<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
(Mark One)
/X/ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the quarterly period ended September 30, 1997
------------------
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from _____ to_____
Commission file number: 0-27838
---------------
FORTE SOFTWARE, INC.
--------------------
(Exact name of registrant as specified in its charter)
Delaware 94-3131872
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1800 Harrison Street
Oakland, California 94612
(510) 869-3400
(Address, including zip code, of Registrant's principal
executive offices and telephone number, including area code)
---------------
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $0.01 par value 19,349,939
(Class of common stock) (Shares outstanding at September 30, 1997)
1
<PAGE>
FORTE SOFTWARE, INC.
FORM 10-Q QUARTERLY REPORT
Table of Contents
PART I FINANCIAL INFORMATION
Item 1. Financial Statements Page
Condensed Consolidated Balance Sheets 3
At March 31, 1997 and September 30, 1997
Condensed Consolidated Statements of Operations 4
For the Three and Six Months Ended September 30, 1996 and 1997
Condensed Consolidated Statements of Cash Flows 5
For the Six Months Ended September 30, 1996 and 1997
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial 8
Condition and Results of Operations
Part II OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 2. Changes in Securities 22
Item 3. Defaults on Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 23
Item 6. Exhibits, Financial Statement Schedules and Reports on Form 8-K 23
Signatures 24
2
<PAGE>
PART 1.
ITEM 1. FINANCIAL STATEMENTS
FORTE SOFTWARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
March 31, September 30,
1997 1997
------------- -------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 35,103 $ 24,349
Short-term investments 13,154 15,294
Accounts receivable, net of allowances
of $969 ($941 at March 31, 1997) 17,750 17,151
Prepaid expenses and other current assets 1,003 2,125
------------- -------------
Total current assets 67,010 58,919
Equipment and leasehold improvements, net 6,489 7,238
Other assets 250 300
------------- -------------
Total assets $ 73,749 $ 66,457
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,003 $ 2,503
Accrued expenses and other liabilities 10,190 8,890
Deferred revenue 9,247 8,324
Current portion of capital lease obligations 915 863
------------- -------------
Total current liabilities 23,355 20,580
------------- -------------
Capital lease obligations due after one year 849 408
Deferred revenue 871 331
Commitments
Stockholders' equity:
Common stock 188 193
Additional paid-in capital 64,169 65,740
Accumulated deficit (15,486) (20,715)
Foreign currency translation adjustments (197) (80)
------------- -------------
Total stockholders' equity 48,674 45,138
------------- -------------
Total liabilities and stockholders' equity $ 73,749 $ 66,457
------------- -------------
------------- -------------
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE>
FORTE SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS; UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Six months ended
September 30, September 30,
1996 1997 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
License fees $ 9,833 $ 9,919 $ 17,856 $ 17,884
Maintenance and services 4,381 7,569 8,038 14,278
---------- --------- ---------- ----------
Total revenues 14,214 17,488 25,894 32,162
---------- --------- ---------- ----------
Operating expenses:
Cost of license fees 128 171 266 240
Cost of maintenance and
services 2,542 4,509 4,920 8,638
Sales and marketing 6,601 10,752 12,366 20,009
Product development and
engineering 2,565 3,667 4,849 6,713
General and administrative 1,248 1,907 2,527 3,454
---------- --------- ---------- ----------
Total operating expenses 13,084 21,006 24,928 39,054
---------- --------- ---------- ----------
Income (loss) from operations 1,130 (3,518) 966 (6,892)
Interest income, net 520 515 1,009 1,068
---------- --------- ---------- ----------
Income (loss) before income taxes 1,650 (3,003) 1,975 (5,824)
Provision (benefit) for income taxes 205 (20) 237 (595)
---------- --------- ---------- ----------
Net income (loss) $ 1,445 $ (2,983) $ 1,738 $ (5,229)
---------- --------- ---------- ----------
---------- --------- ---------- ----------
Net income (loss) per share $ 0.07 $ (0.15) $ 0.08 $ (0.27)
---------- --------- ---------- ----------
---------- --------- ---------- ----------
Shares used in computing net
income (loss) per share 21,078 19,296 21,107 19,200
---------- --------- ---------- ----------
---------- --------- ---------- ----------
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE>
FORTE SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS; UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended September
30,
----------------------------
1996 1997
-------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 1,738 $ (5,229)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation and amortization 1,120 1,879
Changes in operating assets and liabilities:
Accounts receivable (2,088) 659
Prepaid expenses and other assets (412) (1,172)
Accounts payable 40 (441)
Accrued expenses and other liabilities 984 (1,300)
Deferred revenue (206) (1,463)
-------------- -------------
Net cash provided by (used in) operating activities 1,176 (7,067)
-------------- -------------
INVESTING ACTIVITIES
Purchases of equipment and leasehold improvements (2,230) (2,628)
Purchase of short-term investments (11,027) (5,492)
Maturities of short-term investments 2,966 3,350
-------------- -------------
Net cash used in investing activities (10,291) (4,770)
-------------- -------------
FINANCING ACTIVITIES
Reduction in capital lease obligations (611) (493)
Proceeds from issuance of common stock 84 1,576
-------------- -------------
Net cash (used in) provided by financing activities (527) 1,083
-------------- -------------
Decrease in cash and cash equivalents (9,642) (10,754)
Cash and cash equivalents at beginning of period 35,081 35,103
-------------- -------------
Cash and cash equivalents at end of period $ 25,439 $ 24,349
-------------- -------------
-------------- -------------
Supplemental disclosures:
Interest paid $ 153 $ 115
-------------- -------------
-------------- -------------
Income taxes paid $ 93 $ 381
-------------- -------------
-------------- -------------
Supplemental disclosures of noncash investing
and financing Activities:
Capital lease obligations incurred $ 90 $ -
-------------- -------------
-------------- -------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
<PAGE>
FORTE SOFTWARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements included herein
reflect all adjustments, consisting only of normal recurring accruals, which
in the opinion of management are necessary to fairly present the Company's
consolidated financial position, results of operations, and cash flows for
the periods presented. These financial statements should be read in
conjunction with the Company's audited consolidated financial statements as
included in the Annual Report on Form 10-K for the year ended March 31, 1997.
Certain information and footnote disclosures normally included in audited
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the
Securities and Exchange Commission rules and regulations. The consolidated
results of operations for the period ended September 30, 1997 are not
necessarily indicative of the results to be expected for any subsequent
quarter or for the entire fiscal year ending March 31, 1998. The March 31,
1997 balance sheet was derived from audited financial statements, but does
not include all disclosures required by generally accepted accounting
principles.
NET INCOME (LOSS) PER SHARE
Net income per share is computed using the weighted average number of
outstanding shares of common stock and the common stock equivalents from
outstanding stock options (when dilutive using the treasury stock method). In
February 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings per Share," which the Company will be required to adopt on
March 31, 1998. At that time the Company will be required to change the
method currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating primary earnings per
share, the dilutive effect of the stock options will be excluded. This change
is expected to have no impact on primary earnings per share for the second
quarter and for the six months ended September 30, 1997 and will result in an
increase of $0.01 per share for the second quarter and the six months ended
September 30, 1996, respectively. The impact of Statement 128 on the
calculation of fully diluted earnings per share for those quarters is not
expected to be material.
6
<PAGE>
FORTE SOFTWARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(UNAUDITED)
SHORT-TERM INVESTMENTS
As of September 30, 1997, all short-term investments were classified as
available-for-sale securities pursuant to the provisions of Financial
Accounting Standards Board Statement No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." Available-for-sale securities are
stated at estimated fair market value. Differences between the estimated
fair market value and cost were not material.
The following is a summary of the Company's investments and reconciliation of
the Company's investments to the balance sheet at September 30, 1997 (in
thousands).
Estimated
Fair
Value
-----------
Commercial Paper $ 17,074
Medium Term Notes 5,330
Corporate Notes 6,138
Foreign Debt Securities 3,823
Auction rate preferred stock 1,204
-----------
Total investments $ 33,569
-----------
-----------
Estimated
Fair
Value
-----------
Cash equivalents $ 18,275
Short-term investments 15,294
-----------
Total investments $ 33,569
-----------
-----------
Cash 6,074
-----------
Total cash, cash equivalents and
short-term investments $39,643
-----------
-----------
7
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS WHICH
REFLECT THE COMPANY'S CURRENT VIEWS WITH RESPECT TO FUTURE EVENTS AND
FINANCIAL PERFORMANCE. IN THIS REPORT, THE WORDS "ANTICIPATE," "BELIEVES,"
"EXPECTS," "INTENDS," "FUTURE," "ESTIMATES," AND OTHER SIMILAR EXPRESSIONS
IDENTIFY FORWARD-LOOKING STATEMENTS. THESE FORWARD-LOOKING STATEMENTS ARE
SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES, INCLUDING THOSE DISCUSSED IN
"BUSINESS RISKS" BELOW AND IN "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS," THAT COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM HISTORICAL RESULTS OR THOSE ANTICIPATED.
The following table sets forth certain unaudited condensed consolidated
statement of operations data as a percentage of total revenues for the three
and the six month periods ended September 30, 1996 and 1997.
<TABLE>
<CAPTION>
Three months ended Six months ended
September 30, September 30,
1996 1997 1996 1997
------ ------- ------- -------
<S> <C> <C> <C> <C>
Revenues:
License 69.2% 56.7% 69.0% 55.6%
Maintenance and services 30.8 43.3 31.0 44.4
-------- -------- -------- --------
Total revenues 100.0 100.0 100.0 100.0
-------- -------- -------- --------
-------- -------- -------- --------
Cost of revenues:
License 0.9 1.0 1.0 0.7
Maintenance and services 17.9 25.8 19.0 26.9
-------- -------- -------- --------
Total cost of revenues 18.8 26.8 20.0 27.6
Gross profit 81.2 73.2 80.0 72.4
Operating expenses:
Sales and marketing 46.5 61.5 47.8 62.2
Product development and
engineering 18.0 21.0 18.7 20.9
General and administrative 8.8 10.9 9.8 10.7
-------- -------- -------- --------
Total operating expenses 73.3 93.4 76.3 93.8
Income (loss) from operations 7.9 (20.2) 3.7 (21.4)
-------- -------- -------- --------
Interest income, net 3.7 2.9 3.9 3.3
-------- -------- -------- --------
Income (loss) before income taxes 11.6 (17.3) 7.6 (18.1)
Provision (benefit) for income taxes (1.4) 0.1 (0.9) 1.9
-------- -------- -------- --------
Net income (loss) 10.2% (17.2)% 6.7 % (16.2)%
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
8
<PAGE>
RESULTS OF OPERATIONS
REVENUES. The Company's total revenues consist of license fees for its Forte
application environment and related products as well as associated
maintenance and service revenues. The Company licenses software under
non-cancelable license agreements and provides services including
maintenance, training and consulting. License revenues are recognized when a
non-cancelable license agreement has been signed, the product has been
shipped, the fees are fixed and determinable and collectibility is reasonably
assured. Fees for services are charged separately from the license of the
Company's software products. Maintenance revenues consist of fees for ongoing
support and product updates and are recognized ratably over the term of the
contract, which is typically twelve months. Revenues from training are
recognized upon completion of the related training class. Consulting revenues
are recognized as the services are performed. Allowances for credit risks and
for estimated future returns are provided for upon product shipment. Returns
to date have not been material. Actual credit losses and returns may differ
from the Company's estimates and such differences could be material to the
financial statements.
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 or 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.
The Company's total revenues increased 23% from $14.2 million to $17.5
million for the quarters ended September 30, 1996 and 1997, respectively.
License revenues were $17.9 million for each of the six month periods ended
September 30, 1996 and 1997. While the Company's sales force headcount grew
significantly for the first six months of fiscal 1998, the Company
experienced lower productivity per sales representative due to longer sales
cycles and other factors as compared to the first six months of fiscal 1997.
Maintenance and services revenues increased 73% from $4.4 million, or 31% of
total revenues, to $7.6 million, or 43% of total revenues, for the quarters
ended September 30, 1996 and 1997, respectively. Maintenance and services
revenue for the six months ended September 30, 1997, increased by 78% from
$8.0 million in 1996 to $14.3 million for the same period in 1997. These
increases in total maintenance and service revenues were primarily a result
of the growing installed base in the Company's software products and the
associated increase in demand for maintenance, training and consulting
services. Services revenues as a percentage of total revenues may vary
between periods due to changes in demand for the Company's services and
changes in the rate of growth of license revenue.
International revenues include all revenues other than from the United
States. International revenues include sales from the Company's direct sales
organizations in Europe and Australia and export sales through distributors
and resellers in Asia, Europe and other areas of the world, as well
9
<PAGE>
as international sales made by the domestic direct sales organization in
Canada. International revenues increased 56% from $5.0 million for the
quarter ended September 30, 1996 to $7.8 million for the quarter ended
September 30, 1997 representing 35% and 45% of total revenues, respectively.
International revenues increased 67% from $8.4 million for the six months
ended September 30, 1996 to $14.0 million for the same period in 1997. The
increase in international revenues reflects a growing direct sales presence
in Europe through the Company's foreign subsidiaries. The Company expects
that international license and related maintenance and service revenues will
continue to account for a significant portion of its total revenues in the
future. The Company believes that in order to increase sales opportunities
and profitability it will be required to continue expanding 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 and related products. 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.
COST OF REVENUES
COST OF LICENSE REVENUES. Cost of license revenues consists primarily of
production and documentation, royalties paid to third-party vendors and
product packaging. Cost of license revenues was $128,000 and $171,000 for the
quarters ended September 30, 1996 and 1997, respectively, representing 1% of
license revenues in each of the periods. Cost of license revenues for the six
months ended September 30, 1996 and 1997 was $266,000 and $240,000,
respectively, representing 1% of total license fee revenue for each of the
periods. Cost of license revenues may vary as a percentage of license revenue
due to changes in the Company's royalty obligations to third party technology
providers and the number of new products and product releases in a given
period.
COST OF MAINTENANCE AND SERVICES REVENUES. Cost of maintenance and services
revenues consist primarily of personnel-related and facilities costs incurred
in providing customer support, training and consulting services, as well as
costs incurred in providing training and consulting services through third
party contractors. Cost of maintenance and services revenues was $2.5 million
and $4.5 million for the quarters ended September 30, 1996 and 1997,
respectively, representing 58% and 60% of maintenance and services revenues,
respectively. Cost of maintenance for the six months ended September 30, 1996
and 1997 was $4.9 million and $8.6 million respectively, representing 61% and
60% of maintenance and services revenues, respectively. The cost of services
as a percentage of services revenues may vary between periods due to the mix
of services provided by the Company and the extent to which external
contractors are used to provide those services.
OPERATING EXPENSES
SALES AND MARKETING. Sales and marketing expenses consist primarily of
salaries, commissions and bonuses earned by sales and marketing personnel,
field office expenses, travel and entertainment, promotional and lead
generation expenses, and advertising. Sales and marketing expenses increased
from $6.6 million for the quarter ended September 30, 1996 to $10.8 million
for the
<PAGE>
quarter ended September 30, 1997, and increased from $12.4 million for the
six months ended September 30, 1996 to $20.0 million for the six months ended
September 30, 1997. These increases reflect the hiring of additional sales
and marketing personnel, and their related costs, as well as increased costs
associated with expanded promotional, training, and lead generation
activities. Sales and marketing expenses represented 46% and 61% of total
revenues for the quarters ended September 30, 1996 and 1997, respectively.
Sales and marketing expenses represented 48% and 62% of total revenues for
the six months ended September 30, 1996 and 1997, respectively. The increase
in sales and marketing expenses as a percentage of total revenue was
primarily due to the cost of hiring additional personnel in the direct sales
force and increased promotional activities coupled with slower revenue growth
in the first six months of fiscal 1998 compared to the first six months of
fiscal 1997. The Company expects that sales and marketing expenses will
continue to increase in dollar amount as the Company intends to continue
investing in its sales and marketing organization and their related
activities.
PRODUCT DEVELOPMENT AND ENGINEERING. Product development and Engineering
expenses consist primarily of salaries and other personnel-related expenses
and depreciation of development equipment. The Company believes that a
significant level of investment for product development is required to remain
competitive. Product development expenses increased from $2.6 million for the
quarter ended September 30, 1996 to $3.7 million for the quarter ended
September 30, 1997. Product development expenses increased from $4.8 million
for the six months ended September 30, 1996 to $6.7 million for the six
months ended September 30, 1997. These increases were primarily attributable
to additional hiring of product development personnel. Product development
expenses represented 18% and 21% of total revenues for the quarters ended
September 30, 1996 and 1997, respectively. Product development expenses
represented 19% and 21% of total revenues for the six months ended September
30, 1996 and 1997, respectively. The increase in product development expenses
as a percentage of total revenues was primarily due to increased hiring of
product development personnel coupled with slower revenue growth in the first
six months of fiscal 1998 compared to the first months of fiscal 1997. 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 the future. Because all costs incurred in the research and
development of software products and enhancements to existing software
products have been expensed as incurred, cost of license revenues includes no
amortization of capitalized software development costs.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
from $1.2 million for the quarter ended September 30, 1996 to $1.9 million
in for the quarter ended September 30, 1997. General and administrative
expenses increased from $2.5 million for the six months ended September 30,
1996 to $3.5 million for the six months ended September 30, 1997. 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 9% and 11% of total revenues
for the quarters ended September 30, 1996 and 1997, respectively. General and
administrative expenses represented 10% and 11% for the six months ended
September 30, 1996 and 1997, respectively. The increase in general and
administration expenses as a percentage of total revenues was primarily due
slower revenue growth in the first six months of fiscal 1998 compared to the
first six months fiscal 1997, coupled with continuing improvements in the
Company's administrative infrastructure. The Company believes that its
general and administrative expenses will increase in dollar amount in the
future as a result of the expansion of the Company's administrative staff to
support its growing operations.
11
<PAGE>
INTEREST INCOME, NET. Interest income, net, represents interest earned by
the Company on its cash and cash equivalents and short-term investments
offset by interest expense on capitalized leases. Interest income, net,
decreased from $520,000 for the quarter ended September 30, 1996 to $515,000
for the quarter ended September 30, 1997. Interest income, net, increased
from $1.0 million for the six months ended September 30, 1996 to $1.1 million
for the six months ended September 30, 1997.
PROVISION (BENEFIT) FOR INCOME TAXES. The effective tax rate for the six
months ended September 30, 1997 was reduced to 10% from 20% in the quarter
ended June 30, 1997. The tax benefit of $20,000 for the quarter ended
September 30, 1997 was due to a change in estimate by the Company of its
expected effective tax rate for the year. This rate differs from the federal
statutory rate primarily due to the utilization of the net operating loss
carryovers and tax credits. The rate could change based on the mix of the
Company's geographic locations and the amount of permanent reinvestment
offshore of a portion of the Company's earnings, or changes in the tax law.
LIQUIDITY AND CAPITAL RESOURCES
The Company completed an initial public offering of common stock on March 11,
1996 with net proceeds of $34.3 million. The common stock is trading on the
NASDAQ National Market under the symbol FRTE.
At September 30, 1997, the Company had $39.6 million in cash, cash
equivalents and short term investments and $38.3 million in working capital,
which is the Company's primary source of liquidity.
The Company used cash of $7.1 million in operating activities for the six
months ended September 30, 1997 compared to cash provided by operating
activities of $1.2 million for the six months ended September 30, 1996. For
the six months ended September 30, 1997, the decrease in cash flow from
operations resulted primarily from the net loss for the six month period and
decreases in accounts payable, accrued expenses and other liabilities and
deferred revenue, partially offset by a decrease in accounts receivable.
The Company's investing activities consisted of the purchases of
interest-bearing securities representing a shift from cash equivalents to
short term investments, as well as purchases of property and equipment.
Capital expenditures were $2.6 million for the six months ended September 30,
1997 compared to $2.2 million for the same period in 1996. Capital
expenditures consisted of purchases of computer equipment and office
furniture to support its growing employee base. The Company expects that its
capital expenditures will increase as the Company's employee base grows. At
September 30, 1997 the Company did not have any material commitments for
capital expenditures.
The Company believes that its existing cash, cash equivalents, short-term
investments will be adequate to meet its cash needs for at least the next 12
months. Thereafter, the Company may
12
<PAGE>
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.
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 QUARTERLY REPORT ON FORM 10-Q. THIS REPORT ON
FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS WHICH REFLECT THE COMPANY'S
CURRENT VIEWS WITH RESPECT TO FUTURE EVENTS AND FINANCIAL PERFORMANCE. IN
THIS REPORT, THE WORDS "ANTICIPATE," "BELIEVES," "EXPECTS," "INTENDS,"
"FUTURE," "ESTIMATES," AND OTHER SIMILAR EXPRESSIONS IDENTIFY FORWARD-LOOKING
STATEMENTS. 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.
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS; UNCERTAINTY OF
FUTURE OPERATING RESULTS; SEASONALITY. The Company's quarterly operating
results have varied significantly in the past and are likely to vary
significantly in the future, depending on factors such as the size and timing
of significant orders and their fulfillment, demand for the Company's
products, changes in pricing policies by the Company or its competitors, the
number, timing and significance of product enhancements and new product
announcements by the Company and its competitors, the ability of the Company
to develop, introduce and market new and enhanced versions of the Company's
products on a timely basis, changes in the level of operating expenses,
changes in the Company's sales incentive plans, budgeting cycles of its
customers, customer order deferrals in anticipation of enhancements or new
products offered by the Company or its competitors, the cancellation of
licenses during the warranty period or nonrenewal of maintenance agreements,
product life cycles, software bugs and other product quality problems,
personnel changes, changes in the Company's strategy, the level of
international expansion, seasonal trends and general domestic and
international economic and political conditions, among others. A significant
portion of the Company's revenues have been, and the Company believes will
continue to be, derived from a limited number of orders placed by large
organizations, and the timing of such orders and their fulfillment has caused
and could continue to cause material fluctuations in the Company's operating
results, particularly on a quarterly basis. In addition, the Company intends
to continue to expand its domestic and international direct sales force.
Competition for sales personnel is intense, and there can be no assurance
that the Company can retain its existing sales personnel or that it can
attract, assimilate and retain additional highly qualified sales personnel in
the future. 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 distributed enterprise
application development software is rapidly evolving, and the Company's sales
cycle, from initial evaluation to purchase and the provision of support
services, is lengthy and varies substantially from customer to customer.
Product orders are typically shipped shortly after receipt, and consequently,
order backlog at the beginning of any quarter has in the past represented
only a small portion of that quarter's 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
13
<PAGE>
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 revenues
in its quarters ending June 30 as a result of efforts by its direct sales
force to meet the March 31 fiscal year-end sales quotas. Since international
operations constitute a significant percentage of the Company's total
revenues, the Company anticipates that it may also experience relatively
weaker demand in the quarters ending September 30 as a result of reduced
sales activity in Europe during the summer months.
LIMITED OPERATING HISTORY; HISTORY OF OPERATING LOSSES. The Company was
founded in February 1991 and first shipped product in August 1994. For the
quarters ended June 30, 1997 and September 30, 1997, the Company incurred net
losses. At September 30, 1997 the Company had an accumulated deficit of $20.7
million. A substantial portion of the accumulated deficit is due to the
significant commitment of resources to the Company's product development,
sales and marketing organizations. The Company expects to continue to devote
substantial resources in these areas and as a result will need to recognize
significant 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.
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 materially and adversely
affect 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. In
addition, the Company intends to continue to expand its domestic and
international direct sales force. Competition for sales personnel is intense,
and there can be no assurance that the Company can retain its existing sales
personnel or that it can
14
<PAGE>
attract, assimilate and retain additional highly qualified sales personnel in
the future. 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. The Company has at times experienced
and continues to experience difficulty in recruiting and retaining 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.
PRODUCT CONCENTRATION; DEPENDENCE ON EMERGING MARKET FOR DISTRIBUTED
APPLICATIONS. All of the Company's revenues have been attributable to sales
of Forte and related products and services. The Company currently expects
Forte and related products and 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 and related products, 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 and related products. There can be no assurance
that the Company will continue to be successful in marketing the Forte
product, related products or other products. Although the Company has
recently experienced growth in sales of Forte, there can be no assurance that
the market for distributed applications will continue to grow. If the
distributed applications 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 and retaining qualified sales personnel and in establishing
necessary third-party relationships. There can be no assurance that the
Company will be able to successfully expand its direct sales force or other
distribution channels or that any such expansion will result in an increase
in revenues. Any failure by the Company to expand its direct sales force or
other distribution channels would materially adversely affect the Company's
business, operating results and financial condition.
COMPETITION. The market for distributed software used in the
development, deployment and management of distributed applications is
intensely competitive and characterized by rapidly changing technology,
evolving industry standards, frequent new product introductions and rapidly
changing customer requirements. Distributed applications that can be
developed and deployed using the Company's Forte environment can also be
implemented by integrating a combination of application development tools and
more powerful server programming techniques such as stored procedures in
relational databases and C or C++ programming, along
15
<PAGE>
with 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 on the
advantages of the Company's products over the approach of integrating a
combination of 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 also experienced and expects to continue to experience
increased competition from a number of vendors that market software products
specifically targeted for building distributed applications. Actual and
potential competitors include: providers of application development software,
such as Compuware/Uniface, Dynasty Technologies, Inc., IBM, Microsoft
Corporation, NAT Systems, Inc., Oracle Corporation, Seer Technologies, Inc.,
Sterling Software, Inc., and the Powersoft unit of Sybase, Inc.; web-based
development tools targeting production enterprise Internet applications;
middleware companies advocating a middleware-centric approach to building
enterprise applications; developers of packaged applications and application
components, templates and frameworks; and integration software vendors.
Many of these competing vendors have or will have significantly greater
financial, technical, marketing and other resources than the Company, and may
be able to respond more quickly to new or emerging technologies. 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 distributed
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 products and
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.
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
16
<PAGE>
Company 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 effect upon 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 distributed
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. In addition, there are a large number of alternative methods or
technologies to develop applications which can require significant time for
potential customers to evaluate. 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.
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, networking and Internet-based 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 customers use the Company's proprietary
development language to develop applications using the Company's products,
and customers may desire to utilize other widely-used programming languages
to develop Internet-based and other distributed applications. 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, programming language, database, networking and
Internet-based platforms and by developing and introducing enhancements to
Forte, related products and new products on a timely basis that keep pace
with such technological developments and emerging industry standards and
changing customer requirements. There can be no assurance that the Company
will be successful in developing and marketing enhancements to Forte and
related products that respond to technological change, evolving industry
standards or changing 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
17
<PAGE>
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 and related products, which could have
a material adverse effect on the Company's business, operating results and
financial condition.
LIMITED DEPLOYMENT; DEPENDENCE ON SYSTEM INTEGRATORS AND VALUE ADDED
RESELLERS. 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 distributed applications using Forte and related products. If
any of the Company's customers are not able to successfully develop and
deploy distributed applications with Forte and related products, 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 and related
products or for any other reason are not satisfied with Forte products, 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 and value added
resellers to develop and deploy distributed applications. If the Company is
unable to adequately train a sufficient number of system integrators and
value added resellers or if, for any reason, a large number of such
integrators and value added resellers adopt a product or technology other
than Forte, the Company's business, operating results and financial condition
would be materially and adversely affected.
RISK OF SOFTWARE DEFECTS. Software products as internally complex as
Forte and related products 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, Release 3.0 of
Forte in August in 1997 and the initial release of Forte Conductor in
September 1997. Despite extensive product testing by the Company, the Company
has discovered software errors in its releases after their introduction.
Although the Company has not experienced material adverse effects resulting
from any such defects or errors to date, there can be no assurance that,
despite testing by the Company and by current and potential customers,
defects and errors will not be found in current versions, new versions, new
product or enhancements to existing products 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 distributed 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
18
<PAGE>
condition.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS. Revenues from foreign
subsidiaries and export sales accounted for 35% and 45% of the Company's
total revenues for the quarters ended September 30, 1996 and 1997,
respectively, and 32% and 44% for the six months ended September 30, 1996 and
1997, respectively. The Company currently has international sales offices
located in Australia, Belgium, Canada, France, Germany, Switzerland, and the
United Kingdom 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 continue 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 and related products. 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
19
<PAGE>
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 has obtained registration of the FORTE trademark in one country and
has trademark registration applications pending in numerous additional
countries. 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") 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 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. 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
20
<PAGE>
inability to maintain, any such software licenses could result in shipment
delays or reductions until equivalent software could be developed,
identified, licensed and integrated which would materially adversely affect
the Company's business, operating results and financial condition.
VOLATILITY OF STOCK PRICE. The Company's Common Stock has experienced
significant price volatility and such volatility may occur in the future.
Factors, such as announcements of the introduction of new products by the
Company or its competitors and quarter-to-quarter variations in the Company's
operating results, as well as market conditions in the technology and
emerging growth company sectors, may have a significant impact on the market
price of the Company's Common Stock. Further, the stock market has
experienced extreme volatility 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.
EFFECT OF CERTAIN CHARTER PROVISIONS; ANTI-TAKEOVER EFFECTS OF RIGHTS
PLAN, CERTIFICATE OF INCORPORATION, DELAWARE LAW AND CERTAIN AGREEMENTS. The
Company's Board of Directors has the authority to issue up to 5,000,000
shares of Preferred Stock and to determine the price, rights, preferences,
privileges and restrictions, including voting and conversion rights of such
shares, without any further vote or action by the Company's stockholders.
The rights of the holders of Common Stock will be subject to, and may be
adversely affected by, the rights of the holders of any Preferred Stock that
may be issued in the future. The issuance of Preferred Stock could have the
effect of making it more difficult for a third party to acquire a majority of
the outstanding voting stock of the Company. The Company has no current
plans to issue shares of Preferred Stock. Further, the Company has adopted a
stockholder rights plan that, in conjunction with certain provisions of the
Company's Certificate of Incorporation and of Delaware law, could delay or
make more difficult a merger, tender offer, or proxy contest involving the
Company.
21
<PAGE>
PART II
ITEM 1. LEGAL PROCEEDINGS
The Company is not aware of any pending or threatened litigation that
could have a material adverse effect upon the Company's business, operating
results or financial condition.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS ON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of Stockholders on August 12, 1997.
The Company's stockholders voted on the following matters:
(a)Election of four directors. All directors proposed by management were
elected for a period of one year.
<TABLE>
<CAPTION>
Name of Number of #of Votes #of Votes Number of Broker
Nominee Votes For Against Withheld Abstentions Non Votes
<S> <C> <C> <C> <C> <C>
Martin J. Sprinzen 15,551,526 - 195,333 - -
William H. Younger, Jr. 15,556,739 - 190,120 - -
Thomas A. Jermoluk 15,562,489 - 184,370 - -
Christos M. Cotsakos 15,562,589 - 184,270 - -
</TABLE>
(b) The stockholders approved the Company's 1997 Stock Option Plan. 9,224,191
votes were cast in favor of the Plan, 889,952 votes were cast against the
Plan, there were 51,960 abstentions and there were 5,580,756 broker non-votes.
(c) Amend the Company's Employee Stock Purchase Plan to increase the number
of shares of Common Stock for issuance thereunder by 300,000 shares. The
stockholders approved the Employee Stock Purchase Plan Amendment. 9,647,089
votes were cast in favor of the Amendment, 462,834 votes were cast against
the Amendment, there were 56,180 abstentions and there were 5,580,756 broker
non-votes.
(d) Ratification of independent public auditors. The stockholders ratified
the appointment of Ernst & Young, LLP as the Company's independent public
auditors for the fiscal year ended March 31, 1998. 15,626,313 votes were cast
in favor of the appointment, 60,874 votes cast against, zero were with held,
there were 59,672 abstentions, and zero broker non-votes.
22
<PAGE>
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 10.13 Stock Option Grant to Thomas A. Jermoluk
Exhibit 10.14 Stock Option Grant to Christos M. Cotsakos
Exhibit 11.1 Statement Regarding Computation of Earnings
Per Share
Exhibit 27 Financial Data Schedule
(b) No reports on Form 8-K have been filed during the quarter ended
September 30, 1997.
23
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, as amended,
the Registrant has duly caused this Report on Form 10-Q to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Oakland,
State of California, on this the 14th day of November, 1997.
FORTE SOFTWARE, INC.
By: /s/ RODGER E. WEISMANN
Rodger E. Weismann
SENIOR VICE PRESIDENT, FINANCE AND
ADMINISTRATION, CHIEF FINANCIAL
OFFICER AND SECRETARY
24
<PAGE>
EXHIBIT 10.13
FORTE SOFTWARE, INC. NOTICE OF STOCK OPTION GRANT
You have been granted the following option to purchase Common Stock of
Forte Software, Inc. (the "Company"):
Name of Optionee: Thomas A. Jermoluk
Total Number of Shares Granted: 3,000
Type of Option: Nonstatutory Stock Option
Exercise Price Per Share: $15.0625
Date of Grant: September 12, 1997
Date Exercisable: No part of this option may be
exercised prior to September
12, 1998. This option may be
exercised for all or any part
of the Shares subject to this
option at any time on or after
September 12, 1998.
Expiration Date: September 11, 2007
By your signature and the signature of the Company's representative below,
you and the Company agree that this option is granted under and governed by
the terms and conditions of the Stock Option Agreement, which is attached to
and made a part of this document.
OPTIONEE: FORTE SOFTWARE, INC.
By:
- ---------------------------------------- --------------------------------
Thomas A. Jermoluk Title:
-----------------------------
<PAGE>
THE OPTION GRANTED PURSUANT TO THIS AGREEMENT AND THE SHARES ISSUABLE UPON
THE EXERCISE THEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED, OR OTHERWISE TRANSFERRED
WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR AN OPINION OF
COUNSEL, SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION
IS NOT REQUIRED.
FORTE SOFTWARE, INC.
STOCK OPTION AGREEMENT
GRANT OF OPTION.
OPTION. ON THE TERMS AND CONDITIONS SET FORTH IN THE NOTICE OF STOCK OPTION
GRANT AND THIS AGREEMENT, THE COMPANY GRANTS TO THE OPTIONEE ON THE DATE OF
GRANT THE OPTION TO PURCHASE AT THE EXERCISE PRICE THE NUMBER OF SHARES SET
FORTH IN THE NOTICE OF STOCK OPTION GRANT. THE EXERCISE PRICE IS AGREED TO
BE 100% OF THE FAIR MARKET VALUE PER SHARE ON THE DATE OF GRANT. THIS OPTION
IS INTENDED TO BE A NONSTATUTORY OPTION, AS PROVIDED IN THE NOTICE OF STOCK
OPTION GRANT.
DEFINED TERMS. CAPITALIZED TERMS ARE DEFINED IN SECTION 12 OF THIS AGREEMENT.
RIGHT TO EXERCISE.
GENERAL RULE. SUBJECT TO THE CONDITIONS SET FORTH IN THIS AGREEMENT, ALL OR
PART OF THIS OPTION MAY BE EXERCISED PRIOR TO ITS EXPIRATION AT THE TIME OR
TIMES SET FORTH IN THE NOTICE OF STOCK OPTION GRANT. THIS OPTION SHALL NOT
BECOME EXERCISABLE WITH RESPECT TO ANY ADDITIONAL SHARES AFTER THE OPTIONEE'S
SERVICE HAS TERMINATED FOR ANY REASON.
ACCELERATED EXERCISABILITY. THIS OPTION SHALL BECOME EXERCISABLE IN FULL IF
THE COMPANY IS SUBJECT TO A CHANGE IN CONTROL BEFORE THE OPTIONEE'S SERVICE
TERMINATES. THE PRECEDING SENTENCE, HOWEVER, SHALL NOT APPLY TO THE EXTENT
THAT, IN CONNECTION WITH THE CHANGE IN CONTROL, THIS OPTION:
REMAINS OUTSTANDING;
IS ASSUMED BY THE SUCCESSOR CORPORATION (OR ITS PARENT);
IS REPLACED WITH A COMPARABLE OPTION TO PURCHASE SHARES OF THE CAPITAL STOCK
OF THE SUCCESSOR CORPORATION (OR ITS PARENT); OR
IS REPLACED WITH A CASH INCENTIVE PROGRAM OF THE SUCCESSOR CORPORATION (OR
ITS PARENT) THAT
<PAGE>
(A) PRESERVES THE EXCESS OF THE FAIR MARKET VALUE OF THE SHARES SUBJECT TO
THIS OPTION OVER THE EXERCISE PRICE AND (B) PROVIDES FOR A SUBSEQUENT PAYOUT
OF SUCH EXCESS IN ACCORDANCE WITH THE EXERCISABILITY SCHEDULE SET FORTH IN
THE NOTICE OF STOCK OPTION GRANT.
The Board of Directors shall determine whether an option to purchase shares
of the capital stock of the successor corporation (or its parent) is
comparable to this option. The Board of Directors shall also determine
whether a cash incentive program of the successor corporation (or its parent)
meets the foregoing requirements. The determinations of the Board of
Directors shall be final and binding.
NO TRANSFER OR ASSIGNMENT OF OPTION.
Except as otherwise provided in this Agreement, this option and the
rights and privileges conferred hereby shall not be sold, pledged or
otherwise transferred (whether by operation of law or otherwise) and shall
not be subject to sale under execution, attachment, levy or similar process.
<PAGE>
EXERCISE PROCEDURES.
NOTICE OF EXERCISE. THE OPTIONEE OR THE OPTIONEE'S REPRESENTATIVE MAY
EXERCISE THIS OPTION BY GIVING WRITTEN NOTICE TO THE COMPANY PURSUANT TO
SECTION 11(b). THE NOTICE SHALL SPECIFY THE ELECTION TO EXERCISE THIS
OPTION, THE NUMBER OF SHARES FOR WHICH IT IS BEING EXERCISED AND THE FORM OF
PAYMENT. THE NOTICE SHALL BE SIGNED BY THE PERSON EXERCISING THIS OPTION.
IN THE EVENT THAT THIS OPTION IS BEING EXERCISED BY THE REPRESENTATIVE OF THE
OPTIONEE, THE NOTICE SHALL BE ACCOMPANIED BY PROOF (SATISFACTORY TO THE
COMPANY) OF THE REPRESENTATIVE'S RIGHT TO EXERCISE THIS OPTION. THE OPTIONEE
OR THE OPTIONEE'S REPRESENTATIVE SHALL DELIVER TO THE COMPANY, AT THE TIME OF
GIVING THE NOTICE, PAYMENT IN A FORM PERMISSIBLE UNDER SECTION 5 FOR THE FULL
AMOUNT OF THE PURCHASE PRICE.
ISSUANCE OF SHARES. AFTER RECEIVING A PROPER NOTICE OF EXERCISE, THE COMPANY
SHALL CAUSE TO BE ISSUED A CERTIFICATE OR CERTIFICATES FOR THE SHARES AS TO
WHICH THIS OPTION HAS BEEN EXERCISED, REGISTERED IN THE NAME OF THE PERSON
EXERCISING THIS OPTION (OR IN THE NAMES OF SUCH PERSON AND HIS OR HER SPOUSE
AS COMMUNITY PROPERTY OR AS JOINT TENANTS WITH RIGHT OF SURVIVORSHIP). THE
COMPANY SHALL CAUSE SUCH CERTIFICATE OR CERTIFICATES TO BE DELIVERED TO OR
UPON THE ORDER OF THE PERSON EXERCISING THIS OPTION.
WITHHOLDING TAXES. IN THE EVENT THAT THE COMPANY DETERMINES THAT IT IS
REQUIRED TO WITHHOLD ANY TAX AS A RESULT OF THE EXERCISE OF THIS OPTION, THE
OPTIONEE, AS A CONDITION TO THE EXERCISE OF THIS OPTION, SHALL MAKE
ARRANGEMENTS SATISFACTORY TO THE COMPANY TO ENABLE IT TO SATISFY ALL
WITHHOLDING REQUIREMENTS. THE OPTIONEE SHALL ALSO MAKE ARRANGEMENTS
SATISFACTORY TO THE COMPANY TO ENABLE IT TO SATISFY ANY WITHHOLDING
REQUIREMENTS THAT MAY ARISE IN CONNECTION WITH THE DISPOSITION OF SHARES
PURCHASED BY EXERCISING THIS OPTION.
PAYMENT FOR STOCK.
CASH. ALL OR PART OF THE PURCHASE PRICE MAY BE PAID IN CASH OR CASH
EQUIVALENTS.
SURRENDER OF STOCK. ALL OR ANY PART OF THE PURCHASE PRICE MAY BE PAID BY
SURRENDERING, OR ATTESTING TO THE OWNERSHIP OF, SHARES THAT ARE ALREADY OWNED
BY THE OPTIONEE. SUCH SHARES SHALL BE SURRENDERED TO THE COMPANY IN GOOD
FORM FOR TRANSFER AND SHALL BE VALUED AT THEIR FAIR MARKET VALUE ON THE DATE
WHEN THIS OPTION IS EXERCISED. THE OPTIONEE SHALL NOT SURRENDER, OR ATTEST
TO THE OWNERSHIP OF, SHARES IN PAYMENT OF THE PURCHASE PRICE IF SUCH ACTION
WOULD CAUSE THE COMPANY TO RECOGNIZE COMPENSATION EXPENSE (OR ADDITIONAL
COMPENSATION EXPENSE) WITH RESPECT TO THIS OPTION FOR FINANCIAL REPORTING
PURPOSES.
EXERCISE/SALE. ALL OR PART OF THE PURCHASE PRICE AND ANY WITHHOLDING TAXES
MAY BE PAID BY THE DELIVERY (ON A FORM PRESCRIBED BY THE COMPANY) OF AN
IRREVOCABLE DIRECTION TO A SECURITIES BROKER APPROVED BY THE COMPANY TO SELL
SHARES AND TO DELIVER ALL OR PART OF THE SALES PROCEEDS TO THE COMPANY.
<PAGE>
EXERCISE/PLEDGE. ALL OR PART OF THE PURCHASE PRICE AND ANY WITHHOLDING TAXES
MAY BE PAID BY THE DELIVERY (ON A FORM PRESCRIBED BY THE COMPANY) OF AN
IRREVOCABLE DIRECTION TO PLEDGE SHARES TO A SECURITIES BROKER OR LENDER
APPROVED BY THE COMPANY, AS SECURITY FOR A LOAN, AND TO DELIVER ALL OR PART
OF THE LOAN PROCEEDS TO THE COMPANY.
TERM AND EXPIRATION.
BASIC TERM. THIS OPTION SHALL IN ANY EVENT EXPIRE ON THE EXPIRATION DATE SET
FORTH IN THE NOTICE OF STOCK OPTION GRANT, WHICH DATE IS 10 YEARS AFTER THE
DATE OF GRANT.
TERMINATION OF SERVICE (EXCEPT BY DEATH). IF THE OPTIONEE'S SERVICE
TERMINATES FOR ANY REASON OTHER THAN DEATH, THEN THIS OPTION SHALL EXPIRE ON
THE EARLIEST OF THE FOLLOWING OCCASIONS:
THE EXPIRATION DATE DETERMINED PURSUANT TO SUBSECTION (a) ABOVE;
THE DATE THREE MONTHS AFTER THE TERMINATION OF THE OPTIONEE'S SERVICE FOR ANY
REASON OTHER THAN DISABILITY; OR
THE DATE 12 MONTHS AFTER THE TERMINATION OF THE OPTIONEE'S SERVICE BY REASON
OF DISABILITY.
The Optionee may exercise all or part of this option at any time before its
expiration under the preceding sentence, but only to the extent that this
option had become exercisable before the Optionee's Service terminated. When
the Optionee's Service terminates, this option shall expire immediately with
respect to the number of Shares for which this option is not yet exercisable.
In the event that the Optionee dies after termination of Service but before
the expiration of this option, all or part of this option may be exercised
(prior to expiration) by the executors or administrators of the Optionee's
estate or by any person who has acquired this option directly from the
Optionee by beneficiary designation, bequest or inheritance, but only to the
extent that this option had become exercisable before the Optionee's Service
terminated.
DEATH OF THE OPTIONEE. IF THE OPTIONEE DIES WHILE IN SERVICE, THEN THIS
OPTION SHALL EXPIRE ON THE EARLIER OF THE FOLLOWING DATES:
THE EXPIRATION DATE DETERMINED PURSUANT TO SUBSECTION (a) ABOVE; OR
THE DATE 12 MONTHS AFTER THE OPTIONEE'S DEATH.
All or part of this option may be exercised at any time before its expiration
under the preceding sentence by the executors or administrators of the
Optionee's estate or by any person who has acquired this option directly from
the Optionee by beneficiary designation, bequest or inheritance, but only to
the extent that this option had become exercisable before the Optionee's
death. When the Optionee dies, this option shall expire immediately with
respect to the number of Shares for which this option is not yet exercisable.
<PAGE>
LEGALITY OF INITIAL ISSUANCE.
No Shares shall be issued upon the exercise of this option unless and
until the Company has determined that:
IT AND THE OPTIONEE HAVE TAKEN ANY ACTIONS REQUIRED TO REGISTER THE SHARES
UNDER THE SECURITIES ACT OR TO PERFECT AN EXEMPTION FROM THE REGISTRATION
REQUIREMENTS THEREOF;
ANY APPLICABLE LISTING REQUIREMENT OF ANY STOCK EXCHANGE OR OTHER SECURITIES
MARKET ON WHICH STOCK IS LISTED HAS BEEN SATISFIED; AND
ANY OTHER APPLICABLE PROVISION OF STATE OR FEDERAL LAW HAS BEEN SATISFIED.
NO REGISTRATION RIGHTS.
The Company may, but shall not be obligated to, register or qualify the
sale of Shares under the Securities Act or any other applicable law. The
Company shall not be obligated to take any affirmative action in order to
cause the sale of Shares under this Agreement to comply with any law.
RESTRICTIONS ON TRANSFER.
SECURITIES LAW RESTRICTIONS. REGARDLESS OF WHETHER THE OFFERING AND SALE OF
SHARES UNDER THIS OPTION HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OR
HAVE BEEN REGISTERED OR QUALIFIED UNDER THE SECURITIES LAWS OF ANY STATE, THE
COMPANY AT ITS DISCRETION MAY IMPOSE RESTRICTIONS UPON THE SALE, PLEDGE OR
OTHER TRANSFER OF SUCH SHARES (INCLUDING THE PLACEMENT OF APPROPRIATE LEGENDS
ON STOCK CERTIFICATES OR THE IMPOSITION OF STOP-TRANSFER INSTRUCTIONS) IF, IN
THE JUDGMENT OF THE COMPANY, SUCH RESTRICTIONS ARE NECESSARY OR DESIRABLE IN
ORDER TO ACHIEVE COMPLIANCE WITH THE SECURITIES ACT, THE SECURITIES LAWS OF
ANY STATE OR ANY OTHER LAW.
INVESTMENT INTENT AT GRANT. THE OPTIONEE REPRESENTS AND AGREES THAT THE
SHARES TO BE ACQUIRED UPON EXERCISING THIS OPTION WILL BE ACQUIRED FOR
INVESTMENT, AND NOT WITH A VIEW TO THE SALE OR DISTRIBUTION THEREOF.
INVESTMENT INTENT AT EXERCISE. IN THE EVENT THAT THE SALE OF SHARES UNDER
THIS OPTION IS NOT REGISTERED UNDER THE SECURITIES ACT BUT AN EXEMPTION IS
AVAILABLE WHICH REQUIRES AN INVESTMENT REPRESENTATION OR OTHER
REPRESENTATION, THE OPTIONEE SHALL REPRESENT AND AGREE AT THE TIME OF
EXERCISE THAT THE SHARES BEING ACQUIRED UPON EXERCISING THIS OPTION ARE BEING
ACQUIRED FOR INVESTMENT, AND NOT WITH A VIEW TO THE SALE OR DISTRIBUTION
THEREOF, AND SHALL MAKE SUCH OTHER REPRESENTATIONS AS ARE DEEMED NECESSARY OR
APPROPRIATE BY THE COMPANY AND ITS COUNSEL.
LEGENDS. ALL CERTIFICATES EVIDENCING SHARES PURCHASED UNDER THIS AGREEMENT
IN AN UNREGISTERED TRANSACTION SHALL BEAR THE FOLLOWING LEGEND (AND SUCH
OTHER RESTRICTIVE LEGENDS AS ARE REQUIRED OR DEEMED ADVISABLE UNDER THE
PROVISIONS OF ANY APPLICABLE LAW):
<PAGE>
"THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED, OR
OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER
SUCH ACT OR AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY AND
ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED."
REMOVAL OF LEGENDS. IF, IN THE OPINION OF THE COMPANY AND ITS COUNSEL, ANY
LEGEND PLACED ON A STOCK CERTIFICATE REPRESENTING SHARES SOLD UNDER THIS
AGREEMENT IS NO LONGER REQUIRED, THE HOLDER OF SUCH CERTIFICATE SHALL BE
ENTITLED TO EXCHANGE SUCH CERTIFICATE FOR A CERTIFICATE REPRESENTING THE SAME
NUMBER OF SHARES BUT WITHOUT SUCH LEGEND.
ADMINISTRATION. ANY DETERMINATION BY THE COMPANY AND ITS COUNSEL IN
CONNECTION WITH ANY OF THE MATTERS SET FORTH IN THIS SECTION 9 SHALL BE
CONCLUSIVE AND BINDING ON THE OPTIONEE AND ALL OTHER PERSONS.
ADJUSTMENT OF SHARES.
ADJUSTMENTS. IN THE EVENT OF A SUBDIVISION OF THE OUTSTANDING SHARES, A
DECLARATION OF A DIVIDEND PAYABLE IN SHARES, A DECLARATION OF A DIVIDEND
PAYABLE IN A FORM OTHER THAN SHARES IN AN AMOUNT THAT HAS A MATERIAL EFFECT
ON THE PRICE OF SHARES, A COMBINATION OR CONSOLIDATION OF THE OUTSTANDING
SHARES (BY RECLASSIFICATION OR OTHERWISE) INTO A LESSER NUMBER OF SHARES, A
RECAPITALIZATION, A SPIN-OFF OR A SIMILAR OCCURRENCE, THE BOARD OF DIRECTORS
SHALL MAKE SUCH ADJUSTMENTS AS IT, IN ITS SOLE DISCRETION, DEEMS APPROPRIATE
IN ONE OR MORE OF (a) THE NUMBER OF SHARES COVERED BY THIS OPTION OR (b) THE
EXERCISE PRICE. EXCEPT AS PROVIDED IN THIS SECTION 10, THE OPTIONEE SHALL
HAVE NO RIGHTS BY REASON OF ANY ISSUE BY THE COMPANY OF STOCK OF ANY CLASS OR
SECURITIES CONVERTIBLE INTO STOCK OF ANY CLASS, ANY SUBDIVISION OR
CONSOLIDATION OF SHARES OF STOCK OF ANY CLASS, THE PAYMENT OF ANY STOCK
DIVIDEND OR ANY OTHER INCREASE OR DECREASE IN THE NUMBER OF SHARES OF STOCK
OF ANY CLASS.
DISSOLUTION OR LIQUIDATION. TO THE EXTENT NOT PREVIOUSLY EXERCISED, THIS
OPTION SHALL TERMINATE IMMEDIATELY PRIOR TO THE DISSOLUTION OR LIQUIDATION OF
THE COMPANY.
REORGANIZATIONS. IN THE EVENT THAT THE COMPANY IS A PARTY TO A MERGER OR
OTHER REORGANIZATION, THIS OPTION SHALL BE SUBJECT TO THE AGREEMENT OF MERGER
OR REORGANIZATION. SUCH AGREEMENT SHALL PROVIDE FOR (a) THE CONTINUATION OF
THIS OPTION BY THE COMPANY, IF THE COMPANY IS A SURVIVING CORPORATION, (b)
THE ASSUMPTION OF THIS OPTION BY THE SURVIVING CORPORATION OR ITS PARENT OR
SUBSIDIARY, (c) THE SUBSTITUTION BY THE SURVIVING CORPORATION OR ITS PARENT
OR SUBSIDIARY OF ITS OWN OPTION FOR THIS OPTION, (d) FULL EXERCISABILITY AND
ACCELERATED EXPIRATION OF THIS OPTION OR (e) SETTLEMENT OF THE FULL VALUE OF
THIS OPTION IN CASH OR CASH EQUIVALENTS FOLLOWED BY CANCELLATION OF THIS
OPTION.
MISCELLANEOUS PROVISIONS.
RIGHTS AS A STOCKHOLDER. NEITHER THE OPTIONEE NOR THE OPTIONEE'S
REPRESENTATIVE SHALL HAVE ANY
<PAGE>
RIGHTS AS A STOCKHOLDER WITH RESPECT TO ANY SHARES SUBJECT TO THIS OPTION
UNTIL THE OPTIONEE OR THE OPTIONEE'S REPRESENTATIVE BECOMES ENTITLED TO
RECEIVE SUCH SHARES BY FILING A NOTICE OF EXERCISE AND PAYING THE PURCHASE
PRICE PURSUANT TO SECTIONS 4 AND 5.
NOTICE. ANY NOTICE REQUIRED BY THE TERMS OF THIS AGREEMENT SHALL BE GIVEN IN
WRITING AND SHALL BE DEEMED EFFECTIVE UPON PERSONAL DELIVERY OR UPON DEPOSIT
WITH THE UNITED STATES POSTAL SERVICE, BY REGISTERED OR CERTIFIED MAIL, WITH
POSTAGE AND FEES PREPAID. NOTICE SHALL BE ADDRESSED TO THE COMPANY AT ITS
PRINCIPAL EXECUTIVE OFFICE AND TO THE OPTIONEE AT THE ADDRESS THAT HE OR SHE
MOST RECENTLY PROVIDED TO THE COMPANY.
ENTIRE AGREEMENT. THE NOTICE OF STOCK OPTION GRANT AND THIS AGREEMENT
CONSTITUTE THE ENTIRE CONTRACT BETWEEN THE PARTIES HERETO WITH REGARD TO THE
SUBJECT MATTER HEREOF. THEY SUPERSEDE ANY OTHER AGREEMENTS, REPRESENTATIONS
OR UNDERSTANDINGS (WHETHER ORAL OR WRITTEN AND WHETHER EXPRESS OR IMPLIED)
WHICH RELATE TO THE SUBJECT MATTER HEREOF.
CHOICE OF LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF CALIFORNIA, AS SUCH LAWS ARE
APPLIED TO CONTRACTS ENTERED INTO AND PERFORMED IN SUCH STATE.
DEFINITIONS.
"AGREEMENT" SHALL MEAN THIS STOCK OPTION AGREEMENT.
"BOARD OF DIRECTORS" SHALL MEAN THE BOARD OF DIRECTORS OF THE COMPANY, AS
CONSTITUTED FROM TIME TO TIME.
"CHANGE IN CONTROL" SHALL MEAN:
THE CONSUMMATION OF A MERGER OR CONSOLIDATION OF THE COMPANY WITH OR INTO
ANOTHER ENTITY OR ANY OTHER CORPORATE REORGANIZATION, IF MORE THAN 50% OF THE
COMBINED VOTING POWER OF THE CONTINUING OR SURVIVING ENTITY'S SECURITIES
OUTSTANDING IMMEDIATELY AFTER SUCH MERGER, CONSOLIDATION OR OTHER
REORGANIZATION IS OWNED BY PERSONS WHO WERE NOT STOCKHOLDERS OF THE COMPANY
IMMEDIATELY PRIOR TO SUCH MERGER, CONSOLIDATION OR OTHER REORGANIZATION;
THE SALE, TRANSFER OR OTHER DISPOSITION OF ALL OR SUBSTANTIALLY ALL OF THE
COMPANY'S ASSETS;
A CHANGE IN THE COMPOSITION OF THE BOARD OF DIRECTORS, AS A RESULT OF WHICH
FEWER THAN A MAJORITY OF THE INCUMBENT DIRECTORS ARE DIRECTORS WHO EITHER (A)
HAD BEEN DIRECTORS OF THE COMPANY ON THE DATE 24 MONTHS PRIOR TO THE DATE OF
THE EVENT THAT MAY CONSTITUTE A CHANGE IN CONTROL (THE "ORIGINAL DIRECTORS")
OR (B) WERE ELECTED, OR NOMINATED FOR ELECTION, TO THE BOARD OF DIRECTORS
WITH THE AFFIRMATIVE VOTES OF AT LEAST A MAJORITY OF THE AGGREGATE OF THE
ORIGINAL DIRECTORS WHO WERE STILL IN OFFICE AT THE TIME OF THE ELECTION OR
NOMINATION AND THE DIRECTORS WHOSE ELECTION OR NOMINATION WAS PREVIOUSLY SO
APPROVED; OR
<PAGE>
ANY TRANSACTION AS A RESULT OF WHICH ANY PERSON IS THE "BENEFICIAL OWNER" (AS
DEFINED IN RULE 13d-3 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED),
DIRECTLY OR INDIRECTLY, OF SECURITIES OF THE COMPANY REPRESENTING AT LEAST
50% OF THE TOTAL VOTING POWER REPRESENTED BY THE COMPANY'S THEN OUTSTANDING
VOTING SECURITIES. FOR PURPOSES OF THIS PARAGRAPH (iv), THE TERM "PERSON"
SHALL HAVE THE SAME MEANING AS WHEN USED IN SECTIONS 13(d) AND 14(d) OF SUCH
ACT BUT SHALL EXCLUDE (A) A TRUSTEE OR OTHER FIDUCIARY HOLDING SECURITIES
UNDER AN EMPLOYEE BENEFIT PLAN OF THE COMPANY OR OF A PARENT OR SUBSIDIARY
AND (B) A CORPORATION OWNED DIRECTLY OR INDIRECTLY BY THE STOCKHOLDERS OF THE
COMPANY IN SUBSTANTIALLY THE SAME PROPORTIONS AS THEIR OWNERSHIP OF THE
COMMON STOCK OF THE COMPANY.
A transaction shall not constitute a Change in Control if its sole purpose is
to change the state of the Company's incorporation or to create a holding
company that will be owned in substantially the same proportions by the
persons who held the Company's securities immediately before such transaction.
<PAGE>
"COMPANY" SHALL MEAN FORTE SOFTWARE, INC., A DELAWARE CORPORATION.
"CONSULTANT" SHALL MEAN A PERSON WHO PERFORMS BONA FIDE SERVICES FOR THE
COMPANY, A PARENT OR A SUBSIDIARY AS A CONSULTANT OR ADVISOR, EXCLUDING
EMPLOYEES AND OUTSIDE DIRECTORS.
"DATE OF GRANT" SHALL MEAN THE DATE SPECIFIED IN THE NOTICE OF STOCK OPTION
GRANT, WHICH SHALL BE THE DATE ON WHICH THE BOARD OF DIRECTORS RESOLVED TO
GRANT THIS OPTION.
"DISABILITY" SHALL MEAN THAT THE OPTIONEE IS UNABLE TO ENGAGE IN ANY
SUBSTANTIAL GAINFUL ACTIVITY BY REASON OF ANY MEDICALLY DETERMINABLE PHYSICAL
OR MENTAL IMPAIRMENT WHICH CAN BE EXPECTED TO RESULT IN DEATH OR WHICH HAS
LASTED, OR CAN BE EXPECTED TO LAST, FOR A CONTINUOUS PERIOD OF NOT LESS THAN
12 MONTHS.
"EMPLOYEE" SHALL MEAN ANY INDIVIDUAL WHO IS A COMMON-LAW EMPLOYEE OF THE
COMPANY, A PARENT OR A SUBSIDIARY.
"EXERCISE PRICE" SHALL MEAN THE AMOUNT FOR WHICH ONE SHARE MAY BE PURCHASED
UPON EXERCISE OF THIS OPTION, AS SPECIFIED IN THE NOTICE OF STOCK OPTION
GRANT.
"FAIR MARKET VALUE" SHALL MEAN THE FAIR MARKET VALUE OF A SHARE, AS
DETERMINED BY THE BOARD OF DIRECTORS IN GOOD FAITH. SUCH DETERMINATION SHALL
BE CONCLUSIVE AND BINDING ON ALL PERSONS.
"NONSTATUTORY OPTION" SHALL MEAN A STOCK OPTION NOT DESCRIBED IN SECTIONS
422(b) OR 423(b) OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED.
"NOTICE OF STOCK OPTION GRANT" SHALL MEAN THE DOCUMENT SO ENTITLED TO WHICH
THIS AGREEMENT IS ATTACHED.
"OPTIONEE" SHALL MEAN THE INDIVIDUAL NAMED IN THE NOTICE OF STOCK OPTION
GRANT.
"OUTSIDE DIRECTOR" SHALL MEAN A MEMBER OF THE BOARD OF DIRECTORS WHO IS NOT
AN EMPLOYEE.
"PARENT" SHALL MEAN ANY CORPORATION (OTHER THAN THE COMPANY) IN AN UNBROKEN
CHAIN OF CORPORATIONS ENDING WITH THE COMPANY, IF EACH OF THE CORPORATIONS
OTHER THAN THE COMPANY OWNS STOCK POSSESSING 50% OR MORE OF THE TOTAL
COMBINED VOTING POWER OF ALL CLASSES OF STOCK IN ONE OF THE OTHER
CORPORATIONS IN SUCH CHAIN.
"PURCHASE PRICE" SHALL MEAN THE EXERCISE PRICE MULTIPLIED BY THE NUMBER OF
SHARES WITH RESPECT TO WHICH THIS OPTION IS BEING EXERCISED.
"SECURITIES ACT" SHALL MEAN THE SECURITIES ACT OF 1933, AS AMENDED.
"SERVICE" SHALL MEAN SERVICE AS AN EMPLOYEE, OUTSIDE DIRECTOR OR CONSULTANT.
"SHARE" SHALL MEAN ONE SHARE OF STOCK, AS ADJUSTED IN ACCORDANCE WITH SECTION
10 (IF
<PAGE>
APPLICABLE).
"STOCK" SHALL MEAN THE COMMON STOCK OF THE COMPANY.
A. "SUBSIDIARY" SHALL MEAN ANY CORPORATION (OTHER THAN THE COMPANY) IN
AN UNBROKEN CHAIN OF CORPORATIONS BEGINNING WITH THE COMPANY, IF
EACH OF THE CORPORATIONS OTHER THAN THE LAST CORPORATION IN THE
UNBROKEN CHAIN OWNS STOCK POSSESSING 50% OR MORE OF THE TOTAL
COMBINED VOTING POWER OF ALL CLASSES OF STOCK IN ONE OF THE OTHER
CORPORATIONS IN SUCH CHAIN.
<PAGE>
EXHIBIT 10.14
FORTE SOFTWARE, INC. NOTICE OF STOCK OPTION GRANT
You have been granted the following option to purchase Common Stock of
Forte Software, Inc. (the "Company"):
Name of Optionee: Christos M. Cotsakos
Total Number of Shares Granted: 10,000
Type of Option: Nonstatutory Stock Option
Exercise Price Per Share: $15.0625
Date of Grant: September 12, 1997
Date Exercisable: This option may be exercised
with respect to the first
33.333% of the Shares subject
to this option when the
Optionee completes 12 months
of continuous Service after
the Date of Grant. This
option may be exercised with
respect to an additional
2.777% of the Shares subject
to this option when the
Optionee completes each month
of continuous Service
thereafter.
Expiration Date: September 11, 2007
By your signature and the signature of the Company's representative below,
you and the Company agree that this option is granted under and governed by
the terms and conditions of the Stock Option Agreement, which is attached to
and made a part of this document.
OPTIONEE: FORTE SOFTWARE, INC.
By:
- -------------------------- -------------------------
Christos M. Cotsakos Title:
----------------------
<PAGE>
THE OPTION GRANTED PURSUANT TO THIS AGREEMENT AND THE SHARES ISSUABLE UPON
THE EXERCISE THEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED, OR OTHERWISE TRANSFERRED
WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR AN OPINION OF
COUNSEL, SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION
IS NOT REQUIRED.
FORTE SOFTWARE, INC.
STOCK OPTION AGREEMENT
GRANT OF OPTION.
OPTION. ON THE TERMS AND CONDITIONS SET FORTH IN THE NOTICE OF STOCK OPTION
GRANT AND THIS AGREEMENT, THE COMPANY GRANTS TO THE OPTIONEE ON THE DATE OF
GRANT THE OPTION TO PURCHASE AT THE EXERCISE PRICE THE NUMBER OF SHARES SET
FORTH IN THE NOTICE OF STOCK OPTION GRANT. THE EXERCISE PRICE IS AGREED TO
BE 100% OF THE FAIR MARKET VALUE PER SHARE ON THE DATE OF GRANT. THIS OPTION
IS INTENDED TO BE A NONSTATUTORY OPTION, AS PROVIDED IN THE NOTICE OF STOCK
OPTION GRANT.
DEFINED TERMS. CAPITALIZED TERMS ARE DEFINED IN SECTION 12 OF THIS AGREEMENT.
RIGHT TO EXERCISE.
GENERAL RULE. SUBJECT TO THE CONDITIONS SET FORTH IN THIS AGREEMENT, ALL OR
PART OF THIS OPTION MAY BE EXERCISED PRIOR TO ITS EXPIRATION AT THE TIME OR
TIMES SET FORTH IN THE NOTICE OF STOCK OPTION GRANT. THIS OPTION SHALL NOT
BECOME EXERCISABLE WITH RESPECT TO ANY ADDITIONAL SHARES AFTER THE OPTIONEE'S
SERVICE HAS TERMINATED FOR ANY REASON.
ACCELERATED EXERCISABILITY. THIS OPTION SHALL BECOME EXERCISABLE IN FULL IF THE
COMPANY IS SUBJECT TO A CHANGE IN CONTROL BEFORE THE OPTIONEE'S SERVICE
TERMINATES. THE PRECEDING SENTENCE, HOWEVER, SHALL NOT APPLY TO THE EXTENT
THAT, IN CONNECTION WITH THE CHANGE IN CONTROL, THIS OPTION:
REMAINS OUTSTANDING;
IS ASSUMED BY THE SUCCESSOR CORPORATION (OR ITS PARENT);
IS REPLACED WITH A COMPARABLE OPTION TO PURCHASE SHARES OF THE CAPITAL STOCK OF
THE SUCCESSOR CORPORATION (OR ITS PARENT); OR
IS REPLACED WITH A CASH INCENTIVE PROGRAM OF THE SUCCESSOR CORPORATION (OR ITS
PARENT) THAT (A) PRESERVES THE EXCESS OF THE FAIR MARKET VALUE OF THE SHARES
SUBJECT TO THIS OPTION OVER THE EXERCISE PRICE AND (B) PROVIDES FOR A SUBSEQUENT
PAYOUT OF SUCH EXCESS IN ACCORDANCE
<PAGE>
WITH THE EXERCISABILITY SCHEDULE SET FORTH IN THE NOTICE OF STOCK OPTION
GRANT.
The Board of Directors shall determine whether an option to purchase shares of
the capital stock of the successor corporation (or its parent) is comparable to
this option. The Board of Directors shall also determine whether a cash
incentive program of the successor corporation (or its parent) meets the
foregoing requirements. The determinations of the Board of Directors shall be
final and binding.
NO TRANSFER OR ASSIGNMENT OF OPTION.
Except as otherwise provided in this Agreement, this option and the
rights and privileges conferred hereby shall not be sold, pledged or
otherwise transferred (whether by operation of law or otherwise) and shall
not be subject to sale under execution, attachment, levy or similar process.
EXERCISE PROCEDURES.
NOTICE OF EXERCISE. THE OPTIONEE OR THE OPTIONEE'S REPRESENTATIVE MAY
EXERCISE THIS OPTION BY GIVING WRITTEN NOTICE TO THE COMPANY PURSUANT TO
SECTION 11(b). THE NOTICE SHALL SPECIFY THE ELECTION TO EXERCISE THIS OPTION,
THE NUMBER OF SHARES FOR WHICH IT IS BEING EXERCISED AND THE FORM OF PAYMENT.
THE NOTICE SHALL BE SIGNED BY THE PERSON EXERCISING THIS OPTION. IN THE
EVENT THAT THIS OPTION IS BEING EXERCISED BY THE REPRESENTATIVE OF THE
OPTIONEE, THE NOTICE SHALL BE ACCOMPANIED BY PROOF (SATISFACTORY TO THE
COMPANY) OF THE REPRESENTATIVE'S RIGHT TO EXERCISE THIS OPTION. THE OPTIONEE
OR THE OPTIONEE'S REPRESENTATIVE SHALL DELIVER TO THE COMPANY, AT THE TIME OF
GIVING THE NOTICE, PAYMENT IN A FORM PERMISSIBLE UNDER SECTION 5 FOR THE FULL
AMOUNT OF THE PURCHASE PRICE.
ISSUANCE OF SHARES. AFTER RECEIVING A PROPER NOTICE OF EXERCISE, THE COMPANY
SHALL CAUSE TO BE ISSUED A CERTIFICATE OR CERTIFICATES FOR THE SHARES AS TO
WHICH THIS OPTION HAS BEEN EXERCISED, REGISTERED IN THE NAME OF THE PERSON
EXERCISING THIS OPTION (OR IN THE NAMES OF SUCH PERSON AND HIS OR HER SPOUSE
AS COMMUNITY PROPERTY OR AS JOINT TENANTS WITH RIGHT OF SURVIVORSHIP). THE
COMPANY SHALL CAUSE SUCH CERTIFICATE OR CERTIFICATES TO BE DELIVERED TO OR
UPON THE ORDER OF THE PERSON EXERCISING THIS OPTION.
WITHHOLDING TAXES. IN THE EVENT THAT THE COMPANY DETERMINES THAT IT IS
REQUIRED TO WITHHOLD ANY TAX AS A RESULT OF THE EXERCISE OF THIS OPTION, THE
OPTIONEE, AS A CONDITION TO THE EXERCISE OF THIS OPTION, SHALL MAKE
ARRANGEMENTS SATISFACTORY TO THE COMPANY TO ENABLE IT TO SATISFY ALL
WITHHOLDING REQUIREMENTS. THE OPTIONEE SHALL ALSO MAKE ARRANGEMENTS
SATISFACTORY TO THE COMPANY TO ENABLE IT TO SATISFY ANY WITHHOLDING
REQUIREMENTS THAT MAY ARISE IN CONNECTION WITH THE DISPOSITION OF SHARES
PURCHASED BY EXERCISING THIS OPTION.
PAYMENT FOR STOCK.
CASH. ALL OR PART OF THE PURCHASE PRICE MAY BE PAID IN CASH OR CASH
EQUIVALENTS.
SURRENDER OF STOCK. ALL OR ANY PART OF THE PURCHASE PRICE MAY BE PAID BY
SURRENDERING, OR ATTESTING TO THE OWNERSHIP OF, SHARES THAT ARE ALREADY OWNED BY
THE OPTIONEE. SUCH SHARES SHALL BE SURRENDERED TO THE COMPANY IN GOOD FORM FOR
TRANSFER AND SHALL BE VALUED AT THEIR
<PAGE>
FAIR MARKET VALUE ON THE DATE WHEN THIS OPTION IS EXERCISED. THE OPTIONEE
SHALL NOT SURRENDER, OR ATTEST TO THE OWNERSHIP OF, SHARES IN PAYMENT OF THE
PURCHASE PRICE IF SUCH ACTION WOULD CAUSE THE COMPANY TO RECOGNIZE
COMPENSATION EXPENSE (OR ADDITIONAL COMPENSATION EXPENSE) WITH RESPECT TO
THIS OPTION FOR FINANCIAL REPORTING PURPOSES.
EXERCISE/SALE. ALL OR PART OF THE PURCHASE PRICE AND ANY WITHHOLDING TAXES
MAY BE PAID BY THE DELIVERY (ON A FORM PRESCRIBED BY THE COMPANY) OF AN
IRREVOCABLE DIRECTION TO A SECURITIES BROKER APPROVED BY THE COMPANY TO SELL
SHARES AND TO DELIVER ALL OR PART OF THE SALES PROCEEDS TO THE COMPANY.
EXERCISE/PLEDGE. ALL OR PART OF THE PURCHASE PRICE AND ANY WITHHOLDING TAXES
MAY BE PAID BY THE DELIVERY (ON A FORM PRESCRIBED BY THE COMPANY) OF AN
IRREVOCABLE DIRECTION TO PLEDGE SHARES TO A SECURITIES BROKER OR LENDER
APPROVED BY THE COMPANY, AS SECURITY FOR A LOAN, AND TO DELIVER ALL OR PART
OF THE LOAN PROCEEDS TO THE COMPANY.
TERM AND EXPIRATION.
BASIC TERM. THIS OPTION SHALL IN ANY EVENT EXPIRE ON THE EXPIRATION DATE SET
FORTH IN THE NOTICE OF STOCK OPTION GRANT, WHICH DATE IS 10 YEARS AFTER THE
DATE OF GRANT.
TERMINATION OF SERVICE (EXCEPT BY DEATH). IF THE OPTIONEE'S SERVICE
TERMINATES FOR ANY REASON OTHER THAN DEATH, THEN THIS OPTION SHALL EXPIRE ON
THE EARLIEST OF THE FOLLOWING OCCASIONS:
THE EXPIRATION DATE DETERMINED PURSUANT TO SUBSECTION (a) ABOVE;
THE DATE THREE MONTHS AFTER THE TERMINATION OF THE OPTIONEE'S SERVICE FOR ANY
REASON OTHER THAN DISABILITY; OR
THE DATE 12 MONTHS AFTER THE TERMINATION OF THE OPTIONEE'S SERVICE BY REASON
OF DISABILITY.
The Optionee may exercise all or part of this option at any time before its
expiration under the preceding sentence, but only to the extent that this
option had become exercisable before the Optionee's Service terminated. When
the Optionee's Service terminates, this option shall expire immediately with
respect to the number of Shares for which this option is not yet exercisable.
In the event that the Optionee dies after termination of Service but before
the expiration of this option, all or part of this option may be exercised
(prior to expiration) by the executors or administrators of the Optionee's
estate or by any person who has acquired this option directly from the
Optionee by beneficiary designation, bequest or inheritance, but only to the
extent that this option had become exercisable before the Optionee's Service
terminated.
DEATH OF THE OPTIONEE. IF THE OPTIONEE DIES WHILE IN SERVICE, THEN THIS
OPTION SHALL EXPIRE ON THE EARLIER OF THE FOLLOWING DATES:
THE EXPIRATION DATE DETERMINED PURSUANT TO SUBSECTION (a) ABOVE; OR
THE DATE 12 MONTHS AFTER THE OPTIONEE'S DEATH.
All or part of this option may be exercised at any time before its expiration
under the preceding
<PAGE>
sentence by the executors or administrators of the Optionee's estate or by
any person who has acquired this option directly from the Optionee by
beneficiary designation, bequest or inheritance, but only to the extent that
this option had become exercisable before the Optionee's death. When the
Optionee dies, this option shall expire immediately with respect to the
number of Shares for which this option is not yet exercisable.
LEGALITY OF INITIAL ISSUANCE.
No Shares shall be issued upon the exercise of this option unless and
until the Company has determined that:
IT AND THE OPTIONEE HAVE TAKEN ANY ACTIONS REQUIRED TO REGISTER THE SHARES UNDER
THE SECURITIES ACT OR TO PERFECT AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS
THEREOF;
ANY APPLICABLE LISTING REQUIREMENT OF ANY STOCK EXCHANGE OR OTHER SECURITIES
MARKET ON WHICH STOCK IS LISTED HAS BEEN SATISFIED; AND
ANY OTHER APPLICABLE PROVISION OF STATE OR FEDERAL LAW HAS BEEN SATISFIED.
NO REGISTRATION RIGHTS.
The Company may, but shall not be obligated to, register or qualify the
sale of Shares under the Securities Act or any other applicable law. The
Company shall not be obligated to take any affirmative action in order to
cause the sale of Shares under this Agreement to comply with any law.
<PAGE>
RESTRICTIONS ON TRANSFER.
SECURITIES LAW RESTRICTIONS. REGARDLESS OF WHETHER THE OFFERING AND SALE OF
SHARES UNDER THIS OPTION HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OR
HAVE BEEN REGISTERED OR QUALIFIED UNDER THE SECURITIES LAWS OF ANY STATE, THE
COMPANY AT ITS DISCRETION MAY IMPOSE RESTRICTIONS UPON THE SALE, PLEDGE OR
OTHER TRANSFER OF SUCH SHARES (INCLUDING THE PLACEMENT OF APPROPRIATE LEGENDS
ON STOCK CERTIFICATES OR THE IMPOSITION OF STOP-TRANSFER INSTRUCTIONS) IF, IN
THE JUDGMENT OF THE COMPANY, SUCH RESTRICTIONS ARE NECESSARY OR DESIRABLE IN
ORDER TO ACHIEVE COMPLIANCE WITH THE SECURITIES ACT, THE SECURITIES LAWS OF
ANY STATE OR ANY OTHER LAW.
INVESTMENT INTENT AT GRANT. THE OPTIONEE REPRESENTS AND AGREES THAT THE
SHARES TO BE ACQUIRED UPON EXERCISING THIS OPTION WILL BE ACQUIRED FOR
INVESTMENT, AND NOT WITH A VIEW TO THE SALE OR DISTRIBUTION THEREOF.
INVESTMENT INTENT AT EXERCISE. IN THE EVENT THAT THE SALE OF SHARES UNDER
THIS OPTION IS NOT REGISTERED UNDER THE SECURITIES ACT BUT AN EXEMPTION IS
AVAILABLE WHICH REQUIRES AN INVESTMENT REPRESENTATION OR OTHER
REPRESENTATION, THE OPTIONEE SHALL REPRESENT AND AGREE AT THE TIME OF
EXERCISE THAT THE SHARES BEING ACQUIRED UPON EXERCISING THIS OPTION ARE BEING
ACQUIRED FOR INVESTMENT, AND NOT WITH A VIEW TO THE SALE OR DISTRIBUTION
THEREOF, AND SHALL MAKE SUCH OTHER REPRESENTATIONS AS ARE DEEMED NECESSARY OR
APPROPRIATE BY THE COMPANY AND ITS COUNSEL.
LEGENDS. ALL CERTIFICATES EVIDENCING SHARES PURCHASED UNDER THIS AGREEMENT
IN AN UNREGISTERED TRANSACTION SHALL BEAR THE FOLLOWING LEGEND (AND SUCH
OTHER RESTRICTIVE LEGENDS AS ARE REQUIRED OR DEEMED ADVISABLE UNDER THE
PROVISIONS OF ANY APPLICABLE LAW):
"THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED, OR
OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH
ACT OR AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY AND ITS COUNSEL,
THAT SUCH REGISTRATION IS NOT REQUIRED."
REMOVAL OF LEGENDS. IF, IN THE OPINION OF THE COMPANY AND ITS COUNSEL, ANY
LEGEND PLACED ON A STOCK CERTIFICATE REPRESENTING SHARES SOLD UNDER THIS
AGREEMENT IS NO LONGER REQUIRED, THE HOLDER OF SUCH CERTIFICATE SHALL BE
ENTITLED TO EXCHANGE SUCH CERTIFICATE FOR A CERTIFICATE REPRESENTING THE SAME
NUMBER OF SHARES BUT WITHOUT SUCH LEGEND.
ADMINISTRATION. ANY DETERMINATION BY THE COMPANY AND ITS COUNSEL IN
CONNECTION WITH ANY OF THE MATTERS SET FORTH IN THIS SECTION 9 SHALL BE
CONCLUSIVE AND BINDING ON THE OPTIONEE AND ALL OTHER PERSONS.
ADJUSTMENT OF SHARES.
ADJUSTMENTS. IN THE EVENT OF A SUBDIVISION OF THE OUTSTANDING SHARES, A
DECLARATION OF A DIVIDEND PAYABLE IN SHARES, A DECLARATION OF A DIVIDEND
PAYABLE IN A FORM OTHER THAN SHARES IN AN AMOUNT THAT HAS A MATERIAL EFFECT
ON THE PRICE OF SHARES, A COMBINATION OR CONSOLIDATION OF THE OUTSTANDING
SHARES (BY RECLASSIFICATION OR OTHERWISE) INTO A LESSER NUMBER OF SHARES, A
RECAPITALIZATION, A SPIN-OFF OR A SIMILAR OCCURRENCE, THE BOARD OF DIRECTORS
SHALL
<PAGE>
MAKE SUCH ADJUSTMENTS AS IT, IN ITS SOLE DISCRETION, DEEMS APPROPRIATE IN ONE
OR MORE OF (a) THE NUMBER OF SHARES COVERED BY THIS OPTION OR (b) THE
EXERCISE PRICE. EXCEPT AS PROVIDED IN THIS SECTION 10, THE OPTIONEE SHALL
HAVE NO RIGHTS BY REASON OF ANY ISSUE BY THE COMPANY OF STOCK OF ANY CLASS OR
SECURITIES CONVERTIBLE INTO STOCK OF ANY CLASS, ANY SUBDIVISION OR
CONSOLIDATION OF SHARES OF STOCK OF ANY CLASS, THE PAYMENT OF ANY STOCK
DIVIDEND OR ANY OTHER INCREASE OR DECREASE IN THE NUMBER OF SHARES OF STOCK
OF ANY CLASS.
DISSOLUTION OR LIQUIDATION. TO THE EXTENT NOT PREVIOUSLY EXERCISED,
THIS OPTION SHALL TERMINATE IMMEDIATELY PRIOR TO THE DISSOLUTION OR
LIQUIDATION OF THE COMPANY.
REORGANIZATIONS. IN THE EVENT THAT THE COMPANY IS A PARTY TO A MERGER
OR OTHER REORGANIZATION, THIS OPTION SHALL BE SUBJECT TO THE AGREEMENT OF
MERGER OR REORGANIZATION. SUCH AGREEMENT SHALL PROVIDE FOR (a) THE
CONTINUATION OF THIS OPTION BY THE COMPANY, IF THE COMPANY IS A SURVIVING
CORPORATION, (b) THE ASSUMPTION OF THIS OPTION BY THE SURVIVING CORPORATION
OR ITS PARENT OR SUBSIDIARY, (c) THE SUBSTITUTION BY THE SURVIVING
CORPORATION OR ITS PARENT OR SUBSIDIARY OF ITS OWN OPTION FOR THIS OPTION,
(d) FULL EXERCISABILITY AND ACCELERATED EXPIRATION OF THIS OPTION OR (e)
SETTLEMENT OF THE FULL VALUE OF THIS OPTION IN CASH OR CASH EQUIVALENTS
FOLLOWED BY CANCELLATION OF THIS OPTION.
MISCELLANEOUS PROVISIONS.
RIGHTS AS A STOCKHOLDER. NEITHER THE OPTIONEE NOR THE OPTIONEE'S
REPRESENTATIVE SHALL HAVE ANY RIGHTS AS A STOCKHOLDER WITH RESPECT TO ANY
SHARES SUBJECT TO THIS OPTION UNTIL THE OPTIONEE OR THE OPTIONEE'S
REPRESENTATIVE BECOMES ENTITLED TO RECEIVE SUCH SHARES BY FILING A NOTICE OF
EXERCISE AND PAYING THE PURCHASE PRICE PURSUANT TO SECTIONS 4 AND 5.
NOTICE. ANY NOTICE REQUIRED BY THE TERMS OF THIS AGREEMENT SHALL BE GIVEN IN
WRITING AND SHALL BE DEEMED EFFECTIVE UPON PERSONAL DELIVERY OR UPON DEPOSIT
WITH THE UNITED STATES POSTAL SERVICE, BY REGISTERED OR CERTIFIED MAIL, WITH
POSTAGE AND FEES PREPAID. NOTICE SHALL BE ADDRESSED TO THE COMPANY AT ITS
PRINCIPAL EXECUTIVE OFFICE AND TO THE OPTIONEE AT THE ADDRESS THAT HE OR SHE
MOST RECENTLY PROVIDED TO THE COMPANY.
ENTIRE AGREEMENT. THE NOTICE OF STOCK OPTION GRANT AND THIS AGREEMENT
CONSTITUTE THE ENTIRE CONTRACT BETWEEN THE PARTIES HERETO WITH REGARD TO THE
SUBJECT MATTER HEREOF. THEY SUPERSEDE ANY OTHER AGREEMENTS, REPRESENTATIONS
OR UNDERSTANDINGS (WHETHER ORAL OR WRITTEN AND WHETHER EXPRESS OR IMPLIED)
WHICH RELATE TO THE SUBJECT MATTER HEREOF.
CHOICE OF LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF CALIFORNIA, AS SUCH LAWS ARE
APPLIED TO CONTRACTS ENTERED INTO AND PERFORMED IN SUCH STATE.
DEFINITIONS.
"AGREEMENT" SHALL MEAN THIS STOCK OPTION AGREEMENT.
"BOARD OF DIRECTORS" SHALL MEAN THE BOARD OF DIRECTORS OF THE COMPANY, AS
CONSTITUTED FROM TIME TO TIME.
<PAGE>
"CHANGE IN CONTROL" SHALL MEAN:
THE CONSUMMATION OF A MERGER OR CONSOLIDATION OF THE COMPANY WITH OR INTO
ANOTHER ENTITY OR ANY OTHER CORPORATE REORGANIZATION, IF MORE THAN 50% OF THE
COMBINED VOTING POWER OF THE CONTINUING OR SURVIVING ENTITY'S SECURITIES
OUTSTANDING IMMEDIATELY AFTER SUCH MERGER, CONSOLIDATION OR OTHER
REORGANIZATION IS OWNED BY PERSONS WHO WERE NOT STOCKHOLDERS OF THE COMPANY
IMMEDIATELY PRIOR TO SUCH MERGER, CONSOLIDATION OR OTHER REORGANIZATION;
THE SALE, TRANSFER OR OTHER DISPOSITION OF ALL OR SUBSTANTIALLY ALL OF THE
COMPANY'S ASSETS;
A CHANGE IN THE COMPOSITION OF THE BOARD OF DIRECTORS, AS A RESULT OF WHICH
FEWER THAN A MAJORITY OF THE INCUMBENT DIRECTORS ARE DIRECTORS WHO EITHER (A)
HAD BEEN DIRECTORS OF THE COMPANY ON THE DATE 24 MONTHS PRIOR TO THE DATE OF
THE EVENT THAT MAY CONSTITUTE A CHANGE IN CONTROL (THE "ORIGINAL DIRECTORS")
OR (B) WERE ELECTED, OR NOMINATED FOR ELECTION, TO THE BOARD OF DIRECTORS
WITH THE AFFIRMATIVE VOTES OF AT LEAST A MAJORITY OF THE AGGREGATE OF THE
ORIGINAL DIRECTORS WHO WERE STILL IN OFFICE AT THE TIME OF THE ELECTION OR
NOMINATION AND THE DIRECTORS WHOSE ELECTION OR NOMINATION WAS PREVIOUSLY SO
APPROVED; OR
ANY TRANSACTION AS A RESULT OF WHICH ANY PERSON IS THE "BENEFICIAL OWNER" (AS
DEFINED IN RULE 13d-3 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED),
DIRECTLY OR INDIRECTLY, OF SECURITIES OF THE COMPANY REPRESENTING AT LEAST
50% OF THE TOTAL VOTING POWER REPRESENTED BY THE COMPANY'S THEN OUTSTANDING
VOTING SECURITIES. FOR PURPOSES OF THIS PARAGRAPH (iv), THE TERM "PERSON"
SHALL HAVE THE SAME MEANING AS WHEN USED IN SECTIONS 13(d) AND 14(d) OF SUCH
ACT BUT SHALL EXCLUDE (A) A TRUSTEE OR OTHER FIDUCIARY HOLDING SECURITIES
UNDER AN EMPLOYEE BENEFIT PLAN OF THE COMPANY OR OF A PARENT OR SUBSIDIARY
AND (B) A CORPORATION OWNED DIRECTLY OR INDIRECTLY BY THE STOCKHOLDERS OF THE
COMPANY IN SUBSTANTIALLY THE SAME PROPORTIONS AS THEIR OWNERSHIP OF THE
COMMON STOCK OF THE COMPANY. A transaction shall not constitute a Change in
Control if its sole purpose is to change the state of the Company's
incorporation or to create a holding company that will be owned in
substantially the same proportions by the persons who held the Company's
securities immediately before such transaction.
<PAGE>
"COMPANY" SHALL MEAN FORTE SOFTWARE, INC., A DELAWARE CORPORATION.
"CONSULTANT" SHALL MEAN A PERSON WHO PERFORMS BONA FIDE SERVICES FOR THE
COMPANY, A PARENT OR A SUBSIDIARY AS A CONSULTANT OR ADVISOR, EXCLUDING
EMPLOYEES AND OUTSIDE DIRECTORS.
"DATE OF GRANT" SHALL MEAN THE DATE SPECIFIED IN THE NOTICE OF STOCK OPTION
GRANT, WHICH SHALL BE THE DATE ON WHICH THE BOARD OF DIRECTORS RESOLVED TO GRANT
THIS OPTION.
"DISABILITY" SHALL MEAN THAT THE OPTIONEE IS UNABLE TO ENGAGE IN ANY SUBSTANTIAL
GAINFUL ACTIVITY BY REASON OF ANY MEDICALLY DETERMINABLE PHYSICAL OR MENTAL
IMPAIRMENT WHICH CAN BE EXPECTED TO RESULT IN DEATH OR WHICH HAS LASTED, OR CAN
BE EXPECTED TO LAST, FOR A CONTINUOUS PERIOD OF NOT LESS THAN 12 MONTHS.
"EMPLOYEE" SHALL MEAN ANY INDIVIDUAL WHO IS A COMMON-LAW EMPLOYEE OF THE
COMPANY, A PARENT OR A SUBSIDIARY.
"EXERCISE PRICE" SHALL MEAN THE AMOUNT FOR WHICH ONE SHARE MAY BE PURCHASED UPON
EXERCISE OF THIS OPTION, AS SPECIFIED IN THE NOTICE OF STOCK OPTION GRANT.
"FAIR MARKET VALUE" SHALL MEAN THE FAIR MARKET VALUE OF A SHARE, AS DETERMINED
BY THE BOARD OF DIRECTORS IN GOOD FAITH. SUCH DETERMINATION SHALL BE CONCLUSIVE
AND BINDING ON ALL PERSONS.
"NONSTATUTORY OPTION" SHALL MEAN A STOCK OPTION NOT DESCRIBED IN SECTIONS 422(b)
OR 423(b) OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED.
"NOTICE OF STOCK OPTION GRANT" SHALL MEAN THE DOCUMENT SO ENTITLED TO WHICH THIS
AGREEMENT IS ATTACHED.
"OPTIONEE" SHALL MEAN THE INDIVIDUAL NAMED IN THE NOTICE OF STOCK OPTION GRANT.
"OUTSIDE DIRECTOR" SHALL MEAN A MEMBER OF THE BOARD OF DIRECTORS WHO IS NOT AN
EMPLOYEE.
"PARENT" SHALL MEAN ANY CORPORATION (OTHER THAN THE COMPANY) IN AN UNBROKEN
CHAIN OF CORPORATIONS ENDING WITH THE COMPANY, IF EACH OF THE CORPORATIONS OTHER
THAN THE COMPANY OWNS STOCK POSSESSING 50% OR MORE OF THE TOTAL COMBINED VOTING
POWER OF ALL CLASSES OF STOCK IN ONE OF THE OTHER CORPORATIONS IN SUCH CHAIN.
"PURCHASE PRICE" SHALL MEAN THE EXERCISE PRICE MULTIPLIED BY THE NUMBER OF
SHARES WITH RESPECT TO WHICH THIS OPTION IS BEING EXERCISED.
"SECURITIES ACT" SHALL MEAN THE SECURITIES ACT OF 1933, AS AMENDED.
"SERVICE" SHALL MEAN SERVICE AS AN EMPLOYEE, OUTSIDE DIRECTOR OR CONSULTANT.
"SHARE" SHALL MEAN ONE SHARE OF STOCK, AS ADJUSTED IN ACCORDANCE WITH SECTION 10
(IF APPLICABLE).
<PAGE>
"STOCK" SHALL MEAN THE COMMON STOCK OF THE COMPANY.
"SUBSIDIARY" SHALL MEAN ANY CORPORATION (OTHER THAN THE COMPANY) IN AN UNBROKEN
CHAIN OF CORPORATIONS BEGINNING WITH THE COMPANY, IF EACH OF THE CORPORATIONS
OTHER THAN THE LAST CORPORATION IN THE UNBROKEN CHAIN OWNS STOCK POSSESSING 50%
OR MORE OF THE TOTAL COMBINED VOTING POWER OF ALL CLASSES OF STOCK IN ONE OF THE
OTHER CORPORATIONS IN SUCH CHAIN.
<PAGE>
EXHIBIT 11.1
FORTE SOFTWARE, INC.
COMPUTATION OF LOSS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
1996 1997 1996 1997
<S> <C> <C> <C> <C>
Actual weighted average shares outstanding for the period:
Common Stock 18,338 19,296 18,331 19,200
Common Stock Equivalents 2,740 - 2,776 -
Total common stock weighted average shares outstanding 21,078 19,296 21,107 19,200
Net income (loss) $1,445 $(2,983) $1,738 $(5,229)
------ -------- ------ --------
Net income (loss) per share $0.07 $(0.15) $0.08 $(0.27)
------ -------- ------ --------
------ -------- ------ --------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> MAR-31-1998 MAR-31-1998
<PERIOD-START> JUL-01-1997 APR-01-1997
<PERIOD-END> SEP-30-1997 SEP-30-1997
<CASH> 24,349 24,349
<SECURITIES> 15,294 15,294
<RECEIVABLES> 18,120 18,120
<ALLOWANCES> 969 969
<INVENTORY> 0 0
<CURRENT-ASSETS> 58,919 58,919
<PP&E> 13,750 13,750
<DEPRECIATION> 6,512 6,512
<TOTAL-ASSETS> 66,457 66,457
<CURRENT-LIABILITIES> 20,580 20,580
<BONDS> 0 0
0 0
0 0
<COMMON> 193 193
<OTHER-SE> 44,945 44,945
<TOTAL-LIABILITY-AND-EQUITY> 66,457 66,457
<SALES> 17,488 32,162
<TOTAL-REVENUES> 17,488 32,162
<CGS> 4,680 8,878
<TOTAL-COSTS> 4,680 8,878
<OTHER-EXPENSES> 16,326 30,176
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (3,003) (5,824)
<INCOME-TAX> (20) (595)
<INCOME-CONTINUING> (2,983) (5,229)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,983) (5,229)
<EPS-PRIMARY> (.15) (.27)
<EPS-DILUTED> (.15) (.27)
</TABLE>
