ForeFront files the requisite statement describing the Merger with
its federal income tax return for the taxable year of the Merger.
GENERAL CONSEQUENCES OF THE MERGER. The Merger is intended to constitute a
Reorganization within the meaning of Section 368(a) of the Code, with each of
CBT, Merger Sub and ForeFront intended to qualify as a "party to the
reorganization" under Section 368(b) of the Code, in which case, subject to
the limitations and qualifications referred to herein, the Merger will
generally result in the following United States federal income tax
consequences:
(i) No gain or loss will be recognized by holders of ForeFront Common
Stock, owning (directly or by attribution from related persons) less than
5% of the total voting power or value of the stock of CBT immediately
following the Merger, solely upon their receipt of CBT ADSs in exchange for
ForeFront Common Stock in the Merger (except to the extent of cash received
in lieu of a fractional share of CBT ADSs).
(ii) The aggregate tax basis of the CBT ADSs received in the Merger by
ForeFront stockholders owning (directly or indirectly) less than 5% of the
total voting power or value of the stock of CBT immediately following the
Merger will be the same as the aggregate tax basis of the ForeFront Common
Stock surrendered by such stockholders in exchange therefor (reduced by any
tax basis attributable to fractional CBT ADSs deemed to be disposed of).
(iii) The holding period of the CBT ADSs received by such ForeFront
stockholder in the Merger will include the period for which the ForeFront
Common Stock surrendered in exchange therefor was considered to be held.
(iv) Cash payments received by holders of ForeFront Common Stock in lieu
of a fractional share will be treated as if such fractional share of CBT
ADSs had been issued in the Merger and then redeemed by CBT. A ForeFront
stockholder receiving such cash will recognize gain or loss upon such
payment, measured by the difference (if any) between the amount of cash
received and the basis in such fractional share.
(v) Neither CBT, Merger Sub nor ForeFront will recognize any gain solely
as a result of the Merger.
A successful IRS challenge to the Reorganization status of the Merger would
result in ForeFront stockholders recognizing taxable gain or loss with respect
to each share of ForeFront Common Stock surrendered equal to the difference
between the stockholder's basis in such share and the fair market value, as of
the Effective Time, of the CBT ADSs received in exchange therefor. In such
event, a shareholder's aggregate basis in the CBT ADSs so received would equal
its fair market value, and the shareholder's holding period for such stock
would begin the day after the Merger.
There will be no Irish tax consequences to holders of ForeFront Common Stock
as a result of the Merger and the exchange of shares of ForeFront Common Stock
for CBT ADSs. While the Republic of Ireland levies a capital duty on the
initial allotment of the Ordinary Shares represented by the CBT ADSs, CBT will
pay the capital duty with respect to the Ordinary Shares represented by the
CBT ADSs issued to former ForeFront stockholders. In the event the Republic of
Ireland levies a stamp duty with respect to the Merger, CBT will discharge
this stamp duty. See "--Taxation of CBT."
87
<PAGE>
Any ForeFront United States stockholder that receives CBT ADSs in exchange
for shares of ForeFront Common Stock pursuant to the Merger may be required to
file a notice providing certain information relating to the Merger on IRS Form
926 with its United States federal income tax return for the taxable year of
the Merger. Each ForeFront United States stockholder is advised to consult its
tax advisor with respect to the requirements of such notice. Failure by a
ForeFront United States stockholder to file such notice when required may
result in the Merger being a taxable event for such ForeFront United States
stockholder.
TAXATION OF CBT
General. On July 28, 1997, a Convention Between the Government of the United
States of America and the Government of Ireland for the Avoidance of Double
Taxation and the Prevention of Fiscal Evasion With Respect to Taxes on Income
and Capital Gains (the "1997 Convention") was signed. The 1997 Convention has
been ratified and is generally effective January 1, 1998, except that where
the provisions of the Convention between the Government of Ireland and the
Government of the United States of America for the Avoidance of Double
Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income,
signed September 13, 1949 (the "1949 Convention") would have afforded any
greater relief from tax to a person entitled to its benefits than is afforded
under the 1997 Convention, such provisions of the 1949 Convention will
continue to have effect for a period of 12 calendar months from January 1,
1998. Except as set forth in the preceding sentence, the provisions of the
1949 Convention ceased to have effect as of January 1, 1998. The following
discussion does not address the rules applicable to holders who elect to apply
the 1949 Convention during the transition period. United States holders of CBT
ADSs are treated as the owners of the underlying Ordinary Shares for purposes
of the Code and for purposes of the 1997 Convention.
Republic of Ireland Taxation. Companies which are resident (i.e. managed and
controlled) in the Republic of Ireland are subject to Irish corporation tax on
their total profits (wherever arising and whether or not remitted to the
Republic of Ireland). The standard rate of Irish corporation tax on both
trading and non-trading income presently is 32%. However, a corporation tax
rate of 10% applies in respect of income derived from certain activities of
CBT carried out in the Republic of Ireland.
Irish capital duty, which is a tax on the issuance of capital shares by
companies, is payable at the rate of one percent of the proceeds received by
CBT in exchange for such issuance.
United States Taxation. Under the 1997 Convention, CBT will not be subject
to United States income tax unless it engages in a trade or business in the
United States through a permanent establishment. CBT currently operates in the
United States through its wholly-owned United States subsidiary, CBT USA. CBT
expects to be able to conduct its business activities in a manner that will
not result in its being considered to be engaged in a trade or business or to
have a permanent establishment in the United States, even though CBT USA is a
United States taxpayer.
TAXATION OF ADS HOLDERS
Taxation of Dividends
Republic of Ireland Taxation. CBT does not expect to pay dividends for the
foreseeable future. Should CBT begin paying dividends, the dividends will
carry an imputed tax credit (the "Tax Credit"). The amount of the Tax Credit
is calculated as a weighted average of Tax Credits applicable to different
portions of the dividend, the amount of which credits vary depending on the
nature of the income out of which the dividend is paid. Accordingly, dividends
paid out of profits taxable at the standard rate carry an imputed Tax Credit
equal to 11/89ths of the amount of such dividend; dividends paid out of
profits taxable at the 10% incentive rate carry an imputed tax credit equal to
1/18 of the amount of such dividend. Dividends paid out of income not subject
to tax do not carry an imputed tax credit. It is proposed that Tax Credits
will be abolished as of April 6, 1999.
88
<PAGE>
CBT will be required, when paying a dividend in respect of the Ordinary
Shares, to account to the Irish Revenue Commissioners for a payment known as
advance corporation tax ("ACT") equal to the amount of the Tax Credit. ACT is
available for set off against the corporation tax liability exclusive of the
liability arising on taxable gains of CBT or can be used by other Irish tax
resident group companies for set off against their corporation tax liabilities
exclusive of the liability arising on taxable gains.
Persons who are neither resident nor ordinarily resident in the Republic of
Ireland do not have an Irish income tax liability on dividends received from
Irish resident companies. Although a net Irish income tax is imposed, the
income tax liability of each such person is restricted to the amount of the
Tax Credit attaching to the dividend and, as the Tax Credit is allowed against
the restricted liability, the Irish income tax liability is fully offset by
the Tax Credit. Individuals are liable for Irish health and employment levies
of 2.25% on such dividends. These levies only apply to Irish income of
IR(Pounds)10,750 or more paid to any one shareholder in any one year. There is
no Irish withholding tax on dividends paid by an Irish resident company.
United States Taxation. For United States Federal income tax purposes, the
gross amount (i.e. including the amount of the imputed Tax Credit) of any
dividend paid (to the extent of the current or accumulated earnings and
profits of CBT) will be included in gross income and treated as foreign source
dividend income. The dividend will not be eligible for the dividends received
deduction allowed to United States corporations. The amount includible in
income will be the United States dollar value of the payment on the date of
payment regardless of whether the payment is in fact converted into United
States dollars. Generally, gain or loss (if any) resulting from currency
fluctuations during the period from the date any dividend is paid to the date
such payment is converted into United States dollars will be treated as
ordinary income or loss.
The IRS has ruled privately that a United States Holder will be eligible for
a United States foreign tax credit under Article XIII of the 1949 Convention
for the Irish tax imposed on a dividend paid by an Irish company. The same
result should occur under the 1997 Convention. Although private letter rulings
are not binding authority and are directed only to the taxpayers who request
them, they are considered persuasive in determining the position of the IRS.
The amount of the allowable credit (the "Tax Credit Amount") is likely to be
determined by applying a statutorily defined formula. To the extent that any
distribution is made by CBT out of profits taxed in the Republic of Ireland at
the standard rate, the Tax Credit Amount should be equal to 11/89 of the net
distribution. To the extent that the distribution is paid out of profits
taxable in the Republic of Ireland at the reduced 10% rate, the Tax Credit
Amount should be equal to 1/18 of the net distribution.
If the United States Holder is a United States partnership, trust or estate,
the Tax Credit Amount will be available only to the extent that the income
derived by such partnership, trust or estate is subject to United States tax
as the income of a resident either in its hands or in the hands of its
partners or beneficiaries, as the case may be.
Taxation of Capital Gains
A United States Holder who is not resident or ordinarily resident in the
Republic of Ireland for Irish tax purposes will generally not be subject to
Irish capital gains tax on capital gains realized or accrued on the sale or
other disposition of ADSs which are quoted on a recognized stock market unless
(i) such gains are attributable to a permanent establishment in the Republic
of Ireland or a fixed base that is available to a resident of the United
States in the Republic of Ireland for the purpose of performing independent
personal services or (ii) the ADSs are not quoted on a stock exchange and
derive the greater of their value from Irish real property. Subject to the
discussion below under the heading "Passive Foreign Investment Company
Considerations," a United States Holder will be liable for United States
Federal income tax on such gains to the same extent as on any other gains from
sales or disposition of shares.
A United States Holder that is liable for both Irish and United States tax
on a gain on the disposal of the ADSs will generally be entitled, subject to
certain limitations and pursuant to the 1997 Convention, to credit the amount
of Irish capital gains or corporation tax, as the case may be, paid in respect
of such gain against such United States Holder's United States Federal income
tax liability in respect of such gain.
89
<PAGE>
Passive Foreign Investment Company Considerations
CBT will be classified as a passive foreign investment company ("PFIC") for
United States Federal income tax purposes if it satisfies either of the
following two tests: (i) 75% or more of its gross income is passive income or
(ii) on average for the taxable year, 50% or more of its assets (by value or,
if CBT so elects, by adjusted basis) produce or are held for the production of
passive income.
CBT does not believe that it satisfies (or, after the completion of the
Merger, will satisfy) either of the tests for PFIC status. If CBT is a PFIC
for any taxable year, United States Holders would be required to either (i)
pay an interest charge together with tax calculated at maximum ordinary income
rates on certain "excess distributions" (defined to include gain on a sale or
other disposition of ADSs) or (ii) if a Qualified Electing Fund ("QEF")
election is made by a United States stockholder, to include in their taxable
income certain undistributed amounts of CBT's income. Each United States
Holder should consult its own tax advisor regarding the advisability of making
the QEF election.
United States Information Reporting and Backup Withholding
A holder of CBT ADSs may, under certain circumstances, be subject to certain
information reporting requirements and backup withholding tax at the rate of
31% with respect to dividends paid on the CBT ADSs or the proceeds of sale of
the CBT ADSs, unless such holder (i) is a corporation or comes within certain
other exempt categories and, when required, demonstrates this fact or (ii)
provides a correct taxpayer identification number ("T.I.N."), certifies that
such holder is not subject to backup withholding and otherwise complies with
applicable requirements of the backup withholding rules. A holder of CBT ADSs
who does not provide a correct T.I.N. or Certificate of Foreign Status may be
subject to penalties imposed by the IRS. Any amount withheld under these rules
will be creditable against the holder's United States federal income tax
liability, provided that the required information is provided to the IRS.
Irish Capital Acquisitions Tax
Irish capital acquisitions tax ("CAT") applies to gifts and inheritances (i)
where the person making the gift or inheritance is domiciled in the Republic
of Ireland or (ii) to the extent that the property of which the gift or
inheritance consists is situated in the Republic of Ireland at the date of the
gift or inheritance. The person by whom CAT is primarily payable is the person
who receives the gift or inheritance. Persons who are secondarily liable
include the donor, his personal representatives and an agent, trustee or other
person in whose care the property constituting the gift or inheritance or the
income therefrom is placed. All taxable gifts and inheritances received by an
individual since June 2, 1982 are aggregated and only the excess over a
certain tax free threshold is taxed. The tax free threshold is dependent on
the relationship between the donor and donee and the aggregation of all
previous gifts and inheritances. The tax free thresholds range from
IR(Pounds)12,560 in the case of unrelated parties to IR(Pounds)25,120 in the
case of linear descendants or ancestors, siblings, or children of siblings to
IR(Pounds)188,400 in the case of gifts and inheritances taken from one's
parents. Gifts and inheritances passing between spouses are exempt from CAT.
CAT is charged at progressive rates ranging in the case of gifts from 15% to
30% and in the case of inheritances from 20% to 40%.
Although ADSs may be held by persons who are neither domiciled nor resident
in Ireland, ADSs may be regarded as located in Ireland and because the
underlying Ordinary Shares are situated in Ireland because CBT is required to
maintain its Ordinary Share register in Ireland. Accordingly, ADS may be
subject to CAT notwithstanding the fact that the Holder may be domiciled
and/or resident outside of the Republic of Ireland. The 1997 Convention
relating to estate taxes generally provides for CAT paid on inheritances in
the Republic of Ireland to be credited against tax payable in the United
States and for tax paid in the United States to be credited against any tax
payable in the Republic of Ireland, based on priority rules set forth in that
Convention, in a case where an ADS is subject to both Irish CAT with respect
to inheritance and United States Federal estate tax. The 1997 Convention does
not apply to gifts.
90
<PAGE>
Irish Probate Tax
In addition to CAT, a probate tax of 2% applies to the value of all assets
passing under the will or intestacy of an Irish domiciled person. Where the
deceased was not domiciled in Ireland, only assets situated in Ireland are
liable for this tax. No probate tax applies on an inheritance from a spouse.
Irish Stamp Duty
Stamp duty, which is a tax on certain documents, is payable on all transfers
of Ordinary Shares (other than between spouses) in companies registered in
Ireland wherever the instrument of transfer may be executed. In the case of a
transfer on sale, stamp duty will be charged at the rate of IR(Pounds)1 for
every IR(Pounds)100 or part thereof (the ad valorem rate), of the amount or
value of the consideration (i.e., purchase price). Where the consideration for
the sale is expressed in a currency other than Irish pounds, the duty will be
charged on the Irish pound equivalent calculated at the rate of exchange
prevailing on the date of the transfer. In the case of a transfer by way of
gift (subject to certain exceptions) or for considerations less than the
market value of the Ordinary Shares transferred, stamp duty will be charged at
the ad valorem rate on such market value.
In the case of transfers of Ordinary Shares where no beneficial interest
passes (e.g. a transfer of shares from a beneficial owner to his nominee), a
rate of IR(Pounds)10 (the nominal rate) will apply.
A transfer to the Depositary or custodian of Ordinary Shares for deposit
under the Deposit Agreement in return for ADRs will be similarly chargeable
with stamp duty at the ad valorem rate as will a transfer of Ordinary Shares
from the Depositary or the custodian upon surrender of an ADR for the purpose
of the withdrawal of the underlying Ordinary Shares in accordance with the
terms of the Deposit Agreement, unless, in either case, the transfer does not
relate to a sale or contemplated sale or any other change in the beneficial
ownership of such Ordinary Shares, in which case the transfer will be
chargeable with nominal duty of IR(Pounds)10.
Transfers of ADRs issued in respect of CBT's shares will not be chargeable
with Irish stamp duty for as long as the ADSs are dealt in and quoted on the
Nasdaq National Market or any recognized stock exchange in the United States.
The person accountable for payment of stamp duty is the transferee or, in
the case of a transfer by way of gift or for a consideration less than the
market value, both parties to the transfer. Stamp duty is normally payable
within 30 days after the date of execution of the transfer. Late or inadequate
payment of stamp duty will result in liability to interest, penalties and
fines.
91
<PAGE>
DESCRIPTION OF CBT CAPITAL STOCK
The following summary is a description of the material terms of CBT capital
stock, does not purport to be complete and is subject in all respects to the
applicable provisions of Irish law, the CBT Charter and the Deposit Agreement.
The CBT Charter and the Deposit Agreement are included in or incorporated by
reference as exhibits to the Registration Statement of which the Proxy
Statement/Prospectus is a part.
The authorized share capital of CBT is IR(Pounds)11,250,000, divided into
30,000,000 Ordinary Shares, nominal value IR37.5p per share. The number of CBT
ADSs outstanding as of April 20, 1998 was 40,381,220. The number of Ordinary
Shares outstanding as of April 20, 1998 was 10,188,983.
At the 1998 Annual General Meeting of CBT, CBT stockholders will be asked to
consider a proposal to subdivide each of the Ordinary Shares into four
Ordinary Shares of IR9.375p par value each (the "Ordinary Share Split").
Currently, each CBT ADS represents and is exchangeable for one-fourth of one
Ordinary Share of IR37.5p par value. The Ordinary Share Split will have no
effect on the CBT ADSs except that, following the Ordinary Share Split, each
CBT ADS will represent and be exchangeable for one Ordinary Share of IR9.375p
par value. As a result, the Ordinary Share Split will have no effect on the
number of CBT ADSs outstanding and, in and of itself, is not expected to have
an effect on the market price of the CBT ADSs. To effect the Ordinary Share
Split, CBT is required to amend the CBT Charter to reflect the subdivision of
each of its Ordinary Shares of IR37.5p par value into four Ordinary Shares of
IR9.375p par value each.
The Transfer Agent and Registrar for the Ordinary Shares is AIB Bank plc,
Registrars' & New Issue Department, Bankcentre, Ballsbridge, Dublin 4,
Ireland. The telephone number at this location is 011-353-1-660-0311. The
Transfer Agent and Registrar for the CBT ADSs is The Bank of New York, 101
Barclay Street, New York, New York 10286. The telephone number at this
location is (212) 815-2291.
ORDINARY SHARES
All of the outstanding Ordinary Shares are fully paid and nonassessable. The
holders of Ordinary Shares are entitled to receive dividends as and when
declared by the CBT Board out of funds legally available therefor and, in the
event of the dissolution of CBT, to share ratably in all assets remaining
after payment of liabilities. Each holder of an Ordinary Share is entitled to
one vote for each share held of record on all matters presented to a vote at a
stockholders' meeting, including the election of directors. Holders of
Ordinary Shares have no cumulative voting rights or preemptive rights to
purchase or subscribe for any stock or other securities and there are no
conversion rights or redemption or sinking fund provisions with respect to
such stock. Additional authorized Ordinary Shares may be issued without
stockholder approval.
AMERICAN DEPOSITARY SHARES
Each CBT ADS represents one-fourth of one Ordinary Share deposited under the
Deposit Agreement. Subject to the terms of the Deposit Agreement, each holder
of a CBT ADS is entitled proportionately to all of the rights and preferences
of one-fourth of one Ordinary Share represented thereby (including dividend,
voting and liquidation rights) contained in the CBT Charter and summarized
under "--Ordinary Shares." The CBT ADSs are evidenced by ADRs.
The following is a summary of certain provisions of the Deposit Agreement.
This summary does not purport to be complete and is subject to and qualified
in its entirety by reference to the Deposit Agreement, including the form of
ADR. Terms used herein and not otherwise defined have the meanings set forth
in the Deposit Agreement. Copies of the Deposit Agreement and the CBT Charter
are available for inspection at the Corporate Trust Office of the Depositary,
currently located at 101 Barclay Street, New York, New York 10286, and at the
principal office of the agent of the Depositary (the "Custodian"), currently
located at the Dublin office of AIB Custodial Services. The Depositary's
principal executive office is located at 48 Wall Street, New York, New York,
10286.
92
<PAGE>
American Depositary Receipts. ADRs evidencing CBT ADSs are issuable by the
Depositary pursuant to the Deposit Agreement. Each CBT ADS represents one-
fourth of one Ordinary Share or evidence of the right to receive one-fourth of
one Ordinary Share (together with any additional Ordinary Shares at any time
deposited or deemed deposited under the Deposit Agreement and any and all
other securities, cash and property received by the Depositary or the
Custodian in respect thereof and at such time held under the Deposit
Agreement, "Deposited Securities"). Only persons in whose names ADRs are
registered on the books of the Depositary will be treated by the Depositary
and CBT as owners. When initially issued at the time of CBT's initial public
offering, each issued and outstanding CBT ADS represented one issued and
outstanding Ordinary Share. On May 15, 1996 and March 9, 1998, CBT effected
two-for-one splits of the issued and outstanding CBT ADSs, whereby each issued
and outstanding CBT ADS now represents one-fourth of one Ordinary Share and
each issued and outstanding Ordinary Share that is deposited with the
Depositary is represented by four CBT ADSs.
Deposit of Ordinary Shares; Execution and Delivery of ADRs. Subject to the
terms and conditions of the Deposit Agreement, Ordinary Shares or evidence of
rights to receive Ordinary Shares may be deposited by delivery thereof to the
Custodian, accompanied by any appropriate instrument or instruments of
transfer, or endorsement, in form satisfactory to the Custodian, together with
all such certifications as may be required by the Depositary or the Custodian
in accordance with the provisions of the Deposit Agreement, and, if the
Depositary requires, together with a written order directing the Depositary to
execute and deliver to, or upon the written order of, the person or persons
stated in such order, an ADR for the number of CBT ADSs representing such
deposit. No Ordinary Share will be accepted for deposit unless accompanied by
evidence satisfactory to the Depositary that any necessary approval has been
granted by any governmental body in the Republic of Ireland which is then
performing the functions of the regulation of currency exchange.
Pre-Release of ADRs. Subject to the terms of the Deposit Agreement, the
Depositary may execute and deliver ADRs prior to the receipt of Ordinary
Shares (a "Pre-Release"). The Depositary may deliver Ordinary Shares upon the
receipt and cancellation of ADRs which have been Pre-Released, whether or not
such cancellation is prior to the termination of such Pre-Release or the
Depositary knows that such ADR has been Pre-Released. The Depositary may
receive ADRs in lieu of Ordinary Shares in satisfaction of a Pre-Release.
Transfer of ADRs. The Depositary, subject to the terms and conditions of the
Deposit Agreement, will register transfers of ADRs on its transfer books from
time to time, upon any surrender of an ADR by the owner in person or by a duly
authorized attorney, properly endorsed or accompanied by proper instruments of
transfer, and duly stamped as may be required by the laws of the State of New
York and of the United States. Thereupon the Depositary will execute a new ADR
and deliver the same to or upon the order of the person entitled thereto.
Surrender of ADRs and Withdrawal of Ordinary Shares. Subject to the terms of
the Deposit Agreement, upon surrender at the Corporate Trust Office of the
Depositary of an ADR for the purpose of withdrawal of the Deposited Securities
represented by the CBT ADSs evidenced by such ADR, and upon payment of the
Depositary fee for the surrender of ADRs and payment of all taxes and
governmental charges payable in connection with such surrender and withdrawal
of the Deposited Securities, the owner of such ADR will be entitled to
delivery, to him or upon his order, of the amount of Deposited Securities at
the time represented by the CBT ADSs evidenced by such ADR.
Obligations of ADR Owners. Any person presenting Ordinary Shares for deposit
or any owner or beneficial owner of an ADR may be required from time to time
to file with the Depositary or the Custodian such proof of citizenship or
residence, exchange control approval, or such information relating to the
registration on the books of CBT or the Foreign Registrar, if applicable, to
execute such certificates and to make such representations and warranties as
the Depositary may deem necessary or proper. The Depositary may withhold the
delivery or registration of transfer of any ADR or the distribution of any
dividend or sale or distribution of rights or of the proceeds thereof or the
delivery of any Deposited Securities until such proof or other information is
filed or such certificates are executed or such representations and warranties
made.
93
<PAGE>
If any tax or other governmental charge becomes payable by the Custodian or
the Depositary with respect to any ADR or any Deposited Securities represented
by any ADR, such tax or other governmental charge will be payable by the owner
or beneficial owner of such ADR to the Depositary. The Depositary may refuse
to effect any transfer of such ADR or any withdrawal of Deposited Securities
represented by CBT ADSs evidenced by such ADR until such payment is made, and
may withhold any dividends or other distributions, or may sell for the account
of the owner or beneficial owner thereof any part or all of the Deposited
Securities represented by the CBT ADSs evidenced by such ADR, and may apply
such dividends or other distributions or the proceeds of any such sale in
payment of such tax or other governmental charge, and the owner or beneficial
owner of such ADR shall remain liable for any deficiency.
Every person depositing Ordinary Shares under the Deposit Agreement is
deemed thereby to represent and warrant that such Ordinary Shares and each
certificate therefor are validly issued, fully paid, nonassessable and free of
any preemptive rights of the holders of outstanding Ordinary Shares and that
the person making such deposit is duly authorized to do so. Every such person
shall also be deemed to represent that such Ordinary Shares and the ADRs
evidencing CBT ADSs representing such Ordinary Shares would not be Restricted
Securities. Such representations and warranties survive the deposit of
Ordinary Shares and issuance of ADRs.
Notwithstanding any other provision of the Deposit Agreement, each owner and
beneficial owner agrees to be bound by and subject to Irish law and the CBT
Charter (to the same extent as if such CBT ADSs evidenced by such ADRs were
the Ordinary Shares represented by such CBT ADSs evidenced by such ADR,
provided, however, that such provisions shall apply to such persons only to
the extent feasible), and to provide such information to CBT relating to
ownership of the Ordinary Shares as may be required thereunder.
Dividends and Distributions. Whenever the Depositary receives any cash
dividend or other cash distribution on any Deposited Securities, the
Depositary will convert such dividend or distribution into Dollars, and
distribute the amount thus received (net of the fees and expenses of the
Depositary) to the owners entitled thereto, in proportion to the number of CBT
ADSs representing such Deposited Securities held by them respectively;
provided, however, that in the event that CBT or the Depositary is required to
withhold and does withhold from such cash dividend or such other cash
distribution an amount on account of taxes, the amount distributed to the
owner of the ADRs evidencing CBT ADSs representing such Deposited Securities
will be reduced accordingly.
If any distribution upon any Deposited Securities consists of a dividend in,
or free distribution of, Ordinary Shares, the Depositary may distribute to the
owners of outstanding ADRs entitled thereto, in proportion to the number of
CBT ADSs representing such Deposited Securities held by them respectively,
additional ADRs evidencing an aggregate number of CBT ADSs representing the
amount of Ordinary Shares received as such dividend or free distribution,
subject to the terms and conditions of the Deposit Agreement with respect to
the deposit of Ordinary Shares and the issuance of CBT ADSs evidenced by ADRs,
including the withholding of any tax or other governmental charge and the
payment of the fees and expenses of the Depositary.
In the event that CBT offers or cause to be offered to the holders of any
Deposited Securities any rights to subscribe for additional Ordinary Shares or
any rights of any other nature, the Depositary has discretion as to the
procedure to be followed in making such rights available to any owners or in
disposing of such rights on behalf of any owners and making the net proceeds
available to such owners or, if by the terms of such rights offering or for
any other reason, the Depositary may neither make such rights available to any
owners nor dispose of such rights and make the net proceeds available to such
owners, then the Depositary shall allow the rights to lapse. If at the time of
any rights offering the Depositary determines in its discretion that it is
lawful and feasible to make such rights available to all or certain owners but
not to other owners, the Depositary may distribute to any owner to whom it
determines the distribution to be lawful and feasible, in proportion to the
number of CBT ADSs held by such owner, warrants or other instruments therefor
in such form as it deems appropriate.
In circumstances in which rights would otherwise not be distributed, if an
owner of ADRs requests the distribution of warrants or other instruments in
order to exercise the rights allocable to the CBT ADSs of such
94
<PAGE>
owner under the terms of the Deposit Agreement, the Depositary will make such
rights available to such owner upon written notice from CBT to the Depositary
that (a) CBT has elected in its sole discretion to permit such rights to be
exercised and (b) such owner has executed such documents as CBT has determined
in its sole discretion are reasonably required under applicable law.
If the Depositary has distributed warrants or other instruments for rights
to all or certain owners, then upon instruction from such an owner pursuant to
such warrants or other instruments to the Depositary from such owner to
exercise such rights, upon payment by such owner to the Depositary for the
account of such owner of an amount equal to the purchase price of the Ordinary
Shares to be received upon the exercise of the rights, and upon payment of the
fees and expenses of the Depositary and any other charges as set forth in such
warrants or other instruments, the Depositary shall, on behalf of such owner,
exercise the rights and purchase the Ordinary Shares, and CBT shall cause the
Ordinary Shares so purchased to be delivered to the Depositary on behalf of
such owner. As agent for such owner, the Depositary will cause the Ordinary
Shares so purchased to be deposited pursuant to the Deposit Agreement, and
shall execute and deliver ADRs to such owner. In the case of a distribution
pursuant to the second paragraph of this section, such ADRs will be legended
in accordance with applicable United States laws, and shall be subject to the
appropriate restrictions on sale, deposit, cancellation, and transfer under
such laws.
If the Depositary determines in its discretion that it is not lawful and
feasible to make such rights available to all or certain owners, it may sell
the rights, warrants or other instruments in proportion to the number of CBT
ADSs held by the owners to whom it has determined it may not lawfully or
feasibly make such rights available, and allocate the net proceeds of such
sales (net of the fees and expenses of the Depositary and all taxes and
governmental charges payable in connection with such rights and subject to the
terms and conditions of the Deposit Agreement) for the account of such owners
otherwise entitled to such rights, warrants or other instruments, upon an
averaged or other practical basis without regard to any distinctions among
such owners because of exchange restrictions or the date of delivery of any
ADR or otherwise.
The Depositary will not offer rights to owners unless both the rights and
the securities to which such rights relate are either exempt from registration
under the Securities Act with respect to a distribution to all owners or are
registered under the provisions of such Act; provided, that nothing in the
Deposit Agreement shall create any obligation on the part of CBT to file a
registration statement with respect to such rights or underlying securities or
to endeavor to have such a registration statement declared effective.
Changes Affecting Deposited Securities. In circumstances where the
provisions of Section 4.03 of the Deposit Agreement do not apply, upon any
change in nominal value, split-up, consolidation or any other reclassification
of Deposited Securities, or upon any recapitalization, reorganization, merger
or consolidation or sale of assets affecting CBT or to which it is a party,
any securities which shall be received by the Depositary or a Custodian in
exchange for or in conversion of or in respect of Deposited Securities, shall
be treated as new Deposited Securities under the Deposit Agreement, and CBT
ADSs shall thenceforth represent, in addition to the existing Deposited
Securities, the right to receive the new Deposited Securities so received in
exchange or conversion, unless additional ADRs are delivered pursuant to the
following sentence. In any such case the Depositary may execute and deliver
additional ADRs as in the case of a dividend in Ordinary Shares, or call for
the surrender of outstanding ADRs to be exchanged for new ADRs specifically
describing such new Deposited Securities.
Conversion of Foreign Currency. Whenever the Depositary or the Custodian
receives foreign currency, by way of dividends or other distributions or the
net proceeds from the sale of securities, property or rights, and if at the
time of the receipt thereof the foreign currency so received can in the
judgment of the Depositary be converted on a reasonable basis into Dollars and
the resulting Dollars transferred to the United States, the Depositary will
convert or cause to be converted, by sale or in any other manner that it may
determine, such foreign currency into Dollars, and such Dollars will be
distributed to the owners entitled thereto or, if the Depositary shall have
distributed any warrants or other instruments which entitle the holders
thereof to such Dollars, then to the holders of such warrants and/or
instruments upon surrender thereof for cancellation. Such
95
<PAGE>
distribution may be made upon an averaged or other practicable basis without
regard to any distinctions among owners on account of exchange restrictions,
the date of delivery of any ADR or otherwise and shall be net of any expenses
of conversion into Dollars incurred by the Depositary.
Fixing of Record Date. Whenever any cash dividend or other cash distribution
becomes payable or any distribution other than cash is made, or whenever
rights are issued with respect to the Deposited Securities, or whenever the
Depositary receives notice of any meeting of holders of Ordinary Shares or
other Deposited Securities, or whenever for any reason the Depositary causes a
change in the number of Ordinary Shares that are represented by each CBT ADS,
or whenever the Depositary finds it necessary or convenient, the Depositary
shall fix a record date, which shall be the record date, if any, established
by CBT for such purpose or, if different, as close thereto as practicable, (a)
for the determination of the owners who are (i) entitled to receive such
dividend, distribution or rights or the net proceeds of the sale thereof or
(ii) entitled to give instructions for the exercise of voting rights at any
such meeting, or (b) on or after which each CBT ADS will represent the changed
number of Ordinary Shares.
Voting of Deposited Securities. Upon receipt of notice of any meeting of
holders of Ordinary Shares or other Deposited Securities, if requested in
writing by CBT, the Depositary will, as soon as practicable thereafter, mail
to the owners a notice, the form of which will be in the sole discretion of
the Depositary, which will contain (a) all of the information contained in
such notice of meeting received by the Depositary from CBT, (b) a statement
that the owners as of the close of business on a specified record date will be
entitled, subject to any applicable provision of Irish law and the CBT
Charter, to instruct the Depositary as to the exercise of the voting rights,
if any, pertaining to the amount of Ordinary Shares or other Deposited
Securities represented by their respective CBT ADSs, (c) a statement that
owners who instruct the Depositary as to the exercise of their voting rights
will be deemed to have instructed the Depositary or its authorized
representative to call for a poll with respect to each matter for which such
instructions are given, subject to any applicable provisions of Irish law and
the CBT Charter and (d) if applicable, a statement as to the manner in which
such instructions may be given, including an express indication that
instructions may be given or deemed given in accordance with the last sentence
of this paragraph if no instruction is received, to the Depositary to give a
discretionary proxy to a person designated by CBT.
Upon the written request of an owner on such record date, received on or
before the date established by the Depositary for such purpose, the Depositary
will endeavor, in so far as practicable, to vote or cause to be voted the
amount of Ordinary Shares or other Deposited Securities represented by the CBT
ADSs evidenced by such ADR in accordance with the instructions set forth in
such request. Accordingly, pursuant to the CBT Charter and applicable Irish
law, the Depositary will cause its authorized representative to attend each
meeting of holders of Ordinary Shares and call for a poll as instructed in
accordance with clause (c) above for the purpose of effecting such vote. The
Depositary will not vote or attempt to exercise the right to vote that
attaches to the Ordinary Shares or other Deposited Securities, other than in
accordance with such instructions or deemed instructions.
If no instructions are received by the Depositary from any owner with
respect to any of the Deposited Securities represented by the CBT ADSs
evidenced by such owner's ADRs on or before the date established by the
Depositary for such purpose, the Depositary will deem such owner to have
instructed the Depositary to give a discretionary proxy to a person designated
by CBT with respect to such Deposited Securities and the Depositary will give
a discretionary proxy to a person designated by CBT to vote such Deposited
Securities; provided, that no such instructions will be deemed given and no
such discretionary proxy will be given when CBT notifies the Depositary (and
CBT agrees to provide such notice as promptly as practicable in writing) that
the matter to be voted upon is one which: (1) is a matter not submitted to
shareholders by means of a proxy statement comparable to that specified in
Schedule 14A promulgated under the Securities Act; (2) is the subject of a
counter-solicitation, or is part of a proposal made by a shareholder which is
being opposed by management (i.e., a contest); (3) relates to a merger or
consolidation (except when CBT's proposal is to merge with its own wholly-
owned subsidiary, provided its shareholders dissenting thereto do not have
rights of appraisal); (4) involves right of appraisal; (5) authorizes
mortgaging of property; (6) authorizes or creates indebtedness or
96
<PAGE>
increases the authorized amount of indebtedness; (7) authorizes or creates
preferred shares or increases the authorized amount of existing preferred
shares; (8) alters the terms or conditions of any shares of CBT's stock then
outstanding or existing indebtedness; (9) involves waiver or modification of
preemptive rights (except when CBT's proposal is to waive such rights with
respect to Ordinary Shares being offered pursuant to stock option or purchase
plans involving the additional issuance of not more than 5% of CBT's
outstanding Ordinary Shares (see Item 12 below); (10) alters voting provisions
or the proportionate voting power of a class of shares, or the number of its
votes per share (except where cumulative voting provisions govern the number
of votes per share for election of directors and CBT's proposal involves a
change in the number of its directors by not more than 10% or not more than
one); (11) changes existing quorum requirements with respect to shareholder
meetings; (12) authorizes issuance of Ordinary Shares, or options to purchase
Ordinary Shares, to directors, officers, or employees in an amount which
exceeds 5% of the total amount of the class outstanding (when no plan is
amended to extend its duration, CBT will factor into the calculation the
number of Ordinary Shares that remain available for issuance, the number of
Ordinary Shares subject to outstanding options and any Ordinary Shares being
added; should there be more than one plan being considered at the same
meeting, all Ordinary Shares are aggregated); (13) authorizes (a) a new
profit-sharing or special remuneration plan, or a new retirement plan, the
annual cost of which will amount to more than 10% of average annual income
before taxes for the preceding five years, or (b) the amendment of an existing
plan which would bring its costs above 10% of such average annual income
before taxes (should there be more than one plan being considered at the same
meeting, all costs are aggregated; exceptions may be made in cases of (a)
retirement plans based on any agreement or negotiations with labor unions (or
which have been or are to be approved by such unions); and (b) any related
retirement plan for benefit of non-union employees having terms substantially
equivalent to the terms of such union-negotiated plan, which is submitted for
the action of stockholders concurrently with such union-negotiated plan); (14)
changes the purposes or powers of CBT to an extent which would permit it to
change to a materially different line of business and it is CBT's stated
intention to make such a change; (15) authorizes the acquisition of property,
assets, or a company, where the consideration to be given has a fair value of
20% or more of the market value of the previously outstanding shares; (16)
authorizes the sale or other disposition of assets or earning power of 20% or
more of those existing prior to the transaction; (17) authorizes a transaction
not in the ordinary course of business in which an officer, director or
substantial security holder has a direct or indirect interest; or (18) reduces
earned surplus by 51% or more, or reduces earned surplus to an amount less
than the aggregate of three years' ordinary share dividends computed at the
current dividend rate.
Maintenance of Office and Transfer Books by the Depositary. Until
termination of the Deposit Agreement in accordance with its terms, the
Depositary will maintain in New York, New York, facilities for the execution
and delivery, registration, registration of transfers and surrender of ADRs in
accordance with the provisions of the Deposit Agreement. The Depositary will
keep books at its Corporate Trust Office for the registration of ADRs and
transfers of ADRs, which at all reasonable times will be open for inspection
by the owners, provided that such inspection may not be for the purpose of
communicating with owners in the interest of a business or object other than
the business of CBT or a matter related to the Deposit Agreement or the ADRs.
The Depositary may close the transfer books, at any time or from time to time,
when deemed expedient by it in connection with the performance of its duties
hereunder.
Reports. The Depositary will make available for inspection by owners at its
Corporate Trust Office any reports and communications, including any proxy
solicitation material, received from CBT which are both (a) received by the
Depositary as the holder of the Deposited Securities and (b) made generally
available to the holders of such Deposited Securities by CBT. The Depositary
will also send to the owners copies of such reports when furnished by CBT. Any
such reports and communications, including any such proxy solicitation
material, furnished to the Depositary by CBT will be furnished in English, to
the extent such materials are required to be translated into English pursuant
to any regulations of the SEC.
Lists of Owners. Promptly upon request by CBT, the Depositary will, at the
expense of CBT, furnish to it a list, as of a recent date, of the names,
addresses and holdings of CBT ADSs by all persons in whose names ADRs are
registered on the books of the Depositary.
97
<PAGE>
Charges of the Depositary. The following charges will be incurred by any
party depositing or withdrawing Ordinary Shares or by any party surrendering
ADRs or to whom ADRs are issued (including, without limitation, issuance
pursuant to a stock dividend or stock split declared by CBT or an exchange of
stock regarding the ADRs or Deposited Securities or a distribution of ADRs
pursuant to the Deposit Agreement), whichever is applicable: (1) taxes and
other governmental charges, (2) such registration fees as may from time to
time be in effect for the registration of transfers of Ordinary Shares
generally on the Ordinary Share register of CBT or Foreign Registrar and
applicable to transfers of Ordinary Shares to the name of the Depositary or
its nominee or the Custodian or its nominee on the making of deposits or
withdrawals hereunder, (3) such cable, telex and facsimile transmission
expenses as are expressly provided in the Deposit Agreement, (4) such expenses
as are incurred by the Depositary in the conversion of foreign currency, (5) a
fee of $5.00 or less per 100 CBT ADSs (or portion thereof) for the execution
and delivery, and the surrender of ADRs, (6) a fee of $.02 or less per
American Depositary Share (or portion thereof) for any cash distribution made
pursuant to the Deposit Agreement, (7) a fee for the distribution of
securities, such fee being in an amount equal to the fee for the execution and
delivery of CBT ADSs referred to above which would have been charged as a
result of the deposit of such securities (for purposes of this clause 7
treating all such securities as if they were Ordinary Shares) but which
securities are instead distributed by the Depositary to owners and (8) a fee
not in excess of $1.50 per certificate for a ADR or ADRs for transfers made
pursuant to the terms of the Deposit Agreement.
Obligations and Liabilities of the Depositary, the Custodian, and
CBT. Neither the Depositary nor CBT nor any of their respective directors,
employees, agents or affiliates shall incur any liability to any owner or
Beneficial owner of any ADR, if by reason of any provision of any present or
future law or regulation of the United States or any other country, or of any
governmental or regulatory authority or stock exchange, or by reason of any
provision, present or future, of the CBT Charter, or by reason of any
provision of any securities issued or distributed by CBT, or any offering or
distribution thereof, or by reason of any act of God or war or other
circumstances beyond its control, the Depositary or CBT shall be prevented,
delayed or forbidden from, or be subject to any civil or criminal penalty on
account of, doing or performing any act or thing which by the terms of the
Deposit Agreement or Deposited Securities it is provided shall be done or
performed; nor shall the Depositary or CBT or any of their respective
directors, employees, agents or affiliates incur any liability to any owner or
Beneficial owner of any ADR by reason of any nonperformance or delay, caused
as aforesaid, in the performance of any act or thing which by the terms of the
Deposit Agreement it is provided shall or may be done or performed, or by
reason of any exercise of, or failure to exercise, any discretion provided for
in the Deposit Agreement. Where, by the terms of a distribution or an offering
or distribution pursuant to the Deposit Agreement, or for any other reason,
such distribution or offering may not be made available to owners, and the
Depositary may not dispose of such distribution or offering on behalf of such
owners and make the net proceeds available to such owners, then the Depositary
shall not make such distribution or offering, and shall allow any rights, if
applicable, to lapse.
CBT assumes no obligation nor shall it be subject to any liability under the
Deposit Agreement to owners or beneficial owners, except that it agrees to
perform its obligations specifically set forth in this Deposit Agreement
without negligence or bad faith. The Depositary assumes no obligation nor
shall it be subject to any liability under the Deposit Agreement to any owner
or beneficial owner (including, without limitation, liability with respect to
the validity or worth of the Deposited Securities), except that it agrees to
perform its obligations specifically set forth in the Deposit Agreement
without negligence or bad faith. Neither the Depositary nor CBT shall be under
any obligation to appear in, prosecute or defend any action, suit or other
proceeding in respect of any Deposited Securities or in respect of the ADRs,
which in its opinion may involve it in expense or liability, unless indemnity
satisfactory to it against all expense and liability shall be furnished as
often as may be required, and the Custodian shall not be under any obligation
whatsoever with respect to such proceedings, the responsibility of the
Custodian being solely to the Depositary.
Neither the Depositary nor CBT shall be liable for any action or nonaction
by it in reliance upon the advice of or information from legal counsel,
accountants, any person presenting Ordinary Shares for deposit, any owner or
any other person believed by it in good faith to be competent to give such
advice or information. The
98
<PAGE>
Depositary shall not be liable for any acts or omissions made by a successor
depositary whether in connection with a previous act or omission of the
Depositary or in connection with any matter arising wholly after the removal
or resignation of the Depositary, provided that in connection with the issue
out of which such potential liability arises the Depositary performed its
obligations without negligence or bad faith while it acted as Depositary. The
Depositary shall not be responsible for any failure to carry out any
instructions to vote any of the Deposited Securities, or for the manner in
which any such vote is cast or the effect of any such vote, provided that any
such action or nonaction is in good faith. No disclaimer of liability under
the Securities Act is intended by any provision of the Deposit Agreement.
Amendment and Termination of the Deposit Agreement. The form of the ADRs and
any provisions of the Deposit Agreement may at any time and from time to time
be amended by agreement between CBT and the Depositary without the consent of
owners or beneficial owners of ADRs in any respect which they may deem
necessary or desirable. Any amendment which shall impose or increase any fees
or charges (other than taxes and other governmental charges, registration
fees, cable, telex or facsimile transmission costs, delivery costs or other
such expenses), or which shall otherwise prejudice any substantial existing
right of owners, shall, however, not become effective as to outstanding ADRs
until the expiration of thirty days after notice of such amendment shall have
been given to the owners of outstanding ADRs. Every owner, at the time any
amendment so becomes effective, shall be deemed, by continuing to hold such
ADR, to consent and agree to such amendment and to be bound by the Deposit
Agreement as amended thereby. In no event shall any amendment impair the right
of the owner of any ADR to surrender such ADR and receive therefore the
Deposited Securities represented thereby, except in order to comply with
mandatory provisions of applicable law.
The Depositary shall, at any time at the direction of CBT, terminate the
Deposit Agreement by mailing notice of such termination to the owners of all
ADRs then outstanding at least 90 days prior to the date fixed in such notice
for such termination. The Depositary may likewise terminate the Deposit
Agreement by mailing notice of such termination to CBT and the owners of all
ADRs then outstanding, if at any time 90 days shall have expired after the
Depositary shall have delivered to CBT a written notice of its election to
resign and a successor depositary shall not have been appointed and accepted
its appointment. On and after the date of termination, the owner of a ADR
will, upon (a) surrender of such ADR at the Corporate Trust Office of the
Depositary, (b) payment of the fee of the Depositary for the surrender of
ADRs, and (c) payment of any applicable taxes or governmental charges, be
entitled to delivery, to him or upon his order, of the amount of Deposited
Securities represented by the CBT ADSs evidenced by such ADR.
If any ADRs shall remain outstanding after the date of termination, the
Depositary thereafter shall discontinue the registration of transfers of ADRs,
shall suspend the distribution of dividends to the owners thereof, and shall
not give any further notices or perform any further acts under the Deposit
Agreement, except that the Depositary shall continue to collect dividends and
other distributions pertaining to Deposited Securities, shall sell rights and
other property as provided in the Deposit Agreement, and shall continue to
deliver Deposited Securities, together with any dividends or other
distributions received with respect thereto and the net proceeds of the sale
of any rights or other property, in exchange for ADRs surrendered to the
Depositary (after deducting, in each case, the fee of the Depositary for the
surrender of a ADR, any expenses for the account of the owner of such ADR in
accordance with the terms and conditions of the Deposit Agreement, and any
applicable taxes or governmental charges). At any time after the expiration of
one year from the date of termination, the Depositary may sell the Deposited
Securities then held hereunder and may thereafter hold uninvested the net
proceeds of any such sale, together with any other cash then held by it
hereunder, unsegregated and without liability for interest, for the pro rata
benefit of the Owners of ADRs which have not theretofore been surrendered,
such owners thereupon becoming general creditors of the Depositary with
respect to such net proceeds. After making such sale, the Depositary shall be
discharged from all obligations under the Deposit Agreement, except to account
for such net proceeds and other cash (after deducting, in each case, the fee
of the Depositary for the surrender of a ADR, any expenses for the account of
the owner of such ADR in accordance with the terms and conditions of the
Deposit Agreement, and any applicable taxes or governmental charges).
99
<PAGE>
DESCRIPTION OF FOREFRONT CAPITAL STOCK
COMMON STOCK
ForeFront has authorized 20,000,000 shares of Common Stock, par value $.01
per share. As of the Record Date there were 6,876,609 shares of Common Stock
issued and outstanding and held by 258 holders of record.
The holders of ForeFront Common Stock are entitled to one vote for each
share held of record on all matters on which stockholders may vote, including
the election of directors. The holders of ForeFront Common Stock are entitled
to share ratably on a share for share basis with respect to any dividends
when, as and if declared by the ForeFront Board out of funds legally available
therefor. In the event of a liquidation, dissolution or winding up of
ForeFront, holders of ForeFront Common Stock are entitled to share ratably in
all assets remaining after payment of liabilities and the liquidation
preference of any then outstanding ForeFront Preferred Stock (as defined
below). Holders of ForeFront Common Stock have no preemptive rights and no
right to convert their ForeFront Common Stock into any other securities. There
are no redemption or sinking fund provisions applicable to ForeFront Common
Stock. All outstanding shares of ForeFront Common Stock are fully paid and
nonassessable.
PREFERRED STOCK
The ForeFront Board has the authority, without further action by the
stockholders, to issue up to 5,000,000 shares of Preferred Stock, par value
$.01 per share ("ForeFront Preferred Stock"), in one or more series and to fix
the rights, preferences, privileges and restrictions thereof, including
dividend rights, conversion rights, voting rights, terms of redemption,
liquidation preferences, sinking fund terms and the number of shares
constituting any series or the designation of such series. The issuance of
ForeFront Preferred Stock could adversely affect the voting power of the
holders of ForeFront Common Stock and the likelihood that such holders will
receive dividend payments and payments upon liquidation and could have the
effect of delaying, deferring or preventing a change in control of ForeFront.
ForeFront has no present plan to issue any shares of ForeFront Preferred
Stock.
OUTSTANDING OPTIONS, WARRANTS AND OTHER RIGHTS TO ACQUIRE FOREFRONT COMMON
STOCK
At the Record Date, ForeFront had outstanding options and warrants to
purchase approximately 2,817,000 shares of ForeFront Common Stock, expiring at
various periods through November 2007. At March 16, 1998, there were
outstanding 557,413 exchangeable shares of ForeFront Canada Ltd., each of
which is exchangeable for one share of ForeFront Common Stock.
TRANSFER AGENT AND REGISTRAR
Harris Trust & Savings Bank is the transfer agent and registrar for the
ForeFront Common Stock.
DELAWARE BUSINESS COMBINATION STATUTE
ForeFront is subject to Section 203 of Delaware Law ("Section 203") which,
subject to certain exceptions, prohibits a Delaware corporation from engaging
in any business combination with any interested stockholder for a period of
three years following the date that such stockholder became an interested
stockholder, unless: (i) prior to such date, the board of directors of the
corporation approved either the business combination or the transaction which
resulted in the stockholder becoming an interested stockholder; (ii) upon
consummation of the transaction which resulted in the stockholder becoming an
interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced, excluding for purposes of determining the number of shares
outstanding those shares owned (x) by persons who are directors and also
officers and (y) by employee stock plans in which employee participants do not
have the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer; or (iii) on or subsequent
to such date, the business combination is approved by the board of directors
and
100
<PAGE>
authorized at an annual or special meeting of stockholders, and not by written
consent, by the affirmative vote of at least 66 2/3% of the outstanding voting
stock which is not owned by the interested stockholder.
Section 203 defines business combination to include: (i) any merger or
consolidation involving the corporation and the interested stockholder; (ii)
any sale, transfer, pledge or other disposition involving the interested
stockholder of 10% or more of the assets of the corporation; (iii) subject to
certain exceptions, any transaction which results in the issuance or transfer
by the corporation of any stock of the corporation to the interested
stockholder; (iv) any transaction involving the corporation which has the
effect of increasing the proportionate share of the stock of any class or
series of the corporation beneficially owned by the interested stockholder; or
(v) the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation. In general, Section 203 defines an interested
stockholder as any entity or person beneficially owning 15% or more of the
outstanding voting stock of the corporation and any entity or person
affiliated with or controlling or controlled by such entity or person.
COMPARISON OF STOCKHOLDER RIGHTS
After consummation of the Merger, the holders of ForeFront Common Stock who
receive CBT ADSs under the terms of the Reorganization Agreement will become
holders of CBT ADSs. As stockholders of ForeFront, their rights are presently
governed by Delaware law and by the ForeFront Certificate and the ForeFront
Bylaws (the "ForeFront Bylaws"). As holders of CBT ADSs, their rights will be
governed by Irish law, the CBT Charter and the Deposit Agreement. The
following discussion summarizes the material differences between the rights of
holders of ForeFront Common Stock and the rights of holders of CBT ADSs and
differences between the organizational documents of ForeFront and CBT. This
summary does not purport to be complete and is qualified in its entirety by
reference to the ForeFront Certificate and ForeFront Bylaws, the CBT Charter,
the Deposit Agreement and the relevant provisions of Delaware and Irish law.
Size of the Board of Directors. Delaware law permits the board of directors
alone to change the authorized number, or the range, of directors by amendment
to the bylaws, unless the directors are not authorized to amend the bylaws or
the number of directors is fixed in the certificate of incorporation (in which
case a change in the number of directors may be made only by amendment to the
certificate of incorporation following approval of such change by the
stockholders). The ForeFront Bylaws state that the number of directors will be
set by the ForeFront Board and authorizes the ForeFront Board to change the
number by resolution. The number of directors of ForeFront is currently fixed
at five. The ForeFront Certificate does not fix the number of directors and,
as a result, the ForeFront Board acting without stockholder approval may
change such number. Under Irish law, companies must have at least two
directors. CBT's Articles of Association provide that CBT may have up to a
maximum of ten directors, which number may be changed by a resolution of CBT's
stockholders. CBT currently has six directors.
Loans to Officers and Employees. Under Delaware law, a corporation may make
loans to, guarantee the obligations of or otherwise assist its officers or
other employees and those of its subsidiaries (including directors who are
also officers or employees) when such action, in the judgment of the
directors, may reasonably be expected to benefit the corporation.
Under Irish law, a company may not, except in certain specified
circumstances, make a loan or a quasi loan to, or enter into a credit
transaction as creditor for, or enter into a guarantee or provide any security
in connection with a loan, quasi loan or credit transaction made by another
person for any of its directors or any of the directors of its holding company
or a person connected with such a director. This prohibition does not prevent
a company, however, from entering into an arrangement with a director or a
person connected with a director if the value of the arrangement and the total
amount outstanding under any other arrangements by the company with any
director or any person connected with a director is together less than 10% of
the company's relevant assets.
Voting by Ballot. Under Delaware law, the right to vote by written ballot
may be restricted if so provided in the certificate of incorporation. The
ForeFront Certificate provides that the election of directors need not be by
101
<PAGE>
ballot unless the ForeFront Bylaws so provide. The ForeFront Bylaws provide
that no vote on the election of directors or any other matter brought before a
stockholders' need be by ballot, unless otherwise required by law or unless
the chairman of the meeting shall determine that it shall be by ballot or the
holders of a majority of the shares of stock present in person or by proxy and
entitled to participate in such vote shall so demand. The ForeFront
Certificate does not eliminate the written ballot requirement. Under Irish
law, the voting rights of stockholders are governed by the Companies Acts of
the Republic of Ireland and by a company's articles of association. Voting at
any general meeting of stockholders is by a show of hands unless a poll (i.e.,
a written vote) is duly demanded. The Articles of Association of CBT provide
that votes may be given either personally or by proxy. Subject to any rights
or restrictions for the time being attaching to any class or classes of
shares, on a show of hands each stockholder present in person or by proxy,
shall have one vote provided, however, that no individual shall have more than
one vote and, on a poll, each stockholder present in person or by proxy shall
have one vote for each share of which he or she is the holder. Three or more
stockholders present in person or by proxy, being entitled to vote upon the
business to be transacted at the meeting and who together hold not less than
one-third of the voting share capital of CBT in issue, constitute a quorum at
stockholders' meetings. A poll may be demanded by: (i) the chairman of the
meeting; or (ii) at least three stockholders present (in person or by proxy)
entitled to vote at the meeting; or (iii) any stockholder or stockholders
present (in person or by proxy) representing not less than one-tenth of the
total voting rights of all the stockholders entitled to vote at the meeting;
or (iv) any stockholder or stockholders present (in person or by proxy)
holding shares conferring the right to vote at the meeting being shares on
which there have been paid up sums in the aggregate equal to not less than
one-tenth of the total sum paid up on all the shares conferring that right.
Where there is an equality of votes, whether on a show of hands or on a poll,
the chairman of the meeting is entitled to a casting vote in addition to any
other vote he may have.
Cumulative Voting. In an election of directors under cumulative voting, each
share of stock normally having one vote is entitled to a number of votes equal
to the number of directors to be elected. A stockholder may then cast all such
votes for a single candidate or may allocate them among as many candidates as
the stockholder may choose. Under Delaware law, cumulative voting in the
election of directors is not available unless specifically provided for in the
certificate of incorporation. The ForeFront Certificate does not provide for
cumulative voting. Cumulative voting is essentially unknown under Irish law.
Classified Board of Directors. A classified board is one on which a certain
number of the directors are elected on a rotating basis each year. This method
of electing directors makes changes in the composition of the board of
directors, and thus a potential change in control of a corporation, a
lengthier and more difficult process. Delaware law permits, but does not
require, a classified board of directors, with staggered terms under which
one-half or one-third of the directors are elected for terms of two or three
years, respectively. The ForeFront Certificate does not provide for a
classified board of directors.
Irish law permits a company to provide for the classification of the board
of directors with respect to the time for which directors severally hold
office. The Articles of Association of CBT do not provide for such
classification of the CBT Board of Directors. The Articles of Association of
CBT provide that at each annual general meeting of stockholders, one-third of
the existing directors or, if their number is not three or a multiple of
three, then the number nearest to, but not exceeding, one-third shall retire
from office by rotation. Such directors are eligible for re-election. The
directors to retire at each annual general meeting shall be those who have
been longest in office since their last appointment. As between directors of
equal seniority, the directors to retire shall, in the absence of agreement,
be selected from among them by lot. Although this rotation of directors is
similar to a classified board, it is different in that any director who is one
of the one-third of the directors who have been longest in office since their
last appointment at the time of the annual general meeting must retire from
office, irrespective of the actual year of such director's last appointment.
Power to Call Special Stockholders' Meetings; Advance Notice of Stockholder
Business and Nominees. Under Delaware law, a special meeting of stockholders
may be called by the board of directors or by any other person authorized to
do so in the certificate of incorporation or the bylaws. The ForeFront Bylaws
authorize the ForeFront Board and the holders of ten percent or more of the
votes to be cast on an issue at a
102
<PAGE>
special meeting to call special meetings of stockholders. Under Irish law,
extraordinary general meetings of a company may be convened by the board of
directors or at the request of stockholders holding not less than one-tenth of
such of the paid-up capital of that company as at the relevant date carries
the right of voting at general meetings of the company. Unless all the
stockholders of a company and the company's auditors consent to shorter
notice, Irish company law requires at least 14 days written notice of a
meeting, except that an annual general meeting or a meeting convened for the
passing of a special resolution requires at least 21 days written notice.
Meetings for the passing of a special resolution may also be called on shorter
notice if so agreed by a majority in number of the stockholders who together
hold not less than 90% in nominal value of the shares giving the right to
attend and vote at such meeting. Extended notice of not less than 28 days is
required in certain circumstances in respect of resolutions relating to the
appointment or removal of a company's auditors or the removal of a director
before the expiration of his period of office and the appointment of someone
as a director in place of the director so removed.
To be passed, a special resolution requires the approval of at least 75% of
the votes cast at the meeting. "Special Resolutions" generally involve
proposals to change the name of the company, to alter its capital structure in
certain respects, to change or amend the rights of stockholders, to permit the
company to issue new shares for cash without applying the stockholders'
preemptive rights, to amend the company's objects (purpose clause) and
articles of association and to carry out certain other matters where either
the company's articles of association or the Companies Acts of the Republic of
Ireland prescribe that a "special resolution" is required. All other proposals
relating to the ordinary course of the company's business, such as the
election of directors, would be the subject of an "ordinary resolution."
The terms of any resolution (whether special or otherwise) before a general
meeting may be amended by ordinary resolution moved at the meeting provided
that the terms of the resolution as amended will still be such that adequate
notice of the intention to pass the same can be deemed to have been given.
Elimination of Actions by Written Consent of Shareholders. Under Delaware
law, stockholders may take action by written consent in lieu of voting at a
stockholders meeting. Delaware law permits a corporation to eliminate the
ability of stockholders to act by written consent. Elimination of written
consents of stockholders could lengthen the amount of time required to take
stockholder actions because certain actions by written consent are not subject
to the minimum notice requirements of a stockholders' meeting, and could deter
hostile takeover attempts. Without a stockholders' written consent provision,
a holder or group of holders controlling a majority in interest of a
corporation's capital stock would not be able to amend such corporation's
bylaws or remove its directors pursuant to a stockholders' written consent.
The ForeFront Certificate and the ForeFront Bylaws do not eliminate the
ability of stockholders to act by written consent.
Under Irish law, a company's articles of association may provide that a
resolution in writing executed by or on behalf of each stockholder who would
have been entitled to vote upon it if it had been proposed at a general
meeting will be as valid and effective as if it had been passed at a general
meeting properly convened and held. The Articles of Association of CBT contain
such a provision.
Business Combinations and Share Acquisitions. Section 203 provides that
certain "business combinations" by Delaware corporations with "interested
stockholders" are subject to a three-year moratorium unless specified
conditions are met or unless the corporation elects in its certificate of
incorporation or bylaws to opt out of Section 203. ForeFront has not elected
to opt out of Section 203.
Takeovers of certain Irish public companies are regulated by the Irish
Takeover Panel Act, 1997 (the "Takeover Act"). The Takeover Act provides that
if (i) any person, or any persons acting in concert, acquire control of a
relevant company or (ii) any person, or any persons acting in concert, who
control a relevant company but do not hold securities conferring in the
aggregate more than 50% of the voting rights in that company acquire in any 12
month period additional securities conferring in the aggregate more than 1% of
the voting rights in that company; such person or, in the case of persons
acting in concert, such one or more of them as the Irish Takeover Panel shall
direct, must make an offer to the holders of each class of equity share
capital of
103
<PAGE>
the relevant company, whether or not such class confers voting rights, and
also to the holders of each class of non-equity share capital of the company
conferring voting rights of which such person or, in the case of persons
acting in concert, any of those persons hold shares. "Control" in relation to
a relevant company means the holding, whether directly or indirectly, of
securities of the company that confer, in aggregate, not less than 30% of the
voting rights in that company. CBT is not a "relevant company" for purposes of
the Takeover Act.
Under Irish law, the Minister for Enterprise and Employment exercises
control over mergers and certain takeovers, including the acquisition of more
than 25% of the voting power of a company, when the revenues or gross assets
of two or more parties involved in the transaction exceed certain thresholds
(currently IR(Pounds)20 million and IR(Pounds)10 million, respectively).
Accordingly, any person or entity or group of persons acting in concert
proposing to acquire Ordinary Shares in CBT or CBT ADSs must provide advance
notice of such proposed acquisition to the Minister if, after such
acquisition, that person or entity or group of persons can control 25% or more
of the voting rights in CBT. Subject to certain exceptions, such person or
entity or group of persons must also notify the Minister of any subsequent
acquisition of Ordinary Shares in CBT or CBT ADSs. Failure to notify properly
is an offense under Irish law. Under Irish law, title to the Ordinary Shares
or ADSs involved will not pass unless either clearance for such acquisition is
obtained from the Minister or the prescribed statutory period following
notification of such acquisition lapses.
Disclosure Requirements. Under Irish law, where a person either acquired an
interest in or ceased to be interested in or becomes aware that he has
acquired an interest in or ceased to be interested in 5% or more of the issued
voting share capital of any class of a public limited company, such as CBT,
then such person is obliged to notify the company (in the prescribed manner
and normally within five business days) of the interest which he has or had in
its shares and of certain circumstances and events affecting that interest.
Any interest of a person in a CBT ADS would be regarded as an interest in the
Ordinary Shares for this purpose. Failure by any person to notify punctually
and properly is an offence under Irish law. Additionally, no right or interest
whatsoever in respect of any of the relevant shares will be enforceable,
whether directly or indirectly, by action or legal proceeding by the person
having such an interest should they fail to notify the company of such
interest. Application may be made to the Irish courts to remove this
restriction, but this would not be successful unless the court was satisfied
that the failure to notify was not due to any deliberate act or omission on
the part of the applicant.
United States Federal securities laws contain similar disclosure
requirements, and failure to comply with such disclosure requirements may
result in a United States court restricting the rights of the shares acquired,
including the right to vote such shares, until the acquiring person provides
the required disclosure.
In addition, Section 81 of the Irish Companies Act, 1990, provides that a
public limited company, such as CBT, may by notice in writing (a "Section 81
Notice") require a person whom the company knows or has reasonable cause to
believe to be, or to have been at any time during the three years immediately
preceding the date on which the notice is issued, interested in shares
comprised in the company's "relevant share capital" to confirm that fact or
(as the case may be) to indicate whether or not that is the case, and where he
holds or has during the relevant time held an interest in such shares, to give
such further information as may be required relating to his interest and any
other interest in the shares of which he is aware. The disclosure must be made
within such reasonable period as may be specified in the relevant notice
(which may, depending on the circumstances, be as short as one or two days).
For purposes of the foregoing obligations, the interest of a person in
shares means, subject to certain exceptions, any kind of interest in shares
including interests in any shares (i) in which his or her spouse, or minor
child is interested; (ii) in which a corporate body is interested and either:
(a) that corporate body is or its directors are accustomed to act in
accordance with that person's directions or instructions; or (b) that person
controls the exercise of one-third or more of the voting power of that
corporate body; or (iii) in which another party is interested and the person
and that other party are parties to an agreement (being an agreement which
provides for the acquisition by one or more of the parties to it of interests
in shares of the company, which imposes obligations or restrictions on any one
or more of the parties with respect to the use, retention or disposal of such
104
<PAGE>
interests acquired pursuant to such agreement and pursuant to which any
interest in the company's shares is in fact acquired by any of the parties).
The holding of a CBT ADR evidencing a CBT ADS would generally constitute an
interest in the underlying Ordinary Share.
Where a Section 81 Notice is served by a company on a person who is or was
interested in shares of the company and that person fails to give the company
any information required by the notice within the time specified in the
notice, the company may apply to the court for an order directing that any
transfer of those shares will be void, no voting rights in respect of such
shares may be exercised, no further shares shall be issued in respect of such
shares or otherwise to such person and, other than in a liquidation, no
payment, including dividends, shall be made in respect of such shares. Such
restrictions may also void any agreement to transfer such shares. In addition,
a person who fails to comply with a Section 81 Notice is guilty of an offence.
Removal of Directors. Under Delaware law, a director of a corporation that
has a classified board of directors or cumulative voting may be removed only
with cause unless otherwise provided in the corporation's certificate of
incorporation. A director of a corporation that does not have a classified
board of directors or cumulative voting may be removed with the approval of a
majority of the outstanding shares entitled to vote with or without cause. The
ForeFront Certificate and the ForeFront Bylaws do not provide either for a
classified board or for cumulative voting.
Under the Companies Acts of the Republic of Ireland, the stockholders of a
company may, by ordinary resolution, remove a director before the expiration
of his period of office, notwithstanding anything in the articles of
association of that company or in any agreement between that company and the
director, provided that notice of the intention to propose such a resolution
has been given to the stockholders of the company not less than 28 days before
the relevant meeting.
Filling Vacancies on the Board of Directors. Under Delaware law, vacancies
and newly created directorships may be filled by a majority of the directors
then in office (even though less than a quorum) unless otherwise provided in
the certificate of incorporation or bylaws (and unless the certificate of
incorporation directs that a particular class of stock is to elect such
director, in which case any other directors elected by such class, or a sole
remaining director so elected, shall fill such vacancy). The ForeFront
Certificate and the ForeFront Bylaws allow any vacancy on the Board to be
filled by a majority of the directors then in office even though less than a
quorum.
CBT's Articles of Association provide that the company may, by ordinary
resolution, appoint a person as a director either to fill a vacancy or as an
additional director. The board of directors also has the power to appoint a
person as a director either to fill a vacancy or as an additional director,
provided that any director so elected during the year must stand for re-
election at the company's next annual general meeting of stockholders.
Indemnification and Limitation of Liability. Delaware law permits
corporations to adopt a provision in their charters eliminating the liability
of a director to the corporation or its stockholders for monetary damages for
breach of the director's fiduciary duty of care. Delaware law states that the
indemnification provided by statute shall not be deemed exclusive of any other
rights under any bylaw, agreement, vote of stockholders or disinterested
directors or otherwise. Under Delaware law, such provision may not eliminate
or limit director monetary liability for (i) breaches of the director's duty
of loyalty to the corporation or its stockholders; (ii) acts or omissions not
in good faith or involving intentional misconduct or knowing violations of
law; (iii) the payment of unlawful dividends or unlawful stock repurchases or
redemptions; or (iv) transactions in which the director received an improper
personal benefit. Such limitation of liability provisions also may not limit a
director's liability for violation of, or otherwise relieve ForeFront or its
directors from the necessity of complying with, federal or state securities
laws, or affect the availability of non-monetary remedies such as injunctive
relief or rescission. The ForeFront Certificate and ForeFront Bylaws eliminate
the liability of directors to the fullest extent permissible under Delaware
law, as such law exists currently or as it may be amended in the future.
Irish law does not permit a company to exempt any director or other officer
of the company or any person employed by the company as auditor from, or to
indemnify any such person against, any liability which by virtue
105
<PAGE>
of any rule of law would otherwise attach to him in respect of any negligence,
default, breach of duty or breach of trust of which he may be guilty in
relation to the company, save that a company may indemnify any such person
against any liability incurred by him in defending any proceedings, whether
civil or criminal, in which judgment is given in his favor or in which he is
acquitted or in certain proceedings in which it appears to the court hearing
the case that, although he is or may be liable, he acted honestly and
reasonably and that, having regard to all the circumstances, he ought fairly
to be excused, in which case that court may relieve him either wholly or
partly from his liability on such terms as the court may think fit. The
Articles of Association of CBT contain such an indemnity in respect of such
persons.
A subsidiary of CBT, CBT USA, has agreed to indemnify CBT's officers and
directors serving at the request of CBT USA as directors of CBT against
certain liabilities and expenses incurred by such persons in connection with
claims made by reason of their being such a director or officer. CBT has
obtained directors and officers insurance providing indemnification for
certain of its directors, officers, affiliates, partners or employees for
certain liabilities.
Inspection of Shareholders List. Delaware law allows any stockholder to
inspect and copy the stockholders list for a purpose reasonably related to
such person's interest as a stockholder.
Except when closed in accordance with the provisions of the Companies Acts
of the Republic of Ireland, the register and index of the names of the
stockholders in an Irish company may be inspected during business hours by its
stockholders, including in the case of CBT, holders of CBT ADSs, without
charge and by any other person upon payment of a nominal charge, and copies
may be obtained on payment of a charge. The stockholders of an Irish company,
including in the case of CBT, holders of CBT ADSs, may also, without charge,
during business hours, inspect the minutes of proceedings of any general
meeting of the company and obtain copies of any such minutes upon payment of a
charge. The published annual accounts of an Irish company are required to be
laid before the stockholders of that company in general meeting and a
stockholder is entitled to a copy of such accounts. Unless otherwise
determined by the directors of CBT, the stockholders of CBT, including the
holders of CBT ADSs, have no rights to inspect the accounting records of CBT
or minutes of meetings of directors. Certain registers required to be kept by
the company are open to public inspection, and service contracts of directors
of the company (which have at least three years unexpired or require at least
three years' notice to terminate without compensation) must be available for
inspection by stockholders of the company during business hours, without
charge.
Dividends and Repurchases of Shares. Delaware law permits a corporation to
declare and pay dividends out of surplus or, if there is no surplus, out of
net profits for the fiscal year in which the dividend is declared and/or for
the preceding fiscal year as long as the amount of capital of the corporation
following the declaration and payment of the dividend is not less than the
aggregate amount of the capital represented by the issued and outstanding
stock of all classes having a preference upon the distribution of assets. In
addition, Delaware law generally provides that a corporation may redeem or
repurchase its shares only if such redemption or repurchase would not impair
the capital of the corporation.
Under Irish law, dividends are payable by a company on its ordinary shares
subject to the prior rights of holders of its preferred shares, only out of
profits available for distribution (accumulated, realized profits less
accumulated, realized losses) and not out of share capital, which includes
share premiums (paid-in surplus). Amounts credited to the share premium
account (representing the excess of the consideration for the issue of
outstanding shares over the aggregate par value of such shares) may not be
paid out as cash dividends but may be used, among other things, to pay up
unissued shares which may then be distributed to stockholders in proportion to
their holdings.
In addition, a public limited company such as CBT may only make a
distribution at any time if, at that time and immediately after such
distribution, the amount of its net assets is not less than the aggregate of
its called-up share capital and its undistributable reserves.
106
<PAGE>
Under Irish law the stockholders of a company are entitled to receive such
dividends as may be recommended by its board of directors and approved by the
stockholders and/or such interim dividends as its board of directors may
decide. CBT has not paid any dividends on its Ordinary Shares since the date
of its incorporation. Any dividend recommended by the CBT Board may be in such
currency or currencies as the CBT Board decides. CBT intends that any
dividends, if and when declared, will be paid in United States dollars.
Under Irish law, a company may, if so authorized by its articles of
association, issue redeemable shares and purchase its own shares, including
any redeemable shares, and CBT has such authority in its Articles of
Association.
The power to purchase its own shares may not be exercised by CBT unless, in
the case of a purchase, other than on a recognized stock exchange, (currently
the Irish Stock Exchange is the only recognized stock exchange for this
purpose) the terms of the contract relating to such purchase have first been
authorized by a special resolution of CBT before the contract is entered into
and, in the case of a purchase on a recognized stock exchange, the purchase
has first been authorized by CBT in general meeting.
Under Irish law, a company may only redeem or purchase its shares if they
are fully paid and such redemption or purchase may only be made out of the
distributable profits of the company unless the shares are to be canceled on
redemption or purchase, in which case they may also be redeemed or, as the
case may be, purchased out of the proceeds of a new issue of shares made for
the purpose of the redemption or purchase. Any amount in excess of the par
value thereof, payable on the redemption or purchase of any shares must be
paid out of the distributable profits of the company unless the shares are to
be canceled upon redemption or purchase, in which case any premium payable on
their redemption or purchase may be paid out of the proceeds of a new issue of
shares up to an amount equal to the lesser of the aggregate of the premiums
received by the company on the issue of the shares to be redeemed or purchased
and the amount of the company's share premium account at the time of the
redemption or purchase (including amounts transferred to that account in
respect of premiums on the new issue). The share premium account must be
reduced by the amount of any such payment.
Shareholder Voting on Mergers and Similar Transactions. Delaware law
generally requires that the holders of a majority of the outstanding voting
shares of the acquiring and target corporations approve statutory mergers.
Delaware law does not require a stockholder vote of the surviving corporation
in a merger (unless the corporation provides otherwise in its certificate of
incorporation) if (i) the merger agreement does not amend the existing
certificate of incorporation; (ii) each share of the surviving corporation
outstanding before the merger is equal to an identical outstanding or treasury
share after the merger; and (iii) the number of shares to be issued by the
surviving corporation in the merger does not exceed 20% of the shares
outstanding immediately prior to the merger. Irish law contains a similar
exception to its voting requirements for reorganizations where stockholders or
the corporation itself, or both, immediately prior to the reorganization will
own immediately after the reorganization equity securities constituting more
than five-sixths of the voting power of the surviving or acquiring corporation
or its parent entity. Delaware law also requires that a sale of all or
substantially all of the assets of a corporation be approved by a majority of
the voting shares of the corporation transferring such assets.
The Companies Acts of the Republic of Ireland provide for schemes of
arrangement, which are arrangements or compromises between a company and its
stockholders, or any class of them, or its creditors, or any class of them,
and are used for certain types of reconstructions, amalgamations, capital
reorganizations or takeovers. They require the approval, at a specially
convened meeting, of a majority in number representing 75% in value of the
stockholders, or class of stockholders, or creditors, or class of creditors,
as the case may be, present and voting, either in person or by proxy at the
meeting, and the sanction of the courts. Once approved and sanctioned, the
compromise or arrangement is binding on all stockholders, or the relevant
class of stockholders, or on all creditors, or the relevant class of
creditors, as the case may be, and also on the company. A dissenting
stockholder would have no dissenters' rights.
The Companies Acts of the Republic of Ireland also provide that when a
takeover offer is made for the shares of a certain class (except those already
owned by the offeror) of a company incorporated in Ireland and, within four
months of the date of the offer the offeror has, by virtue of acceptances of
the offer, acquired or
107
<PAGE>
contracted to acquire not less than 80% in value of the shares to which the
offer relates, the offeror may before the expiration of six months after the
date of the offer by notice compulsorily require stockholders of the relevant
class who do not accept the offer to transfer their shares on the terms of the
offer. A dissenting stockholder may apply to the court within one month of the
date on which such notice was given objecting to the compulsory transfer or
its terms. The court is unlikely (in the absence of fraud or oppression) to
exercise its discretion to order that the compulsory transfer not take effect,
but it may vary the terms of the transfer as it thinks fit. Where in
consequence of such an offer 80% in value of the shares of the relevant
company have become beneficially owned by the offeror then the offeror must,
within 1 month of the date of acquiring such shares, give notice of that fact
to all outstanding shareholders and any such shareholder may, within three
months of the giving of such notice, require the offeror to acquire his or her
shares on the terms of the offer or such other terms as may be agreed or as
the court, on the application of either party, may order.
Interested Director Transactions. Under Delaware law, certain contracts or
transactions in which one or more of a corporation's directors has an interest
are not void or voidable because of such interest, provided that certain
conditions, such as obtaining the required approval and fulfilling the
requirements of good faith and full disclosure, are met. Under Delaware law,
either (i) the stockholders or the board of directors must approve any such
contract or transaction after full disclosure of the material facts, or (ii)
the contract or transaction must have been just and reasonable or fair as to
the corporation at the time it was approved. Under Delaware law, if board
approval is sought, the contract or transaction must be approved by a majority
of the disinterested directors (even though less than a majority of a quorum).
Irish law provides that it shall be the duty of a director of a company who
is in any way, whether directly or indirectly, interested in a contract or
proposed contract with the company to declare the nature of his interest at a
meeting of the directors of the company. A director includes a "shadow
director" who is any person in accordance with whose directions or
instructions the directors are accustomed to act. Irish law and the Articles
of Association of CBT provide, among other things, that a director may not
generally vote in respect of any contract or arrangement or any other proposal
in which he has any material interest otherwise than by virtue of his
interests in shares or other securities of or otherwise in or through CBT. The
Articles of Association of CBT also provide that if any question shall arise
at any meeting as to the materiality of a director's interest or as to the
right of any director to vote and such question is not resolved by his
voluntarily agreeing to abstain from voting, such question may, before the
conclusion of the meeting, be referred to the meeting of directors whose votes
are not in question. Additionally, the Articles of Association of CBT provide
that the stockholders of CBT may, by ordinary resolution, suspend or relax
these provisions to any extent to ratify any transaction not duly authorized
by reason of a contravention of the Articles of Association of CBT.
Dissenters' Rights. Under Delaware law, a stockholder of a corporation
participating in certain major corporate transactions may be entitled, under
varying circumstances, to dissenters' or appraisal rights pursuant to which
such stockholder may receive cash in the amount of the fair market value of
his or her shares in lieu of the consideration he or she would otherwise
receive in the transaction. Under Delaware law, such rights are not available
(i) with respect to the sale, lease or exchange of all or substantially all of
the assets of a corporation; (ii) with respect to a merger or consolidation by
a corporation the shares of which are either listed on a national securities
exchange or are held of record by more than 2,000 holders if such stockholders
receive only shares of the surviving corporation or shares of any other
corporation which are either listed on a national securities exchange or held
of record by more than 2,000 holders, plus cash in lieu of fractional shares;
or (iii) to stockholders of a corporation surviving a merger if no vote of the
stockholders of the surviving corporation is required to approve the merger
because the merger agreement does not amend the existing certificate of
incorporation, each share of the surviving corporation outstanding prior to
the merger is an identical outstanding or treasury share after the merger, and
the number of shares to be issued in the merger does not exceed 20% of the
shares of the surviving corporation outstanding immediately prior to the
merger and if certain other conditions are met.
While Irish law does not generally provide for dissenters' or appraisal
rights, if a shareholder applies to a court as described under "Shareholder
Voting on Mergers and Similar Transactions" above, the court may specify such
terms for the acquisition as it considers appropriate.
108
<PAGE>
Dissolution. Under Delaware law, unless the board of directors approves a
proposal to dissolve, a dissolution must be approved by stockholders holding
100% of the total voting power of the corporation. Only if a dissolution is
initially approved by the board of directors may it be approved by a simple
majority of the corporation's stockholders. Delaware law allows a Delaware
corporation to include in its certificate of incorporation a supermajority
voting requirement in connection with dissolutions initiated by the Board. The
ForeFront Certificate contains no such supermajority voting requirement.
Irish law and the Articles of Association of CBT provide that in the event
of a liquidation, dissolution or winding up of CBT, the assets remaining for
distribution to the holders of Ordinary Shares, after payment of liabilities
and after provision has been made for each class of shares, if any, having
preference over the Ordinary Shares shall be divided, pari passu, among the
holders of Ordinary Shares in proportion to the amounts paid up on the shares
held by them, respectively. The liquidator may, with the sanction of a special
resolution of CBT and any other sanction required by the Companies Acts of the
Republic of Ireland, divide among the members in cash or property the whole or
any part of the assets of CBT and may vest any assets in trustees upon such
trusts for the benefit of contributories provided that no stockholder shall be
compelled to accept any assets upon which there is a liability.
Shareholder Derivative Suits. Under Delaware law, a stockholder may only
bring a derivative action on behalf of the corporation if the stockholder was
a stockholder of the corporation at the time of the transaction in question or
his or her stock thereafter devolved upon him or her by operation of law.
As a general principle of Irish law, only a company itself can be the proper
plaintiff for the purposes of maintaining proceedings in respect of wrongs
done to the company. Neither an individual stockholder nor any group of
stockholders has any right of action in such circumstances. There are,
however, certain exceptions to this principle available under equitable
principles on a case-by-case basis. For example, the controlling stockholders
cannot perpetuate a fraud on the minority stockholders or commit an act that
is illegal or ultra vires. Additionally, if a company purports to act on the
strength of a decision by a simple majority of votes where such a decision
requires more than a simple majority, an individual stockholder is entitled to
bring suit. In certain circumstances, if the controlling stockholders fail to
institute proceedings in the name of the company when such proceedings are
properly called for, one or more of the aggrieved minority stockholders may
apply to the court to bring what has come to be known as a derivative action,
namely an action that derives from the injury to the company rather than the
injury to individual stockholders. The defendants in any such proceedings
would normally be the company itself and those persons who are alleged to have
committed the wrong.
Issuance of Shares. Irish company law restricts the power of the directors
of a company (other than under certain employee share plans) to allot shares
or to grant share subscription rights and rights to convert any security into
shares unless either the articles of association of such company or a
resolution of the stockholders authorizes the board of directors to do so. No
such authority may be given for a period in excess of five years. The Articles
of Association of CBT contain a provision giving the CBT Board the necessary
authority for a five year period from the date of adoption of the Articles of
Association of CBT (March 31, 1995).
Delaware law does not contain such a restriction.
Preemptive Rights. Irish law provides that, in general, a company may not
allot any shares (or grant a right to subscribe for or to convert any
securities into shares in a company) for cash unless it has first offered
those shares, on a pro rata basis, to the existing stockholders of the
company. This preemptive right may be disapplied for a period of up to five
years by the articles of association of the company or by a special resolution
passed by the stockholders of the company. The Articles of Association of CBT
contain a provision disapplying this preemptive right for a five year period
from the date of adoption of the Articles of Association of CBT (March 31,
1995) in respect of all allotments of shares to be made by the CBT Board
pursuant to the authorization given to them by the Articles of Association of
CBT referred to above under "--Issuance of Shares."
Under Delaware law, no stockholder of a Delaware corporation has preemptive
rights unless such rights are granted in the corporation's certificate of
incorporation. The ForeFront Certificate does not grant preemptive rights.
109
<PAGE>
Class Action Suits. In contrast to a derivative action, Irish law permits an
action by a stockholder in his own right when he alleges that his personal
rights have been infringed. Such a stockholder may commence a suit in a
representative capacity on behalf of himself and other affected consenting
stockholders of the same class if their rights are identical. Additionally,
under Irish law any stockholder of a company who claims that the affairs of
the company are being conducted, or that the powers of the directors of the
company are being exercised, in a manner oppressive to him or any of the
stockholders (including himself) or in disregard of his or their interests as
stockholders, may apply to the courts for an appropriate order. Such an order
could include the requirement that the claimant's shares be purchased by other
stockholders or by the company.
Delaware and United States Federal law contain similar provisions.
Amendment of Governing Instruments. Under Irish law, the stockholders of a
company have the authority to alter most provisions of that company's
memorandum and all of the provisions of its articles of association by a
special resolution subject, in the case of certain amendments to the
memorandum of association, to the rights of dissenting stockholders to apply
to the courts to cancel the amendments. Under Irish law, the board of
directors is not authorized to change the memorandum or the articles of
association. Amendments affecting the rights of the holders of any class of
shares may, depending on the rights attaching to such class and the nature of
the amendments, also require approval of the class affected at a separate
class meeting, although an amendment so approved will be subject to
confirmation by the court if the holders of at least 10% of the shares of that
class apply to the court for the cancellation of the amendment.
Under Delaware law, the board of directors of a Delaware corporation may
propose amendments to a corporation's certificate of incorporation. Under the
DGCL, proposed amendments must be approved by the affirmative vote of the
holders of a majority of the voting power of the shares entitled to vote. In
addition, the DGCL requires that certain amendments must be approved by a
separate vote of a class or series of stock if, among other things, the
amendment would adversely affect the rights or preferences of such shares.
Under the DGCL, the power to adopt, amend or repeal the bylaws is vested in
the stockholders entitled to vote, unless the certificate of incorporation
confers the power to adopt, amend or repeal the bylaws upon the directors. The
ForeFront Certificate confers the power to adopt, amend or repeal the
ForeFront Bylaws on the ForeFront Board.
LEGAL MATTERS
Certain legal matters in connection with the Merger and the federal income
tax consequences of the Merger will be passed upon for ForeFront by Andrews &
Kurth L.L.P., The Woodlands, Texas. The legality of the Ordinary Shares
represented by the CBT ADSs to be issued in the Merger will be passed upon by
Binchys, Solicitors, Dublin, Ireland. Certain legal matters in connection with
the Merger and the federal income tax consequences of the Merger will be
passed upon for CBT by Wilson Sonsini Goodrich & Rosati, Palo Alto,
California.
EXPERTS
The consolidated financial statements of CBT at December 31, 1996 and 1997,
and for each of the three years in the period ended December 31, 1997,
appearing in this Proxy Statement/Prospectus have been audited by Ernst &
Young, independent auditors, as set forth in their report thereon appearing
elsewhere herein, and are included in reliance upon such report given upon the
authority of such firm as experts in auditing and accounting.
The consolidated financial statements of ForeFront as of December 31, 1996
and 1997, and for each of the years ended December 31, 1995, 1996 and 1997,
presented in this Proxy Statement/Prospectus, have been audited by Arthur
Andersen LLP, independent public accountants, as indicated in their reports
with respect thereto, and are presented in reliance upon the authority of said
firm as experts in giving said reports. Representatives of Arthur Andersen LLP
are expected to be present at the Special Meeting and such representatives
will have the opportunity to make a statement if they should desire to do so
and they are expected to be available to respond to appropriate questions.
110
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma consolidated financial information of CBT
are based on the historical consolidated financial statements and have been
prepared to illustrate the effects of the Merger as though such Merger had
occurred at the beginning of the earliest period presented for the pro forma
statements of operations.
The unaudited pro forma results of operations for CBT for the years ended
December 31, 1997, 1996 and 1995 have been derived from CBT's and ForeFront's
audited financial statements. The pro forma adjustments include, in the
opinion of management, all adjustments necessary to give pro forma effect to
the Merger as though such transaction had occurred on January 1, 1995.
The unaudited pro forma consolidated financial information is not
necessarily indicative of how CBT's balance sheet and results of operations
would have been presented had the transactions referenced above actually been
consummated at the assumed dates, nor is it necessarily indicative of CBT's
balance sheet and results of operations for any future period. The unaudited
pro forma consolidated financial information should be read in conjunction
with the historical consolidated financial statements and related notes
thereto included in this Proxy Statement/Prospectus.
111
<PAGE>
CBT GROUP PLC
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
------------------------------------------
PRO FORMA
CBT FOREFRONT ADJUSTMENTS PRO FORMA
-------- --------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
Current assets
Cash................................ $ 28,877 $ 6,629 $-- $ 35,506
Short term investments.............. 36,038 -- -- 36,038
Accounts receivable, net............ 38,985 1,045 -- 40,030
Inventories......................... 446 169 -- 615
Deferred tax assets, net............ 140 -- -- 140
Prepaid expenses.................... 3,857 341 -- 4,198
-------- -------- ---- --------
Total current assets.............. 108,343 8,184 -- 116,527
Notes receivable...................... -- 99 -- 99
Intangibles, net...................... 5,297 303 -- 5,600
Property and equipment, net........... 9,140 1,067 -- 10,207
Investment............................ 200 -- -- 200
Deferred tax asset.................... 342 -- -- 342
Other assets.......................... 7,999 355 -- 8,354
-------- -------- ---- --------
Total assets...................... 131,321 10,008 -- 141,329
======== ======== ==== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Borrowings under bank overdraft
facility and overdrafts............ 13 -- -- 13
Accounts payable.................... 4,107 713 -- 4,820
Accrued payroll and related
expenses........................... 5,786 625 -- 6,411
Other accrued liabilities........... 15,450 1,265 -- 16,715
Deferred revenues................... 3,845 706 -- 4,551
-------- -------- ---- --------
Total current liabilities......... 29,201 3,309 -- 32,510
Non current liabilities
Minority equity interest............ 622 -- -- 622
Other accrued liabilities........... 519 -- -- 519
-------- -------- ---- --------
Total non current liabilities..... 1,141 -- -- 1,141
Shareholders' equity
Ordinary shares, IR37.5p par value:
30,000,000 shares authorized at
December 31, 1997: issued and
outstanding: 9,910,664 shares at
December 31, 1997.................. 6,058 67 205 (1) 6,330
Additional paid-in capital.......... 74,958 23,156 (205)(1) 97,909
Deferred compensation............... -- (112) -- (112)
Treasury stock 82,145 shares at
cost............................... -- (2) -- (2)
Accumulated profit (deficit)........ 19,383 (16,398) -- 2,985
Cumulative translation adjustment... 580 (12) -- 568
-------- -------- ---- --------
Total shareholders' equity........ 100,979 6,699 -- 107,678
-------- -------- ---- --------
Total liabilities and
shareholders' equity............. 131,321 10,008 -- 141,329
======== ======== ==== ========
</TABLE>
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET:
(1) Adjustment to Share Capital and Additional Paid In Capital relates to the
issuance of 803,642 CBT Ordinary Shares to effect the merger.
112
<PAGE>
CBT GROUP PLC
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
------------------------------------------
PRO FORMA
CBT FOREFRONT ADJUSTMENTS PRO FORMA
-------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues........................... $118,639 $ 18,408 $-- $137,047
Cost of revenues................... 19,475 3,027 -- 22,502
-------- -------- ---- --------
Gross profit....................... 99,164 15,381 -- 114,545
Operating expenses:
Research and development......... 19,068 1,810 -- 20,878
Sales and marketing.............. 47,035 12,125 -- 59,160
General and administrative....... 8,012 3,589 -- 11,601
Acquired research and
development..................... -- 4,097 -- 4,097
Cost of acquisition.............. 1,534 -- -- 1,534
-------- -------- ---- --------
Total operating expenses....... 75,649 21,621 -- 97,270
-------- -------- ---- --------
Income (loss) from operations...... 23,515 (6,240) -- 17,275
Other income, net.................. 2,598 243 -- 2,841
Gain on sale of assets............. -- 1,869 -- 1,869
-------- -------- ---- --------
Income (loss) before provisions for
income taxes...................... 26,113 (4,128) -- 21,985
Provision for income taxes......... (3,916) -- -- (3,916)
-------- -------- ---- --------
Net income (loss).................. 22,197 (4,128) -- 18,069
======== ======== ==== ========
Net income per equivalent
ADS/Share-Basic(1)................ $ 0.58 $ (0.63) $ 0.45
======== ======== ========
Net income per equivalent
ADS/Share-Diluted(1).............. $ 0.53 $ (0.63) $ 0.41
======== ======== ========
</TABLE>
- --------
(1) Figures in the "CBT," "Pro Forma Adjustments" and "Pro Forma" columns are
per equivalent ADS. Figures in the "ForeFront" column are per share of
ForeFront Common Stock.
113
<PAGE>
CBT GROUP PLC
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
------------------------------------------
PRO FORMA
CBT FOREFRONT ADJUSTMENTS PRO FORMA
-------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues........................... $ 73,566 $ 13,798 $ -- $ 87,364
Cost of revenues................... 12,770 2,675 -- 15,445
-------- -------- ----- --------
Gross profit....................... 60,796 11,123 -- 71,919
Operating expenses:
Research and development......... 11,481 3,021 -- 14,502
Sales and marketing.............. 30,382 8,906 -- 39,288
General and administrative....... 6,379 4,255 -- 10,634
Acquired research and
development..................... -- 2,799 -- 2,799
Cost of acquisition.............. 596 -- -- 596
-------- -------- ----- --------
Total operating expenses....... 48,838 18,981 -- 67,819
-------- -------- ----- --------
Income (loss) from operations...... 11,958 (7,858) -- 4,100
Other income, net.................. 2,300 525 -- 2,825
-------- -------- ----- --------
Income (loss) before provisions for
income taxes...................... 14,258 (7,333) -- 6,925
Provision for income taxes......... (2,419) -- -- (2,419)
-------- -------- ----- --------
Net income (loss).................. 11,839 (7,333) -- 4,506
======== ======== ===== ========
Net income per equivalent
ADS/Share-Basic(1)................ $ 0.33 $ (1.22) $ 0.12
======== ======== ========
Net income per equivalent
ADS/Share-Diluted(1).............. $ 0.30 $ (1.22) $ 0.11
======== ======== ========
</TABLE>
- --------
(1) Figures in the "CBT," "Pro Forma Adjustments" and "Pro Forma" columns are
per equivalent ADS. Figures in the "ForeFront" column are per share of
ForeFront Common Stock.
114
<PAGE>
CBT GROUP PLC
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
----------------------------------------
PRO FORMA
CBT FOREFRONT ADJUSTMENTS PRO FORMA
------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues............................. $49,342 $6,053 $ -- $55,395
Cost of revenues..................... 11,288 1,217 -- 12,505
------- ------ ----- -------
Gross profit......................... 38,054 4,836 -- 42,890
Operating expenses:
Research and development........... 6,597 888 -- 7,485
Sales and marketing................ 20,282 3,246 -- 23,528
General and administrative......... 4,325 1,159 -- 5,484
Acquired research and development.. -- -- -- --
Cost of acquisition................ 198 -- -- 198
------- ------ ----- -------
Total operating expenses......... 31,402 5,293 -- 36,695
------- ------ ----- -------
Income (loss) from operations........ 6,652 (457) -- 6,195
Other income, net.................... 801 5 -- 806
------- ------ ----- -------
Income (loss) before provisions for
income taxes........................ 7,453 (452) -- 7,001
Provision for income taxes........... (1,424) -- -- (1,424)
------- ------ ----- -------
Net income (loss).................... 6,029 (452) -- 5,577
======= ====== ===== =======
Net income per equivalent ADS/Share-
Basic(1)............................ $ 0.20 $(0.12) $ 0.18
======= ====== =======
Net income per equivalent ADS/Share-
Diluted(1).......................... $ 0.17 $(0.12) $ 0.15
======= ====== =======
</TABLE>
- --------
(1) Figures in the "CBT," "Pro Forma Adjustments" and "Pro Forma" columns are
per equivalent ADS. Figures in the "ForeFront" column are per share of
ForeFront Common Stock.
115
<PAGE>
CBT GROUP, PLC
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Ernst & Young, Chartered Accountants............................. F-2
Consolidated Balance Sheets as at 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 Changes in Redeemable Convertible Preferred
Shares and Shareholders' Equity (Deficit) 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-7
Notes to the Consolidated Financial Statements............................. F-8
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG, INDEPENDENT AUDITORS
The Board of Directors and Shareholders,
CBT Group PLC
We have audited the accompanying consolidated balance sheets of CBT Group
PLC as of December 31, 1996 and 1997 and the related consolidated statements
of operations, changes in redeemable convertible preferred shares and
shareholders' equity (deficit), 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 United States 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, based on our audits, the financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of CBT Group PLC at December 31, 1996 and 1997, and the consolidated
results of its operations and its cash flows for each of the three years in
the period ended December 31, 1997 in conformity with United States generally
accepted accounting principles.
/s/ Ernst & Young
Ernst & Young
Chartered Accountants
Dublin, Ireland
Date: January 20, 1998
F-2
<PAGE>
CBT GROUP PLC
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------
1996 1997
------- --------
<S> <C> <C>
ASSETS
Current assets
Cash....................................................... $11,037 $ 28,877
Short term investments..................................... 36,782 36,038
Accounts receivable, net................................... 19,951 38,985
Inventories................................................ 319 446
Deferred tax assets, net................................... 140 140
Prepaid expenses........................................... 3,553 3,857
------- --------
Total current assets..................................... 71,782 108,343
Intangible assets............................................ -- 5,297
Property and equipment, net.................................. 6,983 9,140
Investments.................................................. 4,997 200
Deferred tax assets, net..................................... 391 342
Other assets................................................. 2,875 7,999
------- --------
Total assets............................................. $87,028 $131,321
======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Borrowings under bank overdraft facility and overdrafts.... 153 13
Accounts payable........................................... 3,770 4,107
Accrued payroll and related expenses....................... 3,297 5,786
Other accrued liabilities.................................. 11,401 15,450
Deferred revenues.......................................... 6,913 3,845
------- --------
Total current liabilities................................ 25,534 29,201
Non Current Liabilities......................................
Minority equity interest..................................... 16 622
Other liabilities............................................ 247 519
------- --------
Total non current liabilities................................ 263 1,141
Shareholders' equity
Ordinary shares, IR37.5p par value: 30,000,000 shares
authorized at December 31, 1996 and 1997; issued and
outstanding: 9,043,943 at December 31, 1996 and 9,910,664
shares at December 31, 1997............................... 5,516 6,058
Additional paid-in capital................................... 58,282 74,958
Accumulated profit (deficit)................................. (2,926) 19,383
Cumulative translation adjustment............................ 359 580
------- --------
Total shareholders' equity............................... 61,231 100,979
------- --------
Total liabilities and shareholders' equity............... $87,028 $131,321
======= ========
</TABLE>
(see accompanying notes)
F-3
<PAGE>
CBT GROUP PLC
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1995 1996 1997
------- ------- --------
<S> <C> <C> <C>
Revenues............................................ $49,342 $73,566 $118,639
Cost of revenues.................................... 11,288 12,770 19,475
------- ------- --------
Gross profit........................................ 38,054 60,796 99,164
Operating expenses:
Research and development.......................... 6,597 11,481 19,068
Sales and marketing............................... 20,282 30,382 47,035
General and administrative........................ 4,325 6,379 8,012
Costs of acquisitions............................. 198 596 1,534
------- ------- --------
Total operating expenses........................ 31,402 48,838 75,649
------- ------- --------
Income from operations.............................. 6,652 11,958 23,515
Interest income, net................................ 962 2,296 2,486
Net exchange gain (loss)............................ (161) 4 112
------- ------- --------
Income before provision for income taxes............ 7,453 14,258 26,113
Provision for income taxes.......................... (1,424) (2,419) (3,916)
------- ------- --------
Net income.......................................... $ 6,029 $11,839 $ 22,197
======= ======= ========
Net income per share--Basic......................... $ 0.80 $ 1.34 $ 2.32
======= ======= ========
Net income per share--Diluted....................... $ 0.68 $ 1.19 $ 2.13
======= ======= ========
Net income per equivalent ADS--Basic................ $ 0.20 $ 0.33 $ 0.58
======= ======= ========
Net income per equivalent ADS--Diluted.............. $ 0.17 $ 0.30 $ 0.53
======= ======= ========
</TABLE>
(see accompanying notes)
F-4
<PAGE>
CBT GROUP PLC
CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE CONVERTIBLE
PREFERRED SHARES AND SHAREHOLDERS' EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SHAREHOLDERS' EQUITY (DEFICIT)
-------------------------------------------------------------------------------------
REDEEMABLE
CONVERTIBLE ADDITIONAL ACCUMULATED RECEIVABLE CUMULATIVE TOTAL
PREFERRED ORDINARY PAID-IN PROFIT FROM TRANSLATION SHAREHOLDERS'
SHARES SHARES CAPITAL (DEFICIT) SHAREHOLDERS ADJUSTMENT EQUITY (DEFICIT)
----------- -------- ---------- ----------- ------------ ----------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1994................... $ 4,736 $3,678 $12,150 $(20,725) $(396) $(89) $(5,382)
Issuance of 1,150,000
Ordinary Shares under
initial public
offering, net of
issuance costs of
$5,197................. -- 702 12,501 -- -- -- 13,203
Redemption of Series A
redeemable convertible
preferred shares....... (2,666) 241 2,425 -- -- -- 2,666
Discount on redemption
of Series A redeemable
convertible preferred
shares................. -- -- 1,316 -- -- -- 1,316
Cancellation of
converted Series A
Ordinary Shares........ -- (241) (2,425) -- -- -- (2,666)
Conversion of Series B
redeemable convertible
preferred shares....... (2,070) 355 1,715 -- -- -- 2,070
Issuance of 700,000
Ordinary Shares under
secondary public
offering, net of
issuance costs of
$2,913................. -- 408 27,654 -- -- -- 28,062
Issuance of 170,598
Ordinary Shares as a
result of option
exercises, net of
issuance costs of $58.. -- 105 531 -- -- -- 636
Issuance of 17,480
Ordinary Shares as a
result of pooling
Benelux................ -- 10 11 -- -- -- 21
Received from
shareholders........... -- -- -- -- 217 -- 217
Translation adjustment.. -- -- -- -- -- 90 90
Exchange adjustment..... -- -- -- -- (11) -- (11)
Adjustment to record the
overlap in accounting
for Personal Training
Systems' net income
from January 1, 1995 to
June 30, 1995.......... -- -- -- (69) -- -- (69)
Net income.............. -- -- -- 6,029 -- -- 6,029
------- ------ ------- -------- ----- ---- -------
Balance at December 31,
1995................... $ -- $5,258 $55,878 $(14,765) $(190) $ 1 $46,182
</TABLE>
(see accompanying notes)
F-5
<PAGE>
CBT GROUP PLC
CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE CONVERTIBLE
PREFERRED SHARES AND SHAREHOLDERS' EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SHAREHOLDERS' EQUITY (DEFICIT)
-------------------------------------------------------------------------------------
REDEEMABLE
CONVERTIBLE ADDITIONAL ACCUMULATED RECEIVABLE CUMULATIVE TOTAL
PREFERRED ORDINARY PAID-IN PROFIT FROM TRANSLATION SHAREHOLDERS'
SHARES SHARES CAPITAL (DEFICIT) SHAREHOLDERS ADJUSTMENT EQUITY (DEFICIT)
----------- -------- ---------- ----------- ------------ ----------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1995................... $-- $5,258 $55,878 $(14,765) $(190) $ 1 $46,182
Issuance of 9,408
Ordinary Shares as a
result of pooling
Scholars.com........... -- 5 (5) -- -- -- --
Issuance of 387,045
Ordinary Shares as a
result of option
exercises and 34,895
from employee share
purchase plan.......... -- 253 2,409 -- -- -- 2,662
Received from
shareholders........... -- -- -- -- 190 -- 190
Translation adjustment.. -- -- -- -- -- 358 358
Net income.............. -- -- -- 11,839 -- -- 11,839
---- ------ ------- -------- ----- ---- --------
Balance at December 31,
1996................... $-- $5,516 $58,282 $ (2,926) $ -- $359 $ 61,231
Issuance of 64,500
Ordinary Shares as a
result of pooling
MidEast................ -- 37 370 -- -- -- 407
Issuance of 779,348
Ordinary Shares as a
result of option
exercises and 22,873
from employee share
purchase plan.......... -- 505 15,481 -- -- -- 15,986
Taxation credit as a
result of disqualifying
dispositions........... -- -- 825 -- -- -- 825
Translation adjustment.. -- -- -- -- -- 221 221
Adjustment to record the
overlap in accounting
for ALA's net loss from
January 1, 1997 to June
30, 1997............... -- -- -- 112 -- -- 112
Net income.............. -- -- -- 22,197 -- -- 22,197
---- ------ ------- -------- ----- ---- --------
Balance at December 31,
1997................... $-- $6,058 $74,958 $ 19,383 $ -- $580 $100,979
==== ====== ======= ======== ===== ==== ========
</TABLE>
(see accompanying notes)
F-6
<PAGE>
CBT GROUP PLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1995 1996 1997
-------- ------- --------
<S> <C> <C> <C>
Increase (decrease) in cash
CASH FLOWS FROM OPERATING ACTIVITIES
Net income....................................... $ 6,029 $11,839 $ 22,197
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.................... 874 1,882 3,122
Taxation credit from disqualifying dispositions.. -- -- 825
Overlap in accounting for ALA net loss, excluding
depreciation.................................... -- -- (67)
Overlap in accounting for PTS' net income,
excluding depreciation.......................... (108) -- --
Accrued interest on short-term investments....... (469) 221 (465)
Changes in operating assets and liabilities:
Accounts receivable.............................. (6,218) (4,753) (19,546)
Inventories...................................... 185 45 (170)
Deferred tax assets.............................. (64) (132) 49
Prepaid expenses and other assets................ (777) (3,732) (5,501)
Accounts payable................................. 1,070 1,013 185
Accrued payroll and related expenses and other
accrued liabilities............................. 2,726 2,780 7,175
Deferred revenue................................. 1,234 1,865 (3,195)
-------- ------- --------
Net cash provided by operating activities........ 4,482 11,028 4,609
-------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of intangible assets................... -- -- (5,297)
Purchases of property and equipment.............. (1,894) (6,369) (5,279)
Payments to acquire short-term investments....... (40,200) (1,334) (2,291)
Proceeds from short-term investments............. -- 5,000 3,500
Proceeds from investments........................ -- -- 4,997
Payment to acquire investment.................... -- (4,997) (200)
-------- ------- --------
Net cash used in investing activities............ (42,094) (7,700) (4,570)
-------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments of notes payable........................ (1,325) (79) --
Redemption of Series A shares.................... (1,350) -- --
Proceeds (repayments) under bank overdraft
facility........................................ 671 (1,381) (140)
Repayments of bank loan.......................... -- (742) --
Payment of receivables from shareholders......... 217 190 --
Proceeds from issuance of preferred shares in
subsidiary...................................... -- -- 606
Proceeds from issuance of Ordinary Shares, net... 41,901 2,662 16,393
-------- ------- --------
Net cash provided by financing activities........ 40,114 650 16,859
-------- ------- --------
Effect of exchange rate changes on cash.......... 74 (135) 942
-------- ------- --------
Net increase in cash............................. 2,576 3,843 17,840
Cash at beginning of period...................... 4,618 7,194 11,037
-------- ------- --------
Cash at end of period............................ $ 7,194 $11,037 $ 28,877
======== ======= ========
Supplemental disclosure of cash flow information:
Interest paid.................................... $ 84 $ 108 $ 43
Taxes paid....................................... $ 1,098 $ 847 $ 994
</TABLE>
(see accompanying notes)
F-7
<PAGE>
CBT GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
CBT Group PLC is organized as a public limited company under the laws of the
Republic of Ireland. CBT Group PLC and its wholly owned subsidiaries
(collectively, the "Company" or "CBT") develops and markets interactive
information technology ("IT") education and training software. The principal
market for the Company's products comprises major United States national and
multinational organizations.
Basis of Presentation and Principles of Consolidation
The consolidated financial statements are prepared in accordance with
generally accepted accounting principles in the United States and include the
Company and its wholly owned subsidiaries in the United States, United
Kingdom, Ireland, South Africa, Canada, Germany, Australia, Netherlands,
Sweden, the Commonwealth of the Bahamas, Dubai and Grand Cayman after
eliminating all material inter-company accounts and transactions. All
acquisitions have been accounted for under the purchase accounting method,
except for the mergers with Personal Training Systems ("PTS"), CBT Systems
Canada Limited (formerly known as New Technology Training Limited) ("NTT"),
CLS Consult Gessellschaft fur Beratung, Management und Beteiligung mbH
("CLS"), CBT Systems Benelux B.V. ("Benelux"), Applied Learning Limited
("ALA"), Ben Watson & Associates Limited ("Scholars.com") and CBT Systems
Middle East Limited ("MidEast") which have been included in the consolidated
financial statements under the pooling-of-interests method (see note 3).
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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Translation of Financial Statements of Foreign Entities
The reporting currency for the Company is the United States dollar
("dollar"). The functional currency of the Company's subsidiaries in the
United States, United Kingdom, Republic of South Africa, Canada, Germany,
Australia, Netherlands and Sweden are the currencies of those countries. The
functional currency of the Company's subsidiaries in Ireland, the Commonwealth
of the Bahamas and Grand Cayman is the dollar.
Balance sheet amounts are translated to the dollar from the local functional
currency at year-end exchange rates, while statements of operations amounts in
local functional currency are translated using average exchange rates.
Translation gains or losses are recorded in a separate component of
shareholders' equity. Currency gains or losses on transactions denominated in
a currency other than an entity's functional currency are recorded in the
results of the operations. The Company has not undertaken hedging transactions
to cover its currency exposures.
Revenue Recognition
The Company derives its revenues primarily pursuant to license agreements
under which customers license usage of delivered products for a period of one,
two or three years. On each anniversary date during the term of multiyear
license agreements, customers are allowed to exchange any or all of the
licensed products for an equivalent amount of new products. The first year
license fee is generally recognized as revenue at the time of delivery of all
products, provided there are no significant vendor obligations remaining.
Subsequent annual license fees are recognized on each anniversary date,
provided there are no remaining significant vendor obligations. The cost of
satisfying any insignificant vendor obligations is accrued at the time revenue
is recognized. In addition, the Company derives revenues from sales of its
products, primarily through resellers.
F-8
<PAGE>
CBT GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Revenues from product development arrangements are generally recognized on a
percentage of completion basis as milestones are completed or products
produced under the arrangement.
Revenues from license agreements providing product exchange rights other
than annually during the term of the agreement are deferred and recognized
ratably over the contract period. Such amounts, together with unearned
development and license revenues, are recorded as deferred revenues in the
consolidated financial statements.
Cost of Revenues
Cost of revenues include materials (such as diskettes, packaging and
documentation), royalties paid to third parties, the portion of development
costs associated with product co-development arrangements, fulfillment costs
and the amortization of the cost of purchased products. Approximately
$245,000, $803,000 and $442,000 of development expenses incurred in connection
with development and marketing alliances were charged to cost of revenues in
1995, 1996 and 1997, respectively.
Inventories
Inventories are stated at the lower of cost (first in, first out) or net
realizable value and consist principally of compact discs, diskettes and
manuals. Net realizable value is the estimated selling price less all
applicable selling costs.
Research and Development
Research and development expenditures are generally charged to operations as
incurred. Statement of Financial Accounting Standards 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. Development 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. Through December 31, 1997, all
research and development costs have been expensed as incurred.
Intangible Fixed Assets
In December 1997 the Company and Street Technologies, Inc. ("Street") a
developer of technology to "stream" multimedia and other large data files to
permit real-time delivery over local and wide area networks, corporate
intranets and the Internet, entered into an agreement pursuant to which Street
granted to the Company a perpetual license to its software in return for a
once off payment of $5,297,000. As part of the agreement the Company disposed
of its investment in Street for $4,997,000, which was the cost of its original
investment. The Company will commence to amortize this asset, using the
straight line method, over a period of five years commencing January 1, 1998.
F-9
<PAGE>
CBT GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are
computed using the straight- line method over estimated useful lives of two to
five years. Major classes of property and equipment are summarized as follows
(dollars in thousands):
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Office and computer equipment............................... $ 8,450 $12,624
Furniture, fixtures and others.............................. 2,749 3,171
------- -------
Total property and equipment................................ 11,199 15,795
Accumulated depreciation.................................... 4,216 6,655
------- -------
Property and equipment, net................................. $ 6,983 $ 9,140
======= =======
</TABLE>
Depreciation of property and equipment amounted to $874,000, $1,882,000, and
$3,122,000 for the years ended December 31, 1995, 1996 and 1997, respectively.
Net Income Per Share
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 128 (SFAS 128), "Earnings per Share,"
which is effective for the Company's fiscal 1997 year. Under SFAS 128, the
Company will present two net income per share amounts. Basic net income per
share is computed using the weighted average number of Ordinary Shares
outstanding during the period. Diluted net income per share will include
additional dilution from potential Ordinary Shares, such as incremental
Ordinary Shares issuable upon conversion of the Series A and Series B
redeemable convertible preferred shares and shares issuable pursuant to the
exercise of options outstanding (using the treasury stock method). All prior
period net income per share amounts have been restated to conform with SFAS
128.
On January 20, 1998 the Company announced that its Board of Directors had
authorized a two-for-one split of the company's American Depositary Shares.
Each Ordinary Share is now represented by four (previously two) American
Depositary Shares ("ADSs") which are the Company's securities that are
publicly traded. Net income per Ordinary Share is therefore, within rounding,
four times net income per equivalent ADS.
Basic net income per equivalent ADS is therefore calculated using four times
the weighted average number of Ordinary Shares outstanding during the period.
Diluted net income per equivalent ADS is similarly calculated using four times
the weighted average number of ordinary and dilutive ordinary equivalent
shares outstanding during the period. All other period net income per
equivalent ADS amounts have been restated to give effect to the ADS split.
Basic net income per share is calculated using the combined weighted average
number of ordinary shares of the Company including the issuance of 106,057
shares of Company Ordinary Shares in exchange for all of the stock of PTS, the
issuance of 36,401 shares of Company Ordinary Shares in exchange for all the
stock of CLS, the issuance of 36,531 shares of Company Ordinary Shares in
exchange for all the stock of NTT, the issuance of 85,771 shares of Company
Ordinary Shares in exchange for all the stock of ALA, the issuance of 17,840
shares of Company Ordinary Shares in exchange for all the stock of Benelux,
the issuance of 9,408 shares of Company Ordinary Shares in exchange for all
the stock of Scholars.com and the issuance of 64,500 shares of Company
Ordinary Shares in exchange for all the stock of MidEast at the beginning of
the earliest period presented or subsequent date of incorporation of the
pooled entity as applicable.
F-10
<PAGE>
CBT GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Diluted net income per share is similarly calculated using the combined
weighted average number of ordinary and dilutive ordinary equivalent shares of
the Company including the issuance of Company Ordinary Shares as a result of
pooling-of-interests above.
Defined Contribution Plan
The Company sponsors and contributes to a defined contribution plan for
certain employees and directors. Contribution amounts by the Company are
determined by management and allocated to employees on a pro rata basis based
on the employees' contribution. The Company contributed approximately
$164,000, $232,000 and $270,000 to the Plan in the years ended December 31,
1995, 1996 and 1997, respectively.
Stock Based Compensation
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" encourages, but does not require companies to record
compensation cost for stock-based employee compensation plans at fair value.
The Company has chosen to continue to account for stock-based compensation
using the intrinsic value method prescribed in Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB25"), and
related interpretations. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the quoted market price of the Company's
stock at the date of the grant over the amount an employee must pay to acquire
the stock. Under APB25, because the exercise price of the Company's employee
stock options equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized.
Advertising Costs
Costs incurred for producing and communicating advertising are expensed when
incurred. Advertising expenses amounted to $729,000, $1.3 million and $5.1
million for the years ended December 31, 1995, 1996 and 1997 respectively.
Research and Development Grants
Research and development grants are credited to the income statement and
offset against the related expense.
Concentration of Credit Risk
The principal market for the Company's products comprises major United
States national and multi-national organizations. The Company performs ongoing
credit evaluations of its customers and maintains reserves for potential
credit losses. To date such losses have been within management's expectations.
The Company had an allowance for doubtful accounts of $588,000 and $900,000 at
December 31, 1996 and 1997, respectively. The Company generally requires no
collateral from its customers.
The Company maintains its cash with various financial institutions. At
December 31, 1996 and 1997 $36,782,000 and $36,038,000 respectively (inclusive
of accrued interest of $248,000 and $713,000 respectively) was held in debt
securities issued by the United States Treasury, under the management of a
single financial institution. In addition, at December 31, 1996 and 1997,
$927,000 and $213,000 respectively in cash was held with this institution. The
Company also maintains deposits with another financial institution. Cash
balance held with this institution at December 31, 1996 and 1997 was $nil and
$11.1 million respectively. The Company performs periodic evaluations of the
relative credit standing of all the financial institutions dealt with by the
Company, and considers the related credit risk to be minimal.
F-11
<PAGE>
CBT GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Accounting for Income Taxes
The Company uses the liability method in accounting for income taxes. Under
this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws which will
be in effect when the differences are expected to reverse.
Short-Term Investments
Short-term investments at December 31, 1996 and 1997 comprise debt
securities issued by the United States Treasury with a maturity of six months
or less at the date of acquisition by the Company. These are included at cost
plus accrued interest which approximates the fair market value of the
securities. The Company classifies available for sale securities as short-term
investments.
Other Assets
Other assets at December 31, 1996 and 1997 consist primarily of deferred
sales commissions. Deferred sales commissions are charged to expense when the
related revenue is recognized.
2. NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted net
income per share:
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- --------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Numerator:
Numerator for basic and diluted net income per
share--income available to common shareholders... $ 6,029 $ 11,839 $ 22,197
======== ======== ========
Denominator:
Denominator for basic net income per share--
weighted average shares.......................... 7,518 8,848 9,560
Effect of dilutive securities:
Employee stock options.......................... 1,059 1,130 867
Equivalent shares attributable to redeemable
convertible preferred shares................... 265 -- --
-------- -------- --------
Dilutive potential common shares.................. 1,324 1,130 867
Denominator for diluted net income per share--
adjusted weighted average shares and assumed
conversion..................................... 8,842 9,978 10,427
======== ======== ========
Basic net income per share.......................... $ 0.80 $ 1.34 $ 2.32
======== ======== ========
Diluted net income per share........................ $ 0.68 $ 1.19 $ 2.13
======== ======== ========
ADS's used in computing net income per equivalent
ADS--Basic......................................... 30,070 35,391 38,240
======== ======== ========
ADS's used in computing net income per equivalent
ADS--Diluted....................................... 35,366 39,912 41,708
======== ======== ========
</TABLE>
3. ACQUISITIONS AND MERGERS
On November 30, 1995, a merger occurred between the Company and PTS under
which the Company issued 106,057 Ordinary Shares in exchange for all the
outstanding stock of PTS.
F-12
<PAGE>
CBT GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
3. ACQUISITIONS AND MERGERS--(CONTINUED)
On May 31, 1996 a merger occurred between the Company and CLS, a distributor
of multimedia training and education software based in Germany, under which
the Company issued 36,401 Ordinary Shares for all the outstanding stock of
CLS. On the same date a merger occurred between the Company and NTT, the
Company's Canadian distributor, under which the Company issued 36,531 Ordinary
Shares for all the outstanding stock of NTT.
On February 28, 1997, a merger occurred between the Company and ALA, a
distributor of multimedia training and education software based in Australia,
under which the Company issued 85,771 Ordinary Shares for all the outstanding
stock of ALA. On the same date a merger occurred between the Company and
Benelux, the Company's Benelux distributor, under which the Company issued
17,840 Ordinary Shares for all the outstanding stock of Benelux.
On August 31, 1997, a merger occurred between the Company and Scholars.com.,
a provider of online mentoring, under which the Company issued 9,408 Ordinary
Shares for all the outstanding stock of Scholars.com.
On December 1, 1997 a merger occurred between the Company and MidEast, the
Company's Middle Eastern distributor, under which the Company issued 64,500
Ordinary Shares for all the outstanding stock of MidEast. The financial
results of the Company, PTS, CLS, NTT, ALA, Benelux, Scholars.com and MidEast
have been accounted for using the "pooling-of-interests" method. The "pooling-
of-interests" method gives effect to the mergers as if they had occurred at
the beginning of the earliest period presented or subsequent date of
incorporation of the pooled entity as applicable. The consolidated financial
statements as presented are based on the Company's historical consolidated
financial statements and PTS's, CLS's, NTT's, ALA's, Benelux's, Scholars.com's
and MidEast's historical financial statements.
The consolidated financial information for the year ended December 31, 1997
includes the results of the Company and PTS, CLS, NTT, ALA, Benelux,
Scholars.com, and MidEast (from the date of its incorporation), for the period
January 1 to December 31, 1997 and the assets and liabilities of the Company
and PTS, CLS, NTT, ALA, Benelux, Scholars.com, and MidEast as at December 31,
1997. The comparative figures for the year ended December 31, 1996 comprise
the results of the Company and PTS, CLS, NTT, Benelux, and Scholars.com for
that period combined with the results of ALA for the year ended June 30, 1997
and the assets and liabilities of the Company and PTS, CLS, NTT, Benelux, and
Scholars.com as at December 31, 1996 combined with the assets and liabilities
of ALA as at June 30, 1997. The comparative figures for the year ended
December 31, 1995 comprise the results of the Company and PTS, CLS, NTT, and
Benelux (from the date of its incorporation) for that period combined with the
results of ALA for the year ended June 30, 1996.
ALA and Benelux, in the two month period ended February 28, 1997 had net
revenues of $1,094,315 and $374,390 respectively. Net income in that period
was $123,642 and $21,190, respectively.
Scholars.com, in the eight month period ended August 31, 1997 had net
revenues of $1,293,518. Net income in that period was $111,418.
MidEast was established in April 1997 and in the period to December 1, 1997
had net revenues of $225,171. The net loss in the period was $532,046.
PTS's results of operations for the six month period ended June 30, 1995,
which reflected net revenues of $1,470,000, expenses of $1,385,000 and net
income of $69,000, have been duplicated in the accompanying 1995 Financial
Statements to conform operating results to the Company's fiscal year end. The
duplicate periods have been adjusted by including the net income as a decrease
to the Company's accumulated deficit as of December 31, 1995.
F-13
<PAGE>
CBT GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
3. ACQUISITIONS AND MERGERS--(CONTINUED)
ALA's results of operations for the six month period ended June 30, 1997
which reflected net revenues of $2,991,712, expenses of $3,104,193 and a net
loss of $112,481 have been duplicated in the accompanying 1997 Financial
Statements to conform operating results to the Company's fiscal year end. The
duplicate periods have been adjusted by including the net loss as an increase
to the Company's accumulated profit as of December 31, 1997.
The results of the operations for the enterprises acquired in 1997 and the
combined amounts presented in the consolidated financial statements are
summarized below (dollars in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1995 1996 1997
------- ------- --------
<S> <C> <C> <C>
Revenues:
CBT Group PLC.................................. $40,192 $66,324 $105,239
Pooled entities................................ 9,179 7,817 14,299
Intercompany Sales............................. (29) (575) (899)
------- ------- --------
Combined....................................... $49,342 $73,566 $118,639
======= ======= ========
Net income:
CBT Group PLC.................................. $ 5,574 $12,573 $ 22,489
Pooled entities................................ 455 (734) (292)
------- ------- --------
Combined....................................... $ 6,029 $11,839 $ 22,197
======= ======= ========
</TABLE>
4. BANK OVERDRAFT FACILITY AND OVERDRAFTS
The Company has a bank overdraft facility with AIB Bank PLC. This facility
is renewable on an annual basis at the bank's discretion. Under the facility
the Company may incur overdrafts with the bank up to IR195,000 (approximately
$278,000 at December 31, 1997), with a variable interest rate based on the
Dublin Inter-Bank Overnight Rate ("DIBOR") plus five percent (10.4 percent at
December 31, 1997). This facility is collateralized by the assets of CBT
Systems Limited, a wholly owned subsidiary of CBT Group PLC. The Company's UK
subsidiary also has an arrangement with its bank which allows the subsidiary
to maintain funds in a deposit account and to have the bank transfer the funds
as necessary to pay checks written against a checking account with the same
bank. At December 31, 1996 and 1997 the subsidiary had written no checks in
excess of the balance in the checking account.
PTS had available a $400,000 line of credit which expired on January 12,
1996. The line bore interest at the bank's prime rate plus 2%. No amount was
drawn against this line of credit during 1996.
5. OTHER ACCRUED LIABILITIES
Other accrued liabilities consist of the following at December 31 (dollars
in thousands):
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Royalties................................................... $ 2,912 $ 3,305
Income and other taxes payable.............................. 3,237 6,467
Other....................................................... 5,252 5,678
------- -------
$11,401 $15,450
======= =======
</TABLE>
F-14
<PAGE>
CBT GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
6. OPERATING LEASE COMMITMENTS
The Company leases various facilities, automobiles and equipment under non-
cancellable operating lease arrangements. The major facilities leases are for
terms of 2 to 5 years, (except for CBT Systems Limited's new premises which
has a non-cancellable lease term of 11 years) and generally provide renewal
options for terms of up to 3 additional years. Rent expense under all
operating leases was approximately $1,405,000, $2,012,000 and $2,199,000 in
1995, 1996 and 1997, respectively. Future minimum lease payments under these
non-cancellable operating leases as of December 31, 1997, are as follows
(dollars in thousands):
<TABLE>
<S> <C>
1998.............................................................. $ 3,164
1999.............................................................. 2,807
2000.............................................................. 2,639
2001.............................................................. 1,685
2002.............................................................. 1,469
Thereafter........................................................ 3,527
-------
Total minimum lease payments................................... $15,291
=======
</TABLE>
7. CONTINGENCIES
In May 1995, the Company was made aware of the following matter. During
1990, the Company acquired an interest in Datacode Electronics Limited
("Datacode"). Certain of the remaining shareholders in Datacode have alleged
that the acquisition by the Company had the effect of depriving them of
certain benefits and have claimed 21,126 of the Company's Ordinary Shares in
compensation and have initiated legal action against the Company. The Company
believes that the action taken against the Company with respect to this matter
is without merit and intends to defend the action vigorously.
A major shareholder in the Company at the time of the acquisition and from
whom the Company acquired its interest in Datacode has agreed to indemnify the
Company against all losses arising from any action against the Company.
In addition, certain claims and litigation have arisen against the Company
in the ordinary course of its business. The Company believes that all claims
and lawsuits against the Company are without merit, and the Company intends to
vigorously contest such disputes. In the opinion of management, the outcome of
such disputes will not have a material effect on its financial position,
results of operations or liquidity, as reported in these financial statements.
Depending on the amount and timing of any unfavorable resolution of these
matters, it is possible that the Company's future results of operations or
cash flows could be materially affected in a particular period.
8. NOTES PAYABLE TO SHAREHOLDERS
In conjunction with the acquisition of certain of its wholly owned
subsidiaries in 1991, the Company assumed non-interest bearing liabilities of
certain of the subsidiaries due to the subsidiaries' former parent. The
original terms of the liability provided for monthly repayments commencing in
1992. The repayment terms were altered in July 1993. In October 1994, the
liability totaled approximately $1,450,000. At that time, the Company
renegotiated the terms of the liability into a non-interest bearing note
payable under which payments of approximately $250,000 were made during the
remainder of 1994 and the balance of $1,226,000 was repaid in four quarterly
installments of approximately $306,000 beginning on March 31, 1995 through
December 31, 1995.
F-15
<PAGE>
CBT GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
9. REDEEMABLE CONVERTIBLE PREFERRED SHARES AND SHAREHOLDERS' EQUITY
Prior to 1995, the Company's authorized share capital was divided into three
classes of shares, Series A and Series B redeemable convertible preferred
shares and Ordinary Shares, each with a par value of IR37.5p.
Dividends may only be declared and paid out of profits available for
distribution determined in accordance with accounting principles generally
accepted in Ireland and applicable Irish Company Law. Any dividends, if and
when declared, will be declared and paid in dollars. No reserves are available
for distribution as dividends at December 31, 1997.
Redeemable Convertible Preferred Shares
In November 1994, CBT Systems Limited, a subsidiary of the Company, agreed
to repurchase the Series A redeemable convertible preferred shares ("Series A
shares") for a consideration contingent on the date of repurchase.
At March 31, 1995, CBT Systems Limited exercised its right to purchase the
Series A shares for $1.35 million. The purchase of the shares was paid for
from the proceeds of the initial public offering. The converted Series A
shares were subsequently converted to treasury shares and canceled in April
1995.
The Series B redeemable convertible preferred shares ("Series B shares")
automatically converted into Ordinary Shares on a one-for-one basis, on the
closing of the initial public offering on April 21, 1995.
Share Option Plans
The Company has elected to follow Accounting Principles Board Opinion 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its stock options because, as discussed
below, the alternative fair value accounting provided for under FASB Statement
No. 123, "Accounting for Stock-Based Compensation" ("Statement 123"), requires
use of option valuation models that were not developed for use in valuing
employee stock options. Under APB 25, because the exercise price of the
Company's employee stock options equals the market price of the underlying
stock on the date of grant, no compensation expense is recognized.
The Company has three share option plans, the 1990 Share Option Scheme (the
"1990 Plan"), the 1994 Share Option Plan (the "1994 Plan") and the
Supplemental Share Option Scheme (the "1996 Plan"), (collectively the
"Plans").
Under the 1990 Plan, options to acquire Ordinary Shares in the Company may
be granted to any director or employee of the Company. Under the 1994 Plan,
all employees and directors of the Company and any independent contractor who
performs services for the Company are eligible to receive grants of non
statutory options ("NSO"). Employees are also eligible to receive grants of
incentive share options ("ISO") which are intended to qualify under section
422 of the United States Internal Revenue Code of 1986, as amended. Under the
1996 Plan all employees, with the exception of directors and executive
officers, are eligible to receive grants of NSO's. As of December 31, 1997,
approximately 1,175,000, 1,560,751 (which includes an increase in the number
of shares reserved for issuance of 464,905, authorized by a resolution passed
at the Annual General Meeting of the Company on June 17, 1997) and 250,000
Ordinary Shares have been reserved for issuance under the 1990 Plan, the 1994
Plan and 1996 Plan, respectively. The Plans are administered by the Stock
Option Committee (the "Committee").
The terms of the options granted are generally determined by the Committee.
The exercise price of options granted under the 1990 Plan and ISO's granted
under the 1994 Plan cannot be less than the fair market value of
F-16
<PAGE>
CBT GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
9. REDEEMABLE CONVERTIBLE PREFERRED SHARES AND SHAREHOLDERS' EQUITY--
(CONTINUED)
Ordinary Shares on the date of grant. In the case of ISO's granted to holders
of more than 10% of the voting power of the Company the exercise price cannot
be less than 110% of such fair market value. Under the 1994 Plan, the exercise
price of NSO's is set by the Committee at its discretion. The term of an
option under the 1994 and 1996 Plans cannot exceed ten years and, generally,
the terms of an option under the 1990 Plan cannot exceed ten years. The term
of an ISO granted to a holder of more than 10% of the voting power of the
Company cannot exceed five years. An option may not be exercised unless the
option holder is at the date of exercise, or within three months of the date
of exercise has been, a director, employee or contractor of the Company. There
are certain exceptions for exercises following retirement or death. Options
under the Plans generally expire not later than 90 days following termination
of employment or service or six months following an optionees' death or
disability.
In the event that options under the Plans terminate or expire without having
been exercised in full, the shares subject to those options are available for
additional option grants. Vesting periods of the options are determined by the
Committee and are currently for periods of up to four years. Under the 1990,
1994 and 1996 Plans, options to purchase approximately 122,746, 154,929 and
1,276 shares respectively were exercisable as of December 31, 1997. As of
December 31, 1997, 611,146 options are available for grant under the plans.
Pro forma information regarding net income and earnings per share is
required by Statement 123, and has been determined as if the Company had
accounted for its stock options under the fair value method of that Statement.
The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 1995, 1996 and 1997, respectively; risk-free interest rates of
approximately 6%; dividend yields of 0%; volatility factors of the expected
market price of the Company's Ordinary Shares of .39, .37 and .45
respectively; and a weighted-average expected life of the option of five
years.
The Black-Scholes option model was developed for use in estimating the fair
value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's stock options have characteristics significantly different from
those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in the management's
opinion, the existing models do not provide a reliable single measure of the
fair value of its stock options.
For the purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period.
Pro forma net income for the years ended December 31, 1995, 1996 and 1997
was $5.1 million, $5.9 million and $14.7 million, respectively. Pro forma
basic net income per share was $0.68, $0.67 and $1.54 for the years ended
December 31, 1995, 1996 and 1997, respectively. Pro forma diluted net income
per share was $0.58, $0.60 and $1.41 for the years ended December 31, 1995,
1996 and 1997, respectively. Because options vest over several years and
additional grants are expected, the effects of these hypothetical calculations
are not likely to be representative of similar future calculations.
F-17
<PAGE>
CBT GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
9. REDEEMABLE CONVERTIBLE PREFERRED SHARES AND SHAREHOLDERS' EQUITY--
(CONTINUED)
A summary of the Company's stock option activity, and related information
for the years ended December 31, 1995, 1996 and 1997 follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
---------------------------------------
WEIGHTED
NUMBER OF PRICE AVERAGE
SHARES PER SHARE EXERCISE PRICE
--------- ------------- --------------
<S> <C> <C> <C>
Balance at December 31, 1994............ 922,932 $ 0.58- 5.63 $ 1.55
Granted in 1995......................... 397,537 $16.00- 45.13 $22.72
Exercised in 1995....................... (131,066) $ 0.58- 3.37 $ 0.59
Canceled in 1995........................ (1,373) $ 3.37 $ 3.37
--------- ------------- ------
Balance at December 31, 1995............ 1,188,030 $ 0.58- 45.13 $ 8.68
Granted in 1996......................... 764,999 $45.25-116.00 $61.45
Exercised in 1996....................... (387,045) $ 0.58-110.00 $ 3.90
Canceled in 1996........................ (24,525) $ 2.02-110.00 $24.61
--------- ------------- ------
Balance at December 31, 1996............ 1,541,459 $ 0.58-116.00 $35.81
Granted in 1997......................... 370,604 $81.00-139.00 $95.00
Exercised in 1997....................... (779,348) $ 0.58-114.25 $18.34
Canceled in 1997........................ (35,448) $10.71-102.50 $51.16
--------- ------------- ------
Balance at December 31, 1997............ 1,097,267 $ 1.58-139.00 $67.95
========= ============= ======
</TABLE>
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
AT DECEMBER 31, 1997 OPTIONS EXERCISABLE
------------------------------------------- ------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF SHARES REMAINING AVERAGE NUMBER OF AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE SHARES EXERCISE PRICE
--------------- ----------- ---------------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C>
$ 1.58- 3.37.......... 1,707 6.49 $ 1.67 1,707 $ 1.72
$ 5.63- 10.71.......... 16,849 6.46 $ 5.68 3,456 $ 5.80
$ 16.00- 16.00.......... 95,431 7.28 $ 16.00 63,183 $ 16.00
$ 45.13- 45.13.......... 40,003 7.84 $ 45.13 1,669 $ 45.13
$ 45.25- 53.25.......... 264,585 8.04 $ 45.31 134,477 $ 45.28
$ 68.00- 77.00.......... 91,120 8.30 $ 68.87 18,497 $ 68.99
$ 78.50- 78.50.......... 207,500 8.56 $ 78.50 50,885 $ 78.50
$ 81.00- 91.50.......... 261,747 5.40 $ 81.20 1,932 $ 85.18
$102.50-110.00.......... 9,875 9.05 $103.22 1,895 $103.30
$116.00-139.00.......... 108,450 9.64 $131.38 1,250 $116.00
--------- ---- ------- ------- -------
$ 1.58-139.00.......... 1,097,267 7.60 $ 67.95 278,951 $ 46.52
========= ==== ======= ======= =======
</TABLE>
At December 31, 1995 and 1996 there were 648,541 and 678,997 options
exercisable, respectively, at a weighted average exercise price of $1.22 and
$12.51 respectively. The weighted average fair value of options granted during
the years ended December 31, 1995, 1996 and 1997 was $9.84, $25.97 and $43.45,
respectively.
F-18
<PAGE>
CBT GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
9. REDEEMABLE CONVERTIBLE PREFERRED SHARES AND SHAREHOLDERS' EQUITY--
(CONTINUED)
Other Options
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
--------------------------------------
NUMBER OF WEIGHTED AVERAGE
SHARES SHARE PRICE EXERCISE PRICE
--------- ----------- ----------------
<S> <C> <C> <C>
Granted in 1994.......................... 46,666 $1.58 $1.58
Exercised in 1996........................ (6,666) $1.58 $1.58
Canceled in 1996......................... (13,000) $1.58 $1.58
------- ----- -----
Balance at December 31, 1997............. 27,000 $1.58 $1.58
======= ===== =====
</TABLE>
In November 1996, the Company granted to Forbairt, in conjunction with their
approval of an employment grant, a rent reduction grant and a management
development grant, an option to purchase 2,500 Ordinary Shares with an
exercise price equal to the fair market value at the time of exercise. The
option expires at December 31, 1998.
10. INCOME TAXES
Income before provision for income taxes consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------
1995 1996 1997
------ ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Ireland............................................. $6,308 $12,264 $22,517
Rest of world....................................... 1,145 1,994 3,596
------ ------- -------
Total............................................. $7,453 $14,258 $26,113
====== ======= =======
The provision for income taxes consists of the following:
Current............................................. $1,486 $ 2,161 $ 3,916
Deferred............................................ (62) 258 --
------ ------- -------
Total provision for income tax.................... $1,424 $ 2,419 $ 3,916
====== ======= =======
</TABLE>
The current provision for 1997 relates predominantly to provision for income
taxes in Ireland and includes an adjustment at the beginning of the year to
valuation allowance of $402,000.
The provision for income taxes differs from the amount computed by applying
the statutory income tax rate to income before taxes. The sources and tax
effects of the difference are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1995 1996 1997
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Income taxes computed at the Irish statutory
income tax rate of 38.5% for 1995, 38% for
1996, and 36.5% for 1997...................... $ 2,869 $ 5,418 $ 9,531
Income from Irish manufacturing operations
taxed at lower rates.......................... (1,804) (3,815) (7,143)
Income subject to higher rate of tax........... 542 1,099 1,780
Operating losses not utilized.................. 129 1,261 347
Operating losses utilized...................... (136) (554) (876)
Intangible asset amortization and other non-
deductible expenses........................... 53 (461) 662
Change in valuation allowance.................. -- 242 402
Profits arising not subject to tax............. (229) (771) (787)
------- ------- -------
$ 1,424 $ 2,419 $ 3,916
======= ======= =======
</TABLE>
F-19
<PAGE>
CBT GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
10. INCOME TAXES--(CONTINUED)
Deferred taxes reflect the net tax effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred taxes consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1997
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Deferred tax assets
Net operating loss carry forwards................... $ 3,568 $ 15,151
Valuation allowance................................. (3,037) (14,669)
---------- -----------
Net deferred tax assets............................. $ 531 $ 482
========== ===========
</TABLE>
At January 1, 1996 the valuation allowance was $750,000.
At December 31, 1997, the Company had net operating loss carry forwards in
its UK subsidiary of approximately $1,266,000. The utilization of these net
operating loss carry forwards is limited to the future profitable operations
of the Company in the UK tax jurisdiction where such carry forwards arose.
These losses carry forward indefinitely.
At December 31, 1997, the Company has a net operating loss carry forward of
approximately $37 million for United States federal income tax purposes which
will expire in the tax years 2010 through 2012 if not previously utilized.
Utilization of the United States net operating loss carry forward may be
subject to an annual limitation due to the change in ownership rules provided
by the Internal Revenue Code of 1986. This limitation and other restrictions
provided by the Internal Revenue Code of 1986 may reduce the net operating
loss carry forward such that it would not be available to offset future
taxable income of the United States subsidiary.
The net operating loss carry forwards in the United States result from
disqualifying dispositions. The tax value of the disqualifying dispositions
has not been recognized in the tax reconciliation note as it is not expected
that it will reverse. At December 31, 1997, $13.7 million of the valuation
allowance related to such disqualifying dispositions. As noted in the tax
reconciliation note the valuation allowance has increased by $402,000 in
respect of other net operating loss carryforwards.
F-20
<PAGE>
CBT GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
11. INDUSTRY AND GEOGRAPHIC INFORMATION
The Company and its subsidiaries operate in one industry segment, the
development and marketing of interactive education and training software.
Operations outside of Ireland consist principally of sales and marketing.
Transfers between geographic areas are accounted for at amounts which are
generally above costs. Such transfers are eliminated in the consolidated
financial statements. Identifiable assets are those assets that can be
directly associated wth a particular geographic area. The following is a
summary of operations within geographic areas:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1995 1996 1997
------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Revenue from unaffiliated customers
Ireland.................................... $ 8 $ 774 $ 1,079
Europe, excluding Ireland.................. 9,051 13,557 19,218
United States.............................. 29,380 49,312 83,572
Australia.................................. 9,112 6,757 7,897
Other...................................... 1,791 3,166 6,873
------- -------- ---------
Total revenue............................ $49,342 $ 73,566 $ 118,639
======= ======== =========
Transfers between geographic areas
(eliminated on consolidation)
Ireland.................................... $18,018 $ 31,732 $ 57,708
Europe, excluding Ireland.................. 29 120 940
United States.............................. 450 -- 529
Australia.................................. -- -- --
Other...................................... -- -- --
------- -------- ---------
Total transfers.......................... $18,497 $ 31,852 $ 59,177
======= ======== =========
Income from operations
Ireland.................................... $ 6,373 $ 12,266 $ 22,419
Europe, excluding Ireland.................. (1,093) (1,066) (144)
United States.............................. 328 1,068 1,793
Australia.................................. 1,000 (116) (312)
Other...................................... 44 (194) (241)
------- -------- ---------
Income from operations................... $ 6,652 $ 11,958 $ 23,515
======= ======== =========
Identifiable assets
Ireland.................................... $ 88,130 $ 127,786
Europe, excluding Ireland.................. 7,689 13,189
United States.............................. 28,648 53,709
Australia.................................. 2,627 2,959
Grand Cayman............................... 42,709 50,860
Other...................................... 1,999 5,165
Eliminations............................... (84,774) (122,347)
-------- ---------
$ 87,028 $ 131,321
======== =========
</TABLE>
F-21
<PAGE>
CBT GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
12. GOVERNMENT GRANTS
Under agreements between the Company and Forbairt, the Company has offset
against related salary and rent expense amounts of $nil, $598,000 and
$1,021,000 in the years ended December 31, 1995, 1996 and 1997, respectively.
Under the terms of the agreement between the Company and Forbairt, these
grants may be revoked in certain circumstances, principally failure to
maintain the related jobs for a period of five years from the payment of the
first installment of the related grant. The Company has complied with the
terms of the grant agreements through December 31, 1997.
13. RELATED PARTY TRANSACTIONS
Ownership of CBT Technology
Approximately 9% of the outstanding share capital of CBT (Technology)
Limited ("CBT T"), one of the Company's Irish subsidiaries, representing a
special non-voting class, is owned by Stargazer Productions ("Stargazer"), an
unlimited company which is wholly-owned by officers and key employees of the
Group. CBT T has in the past and may in the future declare and pay dividends
to Stargazer, and Stargazer may pay dividends to its shareholders out of such
amounts.
Loan to Director
In February 1996, Gregory M. Priest, a director of the Company and former
Vice President, Finance and Chief Financial Officer of the Company, received
an interest free loan from the Group in the amount of US$125,000 repayable in
four equal annual installments. At December 31, 1996 and 1997 the balance
outstanding on this loan was $125,000 and $93,750, respectively.
14. SUBSEQUENT EVENT
New Research and Development Facility
On January 6, 1998, the Company signed a twenty-five year lease, with a ten
year break clause, for new premises, in Dublin, at an annual rent of $1.4
million.
15. EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS
In 1997, The American Institute of Certified Public Accountants issued
Statement of Position 97 -2 ("SOP 97-2"), "Software Revenue Recognition". The
Company has considered SOP 97-2 and concluded that it has no material effect
on the Company's current revenue recognition policy.
In June 1997 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 131 (SFAS 131) "Disclosures about Segments
of an Enterprise and Related Information". Companies are required to adopt
SFAS 131 for fiscal years beginning after December 15, 1997. The Company is
not required to disclose this segment information until its 1998 annual
report, at which time it will restate prior year's segment disclosures to
conform with SFAS 131 segment presentation. The Company has not completed its
review of SFAS 131, but anticipates that the adoption of this statement will
not have a fundamental effect on the Company's reported segments.
16. EVENT SUBSEQUENT TO DATE OF AUDITORS' REPORT--UNAUDITED
On March 16, 1998, the Company entered into a definitive agreement to
acquire The ForeFront Group, Inc., a Houston-based provider of high-quality,
cost-effective, computer-based training products and network utilities for
technical professionals ("ForeFront"). In the merger, each share of ForeFront
common stock will be exchanged for 0.3137 ADSs and the Company will assume
outstanding ForeFront stock options, warrants and
F-22
<PAGE>
CBT GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
16. EVENT SUBSEQUENT TO DATE OF AUDITORS' REPORT--UNAUDITED--(CONTINUED)
other rights to acquire ForeFront common stock. As a result of the merger, the
Company will issue approximately 2.1 million ADSs and assume options, warrants
and other rights that may be converted into up to approximately 1.1 million
ADSs. The transaction is intended to be tax free to shareholders and is
intended to be accounted for as a pooling-of-interests. Consummation of the
transaction is subject to expiration or termination of the applicable Hart-
Scott-Rodino waiting period, approval of the merger by ForeFront shareholders
and other customary closing conditions. The merger is expected to be completed
during the second quarter of 1998.
SELECTED PRO FORMA CONSOLIDATED
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
--------------
<S> <C>
Revenue....................................................... $137.0 million
Net Income.................................................... $18.1 million
Net Income per share--Basic................................... $1.80
Net Income per share--Diluted................................. $1.64
</TABLE>
F-23
<PAGE>
ERNST & YOUNG
CHARTERED ACCOUNTANTS
REPORT OF ERNST & YOUNG, INDEPENDENT AUDITORS
The Board of Directors and Shareholders,
CBT Group PLC
We have audited the consolidated balance sheets of CBT Group PLC as of
December 31, 1996 and 1997 and the related consolidated statements of
operations, changes in redeemable convertible preferred shares and
shareholders' equity (deficit), and cash flows for each of the three years in
the period ended December 31, 1997, and have issued our report thereon dated
January 20, 1998. Our audits also included the financial statement schedule of
the Company listed in Item 21(b). This schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits.
In our opinion, based on our audits, the financial statement schedule
referred to above, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
/s/ Ernst & Young
-------------------------------------
ERNST & YOUNG
Chartered Accountants
Dublin, Ireland
Date: January 20, 1998
F-24
<PAGE>
THE FOREFRONT GROUP, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Public Accountants................................. F-26
Consolidated Balance Sheets as of December 31, 1996 and 1997............. F-27
Consolidated Statements of Operations for Each of the Three Years in the
Period Ended December 31, 1997.......................................... F-28
Consolidated Statements of Stockholders' Equity for Each of the Three
Years in the Period Ended December 31, 1997............................. F-29
Consolidated Statements of Cash Flows for Each of the Three Years in the
Period Ended December 31, 1997.......................................... F-30
Notes to Consolidated Financial Statements............................... F-31
</TABLE>
F-25
<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-26
<PAGE>
THE FOREFRONT GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------
1996 1997
------------ ------------
<S> <C> <C>
ASSETS
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-27
<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-28
<PAGE>
THE FOREFRONT GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
SERIES B
SERIES A CONVERTIBLE CONVERTIBLE COMMON
PREFERRED STOCK PREFERRED STOCK STOCK
---------------------- ------------------- -----------------
ADDITIONAL CUMULATIVE
PAR PAR PAR PAID IN DEFERRED TRANSLATION
SHARES VALUE SHARES VALUE SHARES VALUE CAPITAL COMPENSATION ADJUSTMENT
----------- --------- ---------- ------- --------- ------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total Balance,
December 31,
1994............ 2,000,000 $ 20,000 -- $ -- 2,670,853 $26,708 $ 2,557,221 $ -- $--
Exercise of
stock options... -- -- -- -- 4,440 44 956 -- --
Issuance of
Series B
preferred stock
in September
1995 at $1.25
per share, net
of offering
costs of
$10,000......... -- -- 840,000 8,400 -- -- 1,031,600 -- --
Issuance of
preferred stock
in September
1995 at $1.25
per share for
conversion of
notes payable... -- -- 464,000 4,640 -- -- 575,360 -- --
Deferred
compensation
relating to
issuance of
certain stock
options......... -- -- -- -- -- -- 726,375 (726,375) --
Amortization of
deferred
compensation.... -- -- -- -- -- -- -- 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...... -- -- -- -- 1,700,000 17,000 11,837,522 -- --
Conversion of
all preferred
stock upon
closing of
Initial Public
Offering........ (2,000,000) (20,000) (1,304,000) (13,040) 1,462,953 14,630 18,410 -- --
Issuance of
common stock
purchase
warrants upon
closing of
Initial Public
Offering........ -- -- -- -- -- -- 170 -- --
Distributions to
Stockholders.... -- -- -- -- -- -- -- -- --
Net loss........ -- -- -- -- -- -- -- -- --
----------- -------- ---------- ------- --------- ------- ----------- --------- --------
Balance,
December 31,
1995............ -- -- -- -- 5,838,246 58,382 16,747,614 (586,105) --
Issuance of
common stock for
Blue Squirrel
Acquisition..... -- -- -- -- 125,000 1,250 397,188 -- --
Issuance of
common stock for
Bookmaker
Acquisition..... -- -- -- -- 223,538 2,235 2,411,975 -- --
Amortization of
deferred
compensation.... -- -- -- -- -- -- (15,719) 216,769 --
Exercise of
stock options... -- -- -- -- 77,392 774 53,172 -- --
Distributions to
Stockholders.... -- -- -- -- -- -- -- -- --
Net loss........ -- -- -- -- -- -- -- -- --
----------- -------- ---------- ------- --------- ------- ----------- --------- --------
Balance,
December 31,
1996............ -- -- -- -- 6,264,176 62,641 19,594,230 (369,336) --
Amortization of
deferred
compensation.... -- -- -- -- -- -- (176,055) 257,155 --
Exercise of
stock options... -- -- -- -- 358,528 3,587 970,626 -- --
Issuance of
common stock for
Bookmaker
Acquisition..... -- -- -- -- 37,754 377 215,202 -- --
Issuance of
common stock for
Lantec
Acquisition..... -- -- -- -- -- -- 2,552,439 -- --
Cumulative
translation
adjustment...... -- -- -- -- -- -- -- -- (11,738)
Net Loss........ -- -- -- -- -- -- -- -- --
----------- -------- ---------- ------- --------- ------- ----------- --------- --------
Balance,
December 31,
1997............ -- $ -- -- $ -- 6,660,458 $66,605 $23,156,442 $(112,181) $(11,738)
=========== ======== ========== ======= ========= ======= =========== ========= ========
<CAPTION>
ACCUMULATED TREASURY
DEFICIT STOCK TOTAL
------------- --------- ------------
<S> <C> <C> <C>
Total Balance,
December 31,
1994............ $ (2,125,100) $(1,850) $ 476,979
Exercise of
stock options... -- -- 1,000
Issuance of
Series B
preferred stock
in September
1995 at $1.25
per share, net
of offering
costs of
$10,000......... -- -- 1,040,000
Issuance of
preferred stock
in September
1995 at $1.25
per share for
conversion of
notes payable... -- -- 580,000
Deferred
compensation
relating to
issuance of
certain stock
options......... -- -- --
Amortization of
deferred
compensation.... -- -- 140,270
Issuance of
common stock in
conjunction with
Initial Public
Offering at
$8.00 per share,
net of offering
costs of
$1,745,478...... -- -- 11,854,522
Conversion of
all preferred
stock upon
closing of
Initial Public
Offering........ -- -- --
Issuance of
common stock
purchase
warrants upon
closing of
Initial Public
Offering........ -- -- 170
Distributions to
Stockholders.... (854,620) -- (854,620)
Net loss........ (451,831) -- (451,831)
------------- --------- ------------
Balance,
December 31,
1995............ (3,431,551) (1,850) 12,786,490
Issuance of
common stock for
Blue Squirrel
Acquisition..... -- -- 398,438
Issuance of
common stock for
Bookmaker
Acquisition..... -- -- 2,414,210
Amortization of
deferred
compensation.... -- -- 201,050
Exercise of
stock options... -- -- 53,946
Distributions to
Stockholders.... (1,504,962) -- (1,504,962)
Net loss........ (7,332,588) -- (7,332,588)
------------- --------- ------------
Balance,
December 31,
1996............ (12,269,101) (1,850) 7,016,584
Amortization of
deferred
compensation.... -- -- 81,100
Exercise of
stock options... -- -- 974,213
Issuance of
common stock for
Bookmaker
Acquisition..... -- -- 215,579
Issuance of
common stock for
Lantec
Acquisition..... -- -- 2,552,439
Cumulative
translation
adjustment...... -- -- (11,738)
Net Loss........ (4,128,571) -- (4,128,571)
------------- --------- ------------
Balance,
December 31,
1997............ $(16,397,672) $(1,850) $ 6,699,606
============= ========= ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-29
<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-30
<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.
Foreign Currency Translation
Assets and liabilities denominated in foreign currencies are translated to
United States 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.
F-31
<PAGE>
THE FOREFRONT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 United States
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>
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.
F-32
<PAGE>
THE FOREFRONT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
F-33
<PAGE>
THE FOREFRONT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In February 1998, the Securities and Exchange Commission issue 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.
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 United States 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
F-34
<PAGE>
THE FOREFRONT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
additional paid-in capital account. Retroactive effect has been given to the
reverse stock split in stockholders' equity and in all share and per share
data in the accompanying consolidated financial statements.
In September 1995, the Company's board of directors authorized the
management of the Company to file a registration statement with the Securities
and Exchange Commission permitting the Company to sell shares of its common
stock to the public. The offering of 1,700,000 shares at $8.00 per share was
consummated on December 26, 1995, with all of the preferred stock outstanding
automatically converting into 1,462,953 shares of common stock.
Convertible Notes
In March, April and July 1995, the Company issued senior convertible
promissory notes to certain stockholders, institutions and the former chief
executive officer (the Former Officer) totaling $660,705. The note to the
Former Officer was issued for the remaining amount due of his severance pay in
the amount of $30,705. The notes bore interest at prime plus 2 percent and
were due at the earlier of a common stock offering in which the offering
raised at least $1,000,000 in capital or March 31, 1996.
On September 26, 1995, the Company paid $80,705 in principal to two of the
noteholders and paid interest totaling approximately $35,000 to all of the
noteholders. The remaining principal of $580,000 was converted into 464,000
shares of Series B preferred stock at $1.25 per share in conjunction with the
issuance of Series B preferred stock. The noteholders received warrants to
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-35
<PAGE>
THE FOREFRONT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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
F-36
<PAGE>
THE FOREFRONT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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:
<TABLE>
<CAPTION>
1995 1996 1997
--------- ----------- -----------
<C> <S> <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-37
<PAGE>
THE FOREFRONT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<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
</TABLE>
<TABLE>
<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,
United States 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>
<S> <C>
1998.............................................................. 398,000
1999.............................................................. 359,000
2000.............................................................. 344,000
2001.............................................................. 66,000
2002.............................................................. 37,000
----------
Total........................................................... $1,204,000
==========
</TABLE>
F-38
<PAGE>
THE FOREFRONT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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
F-39
<PAGE>
THE FOREFRONT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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:
<TABLE>
<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
F-40
<PAGE>
THE FOREFRONT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 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>
<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 AUDITORS' REPORT
On March 16, 1998, the Company entered into an Agreement and Plan of
Reorganization (the "Merger Agreement") with CBT Group PLC ("CBT") and Rockets
Acquisition Corp., a wholly-owned subsidiary of CBT ("Merger Sub"), pursuant
to which the parties agreed that 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 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-41
<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
F-42
<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
---- ----------- ------------ ------------- ---------- --------- ----------
<C> <S> <C> <C> <C> <C> <C>
1995 Allowance for doubtful
accounts............... $ -- $ -- $-- $ -- $ --
1996 Allowance for doubtful
accounts............... $ -- $138,600 $-- $ -- $138,600
1997 Allowance for doubtful
accounts............... $138,600 $267,700 $-- $(86,800) $319,500
</TABLE>
F-43
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
CBT GROUP PLC
ROCKETS ACQUISITION CORP.
AND
THE FOREFRONT GROUP, INC.
DATED AS OF MARCH 16, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
ARTICLE I
THE MERGER
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
1.1 The Merger.......................................................... A-1
1.2 Effective Time; Closing............................................. A-1
1.3 Effect of the Merger................................................ A-2
1.4 Certificate of Incorporation; Bylaws................................ A-2
1.5 Directors and Officers.............................................. A-2
1.6 Effect on Capital Stock............................................. A-2
1.7 Surrender of Certificates........................................... A-3
1.8 No Further Ownership Rights in ForeFront Common Stock............... A-4
1.9 Lost, Stolen or Destroyed Certificates.............................. A-4
1.10 Tax and Accounting Consequences..................................... A-4
1.11 Taking of Necessary Action; Further Action.......................... A-4
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF FOREFRONT
2.1 Organization of ForeFront........................................... A-5
2.2 ForeFront Capital Structure......................................... A-5
2.3 Obligations With Respect to Capital Stock........................... A-6
2.4 Authority........................................................... A-6
2.5 SEC Filings; ForeFront Financial Statements......................... A-7
2.6 Absence of Certain Changes or Events................................ A-8
2.7 Tax................................................................. A-8
2.8 Title to Properties; Absence of Liens and Encumbrances.............. A-9
2.9 Intellectual Property............................................... A-9
2.10 Compliance; Permits; Restrictions................................... A-11
2.11 Litigation.......................................................... A-11
2.12 Brokers' and Finders' Fees.......................................... A-11
2.13 Employee Benefit Plans.............................................. A-11
2.14 Employees; Labor Matters............................................ A-13
2.15 Environmental Matters............................................... A-13
2.16 Agreements, Contracts and Commitments............................... A-14
2.17 Pooling-of-Interests................................................ A-15
2.18 Change of Control and Non-Compete Payments.......................... A-15
2.19 Statements; Proxy Statement/Prospectus.............................. A-15
2.20 Board Approval...................................................... A-16
2.21 Fairness Opinion.................................................... A-16
2.22 Section 203 of Delaware Law Not Applicable.......................... A-16
2.23 Documentation Regarding Telemarketing Operations.................... A-16
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF CBT AND MERGER SUB
3.1 Organization of CBT................................................. A-16
3.2 CBT and Merger Sub Capital Structure................................ A-17
3.3 Obligations With Respect to Capital Stock........................... A-17
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
3.4 Authority.......................................................... A-17
3.5 SEC Filings; CBT Financial Statements.............................. A-18
3.6 Absence of Certain Changes or Events............................... A-19
3.7 Taxes.............................................................. A-19
3.8 Title to Properties; Absence of Liens and Encumbrances............. A-19
3.9 Intellectual Property.............................................. A-19
3.10 Compliance, Permits, Restrictions.................................. A-20
3.11 Litigation......................................................... A-20
3.12 Employee Benefit Plans............................................. A-20
3.13 Employees; Labor Matters........................................... A-21
3.14 Environmental Matters.............................................. A-21
3.15 Statements; Proxy Statement/Prospectus............................. A-21
3.16 Pooling-of-Interests............................................... A-22
3.17 Valid Issuance..................................................... A-22
3.18 No Ownership of ForeFront Common Stock............................. A-22
3.19 No Brokers......................................................... A-22
ARTICLE IV
CONDUCT PRIOR TO THE EFFECTIVE TIME
4.1 Conduct of ForeFront's Business.................................... A-22
4.2 Conduct of CBT' Business........................................... A-24
4.3 Control of ForeFront's Operations.................................. A-24
4.4 Control of CBT's Operations........................................ A-24
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 Registration Statement; Other Filings; Board Recommendations....... A-24
5.2 Meeting of Stockholders............................................ A-25
5.3 Confidentiality; Access to Information............................. A-25
5.4 No Solicitation.................................................... A-25
5.5 Public Disclosure.................................................. A-27
5.6 Legal Requirements................................................. A-27
5.7 Third Party Consents............................................... A-27
5.8 Notification of Certain Matters.................................... A-27
5.9 Best Efforts and Further Assurances................................ A-27
5.10 Stock Options, Warrants and Exchangeable Shares.................... A-27
5.11 Form S-8........................................................... A-28
5.12 Nasdaq Listing..................................................... A-29
5.13 Affiliate Agreement................................................ A-29
5.14 Regulatory Filings; Reasonable Efforts............................. A-29
5.15 Comfort Letter..................................................... A-29
5.16 Director and Officer Indemnification............................... A-29
5.17 Tax-Free Reorganization............................................ A-30
ARTICLE VI
CONDITIONS TO THE MERGER
6.1 Conditions to Obligations of Each Party to Effect the Merger....... A-30
6.2 Additional Conditions to Obligations of ForeFront.................. A-31
6.3 Additional Conditions to the Obligations of CBT and Merger Sub..... A-31
</TABLE>
ii
<PAGE>
ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
7.1 Termination......................................................... A-32
7.2 Notice of Termination; Effect of Termination........................ A-33
7.3 Fees and Expenses................................................... A-33
7.4 Amendment........................................................... A-34
7.5 Extension; Waiver................................................... A-34
ARTICLE VIII
GENERAL PROVISIONS
8.1 Non-Survival of Representations and Warranties...................... A-34
8.2 Notices............................................................. A-34
8.3 Interpretation; Knowledge........................................... A-35
8.4 Counterparts........................................................ A-36
8.5 Entire Agreement; Third Party Beneficiaries......................... A-36
8.6 Severability........................................................ A-36
8.7 Other Remedies; Specific Performance................................ A-36
8.8 Governing Law....................................................... A-36
8.9 Rules of Construction............................................... A-36
8.10 Assignment.......................................................... A-36
8.11 Waiver of Jury Trial................................................ A-36
</TABLE>
INDEX OF EXHIBITS
Exhibit A Form of ForeFront Voting Agreement
Exhibit B Form of ForeFront Affiliate Agreement
Exhibit C Form of CBT Affiliate Agreement
Exhibit D Form of Guarantee
Exhibit E Form of Employment and Noncompetition Agreement
iii
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
This AGREEMENT AND PLAN OF REORGANIZATION is made and entered into as of
March 16, 1998, by and among CBT Group PLC, a public limited company organized
under the laws of the Republic of Ireland ("CBT"), Rockets Acquisition Corp.,
a Delaware corporation and wholly-owned subsidiary of CBT ("MERGER SUB"), and
The ForeFront Group, Inc., a Delaware corporation ("FOREFRONT").
RECITALS
A. Upon the terms and subject to the conditions of this Agreement (as
defined in Section 1.2 below) and in accordance with the Delaware General
Corporation Law ("DELAWARE LAW"), CBT and ForeFront intend to enter into a
business combination transaction.
B. The ForeFront Board of Directors (the "FOREFRONT BOARD") (i) has
determined that the Merger (as defined in Section 1.1) is consistent with and
in furtherance of the long-term business strategy of ForeFront and fair to,
and in the best interests of, ForeFront and its stockholders, (ii) has
approved this Agreement, the Merger and the other transactions contemplated by
this Agreement and (iii) has determined to recommend that the stockholders of
ForeFront adopt and approve this Agreement and approve the Merger.
C. The CBT Board of Directors (the "CBT BOARD") (i) has determined that the
Merger is consistent with and in furtherance of the long-term business
strategy of CBT and fair to, and in the best interests of, CBT and its
stockholders and (ii) has approved this Agreement, the Merger and the other
transactions contemplated by this Agreement.
D. Concurrently with the execution of this Agreement, and as a condition and
inducement to CBT's willingness to enter into this Agreement, certain
affiliates of ForeFront are entering into Voting Agreements in substantially
the form attached hereto as Exhibit A (the "FOREFRONT VOTING AGREEMENTS").
E. The parties intend, by executing this Agreement, to adopt a plan of
reorganization within the meaning of Section 368 of the Internal Revenue Code
of 1986, as amended (the "CODE").
F. The parties intend for the Merger to qualify for accounting treatment as
a pooling-of-interests.
NOW, THEREFORE, in consideration of the covenants, promises and
representations set forth herein, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
the parties agree as follows:
ARTICLE I
THE MERGER
1.1 The Merger. At the Effective Time (as defined in Section 1.2) and
subject to and upon the terms and conditions of this Agreement and the
applicable provisions of Delaware Law, Merger Sub shall be merged with and
into ForeFront (the "MERGER"), the separate corporate existence of Merger Sub
shall cease and ForeFront shall continue as the surviving corporation.
ForeFront as the surviving corporation after the Merger is hereinafter
sometimes referred to as the "SURVIVING CORPORATION."
1.2 Effective Time; Closing. Subject to the provisions of this Agreement,
the parties hereto shall cause the Merger to be consummated by filing a
Certificate of Merger with the Secretary of State of the State of Delaware in
accordance with the relevant provisions of Delaware Law (the "CERTIFICATE OF
MERGER") (the time of such filing (or such later time as may be agreed in
writing by the parties and specified in the Certificate of Merger) being the
"EFFECTIVE TIME") as soon as practicable on or after the Closing Date (as
herein defined).
A-1
<PAGE>
Unless the context otherwise requires, the term "AGREEMENT" as used herein
refers collectively to this Agreement and Plan of Reorganization and the
Certificate of Merger. The closing of the Merger (the "CLOSING") shall take
place at the offices of Wilson Sonsini Goodrich & Rosati, Professional
Corporation, at a time and date to be specified by the parties, which shall be
no later than the second business day after the satisfaction or waiver of the
conditions set forth in Article VI and no earlier than May 28, 1998, or at
such other time, date and location as the parties hereto agree in writing (the
"CLOSING DATE").
1.3 Effect of the Merger. At the Effective Time, the effect of the Merger
shall be as provided in this Agreement and the applicable provisions of
Delaware Law. Without limiting the generality of the foregoing, and subject
thereto, at the Effective Time all the property, rights, privileges, powers
and franchises of ForeFront and Merger Sub shall vest in the Surviving
Corporation, and all debts, liabilities and duties of ForeFront and Merger Sub
shall become the debts, liabilities and duties of the Surviving Corporation.
1.4 Certificate of Incorporation; Bylaws.
(a) At the Effective Time, the Certificate of Incorporation of Merger
Sub, as in effect immediately prior to the Effective Time, shall be the
Certificate of Incorporation of the Surviving Corporation until thereafter
amended as provided by law and such Certificate of Incorporation of the
Surviving Corporation; provided, however, that at the Effective Time the
Certificate of Incorporation of the Surviving Corporation shall be amended
so that the name of the Surviving Corporation shall be The ForeFront Group,
Inc., a CBT Company.
(b) The Bylaws of Merger Sub, as in effect immediately prior to the
Effective Time, shall be, at the Effective Time, the Bylaws of the
Surviving Corporation until thereafter amended.
1.5 Directors and Officers. The initial directors of the Surviving
Corporation shall be the directors of Merger Sub immediately prior to the
Effective Time, until their respective successors are duly elected or
appointed and qualified. The initial officers of the Surviving Corporation
shall be the officers of Merger Sub immediately prior to the Effective Time,
until their respective successors are duly appointed.
1.6 Effect on Capital Stock. At the Effective Time, by virtue of the Merger
and without any action on the part of Merger Sub, ForeFront or the holders of
any of the following securities:
(a) Conversion of ForeFront Common Stock. Each share of Common Stock,
$.01 par value per share, of ForeFront (the "FOREFRONT COMMON STOCK")
issued and outstanding immediately prior to the Effective Time, (other than
any shares of ForeFront Common Stock to be canceled pursuant to Section
1.6(b)) will be canceled and extinguished and automatically converted
(subject to Sections 1.6(e) and (f)) into the right to receive 0.3137 (the
"EXCHANGE RATIO") American Depositary Shares of CBT (the "CBT ADSS") upon
surrender of the certificate representing such share of ForeFront Common
Stock in the manner provided in Section 1.7 (or in the case of a lost,
stolen or destroyed certificate, upon delivery of an affidavit (and bond,
if required) in the manner provided in Section 1.9).
(b) Cancellation of CBT-Owned Stock. Each share of ForeFront Common Stock
held by ForeFront or owned by Merger Sub, CBT or any direct or indirect
wholly-owned subsidiary of ForeFront or of CBT immediately prior to the
Effective Time shall be canceled and extinguished without any conversion
thereof.
(c) Stock Options; Employee Stock Purchase Plan; Warrants. At the
Effective Time: (x) all options to purchase ForeFront Common Stock then
outstanding under ForeFront's Amended and Restated 1992 Stock Option Plan
(the "1992 PLAN"), ForeFront's 1996 Non-Employee Directors' Stock Option
Plan (the "DIRECTOR PLAN"), and ForeFront's Amended and Restated 1996 Stock
Option Plan (the "1996 PLAN" and collectively, the "FOREFRONT STOCK OPTION
PLANS") shall be assumed by CBT in accordance with Section 5.10 hereof; (y)
rights outstanding under ForeFront's 1996 Employee Stock Purchase Plan (the
"ESPP") shall be treated as set forth in Section 5.10; and (z) all warrants
to acquire ForeFront Common Stock (the "WARRANTS") then outstanding shall
be assumed by CBT in accordance with Section 5.10.
(d) Exchangeable Shares. At the Effective Time, the rights and
obligations of ForeFront to exchange shares of ForeFront Common Stock for
Exchangeable Shares of ForeFront Canada Ltd. (the
A-2
<PAGE>
"EXCHANGEABLE SHARES") shall be assumed by CBT, and each Exchangeable Share
shall thereupon become exchangeable for the number of CBT ADSs determined
in accordance with Section 5.10 hereof.
(e) Capital Stock of Merger Sub. Each share of Common Stock, $.01 par
value per share, of Merger Sub (the "MERGER SUB COMMON STOCK") issued and
outstanding immediately prior to the Effective Time shall be converted into
one validly issued, fully paid and nonassessable share of Common Stock,
$.01 par value per share, of the Surviving Corporation. Each certificate
evidencing ownership of shares of Merger Sub Common Stock shall evidence
ownership of such shares of capital stock of the Surviving Corporation.
(f) Adjustments to Exchange Ratio. The Exchange Ratio shall be adjusted
to reflect appropriately the effect of any stock split, reverse stock
split, stock dividend (including any dividend or distribution of securities
convertible into CBT ADSs or ForeFront Common Stock), reorganization,
recapitalization, reclassification or other like change with respect to CBT
ADSs or ForeFront Common Stock occurring on or after the date hereof and
prior to the Effective Time.
(g) Fractional Shares. No fractional CBT ADSs will be issued by virtue of
the Merger, but in lieu thereof each holder of shares of ForeFront Common
Stock who would otherwise be entitled to a fractional CBT ADS (after
aggregating all fractional CBT ADSs that otherwise would be received by
such holder) shall receive from CBT an amount of cash (rounded to the
nearest whole cent) equal to the product of (i) such fraction, multiplied
by (ii) the average closing price of one CBT ADS for the ten (10) most
recent days that CBT ADSs have traded ending on the trading day immediately
prior to the Effective Time, as reported on the Nasdaq National Market
System.
1.7 Surrender of Certificates.
(a) Exchange Agent. CBT shall select a bank or trust company reasonably
acceptable to ForeFront with assets of not less than $500 million to act as
the exchange agent (the "EXCHANGE AGENT") in the Merger.
(b) CBT to Provide ADSs. Promptly after the Effective Time, CBT shall
make available to the Exchange Agent for exchange in accordance with this
Article I, the CBT ADSs issuable pursuant to Section 1.6 in exchange for
outstanding shares of ForeFront Common Stock, and cash in an amount
sufficient for payment in lieu of fractional CBT ADSs pursuant to Section
1.6(g) and any dividends or distributions to which holders of shares of
ForeFront Common Stock may be entitled pursuant to Section 1.8(d).
(c) Exchange Procedures. Promptly after the Effective Time, CBT shall
cause the Exchange Agent to mail to each holder of record (as of the
Effective Time) of a certificate or certificates (the "CERTIFICATES"),
which immediately prior to the Effective Time represented outstanding
shares of ForeFront Common Stock whose shares were converted into CBT ADSs
pursuant to Section 1.6, cash in lieu of any fractional shares pursuant to
Section 1.6(g) and any dividends or other distributions pursuant to Section
1.7(d), (i) a letter of transmittal in customary form (which shall specify
that delivery shall be effected, and risk of loss and title to the
Certificates shall pass, only upon delivery of the Certificates to the
Exchange Agent and shall contain such other provisions as CBT may
reasonably specify) and (ii) instructions for use in effecting the
surrender of the Certificates in exchange for American Depositary Receipts
("ADRS") representing CBT ADSs, cash in lieu of any fractional shares
pursuant to Section 1.6(g) and any dividends or other distributions
pursuant to Section 1.7(d). Upon surrender of Certificates for cancellation
to the Exchange Agent or to such other agent or agents as may be appointed
by CBT, together with such letter of transmittal, duly completed and
validly executed in accordance with the instructions thereto, the holders
of such Certificates shall be entitled to receive in exchange therefor ADRs
representing the number of whole CBT ADSs into which their shares of
ForeFront Common Stock were converted at the Effective Time, payment in
lieu of fractional shares which such holders have the right to receive
pursuant to Section 1.6(g) and any dividends or distributions payable
pursuant to Section 1.7(d), and the Certificates so surrendered shall
forthwith be canceled. Until so surrendered, outstanding Certificates will
be deemed from and after the Effective Time, for all corporate purposes,
subject to Section 1.7(d) as to the payment of dividends, to evidence the
ownership of the number of full CBT ADSs into which such shares of
ForeFront Common Stock shall have been so converted and the right to
receive an amount in cash in lieu of the issuance of any fractional shares
in accordance with Section 1.6(g) and any dividends or distributions
payable pursuant to Section 1.7(d).
A-3
<PAGE>
(d) Distributions With Respect to Unexchanged Shares. No dividends or
other distributions declared or made after the date of this Agreement with
respect to CBT ADSs with a record date after the Effective Time will be
paid to the holders of any unsurrendered Certificates with respect to the
CBT ADSs represented thereby until the holders of record of such
Certificates shall surrender such Certificates. Subject to applicable law,
following surrender of any such Certificates, the Exchange Agent shall
deliver to the record holders thereof, without interest, ADRs representing
whole CBT ADSs issued in exchange therefor along with payment in lieu of
fractional shares pursuant to Section 1.6(g) hereof and the amount of any
such dividends or other distributions with a record date after the
Effective Time payable with respect to such whole CBT ADSs.
(e) Transfers of Ownership. If ADRs representing CBT ADSs are to be
issued in a name other than that in which the Certificates surrendered in
exchange therefor are registered, it will be a condition of the issuance
thereof that the Certificates so surrendered will be properly endorsed and
otherwise in proper form for transfer and that the persons requesting such
exchange will have paid to CBT or any agent designated by it any transfer
or other taxes required by reason of the issuance of ADRS representing CBT
ADSs in any name other than that of the registered holder of the
Certificates surrendered, or established to the satisfaction of CBT or any
agent designated by it that such tax has been paid or is not payable.
(f) No Liability. Notwithstanding anything to the contrary in this
Section 1.7, neither the Exchange Agent, CBT, the Surviving Corporation nor
any party hereto shall be liable to a holder of CBT ADSs or ForeFront
Common Stock for any amount properly paid to a public official pursuant to
any applicable abandoned property, escheat or similar law.
1.8 No Further Ownership Rights in ForeFront Common Stock. All CBT ADSs
issued in accordance with the terms hereof (including any cash paid in respect
thereof pursuant to Section 1.6(g) and 1.7(d)) shall be deemed to have been
issued in full satisfaction of all rights pertaining to such shares of
ForeFront Common Stock, and there shall be no further registration of
transfers on the records of the Surviving Corporation of shares of ForeFront
Common Stock that were outstanding immediately prior to the Effective Time. If
after the Effective Time Certificates are presented to the Surviving
Corporation for any reason, they shall be canceled and exchanged as provided
in this Article I.
1.9 Lost, Stolen or Destroyed Certificates. In the event any Certificates
shall have been lost, stolen or destroyed, the Exchange Agent shall issue in
exchange for such lost, stolen or destroyed Certificates, upon the making of
an affidavit of that fact by the holder thereof, ADRs representing the CBT
ADSs into which the shares of ForeFront Common Stock represented by such
Certificates were converted pursuant to Section 1.6, cash for fractional
shares, if any, as may be required pursuant to Section 1.6(g) and any
dividends or distributions payable pursuant to Section 1.7(d); provided,
however, that CBT may, in its discretion and as a condition precedent to the
issuance of such ADRs representing CBT ADSs, require the owner of such lost,
stolen or destroyed Certificates to deliver a bond in such sum as it may
reasonably direct as indemnity against any claim that may be made against CBT,
the Surviving Corporation or the Exchange Agent with respect to the
Certificates alleged to have been lost, stolen or destroyed.
1.10 Tax and Accounting Consequences.
(a) The parties hereto intend that the Merger shall constitute a
reorganization within the meaning of Section 368 of the Code. The parties
hereto adopt this Agreement as a "plan of reorganization" within the
meaning of Sections 1.368-2(g) and 1.368-3(a) of the United States Treasury
Regulations.
(b) The parties hereto intend that the Merger shall qualify for
accounting treatment as a pooling-of-interests.
1.11 Taking of Necessary Action; Further Action. If, at any time after the
Effective Time, any further action is necessary or desirable to carry out the
purposes of this Agreement and to vest the Surviving Corporation with full
right, title and possession to all assets, property, rights, privileges,
powers and franchises of ForeFront and Merger Sub, the officers and directors
of ForeFront and Merger Sub will take all such lawful and necessary action.
CBT shall cause Merger Sub to perform all of its obligations relating to this
Agreement and the transactions contemplated thereby.
A-4
<PAGE>
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF FOREFRONT
ForeFront represents and warrants to CBT and Merger Sub, subject to the
exceptions specifically disclosed in writing in the disclosure schedule and
referencing a specific representation supplied by ForeFront to CBT dated as of
the date hereof and certified by a duly authorized officer of ForeFront (the
"FOREFRONT SCHEDULES"), as follows:
2.1 Organization of ForeFront.
(a) ForeFront and each of its subsidiaries is a corporation or other
legal entity duly organized, validly existing and in good standing under
the laws of the jurisdiction in which it is organized; has the corporate or
other power and authority to own, lease and operate its assets and property
and to carry on its business as now being conducted; and is duly qualified
or licensed to do business and is in good standing (with respect to
jurisdictions which recognize such concept) in each jurisdiction where the
character of the properties owned, leased or operated by it or the nature
of its activities makes such qualification or licensing necessary, except
where the failure to be so qualified would not have a Material Adverse
Effect (as defined below) on ForeFront.
(b) ForeFront has delivered to CBT a true and complete list of all of
ForeFront's subsidiaries as of the date of this Agreement, indicating the
jurisdiction of organization of each subsidiary and ForeFront's equity
interest therein.
(c) ForeFront has delivered or made available to CBT a true and correct
copy of the Certificate of Incorporation and Bylaws of ForeFront and
similar governing instruments of each of its subsidiaries, each as amended
to date, and each such instrument is in full force and effect. Neither
ForeFront nor any of its subsidiaries is in violation of any of the
provisions of its Certificate of Incorporation or Bylaws or equivalent
governing instruments.
(d) When used in connection with ForeFront, the term "MATERIAL ADVERSE
EFFECT" means, for purposes of this Agreement, any change, event or effect
that is materially adverse to the business, assets (including intangible
assets), financial condition or results of operations of ForeFront and its
subsidiaries taken as a whole, except for those changes, events and effects
that are directly caused by (i) conditions affecting the United States
economy as a whole, (ii) conditions affecting the industry in which
ForeFront competes as a whole, or (iii) delays in customer orders resulting
from announcement and pendency of the Merger, which conditions (in the case
of clause (i) or (ii)) do not affect ForeFront in a disproportionate
manner.
2.2 ForeFront Capital Structure. The authorized capital stock of ForeFront
consists of 20,000,000 shares of Common Stock, $.01 par value per share, of
which there were 6,810,186 shares issued and outstanding as of the date hereof
(excluding 82,145 shares held in treasury), and 5,000,000 shares of Preferred
Stock, $.01 par value per share, of which no shares are issued or outstanding
as of the date hereof. All outstanding shares of ForeFront Common Stock are
duly authorized, validly issued, fully paid and nonassessable and are not
subject to preemptive rights created by statute, the Certificate of
Incorporation or Bylaws of ForeFront or any agreement or document to which
ForeFront is a party or by which it is bound. As of the date hereof, there
were options outstanding to purchase an aggregate of 2,617,230 shares of
ForeFront Common Stock issued to employees, consultants and non-employee
directors pursuant to the ForeFront Stock Option Plans. As of the date hereof,
there were Warrants outstanding to purchase an aggregate of 248,560 shares of
ForeFront Common Stock. As of the date hereof, there were Exchangeable Shares
outstanding exchangeable for an aggregate of 557,413 shares of ForeFront
Common Stock. All shares of ForeFront Common Stock subject to issuance as
aforesaid, upon issuance on the terms and conditions specified in the
instruments pursuant to which they are issuable, would be duly authorized,
validly issued, fully paid and nonassessable. The ForeFront Schedules list for
each person who
A-5
<PAGE>
held options to acquire shares of ForeFront Common Stock as of the date
hereof, the name of the holder of such option, the exercise price of such
option and the number of shares issuable upon exercise of such option. The
vesting of all such options will accelerate at the Effective Time by the
express terms of the ForeFront Stock Options Plans pursuant to which such
options were granted. None of the stock option agreements that evidence
options granted under the ForeFront Stock Option Plans provide that such
options will not accelerate upon the closing of the Merger. The ForeFront
Schedules list for each person who held Warrants to acquire shares of
ForeFront Common Stock as of the date hereof, the name of the holder of such
Warrant, the exercise price of such Warrant and the number of shares issuable
upon exercise of such Warrants. There are no equity securities, partnership
interests or similar ownership interests of any class of ForeFront, or any
securities exchangeable or convertible into or exercisable for such equity
securities, partnership interests or similar ownership interests, issued,
reserved for issuance or outstanding except as set forth in this Section 2.2.
2.3 Obligations With Respect to Capital Stock. Except (i) for the
Exchangeable Shares, (ii) for securities ForeFront owns, directly or
indirectly through one or more subsidiaries, and (iii) for shares of capital
stock or other similar ownership interests of certain subsidiaries of
ForeFront that are owned by certain nominee equity holders as required by the
applicable law of the jurisdiction of organization of such subsidiaries, as of
the date of this Agreement, there are no equity securities, partnership
interests or similar ownership interests of any class of any subsidiary of
ForeFront, or any security exchangeable or convertible into or exercisable for
such equity securities, partnership interests or similar ownership interests,
issued, reserved for issuance or outstanding. Except as set forth in Section
2.2, there are no options, warrants, equity securities, partnership interests
or similar ownership interests, calls, rights (including preemptive rights),
commitments or agreements of any character to which ForeFront or any of its
subsidiaries is a party or by which it is bound obligating ForeFront or any of
its subsidiaries to issue, deliver or sell, or cause to be issued, delivered
or sold, or repurchase, redeem or otherwise acquire, or cause the repurchase,
redemption or acquisition of, any shares of capital stock, partnership
interests or similar ownership interests of ForeFront or any of its
subsidiaries or obligating ForeFront or any of its subsidiaries to grant,
extend, accelerate the vesting of or enter into any such option, warrant,
equity security, call, right, commitment or agreement. As of the date of this
Agreement, except as disclosed in the ForeFront Schedules or otherwise
contemplated by this Agreement, there are no registration rights and, to the
knowledge of ForeFront, there are no voting trusts, proxies or other
agreements or understandings to which ForeFront is a party or by which it is
bound with respect to any equity security of any class of ForeFront or with
respect to any equity security, partnership interest or similar ownership
interest of any class of any of its subsidiaries. Stockholders of ForeFront
are not entitled to dissenters rights of appraisal under applicable state law.
2.4 Authority.
(a) ForeFront has all requisite corporate power and authority to enter
into this Agreement and, subject to the approval and adoption of this
Agreement and the approval of the Merger by ForeFront's stockholders, to
consummate the transactions contemplated hereby. The execution and delivery
of this Agreement and the consummation of the transactions contemplated
hereby have been duly authorized by all necessary corporate action on the
part of ForeFront, subject only to the approval and adoption of this
Agreement and the approval of the Merger by ForeFront's stockholders and
the filing of the Certificate of Merger pursuant to Delaware Law. A vote of
the holders of at least a majority of the outstanding shares of the
ForeFront Common Stock is required for ForeFront's stockholders to approve
and adopt this Agreement and approve the Merger. This Agreement has been
duly executed and delivered by ForeFront and, assuming the approval and
adoption of this Agreement by ForeFront's stockholders and the due
authorization, execution and delivery by CBT and Merger Sub, constitutes
the valid and binding obligation of ForeFront, enforceable against
ForeFront in accordance with its terms, except as enforceability may be
limited by bankruptcy and other similar laws and general principles of
equity. The execution and delivery of this Agreement does not, and the
consummation of the transactions contemplated by this Agreement will not,
(i) conflict with or violate the Certificate of Incorporation or Bylaws of
ForeFront or the equivalent organizational documents of any of its
subsidiaries, (ii) subject to obtaining the approval and adoption of this
Agreement and the approval of the Merger by ForeFront's stockholders as
contemplated in Section 5.2 and compliance with
A-6
<PAGE>
the requirements set forth in Section 2.4(b) below, conflict with or
violate any law, rule, regulation, order, judgment or decree applicable to
ForeFront or any of its subsidiaries or by which ForeFront or any of its
subsidiaries or any of their respective properties is bound or affected, or
(iii) result in any material breach of or constitute a material default (or
an event that with notice or lapse of time or both would become a material
default) under, or impair ForeFront's rights or alter the rights or
obligations of any third party under, or give to others any rights of
termination, amendment, acceleration or cancellation of, or result in the
creation of a material lien or encumbrance on any of the material
properties or assets of ForeFront or any of its subsidiaries pursuant to,
any material note, bond, mortgage, indenture, contract, agreement, lease,
license, permit, franchise or other instrument or obligation to which
ForeFront or any of its subsidiaries is a party or by which ForeFront or
any of its subsidiaries or its or any of their respective properties are
bound or affected. The ForeFront Schedules list all consents, waivers and
approvals under any of ForeFront's or any of its subsidiaries' agreements,
contracts, licenses or leases required to be obtained in connection with
the consummation of the transactions contemplated hereby, which, if
individually or in the aggregate not obtained, would result in a material
loss of benefits or any material liability to ForeFront, ForeFront's
subsidiaries, CBT or the Surviving Corporation as a result of the Merger.
(b) No consent, approval, order or authorization of, or registration,
declaration or filing with any court, administrative agency or commission
or other governmental authority or instrumentality, foreign or domestic
("GOVERNMENTAL ENTITY"), is required to be obtained or made by ForeFront in
connection with the execution and delivery of this Agreement or the
consummation of the Merger, except for (i) the filing of the Certificate of
Merger with the Secretary of State of the State of Delaware, (ii) the
filing of the Proxy Statement (as defined in Section 2.19) with the
Securities and Exchange Commission ("SEC") in accordance with the
Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), (iii)
such consents, approvals, orders, authorizations, registrations,
declarations and filings as may be required under applicable federal,
foreign and state securities (or related) laws and the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR ACT"), and the
securities or antitrust laws of any foreign country, and (iv) such other
consents, authorizations, filings, approvals and registrations which if not
obtained or made would not be material to ForeFront or CBT or have a
material adverse effect on the ability of the parties to consummate the
Merger.
2.5 SEC Filings; ForeFront Financial Statements.
(a) ForeFront has filed all forms, reports and documents required to be
filed by ForeFront with the SEC since January 1, 1996 and has made
available to CBT such forms, reports and documents in the form filed with
the SEC. All such required forms, reports and documents (including those
that ForeFront may file subsequent to the date hereof) are referred to
herein as the "FOREFRONT SEC REPORTS." As of their respective dates, the
ForeFront SEC Reports (i) were prepared in all material respects in
accordance with the requirements of the Securities Act of 1933, as amended
(the "SECURITIES ACT"), or the Exchange Act, as the case may be, and the
rules and regulations of the SEC thereunder applicable to such ForeFront
SEC Reports and (ii) did not at the time they were filed (or if amended or
superseded by a filing prior to the date of this Agreement, then on the
date of such filing) contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary in
order to make the statements therein, in the light of the circumstances
under which they were made, not misleading. None of ForeFront's
subsidiaries is required to file any forms, reports or other documents with
the SEC.
(b) Each of the consolidated financial statements (including, in each
case, any related notes thereto) contained in the ForeFront SEC Reports,
including any ForeFront SEC Reports filed after the date hereof until the
Closing, and in the audited financial statements as of and for the periods
ending December 31, 1997, previously provided to CBT (collectively the
"FOREFRONT FINANCIALS"): (x) complied as to form in all material respects
with the published rules and regulations of the SEC with respect thereto,
(y) was prepared in accordance with generally accepted accounting
principles ("GAAP") applied on a consistent basis throughout the periods
involved (except as may be indicated in the notes thereto or, in the case
of unaudited interim financial statements, as may be permitted by the SEC
on Form 10-QSB under the Exchange Act) and (z) fairly presented the
consolidated financial position of ForeFront and its subsidiaries
A-7
<PAGE>
as at the respective dates thereof and the consolidated results of
ForeFront's operations and cash flows for the periods indicated, except
that the unaudited interim financial statements may not contain footnotes
and were or are subject to normal and recurring year-end adjustments. The
balance sheet of ForeFront contained in the ForeFront Financials as of
December 31, 1997 is hereinafter referred to as the "FOREFRONT BALANCE
SHEET." Neither ForeFront nor any of its subsidiaries has any liabilities
(absolute, accrued, contingent or otherwise) of a nature required to be
disclosed on a balance sheet or in the related notes to the consolidated
financial statements prepared in accordance with GAAP which are,
individually or in the aggregate, material to the business, results of
operations or financial condition of ForeFront and its subsidiaries taken
as a whole, except for (i) liabilities identified in the ForeFront Balance
Sheet, or (ii) liabilities incurred since the date of the ForeFront Balance
Sheet in the ordinary course of business consistent with past practices.
(c) ForeFront has heretofore furnished to CBT a complete and correct copy
of any amendments or modifications, which have not yet been filed with the
SEC but which are required to be filed, to agreements, documents or other
instruments which previously had been filed by ForeFront with the SEC
pursuant to the Securities Act or the Exchange Act.
2.6 Absence of Certain Changes or Events. Since the date of the ForeFront
Balance Sheet there has not been: (i) any Material Adverse Effect on
ForeFront, (ii) any material change by ForeFront in its accounting methods,
principles or practices, except as required by concurrent changes in GAAP, or
(iii) any material revaluation by ForeFront of any of its assets, including,
without limitation, writing down the value of capitalized inventory or writing
off notes or accounts receivable other than in the ordinary course of
business.
2.7 Taxes. ForeFront and each of its subsidiaries, and any consolidated,
combined, unitary or aggregate group for Tax (as defined below) purposes of
which ForeFront or any of its subsidiaries is or has been a member, have
timely filed all Tax Returns required to be filed by them and have paid all
Taxes shown thereon to be due. ForeFront has provided adequate accruals in
accordance with generally accepted accounting principles in its financial
statements for any Taxes that have not been paid, whether or not shown as
being due on any Tax Returns. There is (i) no material claim for Taxes that is
a lien against the property of ForeFront or any of its subsidiaries or is
being asserted against ForeFront or any of its subsidiaries other than liens
for Taxes not yet due and payable, (ii) no audit of any Tax Return of
ForeFront or any of its subsidiaries being conducted by a Tax authority, (iii)
no extension of the statute of limitations on the assessment of any Taxes
granted by ForeFront or any of its subsidiaries and currently in effect, and
(iv) no agreement, contract or arrangement to which ForeFront or any of its
subsidiaries is a party that may result in the payment of any amount that
would not be deductible by reason of Sections 280G (other than agreements or
arrangements for which shareholder approval meeting the requirements of
Section 280G(b)(5)(B) will be obtained prior to the Closing) or 404 of the
Code. ForeFront has not been and will not be required to include any material
adjustment in Taxable income for any Tax period (or portion thereof) pursuant
to Section 481 or 263A of the Code or any comparable provision under state or
foreign Tax laws as a result of transactions, events or accounting methods
employed prior to the Merger. Neither ForeFront nor any of its subsidiaries is
a party to any tax reduction or tax allocation agreement nor does ForeFront or
any of its subsidiaries owe any amount under any such agreement. For purposes
of this Agreement, the following terms have the following meanings: "TAX"
(and, with correlative meaning, "Taxes" and "Taxable") means (i) any net
income, alternative or add-on minimum tax, gross income, gross receipts,
sales, use, ad valorem, transfer, franchise, profits, license, withholding,
payroll, employment, excise, severance, stamp, occupation, premium, property,
environmental or windfall profit tax, custom, duty or other tax governmental
fee or other like assessment or charge of any kind whatsoever, together with
any interest or any penalty, addition to tax or additional amount imposed by
any Governmental Entity (a "TAX AUTHORITY") responsible for the imposition of
any such tax (domestic or foreign), (ii) any liability for the payment of any
amounts of the type described in (i) as a result of being a member of an
affiliated, consolidated, combined or unitary group for any Taxable period and
(iii) any liability for the payment of any amounts of the type described in
(i) or (ii) as a result of any express or implied obligation to indemnify any
other person. As used herein, "TAX RETURN" shall mean any return, statement,
report or form (including, without limitation,) estimated Tax Returns and
reports, withholding Tax Returns and reports and information reports and
Returns required to be filed with respect to
A-8
<PAGE>
Taxes. ForeFront and each of its subsidiaries are in full compliance with all
terms and conditions of any Tax exemptions, Tax holiday or other Tax reduction
agreement or order of a foreign government and the consummation of the Merger
shall not have any adverse effect on the continued validity and effectiveness
of any such Tax exemptions, Tax holiday or other Tax reduction agreement or
order.
2.8 Title to Properties; Absence of Liens and Encumbrances.
(a) ForeFront does not own any real property as of the date of this
Agreement. ForeFront has previously provided CBT with copies of all
material real property leases to which ForeFront is a party as of the date
of this Agreement and each amendment thereto that is in effect as of the
date of this Agreement. All such current material leases are in full force
and effect, are valid and effective in accordance with their respective
terms, and there is not, under any of such leases, any existing default or
event of default (or event which with notice or lapse of time, or both,
would constitute a default) that would give rise to a claim in an amount
greater than $1 million.
(b) ForeFront has good and valid title to, or, in the case of leased
properties and assets, valid leasehold interests in, all of its tangible
properties and assets, real, personal and mixed, used or held for use in
its business, free and clear of any liens, pledges, charges, claims,
security interests or other encumbrances of any sort ("LIENS"), except as
reflected in the ForeFront Financials and except for liens for taxes not
yet due and payable and such Liens or other imperfections of title and
encumbrances, if any, which are not material in character, amount or
extent, and which do not materially detract from the value, or materially
interfere with the present use, of the property subject thereto or affected
thereby.
2.9 Intellectual Property. For the purposes of this Agreement, the following
terms have the following definitions:
"INTELLECTUAL PROPERTY" shall mean any or all of the following and all
rights therein: (i) all United States, international and foreign
patents and applications (including provisional applications); (ii) all
inventions (whether patentable or not), invention disclosures, trade
secrets, proprietary information, know how, technology, technical data
and customer lists, and all documentation relating to any of the
foregoing and all improvements thereto; (iii) all copyrights, copyright
registrations and applications therefor, and all other rights
corresponding thereto throughout the world; (iv) all industrial designs
and any registrations and applications therefor throughout the world
that have not been withdrawn; (v) all trade names, logos, common law
trademarks and service marks, trademark and service mark registrations
and applications therefor throughout the world; (vi) all databases and
data collections and all rights therein throughout the world; and (vii)
any similar or equivalent rights to any of the foregoing anywhere in
the world.
"FOREFRONT INTELLECTUAL PROPERTY" shall mean any Intellectual Property
that is owned by, or exclusively licensed to, ForeFront.
"REGISTERED INTELLECTUAL PROPERTY" means all United States,
international and foreign: (i) patents and patent applications
(including provisional applications) that have not been withdrawn; (ii)
registered trademarks, applications to register trademarks, intent- to-
use applications, or other registrations or applications related to
trademarks that have not been withdrawn; (iii) registered copyrights
and applications for copyright registration; and (iv) any other
Intellectual Property that is the subject of an application,
certificate, filing, registration or other document issued, filed with,
or recorded by any state, government or other public legal authority.
(a) Section 2.9 of the ForeFront Schedules lists all of the Registered
Intellectual Property owned by, or filed in the name of, ForeFront (the
"FOREFRONT REGISTERED INTELLECTUAL PROPERTY"). ForeFront has complied in
all material respects with all applicable disclosure requirements and has
not committed any fraudulent act in the application for and maintenance of
any Registered Intellectual Property of ForeFront. Each material item of
ForeFront Registered Intellectual Property is valid and subsisting, all
necessary
A-9
<PAGE>
registration, maintenance and renewal fees currently due in connection with
such material Registered Intellectual Property have been paid and all
necessary documents and certificates in connection with such material
Registered Intellectual Property have been filed with the relevant patent,
copyright, trademark or other authorities in the United States or foreign
jurisdictions, as the case may be, for the purposes of maintaining such
material Registered Intellectual Property.
(b) Section 2.9 of the ForeFront Schedules lists all proceedings or
actions before any court, tribunal (including the United States Patent and
Trademark Office ("PTO") or equivalent authority anywhere in the world)
related to any ForeFront Intellectual Property. No material ForeFront
Intellectual Property or product or service of ForeFront is subject to any
proceeding or outstanding decree, order, judgment, agreement, or
stipulation restricting in any manner the use, transfer, or licensing
thereof by ForeFront, or which may affect the validity, use or
enforceability of such material ForeFront Intellectual Property. Except as
set forth in Section 2.9 of the ForeFront Schedules, neither ForeFront nor,
to ForeFront's knowledge, any customer of ForeFront has received notice
from any third party that the operation of the business of ForeFront or any
act, product or service of ForeFront, infringes or misappropriates the
Intellectual Property of any third party or constitutes unfair competition
or trade practices under the laws of any jurisdiction. Except as set forth
in Section 2.9 of the ForeFront Schedules, to the knowledge of ForeFront,
no Person has infringed or misappropriated or is infringing or
misappropriating any material ForeFront Intellectual Property.
(c) ForeFront owns or has adequate rights to all Intellectual Property
necessary to the conduct of its business as it currently is conducted or is
reasonably contemplated to be conducted, including, without limitation, the
design, development, manufacture and sale of all material products
currently manufactured or sold by ForeFront or under development by
ForeFront and the performance of all services provided by ForeFront. Except
as set forth in Section 2.9 of ForeFront Schedules: (i) ForeFront owns or
has adequate rights to each material item of ForeFront Intellectual
Property, including all ForeFront Registered Intellectual Property listed
in Section 2.9 of the ForeFront Schedules, free and clear of any lien or
encumbrance (excluding licenses and related restrictions); (ii) ForeFront
owns or has adequate rights to all trademarks and trade names used in
connection with the operation or conduct of the business of ForeFront,
including the sale of any products or the provision of any services by
ForeFront; and (iii) ForeFront owns or has adequate rights to all material
copyrighted works that are ForeFront products or which ForeFront otherwise
expressly purports to own.
(d) To the extent that any material work, invention, or material has been
developed or created by a third party for ForeFront, ForeFront has a
written agreement with such third party with respect thereto and ForeFront
thereby either (i) has obtained ownership of, and is the exclusive owner
of, or (ii) has obtained a license to all such third party's Intellectual
Property in such work, material or invention by operation of law or by
valid assignment, to the extent it is legally possible to do so. ForeFront
has taken reasonable steps to protect ForeFront's rights in ForeFront's
confidential information and trade secrets that it wishes to protect or any
trade secrets or confidential information of third parties provided to
ForeFront. Without limiting the foregoing, ForeFront has and enforces a
policy requiring each employee and contractor to execute a proprietary
information and confidentiality agreement substantially in ForeFront's
standard form and all current and former employees and contractors of
ForeFront have executed such an agreement, except where the failure to do
so is not reasonably expected to be material to ForeFront.
(e) Section 2.9 of the ForeFront Schedules lists all material contracts,
licenses and agreements to which ForeFront is a party (i) with respect to
ForeFront Intellectual Property licensed or transferred to any third party
(other than end-user licenses in the ordinary course) or (ii) pursuant to
which a third party has licensed or transferred any material Intellectual
Property to ForeFront. Except as set forth in Section 2.9 of the ForeFront
Schedules, (i) ForeFront has not transferred ownership of, or granted any
rights to use, any of the material Intellectual Property of ForeFront; and
(ii) ForeFront has not granted to any Person, nor authorized any Person to
retain, any rights in the material Intellectual Property of ForeFront.
Section 2.9 of the ForeFront Schedules lists or specifically refers to all
contracts, licenses and agreements between ForeFront and any third party
wherein or whereby ForeFront has agreed to, or assumed, any material
A-10
<PAGE>
obligation or duty to warrant, indemnify, hold harmless or otherwise assume
or incur any obligation or liability with respect to the infringement or
misappropriation by ForeFront or such third party of the Intellectual
Property of any third party, except such contracts entered into in the
ordinary course of ForeFront's business. Following the Closing Date, the
Surviving Corporation will be permitted to exercise all of ForeFront's
rights under the contracts, licenses and agreements required to be listed
in Section 2.9 of the ForeFront Schedules to the same extent ForeFront
would have been able had the consummation of the transactions contemplated
by this Agreement not occurred and without the payment of any additional
amounts or consideration other than ongoing fees, royalties or payments
which ForeFront would otherwise be required to pay.
2.10 Compliance; Permits; Restrictions.
(a) Neither ForeFront nor any of its subsidiaries is, in any material
respect, in conflict with, or in default or in violation of (i) any law,
rule, regulation, order, judgment or decree applicable to ForeFront or any
of its subsidiaries or by which ForeFront or any of its subsidiaries or any
of their respective properties is bound or affected, or (ii) any note,
bond, mortgage, indenture, contract, agreement, lease, license, permit,
franchise or other instrument or obligation to which ForeFront or any of
its subsidiaries is a party or by which ForeFront or any of its
subsidiaries or its or any of their respective properties is bound or
affected, except for conflicts, violations and defaults that (individually
or in the aggregate) would not cause ForeFront to lose benefits aggregating
to $1 million or more, or cause ForeFront to incur liabilities aggregating
to $1 million or more. There is no material agreement, judgment,
injunction, order or decree binding upon ForeFront or any of its
subsidiaries which has or could reasonably be expected to have the effect
of prohibiting or materially impairing any business practice of ForeFront
or any of its subsidiaries, any acquisition of material property by
ForeFront or any of its subsidiaries or the conduct of business by
ForeFront as currently conducted.
(b) ForeFront and its subsidiaries hold, to the extent legally required,
all permits, licenses, variances, exemptions, orders and approvals from
Governmental Entities that are material and required for the operation of
the business of ForeFront as currently conducted (collectively, the
"FOREFRONT PERMITS") and are in compliance in all material respects with
the terms of the ForeFront Permits.
2.11 Litigation. There is no action, suit, proceeding, claim, arbitration or
investigation pending or, to ForeFront's knowledge, threatened against
ForeFront or any of its subsidiaries seeking to restrain or enjoin the
consummation of the Merger or which would be likely to be material to
ForeFront. No Governmental Entity has at any time since January 1, 1997
challenged or questioned the legal right of ForeFront to manufacture, offer or
sell any of its products in the present manner or style thereof. To
ForeFront's knowledge, no investigation or review by any Governmental Entity
is pending or threatened against ForeFront or any of its subsidiaries, nor has
any Governmental Entity indicated an intention to conduct an investigation of
ForeFront or any of its subsidiaries.
2.12 Brokers' and Finders' Fees. Except for fees payable to Piper Jaffray
Inc. pursuant to an engagement letter dated February 6, 1998, a copy of which
has been provided to CBT, ForeFront has not incurred, nor will it incur,
directly or indirectly, any liability for brokerage or finders' fees or
agents' commissions or any similar charges in connection with this Agreement
or any transaction contemplated hereby.
2.13 Employee Benefit Plans.
(a) The ForeFront Schedules contain an accurate and complete list of each
plan, program, policy, practice, contract, or agreement in effect as of the
date of this Agreement providing for compensation, severance, termination
pay, performance awards, stock or stock-related awards, fringe benefits or
other employee benefits of any kind, whether formal or informal, written or
otherwise, funded or unfunded and whether or not legally binding, including
without limitation, each "employee benefit plan" within the meaning of
Section 3(3) of ERISA, which is being maintained or contributed to by
ForeFront or any trade
A-11
<PAGE>
or business which is under common control with ForeFront within the meaning
of Section 414 of the Code (an "AFFILIATE") (or which has been maintained
or contributed to and under which ForeFront has, as of the date of this
Agreement, material obligations under) for the benefit of any current,
former, or retired employee, officer, or director of ForeFront or any
Affiliate (the "FOREFRONT EMPLOYEE PLANS"), together with a schedule of all
material liabilities, whether or not accrued, under each such ForeFront
Employee Plan. As of the date of this Agreement, ForeFront does not have
any plan, commitment or intention, whether legally binding or not, to
establish any new ForeFront Employee Plan, to materially modify any
ForeFront Employee Plan (except to the extent required by law or to conform
any such ForeFront Employee Plan to the requirements of any applicable law,
in each case as previously disclosed to CBT in writing, or as required by
this Agreement), or to enter into any ForeFront Employee Plan.
(b) ForeFront has provided or made available to CBT (i) correct and
complete copies of all documents embodying each ForeFront Employee Plan
including all amendments thereto; (ii) the most recent annual actuarial
valuations, if any, prepared for each ForeFront Employee Plan; (iii) the
three most recent annual reports (Series 5500 and all schedules thereto),
if any, required under ERISA or the Code in connection with each ForeFront
Employee Plan or related trust; (iv) if the ForeFront Employee Plan is
funded, the most recent annual and periodic accounting of ForeFront
Employee Plan assets; (v) the most recent summary plan description together
with the most recent summary of material modifications, if any, required
under ERISA with respect to each ForeFront Employee Plan; (vi) all IRS
determination letters and rulings issued to ForeFront relating to ForeFront
Employee Plans; (vii) all material agreements and contracts relating to
each ForeFront Employee Plan, including but not limited to, administration
service agreements, group annuity contracts and group insurance contracts;
(viii) all material communications from ForeFront to any employees relating
to any amendments, terminations, establishments, increases or decreases in
benefits, acceleration of payments or vesting schedules or other events
with respect to any ForeFront Employee Plan which would result in any
material liability to ForeFront; and (ix) all registration statements and
the most recent prospectuses prepared in connection with each ForeFront
Employee Plan.
(c) (i) ForeFront has performed in all material respects all obligations
required to be performed by it under, is not in material default or
material violation of, and has no knowledge of any material default or
material violation by any other party to each ForeFront Employee Plan, and
each ForeFront Employee Plan has been established and maintained in all
material respects in accordance with its terms and in compliance with all
applicable laws, statutes, orders, rules and regulations (including any
applicable exemptions thereto), including but not limited to ERISA or the
Code; (ii) each ForeFront Employee Plan intended to qualify under Section
401(a) of the Code and each trust intended to qualify under Section 501(a)
of the Code has either received a favorable determination letter with
respect to each such ForeFront Employee Plan from the Internal Revenue
Service (the "IRS") or has remaining a period of time under applicable
Treasury regulations or IRS pronouncements in which to apply for such a
determination letter and make any amendments necessary to obtain a
favorable determination, and nothing has occurred since the date of such
letter that could reasonably be expected to affect the qualified status of
such plan; (iii) no "prohibited transaction", within the meaning of Section
4975 of the Code or Sections 406 or 407 of ERISA, and not otherwise exempt
under Section 408 of ERISA, or Section 4975 of the Code has occurred with
respect to any ForeFront Employee Plan; (iv) there are no actions, suits or
claims pending or, to the knowledge of ForeFront, threatened in a writing
delivered to ForeFront against any ForeFront Employee Plan or against the
assets of any ForeFront Employee Plan; (v) each ForeFront Employee Plan can
be amended, terminated or otherwise discontinued after the Effective Time
in accordance with its terms, without liability to ForeFront, CBT or any
Affiliate (other than liabilities that may arise in accordance with the
terms of such ForeFront Employee Plan, including ordinary administration
expenses typically incurred in a termination event); (vi) there are no
material inquiries or proceedings pending against ForeFront, or, to the
knowledge of ForeFront or any Affiliate, threatened (by either the IRS or
the United States Department of Labor ("DOL")) in a writing delivered to
ForeFront against ForeFront with respect to any ForeFront Employee Plan;
and (vii) neither ForeFront nor any Affiliate is subject to any penalty or
tax in excess of $1 million with respect to any ForeFront Employee Plan
under Section 502(i) of ERISA or Section 4975 through 4980 of the Code.
A-12
<PAGE>
(d) ForeFront does not now, nor has it ever, maintained, established,
sponsored, participated in, or contributed to, any pension plan which is
subject to Title IV of ERISA or Section 412 of the Code.
(e) At no time has ForeFront contributed to or been requested to
contribute to any "multi-employer plan," as defined in Section 3(37) of
ERISA.
(f) Except as set forth in Section 2.13(f) of the ForeFront Schedules, no
ForeFront Employee Plan provides, or has any liability to provide, life
insurance or medical or other employee welfare benefits to any employee
upon his or her retirement or termination of employment for any reason,
except as may be required by the Consolidated Omnibus Budget Reconciliation
Act of 1985 ("COBRA") or other applicable statute, and ForeFront has never
represented, promised or contracted (whether in oral or written form) to
any employee (either individually or to employees as a group) that such
employee(s) would be provided with life insurance or medical or other
employee welfare benefits upon their retirement or termination of
employment, except to the extent required by statute.
(g) Neither ForeFront nor any Affiliate has, prior to the Effective Time
and in any material respect, violated any of the health care continuation
requirements of COBRA or any similar provisions of state law applicable to
its employees.
(h) Except as set forth in Section 2.13(h) of the ForeFront Schedules,
the execution of this Agreement and the consummation of the transactions
contemplated hereby will not constitute an event under any ForeFront
Employee Plan, trust or loan that will or may result in any payment
(whether of severance pay or otherwise), acceleration, forgiveness of
indebtedness, vesting, distribution, increase in benefits or obligation to
fund benefits with respect to any current, former or retired employee of
ForeFront, except (i) to the extent required by statute and (ii) for the
acceleration of options outstanding under the ForeFront Stock Option Plans
pursuant to the terms of such plans.
(i) No payment or benefit which will or may be made by ForeFront or CBT
or any of their respective affiliates with respect to any employee as a
result of the transactions contemplated by this Agreement will be
characterized as an "excess parachute payment," within the meaning of
Section 280G(b)(1) of the Code.
2.14 Employees; Labor Matters. To ForeFront's knowledge, no employee of
ForeFront has violated any employment contract, patent disclosure agreement or
non-competition agreement between such employee and any former employer of
such employee due to such employee being employed by ForeFront and disclosing
to ForeFront trade secrets or proprietary information of such employer. To
ForeFront's knowledge, there are no activities or proceedings of any labor
union to organize any employees of ForeFront or any of its subsidiaries and
there are no strikes, or material slowdowns, work stoppages or lockouts, or
threats thereof by or with respect to any employees of ForeFront or any of its
subsidiaries. ForeFront is not, and has never been, a party to any collective
bargaining agreement. ForeFront and its subsidiaries are in compliance in all
material respects with all applicable laws regarding employment practices,
terms and conditions of employment, and wages and hours (including, without
limitation, ERISA, WARN or any similar state or local law).
2.15 Environmental Matters.
(a) Hazardous Material. Except as would not reasonably be likely to
result in material liability to ForeFront, no underground storage tanks and
no amount of any substance that has been designated by any Governmental
Entity or by applicable federal, state or local law to be radioactive,
toxic, hazardous or otherwise a danger to health or the environment,
including, without limitation, PCBs, asbestos, petroleum, urea-formaldehyde
and all substances listed as hazardous substances pursuant to the
Comprehensive Environmental Response, Compensation, and Liability Act of
1980, as amended, or defined as a hazardous waste pursuant to the United
States Resource Conservation and Recovery Act of 1976, as amended, and the
regulations promulgated pursuant to said laws, but excluding office and
janitorial supplies (a "HAZARDOUS MATERIAL"), are present, as a result of
the actions of ForeFront or any of its subsidiaries or any affiliate of
ForeFront, or, to ForeFront's knowledge, as a result of any actions of any
third party or otherwise, in, on or under any property, including the land
and the improvements, ground water and surface water thereof, that
ForeFront or any of its subsidiaries has at any time owned, operated,
occupied or leased.
A-13
<PAGE>
(b) Hazardous Materials Activities. Except as would not reasonably be
likely to result in liability to ForeFront in excess (either individually
or in the aggregate) of $1 million (i) neither ForeFront nor any of its
subsidiaries has transported, stored, used, manufactured, disposed of,
released or exposed its employees or others to Hazardous Materials in
violation of any law in effect on or before the Closing Date, and (ii)
neither ForeFront nor any of its subsidiaries has disposed of, transported,
sold, used, released, exposed its employees or others to or manufactured
any product containing a Hazardous Material (collectively "HAZARDOUS
MATERIALS ACTIVITIES") in violation of any rule, regulation, treaty or
statute promulgated by any Governmental Entity in effect prior to or as of
the date hereof to prohibit, regulate or control Hazardous Materials or any
Hazardous Material Activity.
(c) Permits. ForeFront and its subsidiaries currently hold all material
environmental approvals, permits, licenses, clearances and consents (the
"FOREFRONT ENVIRONMENTAL PERMITS") necessary for the conduct of ForeFront's
and its subsidiaries' Hazardous Material Activities and other businesses of
ForeFront and its subsidiaries as such activities and businesses are
currently being conducted. ForeFront and its subsidiaries are in compliance
in all material respects with the terms of the ForeFront Environmental
Permits.
(d) Environmental Liabilities. No action, proceeding, revocation
proceeding, amendment procedure, writ, claim or injunction is pending, or
to ForeFront's knowledge, threatened by any Governmental Entity against
ForeFront or any of its subsidiaries concerning any ForeFront Environmental
Permit, Hazardous Material or any Hazardous Materials Activity of ForeFront
or any of its subsidiaries. ForeFront is not aware of any fact or
circumstance which could reasonably involve ForeFront or any of its
subsidiaries in any environmental litigation or impose upon ForeFront any
material environmental liability.
2.16 Agreements, Contracts and Commitments. Except as set forth in Section
2.16 of the ForeFront Schedules, neither ForeFront nor any of its subsidiaries
is a party to or is bound by:
(a) any employment or consulting agreement, contract or commitment with
any officer or director level employee or member of ForeFront's Board of
Directors, other than those that are terminable by ForeFront or any of its
subsidiaries on no more than thirty days notice without liability or
financial obligation, except to the extent general principles of wrongful
termination law may limit ForeFront's or any of its subsidiaries' ability
to terminate employees at will;
(b) any agreement or plan including, without limitation, any stock option
plan, stock appreciation right plan or stock purchase plan, any of the
benefits of which will be increased, or the vesting of benefits of which
will be accelerated, by the occurrence of any of the transactions
contemplated by this Agreement or the value of any of the benefits of which
will be calculated on the basis of any of the transactions contemplated by
this Agreement;
(c) any agreement of indemnification or any guaranty other than: (i) any
agreement of indemnification or guaranty entered into in the ordinary
course of business, (ii) any agreement of indemnification entered into in
connection with the sale or lease of hardware products (or in connection
with the sale, lease or license of the software related to or incorporated
in hardware products) in the ordinary course of business, (iii) any
agreement of indemnification entered into in connection with services
performed in the ordinary course of business, and (v) any indemnification
agreement between ForeFront or any of its subsidiaries and any of their
respective officers, directors or employees;
(d) any agreement, contract or commitment containing any covenant
limiting in any material respect the right of ForeFront or any of its
subsidiaries to engage in any line of business which is material to
ForeFront and its subsidiaries taken as a whole or to compete with any
person or granting any exclusive distribution rights;
(e) any agreement, contract or commitment currently in force (i) relating
to the disposition or acquisition by ForeFront or any of its subsidiaries
or subsequent parent or sister companies after the date of this Agreement
of a material amount of assets not in the ordinary course of business or
(ii) pursuant to which
A-14
<PAGE>
ForeFront has any material ownership interest in any corporation,
partnership, joint venture or other business enterprise other than its
wholly-owned subsidiaries and ForeFront Canada Ltd;
(f) any joint marketing or development agreement currently in force under
which ForeFront or any of its subsidiaries have continuing material
obligations to jointly market any product, technology or service and which
may not be canceled without penalty upon notice of 90 days or less, or any
agreement pursuant to which ForeFront or any of its subsidiaries have
continuing material obligations to jointly develop any intellectual
property that will not be owned, in whole or in part, by ForeFront or any
of its subsidiaries and which may not be canceled without penalty upon
notice of 90 days or less;
(g) any agreement, contract or commitment currently in force to provide
source code to any third party for any product or technology that is
material to ForeFront and its subsidiaries taken as a whole, except for (i)
any agreement, contract or commitment pursuant to which source code is
provided solely for maintenance purposes, and (ii) any source code escrow
agreement entered into in the ordinary course of business that solely
contains provisions relating to the release of source code if ForeFront
and/or any of its subsidiaries ceases to do business or fails to provide
appropriate maintenance; or
(h) any material agreement, contract or commitment currently in force to
license any third party to manufacture or reproduce any ForeFront product,
service or technology except as a distributor in the normal course of
business.
Neither ForeFront nor any of its subsidiaries, nor to ForeFront's knowledge
any other party to a ForeFront Contract (as defined below), is in breach,
violation or default under, and neither ForeFront nor any of its subsidiaries
has received written notice that it has breached, violated or defaulted under,
any of the material terms or conditions of any of the agreements, contracts or
commitments to which ForeFront or any of its subsidiaries is a party or by
which it is bound that are required to be disclosed in the ForeFront Schedules
pursuant to clauses (a) through (h) above or pursuant to Section 2.9 hereof or
that are otherwise material to ForeFront and its subsidiaries (any such
agreement, contract or commitment, a "FOREFRONT CONTRACT") in such a manner as
would permit any other party to cancel or terminate any such ForeFront
Contract, or would permit any other party to seek damages which would be
reasonably likely to exceed $1 million (for any or all of such breaches,
violations or defaults, in the aggregate).
2.17 Pooling-of-Interests. Neither ForeFront nor any of its directors,
officers, affiliates or stockholders has taken any action which would preclude
CBT's ability to account for the Merger as a pooling-of-interests.
2.18 Change of Control and Non-Compete Payments. The ForeFront Schedules set
forth each plan or agreement pursuant to which any amounts may become payable
(whether currently or in the future) to current or former employees, officers
and directors of ForeFront as a result of or in connection with the Merger.
2.19 Statements; Proxy Statement/Prospectus. The information supplied by
ForeFront for inclusion in the Registration Statement (as defined in Section
3.4(b)) shall not at the time the Registration Statement is filed with the SEC
and at the time it becomes effective under the Securities Act contain any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein not misleading. The information supplied by ForeFront for inclusion in
the proxy statement/prospectus to be sent to the stockholders of ForeFront in
connection with the meeting of ForeFront's stockholders to consider the
approval and adoption of this Agreement and the approval of the Merger (the
"FOREFRONT STOCKHOLDERS' MEETING") (such proxy statement/prospectus as amended
or supplemented is referred to herein as the "PROXY STATEMENT") shall not, on
the date the Proxy Statement is first mailed to ForeFront's stockholders or at
the time of the ForeFront Stockholders' Meeting, contain any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances under which they are made, not false or misleading. The Proxy
Statement will comply as to form in all material respects with the provisions
of the Exchange Act and the rules and regulations thereunder. If at any time
prior to the Effective Time any event relating to ForeFront or any of its
affiliates, officers or directors should be discovered by ForeFront which may
be required to be set forth in an amendment to the Registration Statement or a
supplement to the Proxy Statement, ForeFront shall promptly inform CBT.
Notwithstanding the
A-15
<PAGE>
foregoing, ForeFront makes no representation or warranty with respect to any
information supplied by CBT or Merger Sub which is contained in any of the
foregoing documents.
2.20 Board Approval. The ForeFront Board has, as of the date of this
Agreement, determined (i) that the Merger is fair to, and in the best
interests of ForeFront and its stockholders, and (ii) to recommend that the
stockholders of ForeFront approve and adopt this Agreement and approve the
Merger.
2.21 Fairness Opinion. ForeFront's Board of Directors has received a written
opinion from Piper Jaffray Inc., dated as of the date hereof, to the effect
that, as of the date hereof, the Exchange Ratio is fair to ForeFront's
stockholders from a financial point of view and has delivered to CBT a copy of
such opinion.
2.22 Section 203 of Delaware Law Not Applicable. Assuming the accuracy of
the representation set forth in Section 3.18, the ForeFront Board has taken
all actions so that the restrictions contained in Section 203 of the Delaware
General Corporation Law applicable to a "business combination" (as defined in
such Section 203) will not apply to the execution, delivery or performance of
this Agreement or to the consummation of the Merger or the other transactions
contemplated by this Agreement.
2.23 Documentation Regarding Telemarketing Operations. ForeFront has
truthfully, accurately and completely documented in writing all relevant
aspects of ForeFront order fulfillment, demand creation and telemarketing
operations (the "Documentation"). All Documentation is located at ForeFront
offices in Clearwater, Florida. All Documentation is and will remain the sole
property of ForeFront. All material Documentation has been reviewed by, or
truthfully presented to, CBT.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF CBT AND MERGER SUB
CBT and Merger Sub represent and warrant to ForeFront, subject to the
exceptions specifically disclosed in writing in the disclosure schedule
supplied by CBT to ForeFront dated as of the date hereof and certified by a
duly authorized officer of CBT (the "CBT SCHEDULES"), as follows:
3.1 Organization of CBT.
(a) CBT and each of its material subsidiaries (including, without
limitation, Merger Sub) is a corporation or other legal entity duly
organized, validly existing and in good standing (with respect to
jurisdictions which recognize such concept) under the laws of the
jurisdiction in which it is organized; has the corporate or other power and
authority to own, lease and operate its assets and property and to carry on
its business as now being conducted; and is duly qualified or licensed to
do business and is in good standing (with respect to jurisdictions which
recognize such concept) in each jurisdiction where the character of the
properties owned, leased or operated by it or the nature of its activities
makes such qualification or licensing necessary, except where the failure
to be so qualified would not have a Material Adverse Effect (as defined
below) on CBT.
(b) CBT has delivered or made available to ForeFront a true and correct
copy of its Memorandum and Articles of Association (the "CBT CHARTER") and
the Certificate of Incorporation and Bylaws of Merger Sub, each as amended
to date, and each such instrument is in full force and effect. CBT is not
in violation of any provision of the CBT Charter and Merger Sub is not in
violation of any provision of its Certificate of Incorporation or Bylaws.
(c) When used in connection with CBT, the term "MATERIAL ADVERSE EFFECT"
means, for purposes of this Agreement, any change, event or effect that is
materially adverse to the business, assets (including intangible assets),
financial condition or results of operations of CBT and its subsidiaries
taken as a whole (except for those changes, events and effects that are
directly caused by (i) conditions affecting the United States economy as a
whole, (ii) conditions affecting the industry in which CBT competes as a
whole, and
A-16
<PAGE>
(iii) delays in customer orders resulting from announcement and pendency of
the Merger, which conditions (in the case of clause (i) or (ii)) do not
affect CBT in a disproportionate manner).
3.2 CBT and Merger Sub Capital Structure.
(a) Before giving effect to the proposed four-for-split of CBT Ordinary
Shares: (i) the authorized capital stock of CBT consists of 30,000,000
Ordinary Shares, of which 10,110,880 shares were issued and outstanding as
of the date hereof; (ii) each CBT ADS represents one-fourth of one CBT
Ordinary Share as of the date hereof; (iii) as of the date hereof, CBT had
reserved an aggregate of 227,796 of CBT Ordinary Shares, net of exercises,
for issuance to employees, consultants and non-employee directors pursuant
to stock option and stock purchase plans; and (iv) as of the date hereof,
there were options outstanding to purchase an aggregate of 1,279,651 CBT
Ordinary Shares pursuant to such stock options plans. All outstanding CBT
Ordinary Shares are duly authorized, validly issued, fully paid and
nonassessable and are not subject to preemptive rights created by statute,
the CBT Charter or any agreement or document to which CBT is a party or by
which it is bound.
(b) The authorized capital stock of Merger Sub consists of 1,000 shares
of Common Stock, $.01 par value, all of which, as of the date hereof, are
issued and outstanding and are held by CBT. Merger Sub was formed on March
4, 1998, for the purpose of consummating the Merger and has no material
assets or liabilities except as necessary for such purpose.
(c) There are no equity securities, partnership interests or similar
ownership interests of any class of CBT or Merger Sub, or any securities
exchangeable or convertible into or exercisable for such equity securities,
partnership interests or similar interests, issued, reserved for issuance
or outstanding, except as set forth in this Section 3.2.
3.3 Obligations With Respect to Capital Stock. Except (i) for securities CBT
owns directly or indirectly through one or more subsidiaries, (ii) for shares
of capital stock or other similar ownership interests of certain subsidiaries
of CBT that are owned by certain nominee equity holders as required by the
applicable law of the jurisdiction of organization of such subsidiaries, and
(iii) as otherwise expressly disclosed in the CBT SEC Reports (as defined
below), as of the date of this Agreement, there are no equity securities or
partnership interests of any class of any material subsidiary of CBT issued or
outstanding. Except as set forth in Section 3.2, there are no options,
warrants, equity securities or partnership interests or similar ownership
interests, calls, rights (including preemptive rights), commitments or
agreements of any character to which CBT or any of its subsidiaries is a party
or by which it is bound obligating CBT or any of its material subsidiaries to
issue, deliver or sell, or cause to be issued, delivered or sold, or
repurchase, redeem or otherwise acquire, or cause the repurchase, redemption
or acquisition of, any shares of capital stock, partnership interests or
similar ownership interests of CBT or any of its material subsidiaries or
obligating CBT or any of its material subsidiaries to grant, extend or enter
into any such option, warrant, equity security, call, right, commitment or
agreement.
3.4 Authority.
(a) Each of CBT and Merger Sub has all requisite corporate power and
authority to enter into this Agreement and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly
authorized by all necessary corporate action on the part of CBT and Merger
Sub, subject only to the filing of the Certificate of Merger pursuant to
Delaware Law. This Agreement has been duly executed and delivered by each
of CBT and Merger Sub and, assuming the due authorization, execution and
delivery by ForeFront, constitutes the valid and binding obligation of CBT
and Merger Sub, enforceable against CBT and Merger Sub in accordance with
its terms, except as enforceability may be limited by bankruptcy and other
similar laws and general principles of equity. The execution and delivery
of this Agreement by each of CBT and Merger Sub does not, and the
consummation of the transactions contemplated by this Agreement by each of
CBT and Merger Sub will not, (i) conflict with or violate the CBT Charter
or the Certificate of Incorporation or Bylaws of Merger Sub, (ii) conflict
with or violate any law, rule, regulation, order, judgment or decree
applicable to CBT or any of its subsidiaries or by which any of their
respective properties is bound or
A-17
<PAGE>
affected or (iii) result in any material breach of or constitute a material
default (or an event that with notice or lapse of time or both would become
a material default) under, or impair CBT's rights or alter the rights or
obligations of any third party under, or give to others any rights of
termination, amendment, acceleration or cancellation of, or result in the
creation of a material lien or encumbrance on any of the material
properties or assets of CBT or any of its subsidiaries pursuant to, any
material note, bond, mortgage, indenture, contract, agreement, lease,
license, permit, franchise or other instrument or obligation to which CBT
or any of its subsidiaries is a party or by which CBT or any of its
subsidiaries or any of their respective properties are bound or affected.
(b) No consent, approval, order or authorization of, or registration,
declaration or filing with any Governmental Entity is required to be
obtained or made by CBT or Merger Sub in connection with the execution and
delivery of this Agreement or the consummation of the Merger, except for
(i) the filing of a Registration Statement on Form S-4 (the "REGISTRATION
STATEMENT") with, and the declaration of the effectiveness of the
Registration Statement by, the SEC in accordance with the Securities Act,
(ii) the filing of the Certificate of Merger with the Secretary of State of
the State of Delaware, (iii) such consents, approvals, orders,
authorizations, registrations, declarations and filings as may be required
under applicable federal, foreign and state securities (or related) laws
and the HSR Act and the securities or antitrust laws of any foreign
country, and (iv) such other consents, authorizations, filings, approvals
and registrations which if not obtained or made would not be material to
CBT or ForeFront or have a material adverse effect on the ability of the
parties to consummate the Merger.
3.5 SEC Filings; CBT Financial Statements.
(a) CBT has filed all forms, reports and documents required to be filed
by CBT with the SEC since January 1, 1996, and has made available to
ForeFront such forms, reports and documents in the form filed with the SEC.
All such required forms, reports and documents (including those that CBT
may file subsequent to the date hereof) are referred to herein as the "CBT
SEC REPORTS." As of their respective dates, the CBT SEC Reports (i) were
prepared in all material respects in accordance with the requirements of
the Securities Act or the Exchange Act, as the case may be, and the rules
and regulations of the SEC thereunder applicable to such CBT SEC Reports,
and (ii) did not at the time they were filed (or if amended or superseded
by a filing prior to the date of this Agreement, then on the date of such
filing) contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary in order to make
the statements therein, in the light of the circumstances under which they
were made, not misleading. None of CBT's subsidiaries is required to file
any forms, reports or other documents with the SEC.
(b) Each of the consolidated financial statements (including, in each
case, any related notes thereto) contained in the CBT SEC Reports (the "CBT
FINANCIALS"), including any CBT SEC Reports filed after the date hereof
until the Closing, (x) complied as to form in all material respects with
the published rules and regulations of the SEC with respect thereto, (y)
was prepared in accordance with GAAP applied on a consistent basis
throughout the periods involved (except as may be indicated in the notes
thereto or, in the case of unaudited interim financial statements, as may
be permitted by the SEC on Form 10-Q under the Exchange Act) and (z) fairly
presented the consolidated financial position of CBT and its subsidiaries
as at the respective dates thereof and the consolidated results of CBT's
operations and cash flows for the periods indicated, except that the
unaudited interim financial statements may not contain footnotes and were
or are subject to normal and recurring year-end adjustments. The balance
sheet of CBT contained in CBT SEC Reports as of December 31, 1996 is
hereinafter referred to as the "CBT BALANCE SHEET." Except as disclosed in
the CBT Financials, since the date of the CBT Balance Sheet neither CBT nor
any of its subsidiaries has any liabilities (absolute, accrued, contingent
or otherwise) of a nature required to be disclosed on a balance sheet or in
the related notes to the consolidated financial statements prepared in
accordance with GAAP which are material to the business, results of
operations or financial condition of CBT and its subsidiaries taken as a
whole, except for (i) liabilities identified in the CBT Balance Sheet, or
(ii) liabilities incurred since the date of the CBT Balance Sheet in the
ordinary course of business consistent with past practices.
A-18
<PAGE>
(c) CBT has previously made available to ForeFront a complete and correct
copy of any material written amendments or modifications to agreements,
documents or other instruments which had been filed by CBT as exhibits to
its Annual Report on Form 10-K for the year ended December 31, 1996 (the
"1996 10-K") or which have been filed by CBT with the SEC pursuant to the
Securities Act or the Exchange Act since the filing of the 1996 10-K.
3.6 Absence of Certain Changes or Events. Since the date of the CBT Balance
Sheet, there has not been any (i) Material Adverse Effect on CBT; (ii) any
material change by CBT in its accounting methods, principles or practices,
except as required by changes in GAAP, or (iii) any material revaluation by
CBT of any of its material assets, including writing down the value of
capitalized inventory or writing off notes or accounts receivable other than
in the ordinary course of business.
3.7 Taxes. CBT and each of its subsidiaries, and any consolidated, combined,
unitary or aggregate group for Tax purposes of which CBT or any of its
subsidiaries is or has been a member, have timely filed all Tax Returns
required to be filed by them and have paid all Taxes shown thereon to be due.
CBT has provided adequate accruals in accordance with generally accepted
accounting principles in its financial statements for any Taxes that have not
been paid, whether or not shown as being due on any Tax Returns. There is (i)
no material claim for Taxes that is a lien against the property of CBT or any
of its subsidiaries or is being asserted against CBT or any of its
subsidiaries other than liens for Taxes not yet due and payable, (ii) no audit
of any Tax Return of CBT or any of its subsidiaries being conducted by a Tax
authority, and (iii) no extension of the statute of limitations on the
assessment of any Taxes granted by CBT or any of its subsidiaries and
currently in effect.
3.8 Title to Properties; Absence of Liens and Encumbrances. CBT has good and
valid title to, or, in the case of leased properties and assets, valid
leasehold interests in, all of its tangible properties and assets, real,
personal and mixed, used or held for use in its business, free and clear of
any Liens, except as reflected in the CBT Financials and except for liens for
taxes not yet due and payable and such Liens or other imperfections of title
and encumbrances, if any, which are not material in character, amount or
extent, and which do not materially detract from the value, or materially
interfere with the present use, of the property subject thereto or affected
thereby.
3.9 Intellectual Property. CBT owns or has adequate licenses to (i) all
material Intellectual Property necessary to the conduct of its business as it
currently is conducted, including, without limitation, the design,
development, manufacture and sale of all material products currently
manufactured or sold by CBT and the performance of all material services
provided by CBT and (ii) all material Intellectual Property described as owned
or licensed by it in its SEC Reports. CBT has complied in all material
respects with all applicable disclosure requirements and has not committed any
fraudulent act in the application for and maintenance of any material patent
or registered trademark or copyright of CBT, and each material patent or
registered trademark or copyright of CBT is valid and subsisting. All
necessary registration, maintenance and renewal fees currently due in
connection with each such material patent or registered trademark or copyright
have been paid and all necessary documents and certificates, in connection
therewith have been filed with the relevant patent, copyright, trademark or
other authorities in the United States or foreign jurisdictions, as the case
may be, for the purposes of maintaining such material patent, registered
trademark or copyright. No material Intellectual Property of CBT or product or
service of CBT is subject to any proceeding or outstanding decree, order,
judgement, agreement or stipulation restricting in any material manner the
use, transfer or licensing thereof by CBT, or which may materially affect the
validity, use or enforceability of such material Intellectual Property. Except
for such notices as CBT reasonably believes will not result in material
liability, CBT has not received notice from any third party that the operation
of the business of CBT or any act, product or service of CBT, infringes or
misappropriates the Intellectual Property of any third party or constitutes
unfair competition or trade practices under the laws of any jurisdiction. To
the knowledge of CBT, no Person has infringed or misappropriated or is
infringing or misappropriating any Intellectual Property of CBT.
A-19
<PAGE>
3.10 Compliance, Permits, Restrictions.
(a) Neither CBT nor any of its subsidiaries is, in any material respect,
in conflict with, or in default or in violation of (i) any law, rule,
regulation, order, judgment or decree applicable to CBT or any of its
subsidiaries or by which CBT or any of its subsidiaries or any of their
respective properties is bound or affected, or (ii) any note, bond,
mortgage, indenture, contract, agreement, lease, license, permit, franchise
or other instrument or obligation to which CBT or any of its subsidiaries
is a party or by which CBT or any of its subsidiaries or its or any of
their respective properties is bound or affected, except for conflicts,
violations and defaults that (individually or in the aggregate) would not
have a Material Adverse Effect. There is no material agreement, judgment,
injunction, order or decree binding upon CBT or any of its material
subsidiaries which has had or could reasonably be expected to have a
Material Adverse Effect.
(b) CBT and its subsidiaries hold, to the extent legally required, all
permits, licenses, variances, exemptions, orders and approvals from
Governmental Entities that are required for the operation of the business
of CBT as currently conducted (collectively, the "CBT PERMITS"), and are in
compliance in all material respects with the terms of the CBT Permits other
than such failures to hold or be in compliance with CBT Permits that would
not, in the aggregate, have a Material Adverse Effect.
3.11 Litigation. Except as disclosed in the CBT SEC Reports there is no
action, suit, proceeding, claim, arbitration or investigation pending or, to
CBT's knowledge, threatened against CBT or any of its subsidiaries seeking to
restrain or enjoin the Merger or which reasonably could be expected to have a
Material Adverse Effect. To CBT's knowledge, no investigation or review by any
Governmental Entity is pending or threatened against CBT or any of its
material subsidiaries, nor has any Governmental Entity indicated an intention
to conduct an investigation of CBT or any of its material subsidiaries.
3.12 Employee Benefit Plans.
(a) (i) CBT has performed all material obligations required to be
performed by it under, is not in material default or material violation of,
and has no knowledge of any material default or material violation by any
other party to each material plan, program, policy, practice, contract, or
agreement in effect as of the date of this Agreement providing for material
compensation, severance, termination pay, performance awards, stock or
stock-related awards, material fringe benefits or other material employee
benefits of any kind, whether formal or informal, written or otherwise, and
funded or unfunded, including, without limitation, each "employee benefit
plan" within the meaning of Section 3(3) of ERISA which is being maintained
or contributed to by CBT or any Affiliate (or which has been maintained or
contributed to and under which CBT has, as of the date of this Agreement,
material obligations under) for the benefit of any current employee,
officer, or director of CBT or any Affiliate (the "CBT Employee Plans"),
and each CBT Employee Plan has been established and maintained in all
material respects in accordance with its terms and in material compliance
with all applicable laws, statutes, orders, rules and regulations
(including any applicable exemptions thereto), including but not limited to
ERISA or the Code; (ii) each CBT Employee Plan intended to qualify under
Section 401(a) of the Code and each trust intended to qualify under Section
501(a) of the Code has either received a favorable determination letter
with respect to each such CBT Employee Plan from the IRS or has remaining a
period of time under applicable Treasury regulations or IRS pronouncements
in which to apply for such a determination letter and make any amendments
necessary to obtain a favorable determination; (iii) no material
"prohibited transaction", within the meaning of Section 4975 of the Code or
Sections 406 or 407 of ERISA, and not otherwise exempt under Section 408 of
ERISA, or Section 4975 of the Code has occurred with respect to any CBT
Employee Plan; (iv) there are no material actions, suits or claims pending
or, to the knowledge of CBT, threatened in a writing delivered to CBT
against any CBT Employee Plan or against the assets of any CBT Employee
Plan; (v) there are no material inquiries or proceedings pending against
CBT, and, to the knowledge of CBT or any Affiliate, neither the IRS nor the
DOL has threatened in a writing delivered to CBT to commence an inquiry or
proceeding against CBT with respect to any CBT Employee Plan; and (vi)
neither CBT nor any Affiliate is subject to any penalty or tax in excess of
$1 million with respect to any CBT Employee Plan under Section 502(i) of
ERISA or Sections 4975 through 4980 of the Code.
A-20
<PAGE>
(b) CBT does not now, nor has it ever, maintained, established,
sponsored, participated in, or contributed to, any pension plan which is
subject to Title IV of ERISA or Section 412 of the Code.
(c) At no time has CBT contributed to or been requested to contribute to
any "multi-employer plan," as defined in Section 3(37) of ERISA.
(d) Neither CBT nor any Affiliate has, prior to the Effective Time and in
any material respect, violated any of the health care continuation
requirements of COBRA or any similar provisions of state law applicable to
its employees.
3.13 Employees; Labor Matters. To CBT's knowledge, there are no activities
or proceedings of any labor union to organize any employees of CBT or any of
its subsidiaries and there are no strikes, or material slowdowns, work
stoppages or lockouts, or threats thereof by or with respect to any employees
of CBT or any of its subsidiaries. CBT is not, and has never been, a party to
any collective bargaining agreement. CBT and its subsidiaries are, and since
January 1, 1997, CBT and its subsidiaries have been in compliance in all
material respects with all applicable laws regarding employment practices,
terms and conditions of employment, and wages and hours (including, without
limitation, ERISA, WARN or any similar state or local law).
3.14 Environmental Matters.
(a) Hazardous Material. Except as would not reasonably be likely to have
a Material Adverse Effect to CBT, no underground storage tanks and no
amount of any Hazardous Material are present, as a result of the actions of
CBT or any of its subsidiaries or any affiliate of CBT, or, to CBT's
knowledge, as a result of any actions of any third party or otherwise, in,
on or under any property, including the land and the improvements, ground
water and surface water thereof, that CBT or any of its subsidiaries has at
any time owned, operated, occupied or leased.
(b) Hazardous Materials Activities. Except as would not reasonably be
likely to have a Material Adverse Effect on CBT: (i) neither CBT nor any of
its subsidiaries has engaged in any Hazardous Materials Activities in
violation of any rule, regulation, treaty or statute promulgated by any
Governmental Entity in effect prior to or as of the date hereof to
prohibit, regulate or control Hazardous Materials or any Hazardous Material
Activity.
(c) Permits. CBT and its subsidiaries currently hold all material
environmental approvals, permits, licenses, clearances and consents (the
"CBT ENVIRONMENTAL PERMITS") necessary for the conduct of CBT's and its
subsidiaries' Hazardous Material Activities and other businesses of CBT and
its subsidiaries as such activities and businesses are currently being
conducted. CBT and its subsidiaries are in compliance in all material
respects with the terms of the CBT Environmental Permits.
(d) Environmental Liabilities. No action, proceeding, revocation
proceeding, amendment procedure, writ, claim or injunction is pending, or,
to CBT's knowledge, threatened by any Governmental Entity against CBT or
any of its subsidiaries concerning any CBT Environmental Permit, Hazardous
Material or any Hazardous Materials Activity of CBT or any of its
subsidiaries. CBT is not aware of any fact or circumstance which could
reasonably involve CBT or any of its subsidiaries in any environmental
litigation or impose upon CBT any material environmental liability.
3.15 Statements; Proxy Statement/Prospectus. The information supplied by CBT
for inclusion in the Registration Statement shall not at the time the
Registration Statement is filed with the SEC and at the time it becomes
effective under the Securities Act, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein not misleading. The
information supplied by CBT for inclusion in the Proxy Statement shall not, on
the date the Proxy Statement is first mailed to ForeFront's stockholders or at
the time of the ForeFront Stockholders' Meeting contain any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances under which they are made, not false or misleading; or omit to
state any material fact necessary to correct any statement by CBT in any
earlier communication with respect to the solicitation of proxies for the
ForeFront Stockholders' Meeting which has
A-21
<PAGE>
become false or misleading. If at any time prior to the Effective Time, any
event relating to CBT or any of its affiliates, officers or directors should
be discovered by CBT which is required to be set forth in an amendment to the
Registration Statement or a supplement to the Proxy Statement, CBT shall
promptly inform ForeFront. Notwithstanding the foregoing, CBT makes no
representation or warranty with respect to any information supplied by
ForeFront which is contained in any of the foregoing documents.
3.16 Pooling-of-Interests. Neither CBT nor any of its directors, officers,
affiliates or stockholders has taken any action which would preclude CBT's
ability to account for the Merger as a pooling-of-interests.
3.17 Valid Issuance. The CBT ADSs to be issued in the Merger and the CBT
Ordinary Shares represented by such CBT ADSs, when issued in accordance with
the provisions of this Agreement, will be duly authorized, validly issued,
fully paid and nonassessable and free of preemptive rights. The CBT ADSs to be
issued in the Merger, when issued in accordance with the provisions of this
Agreement, will not be subject to any restrictions on resale under the
Securities Act, other than restrictions imposed by Rule 145 promulgated under
the Securities Act.
3.18 No Ownership of ForeFront Common Stock. CBT does not own, beneficially
or of record, any shares of ForeFront Common Stock.
3.19 No Brokers. CBT has not incurred, nor will it incur, directly or
indirectly, any liability for brokerage or finders' fees or agents'
commissions or any similar charges in connection with this Agreement or any
transaction contemplated thereby.
ARTICLE IV
CONDUCT PRIOR TO THE EFFECTIVE TIME
4.1 Conduct of ForeFront's Business. During the period from the date of this
Agreement and continuing until the earlier of the termination of this
Agreement pursuant to its terms or the Effective Time, ForeFront and each of
its subsidiaries shall, except to the extent that CBT shall otherwise consent
in writing, carry on its business in the usual, regular and ordinary course,
in substantially the same manner as heretofore conducted and in compliance in
all material respects with all applicable laws and regulations, pay its debts
and taxes when due subject to good faith disputes over such debts or taxes,
pay or perform other material obligations when due, and use its commercially
reasonable efforts consistent with past practices and policies to (i) preserve
intact its present business organization, (ii) keep available the services of
its present officers and employees and (iii) preserve its relationships with
customers, suppliers, distributors, licensors, licensees, and others with
which it has business dealings. In addition, ForeFront will promptly notify
CBT of any material event involving its business or operations.
In addition and without limiting the generality of the foregoing, except as
permitted by the terms of this Agreement, and except as provided in Article 4
of the ForeFront Schedules, without the prior written consent of CBT, during
the period from the date of this Agreement and continuing until the earlier of
the termination of this Agreement pursuant to its terms or the Effective Time,
ForeFront shall not do any of the following and shall not permit its
subsidiaries to do any of the following (except as otherwise required by law):
(a) Waive any stock repurchase rights, accelerate, amend or change the
period of exercisability of options or restricted stock, or reprice options
granted under any employee, consultant or director stock plans or authorize
cash payments in exchange for any options granted under any of such plans;
(b) Grant any severance or termination pay to any officer or employee
except payments in amounts consistent with policies and past practices or
pursuant to written agreements outstanding, or policies existing, on the
date hereof and as previously disclosed in writing or made available to
CBT, or adopt any new severance plan;
A-22
<PAGE>
(c) Transfer or license to any person or entity or otherwise extend,
amend or modify in any material respect any rights (including without
limitation distribution rights) to the ForeFront Intellectual Property or
products, or enter into grants to future patent rights, other than non-
exclusive licenses and distribution rights in the ordinary course of
business and consistent with past practice;
(d) Declare or pay any dividends on or make any other distributions
(whether in cash, stock, equity securities or property) in respect of any
capital stock or split, combine or reclassify any capital stock or issue or
authorize the issuance of any other securities in respect of, in lieu of or
in substitution for any capital stock;
(e) Repurchase or otherwise acquire, directly or indirectly, any shares
of capital stock of ForeFront, except repurchases of unvested shares at
cost in connection with the termination of the employment relationship with
any employee pursuant to agreements in effect as of the date hereof;
(f) Issue, grant, deliver, sell, authorize or propose the issuance,
delivery or sale of, any shares of capital stock or any securities
convertible into shares of capital stock, or subscriptions, rights,
warrants or options to acquire any shares of capital stock or any
securities convertible into shares of capital stock, or enter into other
agreements or commitments of any character obligating it to issue any such
shares or convertible securities, other than the issuance, delivery and/or
sale of (i) shares of ForeFront Common Stock pursuant to the exercise of
stock options or Warrants therefor outstanding as of the date of this
Agreement and (ii) shares of ForeFront Common Stock issuable to
participants in the ForeFront ESPP consistent with the terms thereof.
(g) Cause, permit or propose any amendments to any charter document or
Bylaw (or similar governing instruments of any subsidiaries);
(h) Acquire or agree to acquire by merging or consolidating with, or by
purchasing any equity interest in or a material portion of the assets of,
or by any other manner, any business or any corporation, partnership
interest, association or other business organization or division thereof,
or otherwise acquire or agree to acquire any assets which are material,
individually or in the aggregate, to the business of ForeFront or enter
into any material joint ventures, strategic partnerships or alliances;
(i) Sell, lease, license, encumber or otherwise dispose of any properties
or assets which are material, individually or in the aggregate, to the
business of ForeFront, except in the ordinary course of business consistent
with past practice, or lend funds to any third party (other than
intercompany loans in the ordinary course of business);
(j) Incur any indebtedness for borrowed money (other than (i) in
connection with the financing of ordinary course trade payables; (ii)
pursuant to existing credit facilities in the ordinary course of business;
or (iii) in connection with leasing activities in the ordinary course of
business) or guarantee any indebtedness of any person for borrowed money
(except that ForeFront may guarantee any indebtedness of any subsidiary of
ForeFront, and any subsidiary of ForeFront may guarantee any indebtedness
of ForeFront or of any other subsidiary of ForeFront), or issue or sell any
debt securities or warrants or rights to acquire debt securities of
ForeFront or guarantee any debt securities of others;
(k) Adopt or amend any employee benefit plan or employee stock purchase
or employee stock option plan, or enter into any employment contract (other
than: (y) offer letters and letter agreements with employees who are
terminable "at will," or (z) as required by law), pay any special bonus or
special remuneration to any director or employee, or increase the salaries
or wage rates of its officers or employees other than in the ordinary
course of business, consistent with past practice, or change in any
material respect any management policies or procedures (including those
relating to hiring);
(l) Make any payments outside of the ordinary course of business for
purposes of settling any dispute;
(m) Take any action that would interfere with CBT's ability to account
for the Merger as a pooling-of- interests whether or not otherwise
permitted by the provisions of this Article IV; or
(n) Agree in writing or otherwise to take any of the actions described in
Article 4 (a) through (m) above.
A-23
<PAGE>
(o) Other than in the ordinary course of business, make or change any
material election in respect of Taxes, adopt or change any accounting
method in respect of Taxes, file any material Tax Return or any amendment
to a material Tax Return, enter into any closing agreement, settle any
claim or assessment in respect of Taxes, or consent to any extension or
waiver of the limitation period applicable to any claim or assessment in
respect of Taxes.
4.2 Conduct of CBT's Business. During the period from the date of this
Agreement and continuing until the earlier of the termination of this
Agreement pursuant to its terms or the Effective Time, CBT shall not (without
the prior consent of ForeFront) (except to effect a four-for-one split of its
Ordinary Shares): (i) declare, accrue, set aside or pay any dividend or any
other distribution in respect of any shares of its capital stock, (ii)
repurchase, redeem or otherwise reacquire any shares of its capital stock in
an extraordinary manner, (iii) amend or permit the adoption of any amendments
to the CBT Charter, (iv) become a party to any recapitalization other than a
merger, consolidation, acquisition or similar transaction with any
unaffiliated third party, or (v) take any action that would interfere with its
ability to account for the Merger as a pooling-of-interests whether or not
otherwise permitted by the provisions of this Article IV. In addition, CBT
will promptly notify ForeFront of any material event involving its business or
operations.
4.3 Control of ForeFront's Operations. Nothing contained in this Agreement
shall give to CBT, directly or indirectly, rights to control or direct
ForeFront operations prior to the Effective Time. Prior to the Effective Time,
ForeFront shall exercise, consistent with the terms and conditions of this
Agreement, complete control and supervision of its operations.
4.4 Control of CBT's Operations. Nothing contained in this Agreement shall
give to ForeFront, directly or indirectly, rights to control or direct CBT
operations prior to the Effective Time. Prior to the Effective Time, CBT shall
exercise, consistent with the terms and conditions of this Agreement, complete
control and supervision of its operations.
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 Registration Statement; Other Filings; Board Recommendations.
(a) As promptly as practicable after the execution of this Agreement,
ForeFront and CBT will prepare, and file with the SEC, the Proxy Statement
and CBT will prepare and file with the SEC the Registration Statement in
which the Proxy Statement will be included as a prospectus. Each of
ForeFront and CBT will respond to any comments of the SEC, will use its
respective reasonable best efforts to have the Registration Statement
declared effective under the Securities Act as promptly as practicable
after such filing and ForeFront will cause the Proxy Statement to be mailed
to the ForeFront stockholders at the earliest practicable time after being
declared effective by the SEC. As promptly as practicable after the date of
this Agreement, each of ForeFront and CBT will prepare and file any other
documents required to be filed by it under the Exchange Act, the Securities
Act or any other Federal, foreign or Blue Sky or related laws relating to
the Merger and the transactions contemplated by this Agreement (the "OTHER
FILINGS"). Each of ForeFront and CBT will notify the other promptly upon
the receipt of any comments from the SEC or its staff or any other
government officials and of any request by the SEC or its staff or any
other government officials for amendments or supplements to the
Registration Statement, the Proxy Statement or any Other Filing or for
additional information and will supply the other with copies of all
correspondence between such party or any of its representatives, on the one
hand, and the SEC, or its staff or any other government officials, on the
other hand, with respect to the Registration Statement, the Proxy
Statement, the Merger or any Other Filing. Each of ForeFront and CBT will
cause all documents that it is responsible for filing with the SEC or other
regulatory authorities under this Section 5.1(a) to comply in all material
respects with all applicable requirements of law and the rules and
regulations promulgated thereunder. Whenever any event occurs that is
required to be set forth in an amendment or supplement to the Proxy
Statement, the
A-24
<PAGE>
Registration Statement or any Other Filing, ForeFront or CBT, as the case
may be, will promptly inform the other of such occurrence and cooperate in
filing with the SEC or its staff or any other government officials, and/or
mailing to stockholders of ForeFront, such amendment or supplement.
(b) The Proxy Statement will include the recommendation of the ForeFront
Board in favor of adoption and approval of this Agreement and approval of
the Merger (except that notwithstanding anything to the contrary contained
in this Agreement, the ForeFront Board may, in response to a Superior
Proposal (as defined below), withdraw, modify or refrain from making such
recommendation to the extent that the ForeFront Board determines, in good
faith, after consultation with outside legal counsel, that compliance with
the ForeFront Board's fiduciary duties under applicable law would require
it to do so).
5.2 Meeting of Stockholders. Promptly after the date hereof, ForeFront will
take all action necessary in accordance with the Delaware Law and its
Certificate of Incorporation and Bylaws to convene the ForeFront Stockholders'
Meeting to be held as promptly as practicable, and in any event (to the extent
permissible under applicable law) within 45 days after the declaration of
effectiveness of the Registration Statement, for the purpose of voting upon
this Agreement and the Merger. Unless the ForeFront Board withdraws, modifies
or refrains from making the recommendation set forth in Section 5.1(b) in
accordance with Section 5.4, ForeFront will use its reasonable best efforts to
solicit from its stockholders proxies in favor of the adoption and approval of
this Agreement and the approval of the Merger and take all other action
necessary or advisable to secure the vote or consent of its stockholders
required by the rules of the Nasdaq National Market System or Delaware Law to
obtain such approvals.
5.3 Confidentiality; Access to Information.
(a) The parties acknowledge that ForeFront and CBT have previously
executed a Non-Disclosure Agreement, dated as of March 5, 1998 (the "NON-
DISCLOSURE AGREEMENT"), which Non-Disclosure Agreement will continue in
full force and effect in accordance with its terms.
(b) Access to Information. ForeFront and CBT will each afford the other
party and its accountants, counsel and other representatives reasonable
access during normal business hours to the properties, books, records and
personnel of such party during the period prior to the Effective Time to
obtain all information concerning the business, including the status of
product development efforts, properties, results of operations and
personnel of such party, as the other party may reasonably request. No
information or knowledge obtained by either party in any investigation
pursuant to this Section 5.3 will affect or be deemed to modify any
representation or warranty contained herein.
5.4 No Solicitation.
(a) From and after the date of this Agreement until the earlier of the
Effective Time or termination of this Agreement pursuant to its terms,
ForeFront and its subsidiaries will not, and will instruct their respective
directors, officers, employees, representatives, investment bankers, agents
and affiliates not to, directly or indirectly, (i) solicit or knowingly
encourage submission of any Acquisition Proposal (as defined below) by any
person, entity or group (other than CBT and its affiliates, agents and
representatives), or (ii) participate in any discussions or negotiations
with, or disclose or provide access to any non-public information
concerning ForeFront or any of its subsidiaries to, or otherwise assist or
facilitate, or enter into any agreement or understanding with, any person,
entity or group (other than CBT and its affiliates, agents and
representatives), in connection with any Acquisition Proposal with respect
to ForeFront. For the purposes of this Agreement, an "ACQUISITION PROPOSAL"
means any proposal or offer for: (i) any merger, consolidation, sale of
substantial assets or similar transactions involving ForeFront or any of
its subsidiaries (other than sales of assets or inventory in the ordinary
course of business or as permitted under the terms of this Agreement), (ii)
sale by ForeFront of any shares of capital stock of ForeFront except as may
be permitted pursuant to Section 4.1 , (iii) without limiting clause (ii)
above, the acquisition by any person (including without limitation by way
of a tender offer or an exchange offer) of beneficial ownership or a right
to acquire beneficial ownership of, or the formation of any "group" (as
defined under Section 13(d) of the Exchange Act and the rules and
regulations thereunder) which beneficially owns, or has the right to
A-25
<PAGE>
acquire beneficial ownership of, 15% or more of the then outstanding shares
of capital stock of ForeFront or (iv) any public announcement of a
proposal, plan or intention to do any of the foregoing or any agreement to
engage in any of the foregoing. ForeFront will immediately cease any and
all existing activities, discussions or negotiations with any parties
conducted heretofore with respect to any Acquisition Proposal. ForeFront
will (i) notify CBT within 24 hours if it receives any Acquisition Proposal
or written inquiry or any written request for information or access in
connection with a potential Acquisition Proposal and (ii) as promptly as
practicable notify CBT of the significant terms and conditions of any such
Acquisition Proposal and any material modification thereto. In addition,
subject to the other provisions of this Section 5.4, from and after the
date of this Agreement until the earlier of the Effective Time and
termination of this Agreement pursuant to its terms, ForeFront and its
subsidiaries will not, and will instruct their respective directors,
officers, employees, representatives, investment bankers, agents and
affiliates not to, directly or indirectly, make or authorize any public
statement, recommendation or solicitation in support of any Acquisition
Proposal made by any person, entity or group (other than CBT or any of its
affiliates); provided, however, that nothing contained in this Agreement
shall prohibit the ForeFront Board from taking and disclosing to
ForeFront's stockholders a position with respect to a tender offer pursuant
to Rules 14d-9 and 14e-2 promulgated under the Exchange Act.
(b) Notwithstanding anything to the contrary contained in Section 5.4(a)
or elsewhere in this Agreement, prior to the Effective Time, ForeFront may,
to the extent the ForeFront Board determines, in good faith, after
consultation with outside legal counsel, that the ForeFront Board's
fiduciary duties under applicable law require it to do so, participate in
discussions or negotiations with, and, subject to the requirements of
paragraph (c), below, furnish information and afford access to any person,
entity or group after such person, entity or group has delivered to
ForeFront in writing, an unsolicited bona fide Acquisition Proposal that
the ForeFront Board determines, in its good faith reasonable judgment after
consultation with its independent financial advisors: (x) would (if
consummated in accordance with its terms) result in a transaction more
favorable than the Merger to the stockholders of ForeFront, (y) for which
financing, to the extent required, is committed or appears reasonably
likely to be obtained and (z) is reasonably likely to be consummated (a
"SUPERIOR PROPOSAL"). In addition, notwithstanding the provisions of
paragraph (a) above or any other provisions of this Agreement, in
connection with a possible Acquisition Proposal, ForeFront may refer any
third party to this Section 5.4 or make a copy of this Section 5.4
available to a third party. In the event ForeFront receives a Superior
Proposal, nothing contained in this Agreement (but subject to the terms of
this paragraph (b)) will prevent the ForeFront Board from recommending such
Superior Proposal to its stockholders, if the ForeFront Board determines,
in good faith, after consultation with outside legal counsel, that such
action is required by its fiduciary duties under applicable law; in such
case, the ForeFront Board may (in accordance with Section 5.1(b)) withdraw,
modify or refrain from making its recommendation set forth in Section
5.1(b), and, to the extent it does so, ForeFront may refrain from
soliciting proxies to secure the vote of its stockholders as may otherwise
be required by Section 5.2; provided, however, that ForeFront shall (i)
provide CBT at least 24 hours prior notice of any ForeFront Board meeting
at which it is reasonably expected to contemplate a Superior Proposal and
(ii) not recommend to its stockholders a Superior Proposal for a period of
not less than 48 hours after CBT receives a copy of such Superior Proposal
(or a description of the significant terms and conditions thereof, if not
in writing); and provided further, that unless this Agreement is terminated
pursuant to Section 7.1, nothing contained in this Section shall limit
ForeFront's obligation to hold and convene the ForeFront Stockholders'
Meeting (regardless of whether the recommendation of the ForeFront Board
shall have been withdrawn, modified or not yet made) or to provide the
ForeFront stockholders with material information relating to such meeting.
(c) Notwithstanding anything to the contrary in this Section 5.4,
ForeFront will not provide any non-public information to a third party
unless: (i) ForeFront provides such non-public information pursuant to a
nondisclosure agreement with terms regarding the protection of confidential
information at least as restrictive as such terms in the Non-Disclosure
Agreement; and (ii) such non-public information has been previously
delivered or made available to CBT.
A-26
<PAGE>
5.5 Public Disclosure. CBT and ForeFront will consult with each other, and
to the extent practicable, agree, before issuing any press release or
otherwise making any public statement with respect to the Merger, this
Agreement or an Acquisition Proposal and will not issue any such press release
or make any such public statement prior to such consultation, except as may be
required by law or any listing agreement with a national securities exchange
or the Nasdaq National Market System. The parties have agreed to the text of
the joint press release announcing the signing of this Agreement.
5.6 Legal Requirements. Each of CBT, Merger Sub and ForeFront will take all
reasonable actions necessary or desirable to comply promptly with all legal
requirements which may be imposed on them with respect to the consummation of
the transactions contemplated by this Agreement (including furnishing all
information required in connection with approvals by or filings with any
Governmental Entity, and prompt resolution of any litigation prompted hereby)
and will promptly cooperate with and furnish information to any party hereto
necessary in connection with any such filings with or investigations by any
Governmental Entity, and any other such requirements imposed upon any of them
or their respective subsidiaries in connection with the consummation of the
transactions contemplated by this Agreement. CBT will use its reasonable best
efforts to take such steps as may be necessary to comply with the securities
and Blue Sky laws of all jurisdictions that are applicable to the issuance of
CBT ADSs pursuant hereto. ForeFront will use its reasonable best efforts to
assist CBT as may be necessary to comply with the securities and Blue Sky laws
of all jurisdictions which are applicable in connection with the issuance of
CBT ADSs pursuant hereto.
5.7 Third Party Consents. As soon as practicable following the date hereof,
CBT and ForeFront will each use its commercially reasonable efforts to obtain
any material consents, waivers and approvals under any of its or its
subsidiaries' agreements, contracts, licenses or leases required to be
obtained in connection with the consummation of the transactions contemplated
hereby.
5.8 Notification of Certain Matters. CBT and Merger Sub will give prompt
notice to ForeFront, and ForeFront will give prompt notice to CBT, after
obtaining knowledge of the occurrence, or non-occurrence, of any event that
would be reasonably likely to cause (a) any representation or warranty
contained in this Agreement and made by it to be untrue or inaccurate in any
material respect at any time from the date of this Agreement to the Effective
Time such that the conditions set forth in Section 6.2(a) or 6.3(a), as the
case may be, would not be satisfied as a result thereof or (b) any material
failure of CBT and Merger Sub or ForeFront, as the case may be, to comply with
or satisfy in any material respect any covenant, condition or agreement to be
complied with or satisfied by it under this Agreement such that the conditions
set forth in Section 6.2(b) or 6.3(b), as the case may be, would not be
satisfied as a result thereof. Notwithstanding the foregoing, the delivery of
any notice pursuant to this section will not limit or otherwise affect the
remedies available hereunder to the party receiving such notice.
5.9 Best Efforts and Further Assurances. Subject to the respective rights
and obligations of CBT and ForeFront under this Agreement (including the
rights of ForeFront under Section 5.1(b) and under Section 5.4(b)), each of
the parties to this Agreement will use its reasonable best efforts to
effectuate the Merger and the other transactions contemplated hereby and to
fulfill and cause to be fulfilled the conditions to closing under this
Agreement; provided that neither CBT nor ForeFront nor any subsidiary or
affiliate thereof will be required to agree to any divestiture by itself or
any of its affiliates of shares of capital stock or of any business, assets or
property, or the imposition of any material limitation on the ability of any
of them to conduct their businesses or to own or exercise control of such
assets, properties and stock. Subject to the foregoing, each party hereto, at
the reasonable request of another party hereto, will execute and deliver such
other instruments and do and perform such other acts and things as may be
necessary or desirable for effecting completely the consummation of the
transactions contemplated hereby.
5.10 Stock Options, Warrants and Exchangeable Shares.
(a) At the Effective Time, each outstanding option to purchase shares of
ForeFront Common Stock (each a "FOREFRONT STOCK OPTION") under the
ForeFront Stock Option Plans, whether or not exercisable,
A-27
<PAGE>
will automatically and without any action on the part of the holder thereof
be assumed by CBT. Each ForeFront Stock Option so assumed by CBT under this
Agreement will continue to have, and be subject to, the same terms and
conditions set forth in the applicable ForeFront Stock Option Plan
immediately prior to the Effective Time and the Stock Option by which it is
evidenced, except that (i) each ForeFront Stock Option will be exercisable
(or will become exercisable in accordance with its terms) for that number
of whole CBT ADSs equal to the product of the number of shares of ForeFront
Common Stock that were issuable upon exercise of such ForeFront Stock
Option immediately prior to the Effective Time multiplied by the Exchange
Ratio, rounded down to the nearest whole CBT ADS, (ii) the per share
exercise price for the CBT ADSs issuable upon exercise of such assumed
ForeFront Stock Option will be equal to the quotient determined by dividing
the exercise price per share of ForeFront Common Stock at which such
ForeFront Stock Option was exercisable immediately prior to the Effective
Time by the Exchange Ratio, rounded up to the nearest whole cent and (iii)
each ForeFront Stock Option so assumed will be fully vested and exercisable
as expressly provided by the terms of the ForeFront Stock Option or the
applicable ForeFront Stock Option Plan upon a change-in-control of
ForeFront. As soon as reasonably practicable after the Effective Time, CBT
will expressly assume all such ForeFront Stock Options and issue to each
holder of an outstanding ForeFront Stock Option a notice describing the
foregoing assumption of such ForeFront Stock Option by CBT. It is intended
that ForeFront Stock Options assumed by CBT shall qualify following the
Effective Time as incentive stock options as defined in Section 422 of the
Code to the extent ForeFront Stock Options qualified as incentive stock
options immediately prior to the Effective Time and the provisions of this
Section 5.10(a) shall be applied consistent with such intent.
(b) At the Effective Time, each outstanding Warrant (each an "FOREFRONT
WARRANT") to purchase shares of ForeFront Common Stock, whether or not
exercisable, will automatically and without any action on the part of the
holder thereof be assumed by CBT. Each ForeFront Warrant so assumed under
this Agreement will continue to have, and be subject to, the same terms and
conditions set forth in the applicable ForeFront Warrant agreement by which
it is evidenced, except that (i) each ForeFront Warrant will be exercisable
(or will become exercisable in accordance with its terms) for that number
of whole CBT ADSs equal to the product of the number of shares of ForeFront
Common Stock that were issuable upon exercise of such ForeFront Warrant
immediately prior to the Effective Time multiplied by the Exchange Ratio,
rounded down to the nearest whole CBT ADS and (ii) the per share exercise
price for the CBT ADSs issuable upon exercise of such assumed ForeFront
Warrant will be equal to the quotient determined by dividing the exercise
price per share of ForeFront Common Stock at which such ForeFront Warrant
was exercisable immediately prior to the Effective Time by the Exchange
Ratio, rounded up to the nearest whole cent. As soon as reasonably
practicable after the Effective Time, CBT will expressly assume all such
ForeFront Warrants and issue to each holder of an outstanding ForeFront
Warrant a notice describing the foregoing assumption of such ForeFront
Warrant by CBT.
(c) At the Effective Time, each outstanding Exchangeable Share will
automatically and without any action on the part of the holder thereof
become exchangeable for CBT ADSs on the terms set forth in this Section
5.10(c). Each Exchangeable Share so converted under this Agreement will
continue to have, and be subject to, the same terms and conditions set
forth in the applicable charter documents of ForeFront Canada Ltd. and the
agreements relating to the Exchangeable Shares and the share certificate by
which it is evidenced, except that each Exchangeable Share will become
exchangeable for that number of whole CBT ADSs equal to the product of the
number of shares of ForeFront Common Stock that were issuable upon exercise
of such Exchangeable Share immediately prior to the Effective Time
multiplied by the Exchange Ratio, rounded down to the nearest whole CBT
ADS. As soon as reasonably practicable after the Effective Time, CBT will
expressly assume all such Exchangeable Shares and issue to each holder of
an outstanding Exchangeable Share a notice describing the foregoing
conversion of such Exchangeable Share by CBT.
(d) Prior to the Effective Time, CBT will reserve sufficient CBT ADSs for
issuance under Section 5.10 and under Section 1.6(c) hereof.
5.11 Form S-8. CBT will file a Registration Statement on Form S-8 for the
CBT Ordinary Shares that underlie the CBT ADSs issuable with respect to
assumed ForeFront Stock Options as soon as reasonably
A-28
<PAGE>
practical (but no later than 20 days) after the Effective Time and will use
its reasonable best efforts to maintain the effectiveness of such registration
statement thereafter for so long as any of such options or other rights remain
outstanding.
5.12 Nasdaq Listing. Prior to the Effective Time, CBT agrees to authorize
for listing on the Nasdaq National Market System the CBT ADSs issuable, and
those required to be reserved for issuance, in connection with the Merger,
upon official notice of issuance.
5.13 Affiliate Agreements.
(a) Set forth on the ForeFront Schedules is a list of those persons who
may be deemed to be, in ForeFront's reasonable judgment, affiliates of
ForeFront within the meaning of Rule 145 promulgated under the Securities
Act (each a "FOREFRONT AFFILIATE"). ForeFront will provide CBT with such
information and documents as CBT reasonably requests for purposes of
reviewing such list. ForeFront will use its reasonable best efforts to
deliver or cause to be delivered to CBT, as promptly as practicable on or
following the date hereof, from each ForeFront Affiliate an executed
affiliate agreement in substantially the form attached hereto as Exhibit B
(the "FOREFRONT AFFILIATE AGREEMENT"), each of which will be in full force
and effect as of the Effective Time. CBT will be entitled to place
appropriate legends on the ADRs evidencing any CBT ADSs to be received by a
ForeFront Affiliate pursuant to the terms of this Agreement, and to issue
appropriate stop transfer instructions to the ADS Depositary and transfer
agent for the CBT ADSs, consistent with the terms of the ForeFront
Affiliate Agreement.
(b) CBT has previously provided to ForeFront a list of those persons who
may be deemed to be, in CBT's reasonable judgment, affiliates of CBT (each
a "CBT AFFILIATE"). CBT will use its reasonable best efforts to deliver or
cause to be delivered to CBT, as promptly as practicable on or following
the date hereof, from each CBT Affiliate an executed affiliate agreement in
substantially the form attached hereto as Exhibit C (the "CBT AFFILIATE
AGREEMENT"), each of which will be in full force and effect as of the
Effective Time.
5.14 Regulatory Filings; Reasonable Efforts. As soon as may be reasonably
practicable, ForeFront and CBT each shall file with the United States Federal
Trade Commission (the "FTC") and the Antitrust Division of the United States
Department of Justice ("DOJ") Notification and Report Forms relating to the
transactions contemplated herein as required by the HSR Act, as well as
comparable pre-merger notification forms required by the merger notification
or control laws and regulations of any applicable jurisdiction, as agreed to
by the parties. ForeFront and CBT each shall promptly (a) supply the other
with any information which may be required in order to effectuate such filings
and (b) supply any additional information which reasonably may be required by
the FTC, the DOJ or the competition or merger control authorities of any other
jurisdiction and which the parties may reasonably deem appropriate.
5.15 Comfort Letter. ForeFront shall use reasonable best efforts to cause
Arthur Andersen LLP, certified public accountants to ForeFront, to provide a
letter reasonably acceptable to CBT, relating to their review of the financial
statements relating to ForeFront contained in or incorporated by reference in
the Registration Statement.
5.16 Director and Officer Indemnification.
(a) All rights to indemnification and the advancement of defense costs
existing in favor of the directors and officers of ForeFront for acts and
omissions occurring prior to the Effective Time, as provided in ForeFront
Certificate of Incorporation or Bylaws (as in effect as of the date of this
Agreement), shall survive the Merger and shall be the obligation of and
observed by the Surviving Corporation for a period of not less than six
years. At Closing, CBT shall cause its wholly-owned subsidiary, CBT Systems
USA, Ltd., to enter into a guarantee agreement, substantially in the form
attached hereto as Exhibit D, to guarantee the performance of Surviving
Corporation under this Section 5.16.
(b) From the Effective Time until December 20, 1999, the Surviving
Corporation shall maintain in effect, for the benefit of the current
directors and officers of ForeFront with respect to acts or omissions
A-29
<PAGE>
occurring prior to the Effective Time, the existing policy of directors'
and officers' liability insurance maintained by ForeFront as of the date of
this Agreement (the "EXISTING POLICY"); provided, however, that (i) the
Surviving Corporation may substitute for the Existing Policy a policy or
policies of comparable coverage and (ii) the Surviving Corporation shall
not be required to pay an annual premium for the Existing Policy (or for
any substitute policies) in excess of 150% of the amount of the last annual
premium paid by ForeFront prior to the date of this Agreement for the
Existing Policy (the "PAST PREMIUM AMOUNT"). In the event any future annual
premium for the Existing Policy (or any substitute policies) exceeds 150%
of the past Premium Amount, the Surviving Corporation shall be entitled to
reduce the amount of coverage of the Existing Policy (or any substitute
policies) to the amount of coverage that can be obtained for a premium
equal to 150% of the Past Premium Amount.
(c) This Section shall survive the consummation of the Merger at the
Effective Time, is intended to be for the benefit of, and enforceable by,
each person entitled to indemnification pursuant hereto and each such
person's heirs and representatives, and shall be binding on all successors
and assigns of CBT and the Surviving Corporation.
5.17 Tax-Free Reorganization. Neither CBT nor ForeFront shall (i) take any
action either prior to or after the Effective Time that could reasonably be
expected to cause the Merger to fail to qualify as a "reorganization" under
Section 368(a) of the Code or (ii) take any action or fail to take any action
either prior to or after the Effective Time that would prevent the rendering
of the opinions of counsel referred to in Section 6.1(d) of this Agreement.
ARTICLE VI
CONDITIONS TO THE MERGER
6.1 Conditions to Obligations of Each Party to Effect the Merger. The
respective obligations of each party to this Agreement to effect the Merger
shall be subject to the satisfaction at or prior to the Closing Date of the
following conditions:
(a) ForeFront Stockholder Approval. This Agreement shall have been
approved and adopted, and the Merger shall have been duly approved, by the
requisite vote under applicable law, by the stockholders of ForeFront.
(b) Registration Statement Effective; Proxy Statement. The SEC shall have
declared the Registration Statement effective. No stop order suspending the
effectiveness of the Registration Statement or any part thereof shall have
been issued and no proceeding for that purpose, and no similar proceeding
in respect of the Proxy Statement, shall have been initiated or threatened
in writing by the SEC or state regulatory authorities.
(c) No Order; HSR Act. No Governmental Entity shall have enacted, issued,
promulgated, enforced or entered any statute, rule, regulation, executive
order, decree, injunction or other order (whether temporary, preliminary or
permanent) which is in effect and which has the effect of making the Merger
illegal or otherwise prohibiting consummation of the Merger. All waiting
periods, if any, under the HSR Act relating to the transactions
contemplated hereby will have expired or terminated early.
(d) Tax Opinions. CBT and ForeFront shall each have received
substantially identical written opinions from their respective tax counsel
(Wilson Sonsini Goodrich & Rosati and Andrews & Kurth LLP, respectively),
in form and substance reasonably satisfactory to them, to the effect that,
based on the facts, representations and assumptions set forth in such
opinions, the Merger will constitute a reorganization within the meaning of
Section 368(a) of the Code and such opinions shall not have been withdrawn;
provided, however, that if the counsel to either CBT or ForeFront does not
render such opinion, this condition shall nonetheless be deemed to be
satisfied with respect to such party if counsel to the other party renders
such opinion to such party. The parties to this Agreement agree to make
such reasonable representations as requested by such counsel for the
purpose of rendering such opinions.
A-30
<PAGE>
(e) Nasdaq Listing. The CBT ADSs issuable to stockholders of ForeFront
pursuant to this Agreement and such other CBT ADSs required to be reserved
for issuance in connection with the Merger shall have been authorized for
quotation on the Nasdaq National Market System upon official notice of
issuance.
6.2 Additional Conditions to Obligations of ForeFront. The obligation of
ForeFront to consummate and effect the Merger shall be subject to the
satisfaction at or prior to the Closing Date of each of the following
conditions, any of which may be waived, in writing, exclusively by ForeFront:
(a) Representations and Warranties. The representations and warranties of
CBT and Merger Sub contained in this Agreement shall have been true and
correct as of the date of this Agreement and as of the Closing Date except
(i) to the extent that the failure of such representations and warranties
(other than the representation in Sections 3.2, 3.3 and 3.17) to be true
and correct in each case or in the aggregate does not constitute a Material
Adverse Effect on CBT, (ii) for changes contemplated by this Agreement and
(iii) for those representations and warranties which address matters only
as of the date of this Agreement or any other particular date (which shall
have been true and correct as of such particular date except to the extent
that the failure of such representations and warranties to have been true
and correct as of such particular date does not constitute a Material
Adverse Effect on CBT) (it being understood that, for purposes of
determining the accuracy of such representations and warranties all
"Material Adverse Effect" qualifications and other qualifications based on
the word "material" or similar phrases contained in such representations
and warranties shall be disregarded). CBT shall have received a certificate
with respect to the foregoing signed on behalf of CBT by the Chief
Executive Officer and the Chief Financial Officer of CBT;
(b) Agreements and Covenants. CBT and Merger Sub shall have performed or
complied in all material respects with all agreements and covenants
required by this Agreement to be performed or complied with by them on or
prior to the Closing Date, and ForeFront shall have received a certificate
to such effect signed on behalf of CBT by the Chief Executive Officer and
the Chief Financial Officer of CBT; and
(c) Material Adverse Effect. No Material Adverse Effect with respect to
CBT shall have occurred since the date of this Agreement.
(d) Legal Opinion. ForeFront shall have received the written opinion of
Wilson Sonsini Goodrich & Rosati, in form and substance reasonably
satisfactory to it, regarding certain legal matters in connection with the
Merger.
6.3 Additional Conditions to the Obligations of CBT and Merger Sub. The
obligations of CBT and Merger Sub to consummate and effect the Merger shall be
subject to the satisfaction at or prior to the Closing Date of each of the
following conditions, any of which may be waived, in writing, exclusively by
CBT:
(a) Representations and Warranties. The representations and warranties of
ForeFront contained in this Agreement shall have been true and correct as
of the date of this Agreement and as of the Closing Date except (i) to the
extent that the failure of such representations and warranties (other than
the representations in Sections 2.2, 2.3 and 2.21) to be true and correct
in each case or in the aggregate does not constitute a Material Adverse
Effect on ForeFront, (ii) for changes contemplated by this Agreement and
(iii) for those representations and warranties which address matters only
as of the date of this Agreement or any other particular date (which shall
have been true and correct as of such particular date except to the extent
that the failure of such representations and warranties to be true and
correct as of such particular date does not constitute a Material Adverse
Effect on ForeFront) (it being understood that, for purposes of determining
the accuracy of such representations and warranties all "Material Adverse
Effect" qualifications and other qualifications based on the word
"material" or similar phrases contained in such representations and
warranties shall be disregarded). CBT shall have received a certificate
with respect to the foregoing signed on behalf of ForeFront by the Chief
Executive Officer and the Chief Financial Officer of ForeFront;
(b) Agreements and Covenants. ForeFront shall have performed or complied
in all material respects with all agreements and covenants required by this
Agreement to be performed or complied with by it at or
A-31
<PAGE>
prior to the Closing Date, and CBT shall have received a certificate to
such effect signed on behalf of ForeFront by the Chief Executive Officer
and the Chief Financial Officer of ForeFront;
(c) Material Adverse Effect. No Material Adverse Effect with respect to
ForeFront shall have occurred since the date of this Agreement;
(d) Employment and Noncompetition Agreements. Michael Kaplan and Ernest
Rapp shall have entered into Employment and Noncompetition Agreements
substantially in the form attached hereto as Exhibit E and such agreements
shall be in full force and effect; and
(e) Opinion of Accountants. CBT shall have received a letter from Ernest
& Young, Chartered Accountants and Arthur Andersen LLP, respectively, dated
within two (2) business days prior to the Effective Time, regarding their
concurrence with the conclusions of CBT management and ForeFront
management, respectively, as to the appropriateness of pooling of interest
accounting for the Merger under Accounting Principles Board Opinion No. 16,
if the Merger is consummated in accordance with this Agreement.
(f) Consents. ForeFront shall have obtained all consents, waivers and
approvals required in connection with the consummation of the transactions
contemplated hereby under the agreements, contracts, licenses or leases set
forth on Schedule 6.3(f).
(g) Legal Opinion. CBT shall have received the written opinion of Andrews
& Kurth LLP, in form and substance reasonably satisfactory to it, regarding
certain legal matters in connection with the Merger.
ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER
7.1 Termination. This Agreement may be terminated at any time prior to the
Effective Time, whether before or after approval of the Merger by the
stockholders of ForeFront:
(a) by mutual written consent duly authorized by the Boards of Directors
of CBT and ForeFront;
(b) by either ForeFront or CBT if the Merger shall not have been
consummated by July 31, 1998 for any reason; provided, however, that the
right to terminate this Agreement under this Section 7.1(b) shall not be
available to any party whose action or failure to act has been a principal
cause of or resulted in the failure of the Merger to occur on or before
such date and such action or failure to act constitutes a breach of this
Agreement;
(c) by either ForeFront or CBT if a Governmental Entity shall have issued
an order, decree or ruling or taken any other action, in any case having
the effect of permanently restraining, enjoining or otherwise prohibiting
the Merger, which order, decree, ruling or other action is final and
nonappealable;
(d) by either ForeFront or CBT if the required approvals of the
stockholders of ForeFront contemplated by this Agreement shall not have
been obtained by reason of the failure to obtain the required vote at a
meeting of ForeFront stockholders duly convened therefor or at any
adjournment thereof (provided that the right to terminate this Agreement
under this Section 7.1(d) shall not be available to ForeFront where the
failure to obtain ForeFront stockholder approval shall have been caused by
the action or failure to act of ForeFront and such action or failure to act
constitutes a breach by ForeFront of this Agreement);
(e) by CBT at any time prior to the approval of the Merger by ForeFront's
stockholders, if the ForeFront Board recommends a Superior Proposal to the
stockholders of ForeFront;
(f) by CBT, if the ForeFront Board shall have withheld, withdrawn or
modified in a manner adverse to CBT its recommendation in favor of adoption
and approval of this Agreement and approval of the Merger;
(g) by ForeFront, upon a breach of any representation, warranty, covenant
or agreement on the part of CBT set forth in this Agreement, or if any
representation or warranty of CBT shall have become untrue, in either case
such that the conditions set forth in Section 6.2(a) or Section 6.2(b)
would not be satisfied as of the time of such breach or as of the time such
representation or warranty shall have become untrue, provided that if such
inaccuracy in CBT's representations and warranties or breach by CBT is
curable by CBT
A-32
<PAGE>
through the exercise of its commercially reasonable efforts, then ForeFront
may not terminate this Agreement under this Section 7.1(g) for thirty days
after notice from ForeFront of such breach, provided CBT continues to
exercise such commercially reasonable efforts to cure such breach (it being
understood that ForeFront may not terminate this Agreement pursuant to this
paragraph (g) if it shall have materially breached this Agreement); or
(h) by CBT, upon a breach of any representation, warranty, covenant or
agreement on the part of ForeFront set forth in this Agreement, or if any
representation or warranty of ForeFront shall have become untrue, in either
case such that the conditions set forth in Section 6.3(a) or Section 6.3(b)
would not be satisfied as of the time of such breach or as of the time such
representation or warranty shall have become untrue, provided, that if such
inaccuracy in ForeFront's representations and warranties or breach by
ForeFront is curable by ForeFront through the exercise of its commercially
reasonable efforts, then CBT may not terminate this Agreement under this
Section 7.1(h) for thirty days after notice from CBT of such breach,
provided ForeFront continues to exercise such commercially reasonable
efforts to cure such breach (it being understood that CBT may not terminate
this Agreement pursuant to this paragraph (h) if it shall have materially
breached this Agreement).
7.2 Notice of Termination; Effect of Termination. Any termination of this
Agreement under Section 7.1 above will be effective immediately upon the
delivery of written notice of the terminating party to the other parties
hereto. In the event of the termination of this Agreement as provided in
Section 7.1, this Agreement shall be of no further force or effect, except (i)
as set forth in this Section 7.2, Section 7.3 and Article VIII
(miscellaneous), each of which shall survive the termination of this
Agreement, and (ii) nothing herein shall relieve any party from liability for
any willful breach of this Agreement. No termination of this Agreement shall
affect the obligations of the parties contained in the Non-Disclosure
Agreement, all of which obligations shall survive termination of this
Agreement in accordance with their terms.
7.3 Fees and Expenses.
(a) General. Except as set forth in this Section 7.3, all fees and
expenses incurred in connection with this Agreement and the transactions
contemplated hereby shall be paid by the party incurring such expenses
whether or not the Merger is consummated; provided, however, that CBT and
ForeFront shall share equally all fees and expenses, other than attorneys'
and accountants fees and expenses, incurred in relation to the printing and
filing (with the SEC) of the Proxy Statement (including any preliminary
materials related thereto) and the Registration Statement (including
financial statements and exhibits) and any amendments or supplements
thereto.
(b) ForeFront Payments.
(i) If either (x) the ForeFront Board shall have withheld, withdrawn
or modified in a manner adverse to CBT its recommendation in favor of
adoption and approval of this Agreement and approval of the Merger and
at that time there shall not have occurred a Material Adverse Effect on
CBT and CBT shall not have materially breached this Agreement, or (y)
the ForeFront Board recommends a Superior Proposal to the stockholders
of ForeFront, ForeFront shall pay to CBT an amount equal to $5,075,000
within three business days following the earlier to occur of (A)
termination of this Agreement pursuant to Section 7.1(e) or (f) hereof
and (B) a ForeFront Negative Vote (as defined below);
(ii) If no payment shall be required pursuant to clause 7.3(b)(i)
above, and if: (x) the vote of the stockholders of ForeFront approving
and adopting this Agreement and approving the Merger shall not have
been obtained by reason of the failure to obtain the required vote at a
meeting of stockholders duly convened therefor or at any adjournment
thereof (a "FOREFRONT NEGATIVE VOTE"), and (y) prior to such ForeFront
Negative Vote there shall have occurred an Acquisition Proposal with
respect to ForeFront which shall have been publicly disclosed and not
withdrawn prior to such meeting (a "FOREFRONT COMPETING PROPOSAL"), and
(z) within 12 months following such ForeFront Negative Vote, ForeFront
shall enter into a definitive agreement with respect to a ForeFront
Acquisition (as
A-33
<PAGE>
defined below) or the ForeFront Board shall recommend to the ForeFront
stockholders that they accept a tender or exchange offer for 25% or more of
the ForeFront Common Stock, then, provided that there shall have not
occurred a Material Adverse Effect on CBT prior to the ForeFront Negative
Vote and provided that CBT shall not have materially breached this
Agreement, ForeFront shall pay to CBT an amount equal to $5,075,000 within
three business days following, as the case may be (1) consummation of a
ForeFront Acquisition (regardless of the timing of the consummation and
regardless of with whom such ForeFront Acquisition is consummated) or (2)
consummation of such tender or exchange offer. For the purposes of this
Agreement, a "FOREFRONT ACQUISITION" means any transaction or series of
transactions involving (i) any merger, consolidation, sale of substantial
assets (including without limitation capital stock of subsidiaries) having
a fair market value in excess of 30% of the fair market value of all the
assets of ForeFront and its subsidiaries immediately prior to such
transaction (or series of transactions) or similar transaction involving
ForeFront or any of its material subsidiaries, (ii) any sale by ForeFront
of any shares of capital stock of ForeFront which would, upon issuance,
represent more than 30% of the outstanding shares of capital stock of
ForeFront, (provided, however, that a public offering of equity or
convertible securities shall not be deemed to be a ForeFront Acquisition),
or (iii) the acquisition by any person (including without limitation by way
of a tender offer or an exchange offer) of beneficial ownership or a right
to acquire beneficial ownership of, or the formation of any "group" (as
defined under Section 13(d) of the Exchange Act and the rules and
regulations thereunder) which beneficially owns, or has the right to
acquire beneficial ownership of, 30% or more of the then outstanding shares
of capital stock of ForeFront.
(c) Payment of the fees described in Section 7.3(b) above shall not be in
lieu of damages incurred in the event of breach of this Agreement.
7.4 Amendment. Subject to applicable law, this Agreement may be amended by
the parties hereto at any time by execution of an instrument in writing signed
on behalf of each of the parties hereto.
7.5 Extension; Waiver. At any time prior to the Effective Time any party
hereto may, to the extent legally allowed, (i) extend the time for the
performance of any of the obligations or other acts of the other parties
hereto, (ii) waive any inaccuracies in the representations and warranties made
to such party contained herein or in any document delivered pursuant hereto
and (iii) waive compliance with any of the agreements or conditions for the
benefit of such party contained herein. Any agreement on the part of a party
hereto to any such extension or waiver shall be valid only if set forth in an
instrument in writing signed on behalf of such party. Delay in exercising any
right under this Agreement shall not constitute a waiver of such right.
ARTICLE VIII
GENERAL PROVISIONS
8.1 Non-Survival of Representations and Warranties. The representations and
warranties of ForeFront, CBT and Merger Sub contained in this Agreement shall
terminate at the Effective Time, and only the covenants that by their terms
survive the Effective Time shall survive the Effective Time.
8.2 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally or by commercial
delivery service, or sent via telecopy (receipt confirmed) to the parties at
the following addresses or telecopy numbers (or at such other address or
telecopy numbers for a party as shall be specified by like notice):
(a) if to CBT or Merger Sub, to:
CBT Group PLC
1005 Hamilton Court
Menlo Park, California
Attention: Chief Executive Officer
Telephone No.: (650) 614-5900
Telecopy No.: (650) 463-2520
A-34
<PAGE>
with a copies to:
CBT Group plc
1005 Hamilton Court
Menlo Park, California
Attention: Vice President and General Counsel
Telephone No.: (650) 614-5900
Telecopy No.: (650) 463-2520
and
Wilson Sonsini Goodrich & Rosati, P.C.
650 Page Mill Road
Palo Alto, California 94304-1050
Attention: Alan K. Austin
Telephone No.: (415) 493-9300
Telecopy No.: (415) 493-6811
(b) if to ForeFront, to:
The ForeFront Group, Inc.
1360 Post Oak Blvd., Suite 2050
Houston, Texas 77056
Attention: Chief Executive Officer
Telephone No.: (713) 961-1101
Telecopy No.: (713) 961-1149
with a copy to:
Andrews & Kurth L.L.P.
2170 Buckthorne Place, Suite 150
The Woodlands, Texas 77380
Attention: Jeffrey L. Wade
Telephone No.: (713) 220-4801
Telecopy No.: (713) 220-4815
8.3 Interpretation; Knowledge.
(a) When a reference is made in this Agreement to Exhibits, such
reference shall be to an Exhibit to this Agreement unless otherwise
indicated. When a reference is made in this Agreement to Sections, such
reference shall be to a Section of this Agreement unless otherwise
indicated. The words "INCLUDE," "INCLUDES" and "INCLUDING" when used herein
shall be deemed in each case to be followed by the words "without
limitation." The table of contents and headings contained in this Agreement
are for reference purposes only and shall not affect in any way the meaning
or interpretation of this Agreement. When reference is made herein to "THE
BUSINESS OF" an entity, such reference shall be deemed to include the
business of all direct and indirect subsidiaries of such entity. Reference
to the subsidiaries of an entity shall be deemed to include all direct and
indirect subsidiaries of such entity.
(b) For purposes of this Agreement (a) as it relates to CBT, the term
"KNOWLEDGE" means, with respect to any matter in question, the actual
knowledge of any of the Chief Executive Officer, Chief Financial Officer or
General Counsel of CBT and (b) as it relates to ForeFront, the term
"KNOWLEDGE" means, with respect to any matter in question, the actual
knowledge of any of the Chief Executive Officer, Chief Financial Officer
and General Counsel of ForeFront and the President of ForeFront Direct,
Inc.
A-35
<PAGE>
8.4 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each
of the parties and delivered to the other party, it being understood that all
parties need not sign the same counterpart.
8.5 Entire Agreement; Third Party Beneficiaries. This Agreement and the
documents and instruments and other agreements among the parties hereto as
contemplated by or referred to herein, including ForeFront Schedules and CBT
Schedules (a) constitute the entire agreement among the parties with respect
to the subject matter hereof and supersede all prior agreements and
understandings, both written and oral, among the parties with respect to the
subject matter hereof, it being understood that the Non-Disclosure Agreement
shall continue in full force and effect until the Closing and shall survive
any termination of this Agreement; and (b) are not intended to confer upon any
other person any rights or remedies hereunder, except as specifically provided
in Section 5.16.
8.6 Severability. In the event that any provision of this Agreement or the
application thereof, becomes or is declared by a court of competent
jurisdiction to be illegal, void or unenforceable, the remainder of this
Agreement will continue in full force and effect and the application of such
provision to other persons or circumstances will be interpreted so as
reasonably to effect the intent of the parties hereto. The parties further
agree to replace such void or unenforceable provision of this Agreement with a
valid and enforceable provision that will achieve, to the extent possible, the
economic, business and other purposes of such void or unenforceable provision.
8.7 Other Remedies; Specific Performance. Except as otherwise provided
herein, any and all remedies herein expressly conferred upon a party will be
deemed cumulative with and not exclusive of any other remedy conferred hereby,
or by law or equity upon such party, and the exercise by a party of any one
remedy will not preclude the exercise of any other remedy. The parties hereto
agree that irreparable damage would occur in the event that any of the
provisions of this Agreement were not performed in accordance with their
specific terms or were otherwise breached. It is accordingly agreed that the
parties shall be entitled to seek an injunction or injunctions to prevent
breaches of this Agreement and to enforce specifically the terms and
provisions hereof in any court of the United States or any state having
jurisdiction, this being in addition to any other remedy to which they are
entitled at law or in equity.
8.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware, regardless of the laws that
might otherwise govern under applicable principles of conflicts of law
thereof; provided that issues involving the corporate governance of any of the
parties hereto shall be governed by their respective jurisdictions of
incorporation. Each of the parties hereto irrevocably consents to the
exclusive jurisdiction of any state or federal court within the State of
Delaware, in connection with any matter based upon or arising out of this
Agreement or the matters contemplated herein, other than issues involving the
corporate governance of any of the parties hereto, agrees that process may be
served upon them in any manner authorized by the laws of the State of Delaware
for such persons and waives and covenants not to assert or plead any objection
which they might otherwise have to such jurisdiction and such process.
8.9 Rules of Construction. The parties hereto agree that they have been
represented by counsel during the negotiation and execution of this Agreement
and, therefore, waive the application of any law, regulation, holding or rule
of construction providing that ambiguities in an agreement or other document
will be construed against the party drafting such agreement or document.
8.10 Assignment. No party may assign either this Agreement or any of its
rights, interests, or obligations hereunder without the prior written approval
of the other parties. Subject to the preceding sentence, this Agreement shall
be binding upon and shall inure to the benefit of the parties hereto and their
respective successors and permitted assigns.
8.11 Waiver of Jury Trial. EACH OF CBT, FOREFRONT AND MERGER SUB HEREBY
IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR
COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR
RELATING TO THIS AGREEMENT OR THE ACTIONS OF CBT, FOREFRONT OR MERGER SUB IN
THE NEGOTIATION, ADMINISTRATION, PERFORMANCE AND ENFORCEMENT HEREOF.
A-36
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized respective officers as of the date first
written above.
CBT Group PLC
/s/ James J. Buckley
By: _________________________________
James J. Buckley
President and Chief Executive
Officer
Rockets Acquisition Corp.
/s/ James J. Buckley
By: _________________________________
James J. Buckley
President and Chief Executive
Officer
The Forefront Group, Inc.
/s/ David Sikora
By: _________________________________
David Sikora
President and Chief Executive
Officer
A-37
<PAGE>
[PIPER JAFFRAY INC. LETTERHEAD]
March 13, 1998
Board of Directors
The ForeFront Group Inc.
1330 Post Oak Blvd., Suite 1300
Houston, TX 77056
Members of the Board:
We understand that CBT Group plc ("CBT"), a public limited company
incorporated under the laws of Ireland, The ForeFront Group Acquisition Corp.,
a Delaware corporation ("Acquisition Sub"), and the ForeFront Group Inc., a
Delaware corporation ("ForeFront" or the "Company") propose to enter into an
Agreement and Plan of Reorganization (the "Agreement") pursuant to which the
Acquisition Sub will be merged with and into the Company in a transaction (the
"Transaction") in which each outstanding share of the Company's common stock,
$0.01 par value per share (the "Company Shares") will be converted into the
right to receive 0.3137 (the "Exchange Ratio") of the American Depository
Shares of CBT (the "Acquiror Shares"). You have requested our opinion as to
whether the Exchange Ratio is fair, from a financial point of view, to the
holders of Company Shares.
Piper Jaffray Inc. ("Piper Jaffray"), as a customary part of its investment
banking business, is engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, underwritings and
secondary distributions of securities, private placements, and valuation for
estate, corporate and other purposes. For our services in rendering this
opinion, the Company will pay us a fee and indemnify us against certain
liabilities. Our fee is not contingent upon consummation of the Transaction.
In the ordinary course of our business, we and our affiliates may actively
trade securities of the Company and CBT for our own account or the accounts of
our customers and, accordingly, may at any time hold a long or short position
in such securities.
In arriving at our opinion, we have undertaken such reviews, analyses and
inquiries as we deemed necessary and appropriate under the circumstances.
Among other things, we have:
1. Reviewed the draft dated March 13, 1998 of the Agreement.
2. Reviewed the draft Annual Report on Form 10-K for the Company for the
fiscal year ended December 31, 1997 and the Annual Reports on Form 10-K for
the Company for the fiscal years ended December 31, 1995 and December 31,
1996.
3. Reviewed the Quarterly Reports on Form 10-Q for the Company for the
periods ended March 31, 1997, June 30, 1997 and September 30, 1997.
4. Reviewed the earnings release issued by the Company for the fiscal
year ended December 31, 1997.
5. Reviewed the Annual Reports on Form 10-K for CBT for the three fiscal
years ended December 31, 1996.
6. Reviewed the Quarterly Reports on Form 10-Q for CBT for the periods
ended March 31, 1997, June 30, 1997 and September 30, 1997.
7. Reviewed a draft of CBT's audited financial statements for the fiscal
year ended December 31, 1997.
8. Reviewed the earnings release issued by CBT for the fiscal year ended
December 31, 1997.
B-1
<PAGE>
Board of Directors
The ForeFront Group Inc.
March 13, 1998
Page 2
9. Reviewed certain financial forecasts for the Company prepared by
Company management ("Financial Forecasts").
10. Visited the headquarters of the Company and conducted discussions
with members of senior management of the Company, including the President
and Chief Executive Officer, the Chief Financial Officer, General
Counsel/Vice President of Corporate Development and other members of senior
management. Topics discussed included, but were not limited to, the
background and rationale of the proposed Transaction, the financial
condition, operating performance and the balance sheet characteristics of
the Company and the prospects for the Company.
11. Visited the headquarters of CBT and conducted discussions with
members of senior management of CBT, including the Chairman, the President
and Chief Executive Officer, the Executive Vice President and Chief
Financial Officer, the Vice President of Corporate Development and the
General Counsel. Topics discussed included, but were not limited to, the
background and rationale of the proposed Transaction, the financial
condition, operating performance and the balance sheet characteristics of
CBT and the prospects for CBT.
12. Reviewed the historical prices and trading activity for the Company's
and CBT's shares.
13. Performed discounted cash flow analysis on the Financial Forecasts.
14. Reviewed the financial terms, to the extent publicly available, of
certain comparable merger and acquisition transactions that we deemed
relevant.
15. Compared certain financial data of the Company and CBT with certain
financial and securities data of companies deemed similar to the Company
and CBT or representative of the business sectors in which they operate.
16. Reviewed such other financial data, performed such other analyses and
considered such other information as we deemed necessary and appropriate
under the circumstances.
We have relied upon and assumed the accuracy and completeness of the
financial statements and other information provided by the Company and CBT or
otherwise made available to us and have not assumed responsibility
independently to verify such information. We have further relied upon the
assurances of the Company's management that the information provided has been
prepared on a reasonable basis in accordance with industry practice and, with
respect to financial planning data of the Company, reflects the best currently
available estimates and judgment of the Company management as to the expected
future financial performance of the Company and that they are not aware of any
information or facts that would make the information provided to us incomplete
or misleading. With respect to CBT, we were not provided any financial
planning data or internal projections regarding CBT's financial prospects and
have relied exclusively on published reports prepared by financial analysts,
as supported by our discussions with CBT's management. Without limiting the
generality of the foregoing, for the purpose of this opinion, we have assumed
that neither the Company nor CBT are a party to any pending transaction,
including external financing, recapitalizations, acquisitions or merger
discussions, other than the Transaction or in the ordinary course of business.
We have also assumed that the Transaction will be free of Federal tax to the
Company, CBT, and the holders of Company Shares and that the Transaction will
be accounted for as a pooling-of-interests under generally accepted accounting
principles. In arriving at our opinion, we have assumed that all the necessary
regulatory approvals and consents required for the Transaction will be
obtained in a manner that will not change the purchase price for the Company.
In arriving at our opinion, we have not performed any appraisals or
valuations of specific assets or liabilities of the Company or CBT and have
not been furnished with any such appraisals or valuations. Without limiting
the generality of the foregoing, we have undertaken no independent analysis of
any pending or threatened
B-2
<PAGE>
Board of Directors
The ForeFront Group Inc.
March 13, 1998
Page 3
litigation, possible unasserted claims or other contingent liabilities, to
which the Company, CBT or any of their respective affiliates is a party or may
be subject and, at the Company's direction and with its consent, our opinion
makes no assumption concerning and therefore does not consider, the possible
assertion of claims, outcomes or damages arising out of any such matters.
Our opinion is necessarily based upon information available to us, facts and
circumstances and economic, market and other conditions as they exist and are
subject to evaluation on the date hereof; events occurring after the date
hereof could materially affect the assumptions used in preparing this opinion.
We have not undertaken to reaffirm or revise this opinion or otherwise comment
upon any events occurring after the date hereof and do not have any obligation
to update, revise or reaffirm this opinion. We are not expressing any opinion
herein as to the prices at which the Acquiror Shares will trade following the
consummation of the Transaction or the prices at which the Company Shares or
the Acquiror Shares will trade between the date hereof and the consummation of
the Transaction. In addition, we express no opinion or recommendation as to
how the holders of Company Shares should vote at the stockholders meeting to
be held in connection with the Transaction.
This opinion is for the benefit of the Board of Directors of the Company in
evaluating the Transaction and shall not be published or otherwise used, nor
shall any public references to Piper Jaffray be made without our prior written
consent. In connection with this opinion, we were not requested to opine as
to, and this opinion does not address (except to the extent expressly set
forth in the next paragraph), the underlying business decision to proceed with
or effect the Transaction.
Based upon and subject to the foregoing and based upon such other factors as
we consider relevant, it is our opinion that the Exchange Ratio is fair, from
a financial point of view, to the holders of Company Shares, as of the date
hereof.
Sincerely,
Piper Jaffray Inc."
B-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has duly caused this Post Effective Amendment No. 2 to
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the city of Menlo Park, State of California, on
July 2, 1998.
CBT GROUP PUBLIC LIMITED COMPANY
By: /s/ Richard Y. Okumoto
----------------------------------
Richard Y. Okumoto
Vice President, Finance and Chief
Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by or on behalf of the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
* Chairman of the Board July 2, 1998
____________________________________
William G. McCabe
* President, Chief Executive July 2, 1998
____________________________________ Officer (Principal Executive
James J. Buckley Officer) and Director
/s/ Richard Y. Okumoto Vice President, Finance and July 2, 1998
____________________________________ Chief Financial Officer
Richard Y. Okumoto
* Group Financial Controller July 2, 1998
____________________________________ (Principal Accounting
John P. Hayes Officer) and Director
* Director July 2, 1998
____________________________________
Gregory M. Priest
Director
____________________________________
Patrick J. McDonagh
* Director July 2, 1998
____________________________________
John Grillos
*By: /s/ Richard Y. Okumoto
____________________________________
Richard Y. Okumoto,
Attorney-in-Fact
</TABLE>
S-1
