SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
(Mark One)
|X| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the quarterly period ended June 30, 1996
|_| Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from _____ to_____
Commission file number: 0-27838
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FORTE SOFTWARE, INC.
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(Exact name of registrant as specified in its charter)
Delaware 94-3131872
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1800 Harrison Street
Oakland, California 94612
(510) 869-3400
(Address, including zip code, of Registrant's
principal executive offices and telephone number,
including area code)
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No __
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $0.01 par value 18,339,000
(Class of common stock) (Shares outstanding at June 30, 1996)
1
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FORTE SOFTWARE, INC.
1996 FORM 10-Q ANNUAL REPORT
Table of Contents
PART I FINANCIAL INFORMATION
Item 1. Financial Statements Page
Condensed Consolidated Balance Sheets 3
At March 31, 1996 and June 30, 1996
Condensed Consolidated Statements of Operations 4
For the Three Months Ended June 30, 1995 and 1996
Condensed Consolidated Statements of Cash Flows 5
For the Three Months Ended June 30, 1995 and 1996
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial 8
Condition and Results of Operations
Part II OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities 21
Item 3. Defaults on Senior Securities 21
Item 4. Submission of Matters to a vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits, Financial Statement Schedules and Reports on Form 8-K 21
Signatures 22
2
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PART 1.
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
FORTE SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
<CAPTION>
March 31, June 30,
1996 1996
---------------- --------------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 35,081 $ 29,015
Short-term investments 6,236 13,273
Accounts receivable, net of allowances of $510 ($531 at March 31,1996) 11,059 8,875
Prepaid expenses and other current assets 839 715
---------------- --------------------
Total current assets 53,215 51,878
Equipment and leasehold improvements, net 3,903 4,638
Other assets 173 220
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Total assets $ 57,291 $ 56,736
================ ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,066 $ 1,450
Accrued expenses and other liabilities 5,410 4,517
Deferred revenue 5,941 5,987
Current portion of capital lease obligations and notes payable 1,084 1,023
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Total current liabilities 13,501 12,977
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Capital lease obligations and notes payable, due after one year 1,714 1,542
Deferred revenue 2,032 1,808
Commitments
Stockholders' equity:
Common Stock 183 183
Additional paid-in capital 62,618 62,642
Accumulated deficit (22,735) (22,442)
Foreign currency translation adjustments (22) 54
Unrealized loss on short-term investments - (28)
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Total stockholders' equity 40,044 40,409
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Total liabilities and stockholders' equity $ 57,291 $ 56,736
================ ====================
<FN>
See accompanying notes to Condensed Consolidated Financial Statements.
</FN>
</TABLE>
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<TABLE>
FORTE SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts; unaudited)
<CAPTION>
Three months ended June 30,
-------------------------------------------
1995 1996
---------------- ------------------
<S> <C> <C>
Revenues:
License fees $ 3,071 $ 8,023
Maintenance and service 1,309 3,657
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Total revenues 4,380 11,680
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Operating expenses:
Cost of license fees 95 138
Cost of maintenance and service 946 2,378
Sales and marketing 2,980 5,765
Product development and engineering 1,688 2,284
General and administrative 631 1,279
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Total operating expenses 6,340 11,844
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Operating loss (1,960) (164)
Interest income, net 104 489
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Income (loss) before income taxes (1,856) 325
Provision for income taxes (17) (32)
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Net income (loss) $ (1,873) $ 293
================ ==================
Pro forma net income (loss) per share $ (0.11) $ 0.01
================ ==================
Shares used in computing net income (loss)
per share 17,660 21,136
================ ==================
<FN>
See accompanying notes to Condensed Consolidated Financial Statements.
</FN>
</TABLE>
4
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<TABLE>
FORTE SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands; unaudited)
<CAPTION>
Three Months Ended June 30,
------------------------------------------
1995 1996
---------------- -----------------
<S> <C> <C>
Operating activities
Net income (loss) $ (1,873) $ 293
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 212 494
Changes in operating assets and liabilities:
Accounts receivable (1,789) 2,184
Prepaid expenses and other assets 125 153
Accounts payable 104 384
Accrued expenses and other liabilities (418) (893)
Deferred revenue 1,797 (178)
Net cash provided by (used in) operating activities (1,842) 2,437
---------------- -----------------
Investing activities
Purchases of equipment and leasehold improvements (403) (1,139)
Purchase of short-term investments - (7,065)
Maturities of short-term investments
973 -
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Net cash provided by (used in) investing activities 570 (8,204)
---------------- -----------------
Financing activities
Payment on notes payable
(37) -
Reduction in capital lease obligations (113) (323)
Proceeds from issuance of common stock 24
70
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Net cash used in financing activities (80) (299)
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Decrease in cash and cash equivalents (1,352) (6,066)
Cash and cash equivalents at beginning of period 9,860 35,081
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Cash and cash equivalents at end of period $ 8,508 $ 29,015
================ =================
Supplemental disclosures:
Interest paid $ 59 $ 67
================ =================
Income taxes paid $ 18 $ 41
================ =================
Supplemental disclosures of noncash investing and financing activities:
Capital lease obligations incurred $ 748 $ 90
================ =================
<FN>
See accompanying notes to Condensed Consolidated Financial Statements.
</FN>
</TABLE>
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FORTE SOFTWARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Basis of Presentation
The unaudited condensed consolidated financial statements included
herein reflect all adjustments, consisting only of normal recurring accruals,
which in the opinion of management are necessary to fairly present the Company's
consolidated financial position, results of operations, and cash flows for the
periods presented. These financial statements should be read in conjunction with
the Company's audited consolidated financial statements as included in the
Annual Report on Form 10-K for the year ended March 31, 1996. Certain
information and footnote disclosures normally included in audited financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the Securities and Exchange
Commission rules and regulations. The consolidated results of operations for the
period ended June 30, 1996 are not necessarily indicative of the results to be
expected for any subsequent quarter or for the entire fiscal year ending March
31, 1997. The March 31, 1996 balance sheet was derived from audited financial
statements, but does not include all disclosures required by generally accepted
accounting principles.
Net Income (Loss) Per Share
Except as noted below, net income (loss) per share is computed using
the weighted average number of shares of common stock outstanding. Pursuant to
the Securities and Exchange Commission Staff Accounting Bulletins, common and
common equivalent shares issued by the Company at prices below the initial
public offering price during the twelve-month period prior to the Company's
initial public offering have been included in the calculation as if they were
outstanding for all periods presented through December 31, 1995 (using the
treasury stock method).
Per share information calculated on the above noted basis for the
period ended June 30, 1995 is $(0.33) based on 5,629,733 weighted average shares
outstanding.
Pro forma net loss per share has been computed as described above and
also gives effect, even if antidilutive, to common equivalent shares from
convertible preferred stock that automatically converted upon the closing of the
Company's initial public offering (using the as-if-converted method). All of the
convertible preferred stock outstanding as of the closing date, March 11, 1996,
was automatically converted into an aggregate of 12,029,883 shares of common
stock.
6
<PAGE>
FORTE SOFTWARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)
Short-Term Investments
As of June 30, 1996, all short-term investments were classified as
available-for-sale securities pursuant to the provisions of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." Available-for-sale securities are stated at estimated fair market
value. Differences between the estimated fair market value and cost are included
in the balance sheet as an unrealized loss on short-term investments.
The following is a summary of the Company's investments and reconciliation of
the Company's investments to the balance sheet at June 30, 1996 (in thousands).
Estimated
Fair
Value
---------------
Money market funds 9
Commercial Paper 19,680
Medium Term Notes 7,269
Municipal Bonds 4,017
Corporate Notes 6,004
Auction rate preferred stock 4,010
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Total investments $ 40,989
========
Estimated
Fair
Value
---------------
Cash equivalents 27,716
Short-term investments 13,273
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Total investments 40,989
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Cash 1,299
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Total cash, cash equivalents and
short-term investments $ 42,288
========
7
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Quarterly Report on Form 10-Q contains forward-looking statements
that involve risks and uncertainties. The Company's actual results may differ
materially from the results discussed in the forward-looking statements. Factors
that might cause such a difference include, but are not limited to, those
discussed under the caption "Business Risks" contained herein.
<TABLE>
The following table sets forth certain consolidated statement of
operations data as a percentage of total revenues for the three months ended
June 30, 1995 and 1996.
<CAPTION>
Three months ended June 30,
1995 1996
-------------- -------------
(unaudited) (unaudited
<S> <C> <C>
Revenues:
License 70.1% 68.7%
Maintenance and service 29.9 31.3
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Total revenues 100.0 100.0
============== =============
Cost of revenues:
License 2.2 1.2
Maintenance and service 21.6 20.4
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Total cost of revenues 23.8 21.5
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Gross profit 76.2 78.5
Operating expenses:
Sales and marketing 68.0 49.4
Product development and engineering 38.5 19.6
General and administrative 14.4 11.0
-------------- -------------
Total operating expenses 120.9 79.9
Operating loss (44.7) (1.4)
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Interest income, net 2.4 4.2
-------------- -------------
Income before income taxes (42.3) 2.8
Provision for income taxes (0.4) (0.3)
-------------- -------------
Net income (loss) (42.7)% 2.5%
============== =============
</TABLE>
8
<PAGE>
Results of Operations
Revenues. The Company's total revenues consist of license fees for its Forte
application environment, Forte Express and the Forte Web SDK as well as
associated maintenance and service revenues. License revenues are recognized
upon execution of a license agreement and shipment of the product if no
significant contractual obligations remain and collection of the resulting
receivable is probable. Allowances for credit risks and for estimated future
returns are provided for upon shipment. Returns to date have not been material.
Maintenance and service revenues consist of fees for maintenance, training and
consulting services. Fees for maintenance and service are charged separately
from the license of Forte software. Maintenance revenues consist of fees for
ongoing support and product updates and are recognized ratably over the term of
the contract, which is typically twelve months. Revenues from training are
recognized upon completion of the related training class. Consulting revenues
are recognized when the services are performed. The Company has recognized
revenues, for all periods presented, in accordance with Statement of Position
91-1 entitled "Software Revenue Recognition."
The Company's total revenues increased 167% to $11.7 million from $4.4
million for the quarters ended June 30, 1996 and 1995, respectively. The
Company's license revenues increased 167% to $8.0 million, or 69% of total
revenues, from $3.0 million, or 70% of total revenues, for the quarters ended
June 30, 1996 and 1995, respectively. Total license revenues increased primarily
as a result of an increase in the number of licenses sold reflecting increased
market awareness as well as acceptance of Forte software and expansion of the
Company's direct sales organization.
Maintenance and service revenues increased 179% to $3.7 million, or 31%
of total revenues, from $1.3 million, or 30% of revenues, for the quarters ended
June 30, 1996 and 1995, respectively. These increases in total maintenance and
service revenues were primarily a result of the growing installed base of Forte
and the associated increase in demand for maintenance, training and consulting
services.
International revenues include all revenues other than from the United
States. International revenues include sales from the Company's direct sales
organizations in Europe and Australia and export sales through distributors and
resellers in Europe and other areas of the world, as well as international sales
made by the domestic direct sales organization. International revenues increased
183% to $3.4 million for the quarter ended June 30, 1996 compared to $1.2
million for the quarter ended June 30, 1995 representing 29% of total revenues
for each of the periods. The increase in international revenues reflects a
growing direct sales presence in Europe and Australia through the Company's
foreign subsidiaries. The Company expects that international license and related
maintenance and service revenues will continue to account for a significant
portion of its total revenues in the future. The Company believes that in order
to increase sales opportunities and profitability it will be required to expand
its international operations. The Company has committed and continues to commit
significant management time and financial resources to developing direct and
indirect international sales and support channels. There can be no assurance,
however, that the Company will be able to maintain or increase international
market demand for Forte. To the extent that the Company is unable to do so in a
timely manner, the Company's international sales will be limited, and the
Company's business, operating results and financial condition would be
materially adversely affected.
9
<PAGE>
Cost of Revenues
Cost of License Revenues. Cost of license revenues consists primarily of
royalties paid to third-party vendors, product packaging, documentation and
production. Cost of license revenues was $95,000 and $138,000 for the quarters
ending June 30, 1995 and 1996, respectively, representing 3% and 2% of license
revenues, respectively. The Company has experienced economies of scale related
to cost of licenses as a result of revenue growth.
Cost of Maintenance and Service Revenues. Cost of maintenance and service
revenues consists primarily of personnel-related and facilities costs incurred
in providing customer support, training and consulting services, as well as
third-party costs incurred in providing training and consulting services. Cost
of maintenance and service revenues was $946,000 and $2.4 million for the
quarters ending June 30, 1995 and 1996, respectively, representing 72% and 65%
of maintenance and service revenues, respectively. The decrease in cost of
maintenance and service revenues for the quarter ended June 30, 1996 as a
percentage of maintenance and service revenues was primarily due to improved
economies of scale of the technical support center and increased productivity
from training, support and consulting personnel. The Company does not expect its
cost of maintenance and service revenues to continue to materially decrease as a
percentage of maintenance and service revenues. The cost of services as a
percentage of services revenues may vary between periods due to the mix of
services provided by the Company and the extent to which external contractors
are used to provide those services.
Operating Expenses
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries, commissions and bonuses earned by sales and marketing personnel, field
office expenses, travel and entertainment and promotional expenses and
advertising. Sales and marketing expenses increased from $3.0 million for the
quarter ended June 30, 1995 to $5.8 million for the quarter ended June 30, 1996.
These increases reflect the hiring of additional sales and marketing personnel,
and their related costs, as well as increased costs associated with expanded
promotional activities. Sales and marketing expenses represented 68% and 49% of
total revenues for the quarters ended June 30, 1995 and 1996, respectively. The
decrease in sales and marketing expenses for fiscal 1996 as a percentage of
total revenue was primarily due to the more rapid growth in revenues. The
Company expects that sales and marketing expenses will continue to increase in
dollar amount as the Company continues to hire additional sales and marketing
personnel and increase promotional activities in the future.
Product Development. Product development expenses consist primarily of salaries
and other personnel-related expenses and depreciation of development equipment.
The Company believes that a significant level of investment for product
development is required to remain competitive. Product development expenses
increased from $1.7 million for the quarter ended June 30, 1995 to $2.3 million
for the quarter ended June 30, 1996. This increase was primarily attributable to
additional hiring of product development personnel. Product development expenses
represented 39% and 20% of total revenues for the quarters ended June 30, 1995
and 1996, respectively. The decrease in product development expenses for fiscal
1996 as a percentage of total revenue was primarily due to the more rapid growth
in revenues. The Company anticipates that it will continue to devote substantial
resources to product development and that product development expenses will
10
<PAGE>
increase in dollar amount in the future. Because all costs incurred in the
research and development of software products and enhancements to existing
software products have been expensed as incurred, cost of license revenues
includes no amortization of capitalized software development costs.
General and Administrative. General and administrative expenses increased from
$631,000 for the quarter ended June 30, 1995 to $1.3 million in for the quarter
ended June 30, 1996. These increases were primarily due to increased staffing
and associated expenses necessary to manage and support the Company's increased
scale of operations. General and administrative expenses represented 14% and 11%
of total revenues for the quarters ended June 30, 1995 and 1996. The decrease in
general and administrative expenses for fiscal 1996 as a percentage of total
revenue was primarily due to the more rapid growth in revenues. The Company
believes that its general and administrative expenses will increase in dollar
amount in the future as a result of the expansion of the Company's
administrative staff to support its growing operations and as a result of an
increase in expense associated with being a public company.
Interest Income, Net. Interest income, net, represents interest earned by the
Company on its cash and cash equivalents and short-term investments offset by
interest expense on long-term debt and capitalized leases. Interest income, net,
increased from $104,000 for the quarter ended June 30, 1995 to $489,000 for the
quarter ended June 30, 1996 primarily as a result of interest income from the
Company investing of proceeds of the Company's initial public offering.
Provision for Income Taxes. The effective tax rate for the quarter ended June
30, 1996 was 10%. The provision for income taxes was due to state and federal
alternative minimum taxes and foreign taxes. The effective tax rate for fiscal
year 1997 is expected to differ from the federal statutory rate of 34% primarily
due to the utilization of net operating loss carryforwards, offset by
adjustments of the valuation allowance, alternative minimum taxes and foreign
taxes. At March 31, 1996, the Company had approximately $16.4 million in federal
net operating loss carryforwards, approximately $7.1 million in state net
operating loss carryforwards and approximately $1.0 million in research and
development credit carryforwards; the federal net operating loss and research
and development credit carryforwards expire in the years 2006 through 2011; the
state net operating loss carryforwards expire in the years 1997 through 2001.
Utilization of net operating losses and credits may be subject to
annual limitations due to the ownership change limitations provided by the
Internal Revenue Code of 1986 and similar state provisions. Such limitations, if
any, are not expected to impact the ultimate utilization of the carryforwards.
The Company has established a valuation allowance against its deferred
tax assets due to the uncertainty surrounding the realization of such assets.
Management evaluates on an annual basis the recoverability of the deferred tax
assets and the level of the valuation allowance. If it is determined that it is
more likely than not that deferred tax assets are realizable, then at such time
the valuation allowance will be appropriately reduced.
11
<PAGE>
Liquidity and Capital Resources
The Company completed an initial public offering of common stock on
March 11, 1996 with net proceeds of $34.3 million. The common stock is trading
on the Nasdaq National Market under the symbol FRTE.
The Company generated cash of $2.4 million from operating activities
for the quarter ended June 30, 1996 compared to cash used in operations of $1.8
million for the quarter ended June 30, 1996. For the quarter ended June 30,
1996, the increase in cash flow from operations resulted primarily from net
income for the quarter, a decrease in accounts receivable and an increase in
accounts payable, offset by a decrease in accrued expenses and other
liabilities. For the quarter ended June 30, 1995, the net cash used in operating
activities was primarily due to an increase in accounts receivable and a
decrease in accrued expenses and other liabilities, offset by an increase in
deferred revenue.
The Company's investing activities consisted of the purchases
of interest-bearing securities, as well as purchases of property and equipment.
Capital expenditures were $1.1 million for the quarter ended June 30, 1996
compared to $403,000 for the same period in fiscal 1996. Capital expenditures
consisted of purchases of computer equipment and office furniture to support its
growing employee base. The Company expects that its capital expenditures will
increase as the Company's employee base grows. At June 30, 1996 the Company did
not have any material commitments for capital expenditures.
At June 30, 1996, the Company had $42.3 million in cash, cash
equivalents and short term investments and $38.9 million in working capital. The
Company's $5 million revolving line of credit expired on June 30, 1996. The
Company has an equipment lease line, which at June 30, 1996, provided $5.8
million of leasing capacity at 12% interest and repayable over 42 months.
Approximately $1.5 million was available under the equipment lease line as of
June 30, 1996.
The Company believes that its existing cash, cash equivalents,
short-term investments will be adequate to meet its cash needs for at least the
next 12 months. Thereafter, the Company may require additional funds to support
its working capital requirements or for other purposes and may seek to raise
such additional funds through public or private equity financings or from other
sources. There can be no assurance that additional financing will be available
at all or that, if available, such financing will be obtainable on terms
favorable to the Company and would not be dilutive.
12
<PAGE>
BUSINESS RISKS
This Quarterly Report on Form 10-Q contains forward-looking statements
that involve risks and uncertainties. The Company's actual results may differ
materially from the results discussed in the forward-looking statements. Factors
that might cause such a difference include, but are not limited to, those
discussed under the caption "Business Risks" contained herein.
Limited Operating History; History of Operating Losses. The Company was
founded in February 1991 and first shipped product in August 1994. Although the
Company's revenues have increased in each of the last eight quarters and the
Company had net income in each of the quarters ended December 31, 1995 through
June 30, 1996, the Company incurred net losses in each quarter from inception
through the quarter ended September 30, 1995, and had an accumulated deficit of
$22.4 million as of June 30, 1996. A substantial portion of the accumulated
deficit is due to the significant commitment of resources to the Company's
product development and sales organizations. The Company expects to continue to
devote substantial resources in these areas and as a result will need to
recognize significant quarterly revenues to achieve and maintain profitability.
There can be no assurance that any of the Company's business strategies will be
successful or the Company will be profitable in any future quarter or period.
Potential Fluctuations in Quarterly Results; Uncertainty of Future
Operating Results; Seasonality. The Company's quarterly operating results have
varied significantly in the past and are likely to vary significantly in the
future, depending on factors such as the size and timing of significant orders
and their fulfillment, demand for the Company's products, changes in pricing
policies by the Company or its competitors, the number, timing and significance
of product enhancements and new product announcements by the Company and its
competitors, the ability of the Company to develop, introduce and market new and
enhanced versions of the Company's products on a timely basis, changes in the
level of operating expenses, changes in the Company's sales incentive plans,
budgeting cycles of its customers, customer order deferrals in anticipation of
enhancements or new products offered by the Company or its competitors, the
cancellation of licenses during the warranty period or nonrenewal of maintenance
agreements, product life cycles, software bugs and other product quality
problems, personnel changes, changes in the Company's strategy, the level of
international expansion, seasonal trends and general domestic and international
economic and political conditions, among others. A significant portion of the
Company's revenues have been, and the Company believes will continue to be,
derived from a limited number of orders placed by large organizations, and the
timing of such orders and their fulfillment has caused and could continue to
cause material fluctuations in the Company's operating results, particularly on
a quarterly basis. In addition, the Company intends to continue to expand its
domestic and international direct sales force. The timing of such expansion and
the rate at which new sales people become productive could also cause material
fluctuations in the Company's quarterly operating results. Due to the foregoing
factors, quarterly revenues and operating results are difficult to forecast.
Revenues are also difficult to forecast because the market for client/server
application development software is rapidly evolving, and the Company's sales
cycle, from initial evaluation to purchase and the provision of support
services, is lengthy and varies substantially from customer to customer. Product
orders are typically shipped shortly after receipt, and consequently, order
backlog at the beginning of any quarter has in the past represented only a small
portion of that quarter's
13
<PAGE>
revenues. As a result, license revenues in any quarter are substantially
dependent on orders booked and shipped in that quarter. Due to all of the
foregoing, revenues for any future quarter are not predictable with any
significant degree of accuracy. Accordingly, the Company believes that
period-to-period comparisons of its operating results are not necessarily
meaningful and should not be relied upon as indications of future performance.
Although the Company has recently experienced revenue growth, such growth should
not be considered indicative of future revenue growth, if any, or of future
operating results. Failure by the Company, for any reason, to increase revenues
would have a material adverse effect on the Company's business, operating
results and financial condition.
To achieve its quarterly revenue objectives, the Company is dependent
upon obtaining orders in any given quarter for shipment in that quarter.
Furthermore, the Company has often recognized a substantial portion of its
revenues in the last month, or even weeks or days, of a quarter. The Company's
expense levels are based, in significant part, on the Company's expectations as
to future revenues and are therefore relatively fixed in the short term. If
revenue levels fall below expectations, net income is likely to be
disproportionately adversely affected because a proportionately smaller amount
of the Company's expenses varies with its revenues. There can be no assurance
that the Company will be able to achieve or maintain profitability on a
quarterly or annual basis in the future. Due to all the foregoing factors, it is
likely that in some future quarter the Company's operating results will be below
the expectations of public market analysts and investors. In such event, the
price of the Company's Common Stock would likely be materially adversely
affected.
The operating results of many software companies reflect seasonal
trends, and the Company expects to be affected by such trends in the future. The
Company believes that it is likely that it will experience relatively higher
revenues in the Company's quarter ended March 31 and relatively lower or flat
revenues in its quarter ending June 30 as a result of efforts by its direct
sales force to meet fiscal year-end sales quotas. As a result, the Company could
incur a decline in net income for the quarter ending June 30, 1997 compared to
the prior quarter. The Company anticipates that it may experience relatively
weaker demand in the quarter ending September 30 as a result of reduced sales
activity in Europe during the summer months.
Product Concentration; Dependence on Emerging Market for High-End
Client/Server Applications. All of the Company's revenues have been attributable
to sales of Forte, Forte Express, Forte Web SDK and related services. The
Company currently expects Forte, Forte Express, Forte Web SDK and related
services to account for all or substantially all of the Company's future
revenues. As a result, factors adversely affecting the pricing of or demand for
Forte, Forte Express and Forte Web SDK such as competition or technological
change, could have a material adverse effect on the Company's business,
operating results and financial condition. The Company's future financial
performance will depend, in significant part, on the successful development,
introduction and customer acceptance of new and enhanced versions of Forte,
Forte Express and Forte Web SDK. There can be no assurance that the Company will
continue to be successful in marketing the Forte products or other products.
Although the Company has recently experienced growth in sales of Forte, Forte
Express and Forte Web SDK, there can be no assurance that the market for
high-end client/server applications will continue to grow. If the high-end
client/server market fails to grow, or grows more slowly than the Company
currently anticipates, the Company's business, operating results and financial
condition would be materially and adversely affected.
14
<PAGE>
Risks Associated with Expanding Distribution. To date, the Company has
sold its products through its direct sales force, distributors and value added
resellers. The Company's ability to achieve significant revenue growth in the
future will depend in large part on its success in recruiting and training
sufficient direct sales personnel and establishing and maintaining relationships
with distributors, resellers and system integrators. Although the Company is
currently investing, and plans to continue to invest, significant resources to
expand its direct sales force and to develop distribution relationships with
third-party distributors and resellers, the Company has at times experienced and
continues to experience difficulty in recruiting qualified sales personnel and
in establishing necessary third-party relationships. There can be no assurance
that the Company will be able to successfully expand its direct sales force or
other distribution channels or that any such expansion will result in an
increase in revenues. Any failure by the Company to expand its direct sales
force or other distribution channels would materially adversely affect the
Company's business, operating results and financial condition.
Lengthy Sales Cycle. The Company's products are typically used to
develop applications that are critical to a customer's business and the purchase
of the Company's products is often part of a customer's larger business process
reengineering initiative or implementation of client/server computing. As a
result, the license and implementation of the Company's software products
generally involves a significant commitment of management attention and
resources by prospective customers. Accordingly, the Company's sales process is
often subject to delays associated with a long approval process that typically
accompanies significant initiatives or capital expenditures. For these and other
reasons, the sales cycle associated with the license of the Company's products
is often lengthy and subject to a number of significant delays over which the
Company has little or no control. There can be no assurance that the Company
will not experience these and additional delays in the future. Therefore, the
Company believes that its quarterly operating results are likely to vary
significantly in the future.
Limited Deployment; Dependence on System Integrators. The Company first
shipped Forte in August 1994. To date, only a limited number of the Company's
customers have completed the development and deployment of high-end
client/server applications using Forte. If any of the Company's customers are
not able to successfully develop and deploy high-end client/server applications
with Forte, the Company's reputation could be damaged, which could have a
material adverse effect on the Company's business, operating results and
financial condition. In addition, the Company expects that a significant
percentage of its future revenues will be derived from sales to existing
customers. If existing customers have difficulty deploying applications built
with Forte or for any other reason are not satisfied with Forte, the Company's
business, operating results and financial condition would be materially
adversely affected. The Company's customers and potential customers often rely
on third-party system integrators to develop, deploy and manage high-end
client/server applications. If the Company is unable to adequately train a
sufficient number of system integrators or if, for any reason, a large number of
such integrators adopt a product or technology other than Forte, the Company's
business, operating results and financial condition would be materially and
adversely affected.
Competition. The market for high-end software used in the development,
deployment and management of client/server applications is intensely competitive
and characterized by rapidly changing technology, evolving industry standards,
frequent new product introductions and rapidly
15
<PAGE>
changing customer requirements. High-end client/server applications that can be
developed and deployed using the Company's Forte environment can also be
implemented using a combination of first generation application development
tools and more powerful server programming techniques such as stored procedures
in relational databases, C or C++ programming, and networking and database
middleware to connect the various components. As such, the Company effectively
experiences its primary competition from potential customers' decisions to
pursue this type of approach as opposed to utilizing an application environment
such as Forte. As a result, the Company must continuously educate existing and
prospective customers as to the advantages of the Company's products. There can
be no assurance that these customers or potential customers will perceive
sufficient value in the Company's products to justify purchasing them.
The Company has experienced and expects to continue to experience
increased competition from current and future competitors, many of whom have
significantly greater financial, technical, marketing and other resources than
the Company. The Company's current direct competitors include, among others,
Dynasty Technologies, Inc., Seer Technologies, Inc. and NAT Systems, Inc. The
Company expects to compete increasingly with Oracle Corporation, Informix
Corporation, Powersoft (a subsidiary of Sybase, Inc.), Microsoft Corporation,
IBM Corporation and others. The Company's competitors may be able to respond
more quickly to new or emerging technologies and changes in customer
requirements or devote greater resources to the development, promotion and sale
of their products than the Company. Also, many current and potential competitors
have greater name recognition and more extensive customer bases that could be
leveraged, thereby gaining market share to the Company's detriment. The Company
expects to face additional competition as other established and emerging
companies enter the client/server application development market and new
products and technologies are introduced. Increased competition could result in
price reductions, fewer customer orders, reduced gross margins and loss of
market share, any of which could materially adversely affect the Company's
business, operating results and financial condition. In addition, current and
potential competitors may make strategic acquisitions or establish cooperative
relationships among themselves or with third parties, thereby increasing the
ability of their products to address the needs of the Company's prospective
customers. Accordingly, it is possible that new competitors or alliances among
current and new competitors may emerge and rapidly gain significant market
share. Such competition could materially adversely affect the Company's ability
to sell additional licenses and maintenance and support renewals on terms
favorable to the Company. Further, competitive pressures could require the
Company to reduce the price of Forte licenses and related services, which could
materially adversely affect the Company's business, operating results and
financial condition. There can be no assurance that the Company will be able to
compete successfully against current and future competitors, and the failure to
do so would have a material adverse effect upon the Company's business,
operating results and financial condition.
Risk Associated with New Versions and New Products; Rapid Technological
Change. The software market in which the Company competes is characterized by
rapid technological change, frequent introductions of new products, changes in
customer demands and evolving industry standards. The introduction of products
embodying new technologies and the emergence of new industry standards can
render existing products obsolete and not marketable. For example, the Company's
customers have adopted a wide variety of hardware, software, database and
networking platforms, and as a result, to gain broad market acceptance, the
Company has had to support Forte on many of such platforms. The Company's future
success will depend upon its ability to address
16
<PAGE>
the increasingly sophisticated needs of its customers by supporting existing and
emerging hardware, software, database and networking platforms and by developing
and introducing enhancements to Forte and new products on a timely basis that
keep pace with such technological developments and emerging industry standards
and customer requirements. There can be no assurance that the Company will be
successful in developing and marketing enhancements to Forte that respond to
technological change, evolving industry standards or customer requirements, that
the Company will not experience difficulties that could delay or prevent the
successful development, introduction and sale of such enhancements or that such
enhancements will adequately meet the requirements of the marketplace and
achieve any significant degree of market acceptance. The Company has in the past
experienced delays in the release dates of enhancements to Forte. If release
dates of any future Forte enhancements or new products are delayed or if when
released they fail to achieve market acceptance, the Company's business,
operating results and financial condition would be materially adversely
affected. In addition, the introduction or announcement of new product offerings
or enhancements by the Company or the Company's competitors may cause customers
to defer or forgo purchases of current versions of Forte, which could have
material adverse effect on the Company's business, operating results and
financial condition.
Risk of Software Defects. Software products as internally complex as
Forte frequently contain errors or defects, especially when first introduced or
when new versions or enhancements are released. Despite extensive product
testing by the Company, the Company has discovered software errors in versions
of Forte after their introduction. Although the Company has not experienced
material adverse effects resulting from any such defects or errors to date,
there can be no assurance that, despite testing by the Company and by current
and potential customers, defects and errors will not be found in current
versions, new versions or enhancements after commencement of commercial
shipments, resulting in loss of revenues or delay in market acceptance, which
could have a material adverse effect upon the Company's business, operating
results and financial condition.
Product Liability. The Company markets Forte to customers for the
development, deployment and management of high-end client/server applications.
The Company's license agreements with its customers typically contain provisions
designed to limit the Company's exposure to potential product liability claims.
It is possible, however, that the limitation of liability provisions contained
in the Company's license agreements may not be effective as a result of existing
or future federal, state or local laws or ordinances or unfavorable judicial
decisions. Although the Company has not experienced any product liability claims
to date, the sale and support of Forte by the Company may entail the risk of
such claims, which are likely to be substantial in light of the use of Forte in
business-critical applications. A successful product liability claim brought
against the Company could have a material adverse effect upon the Company's
business, operating results and financial condition.
Risks Associated with International Operations. Revenues from foreign
subsidiaries and export sales accounted for 29% of the Company's total for each
of the quarters ended June 30, 1995 and 1996. The Company currently has
international sales offices located in the United Kingdom, France, Australia,
Germany, Canada and Switzerland, which have generated substantially all direct
international revenues recognized by the Company to date. The Company believes
that in order to increase sales opportunities and profitability it will be
required to expand its international operations. The Company has committed and
continues to commit significant management time
17
<PAGE>
and financial resources to developing direct and indirect international sales
and support channels. There can be no assurance, however, that the Company will
be able to maintain or increase international market demand for Forte. To the
extent that the Company is unable to do so in a timely manner, the Company's
international sales will be limited, and the Company's business, operating
results and financial condition would be materially and adversely affected.
International operations are subject to inherent risks, including the
impact of possible recessionary environments in economies outside the United
States, costs of localizing products for foreign markets, longer receivables
collection periods and greater difficulty in accounts receivable collection,
unexpected changes in regulatory requirements, difficulties and costs of
staffing and managing foreign operations, reduced protection for intellectual
property rights in some countries, potentially adverse tax consequences and
political and economic instability. There can be no assurance that the Company
or its distributors or resellers will be able to sustain or increase
international revenues from licenses or from maintenance and service, or that
the foregoing factors will not have a material adverse effect on the Company's
future international revenues and, consequently, on the Company's business,
operating results and financial condition. The Company's direct international
revenues are generally denominated in local currencies. The Company does not
currently engage in hedging activities. Revenues generated by the Company's
distributors and resellers are generally paid to the Company in United States
dollars. Although exposure to currency fluctuations to date has been
insignificant, there can be no assurance that fluctuations in currency exchange
rates in the future will not have a material adverse impact on revenues from
international sales and thus the Company's business, operating results and
financial condition.
Proprietary Rights, Risks of Infringement and Source Code Release. The
Company relies primarily on a combination of patent, copyright and trademark
laws, trade secrets, confidentiality procedures and contractual provisions to
protect its proprietary rights. The Company also believes that factors such as
the technological and creative skills of its personnel, new product
developments, frequent product enhancements, name recognition and reliable
product maintenance are essential to establishing and maintaining a technology
leadership position. The Company seeks to protect its software, documentation
and other written materials under trade secret and copyright laws, which afford
only limited protection. The Company currently has one issued United States
patent that expires in 2012 and corresponding patent applications pending in
Canada, Australia, Japan and several member countries within the European Patent
Organization. There can be no assurance that the Company's patent will not be
invalidated, circumvented or challenged, that the rights granted thereunder will
provide competitive advantages to the Company or that any of the Company's
pending or future patent applications, whether or not being currently challenged
by applicable governmental patent examiners, will be issued with the scope of
the claims sought by the Company, if at all. Furthermore, there can be no
assurance that others will not develop technologies that are similar or superior
to the Company's technology or design around the patents owned by the Company.
The Company filed a United States trademark registration application for Forte
in April 1996. Despite the Company's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy aspects of the Company's products or to
obtain and use information that the Company regards as proprietary. Policing
unauthorized use of the Company's products is difficult, and while the Company
is unable to determine the extent to which piracy of its software products
exists, software piracy can be expected to be a persistent problem. In addition,
the laws of some foreign countries do not protect the Company's proprietary
rights as fully as do the laws of the United States. There can be no assurance
that the Company's means of protecting its proprietary
18
<PAGE>
rights in the United States or abroad will be adequate or that competition will
not independently develop similar technology. The Company has entered into
source code escrow agreements with a limited number of its customers and
resellers requiring release of source code in certain circumstances. Such
agreements generally provide that such parties will have a limited,
non-exclusive right to use such code in the event that there is a bankruptcy
proceeding by or against the Company, if the Company ceases to do business or if
the Company fails to meet its support obligations. In addition, Digital
Equipment Corporation ("Digital"), Sequent Computer Systems, Inc. ("Sequent")
and Mitsubishi Corporation ("Mitsubishi") each currently possesses copies of
Forte source code for certain limited purposes, subject to the terms of separate
written agreements each company has entered into with the Company. Digital and
Sequent each has an option to purchase a non-exclusive, fully-paid license of
the Forte source code. Digital's option becomes exercisable if the Company is
acquired and the acquiror fails to agree to assume the Company's contractual
obligations to Digital, and Sequent's option is exercisable if the Company is
acquired by certain Sequent competitors. The provision of source code may
increase the likelihood of misappropriation by third parties.
The Company is not aware that it is infringing any proprietary rights
of third parties. There can be no assurance, however, that third parties will
not claim infringement by the Company of their intellectual property rights. The
Company expects that software product developers will increasingly be subject to
infringement claims as the number of products and competitors in the Company's
industry segment grows and the functionality of products in different industry
segments overlaps. Any such claims, with or without merit, could be time
consuming to defend, result in costly litigation, divert management's attention
and resources, cause product shipment delays or require the Company to enter
into royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to the Company, if at all. In
the event of a successful claim of product infringement against the Company and
failure or inability of the Company to license the infringed or similar
technology, the Company's business, operating results and financial condition
would be materially adversely affected.
The Company relies upon certain software that it licenses from third
parties, including software that is integrated with the Company's internally
developed software and used in Forte to perform key functions. There can be no
assurance that these third-party software licenses will continue to be available
to the Company on commercially reasonable terms. The loss of, or inability to
maintain, any such software licenses could result in shipment delays or
reductions until equivalent software could be developed, identified, licensed
and integrated which would materially adversely affect the Company's business,
operating results and financial condition.
Volatility of Stock Price. The Company's Common Stock has experienced
significant price volatility and such volatility may occur in the future.
Factors, such as announcements of the introduction of new products by the
Company or its competitors and quarter-to-quarter variations in the Company's
operating results, as well as market conditions in the technology and emerging
growth company sectors, may have a significant impact on the market price of the
Company's Common Stock. Further, the stock market has experienced extreme
volatitility that has particularly affected the market prices of equity
securities of many high technology companies and that often has been unrelated
or disproportionate to the operating performance of such companies. These market
fluctuations may adversely affect the price of the Common Stock.
19
<PAGE>
Need to Manage a Changing Business. The Company has recently
experienced a period of significant revenue growth and an expansion in the
number of its employees, the scope of its operating and financial systems and
geographic area of its operations. This growth has resulted in new and increased
responsibilities for management personnel and has placed significant strain upon
the Company's management, operating and financial systems and resources. To
accommodate recent growth, compete effectively and manage potential future
growth, the Company must continue to implement and improve information systems,
procedures and controls and expand, train, motivate and manage its work force.
These demands will require the addition of new management personnel. The
Company's future success will depend to a significant extent on the ability of
its current and future management personnel to operate effectively, both
independently and as a group. There can be no assurance that the Company's
personnel, systems, procedures and controls will be adequate to support the
Company's future operations. Any failure to implement and improve the Company's
operational, financial and management systems or to expand, train, motivate or
manage employees could have a material adverse effect on the Company's business,
operating results and financial condition.
Dependence on Key Personnel. The Company's success depends to a
significant degree upon the continuing contributions of its key management,
sales, marketing, customer support and product development personnel. The loss
of key management or technical personnel could adversely affect the Company.
None of the Company's employees is subject to an employment agreement with the
Company. The Company believes that its future success will depend in large part
upon its ability to attract and retain highly-skilled managerial, sales,
customer support and product development personnel. The Company has at times
experienced and continues to experience difficulty in recruiting qualified
personnel. Competition for qualified software development, sales and other
personnel is intense, and there can be no assurance that the Company will be
successful in attracting and retaining such personnel. Competitors and others
have in the past and may in the future attempt to recruit the Company's
employees. Failure to attract and retain key personnel could have a material
adverse effect on the Company's business, operating results and financial
condition.
20
<PAGE>
PART II
ITEM 1. LEGAL PROCEEDINGS
The Company is not a party to any litigation. The Company is not aware
of any pending or threatened litigation that could have a material adverse
effect upon the Company's business, operating results or financial condition.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS ON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 11.1 Statement Regarding Computation of Earnings Per Share
(b) Exhibit 27 Financial Data Schedule
(c) No reports on Form 8-K have been filed during the quarter ended
June 30, 1996.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, as amended,
the Registrant has duly caused this Report on Form 10-Q to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Oakland,
State of California, on this 9th day of August, 1996.
FORTE SOFTWARE, INC.
By: /s/ RODGER E. WEISMANN
Rodger E. Weismann
Vice President, Finance and Administration, Chief
Financial Officer and Secretary
22
Exhibit 11.1
<TABLE>
FORTE SOFTWARE, INC.
COMPUTATION OF LOSS PER SHARE
(in thousands, except per share data)
<CAPTION>
Three Months Ended
June 30,
--------
1995 1996
---- ----
<S> <C> <C>
Actual weighted average shares outstanding for the period:
Common Stock 3,684,425 18,322,090
Common Stock Equivalents 248,778 2,814,148
SAB 83, Cheap stock 1,696,530 -
----------- ----------
Total common and cheap stock weighted average shares outstanding 5,629,733 21,136,238
----------- ----------
Net income (loss) (1,873,000) 293,000
----------- ----------
Net income (loss) per share $(0.33) $0.01
----------- ----------
</TABLE>
23
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001006370
<NAME> FORTE SOFTWARE INC.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 29,015
<SECURITIES> 13,273
<RECEIVABLES> 9,385
<ALLOWANCES> 510
<INVENTORY> 0
<CURRENT-ASSETS> 51,878
<PP&E> 7,289
<DEPRECIATION> 2,651
<TOTAL-ASSETS> 56,736
<CURRENT-LIABILITIES> 12,977
<BONDS> 0
<COMMON> 183
0
0
<OTHER-SE> 40,266
<TOTAL-LIABILITY-AND-EQUITY> 56,736
<SALES> 11,680
<TOTAL-REVENUES> 11,680
<CGS> 2,516
<TOTAL-COSTS> 2,516
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 510
<INTEREST-EXPENSE> 67
<INCOME-PRETAX> 325
<INCOME-TAX> 32
<INCOME-CONTINUING> 293
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 293
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
</TABLE>
