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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
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/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
[FEE REQUIRED]
For the fiscal year ended March 31, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 [NO FEE REQUIRED]
For the transition period from to
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Commission file number: 0-27838
Forte Software, Inc.
(Exact name of registrant as specified in its charter)
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DELAWARE 94-3131872
(State or other jurisdiction (I.R.S. Employer
of
incorporation or identification
organization) No.)
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1800 Harrison Street, Oakland, California 94612
(Address of principal executive offices and Zip Code)
Registrant's telephone number, including area code: (510) 869-3400
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES /X/
NO / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Registration S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /X/
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing sale price of the Common Stock on May 31,
1996 as reported on the Nasdaq National Market, was approximately $654,476,011.
Shares of Common Stock held by each officer and director and by each person who
owns 5% or more of the outstanding Common Stock have been excluded in that such
persons may be deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes. As of May 31,
1996, Registrant had outstanding 18,338,231 shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for the Annual
Meeting of Stockholders to be held on August 14, 1996 is incorporated by
reference in Part III of this Form 10-K to the extent stated herein.
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FORTE SOFTWARE, INC.
1996 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
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PART I
Item 1. Business.................................................................... 2
Item 2. Properties.................................................................. 25
Item 3. Legal Proceedings........................................................... 25
Item 4. Submission of Matters to a Vote of Security Holders......................... 25
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters....... 26
Item 6. Selected Financial Data..................................................... 27
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................. 28
Item 8. Financial Statements and Supplementary Data................................. 35
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial
Disclosure................................................................. 35
PART III
Item 10. Directors and Executive Officers of Registrant.............................. 36
Item 11. Executive Compensation...................................................... 36
Item 12. Security Ownership of Certain Beneficial Owners and Management.............. 36
Item 13. Certain Relationships and Related Transactions.............................. 36
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............. 37
Signatures.................................................................. 39
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PART I
THIS ANNUAL REPORT ON FORM 10-K INCLUDES A NUMBER OF FORWARD-LOOKING
STATEMENTS WHICH REFLECT THE COMPANY'S CURRENT VIEWS WITH RESPECT TO FUTURE
EVENTS AND FINANCIAL PERFORMANCE. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT
TO CERTAIN RISKS AND UNCERTAINTIES, INCLUDING THOSE DISCUSSED IN "BUSINESS
RISKS" BELOW, THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
HISTORICAL RESULTS OR THOSE ANTICIPATED.
ITEM 1. BUSINESS
INTRODUCTION
Forte Software, Inc. (the "Company") designs, develops, markets and supports
Forte, a software application development, deployment and management environment
for high-end client/server applications. Forte was designed to enable
organizations to create applications with powerful functionality that support up
to hundreds or thousands of concurrent users with high levels of reliability,
performance and manageability. Forte reduces complexity for developers by
providing automatic application partitioning, object-oriented development and
independence from specific hardware platforms, operating systems and databases.
Forte's multi-tier client/server architecture increases developer productivity,
business flexibility and the efficient use of computing resources. Forte allows
organizations to use information technology more strategically and improve their
ability to compete in today's business environment.
Forte is marketed and sold through the Company's direct sales force,
distributors and value added resellers in North America, Europe, Asia, Australia
and South America. Forte has been adopted by customers in a wide variety of
industries, including banking, consumer/retail, education, energy, finance,
healthcare/pharmaceuticals, insurance, manufacturing, media, technology and
telecommunications. As of March 31, 1996, over 130 end-user customers have
licensed Forte, including Andersen Windows, AT&T Universal Card Services, Bank
of America, British Telecom, Corning, Du Pont, EDS, Eli Lilly, Hewlett-Packard
Company, Kawasaki Steel, Merrill Lynch Canada, Montreal Exchange, Pacific Bell
Information Services, Paging Network, Philip Morris, Reuters, World Bank and
Xerox.
INDUSTRY BACKGROUND
BUSINESS NEED FOR MORE POWERFUL APPLICATIONS
In today's increasingly competitive global markets, businesses must rapidly
and continuously improve their operations. The strategic use of information
technology ("IT") is often critical to making such improvements. Information
systems that automate simple tasks are no longer sufficient, as business
entities are demanding applications with increased levels of functionality. For
example, to gain competitive advantage, a catalog telesales organization may
require an application that enables a customer sales representative to check
inventory status, perform a credit check, schedule delivery of a product, and
provide customer-specific recommendations, all while the customer is on the
telephone. When one company begins to offer this level of service, competitors
may be compelled to provide similar capabilities or risk losing market share.
The growing demand for more powerful computer applications presents a major
challenge to corporate IT organizations. These organizations have historically
not been able to keep up with the demand for computer applications, and now they
are being asked to build applications that are both more powerful and easy to
adapt to rapidly changing business requirements. To meet these challenges, new
application development techniques and technologies are required.
EMERGENCE OF CLIENT/SERVER COMPUTING
At the same time that the demand for more powerful applications is growing,
a paradigm shift in computing architectures is occurring. Many organizations are
shifting from mainframe or other host-based environments to the client/server
model of computing. Traditionally, most organizations have processed their
high-end business critical applications in mainframe or other host-based
computing
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environments. These environments offer high levels of reliability, centralized
management and control, and scaleability for large numbers of concurrent users
running transaction-intensive applications. However, mainframe and other
host-based systems are inflexible, require lengthy development and maintenance
cycles, and are closely linked with rigid, character-based user interfaces.
Partially as a result of these limitations, new application development is
shifting to client/server environments.
Adoption of the client/server model of computing has been driven by the
proliferation of inexpensive PCs, the growth of the relational database
management system ("RDBMS") market and the demand by end users for more
responsive information systems with access to enterprise-wide data and
applications. The PC, as the client, provides an easy-to-use interface, and the
RDBMS, as a database server, provides simple and flexible information storage.
To enable the development of applications that take advantage of these
capabilities, client/server development tools such as PowerBuilder from
Powersoft have been used to create the first generation of client/server
applications. These tools implement a "two-tier" architecture where the
application runs entirely on the client PC and accesses RDBMS data stored on a
server. The key benefit of this simple architecture is that user friendly
applications can be developed and deployed very quickly. Many large
organizations have successfully used these tools to build tactical applications
with relatively simple functionality, typically for a small number of concurrent
users. Today, organizations want to combine the usability and flexibility of the
client/server model with the robustness of the mainframe model to create a new
generation of high-end client/server applications.
CHALLENGES OF IMPLEMENTING HIGH-END CLIENT/SERVER APPLICATIONS
Many organizations that have attempted to build high-end client/server
applications have concluded that first generation client/server tools do not
provide sufficient performance and manageability for business critical
applications with large numbers of concurrent users or high transaction volumes.
Performance and manageability are limited because all the application logic
resides on the client. Performance is compromised because this architecture
requires large amounts of data to be sent over the network from the server to
the client for such business needs as investment portfolio analysis or complex
order processing. This might be acceptable for a small number of concurrent
users, but as more users are added, network traffic quickly becomes a
bottleneck. A more efficient approach would be to perform the analysis on the
server where the data is located so that only the results of the analysis would
be sent over the network. Manageability is limited because application updates
need to be deployed on each client PC rather than on a single server. The need
to update each PC creates a large logistical problem for IT organizations and
increases the risk of compromising system integrity if one or more clients are
not updated correctly.
To overcome these and other limitations of first generation tools, many
organizations are seeking to augment these tools with complex server programming
in C or C++ and stored procedures in relational databases, along with the
integration of transaction processing monitors or other "middleware" to connect
the clients and servers. Such an approach, however, introduces substantial
complexity and requires technical expertise in a myriad of hardware, software,
database, networking and other technologies. This extensive expertise is often
beyond the capabilities of in-house IT organizations. Even where such expertise
does exist, or where it can be obtained through a system integrator, the cost
and effort of building and maintaining client/server applications with several
different tools is often prohibitive.
MARKET OPPORTUNITY
The Company believes that the availability of a high-end client/server
application development, deployment and management environment is required for
the widespread adoption of the client/ server computing model for high-end
applications. To be successful, such an environment must:
- Reduce complexity -- Allow programmers to focus on the business rules
rather than the complex technical details involved in building and
maintaining high-end client/server applications.
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- Enable advanced applications -- Enable programmers to rapidly create and
easily modify applications with more powerful functionality to meet more
demanding business requirements.
- Provide high-end application support -- Enable high levels of reliability,
performance and manageability for deployed applications.
An application environment that addresses these requirements will enable
businesses to more effectively address the challenges and rapidly changing
requirements of today's competitive environment.
THE FORTE SOLUTION
The Company was founded with the belief that the implementation of high-end
client/server applications requires dramatically different approaches from those
offered by previously available technologies. As a result, the Company designed
and developed Forte, a client/server application development, deployment and
management environment that enables organizations to effectively create high-end
client/server applications. Applications built with Forte can provide new and
advanced functionality to enable a more competitive use of information
technology, can be easily modified as business requirements or the technical
infrastructure evolve, and can provide the high levels of reliability,
performance and manageability required for high-end applications. Forte offers
the following features and benefits:
REDUCED COMPLEXITY
APPLICATION PARTITIONING. With Forte, programmers develop an
application as if it were to run on a single system even though it may be
deployed on multiple hardware platforms, operating systems, RDBMSs and
networks. Following development, Forte automatically PARTITIONS, or splits
apart, the application, placing the appropriate application logic on the
appropriate system. For example, logic related to the user interface will be
placed on the desktop and logic that manipulates RDBMS data will be placed
on the server where the data resides. When Forte partitions the application,
it automatically sets up the communications among the various components. By
using application partitioning to automate the distribution of application
logic, Forte significantly reduces the complexity of creating high-end
client/server applications.
By correctly partitioning an application, Forte can substantially reduce
network traffic, enabling applications to run faster and scale better.
Partitioning also improves the management of applications because business
rules can be enforced centrally on a server rather than on each user's
desktop computer. This allows organizations to update business rules in one
place, simplifying change management and assuring consistency.
TECHNOLOGY INDEPENDENCE. Forte allows organizations to develop
applications that are independent of specific hardware, software, networking
and other system components. Decisions regarding the selection of such
components do not have to be finalized until deployment. Technology
independence also allows customers to add or replace hardware or software to
take advantage of emerging technologies without having to rewrite their
applications. To enable these capabilities, Forte supports popular hardware
platforms, operating systems, RDBMSs, networking equipment and other
connectivity software.
OBJECT-ORIENTED DEVELOPMENT. Forte's fully object-oriented development
environment makes it easier to model the business, simplifies ongoing
application maintenance and allows organizations to reuse application
functions. With Forte, developers build high-level objects, commonly
referred to as application services, that represent business processes such
as a credit check function. This close mapping between the business and the
application architecture enables IT personnel to more easily design,
maintain and reuse application services. This also enables IT professionals
to more effectively communicate with end-users regarding their requirements,
resulting in more successful implementations. Forte's object-oriented
development language is easy for developers to learn and use, even to
perform complex functions. This allows programmers to focus on the business
logic rather than complex technical details.
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ADVANCED APPLICATIONS
MULTI-TIER CLIENT/SERVER ARCHITECTURE. Forte enables advanced
applications to be built as a set of components. Small development teams can
be assigned to develop each component, and the Forte environment will assure
that the components work together in a multi-tier architecture. Client
components request actions from application services that, in turn, access
one or more data sources. Shared application services are installed on one
or more servers so they can be accessed simultaneously by multiple users.
Once a shared service is developed and deployed, it can be reused in
different applications. For example, a customer information service that
provides customer account and historical purchasing information can be used
simultaneously by an order entry application, a customer service application
and a scheduling application. Shared application services enhance developer
productivity through reuse, ease of maintenance provided by the modular
architecture and increased consistency created by providing the same view of
the business to multiple applications.
BUSINESS EVENT NOTIFICATION. Forte incorporates an event model by which
any component of an application can notify any other component of
significant business occurrences that might call for immediate action by
users and/or application services. For example, in a customer support
application, a service representative may ask to be notified if a priority
call from an important customer arrives. In manufacturing, if a machine
fails, a Forte application can be programmed to automatically adjust
shipping schedules and redeploy repair personnel. By immediately and
automatically responding to important events, businesses can rapidly resolve
problems or take advantage of new opportunities.
HIGH-END APPLICATION SUPPORT
PERFORMANCE. Forte achieves high levels of performance for large
numbers of concurrent users. In addition to application partitioning, which
reduces network traffic, Forte employs various other techniques to improve
performance, such as multi-threading server requests to increase server
throughput, compiling code to improve server response time, caching system
information to reduce network traffic and replicating application services
to handle a greater load.
RELIABILITY. Forte employs a number of technologies to provide high
levels of reliability and eliminate single points of failure. For example,
if a server or network fails, backup servers can be specified to
automatically assume the workload. In addition, Forte incorporates
transaction support to provide application consistency in case a transaction
is aborted.
MANAGEABILITY. Forte incorporates many management capabilities for the
deployment of high-end applications. Forte provides a performance monitor to
report on key performance statistics, a configuration manager to insure that
all the distributed components of an application are at a compatible level,
an environment console to manage the environment and an interface to
third-party systems management tools such as the Tivoli Management
Environment. These management capabilities are critical to the successful
implementation of high-end client/server applications.
STRATEGY
The Company's objective is to establish Forte as the standard environment
for the development, deployment and management of high-end client/server
applications. The Company's strategy incorporates the following key elements:
TARGET HIGH-END CLIENT/SERVER APPLICATIONS IN A BROAD RANGE OF
INDUSTRIES. The Company has designed Forte to satisfy the high-end,
client/server application requirements of businesses in a wide variety of
industries. Forte enables client/server applications to be implemented with
high levels of reliability, performance and manageability. The Company
intends to leverage its experience and continue to target product
development, sales and marketing activities to expand the market acceptance
of Forte.
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EXTEND TECHNOLOGICAL LEADERSHIP. The Company has developed a number of
advanced technologies optimized for the particular requirements of high-end
client/server applications. The Company is a leader in the use of
application partitioning and shared application services for multi-tier,
high-end client/server applications. The Company has made extensive use of
object-oriented technology in the development of its products. In April
1996, the Company announced Forte Web SDK, which enables Web access to the
Forte environment. The Company intends to continue to commit substantial
resources to maintain and extend its technology leadership.
PROMOTE SUCCESSFUL CUSTOMER IMPLEMENTATION. The Company's success is
dependent upon its customers' successful implementation of high-end
applications using Forte. As a result, the Company actively participates in
the customer's development and deployment efforts. The Company assigns an
account management team (consisting of a sales representative, a technical
support representative, a customer support representative and a consultant),
provides extensive introductory and advanced training courses, offers
advanced consulting services and provides extensive post-sale support.
EXPAND GLOBAL SALES CAPABILITIES. The Company intends to expand its
global sales capabilities by increasing the size of its direct sales
organization in major markets and continuing to leverage distributors in
other selected markets. In particular, the Company plans to expand its
direct and indirect sales and marketing activities in Europe, Asia and Latin
America. The Company has operations in the United Kingdom, France, Australia
and Germany and has recently introduced localized versions of its Forte
software for the Japanese market.
LEVERAGE THIRD-PARTY RELATIONSHIPS. The Company seeks to promote the
widespread adoption of Forte through the establishment of close
relationships with development partners, system integrators and value added
resellers. These partners often assist Forte's customers in implementing
high-end, client/server applications. To date, the Company has established
many relationships with such third parties and intends to establish
additional relationships.
PRODUCTS
Forte is an advanced application environment for the development, deployment
and management of high-end client/server applications. Forte includes tools for
developing applications that are independent of any vendor-specific deployment
environment, generating systems for specific hardware platforms and supporting
distributed deployments.
With Forte, developers use the Application Definition Facility to define the
application's functionality, after which Forte automatically generates the
application using the System Generation Facility and deploys it using the
Distributed Execution Facility.
APPLICATION DEFINITION FACILITY. For development, Forte provides an
integrated set of object-oriented software tools including a graphical user
interface ("GUI") designer, an object-oriented fourth generation language
("4GL"), a comprehensive set of class libraries and a repository to support team
development. Forte provides tight integration between application logic and the
leading relational database management systems. Forte also provides interfaces
with external systems such as legacy applications and electronic data feeds.
SYSTEM GENERATION FACILITY. For system generation, Forte partitions the
application into a specific deployment environment. To facilitate this process,
Forte provides a tool for defining the hardware in the environment. For each
hardware system, the tool records its operating system, whether or not it has a
user interface, what networks are available, what RDBMS, if any, is available
and whether or not the system supports an interface to an external resource
manager such as a bar code scanner. Using this environment information, Forte
automatically maps the application to a specific set of hardware platforms,
automatically deploys the code to these platforms and establishes efficient
communications among the Forte components.
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DISTRIBUTED EXECUTION FACILITY. For deployment, Forte supports a robust
distributed execution environment. This includes a communications infrastructure
for delivering large numbers of messages and event notifications as well as
strategies for optimizing reliability and performance such as fail-over, load
balancing, and parallel processing. Forte also includes tools for managing the
deployed application. From an application management console, a systems
administrator can monitor message and event traffic entering and leaving each
Forte component, start and stop Forte components running on remote machines,
monitor the application components running on various machines, monitor the
utilization of various machine resources and perform other management functions.
Forte supports Windows, Windows NT, Macintosh and Motif desktops for both
development and deployment, while masking the differences and preserving the
native look and feel of each one. Forte supports the leading open systems server
platforms including Data General AViiON, Digital Alpha Open VMS and UNIX,
Digital VAX Open VMS, HP 9000, IBM RS/6000, Sequent Symmetry, Sun SPARC, and
Windows NT. Forte also supports the leading RDBMSs including DB2/6000, Informix,
Microsoft SQL Server, Oracle, Rdb and Sybase as well as the Microsoft ODBC
interface.
In March 1996, the Company began shipping Forte Express, an optional
application generator designed for use with Forte. Forte Express can
significantly reduce development time by automatically generating a three-tier
application. Express developers use simple models and a drag-and-drop
development style to create: client user interface components that are portable
across multiple platforms; a framework for implementing business policies as
shared Forte Forte services; and database access. The default user interface
window definitions generated by Forte Express include window layouts, menus and
buttons and can be later modified in Forte. Any customizations are preserved if
the application is later modified in Forte Express.
In March 1996, the Company began beta testing a new product, the Forte Web
SDK, which enables Web access to the Forte environment. The Forte Web SDK will
enable Netscape's Navigator and other Web browsers to function as Forte clients
with full access to the Forte environment, which is designed to support up to
thousands of concurrent users with high levels of reliability and manageability.
The combination of Forte and the Web will provide organizations with the
facilities they need to rapidly deploy Web-accessible, business-critical
applications, such as order processing, without duplicating existing systems.
The Company licenses its software for both development and deployment.
Development license fees are based upon the number of developers and the
complexity of the development environment. Deployment licenses are based upon
the number of concurrent users and the number of servers that will be running
Forte components. A core system, with a U.S. list price of $75,000, includes
five developer licenses, ten concurrent user licenses, and support for a single
GUI, server and RDBMS. A typical initial direct sale to an end-user customer
ranges from $150,000 to $250,000. This includes development and initial
deployment licenses, maintenance, training and consulting services. With each
sale, the Company typically provides a 30-day warranty that the product complies
with the Company's published documentation.
TECHNOLOGY
APPLICATION PARTITIONING
In order to partition an application, Forte analyzes the application
definition that is stored in the development repository and maps it into a
specific target deployment environment using a description of each machine that
is also stored in the repository. The partitioning process involves splitting
apart the application and targeting the presentation components for the
available clients and shared business logic for the available servers.
Application components that access an external resource, such as an RDBMS, are
placed on the machine where the external resource resides. The partitioning
process also involves converting the environment-neutral definition of each
component into an environment-specific implementation. This produces GUI screens
for each client machine by using that
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client's native toolkit and converts RDBMS-neutral database access commands into
efficient instructions for accessing a specific target RDBMS. Once a
partitioning scheme is selected, Forte moves the application components from the
repository to the appropriate machines in the environment. This distribution of
application code is done at the 4GL level (often called dynamic partitioning),
allowing developers to easily test the application after it has been
partitioned, while still providing the option to subsequently generate C++ code
that can be compiled into machine code (often called static partitioning) for
optimizing deployment performance. Forte also enables developers to easily
modify the default partitioning scheme using simple drag-and-drop commands on a
map that displays the objects comprising each partition and the location of each
partition.
SHARED APPLICATION SERVICES
Two enabling technologies permit a single copy of an application service to
be simultaneously accessible by multiple clients in a multi-tier application
architecture. First, Forte multi-threads connections by multiple users, queues
requests and efficiently manages the processing of the queue. Second, Forte
provides concurrency control to keep users from interfering with each other's
work. For example, a credit check service supporting 500 telesales
representatives may provide modem access to a credit bureau via 20 dial-out
lines. At any time, 20 users can get access to a modem and the service will
queue any additional service requests, connecting each one when a line becomes
free. In addition, Forte assists with managing the shared application services
by providing configuration management, system monitoring and operational
controls.
BUSINESS EVENT NOTIFICATION
Forte uses asynchronous events to notify an application component of
significant business occurrences that might call for immediate action by users
and/or application services. Forte supports a publish-and-subscribe event model.
When a Forte application component is interested in a particular event, it
registers its interest with a simple statement. When the event occurs, Forte
automatically sends a notification of the event to all components that have
registered an interest in that event. This event model obviates the need for
polling and, in contrast to the broadcast event model, it only sends the event
notification to those components that are interested in processing the event,
thereby reducing network traffic. Forte's asynchronous communication support
includes a multi-threading model to enable Forte application components to
process the arrival of an event even if it is processing another application
task at the time. These capabilities apply to events that flow from clients to
servers, from servers to servers, and from servers to clients.
INTEGRATION
For desktop integration, Forte users can leverage work in other personal
productivity applications by using Microsoft OLE or Apple Events to both import
and export information. For example, users can enter data in a Forte application
and have it automatically update a spreadsheet. Forte offers integration options
via DCE or CORBA whereby external clients and servers can interoperate with
Forte services. Forte can both call external programs and be called by external
programs. Forte also provides several options for integrating with mainframes
using third-party tools. In addition to these automated interfaces, Forte
facilitates external integration through a general purpose wrappering facility.
This can be used to encapsulate an external service, such as a real-time data
feed or an existing application, and treat it as a Forte component. These
capabilities allow organizations to assemble new applications from existing
Forte and non-Forte components, thereby leveraging other IT investments.
REPLICATION
For increased reliability and performance, Forte can replicate application
services onto multiple servers and use them for either fail-over or
load-balancing. In fail-over mode, Forte will automatically redirect requests to
the backup server whenever the primary application service is unavailable. In
load-balancing mode, Forte can allocate service requests across multiple copies
of an application service as a way to increase scaleability. For example, an
application service may calculate pricing for
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various customer product configurations. As usage grows, Forte can place
replicated copies of the pricing service on different servers and rotate
requests among them. Forte can deploy replicated copies on different hardware
platforms and operating systems.
SUPPORT FOR TRANSACTIONS
Forte incorporates transaction support within the application. This can be
used to automate the synchronization of the client component, the application
service components and the data management component of an application. For
example, a user may traverse a series of screens in the process of defining
updates to an RDBMS. If the transaction aborts, Forte will reset the user's
screen and the application variables stored in a shared service, while
instructing the RDBMS to restore the data. By automating transaction consistency
across all components of a multi-tier application, Forte simplifies the work of
developers and provides for greater reliability of the application.
RAPID APPLICATION DEVELOPMENT AND OPTIONAL CODE GENERATION
By separating the development process from deployment, Forte can support
both rapid application development ("RAD") via an interpretive development
environment and optimal deployment performance via the generation of C++ code,
which is compiled into machine code. During development, Forte supports an
interpretive environment in which the Forte 4GL source code is compiled into an
intermediate pseudo-code that runs with the Forte interpreter. This approach is
similar to most RAD tools that allow developers to rapidly test and view code
without having to go through a lengthy compile and link cycle. When Forte
partitions the application, it partitions at the pseudo-code level, thereby
allowing the developer to test the distributed application quickly. If the
application needs to be repartitioned frequently, it can be deployed using the
pseudo-code. For deployments that call for maximum runtime performance, Forte
generates C++ code that is subsequently compiled using the native C++ compiler
on each target computer. This option is available on a partition by partition
basis.
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CUSTOMERS AND MARKETS
As of March 31, 1996, the Company had licensed Forte to over 130 end-user
customers worldwide. The Company's target end-user customers include
organizations that utilize sophisticated, high-end information systems with
numerous users and diverse, heterogeneous operating systems and databases. No
customer accounted for more than ten percent of the Company's total revenues for
the fiscal year ended March 31, 1995 or 1996. The Company believes that the
following is a representative list of the Company's end-user customers with
active licenses or contracts as of March 31, 1996.
BANKING
Bank of America NT & SA
Bank of Morocco*
Citicorp
Credit Lyonnais
Generale Bank*
Long-Term Credit Bank of
Japan, Ltd.*
World Bank*
CONSUMER/RETAIL
Bass Taverns
Charles Veillon*
Longs Drug Stores
Philip Morris
EDUCATION
Hong Kong University*
University of Canterbury*
University of Iowa*
University of Otago*
ENERGY
Coal Services Corporation
L'Energie De L'Ouest-Suisse*
Hydro Electric Commission
Australia*
Hyundai Petro Chemical Co.,
Ltd.
Osaka Gas*
Sevillana De Electricidad*
TransCanada Pipelines
Limited
Wisconsin Electric Power
Company
FINANCE
AT&T Universal Card Services
Board of Trade Clearing
Corporation
Deutsche Financial Services
Matif
Merrill Lynch Canada, Inc.
Montgomery Securities
Montreal Exchange
Nikko Securities*
Piper Jaffray Companies
Transamerica Leasing Inc.
HEALTHCARE/PHARMACEUTICALS
Abbott Laboratories*
Amgen, Inc.
Baxter Healthcare
Eli Lilly and Company
Massachusetts General
Hospital
INSURANCE
Equitable Life Insurance*
NAC Re Corp.
Nationwide Mutual Insurance
Company
MANUFACTURING
Andersen Windows
A.O. Smith Corporation
British Steel Engineering Steel
Ltd.
Corning Inc.*
E.I. du Pont de Nemours and
Company*
Kawasaki Steel*
Metronic, Inc.
Mitsubishi Electric
Corporation*
Steelcase, Inc.
Taiyo Kogyo*
MEDIA
Home Box Office
Reuters Information
Technology, Inc.
Telecommunications, Inc.
Tele-TV Systems, L.P.
TECHNOLOGY
Apple Computer, Inc.
Data General Corporation
EDS
Hewlett-Packard Company
Hitachi*
NEC Electronics
Silicon Systems, Inc.
Toshiba*
Western Digital Corporation
Xerox Corporation
TELECOMMUNICATIONS
Bellcore
British Telecom*
Hong Kong Telephone*
International Teleconferencing
KDD*
LCI International
Management Services, Inc.
LDDS Worldcom, Inc.
Mobile Telecommunications
Technologies Corp.
NYNEX*
Pacific Bell Information
Services
Paging Bell Information
Services
Paging Network, Inc.
Sasktel
Sprint Communications
Company
US West
OTHER
Airborne Freight Corp.
Belgium Railways*
Capita Group PLC
Carlson Companies Inc.
GTE Government Systems
Corp.
State of Illinois
- ---------
* End-user customer sold through a distributor.
10
<PAGE>
SALES AND MARKETING
Forte markets its software and services primarily through its direct sales
organization complemented by other sales channels including, international
distributors and value added resellers. As of March 31, 1996, the Company's
direct sales force included 25 sales representatives located in 14 field offices
throughout the United States and 9 sales representatives located in the
Company's international sales offices in the United Kingdom, France, Australia
and Germany. The direct sales force is supported by 20 technical sales
representatives. The Company has licensed Digital to resell Forte on a worldwide
basis. As of March 31, 1996, the Company was represented by 12 international
distributors (covering 18 countries), which principally operate in the major
markets of Europe, Asia and Latin America. The Company intends to continue to
add to its direct sales and support force in the United States, Europe and
Australia.
Sales through the Company's European subsidiaries totaled $0, $796,000 and
$2.4 million for the years ended March 31, 1994, 1995 and 1996, respectively.
The table below sets forth the Company's export sales data for the years ended
March 31, 1995 and 1996. See Note 1 of Notes to Consolidated Financial
Statements.
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
--------------------------
1995 1996
----------- -------------
<S> <C> <C>
Export Sales:
Asia...................................................................... $ 187,000 $ 1,031,000
Europe.................................................................... 351,000 2,593,000
Canada.................................................................... 168,000 876,000
Other..................................................................... 184,000 812,000
----------- -------------
Total................................................................... $ 890,000 $ 5,312,000
----------- -------------
----------- -------------
</TABLE>
The Company uses a consultative sales model for selling to major accounts.
This model entails the collaboration of technical and sales personnel to
formulate proposals that address the specific requirements of the customer. Due
to the importance of business-critical client/server applications, the Company
focuses its initial sales efforts on senior IT department personnel and other
members of the customer's management team.
The Company's marketing efforts are directed at broadening the market for
Forte by increasing awareness of the importance of a high-end client/server
application environment and at supporting the Company's world-wide direct and
indirect sales channels. Marketing personnel engage in a variety of activities
including conducting public relations and product seminars, issuing newsletters,
making direct mailings, preparing other marketing materials, coordinating the
Company's participation in industry programs and forums and establishing and
maintaining close relationships with recognized industry analysts.
THIRD-PARTY RELATIONSHIPS
An important element of the Company's sales and marketing strategy is to
expand its relationships with third parties to increase market awareness and
acceptance of Forte. The Company has established relationships with
organizations in three general categories: development partners, system
integrators and value added resellers. The relationships with the development
partners generally provide for the payment of an advance royalty or loan to port
Forte to a specified hardware platform. The relationships with system
integrators generally provide for training and other support necessary to
promote the market acceptance of Forte. The relationships with the value added
resellers generally provide for favorable licensing terms for the reseller in
exchange for a royalty to the Company upon the sale of applications that the
reseller developed using Forte.
11
<PAGE>
The Company has entered into written agreements with the following
development partners, system integrators and value added resellers:
DEVELOPMENT PARTNERS
Apple Computer, Inc.
Data General Corp.
Digital Equipment Corp.
IBM Corp.
Mitsubishi Corporation
Sequent Computer Systems, Inc.
VALUE ADDED RESELLERS
Alpharel, Inc.
Amisys Managed Care Systems, Inc.
Claremont Technologies Group, Inc.
C Star Systems, Inc.
Descartes Systems Group, Inc.
Evolve
Information Concepts, Inc.
J. Frank Consulting, Inc.
Matrix Computer Systems, Ltd.
MEDecision, Inc.
Millenium Partners, Inc.
SHL Systemhouse Inc.
Siemens Energy and Automation, Inc.
Unified Information, Inc.
SYSTEM INTEGRATORS
Advanced Communications Resources
Albion International, Inc.
Andersen Consulting LLP
ARIS Corp.
Axis Systems International
Born Information Services
Braun Technology Group
BSG Alliance/IT, Inc.
Business Data Services
Canadian InfoTech
Cap Volmac NV
Computer Sciences Corp.
EDS
Graphical Business Interfaces
Hoskyns Group plc
KPMG Peat Marwick LLP
Netbase Computing
Nexgen SI, Inc.
Platinum Solutions, Inc.
Price Waterhouse LLP
Relational Options, Inc.
Sage Solutions, Inc.
Trecom Business Systems, Inc.
SHL Systemhouse Inc.
Tier Corp.
Triad Special Systems Ltd.
The Company has entered into a license and development agreement with
Digital, under which Digital is granted a worldwide, non-exclusive,
royalty-bearing license to distribute Forte, to modify and integrate Forte into
Digital products, and to use Forte source code for development, maintenance and
support. The Company has also entered into a development agreement with Sequent,
under which Sequent is granted a non-exclusive, worldwide, royalty-bearing right
to distribute Forte for use on Sequent computer systems and to use Forte source
code to support Sequent customers. Digital and Sequent each have 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 Company also has joint marketing relationships with certain independent
software vendors ("ISVs") under its Tools Partner Program. Each of these ISVs
has products that interface with Forte and extend the range of solutions
available to the end-user. The ISVs participating in the Tools Partner Program
include Interactive Development Environments, Open Horizon, Ptech, SELECT
Software Tools, Tivoli Systems, Inc., ProtoSoft, Inc. (acquired by Platinum),
Netwise (acquired by Microsoft), Rational Software Corporation and Business
Objects S.A.
12
<PAGE>
The Company has also entered into a license and development agreement with
Mitsubishi, under which Mitsubishi is appointed the exclusive Japan-based
distributor of Forte solely within Japan and granted the right to use Forte
source code to develop a Japanese version of Forte. The termination of the
Company's relationship with either Digital or Mitsubishi could have a material
adverse effect on the Company's business, operating results and financial
condition.
CUSTOMER SERVICE AND SUPPORT
The Company believes that a high level of customer support is important to
the successful marketing and sale of Forte. Substantially all of the Company's
direct sales to customers include maintenance and support contracts, which
typically have twelve month terms and entitle the customers to upgrades, if and
when available, and technical support. In addition, the Company offers
introductory and advanced classes and training programs available at the
Company's headquarters, local training centers and customer sites. Telephone
hotline support is complemented by a bulletin board system that provides a
repository for technical tips and skills. Users of Forte can also attend an
annual user group conference, at which knowledge of Forte skills and solutions
is exchanged.
The Company's consulting Forte organization provides a full range of
consulting services to customers developing and deploying high-end client/server
applications with Forte. Such consulting services are offered to promote the
successful development and deployment of applications built with Forte, and
include prototyping assistance, mentoring and technology transfer, Forte
methods, analysis and design assistance and performance tuning. Fees charged for
consulting services vary depending on the nature and quantity of services to be
performed. The Company believes that the availability of effective consulting
services is an important factor in achieving widespread market acceptance.
PRODUCT DEVELOPMENT
The Company believes that its future success will depend in large part on
its ability to enhance Forte, develop new products, maintain technological
leadership and satisfy an evolving range of customer requirements for a high-end
client/server application environment. The Company's product development
organization is responsible for product architecture, core technology and
functionality, product testing, user interface development and expanding the
ability of Forte to operate with the leading hardware platforms, operating
systems, relational database management systems and networking and communication
protocols. This organization is also responsible for new product development.
Since inception, the Company has made substantial investments in product
development and related activities. Forte has been developed primarily by the
Company's internal development staff and, in some instances, with the assistance
of external consultants. Certain technologies have been acquired and integrated
into Forte through licensing arrangements.
In November 1995, the Company introduced Release 2.0 of Forte. The principal
benefit of Release 2.0 is more open integration to give organizations the
freedom to use additional software tools and facilitate greater
interoperability, including tight integration with OLE compliant applications on
Windows PCs. Release 2.0 of Forte also supports international applications, with
native-language screens, error messages, collating sequences and full support
for multi-byte character sets. With Release 2.0 the Company added two new
platforms, Microsoft Windows NT (as both clients and servers on either Intel or
Digital Alpha processors) and Power Macintosh clients, and database access for
Microsoft's ODBC, IBM's DB2/6000, Microsoft SQL Server and Informix. The Company
intends to extend the functionality of Forte and to continue to commit
significant resources to support existing and emerging hardware platforms,
operating systems, RDBMSs and network protocols.
Forte Express, an optional application generator for three-tier
applications, was announced in January 1996 and was delivered in March 1996. The
Company's newest product, the Forte Web SDK which enables Web access to the
Forte environment, was announced in April 1996 with expected availability in
summer of 1996.
13
<PAGE>
As of March 31, 1996, the Company's product development organization
consisted of 63 employees. In fiscal 1994, 1995 and 1996, product development
expenses were $4.7 million, $5.5 million and $8.1 million, respectively. To
date, the Company has not capitalized any software development costs and does
not anticipate capitalizing any software development costs in connection with
Forte Web SDK, as they are expected to be immaterial. See Note 1 of Notes to
Consolidated Financial Statements. The Company expects to continue to devote
substantial resources to its product development activities, including the
continued support of existing and emerging hardware platforms, operating
systems, relational database management systems and networking and communication
protocols.
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 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 and C
or C++ programming, along with the integration of networking and database
middleware to connect the various components. As such, the Company effectively
experiences its primary competition from potential customers' decisions to
pursue such an approach as opposed to utilizing an application environment like
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 or 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 shares, 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 obtain new licenses and
maintenance and support renewals for existing licenses on terms favorable to the
Company. Further, competitive pressures could require the Company to reduce the
price of Forte, 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.
The principal competitive factors affecting the market for Forte are ease of
application development, deployment and management functionality and features,
product architecture, product performance, reliability and scaleability, product
quality, price and customer support. The Company
14
<PAGE>
believes it presently competes favorably with respect to each of these factors.
However, the Company's market is still evolving and 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 successfully will have a material adverse
affect upon the Company's business, operating results and financial condition.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
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 technical 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 of 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
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, Sequent
and 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 becomes 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
15
<PAGE>
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.
EMPLOYEES
As of March 31, 1996, the Company had a total of 221 employees, including 63
in product development, 25 in technical support, 114 in sales and marketing and
related customer support services and 19 in administration. Of these employees,
190 were located in the United States and 31 were located in Europe. None of the
Company's employees is represented by a collective bargaining agreement, nor has
the Company experienced any work stoppage. The Company considers its relations
with its employees to be good.
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.
16
<PAGE>
EXECUTIVE OFFICERS
The officers and directors of the company, and their ages as of March 31,
1996, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------------ --- ------------------------------------------------
<S> <C> <C>
Martin J. Sprinzen.............................. 47 President, Chief Executive Officer and Chairman
of the Board of Directors
Paul Butterworth................................ 45 Vice President and Chief System Architect
Michael Hedger.................................. 43 Vice President, European Operations, Managing
Director -- U.K.
Edward Michehl.................................. 62 Vice President, Software Development and Support
Richard Scheffer................................ 52 Vice President, Marketing
Jay Shiveley.................................... 39 Vice President, Sales -- North America and
Australia
Rodger Weismann................................. 54 Vice President, Finance & Administration, Chief
Financial Officer and Secretary
Promod Haque (1)................................ 47 Director
Thomas A. Jermoluk (2).......................... 39 Director
David N. Strohm (2)............................. 47 Director
William H. Younger, Jr. (1)(2).................. 46 Director
</TABLE>
- ---------
(1) Member of Audit Committee
(2) Member of Compensation Committee
MARTIN J. SPRINZEN co-founded the Company in February 1991 and has served as
its President, Chief Executive Officer and Chairman of the Board of Directors
since inception. Mr. Sprinzen also served as the Company's Secretary from
inception to January 1996. From May 1988 to November 1990, Mr. Sprinzen was
employed by Ingres Corp., an RDBMS company, as Executive Vice President,
International Operations. From October 1986 to May 1988, Mr. Sprinzen was
President and Chief Executive Officer of NASTEC, Corp., a computer-aided
software engineering company. From July 1984 to October 1986, Mr. Sprinzen was
employed by Ingres Corp. as Vice President, Engineering. From December 1979 to
June 1984, Mr. Sprinzen was employed by Candle Corp., a mainframe software
management tools company, where his last position was Vice President,
Technology. Mr. Sprinzen holds a B.S. degree in electrical engineering from The
Cooper Union.
PAUL BUTTERWORTH has served as Vice President and Chief System Architect of
the Company since March 1991. From September 1990 to March 1991, Mr. Butterworth
was employed by Servio Corp., a manufacturer of object-oriented database
management systems, most recently as Vice President, Engineering. From September
1980 to September 1990, Mr. Butterworth was employed by Ingres Corp. where he
served as Vice President, Engineering, and Chief Scientist. Mr. Butterworth
holds a B.S. degree and an M.S. degree in information and computer science from
the University of California, Irvine.
MICHAEL HEDGER has served as Vice President, European Operations, Managing
Director -- U.K. of the Company since September 1995. From September 1994 to May
1995, Mr. Hedger was employed by Oracle Corporation, a database software
company, where his last position was Vice President, Marketing Operations for
Europe, the Middle East and Africa. From May 1989 to July 1994, Mr. Hedger was
employed by The ASK Group, Inc., a database tools and applications company, most
recently as
17
<PAGE>
Managing Director of the UK subsidiary and Northern Europe. Mr. Hedger holds a
degree in business studies from Sheffield Polytechnic and a post-graduate degree
in marketing studies from Kingston Polytechnic.
EDWARD MICHEHL has served as Vice President, Software Development and
Support of the Company since September 1993. From May 1990 to May 1993, Mr.
Michehl was employed by CADAM Inc., an engineering workstation software company,
most recently as a Director of Product Development. From January 1967 to January
1990, Mr. Michehl was employed by Control Data Corp., a computer manufacturing
company, where his last position was as a Product Development Manager. Mr.
Michehl holds an A.B. degree in architectural science from Harvard University.
RICHARD SCHEFFER has served as Vice President, Marketing of the Company
since May 1991. From September 1986 to May 1991, Mr. Scheffer was employed by
Sybase, Inc., a database software company, as Director of Marketing. From July
1982 to September 1986, Mr. Scheffer was employed at Ingres Corp., most recently
as Manager of Corporate Sales. Mr. Scheffer holds an A.B. degree in English from
Princeton University, an M.A. degree in English from the University of
California, Berkeley and an M.S. degree in communications from Stanford
University.
JAY SHIVELEY has served as Vice President, Sales -- North America and
Australia of the Company since March 1992. From November 1986 to February 1992,
Mr. Shiveley was employed by Oracle Corp., most recently as Group Director,
Federal Contractors and System Integrators. From 1983 to 1986, Mr. Shiveley was
National Sales Manager at Lawson Associates, a supplier of financial application
software for IBM's System/38 and AS/400 market. From 1980 to 1983, Mr. Shiveley
was employed by Burroughs Corp. Mr. Shiveley holds a B.S. degree in finance and
accounting from Mankato State University.
RODGER WEISMANN has served as Vice President, Finance and Administration and
Chief Financial Officer of the Company since February 1993. Mr. Weismann has
also served as Secretary of the Company since January 1996. From January 1986 to
January 1993, Mr. Weismann was employed by Banyan Systems, Inc., a computer
networking company, most recently as Executive Vice President, Corporate
Development and prior to that as Chief Financial Officer and Chief Operating
Officer. From May 1981 to November 1985, Mr. Weismann was employed by McCormack
& Dodge, a financial application software company, as Chief Financial Officer.
Mr. Weismann holds a B.S. degree in economics from Cornell University, an M.B.A.
from Dartmouth College and is a Certified Public Accountant.
PROMOD HAQUE has been a director of the Company since May 1992. Mr. Haque
joined Norwest Venture Capital Management, Inc., a venture capital firm, in
November 1990 and currently serves as its Vice President, and is also a General
Partner of Itasca Partners, which is the General Partner of Norwest Equity
Partners IV, L.P., a Minnesota Limited Partnership. Mr. Haque currently serves
as a director of Transaction Systems Architects, Inc., Optical Sensors, Inc.,
Prism Solutions, Inc. and several privately held companies. Mr. Haque holds a
B.S.E.E. from the University of Delhi, India; and an M.S.E.E., a Ph.D.E.E. and
an M.B.A. from Northwestern University.
THOMAS A. JERMOLUK has been a director of the Company since February 1996.
Mr. Jermoluk is President, Chief Operating Officer and a member of the board of
directors of Silicon Graphics, Inc., a manufacturer of high performance visual
computing systems. Prior to being elected President in 1994 and Chief Operating
Officer in 1992, Mr. Jermoluk served as Executive Vice President of Silicon
Graphics, Inc. from 1991 to 1992 and as Vice President/General Manager, Advanced
Systems Division, from 1988 to 1991. Mr. Jermoluk currently serves as a director
of Pure Software Inc. Mr. Jermoluk holds a B.S. degree in computer
science/electrical engineering and an M.S. degree in computer science from
Virginia Tech.
DAVID N. STROHM has been a Director of the Company since February 1991. Mr.
Strohm joined Greylock Management Corporation ("Greylock"), a venture capital
management company, in 1980
18
<PAGE>
and is a general partner of several venture capital funds affiliated with
Greylock. Mr. Strohm currently serves as a director of Banyan Systems, Inc.,
Legato Systems, Inc. and MDL Information Systems, Inc. Mr. Strohm holds a B.A.
degree from Dartmouth College and an M.B.A. from Harvard University.
WILLIAM H. YOUNGER, JR., has been a director of the Company since February
1991. Mr. Younger is a general partner of the general partner of Sutter Hill
Ventures, L.P. ("Sutter Hill"), a venture capital management firm, where he has
been employed since 1981. Mr. Younger currently serves as a director of COR
Therapeutics, Inc., Celeritek, Inc., and Oasis Health Care Systems. Mr. Younger
holds a B.S.E.E. degree from the University of Michigan and an M.B.A. from
Stanford University.
BUSINESS RISKS
IN EVALUATING THE COMPANY'S BUSINESS, READERS SHOULD CAREFULLY CONSIDER THE
BUSINESS RISKS DISCUSSED IN THIS SECTION IN ADDITION TO THE OTHER INFORMATION
PRESENTED IN THIS ANNUAL REPORT ON FORM 10-K. THIS ANNUAL REPORT ON FORM 10-K
INCLUDES A NUMBER OF FORWARD-LOOKING STATEMENTS WHICH REFLECT THE COMPANY'S
CURRENT VIEWS WITH RESPECT TO FUTURE EVENTS AND FINANCIAL PERFORMANCE. THESE
FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES,
INCLUDING THOSE DISCUSSED BELOW, THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM HISTORICAL RESULTS OR THOSE ANTICIPATED.
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 seven quarters and the
Company had net income in each of the quarters ended December 31, 1995 and March
31, 1996, the Company incurred net losses in each quarter from inception through
the quarter ended September 30, 1995, and had an accumulated deficit of $22.7
million as of March 31, 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; POTENTIAL LOSS IN QUARTER ENDING JUNE 30, 1996. 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
19
<PAGE>
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 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 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 net loss
for the quarter ending June 30, 1996. To the extent future international
operations constitute a higher percentage of the Company's total revenues, the
Company anticipates that it may also 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 and related services. The Company currently
expects Forte 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, 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. There can be no
assurance that the Company will continue to be successful in marketing the Forte
product or other products. Although the Company has recently experienced growth
in sales of Forte, 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.
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
20
<PAGE>
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 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
21
<PAGE>
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 unmarketable. 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 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. The Company introduced Release 2.0 of
Forte in November 1995. Despite extensive product testing by the Company, the
Company has discovered software errors in Release 2.0 and earlier 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
22
<PAGE>
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 17% and 26% of the Company's total
revenues in fiscal 1995 and in fiscal 1996, respectively. The Company currently
has international sales offices located in the United Kingdom, France, Australia
and Germany, 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 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
23
<PAGE>
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 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.
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
24
<PAGE>
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.
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 signficiant 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.
ITEM 2. PROPERTIES
The Company's principal administrative, sales, marketing, and product
development facility occupies approximately 45,500 square feet in Oakland,
California pursuant to a lease which expires in October 1998. In addition, the
Company also leases sales and support offices in Los Angeles, CA, San Diego, CA,
Denver, CO, Tampa, FL, Atlanta, GA, Chicago, IL, Oakbrook, IL, Burlington, MA,
Minneapolis, MN, Iselin, NJ, New York, NY, Dallas, TX, Houston, TX, McLean, VA,
and Bellevue, WA. The Company also maintains international offices in the United
Kingdom, France, Germany and Australia. The Company believes that its existing
facilities are adequate for its current needs and that suitable additional or
alternative space will be available in the future on commercially reasonable
terms as needed.
ITEM 3. LEGAL PROCEEDINGS
The Company is currently not a party to any material litigation and is
currently 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
By a vote of 14,860,457 for and 0 against, with 1,328,101 abstentions, the
Company's stockholders on January 22, 1996 approved by action by written consent
the following matters: the reincorporation of the Company in the State of
Delaware; the Company's 1996 Stock Option Plan; the Company's Employee Stock
Purchase Plan; the form of the Company's Amended and Restated Certificate of
Incorporation; and the form of the Company's indemnification agreement to be
entered into between the Company and each of the Company's officers and
directors.
By a vote of 13,477,650 for and 0 against, with 2,710,908 abstentions, the
Company's stockholders on March 8, 1996 approved by action by written consent
the Company's International Employee Stock Purchase Plan.
25
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock is traded over-the-counter on the Nasdaq National
Market under the symbol "FRTE." The Company commenced its initial public
offering of Common Stock on March 11, 1996 at a price $21 per share. Prior to
such date, there was no public market for the Common Stock. The following table
sets forth the high and low closing sale prices for the Common Stock for the
periods indicated, as reported on the Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
Fiscal year ended March 31, 1996
Fourth Quarter (from March 12, 1996)................................. $ 40.50 $ 35.88
</TABLE>
COMMON STOCKHOLDERS OF RECORD AND DIVIDENDS. At May 31, 1996, there were
approximately 490 stockholders of record of the Company's common stock, as shown
in the records of the Company's transfer agent. The Company has not paid any
cash dividends on its capital stock since its inception, and does not expect to
pay cash dividends on its Common Stock in the foreseeable future. The Company's
bank line of credit currently prohibits the payment of cash dividends without
the consent of the bank.
26
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the Company's consolidated financial statements and related
notes thereto and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included in Item 7. The consolidated statement of
operations data for each of the three years in the period ended March 31, 1996
and the consolidated balance sheet data at March 31, 1995 and 1996 are derived
from the audited consolidated financial statements included in Item 8. The
consolidated statement of operations data for each of the two years in the
period ended March 31, 1993 and the consolidated balance sheet data at March 31,
1992, 1993 and 1994 are derived from audited consolidated financial statements
not included in this Annual Report on Form 10-K.
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
-----------------------------------------------------
1992 1993 1994 1995 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
License................................................ $ -- $ -- $ -- $ 7,974 $ 21,357
Maintenance and service................................ -- -- 39 2,033 8,688
--------- --------- --------- --------- ---------
Total revenues..................................... -- -- 39 10,007 30,045
--------- --------- --------- --------- ---------
Cost of revenues:
License................................................ -- -- -- 142 456
Maintenance and service................................ -- -- 36 2,000 5,452
--------- --------- --------- --------- ---------
Total cost of revenues............................. -- -- 36 2,142 5,908
--------- --------- --------- --------- ---------
Gross profit............................................. -- -- 3 7,865 24,137
--------- --------- --------- --------- ---------
Operating expenses:
Sales and marketing.................................... 141 1,112 2,594 7,869 15,060
Product development and engineering.................... 835 2,324 4,679 5,515 8,069
General and administrative............................. 350 745 887 1,874 3,168
--------- --------- --------- --------- ---------
Total operating expenses........................... 1,326 4,181 8,160 15,258 26,297
--------- --------- --------- --------- ---------
Loss from operations..................................... (1,326) (4,181) (8,157) (7,393) (2,160)
Other income, net........................................ 156 94 97 147 286
--------- --------- --------- --------- ---------
Loss before income taxes................................. (1,170) (4,087) (8,060) (7,246) (1,874)
Provision for income taxes............................... -- -- -- (104) (114)
--------- --------- --------- --------- ---------
Net loss................................................. $ (1,170) $ (4,087) $ (8,060) $ (7,350) $ (1,988)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Pro forma net loss per share (1)......................... $ (0.45) $ (0.11)
--------- ---------
--------- ---------
Shares used in pro forma loss per share (1).............. 16,248 17,517
--------- ---------
--------- ---------
<CAPTION>
MARCH 31,
-----------------------------------------------------
1992 1993 1994 1995 1996
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments........ $ 1,948 $ 3,064 $ 5,937 $ 12,775 $ 41,317
Working capital.......................................... 1,906 2,634 3,044 10,070 39,714
Total assets............................................. 2,207 3,864 7,131 18,142 57,291
Capital lease obligations, net of current portion........ -- 361 583 834 1,714
Total stockholders' equity............................... 2,144 810 1,821 7,449 40,044
</TABLE>
- ---------
(1) See Note 1 to Notes to Consolidated Financial Statements.
27
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS INCLUDES A NUMBER OF FORWARD-LOOKING STATEMENTS WHICH REFLECT THE
COMPANY'S CURRENT VIEWS WITH RESPECT TO FUTURE EVENTS AND FINANCIAL PERFORMANCE.
THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES,
INCLUDING THOSE DISCUSSED BELOW AND IN "BUSINESS RISKS", THAT COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM HISTORICAL RESULTS OR THOSE ANTICIPATED.
OVERVIEW
The Company was founded in February 1991 to design, develop and market a
high-end client/ server application development, deployment and management
environment. To date, all of the Company's revenues have been derived from
licenses of the Company's primary product, Forte, and related maintenance,
training and consulting revenues. The Company began shipping Release 1.0 of
Forte in August 1994 and Release 2.0 in November 1995. The Company currently
expects that revenues from Forte and related services will continue to account
for substantially all of the Company's revenues for fiscal 1997 and the
foreseeable future. As a result, factors adversely affecting the pricing of or
demand for Forte could have a material adverse effect on the Company's business,
operating results and financial condition.
Although the Company's revenues have increased in each of the last seven
quarters and the Company had net income in each of the quarters ended December
31, 1995 and March 31, 1996, the Company could incur a loss for the quarter
ending June 30, 1996 due primarily to an expected seasonal decline in or flat
revenues as compared to the quarter ending March 31, 1996. The Company's limited
operating history makes the prediction of future operating results difficult.
Accordingly, 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. There can be no assurance that any of the Company's
business strategies will be successful or that the Company will be able to
sustain profitability on a quarterly basis or achieve profitability on an annual
basis.
The Company's total headcount was 67, 119 and 221 at March 31, 1994, 1995
and 1996, respectively. The growth in headcount is attributable to the Company's
significant expansion in all of its operations.
Forte licenses its software through its direct sales force, distributors and
value added resellers. Revenues from distributors and resellers accounted for
approximately 15% and 18% of the Company's total revenues for fiscal 1995 and
1996, respectively. 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 additional
relationships with distributors, resellers and system integrators.
RESULTS OF OPERATIONS
REVENUES
The Company's total revenues consist of license fees for its Forte
application environment 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
28
<PAGE>
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. See Note 1 of Notes to
Consolidated Financial Statements. The Company has recognized revenues, for all
periods presented, in accordance with Statement of Position 91-1 entitled
"Software Revenue Recognition."
The Company began shipping Forte in August 1994. The Company's total
revenues increased from $39,000 in fiscal 1994 to $10.0 million in fiscal 1995
and to $30.0 million in fiscal 1996. The Company had no license revenues in
fiscal 1994 and had $8.0 million of license revenues in fiscal 1995. License
revenues increased to $21.4 million in fiscal 1996 primarily as a result of an
increase in the number of licenses sold reflecting increased market awareness
and acceptance of Forte software and expansion of the Company's direct sales
organization. Maintenance and service revenues increased from $39,000 in fiscal
1994 to $2.0 million in fiscal 1995, and to $8.7 million for fiscal 1996. These
increases in 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 from the Company's direct sales organizations in
Europe 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, accounted for 17% and 26% of total revenues in fiscal 1995
and 1996. 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.
The Company's license agreements typically require the payment of a
nonrefundable, one-time license fee for a license of perpetual term. Customers
make separate payments for annual maintenance and other services. Customers can
terminate the license at any time but do not have a right to a refund of the
fees for licenses and for services that have been performed. The Company can
terminate the license agreement only upon a material breach by the other party,
provided that the breach is not cured within a specified cure period.
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 $142,000 and $456,000 in fiscal 1995
and 1996, respectively, each representing 2% of license revenues for the
respective periods.
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 $36,000, $2.0 million and $5.5 million
in fiscal 1994, 1995 and 1996, respectively, representing 92%, 98% and 63% of
maintenance and service revenues in the respective periods. The high percentage
of cost of maintenance and service revenues as a percentage of the related
revenue for fiscal 1994 and 1995 resulted from the addition of training, support
and consulting personnel over this period in anticipation of an increase in the
demand for these services. The decrease in cost of maintenance and service
revenues for fiscal 1996 as a percentage of maintenance and service revenues was
primarily due to improved economies of scale of the
29
<PAGE>
technical support center and increased productivity from a significant number of
newly hired 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.
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. Sales and
marketing expenses increased from $2.6 million in fiscal 1994 to $7.9 million in
fiscal 1995 and to $15.1 million in fiscal 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 79% and 50% of total revenues in fiscal 1995
and 1996, respectively. The decrease in sales and marketing expenses for fiscal
1996 as a percentage of total revenue was primarily due to revenue growth. 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 fiscal 1997.
PRODUCT DEVELOPMENT. The Company believes that a significant level of
investment for product development is required to remain competitive. Product
development expenses increased from $4.7 million in fiscal 1994 to $5.5 million
in fiscal 1995 and to $8.1 million in fiscal 1996. These increases were
primarily attributable to additional hiring of product development personnel.
Product development expenses represented 55% and 27% of total revenues in fiscal
1995 and 1996, respectively. The Company anticipates that it will continue to
devote substantial resources to product development and that product development
expenses will increase in dollar amount in fiscal 1997. 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. See
Note 1 of Notes to Consolidated Financial Statements.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
from $887,000 in fiscal 1994 to $1.9 million in fiscal 1995 and to $3.2 million
in fiscal 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 19% and 11%
of total revenues in fiscal 1995 and 1996, respectively. The Company believes
that its general and administrative expenses will increase in dollar amount in
fiscal 1997 as a result of an 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.
OTHER INCOME, NET. Other 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. See Note 8 of Notes
to Consolidated Financial Statements.
PROVISION FOR INCOME TAXES. The Company accounts for income taxes in
accordance with Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes." The Company incurred a net loss and consequently paid no
federal or state income taxes in fiscal 1994, 1995 and 1996. In fiscal 1995 and
1996, the Company recorded a tax provision related to foreign income tax
withholding on certain license fees paid to the Company by foreign licensees.
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.
30
<PAGE>
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. See Note 6 of Notes to
Consolidated Financial Statements.
QUARTERLY RESULTS
The following tables set forth certain unaudited consolidated statement of
operations data for the eight quarters ended March 31, 1996, as well as such
data expressed as a percentage of the Company's total revenues for the periods
indicated. This data has been derived from unaudited condensed
31
<PAGE>
consolidated financial statements that, in the opinion of management, include
all adjustments (consisting only of normal recurring adjustments) necessary for
a fair presentation of such information. Such statement of operations data
should be read in conjunction with the Company's audited consolidated financial
statements and notes thereto.
<TABLE>
<CAPTION>
JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1994 1994 1994 1995 1995 1995 1995 1996
-------- --------- -------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
QUARTER ENDED
-----------------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenues:
License............................... $ -- $ 2,204 $2,765 $ 3,005 $ 3,071 $ 3,623 $ 6,196 $ 8,467
Maintenance and service............... 79 298 782 874 1,309 2,174 2,530 2,675
-------- --------- -------- --------- -------- --------- -------- ---------
Total revenues.................... 79 2,502 3,547 3,879 4,380 5,797 8,726 11,142
-------- --------- -------- --------- -------- --------- -------- ---------
Cost of revenues:
License............................... -- 40 42 60 95 110 127 124
Maintenance and service............... 376 493 561 570 946 1,236 1,446 1,824
-------- --------- -------- --------- -------- --------- -------- ---------
Total cost of revenues............ 376 533 603 630 1,041 1,346 1,573 1,948
-------- --------- -------- --------- -------- --------- -------- ---------
Gross profit............................ (297) 1,969 2,944 3,249 3,339 4,451 7,153 9,194
-------- --------- -------- --------- -------- --------- -------- ---------
Operating expenses:
Sales and marketing................... 1,282 1,626 1,962 2,999 2,980 3,117 3,820 5,143
Product development and engineering... 1,234 1,301 1,344 1,636 1,688 1,980 2,155 2,246
General and administrative............ 284 420 470 700 631 823 831 883
-------- --------- -------- --------- -------- --------- -------- ---------
Total operating expenses................ 2,800 3,347 3,776 5,335 5,299 5,920 6,806 8,272
-------- --------- -------- --------- -------- --------- -------- ---------
Income (loss) from operations........... (3,097) (1,378) (832) (2,086) (1,960) (1,469) 347 922
Other income (expense), net............. (3) (25) 68 107 104 60 10 112
-------- --------- -------- --------- -------- --------- -------- ---------
Income (loss) before income taxes....... (3,100) (1,403) (764) (1,979) (1,856) (1,409) 357 1,034
Provision for income taxes.............. -- -- -- (104) (17) (6) (12) (79)
-------- --------- -------- --------- -------- --------- -------- ---------
Net income (loss)....................... $(3,100) $(1,403) $ (764) $(2,083) $(1,873) $(1,415) $ 345 $ 955
-------- --------- -------- --------- -------- --------- -------- ---------
-------- --------- -------- --------- -------- ---------
Net income per share.................... $ 0.02 $ 0.05
-------- ---------
-------- ---------
Shares used in per share calculation.... 18,920 19,225
-------- ---------
-------- ---------
<CAPTION>
AS A PERCENTAGE OF TOTAL REVENUES*
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
License............................... 88.1% 78.0% 77.5% 70.1% 62.5% 71.0% 76.0%
Maintenance and service............... 11.9 22.0 22.5 29.9 37.5 29.0 24.0
-------- --------- -------- --------- -------- --------- -------- ---------
Total revenues.................... 100.0 100.0 100.0 100.0 100.0 100.0 100.0
-------- --------- -------- --------- -------- --------- -------- ---------
Cost of revenues:
License............................... 1.6 1.2 1.5 2.2 1.9 1.5 1.1
Maintenance and service............... 19.7 15.8 14.7 21.6 21.3 16.5 16.4
-------- --------- -------- --------- -------- --------- -------- ---------
Total cost of revenues............ 21.3 17.0 16.2 23.8 23.2 18.0 17.5
-------- --------- -------- --------- -------- --------- -------- ---------
Gross profit............................ 78.7 83.0 83.8 76.2 76.8 82.0 82.5
-------- --------- -------- --------- -------- --------- -------- ---------
Operating expenses:
Sales and marketing................... 65.0 55.3 77.3 68.0 53.8 43.8 46.2
Product development and engineering... 52.0 37.9 42.2 38.5 34.1 24.7 20.2
General and administrative............ 16.8 13.3 18.1 14.4 14.2 9.5 7.9
-------- --------- -------- --------- -------- --------- -------- ---------
Total operating expenses.......... 133.8 106.5 137.6 120.9 102.1 78.0 74.3
-------- --------- -------- --------- -------- --------- -------- ---------
Income (loss) from operations........... (55.1) (23.5) (53.8) (44.7) (25.3) 4.0 8.3
Other income (expense), net............. (1.0) 1.9 2.8 2.4 1.0 0.1 1.0
-------- --------- -------- --------- -------- --------- -------- ---------
Income (loss) before income taxes....... (56.1) (21.6) (51.0) (42.4) (24.3) 4.1 9.3
Provision for income taxes.............. -- -- (2.7) (0.4) (0.1) (0.1) (0.7)
-------- --------- -------- --------- -------- --------- -------- ---------
Net income (loss)....................... (56.1)% (21.6)% (53.7)% (42.8)% (24.4)% 4.0% 8.6%
</TABLE>
- ------------
* Percentage of total revenues for the quarter ended June 30, 1994 is not
meaningful.
32
<PAGE>
The Company's total revenues have increased in each quarter following
commercial release of its software in August 1994. The increase in each quarter
is due to increased market awareness and acceptance of the Company's software,
expansion of the Company's direct and indirect sales organizations and increased
maintenance and service revenues reflecting the growth in the installed base.
Operating expenses have generally increased in dollar amount over the quarters
shown as the Company has increased staffing in sales and marketing, product
development and general and administrative functions. Operating expenses were
higher in the quarter ending March 31, 1995 primarily as a result of an increase
in incentive compensation payments to employees due to the Company exceeding its
fiscal 1995 operating plan goals.
Revenues in the quarter ended March 31, 1996 increased 28% to $11.1 million
from $8.7 million in the quarter ended December 31, 1995, reflecting increased
sales to new and existing customers primarily as a result of increased market
awareness and acceptance of the Company's products and expansion of the
Company's direct sales force. The Company believes that increased market
awareness and acceptance of the Company's products also contributed to the
increase in license revenues as a percentage of total revenues. License revenues
in the quarter increased to $8.5 million (76% of total revenues) from $6.2
million (71% of total revenues) in the previous quarter. Maintenance and service
revenues increased to $2.7 million in the quarter from $2.5 million in the
previous quarter. International revenues increased to $3.3 million in the
quarter from $2.1 million in the previous quarter primarily as a result of
expanded international operations.
Cost of revenues for the quarter ended March 31, 1996 increased to $1.9
million (17% of total revenues) from $1.6 million (18% of total revenues) in the
previous quarter, primarily as a result of an increase in cost of services
attributable to the hiring of additional consulting, customer service and
training personnel in the quarter as well as the addition of facilities for
training and consulting operations. Cost of license revenues decreased slightly
in the quarter.
Sales and marketing expenses increased to $5.1 million for the quarter ended
March 31, 1996 from $3.8 million in the quarter ended December 31, 1995. The
increase was due primarily to costs associated with expanded international
operations in France and Germany. Product development and engineering and
general and administrative expenses increased slightly during the quarter due to
increases in product development and administration personnel.
Other income for the quarter ended March 31, 1996 increased to $112,000 from
$10,000 in the previous quarter as a result of increased interest income on the
proceeds of the Company's initial public offering.
As a result of the foregoing, income before taxes increased to $1.0 million
for the quarter ended March 31, 1996 from $357,000 in the previous quarter, and
net income increased to $955,000 from $345,000.
The Company's quarterly operating results have varied significantly in the
past and may 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 will continue to cause material
fluctuations in the
33
<PAGE>
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. See "Business Risks Product
Concentration; Dependence on Emerging Market for High-End Client/Server
Applications." 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 expected 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
are 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
expects that such trends will include higher revenues in the Company's quarter
ending March 31 and 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 net loss for the quarter ending
June 30, 1996. To the extent future international operations constitute a higher
percentage of the Company's total revenues, the Company anticipates that it may
also experience relatively weaker demand in the quarter ending September 30 as a
result of reduced sales activity in Europe during the summer months.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has funded its operations and investments in
furniture and equipment through an initial public offering of common stock on
March 11, 1996 with net proceeds of $34.3 million, the private sale of equity
securities totaling approximately $28.3 million, furniture and equipment leases
of approximately $4.1 million and cash advances from development partners. Since
inception, the Company has received $6.9 million from development partners and
as of March 31, 1996, the Company had repaid, through a variety of royalty and
other arrangements, an aggregate of $4.4 million of such advances. Net cash used
in operating activities was $6.2 million, $5.1 million and $3.4 million in
fiscal 1994, 1995 and 1996, respectively. For such periods, net cash used in
operating activities resulted primarily from net losses and increases in
accounts receivable associated with increases in revenues, partially offset by
increases in deferred revenues, accounts payable and accrued liabilities. The
Company's accounts receivable balance increased to 99% of total revenues for the
quarter ended March 31, 1996 from 76% of total revenues for the quarter ended
March 31, 1995. This
34
<PAGE>
increase resulted primarily from the higher proportion of revenues earned during
the last month of the quarter ended March 31, 1996 as compared to the quarter
ended March 31, 1995 and to a lesser extent from the higher proportion of
revenues earned related to services, which are recognized over the services
period. Although accounts receivable increased as a percentage of revenue in the
quarter ended March 31, 1996 compared to prior periods, the Company does not
believe that this increase will have a material impact on the timing of the
payment of such receivables.
In 1994, 1995 and 1996, the Company's investing activities have consisted
primarily of purchases of furniture and equipment and short-term investments.
Capital expenditures, including those under capital leases, totaled $0.7
million, $1.3 million and $3.4 million in fiscal 1994, 1995 and 1996,
respectively, to acquire furniture and equipment, primarily computer hardware,
for the Company's growing employee base. The Company expects that its capital
expenditures will increase as the Company's employee base grows. At March 31,
1996 the Company did not have any material commitments for capital expenditures.
At March 31, 1996, the Company had $41.3 million in cash and cash
equivalents and short term investments and $39.7 million in working capital. The
Company has a $5.0 million revolving line of credit with a bank, but has at no
time borrowed under such line. Total borrowings under the revolving line are
limited generally to 80% of eligible accounts receivable with interest at 0.75%
over the bank's prime lending rate. On March 31, 1996, the Company had
approximately $5.0 million of borrowing capacity under the revolving line. The
Company's line of credit contains certain financial covenants and restrictions
as to various matters including the Company's ability to pay cash dividends and
effect mergers or acquisitions without the bank's prior approval. The Company is
currently in compliance with such financial covenants and restrictions. The
Company has granted a first priority security interest in substantially all of
its assets as security for its obligations under its credit line, which expires
in July 1996. The Company has an equipment lease line, which at March 31, 1996,
provided $5.8 million of leasing capacity at 12% interest and repayable over 42
months. Approximately $1.6 million was available under the equipment lease line
as of March 31, 1996. See Notes 3 and 8 of Notes to Consolidated Financial
Statements.
The Company believes that its existing cash, cash equivalents and 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14(a) for an index to the financial statements and supplementary
financial information which are attached hereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
In January 1995, the Board of Directors authorized the Company to retain
Ernst & Young LLP as its independent auditors and replace Coopers & Lybrand
L.L.P. The reports of Coopers & Lybrand L.L.P. for the years ended March 31,
1993, and 1994, which reports have not been included herein or relied upon in
the Annual Report on Form 10-K, contained no adverse opinion or disclaimer of
opinion and were not qualified or modified as to uncertainty, audit scope or
application of accounting principles. During the years ended March 31, 1992,
1993 and 1994 and through the date of replacement, there were no disagreements
with Coopers & Lybrand L.L.P. on any matter of accounting principles or
practices, financial statement disclosures, or auditing scope or procedure.
35
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item relating to the Company's directors
and nominees and disclosure relating to compliance with Section 16(a) of the
Securities Exchange Act of 1934 is included under the captions "Election of
Directors" and "Compliance with Section 16(a) of the Securities Exchange Act of
1934" in the Company's Proxy Statement for the 1996 Annual Meeting of
Stockholders and is incorporated herein by reference. The information required
by this item relating to the Company's executive officers and key employees is
included under the caption "Executive Officers" in Part I of the Report on Form
10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is included under the caption
"Executive Compensation and Related Information" in the Company's Proxy
Statement for the 1996 Annual Meeting of Stockholders and is incorporated herein
by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is included under the caption "Stock
Ownership of Certain Beneficial Owners and Management" in the Company's Proxy
Statement for the 1996 Annual Meeting of Stockholders and is incorporated herein
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is included under the caption "Certain
Transactions" in the Company's Proxy Statement for the 1996 Annual Meeting of
Stockholders and is incorporated herein by reference.
36
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Annual Report on Form
10-K:
<TABLE>
<CAPTION>
PAGE NUMBER
-----------------
<C> <S> <C>
1. FINANCIAL STATEMENTS
Report of Ernst & Young LLP, Independent Auditors.................................... 40
Consolidated Balance Sheets as of March 31, 1996 and 1995............................ 41
Consolidated Statements of Operations for each of the three years in the period ended 42
March 31, 1996......................................................................
Consolidated Statements of Stockholders' Equity for each of the three years in the 43
period ended March 31, 1996.........................................................
Consolidated Statements of Cash Flows for each of the three years in the period ended 44
March 31, 1996......................................................................
Notes to Consolidated Financial Statements........................................... 45
2. FINANCIAL STATEMENT SCHEDULE
Schedule II -- Valuation and Qualifying Accounts
All schedules, except those listed above, have been omitted because they are not required, not
applicable, or the required information is shown in the financial statements and related notes thereto.
3. EXHIBITS -- See Item 14(c) below.
</TABLE>
(b) REPORTS ON FORM 8-K.
No reports on Form 8-K have been filed during the quarter ended March
31, 1996.
(c) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ---------------------------------------------------------------------------------------------------------
<C> <S>
2.1 Agreement and Plan of Merger dated January 22, 1996, for the reincorporation merger of Forte Software,
Inc., A California corporation, into Forte Software, Inc., a Delaware corporation (the "Registrant").
(1)
3.1 Certificate of Incorporation of Registrant, as amended to date. (1)
3.2 Bylaws of Registrant. (1)
4.1 Specimen Common Stock certificate. (1)
4.3 Amended and Restated Investors' Rights Agreement among Registrant and the Founders and Investors
specified therein dated as of October 6, 1994. (1)
10.1 Form of Indemnification Agreement to be entered into by and between Registrant and its officers and
directors. (1)
10.2 Registrant's 1991 Equity Incentive Plan. (1)
10.3 Registrant's 1996 Stock Option Plan. (1)
10.4 Registrant's Employee Stock Purchase Plan. (1)
10.5 Loan and Security Agreement by and between Registrant and Silicon Valley Bank dated as of September 20,
1994, as modified August 1, 1994. (1)
10.6 Real property lease by and between Registrant and State of California Public Employee's Retirement System
dated December 1, 1994. (1)
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ---------------------------------------------------------------------------------------------------------
10.7 Master Lease Agreement and Warrant Agreement by and between Registrant and Comdisco, Inc. dated as of
December 28, 1992, as modified by subsequent Equipment Schedules and Warrant Agreements dated May 9,
1994 and February 15, 1995, and Equipment Schedule dated January 17, 1996. (1)
<C> <S>
10.8 Software Agreement between Digital Equipment Corporation and Registrant dated July 21, 1992, as amended.
(1)(2)
10.9 Source Code License and Master Distributor Agreement between Registrant and Mitsubishi Corporation dated
September 26, 1994. (1)(2)
10.10 Strategic Software Development and Distribution Agreement between Sequent Computer Systems. Inc. and
Registrant dated August 6, 1992, as amended. (1)(2)
11.1 Computation of net loss per share.
16.1 Letter regarding change in certifying accountant.
21.1 Subsidiaries of Registrant. (1)
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney (see page 39).
27.1 Financial Data Schedule.
</TABLE>
- ---------
(1) Incorporated by reference to the exhibit of the same number filed with
Registrant's Form S-1 Registration Statement (File No. 333-598) declared
effective by the Securities and Exchange Commission on March 11, 1996.
(2) Confidential treatment has been requested with respect to certain portions
of this exhibit. Omitted portions have been filed separately with the
Securities and Exchange Commission.
(d) FINANCIAL STATEMENT SCHEDULE
See Item 14(a)(2) above.
38
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FORTE SOFTWARE, INC.
Date: June 27, 1996 By:
---------------------------------
Rodger E. Weismann
VICE PRESIDENT, FINANCE AND
ADMINISTRATION, CHIEF
FINANCIAL OFFICER AND
SECRETARY
KNOW BY ALL PERSONS BY THESE PRESENTS that each individual whose signature
appears below constitutes and appoints Martin J. Sprinzen and Rodger E.
Weismann, and each of them, his true and lawful attorneys-in-fact and agents
with full power of substitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments to this Report on Form
10-K, and to file the same, with all exhibits thereto and all documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or his or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
date indicated.
SIGNATURE TITLE DATE
- ----------------------------------- ------------------------- ----------------
/s/ MARTIN J. President, Chief
SPRINZEN Executive Officer and
- ----------------------------------- Director (Principal June 27, 1996
Martin J. Sprinzen Executive Officer)
Vice President, Finance
/s/ RODGER E. and Administration,
WEISMANN Chief Financial Officer
- ----------------------------------- and Secretary (Principal June 27, 1996
Rodger E. Weismann Financial and Accounting
Officer)
/s/ PROMOD
HAQUE
- ----------------------------------- Director June 27, 1996
Promod Haque
/s/ DAVID N.
STROHM
- ----------------------------------- Director June 27, 1996
David N. Strohm
/s/ WILLIAM H. YOUNGER,
JR.
- ----------------------------------- Director June 27, 1996
William H. Younger, Jr.
/s/ THOMAS A.
JERMOLUK
- ----------------------------------- Director June 27, 1996
Thomas A. Jermoluk
39
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Forte Software, Inc.
We have audited the accompanying consolidated balance sheets of Forte
Software, Inc. as of March 31, 1995 and 1996, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended March 31, 1996. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule 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 consolidated financial position of
Forte Software, Inc. at March 31, 1995 and 1996, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended March 31, 1996, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
Walnut Creek, California
April 24, 1996
40
<PAGE>
FORTE SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
MARCH 31,
--------------------
1995 1996
--------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................................................ $ 9,860 $ 35,081
Short-term investments................................................................... 2,915 6,236
Accounts receivable, net of allowances of $531 ($365 in 1995)............................ 2,960 11,059
Prepaid expenses and other current assets................................................ 383 839
--------- ---------
Total current assets....................................................................... 16,118 53,215
Furniture, equipment and leasehold improvements, net....................................... 1,847 3,903
Other assets............................................................................... 177 173
--------- ---------
Total assets............................................................................... $ 18,142 $ 57,291
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................................................... $ 365 $ 1,066
Accrued compensation and related expenses................................................ 1,673 2,881
Other accrued liabilities................................................................ 632 2,529
Deferred revenue......................................................................... 2,567 5,941
Current portion of capital lease obligations............................................. 538 1,084
Current portion of notes payable......................................................... 273 --
--------- ---------
Total current liabilities.................................................................. 6,048 13,501
Capital lease obligations, due after one year.............................................. 834 1,714
Notes payable, due after one year.......................................................... 456 --
Deferred revenue........................................................................... 3,355 2,032
Commitments
Stockholders' equity:
Convertible preferred stock, $.01 par value; 5,000,000 shares authorized (13,500,000 in
1995) no shares issued and outstanding (12,029,883 in 1995)............................. 120 --
Common Stock, $.01 par value; 45,000,000 shares authorized; 18,283,905 shares issued and
outstanding (3,684,423 in 1995)......................................................... 37 183
Additional paid-in capital............................................................... 28,015 62,618
Accumulated deficit...................................................................... (20,747) (22,735)
Foreign currency translation adjustments................................................. 24 (22)
--------- ---------
Total stockholders' equity................................................................. 7,449 40,044
--------- ---------
Total liabilities and stockholders' equity................................................. $ 18,142 $ 57,291
--------- ---------
--------- ---------
</TABLE>
See accompanying notes.
41
<PAGE>
FORTE SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Revenues:
License fees............................................................... $ -- $ 7,974 $ 21,357
Maintenance and Services................................................... 39 2,033 8,688
--------- --------- ---------
Total revenues............................................................... 39 10,007 30,045
Operating expenses:
Cost of license fees....................................................... -- 142 456
Cost of maintenance and services........................................... 36 2,000 5,452
Sales and marketing........................................................ 2,594 7,869 15,060
Product development and engineering........................................ 4,679 5,515 8,069
General and administrative................................................. 887 1,874 3,168
--------- --------- ---------
Total operating expenses..................................................... 8,196 17,400 32,205
--------- --------- ---------
Operating loss................................................................. (8,157) (7,393) (2,160)
Interest income................................................................ 223 312 568
Interest expense............................................................... (126) (165) (282)
--------- --------- ---------
Loss before income taxes....................................................... (8,060) (7,246) (1,874)
Provision for income taxes..................................................... -- 104 114
--------- --------- ---------
Net loss....................................................................... $ (8,060) $ (7,350) $ (1,988)
--------- --------- ---------
Pro forma net loss per share................................................... $ (0.45) $ (0.11)
--------- ---------
--------- ---------
Shares used in computing pro forma net loss per share.......................... 16,248 17,517
--------- ---------
--------- ---------
</TABLE>
See accompanying notes.
42
<PAGE>
FORTE SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED
STOCK COMMON STOCK ADDITIONAL NOTES
---------------------- ---------------------- PAID-IN ACCUMULATED RECEIVABLE FROM
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT STOCKHOLDERS
--------- ----------- --------- ----------- ----------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1993............... 6,926 $ 69 3,272 $ 33 $ 6,096 $ (5,337) $ (51)
Issuance of common stock................ -- -- 343 3 34 -- --
Issuance of preferred stock Series C,
net of issuance costs.................. 3,125 31 -- -- 9,003 -- --
Net loss................................ -- -- -- -- -- (8,060) --
--------- ----------- --------- ----- ----------- ------------ ---
Balance at March 31, 1994............... 10,051 100 3,615 36 15,133 (13,397) (51)
Issuance of common stock................ -- -- 69 1 27 -- --
Issuance of preferred stock Series D,
net of issuance costs.................. 1,979 20 -- -- 12,855 -- --
Forgiveness of stockholders' notes
receivable............................. -- -- -- -- -- -- 51
Foreign currency translation
adjustment............................. -- -- -- -- -- -- --
Net loss................................ -- -- -- -- -- (7,350) --
--------- ----------- --------- ----- ----------- ------------ ---
Balance at March 31, 1995............... 12,030 120 3,684 37 28,015 (20,747) --
Issuance of common stock................ -- -- 747 8 334 -- --
Public offering of common stock, net of
expenses of $3,985..................... -- -- 1,823 18 34,269 -- --
Conversion of preferred stock........... (12,030) (120) 12,030 120 -- -- --
Foreign currency translation
adjustment............................. -- -- -- -- -- -- --
Net loss................................ -- -- -- -- -- (1,988) --
--------- ----------- --------- ----- ----------- ------------ ---
Balance at March 31, 1996............... -- $ -- 18,284 $ 183 $ 62,618 $ (22,735) $ --
--------- ----------- --------- ----- ----------- ------------ ---
--------- ----------- --------- ----- ----------- ------------ ---
<CAPTION>
FOREIGN
CURRENCY
TRANSLATION
ADJUSTMENT TOTAL
--------------- ---------
<S> <C> <C>
Balance at March 31, 1993............... $ -- $ 810
Issuance of common stock................ -- 37
Issuance of preferred stock Series C,
net of issuance costs.................. -- 9,034
Net loss................................ -- (8,060)
--- ---------
Balance at March 31, 1994............... -- 1,821
Issuance of common stock................ -- 28
Issuance of preferred stock Series D,
net of issuance costs.................. -- 12,875
Forgiveness of stockholders' notes
receivable............................. -- 51
Foreign currency translation
adjustment............................. 24 24
Net loss................................ -- (7,350)
--- ---------
Balance at March 31, 1995............... 24 7,449
Issuance of common stock................ -- 342
Public offering of common stock, net of
expenses of $3,985..................... -- 34,287
Conversion of preferred stock........... -- --
Foreign currency translation
adjustment............................. (46) (46)
Net loss................................ -- (1,988)
--- ---------
Balance at March 31, 1996............... $ (22) $ 40,044
--- ---------
--- ---------
</TABLE>
See accompanying notes.
43
<PAGE>
FORTE SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
--------------------------------
1994 1995 1996
---------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss...................................................................... $ (8,060) $ (7,350) $ (1,988)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization............................................... 298 457 1,365
Forgiveness of interest and principle on notes receivable from
stockholders............................................................... -- 51 --
Professional services expense paid with common stock........................ 2 -- --
Changes in operating assets and liabilities:
Accounts receivable....................................................... (23) (2,937) (8,099)
Prepaid expenses and other assets......................................... (30) (368) (498)
Accounts payable.......................................................... 62 276 701
Accrued compensation and related expenses................................. 206 1,446 1,208
Deferred revenue.......................................................... 1,267 3,055 2,051
Other accrued liabilities................................................. 44 266 1,897
---------- --------- ---------
Net cash used in operating activities......................................... (6,234) (5,104) (3,363)
INVESTING ACTIVITIES
Purchases of furniture, equipment and leasehold improvements.................. (157) (430) (1,220)
Purchase of short-term investments............................................ (13,396) (3,920) (6,236)
Maturities of short-term investments.......................................... 11,024 5,998 2,915
Proceeds from sale/leaseback of equipment..................................... 69 -- --
---------- --------- ---------
Net cash (used in) provided by investing activities........................... (2,460) 1,648 (4,541)
FINANCING ACTIVITIES
Proceeds from issuance of preferred stock..................................... 9,034 12,875 --
Payment on notes payable...................................................... 300 (171) (729)
Reduction of capital lease obligations........................................ (176) (360) (775)
Proceeds from issuance of common stock........................................ 37 28 34,629
---------- --------- ---------
Net cash provided by financing activities..................................... 9,195 12,372 33,125
---------- --------- ---------
Increase in cash and cash equivalents......................................... 501 8,916 25,221
---------- --------- ---------
Cash and cash equivalents at beginning of year................................ 443 944 9,860
---------- --------- ---------
Cash and cash equivalents at end of year...................................... $ 944 $ 9,860 $ 35,081
---------- --------- ---------
Supplemental disclosures:
Interest paid............................................................... $ 111 $ 177 $ 287
---------- --------- ---------
Income taxes paid........................................................... $ -- $ 100 $ 118
---------- --------- ---------
Supplemental disclosures of noncash investing and financing activities:
Capital lease obligations incurred.......................................... $ 552 $ 871 $ 2,201
---------- --------- ---------
---------- --------- ---------
</TABLE>
See accompanying notes.
44
<PAGE>
FORTE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Forte Software, Inc. (the "Company"), a Delaware Corporation, was originally
incorporated in California in February 1991. The Company designs, develops,
markets and supports Forte, a client/ server application development, deployment
and management environment for high-end client/server applications.
In January 1996, the Company reincorporated into Delaware and effected a
three-for-two stock split of the Company's common and preferred stock. All share
and per share amounts in the accompanying consolidated financial statements have
been adjusted retroactively.
BASIS OF PRESENTATION
The accompanying financial statements include the accounts of the Company
and its wholly owned foreign subsidiaries. The Company translates the accounts
of its foreign subsidiaries using the local foreign currency as the functional
currency. The assets and liabilities of the foreign subsidiaries are translated
into U.S. dollars using exchange rates at the balance sheet date, revenues and
expenses are translated using the weighted average exchange rate for the period,
and gains and losses from this translation process are credited or charged to
stockholders' equity. All significant intercompany accounts and transactions
have been eliminated. Foreign currency transaction gains and losses have not
been material.
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 amounts of 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. Significant estimates made in preparing these financial statements
include the allowance for doubtful accounts and valuation of deferred tax
assets.
CASH AND CASH EQUIVALENTS
Cash equivalents are highly liquid investments with original maturities of
three months or less and are stated at cost, which approximates fair value. Cash
equivalents consist principally of U.S. Government securities, commercial paper
and corporate notes, money market funds, certificates of deposit and demand
deposits. Included in cash and cash equivalents at March 31, 1996 are commercial
paper, U.S. Government agency notes and corporate notes in the amount of
$20,861,000, $1,325,000 and $8,008,000, respectively.
SHORT-TERM INVESTMENTS
As of March 31, 1995, short-term investments consisted principally of
short-term U.S. treasury bills and were classified as held-to-maturity
securities pursuant to the provisions of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," as the
Company intended to hold, and did hold, these securities to maturity.
Held-to-maturity securities are stated at cost, which approximates fair market
value, adjusted for amortization of premiums and accretion of discounts. Such
amortization and interest earned on securities classified as held-to-maturity
are included in interest income.
During fiscal year 1996, the Company purchased corporate debt securities and
U.S. treasury bills, which will mature in 18 months or less. As of March 31,
1996, these securities are classified as
45
<PAGE>
FORTE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
available-for-sale securities. Unrealized gains and losses at March 31, 1996 and
realized gains and losses for the year then ended were not material.
Accordingly, the Company has not made a provision for such amounts in its
consolidated balance sheets.
CONCENTRATIONS OF CREDIT RISK AND CREDIT EVALUATIONS
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of temporary cash investments
including U.S. Treasury bills, other short-term obligations of the U.S.
Government and its agencies, corporate securities, money market funds, and
certificates of deposit. The Company places its temporary cash investments
primarily with two financial institutions.
The Company licenses its products primarily to companies in the North
America, Europe and Japan. The Company performs ongoing credit evaluations of
these customers and generally does not require collateral. Reserves are
maintained for potential credit losses.
REVENUE RECOGNITION
Software license fee revenue is recognized when a noncancellable license
agreement has been executed, the product has been shipped and all significant
contractual obligations have been satisfied and the resulting receivable is
deemed collectible by management. Revenue from third-party distributors and
value added resellers ("VARS") are recognized as products are sold to end users
provided the receivable is collectible. The Company provides reserves for
estimated product returns. Actual returns have not been material. Maintenance
and service revenue includes maintenance revenue which is recognized ratably
over the maintenance period and revenue from training and consulting services
which is recognized as services are performed. The Company's revenue recognition
policy is in compliance with the provisions of the American Institute of
Certified Public Accountants Statement of Position 91-1, "Software Revenue
Recognition."
Deferred revenue includes deferred maintenance revenue, prepaid consulting
and training and prepaid license fees from third-party resellers.
INTERNATIONAL OPERATIONS
The Company operates in one industry segment (the development and marketing
of computer software and related services) and markets its products and services
internationally through foreign subsidiaries in Europe and Australia, Digital
Equipment Corporation on a worldwide basis, and other distributors and resellers
located in the United States, Canada, Asia, Europe, South America, South Africa
and Israel. Export sales through distributors, resellers and the domestic direct
sales organization totaled $0, $890,000 and $5,312,000 for the years ended March
31, 1994, 1995 and 1996, respectively. Sales through the Company's foreign
subsidiaries totaled $0, $796,000 and $2,427,000 for the years ended March 31,
1994, 1995 and 1996, respectively.
SOFTWARE DEVELOPMENT COSTS
Software development costs have been accounted for in accordance with
Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed." Under the standard,
capitalization of software development costs begins upon the establishment of
technological feasibility, subject to net realizable value considerations. The
Company begins capitalization upon completion of a working model. To date, such
capitalizable costs
46
<PAGE>
FORTE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
have not been material. Accordingly, the Company has charged all such costs to
research and development expense. Future capitalized costs, if any, will be
amortized on a straight-line basis over the estimated life of the products or
the ratio of current revenue to the total of current and anticipated future
revenue, whichever expense is greater.
FURNITURE EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Furniture, equipment and leasehold improvements are stated at cost and are
depreciated using the straight-line method over the estimated useful lives of
the related assets. Leasehold improvements and equipment under capital leases
are amortized using the straight-line method over the lesser of the lease term
or the estimated useful lives.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes," which
requires the use of the liability method in accounting for income taxes. Under
this method, deferred tax assets and liabilities are measured using enacted tax
rates and laws that will be in effect when the differences are expected to
reverse.
NET LOSS PER SHARE
Except as noted below, net 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 is as follows (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Net loss per share....................................................... $ (1.60) $ (1.38) $ (0.33)
--------- --------- ---------
Shares used in computing net loss per share.............................. 5,054 5,329 6,089
--------- --------- ---------
--------- --------- ---------
</TABLE>
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.
ACCOUNTING FOR STOCK-BASED COMPENSATION
In October 1995, the Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," (FAS 123) was issued and is effective
for the Company's 1997 fiscal year. The Company intends to continue to account
for employee stock options in accordance with APB Opinion No. 25 and will make
the pro forma disclosures required by FAS 123 in fiscal year 1997.
RECLASSIFICATIONS
Certain reclassifications have been made to prior year's financial
statements to conform to the current year's presentation.
47
<PAGE>
FORTE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1996
2. FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Furniture, equipment and leasehold improvements consisted of the following
(in thousands):
<TABLE>
<CAPTION>
MARCH 31,
--------------------
1995 1996 USEFUL LIVES
--------- --------- ------------------
<S> <C> <C> <C>
Furniture and equipment under capital leases......... $ 1,941 $ 4,150 36 - 42 months
Equipment............................................ 523 1,415 36 - 42 months
Leasehold improvements............................... 175 495 36 months
--------- ---------
2,639 6,060
Less accumulated depreciation and amortization....... (792) (2,157)
Furniture, Equipment and leasehold improvements,
net................................................. $ 1,847 $ 3,903
--------- ---------
--------- ---------
</TABLE>
Accumulated amortization related to assets under capital leases at March 31,
1995 and 1996 totaled $588,000 and $1,528,000, respectively.
3. LINE OF CREDIT
At March 31, 1996, the Company had a line of credit agreement with a bank
providing for borrowings of up to $5,000,000. Borrowings are collateralized by
substantially all of the Company's tangible and intangible assets. Interest is
due at the bank's prime rate plus .75% (8.25% prime rate at March 31, 1996). The
line is subject to certain financial covenants including the maintenance of
certain financial ratios. The Company was in compliance with these covenants
during the year ended March 31, 1996. There were no borrowings under the line of
credit during the year ended March 31, 1996. The agreement expires on July 31,
1996.
4. NOTES PAYABLE
Notes payable consist of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31
--------------------
1995 1996
--------- ---------
<S> <C> <C>
Subordinated notes payable to vendor, due in installments through 1997,
prepaid in December 1995..................................................... $ 729 $ --
Less current portion.......................................................... 273 --
--------- ---------
Long-term portion............................................................. $ 456 $ --
--------- ---------
--------- ---------
</TABLE>
5. STOCKHOLDERS' EQUITY
INITIAL PUBLIC OFFERING
On March 11, 1996, the Company completed an initial public offering of
1,822,500 shares of common stock at $21.00 per share. The Company received net
proceeds of $34,287,000. In connection with the initial public offering, Series
A, B, C and D preferred stock converted into 12,029,883 shares of common stock.
Approximately $750,000 of the initial public offering expenses are included in
other accrued liabilities at March 31, 1996.
48
<PAGE>
FORTE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1996
5. STOCKHOLDERS' EQUITY (CONTINUED)
COMMON STOCK
Common stock has been issued to founders, certain employees and investors of
the Company. Certain common shares issued to employees are subject to repurchase
rights by the Company in the event of termination of employment at the price
originally paid by the employee. At March 31, 1996, common stock was reserved
for issuance as follows:
<TABLE>
<S> <C>
Stock option plan................................................ 4,600,185
Warrants......................................................... 78,902
Employee stock purchase plan..................................... 400,000
---------
5,079,087
---------
---------
</TABLE>
WARRANTS
In September 1994, as part of a debt agreement with a bank, the Company
granted to the bank warrants to purchase 11,479 shares of Series C preferred
stock at an exercise price of $6.53 per share which are now exercisable for
common stock.
As part of a vendor loan agreement, the Company granted to the vendor
warrants in June 1992 to purchase 25,511 shares of the Company's common stock at
an exercise price of $2.94 per share. Pursuant to the warrant agreement, these
warrants were redeemed by the Company for 11,798 shares of common stock in March
1996.
Warrants to purchase preferred stock have been issued in connection with an
equipment lease agreement as follows: in December 1992, the Company issued
warrants to purchase 39,173 shares of the Company's Series B preferred stock at
an exercise price of $2.30 per share; in May 1994, 12,500 shares of the
Company's Series C preferred stock at an exercise price of $4.00 per share; in
February 1995, 13,500 shares of Series C preferred stock at an exercise price of
$6.67 per share; and in September 1995, 2,250 shares of the Company's Series C
preferred stock at an exercise price of $6.67 per share; all of which are now
exercisable for common stock. These warrants are exercisable through 2005.
STOCK OPTION PLAN
Under the terms of the 1991 Stock Option Plan (the "1991 Plan") eligible key
employees, directors, and consultants can receive options to purchase shares of
the Company's common stock at a price not less than 100% and 85% of the fair
value on the date of the grant for incentive stock options and nonqualified
stock options, respectively. The options granted under the 1991 Plan are
exercisable over a maximum term of ten years from the date of grant and
generally vest over a five-year period. Shares sold under the Plan are subject
to various restrictions as to resale and right of repurchase by the Company.
In January 1996, the Company adopted the 1996 Stock Option Plan (the "1996
Plan") as the successor to the 1991 Plan. Under the 1996 Plan, eligible key
employees, directors, and consultants can receive options to purchase shares of
the Company's common stock at a price not less than 85% of the fair market value
on the grant date. The Company authorized 4,860,000 shares of common stock to be
issued under the 1996 Plan, of which 1,527,127 (including options incorporated
from the 1991 Plan and excluding stock options exercised through December 31,
1995) are available for grant at March 31, 1996.
EMPLOYEE STOCK PURCHASE PLAN
The Employee Stock Purchase Plan (the "Purchase Plan") was also adopted in
January 1996. The Company authorized 400,000 shares of common stock under the
Purchase Plan, none of which
49
<PAGE>
FORTE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1996
5. STOCKHOLDERS' EQUITY (CONTINUED)
have been issued at March 31, 1996. Eligible employees may purchase common stock
through payroll deductions, which may not exceed 10% of an employee's
compensation. The price of stock purchased under the Purchase Plan will be 85%
of the lower of the fair market value of the common stock at the beginning of
the twenty-four month offering period or on the applicable semi-annual purchase
date. Unless sooner terminated by the Board, the Purchase Plan shall terminate
upon the earliest of (i) the last business day in October 2006, (ii) the date on
which all shares available for issuance under the Purchase Plan shall have been
sold pursuant to purchase rights exercised under the Purchase Plan or (iii) the
date on which all purchase rights are exercised in connection with certain
corporate transactions.
A summary of the activity under the 1996 Plan is set forth below:
<TABLE>
<CAPTION>
SHARES EXERCISE PRICE
----------- -----------------
<S> <C> <C>
Outstanding at April 1, 1992........................................... 406,671 $ 0.07
Granted.............................................................. 827,501 $0.07 - 0.13
----------- -----------------
Outstanding at March 31, 1993.......................................... 1,234,172 0.07 - 0.13
Granted.............................................................. 541,500 0.13 - 0.28
Exercised............................................................ (348,795) 0.07 - 0.28
Cancelled............................................................ (142,842) 0.07 - 0.13
----------- -----------------
Outstanding at March 31, 1994.......................................... 1,284,035 0.07 - 0.28
Granted.............................................................. 1,681,875 0.28 - 1.33
Exercised............................................................ (46,494) 0.07 - 0.28
Cancelled............................................................ (61,599) 0.13 - 0.28
----------- -----------------
Outstanding at March 31, 1995.......................................... 2,857,817 0.07 - 1.33
-----------
Granted.............................................................. 1,181,075 2.33 - 40.50
Exercised............................................................ (735,353) 0.07 - 11.00
Cancelled............................................................ (230,481) 0.07 - 11.00
----------- -----------------
Outstanding at March 31, 1996.......................................... 3,073,058 $0.07 - $40.50
----------- -----------------
Vested options at March 31, 1996....................................... 519,404 $0.07 - $11.00
-----------
-----------
</TABLE>
At March 31, 1996, 324,370 shares of common stock issued through the
exercise of options were subject to repurchase by the Company. The Company has
entered into agreements with certain officers of the Company that provide for
acceleration of vesting of certain options in exchange for shares subject to
repurchase in the event the officer's employment is involuntarily terminated
following certain acquisitions or changes in control of the Company. Through
March 31, 1996, no such shares have been repurchased by the Company.
6. INCOME TAXES
There were no provisions for federal or state income taxes for any period as
the Company has incurred operating losses and there can be no assurance that the
Company will realize the benefit of the net operating loss carryforwards. In the
years ended March 31, 1995 and 1996, the Company recorded foreign provisions
related to foreign income tax withholding on certain license fees paid to the
Company by foreign licensees.
Deferred income 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.
50
<PAGE>
FORTE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1996
6. INCOME TAXES (CONTINUED)
Significant components of the Company's current and noncurrent deferred tax
assets and liabilities for federal and state income taxes are as follows (in
thousands):
<TABLE>
<CAPTION>
MARCH 31,
--------------------
1995 1996
--------- ---------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards................................................. $ 5,261 $ 5,995
Deferred revenue................................................................. 1,890 1,647
Research and development credit carryforwards.................................... 1,062 1,062
Reserves and other accruals...................................................... 327 547
Depreciation..................................................................... 221 363
Foreign tax credit carryforwards................................................. 100 210
Other............................................................................ 119 83
--------- ---------
Total deferred tax assets...................................................... 8,980 9,907
Valuation allowance................................................................ (8,820) (9,437)
Deferred tax liabilities:
Other............................................................................ (160) (470)
--------- ---------
Net deferred tax assets............................................................ $ -- $ --
--------- ---------
--------- ---------
</TABLE>
At March 31, 1996, the Company had approximately $16,400,000 in federal net
operating loss carryforwards, approximately $7,100,000 in state net operating
loss carryforwards and approximately $1,000,000 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 1996 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.
During the year ended March 31, 1995 and 1996, the valuation allowance
increased by $3,219,000 and $617,000, respectively.
7. PROFIT SHARING PLAN
The Company has a 401(k) profit sharing plan (the "401(k) Plan") for its
eligible employees. All employees, as defined, are eligible to participate after
completion of one month of employment with the Company. Employee contributions
to the Plan are subject to certain statutory limitations. The pre-tax voluntary
contributions are limited to 15% of the aggregate compensation paid to the
employee in all the years since participation in the Plan. The Company's
contribution to the 401(k) Plan is discretionary. The Company has not
contributed any amounts to the 401(k) Plan to date.
8. COMMITMENTS
The Company has entered into operating leases for office space with original
terms ranging from twelve to forty-two months. The facility leases generally
contain renewal options and provisions adjusting the lease payments based upon
changes in operating costs of the buildings.
The Company also entered into capital leases for certain furniture and
equipment under a $5,750,000 equipment lease line with original terms of
forty-two months. Approximately $1,600,000 is available under the equipment
lease line at March 31, 1996.
51
<PAGE>
FORTE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1996
8. COMMITMENTS (CONTINUED)
Capital lease obligations represent the present value of future rental
payments under various lease agreements for furniture and equipment. The Company
has options to purchase the leased assets at the end of the lease terms for
their fair market value.
The future minimum lease payments under all noncancelable leases having
initial terms longer than one year at December 31, 1995 are as follows (in
thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
--------- -----------
<S> <C> <C>
Years ended March 31:
1997............................................................................ $ 1,309 $ 1,052
1998............................................................................ 1,071 890
1999............................................................................ 729 515
2000............................................................................ 73 --
--------- -----------
Total minimum lease payments...................................................... 3,182 $ 2,457
-----------
-----------
Less interest..................................................................... 384
---------
Present value of minimum lease payments........................................... 2,798
Less current portion.............................................................. 1,084
---------
Long-term capital lease obligations............................................... $ 1,714
---------
---------
</TABLE>
Rent expense for the years ended March 31, 1994, 1995 and 1996 was $338,000,
$469,000 and $1,461,000, respectively.
52
<PAGE>
EXHIBIT 11.1
FORTE SOFTWARE, INC.
COMPUTATION OF LOSS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Actual weighted average shares outstanding for the period:
Common Stock.................................................................. 3,357 3,632 4,215
SAB 83, Cheap stock........................................................... 1,697 1,697 1,272
Conversion of outstanding preferred stock..................................... -- -- 602
--------- --------- ---------
Total common and cheap stock weighted average shares outstanding................ 5,054 5,329 6,089
--------- --------- ---------
Net loss........................................................................ $ (8,060) $ (7,350) $ (1,988)
--------- --------- ---------
Net loss per share.............................................................. $ (1.60) $ (1.38) $ (0.33)
--------- --------- ---------
--------- --------- ---------
</TABLE>
<PAGE>
EXHIBIT 16.1
We have read the statements made by Forte Software, Inc. included in this
Annual Report on Form 10-K under the caption "Change in Independent Auditors."
We understand this Form 10-K will be filed with the Commission in June 1996. We
agree with statements concerning our Firm in such Form 10-K.
COOPERS & LYBRAND L.L.P.
<PAGE>
EXHIBIT 21.1
LIST OF SUBSIDIARIES
The following table sets forth certain information concerning the principle
subsidiaries of the Company.
<TABLE>
<CAPTION>
STATE OR OTHER
JURISDICTION OF
NAME INCORPORATION
- ------------------------------------------------------------------------ --------------------
<S> <C>
Forte Software (UK) Limited United Kingdom
Forte Software Pty. Ltd. Australia
Forte France SARL France
Forte Software Gmbh Germany
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-2270) pertaining to the 1996 Stock Option Plan, the Employee
Stock Purchase Plan and options under written Compensation Agreements of Forte
Software, Inc. of our report dated April 24, 1996, with respect to the
consolidated financial statements and schedule of Forte Software, Inc. included
in the Annual Report (Form 10-K) for the year ended March 31, 1996.
ERNST & YOUNG LLP
Walnut Creek, California
April 24, 1996
<PAGE>
SCHEDULE II
FORTE SOFTWARE, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED MARCH 31, 1994, 1995 AND 1996
ALLOWANCE FOR DOUBTFUL ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO
BEGINNING COSTS AND DEDUCTIONS BALANCE AT
YEAR ENDED MARCH 31, OF YEAR EXPENSES WRITE-OFFS END OF YEAR
- ---------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
1994................................................ $ -- $ -- $ -- $ --
1995................................................ -- 365,000 -- 365,000
1996................................................ 365,000 288,000 122,000 531,000
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-START> APR-01-1995
<PERIOD-END> MAR-31-1996
<CASH> 35,081
<SECURITIES> 6,236
<RECEIVABLES> 11,424
<ALLOWANCES> 531
<INVENTORY> 0
<CURRENT-ASSETS> 53,215
<PP&E> 6,060
<DEPRECIATION> 2,157
<TOTAL-ASSETS> 57,291
<CURRENT-LIABILITIES> 13,501
<BONDS> 0
0
0
<COMMON> 183
<OTHER-SE> 39,861
<TOTAL-LIABILITY-AND-EQUITY> 57,291
<SALES> 30,045
<TOTAL-REVENUES> 30,045
<CGS> 5,908
<TOTAL-COSTS> 26,297
<OTHER-EXPENSES> (286)
<LOSS-PROVISION> 531
<INTEREST-EXPENSE> 282
<INCOME-PRETAX> (1,874)
<INCOME-TAX> 114
<INCOME-CONTINUING> (2,160)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,988)
<EPS-PRIMARY> (0.11)
<EPS-DILUTED> (0.11)
</TABLE>
