SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1997
OR
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
(Address of principal executive offices and Zip Code)
Registrant's telephone number, including area code: (510) 869-3400
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO __
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Registration S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates
of the Registrant, based upon the closing sale price of the Common Stock on May
31, 1997 as reported on the Nasdaq National Market System, was approximately
$200,343,386. Shares of Common Stock held by each officer and director and by
each person who owns 5% or more of the outstanding Common Stock have been
excluded in that such persons may be deemed to be affiliates. This determination
of affiliate status is not necessarily a conclusive determination for other
purposes. As of May 31, 1997 the Registrant had outstanding 19,263,884 shares of
Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for the
Annual Meeting of Stockholders to be held on August 12, 1997 is incorporated by
reference in Part III of this Form 10-K to the extent stated herein.
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FORTE SOFTWARE, INC.
1997 REPORT ON FORM 10-K
Table of Contents
PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 8. Financial Statements and Supplementary Data
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
PART III
Item 10. Directors and Executive Officers of Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
Signatures
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PART I
This Annual Report on Form 10-K 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," 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.
ITEM 1. BUSINESS
Introduction
Forte Software, Inc. (the "Company") designs, develops, markets and
supports Forte, a software application development, deployment and management
environment for distributed enterprise applications. Forte was designed to
enable organizations to create applications with powerful functionality that
support up to hundreds or thousands of concurrent users with high levels of
reliability, performance and manageability. Forte reduces complexity for
developers by providing automatic application partitioning, object-oriented,
component-based development and independence from specific hardware platforms,
operating systems and databases. Forte's multi-tier architecture increases
developer productivity, business flexibility and the efficient use of computing
resources. Forte allows organizations to use information technology ("IT") more
strategically and improve their ability to compete in today's business
environment.
Forte is marketed and sold through the Company's direct sales force,
distributors and value added resellers in all major markets. Forte has been
adopted by customers in a wide variety of industries, including banking,
consumer/retail, education, energy, finance, healthcare/pharmaceuticals,
insurance, manufacturing, media, technology and telecommunications.
Industry Background
Business Need for More Powerful Applications
In today's increasingly competitive global markets, businesses must
rapidly and continuously improve their operations. The strategic use of
information technology is often critical to making such improvements.
Information systems that automate simple tasks are no longer sufficient, as
business entities are demanding applications with increased levels of
functionality to automate complete business processes spanning across entire
enterprises.
The growing demand for more powerful computer applications presents a
major challenge to corporate IT organizations. These organizations have
historically not been able to keep up with the demand for computer applications,
and now they are being asked to build applications that are both more powerful
and easy to adapt to rapidly changing business requirements. To meet these
challenges, new application development techniques and technologies are
required.
Emergence of Distributed Computing
At the same time that the demand for more powerful applications is
growing, a paradigm shift in computing architectures is occurring with the
proliferation of inexpensive PCs, the growth of the relational database
management system ("RDBMS") market and the demand by end users for more
responsive information systems with access to enterprise-wide data and
applications. Many organizations began by shifting from mainframe or other
host-based environments to two tier model of computing. Traditionally, most
organizations have processed their distributed business critical applications in
mainframe or other host-based computing environments. These environments offer
high levels of reliability, centralized management and control, and scaleability
for large numbers of concurrent users running transaction-intensive
applications. However, mainframe and other host-based systems are inflexible,
require lengthy development and maintenance cycles, and are closely linked with
rigid, character-based user interfaces. Partially as a result of these
limitations, much new application development began shifting to client/server
environments.
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The emergence of the Internet has validated the multi-tier distributed
computing model of desktop applications communicating with application servers
that talk with databases. The PC, as the client, provides an easy-to-use
interface which can include the Internet or an intranet, and the RDBMS, as a
database server, provides simple and flexible information storage. Today,
organizations want to combine the usability and flexibility of the client/server
model with the robustness of the mainframe model to create a new generation of
distributed applications.
Challenges of Implementing Distributed Applications
Many organizations that have attempted to build distributed
applications have concluded that first generation client/server tools do not
provide sufficient performance and manageability for business critical
applications with large numbers of concurrent users or high transaction volumes.
Performance and manageability are limited because all the application logic
resides on the client. Performance is compromised because this architecture
requires large amounts of data to be sent over the network from the server to
the client for such business needs as investment portfolio analysis or complex
order processing. A more efficient approach would be to perform the analysis on
the server where the data is located so that only the results of the analysis
would be sent over the network. Manageability is limited because application
updates need to be deployed on each client PC rather than on a single server.
To overcome these and other limitations of first generation tools, many
organizations are seeking to augment these tools with complex server programming
in C or C++ and stored procedures in relational databases, along with the
integration of transaction processing monitors or other "middleware" to connect
the clients and servers. Such an approach, however, introduces substantial
complexity and requires technical expertise in a myriad of hardware, software,
database, networking and other technologies. Even where such expertise does
exist in-house, or where it can be obtained through a system integrator, the
cost and effort of building and maintaining applications with several different
tools is often prohibitive.
Market Opportunity
The Company believes that the availability of a distributed application
development, deployment and management environment is required for the
widespread adoption of the distributed computing model. To be successful, such
an environment must:
o Reduce complexity - Allow programmers to focus on the business rules
rather than the complex technical details involved in building and
maintaining distributed applications.
o Enable advanced applications - Enable programmers to rapidly create and
easily modify applications with more powerful functionality to meet
more demanding business requirements.
o Provide distributed application support - Enable high levels of
reliability, performance and manageability for deployed applications.
An application environment that addresses these requirements will
enable businesses to more effectively address the challenges and rapidly
changing requirements of today's competitive environment.
The Forte Solution
The Company was founded with the belief that the implementation of
distributed applications requires dramatically different approaches from those
offered by previously available technologies. As a result, the Company designed
and developed Forte, an application development, deployment and management
environment that enables organizations to effectively create distributed
applications. Applications built with Forte can provide new and advanced
functionality to enable a more competitive use of information technology, can be
easily modified as business requirements or the technical infrastructure evolve,
and can provide the high levels of reliability, performance and manageability
required for distributed applications. Forte offers the following features and
benefits:
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Reduced Complexity
Application Partitioning. With Forte, programmers develop an
application as if it were to run on a single system even though it may be
deployed on multiple hardware platforms, operating systems, RDBMSs and networks.
Following development, Forte automatically partitions, or splits apart, the
application, placing the appropriate application logic on the appropriate
system. By using application partitioning to automate the distribution of
application logic, Forte significantly reduces the complexity of creating
distributed applications.
By correctly partitioning an application, Forte can substantially
reduce network traffic, enabling applications to run faster and scale better.
Partitioning also improves the management of applications because business rules
can be enforced centrally on a server rather than on each user's desktop
computer. This allows organizations to update business rules in one place,
simplifying change management and ensuring consistency.
Technology Independence. Forte allows organizations to develop
applications that are independent of specific hardware, software, networking and
other system components. Decisions regarding the selection of such components do
not have to be finalized until deployment. Technology independence also allows
customers to add or replace hardware or software to take advantage of emerging
technologies without having to rewrite their applications. To enable these
capabilities, Forte supports popular hardware platforms, operating systems,
RDBMSs, networking equipment and other connectivity software.
Object-Oriented Development. Forte's fully object-oriented development
environment makes it easier to model the business, simplifies ongoing
application maintenance and allows organizations to reuse application functions.
With Forte, developers build high-level objects, commonly referred to as
application services, that represent business processes such as a credit check
function. This close mapping between the business and the application
architecture enables IT personnel to more easily design, maintain and reuse
application services. Forte's easy to learn development language allows
programmers to focus on the business logic rather than complex technical
details.
Advanced Applications
Multi-Tier Distributed Architecture. Forte enables advanced
applications to be built as a set of components. Small development teams can be
assigned to develop each component, and the Forte environment will assure that
the components work together in a multi-tier architecture. Client components
request actions from application services that, in turn, access one or more data
sources. Shared application services are installed on one or more servers so
they can be accessed simultaneously by multiple users. Once a shared service is
developed and deployed, it can be reused in different applications. Shared
application services enhance developer productivity through reuse, ease of
maintenance provided by the modular architecture and increased consistency
created by providing the same view of the business to multiple applications.
Business Event Notification. Forte incorporates an event model by which
any component of an application can notify any other component of significant
business occurrences that might call for immediate action by users and/or
application services. By immediately and automatically responding to important
events, businesses can rapidly resolve problems or take advantage of new
opportunities.
Distributed Application Support
Performance. Forte achieves high levels of performance for large
numbers of concurrent users. In addition to application partitioning, which
reduces network traffic, Forte employs various other techniques to improve
performance, such as multi-threading server requests to increase server
throughput, compiling code to improve server response time, caching system
information to reduce network traffic and replicating application services to
handle a greater load.
Reliability. Forte employs a number of technologies to provide high
levels of reliability and eliminate single points of failure. For example, if a
server or network fails, backup servers can be specified to automatically assume
the workload. In addition, Forte incorporates transaction support to provide
application consistency in case a transaction is aborted.
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Manageability. Forte incorporates many management capabilities for the
deployment of distributed applications. Forte provides a performance monitor to
report on key performance statistics, a configuration manager to insure that all
the distributed components of an application are at a compatible level, an
environment console to manage the environment and an interface to third-party
systems management tools such as the Tivoli Management Environment. These
management capabilities are critical to the successful implementation of
distributed applications.
Strategy
The Company's objective is to establish Forte as the standard
environment for the development, deployment and management of distributed
applications. The Company's strategy incorporates the following key elements:
Expand Global Sales Capabilities. The Company intends to expand its domestic and
international sales capabilities by significantly increasing the size of its
direct sales organization in major markets and continuing to leverage
distributors in other selected markets. The Company has direct operations in
Australia, Canada, France, Germany, the United Kingdom and the U.S.
Promote Successful Customer Implementation. The Company's success is dependent
upon its customers' successful implementation of distributed applications using
Forte. As a result, the Company actively participates in the customer's
development and deployment efforts. The Company assigns an account management
team, provides extensive introductory and advanced training courses, offers
advanced consulting services and provides extensive post-sale support to
customer accounts.
Extend Technological Leadership. The Company pioneered the use of application
partitioning and shared application services for multi-tier, distributed
applications. The Company is now extending this technology, along with
production workflow capabilities, to the Internet in order to support
browser-based access to mission-critical business functions written in Forte.
The Company intends to commit substantial resources to extend its technology in
the areas of open language support, open component support and open
communications.
Leverage Third-Party Relationships. The Company seeks to promote the widespread
adoption of Forte through the establishment of close relationships with
development partners, system integrators and value added resellers. These
partners often assist Forte's customers in implementing distributed
applications. To date, the Company has established many relationships with such
third parties and intends to establish additional relationships.
The foregoing statements regarding the Company's strategy, expectations and
intentions are forward-looking statements, and actual results may vary
substantially depending upon a variety of factors, including the development of
emerging markets for distributed application development software, competition,
technological change, changing customer needs, evolving industry standards, any
product development delays, and the ability of the Company to manage any future
growth and new distribution channels. There can be no assurance that any new
products will be completed in a timely basis or that markets will develop for
such products. See the "Business Risks" section below.
Products
Forte is collection of products used for the development, deployment
and management of distributed applications. Forte includes tools for developing
applications that are independent of any vendor-specific deployment environment,
generating systems for specific hardware platforms and supporting distributed
deployments.
Forte Application Environment. The Forte Application Environment is comprised of
three facilities. Developers use the Application Definition Facility to define
the application's functionality, after which Forte automatically generates the
application using the System Generation Facility and deploys it using the
Distributed Execution Facility.
Application Definition Facility. For development, Forte provides an integrated
set of object-oriented software tools including a graphical user interface
("GUI") designer, an object-oriented fourth generation language ("4GL"), a
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comprehensive set of class libraries and a repository to support team
development. Forte provides tight integration between application logic and the
leading relational database management systems. Forte also provides interfaces
with external systems such as legacy applications and electronic data feeds.
System Generation Facility. For system generation, Forte partitions the
application into a specific deployment environment. To facilitate this process,
Forte provides a tool for defining the hardware in the environment. For each
hardware system, the tool records its operating system, whether or not it has a
user interface, what networks are available, what RDBMS, if any, is available
and whether or not the system supports an interface to an external resource
manager such as a bar code scanner. Using this environment information, Forte
automatically maps the application to a specific set of hardware platforms,
automatically deploys the code to these platforms and establishes efficient
communications among the Forte components.
Distributed Execution Facility. For deployment, Forte supports a robust
distributed execution environment. This includes a communications infrastructure
for delivering large numbers of messages and event notifications as well as
strategies for optimizing reliability and performance such as fail-over, load
balancing, and parallel processing. Forte also includes tools for managing the
deployed application. From an application management console, a systems
administrator can monitor message and event traffic entering and leaving each
Forte component, start and stop Forte components running on remote machines,
monitor the application components running on various machines, monitor the
utilization of various machine resources and perform other management functions.
On the desktop, Forte supports Windows, Windows NT, Macintosh, Motif,
Netscape Navigator and Microsoft Explorer. Forte supports the leading open
systems server platforms including Data General AViiON, Digital Alpha Open VMS
and UNIX, Digital VAX Open VMS, HP 9000, IBM RS/6000, Sequent Symmetry, Sun
SPARC, and Windows NT. Forte also supports the leading RDBMSs including
DB2/6000, Informix, Ingres, Microsoft SQL Server, Oracle, Rdb and Sybase as well
as the Microsoft ODBC interface.
In December 1996, the Company began beta testing Forte Release 3.0,
which adds integration with Java, desktop and mainframe platforms, as well as
new features to improve the management and performance of distributed
applications.
Forte Express
In March 1996, the Company began shipping Forte Express, an optional
application generator designed for use with Forte. Forte Express can
significantly reduce development time by automatically generating a three-tier
application. Forte Express developers use simple models and a drag-and-drop
development style to create client user interface components that are portable
across multiple platforms, a framework for implementing business policies as
shared Forte services and database access. The default user interface window
definitions generated by Forte Express include window layouts, menus and buttons
and can be later modified in Forte. Any customizations are preserved if the
application is later modified in Forte Express.
Forte Web SDK
In June 1996, the Company began shipping the Forte Web SDK, which
enables World Wide Web ("Web") access to the Forte environment. The Forte Web
SDK enables Netscape's Navigator and other Web browsers to function as Forte
clients with full access to the Forte environment, which is designed to support
up to thousands of concurrent users with high levels of reliability and
manageability. The Forte Web SDK provides organizations with the facilities they
need to rapidly deploy Web-accessible, business-critical applications, such as
order processing, without duplicating existing systems.
Forte Conductor
In March 1997, the Company began beta testing Forte Conductor, a
production workflow environment for automating mission-critical business
processes. Developers will use an intuitive graphical process designer to define
business processes which, in turn, are managed at runtime by a distributed,
fault-tolerant workflow engine. Forte Conductor also provides an easy way to
track and analyze the status of work in progress. Forte Conductor can be used
with Forte and/or non Forte applications.
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The Company licenses its software for both development and deployment.
Development license fees are based upon the number of developers and the
complexity of the development environment. Deployment licenses are based upon
the number of concurrent users and the number of servers that will be running
Forte components. A core system, with a U.S. list price of $75,000, includes
five developer licenses, ten concurrent user licenses, and support for a single
GUI, server and RDBMS. A typical initial direct sale to an end-user customer
ranges from $300,000 to $400,000. This includes development and initial
deployment licenses, maintenance, training and consulting services.
Technology
Application Partitioning.
In order to partition an application, Forte analyzes the application
definition that is stored in the development repository and maps it into a
specific target deployment environment using a description of each machine that
is also stored in the repository. The partitioning process involves splitting
apart the application and targeting the presentation components for the
available clients and shared business logic for the available servers.
Application components that access an external resource, such as an RDBMS, are
placed on the machine where the external resource resides. The partitioning
process also involves converting the environment-neutral definition of each
component into an environment-specific implementation. This produces GUI screens
for each client machine by using that client's native toolkit and converts
RDBMS-neutral database access commands into efficient instructions for accessing
a specific target RDBMS. Once a partitioning scheme is selected, Forte moves the
application components from the repository to the appropriate machines in the
environment. This distribution of application code is done at the 4GL level
(often called dynamic partitioning), allowing developers to easily test the
application after it has been partitioned, while still providing the option to
subsequently generate C++ code that can be compiled into machine code (often
called static partitioning) for optimizing deployment performance. Forte also
enables developers to easily modify the default partitioning scheme using simple
drag-and-drop commands on a map that displays the components comprising each
partition and the location of each partition.
Shared Application Services
Two enabling technologies permit a single copy of an application
service to be simultaneously accessible by multiple clients in a multi-tier
application architecture. First, Forte multi-threads connections by multiple
users, queues requests and efficiently manages the processing of the queue.
Second, Forte provides concurrency control to keep users from interfering with
each other's work. In addition, Forte assists with managing the shared
application services by providing configuration management, system monitoring
and operational controls.
Business Event Notification
Forte uses asynchronous events to notify an application component of
significant business occurrences that might call for immediate action by users
and/or application services. Forte supports a publish-and-subscribe event model.
When a Forte application component is interested in a particular event, it
registers its interest with a simple statement. When the event occurs, Forte
automatically sends a notification of the event to all components that have
registered an interest in that event. This event model obviates the need for
polling and, in contrast to the broadcast event model, it only sends the event
notification to those components that are interested in processing the event,
thereby reducing network traffic. Forte's asynchronous communication support
includes a multi-threading model to enable Forte application components to
process the arrival of an event even if it is processing another application
task at the time.
Integration
For desktop integration, Forte users can leverage work in other
personal productivity applications by using Microsoft OLE/DCOM to both import
and export information. For example, users can enter data in a Forte application
and have it automatically update a spreadsheet. Forte offers integration options
via DCE or CORBA/IIOP whereby external clients and servers can interoperate with
Forte services. Forte can both call external programs and be called by external
programs. Forte also provides several options for integrating with mainframes
using third-party tools. In addition to these
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automated interfaces, Forte facilitates external integration through a general
purpose wrappering facility. This can be used to encapsulate an external
service, such as a real-time data feed or an existing application, and treat it
as a Forte component. These capabilities allow organizations to assemble new
applications from existing Forte and non-Forte components, thereby leveraging
other IT investments.
Replication
For increased reliability and performance, Forte can replicate
application services onto multiple servers and use them for either fail-over or
load-balancing. In fail-over mode, Forte will automatically redirect requests to
the backup server whenever the primary application service is unavailable. In
load-balancing mode, Forte can allocate service requests across multiple copies
of an application service as a way to increase scaleability.
Support for Transactions
Forte incorporates transaction support within the application. This can
be used to automate the synchronization of the client component, the application
service components and the data management component of an application. By
automating transaction consistency across all components of a multi-tier
application, Forte simplifies the work of developers and provides for greater
reliability of the application.
Rapid Application Development and Optional Code Generation
By separating the development process from deployment, Forte can
support both rapid application development ("RAD") via an interpretive
development environment and optimal deployment performance via the generation of
C++ code, which is compiled into machine code. During development, Forte
supports an interpretive environment in which the Forte 4GL source code is
compiled into an intermediate pseudo-code that runs with the Forte interpreter.
This approach is similar to most RAD tools that allow developers to rapidly test
and view code without having to go through a lengthy compile and link cycle.
When Forte partitions the application, it partitions at the pseudo-code level,
thereby allowing the developer to test the distributed application quickly. If
the application needs to be repartitioned frequently, it can be deployed using
the pseudo-code. For deployments that call for maximum runtime performance,
Forte generates C++ code that is subsequently compiled using the native C++
compiler on each target computer. This option is available on a partition by
partition basis.
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Customers and Markets
The Company's target end-user customers include organizations that
utilize sophisticated, distributed information systems with numerous users and
diverse, heterogeneous operating systems and databases. As of March 31, 1997,
over 230 end-user customers have licensed Forte, including Andersen Windows,
Bank of America, British Telecom, British Steel, Corning, EDS, Eli Lilly, Fox,
Inc., General Motors, Hewlett-Packard Company, Home Box Office, Kaiser
Permanente, Kawasaki Steel, Mitsui Trust Bank, Merrill Lynch Canada, Montreal
Exchange, Pacific Bell Information Services, Pacific Gas & Electric Company,
Paging Network, Philip Morris, Reuters, Telecom Italia Mobile, USAA, World Bank
and Xerox.
Revenues from U.S West Communications, Inc. accounted for approximately
12% of total revenue in fiscal year 1997. No customer accounted for more than
ten percent of the Company's total revenues for the fiscal years ended March 31,
1995 or 1996.
Sales and Marketing
Forte markets its software and services primarily through its direct
sales organization complemented by other sales channels including international
distributors and value added resellers. As of March 31, 1997, the Company's
direct sales force included 51 sales representatives located throughout the
United States and in international sales offices in Australia, Canada, Germany,
France, and the United Kingdom. The Company intends to expand its direct sales
and support force. See Management's Discussion and Analysis of Financial
Condition and Results of Operations for further discussion.
The Company has licensed Digital to resell Forte on a worldwide basis.
As of March 31, 1997, the Company was represented by 17 international
distributors (covering 22 countries), which principally operate in markets where
the Company does not have a direct sales organization.
The Company uses a consultative sales model for selling to major
accounts. This model entails the collaboration of technical and sales personnel
to formulate proposals that address the specific requirements of the customer.
Due to the importance of business-critical distributed applications, the Company
focuses its initial sales efforts on senior IT department personnel and other
members of the customer's management team.
Third-Party Relationships
A key element in Forte's sales and marketing strategy is the continued
expansion of third-party relationships to increase market awareness and
acceptance of Forte. The goal is to deliver complete customer solutions,
therefore, Forte partners with industry-leading companies.
Delivering complete customer solutions requires a broad range of
capabilities. Forte's partners help satisfy these needs by providing on-going
development of Forte products, integration with complementary products,
availability of pre-packaged vertical solutions or pre-built pieces of code, or
additional Forte-knowledgeable resources.
Several leading multi-national companies have worked closely with Forte
to help develop and extend the Company's technology. Apple Computer Systems,
Inc., Data General Corp., Digital Equipment Corp., IBM Corp., Mitsubishi, and
Sequent Computer Systems, Inc. have all sponsored major joint engineering
activities with Forte. Many of these relationships date from the Company's early
days and demonstrate early confirmation and adoption of its technology
capabilities and direction.
The Company has entered into a license and development agreement with
Digital, under which Digital is granted a worldwide, non-exclusive,
royalty-bearing license to distribute Forte, to modify and integrate Forte into
Digital products, and to use Forte source code for development, maintenance and
support. The Company has also entered into a development agreement with Sequent,
under which Sequent is granted a non-exclusive, worldwide, royalty-bearing right
to distribute Forte for use on Sequent computer systems and to use Forte source
code to support Sequent customers.
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The Company has also entered into a license and development agreement
with Mitsubishi, under which Mitsubishi is appointed the exclusive Japan-based
distributor of Forte solely within Japan and granted the right to use Forte
source code to develop a Japanese version of Forte.
Forte has forged strong relationships with industry-leading companies
whose products complement the Forte product set. These relationships further
simplify the complexities of distributed application development. These partners
help implement Forte's vision of open integration by allowing customers to
choose products which best fit their particular needs.
This array of complementary products provide new, unique functionality
as well as capabilities which supplement and deepen features already in the
Forte product set. Through these relationships, Forte customers have a wide
range of choices of databases, object oriented CASE tools, middleware, report
writers, security tools, system management tools, and testing tools.
Value-Added Resellers leverage Forte technology by delivering packaged
business applications usually targeted at vertical markets. These packaged
solutions are a good fit for customers looking for robust, function-rich systems
who do not want to develop the entire systems themselves. Customers are able to
enjoy the benefits of Forte's technology and have an off-the-shelf solution at
the same time.
Forte's products have several advantages as a solution for value-added
resellers. They allow resellers to focus on the business functionality and needs
of the vertical market they want to address, regardless of the technical issues
associated with building their application for a variety of different systems.
Forte's platform and technology independence lets the customer choose vertical
applications which best fit their needs instead of choosing applications because
they can run in their existing IS infrastructure. A bigger potential customer
base is available to resellers for this same reason.
Forte System Integration and Consulting partners represent a ready pool
of trained and experienced Forte developers which can be tapped to supplement
customers' own development teams. These partners often work in conjunction with
Forte's own consultants at a customer site to build end-user applications. The
resulting applications satisfy each customer's unique business requirements.
Component Providers use Forte to deliver pre-built pieces of
applications. The use of components for application development is growing
rapidly since purchasing components can be an easier and less expensive solution
than building them from scratch. While not complete systems, these pre-built
subassemblies help speed the development process for Forte customers since
developers do not have to start from scratch. These robust components, which are
easily built in Forte or other tools, are then "wrappered" into Forte
applications.
Customer Service and Support
The Company believes that a high level of customer support is important
to the successful marketing and sale of Forte. Substantially all of the
Company's direct sales to customers include maintenance and support contracts,
which typically have twelve-month terms and entitle the customers to upgrades,
if and when available, and technical support. In addition, the Company offers
introductory and advanced classes and training programs available at the
Company's headquarters, local training centers and customer sites. Telephone
hotline support is complemented by a bulletin board system that provides a
repository for technical tips and skills. Users of Forte can also attend an
annual user group conference where knowledge of Forte skills and solutions is
exchanged.
The Company's consulting organization provides a full range of
consulting services to customers developing and deploying distributed
applications with Forte. Such consulting services are offered to promote the
successful development and deployment of applications built with Forte, and
include prototyping assistance, mentoring and technology transfer, Forte
methods, analysis and design assistance and performance tuning. Fees charged for
consulting services vary depending on the nature and quantity of services to be
performed. The Company believes that the availability of effective consulting
services is an important factor in achieving widespread market acceptance.
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Product Development
The Company believes that its future success will depend in large part
on its ability to enhance Forte, develop new products, maintain technological
leadership and satisfy an evolving range of customer requirements for a
distributed application environment. The Company's product development
organization is responsible for product architecture, core technology and
functionality, product testing, user interface development and expanding the
ability of Forte to operate with the leading hardware platforms, operating
systems, relational database management systems and networking and communication
protocols. This organization is also responsible for new product development.
Since inception, the Company has made substantial investments in
product development and related activities. Forte has been developed primarily
by the Company's internal development staff and, in some instances, with the
assistance of external consultants. Certain technologies have been acquired and
integrated into Forte through licensing arrangements.
As of March 31, 1997, the Company's product development organization
consisted of 77 employees. In fiscal 1995, 1996 and 1997, product development
expenses were $5.5 million, $8.1 million and $10.6 million, respectively. To
date, the Company has not capitalized any software development costs and does
not anticipate capitalizing any software development costs in connection with
future releases of Forte or other products. See Note 1 of Notes to Consolidated
Financial Statements. The Company expects to continue to devote substantial
resources to its product development activities, including the continued support
of existing and emerging hardware platforms, operating systems, relational
database management systems and networking and communication protocols.
Competition
The market for 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 using a combination of first
generation application development tools and more powerful server programming
techniques such as stored procedures in relational databases, C or C++
programming, and networking and database middleware to connect the various
components. As such, the Company effectively experiences its primary competition
from potential customers' decisions to pursue this type of approach as opposed
to utilizing an application environment such as Forte. As a result, the Company
must continuously educate existing and prospective customers as to the
advantages of the Company's products. There can be no assurance that these
customers or potential customers will perceive sufficient value in the Company's
products to justify purchasing them.
The Company has experienced and expects to continue to experience
increased competition from current and future competitors, many of whom have
significantly greater financial, technical, marketing and other resources than
the Company. The Company's current competitors, include among others, Dynasty
Technologies, Inc., IBM Corporation, Informix Corporation, Microsoft
Corporation, NAT Systems, Inc., Oracle Corporation, Powersoft (a subsidiary of
Sybase, Inc.), Seer Technologies, Inc. and Texas Instruments Software. The
Company expects to compete increasingly with middleware companies that are
advocating a middleware-centric approach to building Internet applications, many
companies that have recently introduced, or are about to introduce, Web-based
tools targeting production Internet applications and other companies offering
packaged applications with specialized modification tools. The Company's
competitors may be able to respond more quickly to new or emerging technologies
and changes in customer requirements or devote greater resources to the
development, promotion and sale of their products than the Company. Also, many
current and potential competitors have greater name recognition and more
extensive customer bases that could be leveraged, thereby gaining market share
to the Company's detriment. The Company expects to face additional competition
as other established and emerging companies enter the 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
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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 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.
Intellectual Property and Other Proprietary Rights
The Company relies primarily on a combination of patent, copyright and
trademark laws, trade secrets, confidentiality procedures and contractual
provisions to protect its proprietary rights. The Company also believes that
factors such as the technical and creative skills of its personnel, new product
developments, frequent product enhancements, name recognition and reliable
product maintenance are essential to establishing and maintaining a technology
leadership position. The Company seeks to protect its software, documentation
and other written materials under trade secret and copyright laws, which afford
only limited protection. The Company currently has one issued United States
patent that expires in 2012 and corresponding patent applications pending in
Canada, Australia, Japan and several member countries within the European Patent
Organization. There can be no assurance that the Company's patent will not be
invalidated, circumvented or challenged, that the rights granted thereunder will
provide competitive advantages to the Company or that any of the Company's
pending or future patent applications, whether or not being currently challenged
by applicable governmental patent examiners, will be issued with the scope of
the claims sought by the Company, if at all. Furthermore, there can be no
assurance that others will not develop technologies that are similar or superior
to the Company's technology or design around the patents owned by the Company.
The Company 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, Sequent and Mitsubishi each
currently possesses copies of Forte source code for certain limited purposes,
subject to the terms of separate written agreements each company has entered
into with the Company. Digital and Sequent each has an option to purchase a
non-exclusive, fully-paid license of the Forte source code. Digital's option
becomes exercisable if the Company is acquired and the acquiror fails to agree
to assume the Company's contractual obligations to Digital, and Sequent's option
becomes exercisable if the Company is acquired by certain Sequent competitors.
The provision of source code may increase the likelihood of misappropriation by
third parties.
The Company is not aware that it is infringing any proprietary rights
of third parties. There can be no assurance, however, that third parties will
not claim infringement by the Company of their intellectual property rights. The
Company expects that software product developers will increasingly be subject to
infringement claims as the number of products and competitors in the Company's
industry segment grows and the functionality of products in different industry
segments overlaps. Any such claims, with or without merit, could be time
consuming to defend, result in costly litigation, divert management's attention
and resources, cause product shipment delays or require the Company to enter
into royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to the
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Company, if at all. In the event of a successful claim of product infringement
against the Company and failure or inability of the Company to license the
infringed or similar technology, the Company's business, operating results and
financial condition would be materially adversely affected.
The Company relies upon certain software that it licenses from third
parties, including software that is integrated with the Company's internally
developed software and used in Forte to perform key functions. There can be no
assurance that these third-party software licenses will continue to be available
to the Company on commercially reasonable terms. The loss of, or inability to
maintain, any such software licenses could result in shipment delays or
reductions until equivalent software could be developed, identified, licensed
and integrated which would materially adversely affect the Company's business,
operating results and financial condition.
Employees
As of March 31, 1997, the Company had a total of 351 employees,
including 77 in product development, 42 in technical support, 192 in sales and
marketing and related customer support services and 40 in administration. Of
these employees, 286 were located in the United States, 60 were located in
Europe and five were located in Australia. None of the Company's employees is
represented by a collective bargaining agreement, nor has the Company
experienced any work stoppage. The Company considers its relations with its
employees to be good.
The Company's success depends to a significant degree upon the
continuing contributions of its key management, sales, marketing, customer
support and product development personnel. The loss of key management or
technical personnel could adversely affect the Company. The Company believes
that its future success will depend in large part upon its ability to attract
and retain highly-skilled managerial, sales, customer support and product
development personnel. The Company has at times experienced and continues to
experience difficulty in recruiting 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. In addition, the Company intends to
continue to expand its domestic and international direct sales force. 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. 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.
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<TABLE>
Executive Officers
The executive officers and directors of the company, and their ages as
of May 31, 1997, are as follows:
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Martin J. Sprinzen.......................... 48 President, Chief Executive Officer and Chairman of the Board
of Directors
Paul Butterworth............................ 46 Senior Vice President and Chief System Architect
Michael Hedger.............................. 45 Senior Vice President, European Operations
Jay Shiveley................................ 40 Senior Vice President, North American and Australian Operations
James Wambach............................... 43 Vice President, Sales - North America
Rodger Weismann............................. 55 Senior Vice President, Finance & Administration, Chief
Financial Officer and Secretary
Christos M. Cotsakos....................... 48 Director
Promod Haque ............................... 49 Director
Thomas A. Jermoluk ......................... 40 Director
David N. Strohm ............................ 49 Director
William H. Younger, Jr...................... 47 Director
</TABLE>
Martin J. Sprinzen co-founded the Company in February 1991 and has
served as its President, Chief Executive Officer and Chairman of the Board of
Directors since inception. Mr. Sprinzen also served as the Company's Secretary
from inception to January 1996. From May 1988 to November 1990, Mr. Sprinzen was
employed by Ingres Corp., an RDBMS company, as Executive Vice President,
International Operations. From October 1986 to May 1988, Mr. Sprinzen was
President and Chief Executive Officer of NASTEC, Corp., a computer-aided
software engineering company. From July 1984 to October 1986, Mr. Sprinzen was
employed by Ingres Corp. as Vice President, Engineering. From December 1979 to
June 1984, Mr. Sprinzen was employed by Candle Corp., a mainframe software
management tools company, where his last position was Vice President,
Technology. Mr. Sprinzen holds a B.S. degree in electrical engineering from The
Cooper Union.
Paul Butterworth has served as Senior Vice President and Chief System
Architect of the Company since March 1991. From September 1990 to March 1991,
Mr. Butterworth was employed by Servio Corp., a manufacturer of object-oriented
database management systems, most recently as Vice President, Engineering. From
September 1980 to September 1990, Mr. Butterworth was employed by Ingres Corp.
where he served as Vice President, Engineering, and Chief Scientist. Mr.
Butterworth holds a B.S. degree and an M.S. degree in information and computer
science from the University of California, Irvine.
Michael Hedger has served as Senior Vice President, European
Operations, Managing Director-U.K. of the Company since September 1995. From
September 1994 to May 1995, Mr. Hedger was employed by Oracle Corporation, a
database software company, where his last position was Vice President, Marketing
Operations for Europe, the Middle East and Africa. From May 1989 to July 1994,
Mr. Hedger was employed by The ASK Group, Inc., a database tools and
applications company, most recently as Managing Director of the UK subsidiary
and Northern Europe. Mr. Hedger holds a degree in business studies from
Sheffield Polytechnic and a post-graduate degree in marketing studies from
Kingston Polytechnic.
Jay Shiveley has served as Senior Vice President, North American and
Australian Operations of the Company since December 1996. From March 1992 to
December 1996, Mr. Shiveley served as Vice President, Sales - North America and
Australia. From November 1986 to February 1992, Mr. Shiveley was employed by
Oracle Corp., most recently as Group Director, Federal Contractors and System
Integrators. From 1983 to 1986, Mr. Shiveley was National Sales Manager at
Lawson Associates, a supplier of financial application software for IBM's
System/38 and AS/400 market. From 1980 to 1983, Mr. Shiveley was employed by
Burroughs Corp. Mr. Shiveley holds a B.S. degree in finance and accounting from
Mankato State University.
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Jim Wambach has served as Vice President of Sales - North America since
December 1996. From January 1990 to December 1996, Mr. Wambach was employed by
Sybase, Inc., a database software company. Most recently he was Vice President
and General Manager for the Alliance Solutions Division. Previously at Sybase
Mr. Wambach held the positions of regional sales director and area vice
president. During his 20 year sales career, Mr. Wambach was vice President of
U.S. sales and support for Authorware, a vendor of multimedia business
solutions, a regional sales manager for Oracle Corporation; and held various
sales and management positions with D&B Computing Services. Mr. Wambach holds a
B.S. degree in business administration from Ohio State University.
Rodger Weismann has served as Senior Vice President, Finance and
Administration and Chief Financial Officer of the Company since February 1993.
Mr. Weismann has also served as Secretary of the Company since January 1996.
From January 1986 to January 1993, Mr. Weismann was employed by Banyan Systems,
Inc., a computer networking company, most recently as Executive Vice President,
Corporate Development and prior to that as Chief Financial Officer and Chief
Operating Officer. From May 1981 to November 1985, Mr. Weismann was employed by
McCormack & Dodge, a financial application software company, as Chief Financial
Officer. Mr. Weismann holds a B.S. degree in economics from Cornell University,
an M.B.A. from Dartmouth College and is a Certified Public Accountant.
Christos M. Cotsakos has been a director of the Company since October
1996. Since March 1996, Mr. Cotsakos has served as President, Chief Executive
Officer and a member of the board of directors of E*TRADE Group, a provider of
Internet-based stock brokerage services. From March 1995 to January 1996, Mr.
Cotsakos was employed by AC Nielsen, Inc. as President, Co-Chief Executive
Officer, Chief Operating Officer and a member of the board of directors. From
September 1993 to March 1995, Mr. Cotsakos was employed as President and Chief
Executive Officer of Nielsen International. From March 1992 to September 1993,
Mr. Cotsakos was President and Chief Operating Officer of Nielsen Europe, Middle
East and Africa. From 1973 to 1992, Mr. Cotsakos was employed by the Federal
Express Corporation and from 1988 to 1992 he held a number of senior executive
positions in the United States and Europe. Mr. Cotsakos currently serves as a
director of National Processing, Inc., a processor of merchant credit and debit
card transactions and a provider of check acceptance services in the United
States. A decorated Vietnam Veteran, Mr. Cotsakos holds a B.A. degree, cum
laude, from William Patterson College, and an M.B.A., summa cum laude, from
Pepperdine University.
Promod Haque has been a director of the Company since May 1992. Dr.
Haque joined Norwest Venture Capital Management, Inc., a venture capital firm,
in November 1990 and currently serves as its Vice President, and is also a
General Partner of Itasca Partners, which is the General Partner of Norwest
Equity Partners IV, L.P., a Minnesota Limited Partnership. Dr. Haque currently
serves as a director of Transaction Systems Architects, Inc., Prism Solutions,
Inc., Raster Graphics, Inc., Optical Sensors, Inc. and Connect, Inc.. Dr. Haque
holds a B.S.E.E. from the University of Delhi, India; and an M.S.E.E., a
Ph.D.E.E. and an M.B.A. from Northwestern University.
Thomas A. Jermoluk has been a director of the Company since February
1996. Mr. Jermoluk currently serves as President, Chief Executive Officer and as
Chairman of the board of directors of @Home, Inc., a distributor of high-speed
interactive services to residences and businesses using the cable industry's
hybrid-fiber coaxial (HFC) infrastructure and its own network architecture. From
1986 to 1996, Mr. Jermoluk was employed by Silicon Graphics, Inc., a
manufacturer of high performance visual computing systems, as President and a
member of its board of directors from 1994 to 1996, and as Chief Operating
Officer from 1992 to 1996. Mr. Jermoluk's other positions at Silicon Graphics
included Executive Vice President from 1991 to 1992 and Vice President/General
Manager, Advanced Systems Division, from 1988 to 1991. Mr. Jermoluk currently
serves as a director of Pure Atria. Mr. Jermoluk holds a B.S. degree in computer
science/electrical engineering and an M.S. degree in computer science from
Virginia Tech.
David N. Strohm has been a Director of the Company since February 1991.
Mr. Strohm joined Greylock Management Corporation ("Greylock"), a venture
capital management company, in 1980 and is a general partner of several venture
capital funds affiliated with Greylock. Mr. Strohm currently serves as a
director of Banyan Systems, Inc., Legato Systems, Inc. and MDL Information
Systems, Inc. Mr. Strohm holds a B.A. degree from Dartmouth College and an
M.B.A. from Harvard University.
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<PAGE>
William H. Younger, Jr., has been a director of the Company since
February 1991. Mr. Younger is a general partner of Sutter Hill Ventures, L.P., a
venture capital management firm, where he has been employed since 1981. Mr.
Younger currently serves as a director of COR Therapeutics, Inc., Celeritek,
Inc., and Oasis Health Care Systems. Mr. Younger holds a B.S.E.E. degree from
the University of Michigan and an M.B.A. from Stanford University.
BUSINESS RISKS
In evaluating the Company's business, readers should carefully consider
the business risks discussed in this section in addition to the other
information presented in this Annual Report on Form 10-K. This Annual Report on
Form 10-K 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," 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.
Limited Operating History; History of Operating Losses. The Company was founded
in February 1991 and first shipped product in August 1994. Although the
Company's revenues have increased in each of the last eleven quarters and the
Company had net income in each of the quarters ended December 31, 1995 through
March 31, 1997, the Company incurred net losses in each quarter from inception
through the quarter ended September 30, 1995, and had an accumulated deficit of
$15.5 million as of March 31, 1997. A substantial portion of the accumulated
deficit is due to the significant commitment of resources to the Company's
product development and sales organizations. The Company expects to continue to
devote substantial resources in these areas and as a result will need to
recognize significant quarterly revenues to achieve and maintain profitability.
There can be no assurance that any of the Company's business strategies will be
successful or the Company will be profitable in any future quarter or period.
Potential Fluctuations in Quarterly Operating Results; Uncertainty of Future
Operating Results; Seasonality; Potential Loss in Quarter Ending June 30, 1997.
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
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 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
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<PAGE>
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
quarter ending June 30 as a result of efforts by its direct sales force to meet
fiscal year-end sales quotas. As a result of this decline coupled with the
growth in operating expenses, the Company expects to incur a net loss for the
quarter ending June 30, 1997. 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 quarter ending
September 30 as a result of reduced sales activity in Europe during the summer
months.
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 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
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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.
Lengthy Sales Cycle. The Company's products are typically used to develop
applications that are critical to a customer's business and the purchase of the
Company's products is often part of a customer's larger business process
reengineering initiative or implementation of client/server computing. As a
result, the license and implementation of the Company's software products
generally involves a significant commitment of management attention and
resources by prospective customers. Accordingly, the Company's sales process is
often subject to delays associated with a long approval process that typically
accompanies significant initiatives or capital expenditures. For these and other
reasons, the sales cycle associated with the license of the Company's products
is often lengthy and subject to a number of significant delays over which the
Company has little or no control. There can be no assurance that the Company
will not experience these and additional delays in the future. Therefore, the
Company believes that its quarterly operating results are likely to vary
significantly in the future.
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 using a combination of first
generation application development tools and more powerful server programming
techniques such as stored procedures in relational databases, C or C++
programming, and networking and database middleware to connect the various
components. As such, the Company effectively experiences its primary competition
from potential customers' decisions to pursue this type of approach as opposed
to utilizing an application environment such as Forte. As a result, the Company
must continuously educate existing and prospective customers as to the
advantages of the Company's products. There can be no assurance that these
customers or potential customers will perceive sufficient value in the Company's
products to justify purchasing them.
The Company has experienced and expects to continue to experience
increased competition from current and future competitors, many of whom have
significantly greater financial, technical, marketing and other resources than
the Company. The Company's current competitors, include among others, Dynasty
Technologies, Inc., IBM Corporation, Informix Corporation, Microsoft
Corporation, NAT Systems, Inc., Oracle Corporation, Powersoft (a subsidiary of
Sybase, Inc.), Seer Technologies, Inc. and Texas Instruments Software. The
Company expects to compete increasingly with middleware companies that are
advocating a middleware-centric approach to building Internet applications, many
companies that have recently introduced, or are about to introduce, Web-based
tools targeting production Internet applications and other companies offering
packaged applications with specialized modification tools. The Company's
competitors may be able to respond more quickly to new or emerging technologies
and changes in customer requirements or devote greater resources to the
development, promotion and sale of their products than the Company. Also, many
current and potential competitors have greater name recognition and more
extensive customer bases that could be leveraged, thereby gaining market share
to the Company's detriment. The Company expects to face additional competition
as other established and emerging companies enter the 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.
19
<PAGE>
The principal competitive factors affecting the market for Forte are
ease of application development, deployment and management functionality and
features, product architecture, product performance, reliability and
scaleability, product quality, price and customer support. The Company 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.
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
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
material adverse effect on the Company's business, operating results and
financial condition.
Limited Deployment; Dependence on System Integrators. The Company first shipped
Forte in August 1994. To date, only a limited number of the Company's customers
have completed the development and deployment of 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 to develop, deploy and manage
distributed applications. If the Company is unable to adequately train a
sufficient number of system integrators or if, for any reason, a large number of
such integrators adopt a product or technology other than Forte, the Company's
business, operating results and financial condition would be materially and
adversely affected.
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. Despite extensive product
testing by the Company, the Company has discovered software errors in Release
2.0 and earlier versions of Forte after their introduction. Although the Company
has not experienced material adverse effects resulting from any such defects or
errors to date, there can be no assurance that, despite testing by the Company
and by current and potential customers, defects and errors will not be found in
current versions, new versions, new product or enhancements to existing products
after commencement of commercial shipments, resulting in loss
20
<PAGE>
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 condition.
Risks Associated with International Operations. Revenues from foreign
subsidiaries and export sales accounted for 17%, 26% and 36% of the Company's
total revenues in fiscal 1995, 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 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
21
<PAGE>
unauthorized use of the Company's products is difficult, and while the Company
is unable to determine the extent to which piracy of its software products
exists, software piracy can be expected to be a persistent problem. In addition,
the laws of some foreign countries do not protect the Company's proprietary
rights as fully as do the laws of the United States. There can be no assurance
that the Company's means of protecting its proprietary rights in the United
States or abroad will be adequate or that competition will not independently
develop similar technology. The Company has entered into source code escrow
agreements with a limited number of its customers and resellers requiring
release of source code in certain circumstances. Such agreements generally
provide that such parties will have a limited, non-exclusive right to use such
code in the event that there is a bankruptcy proceeding by or against the
Company, if the Company ceases to do business or if the Company fails to meet
its support obligations. In addition, Digital Equipment Corporation ("Digital"),
Sequent Computer Systems, Inc. ("Sequent") and Mitsubishi Corporation
("Mitsubishi") each currently possesses copies of Forte source code for certain
limited purposes, subject to the terms of separate written agreements each
company has entered into with the Company. Digital and Sequent each has an
option to purchase a non-exclusive, fully-paid license of the Forte source code.
Digital's option becomes exercisable if the Company is acquired and the acquiror
fails to agree to assume the Company's contractual obligations to Digital, and
Sequent's option is exercisable if the Company is acquired by certain Sequent
competitors. The provision of source code may increase the likelihood of
misappropriation by third parties.
The Company is not aware that it is infringing any proprietary rights
of third parties. There can be no assurance, however, that third parties will
not claim infringement by the Company of their intellectual property rights. The
Company expects that software product developers will increasingly be subject to
infringement claims as the number of products and competitors in the Company's
industry segment grows and the functionality of products in different industry
segments overlaps. Any such claims, with or without merit, could be time
consuming to defend, result in costly litigation, divert management's attention
and resources, cause product shipment delays or require the Company to enter
into royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to the Company, if at all. In
the event of a successful claim of product infringement against the Company and
failure or inability of the Company to license the infringed or similar
technology, the Company's business, operating results and financial condition
would be materially adversely affected.
The Company relies upon certain software that it licenses from third
parties, including software that is integrated with the Company's internally
developed software and used in Forte to perform key functions. There can be no
assurance that these third-party software licenses will continue to be available
to the Company on commercially reasonable terms. The loss of, or inability to
maintain, any such software licenses could result in shipment delays or
reductions until equivalent software could be developed, identified, licensed
and integrated which would materially adversely affect the Company's business,
operating results and financial condition.
Volatility of Stock Price. The Company's Common Stock has experienced
significant price volatility and such volatility may occur in the future.
Factors, such as announcements of the introduction of new products by the
Company or its competitors and quarter-to-quarter variations in the Company's
operating results, as well as market conditions in the technology and emerging
growth company sectors, may have a significant impact on the market price of the
Company's Common Stock. Further, the stock market has experienced extreme
volatitility that has particularly affected the market prices of equity
securities of many high technology companies and that often has been unrelated
or disproportionate to the operating performance of such companies. These market
fluctuations may adversely affect the price of the Common Stock.
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. In addition, under certain circumstances,
including an acquisition, the Company may be required to release its source code
to third parties. This requirement could discourage potential acquisition
proposals for the Company.
22
<PAGE>
ITEM 2. PROPERTIES
The Company's principal administrative, sales, marketing, and product
development facility occupies approximately 68,800 square feet in Oakland,
California pursuant to a lease and sublease which expires June 2000.
Additionally, the company has a contract to lease an additional 60,800 feet
commencing in February 1998 and expiring in June 2000, for a total of 129,600
square feet leased and occupied at the Oakland location by the end of fiscal
year 1998. The Company also leases sales and support offices in Phoenix, AZ, Los
Angeles, CA, San Diego, CA, Denver, CO, Shelton, CT, Atlanta, GA, Oakbrook, IL,
Wakefield, MA, Rockville, MD, Southfield, MI, Minneapolis, MN, Iselin, NJ,
NewYork, NY, Syracuse, NY, W. Conshohocken, PA, Dallas, TX, Houston, TX and
Bellevue, WA. The Company also maintains international offices in Australia,
Canada, France, Germany, and the United Kingdom. The Company believes that its
existing facilities are adequate for its current needs and that suitable
additional or alternative space will be available in the future on commercially
reasonable terms as needed.
ITEM 3. LEGAL PROCEEDINGS
The Company is not aware of any pending or threatened litigation that
could have a material adverse effect upon the Company's business, operating
results or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of fiscal 1997.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is traded over-the-counter on the Nasdaq
National Market under the symbol "FRTE." The Company commenced its initial
public offering of Common Stock on March 11, 1996 at a price $21 per share.
Prior to such date, there was no public market for the Common Stock. The
following table sets forth the high and low closing sale prices for the Common
Stock for the periods indicated, as reported on the Nasdaq National Market.
High Low
---- ---
Fourth Quarter of fiscal year 1996 (from March 12, 1996).... $40.50 $35.88
First Quarter of fiscal year 1997........................... $81.75 $37.75
Second Quarter of fiscal year 1997.......................... $56.00 $27.25
Third Quarter of fiscal year 1997........................... $45.25 $31.50
Fourth Quarter of fiscal year 1997.......................... $38.13 $21.88
At May 31, 1997, there were 433 stockholders of record, representing
approximately 9000 shareholder accounts, of the Company's common stock, as shown
in the records of the Company's transfer agent. The Company has not paid any
cash dividends on its capital stock since its inception, and does not expect to
pay cash dividends on its Common Stock in the foreseeable future.
On May 16, 1997, the Board of Directors of the Company declared a
dividend distribution of one Preferred Share Purchase Right on each outstanding
share of its common stock. Each Right will entitle stockholders to buy one
one-thousandth of a share of newly created Series A Junior Participating
Preferred Stock of the Company at an exercise price of $125.00. The Rights will
be exercisable if a person or group hereafter becomes the beneficial owner of
15% or more of the Common Stock of the Company or announces a tender or exchange
offer for 15% or more of the Common Stock. The Board of Directors will be
entitled to redeem the Rights at one cent per Right at any time before any such
person hereafter becomes the beneficial owner of 15% or more of the outstanding
Common Stock.
23
<PAGE>
The Rights are not being distributed in response to any specific effort
to acquire the Company. The Rights are designed to assure that all stockholders
of the Company receive fair and equal treatment in the event of any proposed
takeover of the Company and to guard against two-tier or partial tender offers,
open market accumulations and other tactics designed to gain control of the
Company without paying all shareholders a fair price.
If a person hereafter becomes the beneficial owner of 15% or more of
the outstanding Common Stock of the Company, each Right will entitle its holder
to purchase, at the Right's exercise price, a number of shares of common Stock
having a market value of twice the Right's exercise price. Rights held by the
15% holder will become void and will not be so exercisable. If the Company is
acquired in a merger or other business combination transaction after a person
becomes the beneficial owner of 15% or more of the Company's Common Stock, each
Right will entitle its holder to purchase, at the Right's then-current exercise
price, a number of the acquiring company's common shares having at that time of
twice the Right's exercise price. The dividend distribution will be payable to
stockholders of record on June 3, 1997. The Rights will expire in 2007. The
Rights distribution is not taxable to shareholders. See the section entitled
"Business Risks" in Item 1 under the caption "Effect of Certain Charter
Provisions; Anti-takeover Effects of Rights Plan, Certificate of Incorporation,
Delaware Law and Certain Agreements."
24
<PAGE>
<TABLE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in conjunction
with the Company's consolidated financial statements and related notes thereto
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in Item 7. The consolidated statement of operations data
for each of the three years in the period ended March 31, 1997 and the
consolidated balance sheet data at March 31, 1996 and 1997 are derived from the
audited consolidated financial statements included elsewhere in Item 8. The
consolidated statement of operations data for each of the two years in the
period ended March 31, 1994 and the consolidated balance sheet data at March 31,
1993, 1994 and 1995 are derived from audited consolidated financial statements
not included in this Annual Report on Form 10-K.
<CAPTION>
Years Ended March 31,
---------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Operations Data:
Revenues:
License ................................................... $_ $_ $ 7,974 $ 21,357 $ 43,595
Maintenance and service ................................... _ 39 2,033 8,688 19,456
-------- -------- -------- -------- --------
Total revenues ......................................... _ 39 10,007 30,045 63,051
Cost of revenues:
License ................................................... _ _ 142 456 665
Maintenance and service ................................... _ 36 2,000 5,452 11,796
-------- -------- -------- -------- --------
Total cost of revenues ................................. _ 36 2,142 5,908 12,461
-------- -------- -------- -------- --------
Gross profit ................................................. _ 3 7,865 24,137 50,590
-------- -------- -------- -------- --------
Operating expenses:
Sales and marketing ....................................... 1,112 2,594 7,869 15,060 28,560
Product development and engineering ....................... 2,324 4,679 5,515 8,069 10,611
General and administrative ................................ 745 887 1,874 3,168 5,119
-------- -------- -------- -------- --------
Total operating expenses ............................... 4,181 8,160 15,258 26,297 44,290
-------- -------- -------- -------- --------
Income (loss) from operations ................................ (4,181) (8,157) (7,393) (2,160) 6,300
Other income, net ............................................ 94 97 147 286 1,988
-------- -------- -------- -------- --------
Income (loss) before income taxes ............................ (4,087) (8,060) (7,246) (1,874) 8,288
Provision for income taxes ................................... _ _ (104) (114) (1,039)
-------- -------- -------- -------- --------
Net income (loss) ............................................ $ (4,087) $ (8,060) $ (7,350) $ (1,988) $ 7,249
-------- -------- -------- -------- --------
Pro forma net income (loss) per share (1) .................... $ (0.45) $ (0.11) $ 0.34
======== ======== ========
Shares used in pro forma income (loss) per share (1) ......... 16,248 17,517 21,110
</TABLE>
<TABLE>
<CAPTION>
March 31,
---------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash, cash equivalents and short-term investments ............ $ 3,064 $ 5,937 $12,775 $41,317 $48,257
Working capital .............................................. 2,634 3,044 10,070 39,714 43,655
Total assets ................................................. 3,864 7,131 18,142 57,291 73,749
Capital lease obligations, due after one year ................ 361 583 834 1,714 849
Total stockholders' equity ................................... 810 1,821 7,449 40,044 48,674
<FN>
(1) See Note 1 to Notes to Consolidated Financial Statements
</FN>
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and results of
Operations includes a number of forward-looking statements which reflect the
Company's current views with respect to future events and financial performance.
In this report, the words "anticipate," "believes," "expects," "intends,"
"future," and other similar expressions identify forward looking statements.
These forward-looking statements are subject to certain risks and uncertainties,
including those discussed below and in "Business Risks," that could cause actual
results to differ materially from historical results or those anticipated.
Overview
The Company was founded in February 1991 to design, develop and market
a distributed client/server application development, deployment and management
environment. To date, all of the Company's revenues have been derived from
licenses of the Company's primary product, Forte and related products as well as
related maintenance, training and consulting revenues. The Company began
shipping Release 1.0 of Forte in August 1994 and Release 2.0 in November 1995.
The Company has announced Release 3.0 which is currently in beta testing. The
Company currently expects that revenues from Forte and related products and
services will continue to account for substantially all of the Company's
revenues for fiscal 1998. As a result, factors adversely affecting the pricing
of or demand for Forte and related products and services could have a material
adverse effect on the Company's business, operating results and financial
condition.
Although the Company's revenues have increased in each of the last
eleven quarters and the Company had net income in each of the quarters ended
December 31, 1995 through March 31, 1997, the Company expects to incur a loss
for the quarter ending June 30, 1997 due primarily to an expected seasonal
decline in revenues as compared to the quarter ending March 31, 1997 coupled
with more rapid growth in sales and marketing expenses. The Company's limited
operating history makes the prediction of future operating results difficult.
Accordingly, although the Company has recently experienced revenue growth, such
growth should not be considered indicative of future revenue growth, if any, or
of future operating results. There can be no assurance that any of the Company's
business strategies will be successful or that the Company will be able to
maintain profitability on a quarterly or annual basis.
The Company's total headcount was 119, 221 and 351 March 31, 1995, 1996
and 1997, respectively. The growth in headcount is attributable to the Company's
significant expansion in all of its operations, especially in sales and
marketing.
Forte licenses its software through its direct sales force,
distributors and value added resellers. Revenues from distributors and resellers
accounted for approximately 15%, 18% and 20% of the Company's total revenues for
fiscal 1995, 1996 and 1997, respectively. The Company's ability to achieve
significant revenue growth in the future will depend in large part on its
success in recruiting and training sufficient direct sales personnel and
establishing additional relationships with distributors, resellers and system
integrators.
Results of Operations
Revenues. The Company's total revenues consist of license fees for its Forte
application environment 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 probable. 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. See Note 1 to Notes to
Consolidated Financial Statements Allowances for credit risks and for estimated
future returns are provided for upon 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.
26
<PAGE>
The Company's total revenues increased from $10.0 in fiscal 1995 to
$30.0 million in fiscal 1996 and by 110% to $63.1 million in fiscal 1997.
License revenues increased 168% to $21.4 million in fiscal 1996 from $8.0
million in fiscal 1995 and increased by 104% to $43.6 million in fiscal 1997.
These increases in license fees are primarily as a result of an increase in the
number of licenses sold reflecting increased market awareness and acceptance of
Forte software and related products, expansion of the Company's direct sales
organization both domestic and international and increased sales from
international distributors.
Maintenance and service revenues increased from $2.0 million in fiscal
1995 to $8.7 million in fiscal 1996, and increased by 124% to $19.5 million in
fiscal 1997. These increases in maintenance and service revenues were primarily
a result of the growing installed base of Forte and related products and the
associated increase in demand for maintenance, training and consulting services.
International revenues include all revenues other than from the United
States. International revenues from the Company's direct sales organizations in
Europe and Australia and export sales through distributors and resellers in
Europe, Asia and other areas of the world, as well as international sales made
by the domestic direct sales organization, accounted for 17%, 26% and 36% of
total revenues in fiscal 1995, 1996 and 1997, respectively. Direct sales through
the Company's European and Australian subsidiaries totaled $796,000, $2.4
million and $13.0 million for the years ended March 31, 1995, 1996 and 1997,
respectively. The table below sets forth the Company's export sales data from
the U.S. for the years ended March 31, 1995, 1996 and 1997. See Note 1 of Notes
to Consolidated Financial Statements.
Years Ended March 31,
---------------------
1995 1996 1997
---- ---- ----
Export Sales:
Asia................. $187,000 $1,031,000 $3,068,000
Europe............... 351,000 2,593,000 2,650,000
Canada............... 168,000 876,000 2,977,000
Other................ 184,000 812,000 1,216,000
------- ------- ---------
Total $890,000 $5,312,000 $9,911,000
The Company expects that international license and related maintenance
and service revenues will continue to account for a significant portion of its
total revenues in the future. The Company believes that in order to increase
sales opportunities and profitability it will be required to expand its
international operations. The Company has committed and continues to commit
significant management time and financial resources to developing direct and
indirect international sales and support channels. There can be no assurance,
however, that the Company will be able to maintain or increase international
market demand for Forte 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.
The Company's license agreements typically require the payment of a
nonrefundable, one-time license fee for a license of perpetual term. Customers
make separate payments for annual maintenance and other services. Customers can
terminate the license at any time but do not have a right to a refund of the
fees for licenses and for services that have been performed. The Company can
terminate the license agreement only upon a material breach by the other party,
provided that the breach is not cured within a specified cure period.
Cost of Revenues
Cost of License Revenues. Cost of license revenues consists primarily of
royalties paid to third-party vendors, product packaging, documentation and
production and shipping costs. Cost of license revenues was $142,000 and
$456,000 and $665,000 in fiscal 1995, 1996 and 1997, respectively, each
representing 2% of license revenues for the respective periods.
27
<PAGE>
Cost of Maintenance and Service Revenues. Cost of maintenance and service
revenues consists primarily of personnel-related and facilities costs incurred
in providing customer support, training and consulting services, as well as
third-party costs incurred in providing training and consulting services. Cost
of maintenance and service revenues was $2.0 million, $5.5 million and $11.8
million in fiscal 1995, 1996 and 1997, respectively, representing 98%, 63% and
61% of maintenance and service revenues in the respective periods. The high
percentage of cost of maintenance and service revenues as a percentage of the
related revenue for fiscal 1995 resulted from the addition of training, support
and consulting personnel in anticipation of an increase in the demand for these
services. The decrease in cost of maintenance and service revenues for fiscal
1996 and 1997 as a percentage of maintenance and service revenues was primarily
due to improved economies of scale of the technical support center and increased
productivity from a significant number of newly hired training, support and
consulting personnel. The Company does not expect its cost of maintenance and
service revenues to continue to decrease materially as a percentage of
maintenance and service revenues.
Operating Expenses
Sales and Marketing. Sales and marketing expenses consist primarily of salaries,
commissions and bonuses earned by sales and marketing personnel, field office
expenses, travel and entertainment and promotional expenses. Sales and marketing
expenses increased from $7.9 million in fiscal 1995 to $15.1 million in fiscal
1996 and to $28.6 million in fiscal 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 activities. Sales and
marketing expenses represented 79%, 50% and 45% of total revenues in fiscal
1995, 1996 and 1997, respectively. The decrease in sales and marketing expenses
for fiscal 1996 and 1997 as a percentage of total revenue was primarily due to
revenue growth. The Company expects that sales and marketing expenses will
continue to increase in dollar amount as the Company continues to hire
additional sales and marketing personnel and increase promotional activities in
fiscal 1998. The company expects to increase hiring in the direct sales force
and as a result, sales expense as a percentage of revenue is expected to be
greater in the first and second quarter of fiscal year 1998 compared to fiscal
1997.
Product Development. The Company believes that a significant level of investment
for product development is required to remain competitive. Product development
expenses increased from $5.5 million in fiscal 1995 to $8.1 million in fiscal
1996 and to $10.6 million in fiscal 1997. These increases were primarily
attributable to additional hiring of product development personnel. Product
development expenses represented 55%, 27% and 17% of total revenues in fiscal
1995, 1996 and 1997, respectively. The decrease in research and development
expenses as a percentage of total revenue was primarily due to revenue growth.
The Company anticipates that it will continue to devote substantial resources to
product development and that product development expenses will increase in
dollar amount in fiscal 1998. Because all costs incurred in the research and
development of software products and enhancements to existing software products
have been expensed as incurred, cost of license revenues includes no
amortization of capitalized software development costs. See Note 1 of Notes to
Consolidated Financial Statements.
General and Administrative. General and administrative expenses increased from
$1.9 million in fiscal 1995 to $3.2 million in fiscal 1996 and to $5.1 million
in fiscal 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 19%, 11%
and 8% of total revenues in fiscal 1995, 1996 and 1997, respectively. The
decrease in general and administrative expenses as a percentage of total revenue
was primarily due to revenue growth and improved economies of scale. The Company
believes that its general and administrative expenses will increase in dollar
amount in fiscal 1998 as a result of an expansion of the Company's
administrative staff and information systems infrastructure to support the
Company's growth.
Other Income, Net. Other income, net, represents interest earned by the Company
on its cash and cash equivalents and short-term investments offset by interest
expense on capitalized leases. See Note 6 of Notes to Consolidated Financial
Statements.
Provision for Income Taxes. The effective tax rate for the year ended March 31,
1997 was 13%. The provision for income taxes was due to state and federal
alternative minimum taxes and foreign withholding taxes. The effective tax rate
differs from the federal statutory rate primarily due to the utilization of net
operating loss carryovers and tax credits.
28
<PAGE>
At March 31, 1997, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $13,266,000 which expire in tax
years 2007 through 2010, a federal research and development tax credit
carryforward of approximately $1,719,000 which expires in tax years 2005 through
2011 and a foreign tax credit carryforward of approximately $757,000 which
expires in tax years 1999 through 2001.
Liquidity and Capital Resources
The Company has funded its operations and investments in furniture and
equipment through an initial public offering of common stock on March 11, 1996
with net proceeds of $34.3 million, the private sale of equity securities
totaling approximately $28.3 million, furniture and equipment leases of
approximately $4.1 million and cash advances from development partners. Since
inception, the Company has received $6.9 million from development partners and
as of March 31, 1997, the Company had repaid, through a variety of royalty and
other arrangements, an aggregate of $5.7 million of such advances. Net cash
generated by operating activities was $11.5 million in fiscal 1997 and net cash
used in operating activities was $5.1 million and $3.4 million in fiscal 1995
and 1996, respectively. Net cash generated in fiscal 1997 resulted primarily
from net income, depreciation and amortization, increases in short term
liabilities, somewhat offset by an increase in accounts receivable. For fiscal
1995 and 1996, net cash used in operating activities resulted primarily from net
losses and increases in accounts receivable associated with increases in
revenues, partially offset by increases in deferred revenues, accounts payable
and accrued liabilities. The Company's accounts receivable balance decreased to
91% of total revenues for the quarter ended March 31, 1997 from 99% of total
revenues for the quarter ended March 31, 1996. This decrease resulted primarily
from increased collection efforts and the timing of payments received. This
percentage could vary significantly on a quarterly or yearly basis and may not
be indicative of future operating results.
In 1995, 1996 and 1997, the Company's investing activities have
consisted primarily of purchases of furniture and equipment and short-term
investments. Capital expenditures, including those under capital leases, totaled
$1.3 million, $3.4 million and $5.0 million in fiscal 1995, 1996 and 1997,
respectively, to acquire furniture and equipment and computer hardware for the
Company's growing employee base. The Company expects that its capital
expenditures will increase as the Company's employee base grows. At March 31,
1997 the Company did not have any material commitments for capital expenditures.
At March 31, 1997, the Company had $48.3 million in cash and cash
equivalents and short term investments and $43.7 million in working capital. The
Company believes that its existing cash, cash equivalents and short-term
investments will be adequate to meet its cash needs for at least the next 12
months. Thereafter, the Company may require additional funds to support its
working capital requirements or for other purposes and may seek to raise such
additional funds through public or private equity financings or from other
sources. There can be no assurance that additional financing will be available
at all or that, if available, such financing will be obtainable on terms
favorable to the Company and would not be dilutive.
29
<PAGE>
<TABLE>
Quarterly Results
The following tables set forth certain unaudited consolidated statement
of operations data for the eight quarters ended March 31, 1997, as well as such
data expressed as a percentage of the Company's total revenues for the periods
indicated. This data has been derived from unaudited condensed consolidated
financial statements that, in the opinion of management, include all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of such information. Such statement of operations data should be
read in conjunction with the Company's audited consolidated financial statements
and notes thereto. See the section entitled "Business Risks" in Item 1 for risk
factors.
<CAPTION>
Quarter Ended
-------------
(in thousands except per share data)
June 30, Sept. 30, Dec. 31, March 31, June 30, Sept. 30, Dec. 31, March 31,
1995 1995 1995 1996 1996 1996 1996 1997
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Revenues:
License........ $3,071 $3,623 $6,196 $8,467 $8,023 $9,833 $12,205 $13,534
Maintenance and service 1,309 2,174 2,530 2,675 3,657 4,381 5,368 6,050
----- ----- ----- ----- ----- ----- ----- -----
Total revenues 4,380 5,797 8,726 11,142 11,680 14,214 17,573 19,584
----- ----- ----- ------ ------ ------ ------ ------
Cost of revenues:
License........ 95 110 127 124 138 128 228 171
Maintenance and service 946 1,236 1,446 1,824 2,378 2,542 3,211 3,665
--- ----- ----- ----- ----- ----- ----- -----
Total cost of revenues 1,041 1,346 1,573 1,948 2,516 2,670 3,439 3,836
----- ----- ----- ----- ----- ----- ----- -----
Gross profit 3,339 4,451 7,153 9,194 9,164 11,544 14,134 15,748
----- ----- ----- ----- ----- ------ ------ ------
Operating expenses:
Sales and marketing 2,980 3,117 3,820 5,143 5,765 6,601 7,697 8,497
Product development and engineering 1,688 1,980 2,155 2,246 2,284 2,565 2,784 2,978
General and administrative 631 823 831 883 1,279 1,248 1,250 1,342
--- --- --- --- ----- ----- ----- -----
Total operating expenses 5,299 5,920 6,806 8,272 9,328 10,414 11,731 12,817
----- ----- ----- ----- ----- ------ ------ ------
Income (loss) from operations (1,960) (1,469) 347 922 (164) 1,130 2,403 2,931
Other income (expense), net 104 60 10 112 489 520 488 491
--- -- -- --- --- --- --- ---
Income (loss) before income taxes (1,856) (1,409) 357 1,034 325 1,650 2,891 3,422
Provision for income taxes (17) (6) (12) (79) (32) (205) (342) (460)
---- --- ---- ---- ---- ----- ----- -----
Net income (loss)....... $(1,873) $(1,415) $345 $955 $293 $1,445 $2,549 $2,962
======== ======== ==== ==== ==== ====== ====== ======
$0.02 $0.05 $0.01 $0.07 $0.12 $0.14
===== ===== ===== ===== ===== =====
Net income per share
18,920 19,225 21,136 21,078 21,156 21,068
====== ====== ====== ====== ====== ======
</TABLE>
<TABLE>
Shares used in per share calculation
<CAPTION>
As a Percentage of Total Revenues
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
License........ 70.1 % 62.5 % 71.0% 76.0% 68.7% 69.2% 69.4% 69.1%
Maintenance and service 29.9 37.5 29.0 24.0 31.3 30.8 30.6 30.9
---- ---- ---- ---- ---- ---- ---- ----
Total revenues 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- ----- ----- ----- -----
Cost of revenues:
License........ 2.2 1.9 1.5 1.1 1.2 0.9 1.3 0.9
Maintenance and service 21.6 21.3 16.5 16.4 20.4 17.9 18.3 18.7
---- ---- ---- ---- ---- ---- ---- ----
Total cost of revenues 23.8 23.2 18.0 17.5 21.5 18.8 19.6 19.6
---- ---- ---- ---- ---- ---- ---- ----
Gross profit...... 76.2 76.8 82.0 82.5 78.5 81.2 80.4 80.4
---- ---- ---- ---- ---- ---- ---- ----
Operating expenses:
Sales and marketing 68.0 53.8 43.8 46.2 49.4 46.5 43.8 43.4
Product development and engineering 38.5 34.1 24.7 20.2 19.6 18.0 15.8 15.2
General and administrative 14.4 14.2 9.5 7.9 10.9 8.8 7.1 6.8
---- ---- --- --- ---- --- --- ---
Total operating expenses 120.9 102.1 78.0 74.3 79.9 73.3 66.7 65.4
----- ----- ---- ---- ---- ---- ---- ----
Income (loss) from operations (44.7) (25.3) 4.0 8.3 (1.4) 7.9 13.7 15.0
Other income (expense), net 2.4 1.0 0.1 1.0 4.2 3.7 2.8 2.5
--- --- --- --- --- --- --- ---
Income (loss) before income taxes (42.4) (24.3) 4.1 9.3 2.8 11.6 16.5 17.5
Provision for income taxes (0.4) (0.1) (0.1) (0.7) (0.3) (1.4) (1.9) (2.4)
----- ----- ----- ----- ----- ----- ----- -----
Net income (loss).............. (42.8)% (24.4)% 4.0% 8.6% 2.5% 10.2% 14.6% 15.1%
======= ======= ==== ==== ==== ===== ===== =====
</TABLE>
<PAGE>
The Company's total revenues have increased in each quarter following
commercial release of its software in August 1994. The increase in each quarter
is due to increased market awareness and acceptance of the Company's software,
expansion of the Company's direct and indirect sales organizations and increased
maintenance and service revenues reflecting the growth in the installed base.
Operating expenses have generally increased in dollar amount over the quarters
shown as the Company has increased staffing in sales and marketing, product
development and general and administrative functions.
Revenues in the quarter ended March 31, 1997 increased 76% to $19.6
million from $11.1 million in the quarter ended March 31, 1996, reflecting
increased sales to new and existing customers primarily as a result of increased
market awareness and acceptance of the Company's products, expansion of the
Company's direct salesforce and increased sales through distributors. Revenues
for the quarter ended March 31, 1997 included a follow-on sale to an existing
customer for $5.5 million. License revenues in the fourth quarter of fiscal 1997
increased to $13.5 million (69% of total revenues) from $8.5 million (76% of
total revenues) in the fourth quarter of fiscal 1996. Maintenance and service
revenues increased to $6.1 million in the fourth quarter of fiscal 1997 from
$2.7 million in the fourth quarter of fiscal 1996. International revenues
increased to $6.7 million in the fourth quarter of fiscal 1997 from $3.3 million
in the fourth quarter of fiscal 1996 primarily as a result of expanded direct
and indirect international operations.
Cost of revenues for the fourth quarter of fiscal 1997 increased to
$3.8 million (20% of total revenues) from $1.9 million (17% of total revenues)
in the fourth quarter of fiscal 1996, primarily as a result of an increase in
cost of services attributable to the hiring of additional consulting, customer
service and training personnel during fiscal 1997 as well as the addition of
facilities for training and consulting operations.
Sales and marketing expenses increased to $8.5 million for the fourth
quarter of fiscal 1997 from $5.1 million in the fourth quarter of fiscal 1996.
The increase was due primarily to costs associated with expanded domestic and
international sales operations. Product development and engineering and general
and administrative expenses increased in dollar amounts primarily due to
increased hiring to support the Company's growth.
As a result of the foregoing, income before taxes increased to $3.4
million for the fourth quarter of fiscal 1997 from $1.0 million in the fourth
quarter of fiscal 1996, and net income increased to $3.0 million from $1.0
million.
31
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14(a) for an index to the financial statements and supplementary
financial information which are attached hereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors is incorporated herein by reference from the
section entitled "Election of Directors" of the Company's proxy statement to be
filed pursuant to Regulation 14A for its Annual Stockholders Meeting to be held
August 12, 1997.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding directors is incorporated herein by reference from the
section entitled "Executive Compensation" of the Company's proxy statement to be
filed pursuant to Regulation 14A for its Annual Stockholders Meeting to be held
August 12, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding directors is incorporated herein by reference from the
section entitled "Stock Ownership of Certain Beneficial Owners and Management"
of the Company's proxy statement to be filed pursuant to Regulation 14A for its
Annual Stockholders Meeting to be held August 12, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding directors is incorporated herein by reference from the
section entitled "Stock Ownership of Certain Beneficial Owners and Management,"
"Executive Compensation," and "Transactions with Management" of the Company's
proxy statement to be filed pursuant to Regulation 14A for its Annual
Stockholders Meeting to be held August 12, 1997.
32
<PAGE>
PART IV
<TABLE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Annual Report on Form 10-K:
<CAPTION>
<S> <C>
1. Financial Statements Page Number
Report of Ernst & Young, LLP, Independent Auditors Consolidated Balance
Sheets as of March 31, 1997 and 1996
Consolidated Income Statements for each of the
three years in the period ended March 31, 1997
Consolidated Statements of Stockholders' Equity for
each of the three years in the period ended
March 31, 1997
Consolidated Statements of Cash Flows for each of the three years in
the period ended March 31, 1997
Notes to Consolidated Financial Statements
2. Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the
consolidated financial statements or notes thereto.
3. Exhibits - See Item 14(c) below
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the quarter ended March
31, 1997.
</TABLE>
33
<PAGE>
<TABLE>
(c) Exhibits
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
2.1 Agreement and Plan of Merger dated January 22, 1996, for the reincorporation merger of Forte Software, Inc., a
California corporation, into Forte Software, Inc., a Delaware corporation (the "Registrant").(1)
3.1 Certificate of Incorporation of Registrant, as amended to date.(1)
3.2 Bylaws of Registrant.(1)
4.1 Specimen Common Stock certificate.(1)
4.3 Amended and Restated Investors' Rights Agreement among Registrant and the Founders and Investors specified
therein dated as of October 6, 1994. (1)
4.3 Rights Agreement dated May 16, 1997.
4.4 1997 Stock Plan.
10.1 Form of Indemnification Agreement entered into by and between Registrant and its officers and directors.(1)
10.2 Registrant's 1991 Equity Incentive Plan.(1)
10.3 Registrant's 1996 Stock Option Plan.(1)
10.4 Registrant's Employee Stock Purchase Plan.(1)
10.5 Loan and Security Agreement by and between Registrant and Silicon Valley Bank dated as of September 20, 1994, as
modified August 1, 1994. (1)
10.6 Real property lease by and between Registrant and State of California Public Employee's Retirement System dated
December 1, 1994. (1)
10.7 Master Lease Agreement and Warrant Agreement by and between Registrant and Comdisco,
Inc. dated as of December 28, 1992, as modified by subsequent Equipment Schedules and
Warrant Agreements dated May 9, 1994 and February 15, 1995, and Equipment Schedule
dated January 17, 1996. (1)
10.8 Software Agreement between Digital Equipment Corporation and Registrant dated July 21,
1992, as amended. (1) (2)
10.9 Source Code License and Master Distributor Agreement between Registrant and Mitsubishi
Corporation dated September 26, 1994. (1) (2)
10.10 Strategic Software Development and Distribution Agreement between Sequent Computer
Systems, Inc. and Registrant dated August 6, 1992, as amended. (1) (2)
10.11 Amendment to Real property lease by and between Registrant and State of California Public Employee's Retirement
System dated December 1, 1994 and amended on January 16, 1997.
10.12 Real property sublease by and between Registrant and ICF Kaiser Engineers, Inc. dated January 16, 1997.
11.1 Computation of net income (loss) per share.
16.1 Letter regarding change in certifying accountant (3)
21.1 Subsidiaries of Registrant. (3)
23.1 Consent of Ernst & Young, LLP, Independent Auditors. (3)
23.2 Consent of Counsel. Reference is made to Exhibit 5.1 (1)
24.1 Power of Attorney.
27.1 Financial data schedule
<FN>
(1) Incorporated by reference to the exhibit of the same number filed with Registrant's Form S-1 Registration Statement (File No.
333-598).
(2) Confidential treatment has been requested with respect to certain portions of this exhibit. Omitted portions have been filed
separately with the Securities and Exchange Commission.
(3) Previously filed in the Company's 1996 Report on Form 10-K and has either no change from the prior year or is no longer
required.
</FN>
</TABLE>
34
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, as amended,
the Registrant has duly caused this Report on Form 10-K to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Oakland,
State of California, on this 26th day of June, 1997.
FORTE SOFTWARE, INC.
By: /s/ RODGER E. WEISMANN
Rodger E. Weismann
Senior Vice President, Finance and Administration,
Chief Financial Officer and Secretary
KNOW BY ALL PERSONS BY THESE PRESENTS that each individual whose
signature appears below constitutes and appoints Martin J. Sprinzen and Rodger
E. Weismann, and each of them, his true and lawful attorneys-in-fact and agents
with full power of substitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments to this Report on Form
10-K, and to file the same, with all exhibits thereto and all documents
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or his or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
<TABLE>
Pursuant to the requirements of the Securities Act of 1934, as amended,
this report has been signed by the following persons in the capacities and on
the date indicated.
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ MARTIN J. SPRINZEN President, Chief Executive Officer and Director June 26, 1997
--------------------------------- (Principal Executive Officer)
Martin J. Sprinzen
/s/ RODGER E. WEISMANN Senior Vice President, Finance and Administration, June 26, 1997
--------------------------------- Chief Financial Officer and Secretary (Principal
Rodger E. Weismann Financial and Accounting Officer)
/s/ CHRISTOS M. COTSAKOS Director June 26, 1997
---------------------------------
Christos M. Cotsakos
/s/ PROMOD HAQUE Director June 26, 1997
---------------------------------
Promod Haque
/s/ THOMAS A. JERMOLUK Director June 26, 1997
---------------------------------
Thomas A. Jermoluk
/s/ DAVID N. STROHM Director June 26, 1997
---------------------------------
David N. Strohm
/s/ WILLIAM H. YOUNGER, JR. Director June 26, 1997
---------------------------------
William H. Younger, Jr.
</TABLE>
35
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors and Stockholders
Forte Software, Inc.
We have audited the accompanying consolidated balance sheets of Forte Software,
Inc. as of March 31, 1996 and 1997, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended March 31, 1997. Our audits also include the financial schedule
listed in the Index at Item 14(a). These financial statements and schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Forte
Software, Inc. at March 31, 1996 and 1997, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
March 31, 1997, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, present fairly
in all material respects the information set forth therein.
Walnut Creek, California
April 24, 1997
<PAGE>
<TABLE>
Forte Software, Inc.
Consolidated Balance Sheets
(in thousands, except share and per share amounts)
<CAPTION>
March 31,
----------------------
1996 1997
---------- ---------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 35,081 $ 35,103
Short-term investments 6,236 13,154
Accounts receivable, net of allowances of $941 ($531 in 1996) 11,059 17,750
Prepaid expenses and other current assets 839 1,003
-------- --------
Total current assets 53,215 67,010
Equipment and leasehold improvements, net 3,903 6,489
Other assets 173 250
-------- --------
Total assets $ 57,291 $ 73,749
======== ========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 1,066 $ 3,003
Accrued compensation and related expenses 2,881 6,191
Other accrued liabilities 2,529 3,999
Deferred revenue 5,941 9,247
Current portion of capital lease obligations 1,084 915
-------- --------
Total current liabilities 13,501 23,355
Capital lease obligations, due after one year 1,714 849
Deferred revenue 2,032 871
Commitments
Stockholders' equity:
Convertible preferred stock, $.01 par value; 5,000,000 shares authorized,
no shares issued and outstanding -- --
Common Stock, $.01 par value; 45,000,000 shares authorized; 18,798,100
shares issued and outstanding (18,283,905 in 1996) 183 188
Additional paid-in capital 62,618 64,169
Accumulated deficit (22,735) (15,486)
Foreign currency translation adjustments (22) (197)
-------- --------
Total stockholders' equity 40,044 48,674
-------- --------
Total liabilities and stockholders' equity $ 57,291 $ 73,749
======== ========
<FN>
See accompanying notes.
</FN>
</TABLE>
<PAGE>
<TABLE>
Forte Software, Inc.
Consolidated Statements of Operations
(In thousands, except per share amounts)
<CAPTION>
Years ended March 31,
--------------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Revenues:
License fees $ 7,974 $ 21,357 $ 43,595
Maintenance and services 2,033 8,688 19,456
-------- -------- --------
Total revenues 10,007 30,045 63,051
Operating expenses:
Cost of license fees 142 456 665
Cost of maintenance and services 2,000 5,452 11,796
Sales and marketing 7,869 15,060 28,560
Product development and engineering 5,515 8,069 10,611
General and administrative 1,874 3,168 5,119
-------- -------- --------
Total operating expenses 17,400 32,205 56,751
-------- -------- --------
Operating income (loss) (7,393) (2,160) 6,300
Interest income 312 568 2,232
Interest expense and other, net (165) (282) (244)
-------- -------- --------
Income (loss) before income taxes (7,246) (1,874) 8,288
Provision for income taxes (104) (114) (1,039)
-------- -------- --------
Net income (loss) $ (7,350) $ (1,988) $ 7,249
======== ======== ========
Pro forma net income (loss) per share $ (0.45) $ (0.11) $ 0.34
======== ======== ========
Shares used in computing pro forma net income (loss)
per share 16,248 17,517 21,110
======== ======== ========
<FN>
See accompanying notes.
</FN>
</TABLE>
<PAGE>
<TABLE>
Forte Software, Inc.
Consolidated Statements of Stockholders' Equity
(In thousands)
<CAPTION>
Convertible Additional
Preferred Stock Common Stock Paid-in
Shares Amount Shares Amount Capital
-------- ------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
Balance at March 31, 1994 10,051 $ 100 3,615 $ 36 $ 15,133
Issuance of common stock -- -- 69 1 27
Issuance of preferred stock Series
D, net of issuance costs 1,979 20 -- -- 12,855
Forgiveness of stockholders' notes
receivable -- -- -- -- --
Foreign currency translation
adjustment -- -- -- -- --
Net loss -- -- -- -- --
-------- -------- -------- -------- --------
Balance at March 31, 1995 12,030 120 3,684 37 28,015
Issuance of common stock -- -- 747 8 334
Public offering of common stock, net
of expenses of $3,985 -- -- 1,823 18 34,269
Conversion of preferred stock (12,030) (120) 12,030 120 --
Foreign currency translation
adjustment -- -- -- -- --
Net loss -- -- -- -- --
-------- -------- -------- -------- --------
Balance at March 31, 1996 -- -- 18,284 183 62,618
Issuance of common stock -- -- 514 5 1,551
Foreign currency translation
adjustment -- -- -- -- --
Net income -- -- -- -- --
-------- -------- -------- -------- --------
Balance at March 31, 1997 -- $ -- 18,798 $ 188 $ 64,169
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Notes Foreign
Receivable Currency
Accumulated from Translation
Deficit Stockholders Adjustment Total
------- ------------ ---------- ------
<S> <C> <C> <C> <C>
Balance at March 31, 1994 $(13,397) $ (51) $ -- $ 1,821
Issuance of common stock -- -- -- 28
Issuance of preferred stock Series
D, net of issuance costs -- -- -- 12,875
Forgiveness of stockholders' notes
receivable -- 51 -- 51
Foreign currency translation
adjustment -- -- 24 24
Net loss (7,350) -- -- (7,350)
-------- -------- -------- --------
Balance at March 31, 1995 (20,747) -- 24 7,449
Issuance of common stock -- -- -- 342
Public offering of common stock, net
of expenses of $3,985 -- -- -- 34,287
Conversion of preferred stock -- -- -- --
Foreign currency translation
adjustment -- -- (46) (46)
Net loss (1,988) -- -- (1,988)
-------- -------- -------- --------
Balance at March 31, 1996 (22,735) -- (22) 40,044
Issuance of common stock -- -- -- 1,556
Foreign currency translation
adjustment -- -- (175) (175)
Net income 7,249 -- -- 7,249
-------- -------- -------- --------
Balance at March 31, 1997 $(15,486) $ -- $ (197) $ 48,674
======== ======== ======== ========
<FN>
See accompanying notes.
</FN>
</TABLE>
<PAGE>
<TABLE>
Forte Software, Inc.
Consolidated Statements of Cash Flows
(In thousands)
<CAPTION>
Years ended March 31,
--------------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Operating activities
Net income (loss) $ (7,350) $ (1,988) $ 7,249
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 457 1,365 2,476
Forgiveness of interest and principal on notes
receivable from stockholders 51 -- --
Changes in operating assets and liabilities:
Accounts receivable (2,937) (8,099) (6,777)
Prepaid expenses and other assets (368) (498) (241)
Accounts payable 276 701 1,851
Accrued compensation and related expenses 1,446 1,208 3,310
Deferred revenue 3,055 2,051 2,145
Other accrued liabilities 266 1,897 1,470
-------- -------- --------
Net cash provided by (used in) operating activities (5,104) (3,363) 11,483
Investing activities
Purchases of equipment and leasehold improvements (430) (1,220) (4,972)
Purchase of short-term investments (3,920) (6,236) (16,539)
Maturities of short-term investments 5,998 2,915 9,618
-------- -------- --------
Net cash (used in) provided by investing activities 1,648 (4,541) (11,893)
Financing activities
Proceeds from issuance of preferred stock 12,875 -- --
Payment on notes payable (171) (729) --
Reduction of capital lease obligations (360) (775) (1,124)
Proceeds from issuance of common stock 28 34,629 1,556
-------- -------- --------
Net cash provided by financing activities 12,372 33,125 432
-------- -------- --------
Increase in cash and cash equivalents 8,916 25,221 22
Cash and cash equivalents at beginning of period 944 9,860 35,081
-------- -------- --------
Cash and cash equivalents at end of period $ 9,860 $ 35,081 $ 35,103
======== ======== ========
Supplemental disclosures:
Interest paid $ 177 $ 287 $ 244
======== ======== ========
Income taxes paid $ 100 $ 118 $ 372
======== ======== ========
Supplemental disclosures of noncash investing
and financing activities:
Capital lease obligations incurred $ 871 $ 2,201 $ 90
======== ======== ========
<FN>
See accompanying notes.
</FN>
</TABLE>
<PAGE>
Forte Software, Inc.
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
The Company
Forte Software, Inc. designs, develops, markets and supports a set of products
for developing, deploying and managing production applications in distributed
environments, including client/server and the Internet. Forte's products and
services are marketed and sold worldwide through a combination of direct
operations, subsidiaries, geographical distributors, and value added resellers.
Basis of Presentation
The accompanying financial statements include the accounts of the Company and
its wholly owned foreign subsidiaries. The Company translates the accounts of
its foreign subsidiaries using the local foreign currency as the functional
currency. The assets and liabilities of the foreign subsidiaries are translated
into U.S. dollars using exchange rates at the balance sheet date, revenues and
expenses are translated using the weighted average exchange rate for the period,
and gains and losses from this translation process are credited or charged to
stockholders' equity. Foreign currency transaction gains and losses have not
been material. All significant intercompany accounts and transactions have been
eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents and Short-Term Investments
Cash equivalents are highly liquid investments with insignificant interest rate
risk and maturities of three months or less at the date of purchase and are
stated at amounts which approximate fair value, based on quoted market prices.
Cash equivalents consist principally of investments in taxable, short-term money
market instruments and commercial paper.
Short-term investments consist principally of short-term U.S. Treasury bills and
corporate securities and are stated at amounts which approximate fair value.
<PAGE>
Forte Software, Inc.
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Cash and Cash Equivalents and Short-Term Investments (continued)
The Company accounts for its cash equivalents and short-term investments in
accordance with Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities." Management determines
the appropriate classification of debt securities at the time of purchase and
reevaluates such designation as of each balance sheet date. At March 31, 1996
and 1997, the Company has classified all of its debt securities as
available-for-sale, the components of which are as follows (in thousands):
Year ended March 31,
1996 1997
--------------------------
Commercial paper $ 20,861 $ 25,432
Corporate securities 14,244 13,154
U.S. Government securities 1,325 -
-------- --------
Total $ 36,430 $ 38,586
======== ========
Unrealized gains and losses at March 31, 1996 and 1997 and realized gains and
losses for the years then ended were not material. The cost of securities sold
is based on the specific identification method.
At March 31, 1996 and 1997, $30,194,000 and $25,432,000 of debt securities were
included in cash equivalents, and $6,236,000 and $13,154,000 were included in
short-term investments, respectively.
Concentrations of Credit Risk and Credit Evaluations
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of temporary cash investments including
short-term obligations of the U.S. Government and its agencies, corporate
securities, money market funds and commercial paper. The Company places its
temporary cash investments primarily with two financial institutions.
The Company licenses its products primarily to companies in North America,
Europe and Japan. The Company performs ongoing credit evaluations of these
customers and generally does not require collateral. Reserves are maintained for
potential credit losses.
<PAGE>
Forte Software, Inc.
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Major Customer
No customer accounted for more than 10% of total revenues for the years ended
March 31, 1996 and 1995. One customer accounted for 12% of total revenues for
the year ended March 31, 1997.
Revenue Recognition
The Company licenses software under noncancelable license agreements and
provides services, including maintenance, training and consulting. License
revenues are recognized when a noncancelable license agreement has been signed,
the product has been shipped, the fees are fixed and determinable and
collectibility is probable. 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 12 months. Revenues from training are
recognized upon completion of the related training class. Consulting revenues
are recognized as the services are performed. To date, all of the Company's
revenues have been derived from licenses of the Company's primary product, Forte
and related products as well as related maintenance, training and consulting
revenues.
Allowances for credit risks and for estimated future returns are provided for
upon 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.
Deferred revenue includes deferred maintenance revenue, prepaid consulting and
training fees and prepaid license fees from third party resellers.
International Operations
The Company operates in one industry segment (the development and marketing of
computer software and related services) and markets its products and services
internationally through foreign subsidiaries in Europe and Australia, Digital
Equipment Corporation on a worldwide basis, and other distributors and resellers
located in the United States, Canada, Asia, Europe, South America, South Africa
and Israel. Export sales through distributors, resellers and the domestic direct
sales organization totaled $890,000, $5,312,000 and $9,911,000 for the years
ended March 31, 1995, 1996 and 1997, respectively. Sales through the Company's
foreign subsidiaries totaled $796,000, $2,427,000 and $12,967,000 for the years
ended March 31, 1995, 1996 and 1997, respectively.
<PAGE>
Forte Software, Inc.
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Software Development Costs
Software development costs have been accounted for in accordance with Statement
of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed." Under the standard,
capitalization of software development costs begins upon the establishment of
technological feasibility, subject to net realizable value considerations. The
Company begins capitalization upon completion of a working model. To date, such
capitalizable costs have not been material. Accordingly, the Company has charged
all such costs to research and development expense. Future capitalized costs, if
any, will be amortized on a straight-line basis over the estimated life of the
products or the ratio of current revenue to the total of current and anticipated
future revenue, whichever expense is greater.
Equipment and Leasehold Improvements
Equipment and leasehold improvements are stated at cost and are depreciated
using the straight-line method over the estimated useful lives of the related
assets. Leasehold improvements and equipment under capital leases are amortized
using the straight-line method over the lesser of the lease term or the
estimated useful lives.
Income Taxes
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes", which requires the
use of the liability method in accounting for income taxes. Under this method,
deferred tax assets and liabilities are measured using enacted tax rates and
laws that will be in effect when the differences are expected to reverse.
Accounting for Stock-Based Compensation
The Company accounts for employee stock options in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25") and has adopted the "disclosure only" alternative described in
Statement of Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123").
<PAGE>
Forte Software, Inc.
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Net Income (Loss) Per Share
Except as noted below, net income (loss) per share is computed using the
weighted average number of shares of common stock and common stock equivalent
shares, when dilutive, from convertible preferred stock (using the
as-if-converted method) and from stock options and warrants (using the
treasury-stock method). Pursuant to the Securities and Exchange Commission Staff
Accounting Bulletins, common and common equivalent shares issued by the Company
at prices below the initial public offering price during the 12-month period
prior to the offering have been included in the calculation as if they were
outstanding for all periods presented through December 31, 1995 (using the
treasury-stock method).
Per share information calculated on this basis is as follows (in thousands,
except per share amounts):
Year ended March 31,
1995 1996 1997
------------------------
Net income (loss) per share $(1.38) $(0.33) $ 0.34
====== ====== ======
Shares used in computing net income (loss) per share 5,329 6,089 21,110
====== ====== ======
Pro forma net income (loss) per share has been computed as described above and
also gives effect, even if antidilutive, to common equivalent shares from
convertible preferred stock that automatically converted upon the closing of the
Company's initial public offering (using the as-if-converted method). All of the
convertible preferred stock outstanding as of the closing date, March 11, 1996,
was automatically converted into an aggregate of 12,029,883 shares of common
stock.
<PAGE>
Forte Software, Inc.
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Newly Issued Accounting Standards
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings per Share," which is effective for both interim and annual
financial statements for periods ended after December 15, 1997. 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 stock options will be
excluded. The impact is expected to result in an increase in primary earnings
per share for the year ended March 31, 1997 and a decrease for the year ended
March 31, 1996. The impact of Statement 128 on the calculation of fully diluted
earnings per share for these periods is not expected to be material.
2. Equipment and Leasehold Improvements
<TABLE>
Equipment and leasehold improvements consist of the following (in thousands):
<CAPTION>
March 31, Useful
1996 1997 Lives
--------------------- -----
<S> <C> <C> <C>
Equipment under capital leases $ 4,150 $ 4,182 36 - 42 months
Equipment 1,415 5,664 36 - 42 months
Leasehold improvements 495 1,276 36 months
------- -------
6,060 11,122
Less accumulated depreciation and amortization (2,157) (4,633)
------- -------
Equipment and leasehold improvements, net $ 3,903 $ 6,489
======= ========
</TABLE>
Accumulated amortization related to assets under capital leases at March 31,
1996 and 1997 totaled $1,528,000 and $2,649,000, respectively.
<PAGE>
Forte Software, Inc.
Notes to Consolidated Financial Statements (continued)
3. Stockholders' Equity
Initial Public Offering
On March 11, 1996, the Company completed an initial public offering of 1,822,500
shares of common stock at $21.00 per share. The Company received net proceeds of
$34,287,000. In connection with the initial public offering, all outstanding
shares of Series A, B, C and D preferred stock converted into 12,029,883 shares
of common stock. Approximately $750,000 of the initial public offering expenses
are included in other accrued liabilities at March 31, 1996 (none at March 31,
1997).
Common Stock
Certain common shares are subject to repurchase rights by the Company in the
event of termination of employment at the price originally paid by the
shareholder.
At March 31, 1997, shares of common stock were reserved for issuance as follows:
Stock option plan 4,160,907
Warrants 67,423
Employee stock purchase plan 331,810
---------
4,560,140
=========
Warrants
In March 1996 and February 1997 11,798 and 9,163 shares, respectively, of common
stock were issued in connection with the exercise of warrants by a vendor and a
bank.
As of March 31, 1997, warrants to purchase common stock were issued in
connection with an equipment lease agreement as follows: 39,173 shares at an
exercise price of $2.30 per share, 12,500 shares at an exercise price of $4.00
per share, 13,500 shares at an exercise price of $6.67 per share, and 2,250
shares at an exercise price of $6.67 per share. These warrants are exercisable
through 2005.
<PAGE>
Forte Software, Inc.
Notes to Consolidated Financial Statements (continued)
3. Stockholders' Equity (continued)
Employee Stock Purchase Plan
The Employee Stock Purchase Plan ("ESPP") was adopted in January 1996. The
Company authorized 400,000 shares of common stock under the ESPP of which 68,190
shares were issued during the year ended March 31, 1997. Eligible employees may
purchase common stock through payroll deductions, which may not exceed 10% of an
employee's compensation. The price of stock purchased under the ESPP will be 85%
of the lower of the fair market value of the common stock at the beginning of
the 24-month offering period or on the applicable semiannual purchase date.
Unless sooner terminated by the Board, the ESPP shall terminate upon the
earliest of (i) the last business day in October 2006, (ii) the date on which
all shares available for issuance under the ESPP shall have been sold pursuant
to purchase rights exercised under the ESPP or (iii) the date on which all
purchase rights are exercised in connection with certain corporate transactions.
The weighted-average fair value of shares issued under the ESPP during 1997 was
$6.11 per share using the Black-Scholes pricing method.
Stock Option Plan
Under the terms of the 1991 Stock Option Plan (the "1991 Plan") eligible key
employees, directors, and consultants can receive options to purchase shares of
the Company's common stock at a price not less than 100% and 85% of the fair
value on the date of the grant for incentive stock options and nonqualified
stock options, respectively. The options granted under the 1991 Plan are
exercisable over a maximum term of ten years from the date of grant and
generally vest over a five-year period. Shares sold under the Plan are subject
to various restrictions as to resale and right of repurchase by the Company.
In January 1996, the Company adopted the 1996 Stock Option Plan (the "1996
Plan") as the successor to the 1991 Plan. Under the 1996 Plan, eligible key
employees, directors, and consultants can receive options to purchase shares of
the Company's common stock at a price not less than 85% of the fair market value
on the grant date. The Company authorized 4,860,000 shares of common stock to be
issued under the 1996 Plan (including shares previously authorized under the
1991 Plan), of which 1,298,635 (including options incorporated from the 1991
Plan) are available for grant at March 31, 1997.
<PAGE>
Forte Software, Inc.
Notes to Consolidated Financial Statements (continued)
3. Stockholders' Equity (continued)
Stock Option Plan (continued)
A summary of the activity under the 1996 Plan is set forth below:
Weighted
Average
Exercise
Shares Price
-------- ---------
Outstanding at March 31, 1994 1,284,035 $ 0.15
Granted 1,681,875 0.59
Exercised (46,494) 0.13
Cancelled (61,599) 0.21
---------- ---------
Outstanding at March 31, 1995 2,857,817 0.41
---------- ---------
Granted 1,181,075 6.22
Exercised (735,353) 0.45
Cancelled (230,481) 0.96
---------- ---------
Outstanding at March 31, 1996 3,073,058 2.73
Granted 486,200 31.06
Exercised (439,278) 0.81
Cancelled (257,708) 7.69
---------- ---------
Outstanding at March 31, 1997 2,862,272 $ 7.35
========== =========
Vested options at March 31, 1997 778,822 $ 3.12
========== =========
At March 31, 1997, 160,290 shares of common stock issued through the exercise of
options were subject to repurchase by the Company.
<PAGE>
Forte Software, Inc.
Notes to Consolidated Financial Statements (continued)
3. Stockholders' Equity (continued)
Stock Option Plan (continued)
The weighted-average fair value of options granted during 1996 and 1997 was
$3.63 and $18.17 per share, respectively.
<TABLE>
The following table summarizes information concerning currently outstanding and
exercisable options:
<CAPTION>
Outstanding Exercisable
---------------------- ----------------------
Weighted
Average Weighted Weighted
Remaining Average Number Average
Number Contractual Exercise Exercisable Exercise
Exercise price Outstanding Life Price and Vested Price
------------- ----------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
$ 0.07 - $ 3.67 1,906,754 7.55 $ 1.13 651,094 $ 0.91
$ 5.00 - $11.00 482,820 7.70 9.12 94,518 9.16
$21.00 - $54.75 472,698 9.33 30.81 33,210 29.24
-------- -------
2,862,272 778,822
========= =======
</TABLE>
Stock-Based Compensation
As permitted under SFAS 123, the Company has elected to continue to follow APB
25 in accounting for stock-based awards to employees. Under APB 25, the Company
has not recognized any compensation expense with respect to such awards, since
the exercise price of the stock options awarded are equal to the fair market
value of the underlying security on the grant date.
<PAGE>
Forte Software, Inc.
Notes to Consolidated Financial Statements (continued)
3. Stockholders' Equity (continued)
Stock-Based Compensation (continued)
Disclosure of information regarding net income (loss) and net income (loss) per
share is required by SFAS 123 for the Company's awards granted after March 31,
1995 as if the Company had accounted for its stock-based awards to employees
under the fair value method of SFAS 123. The fair value of the Company's
stock-based awards to employees was estimated as of the date of the grant using
a Black-Scholes option pricing model. Limitations on the effectiveness of the
Black-Scholes option valuation model are that it was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable and that the model requires the use of highly
subjective assumptions including expected stock price volatility. Because the
Company's stock-based awards to employees have characteristics significantly
different from those of traded options and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its stock-based awards to employees. The Company
has plans which award employees stock including: stock options and the ESPP.
Both of these plans are discussed in the note above. The fair value of the
Company's stock-based awards to employees was estimated assuming the following
weighted-average assumptions:
Stock Options ESPP
--------------------------------- ----------
1996 1997 1997
--------------------------------- ----------
Expected life (in years) 5.00 5.00 0.50
Expected volatility 0.62 0.62 0.75
Risk free interest rate 5.26%-6.84% 6.12%-6.74% 6.44%
Expected dividend yield 0.00% 0.00% 0.00%
<PAGE>
Forte Software, Inc.
Notes to Consolidated Financial Statements (continued)
3. Stockholders' Equity (continued)
Stock-Based Compensation (continued)
For disclosure purposes, the adjusted estimated fair value of the Company's
stock-based awards to employees is amortized over the vesting period for options
and the six-month purchase period for stock purchases under the ESPP. The
Company's adjusted information follows (in thousands, except for per share
information):
Year ended March 31
1996 1997
-----------------------
Net income (loss), as reported $ (1,988) $ 7,249
========== ==========
Net income (loss), as adjusted $ (2,233) $ 5,258
========== ==========
Pro forma net income (loss) per share, as reported $ (0.11) $ 0.34
========== ==========
Pro forma net income (loss) per share, as adjusted $ (0.13) $ 0.25
========== ==========
Because SFAS 123 is applicable only to the Company's stock based awards granted
subsequent to March 31, 1995, its effect will not be fully reflected until
approximately fiscal year 2000.
<PAGE>
Forte Software, Inc.
Notes to Consolidated Financial Statements (continued)
4. Income Taxes
The current income tax provisions are as follows:
Year ended March 31,
1995 1996 1997
----------------------------------------
Federal $ -- $ -- $ 190
State -- -- 115
Foreign 104 114 734
------ ------ ------
$ 104 $ 114 $1,039
====== ====== ======
The provision for income taxes differed from the amount computed by applying the
statutory federal income tax rate as follows:
Year ended March 31,
1995 1996 1997
--------------------------------
Tax (credit) at federal statutory rate $(2,464) $ (637) $ 2,818
State taxes, net of federal benefit -- -- 115
Foreign taxes 104 114 734
Utilization of net operating losses -- -- (2,896)
Net operating losses not benefited 2,464 581 --
Other items -- 56 268
------- ------- -------
Income tax provision $ 104 $ 114 $ 1,039
======= ======= =======
<PAGE>
Forte Software, Inc.
Notes to Consolidated Financial Statements (continued)
4. Income Taxes (continued)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are as follows:
March 31,
1996 1997
----------------------
Deferred tax assets:
Net operating loss carryforwards $ 5,995 $ 4,785
Deferred revenue 1,647 1,346
Research and development credit carryforwards 1,062 1,719
Reserves and other accruals 547 1,719
Depreciation 363 1,277
Foreign tax credit carryforwards 210 757
Other 83 86
-------- --------
Total deferred tax assets 9,907 11,689
Valuation allowance (9,437) (10,862)
-------- --------
470 827
Deferred tax liabilities (470) (827)
-------- --------
Net deferred tax assets $ -- $ --
======== ========
The valuation allowance increased by $1,425,000 and $617,000 in the years ending
March 31, 1997 and 1996, respectively. Of the total deferred tax asset valuation
allowance at March 31, 1997, $3,610,000 relates to the tax benefit resulting
from the exercise of employee stock options during the year ended March 31,
1997. The tax benefit, when realized, will be recorded as an increase in
stockholders' equity rather than as a reduction in the income tax provision.
At March 31, 1997, the Company had net operating loss carryforwards for federal
income tax purposes of approximately $13,266,000 which expire in tax years 2007
through 2010, a federal research and development tax credit carryforward of
approximately $1,719,000 which expires in tax years 2005 through 2011 and a
foreign tax credit carryforward of approximately $757,000 which expires in tax
years 1999 through 2001.
<PAGE>
Forte Software, Inc.
Notes to Consolidated Financial Statements (continued)
4. Income Taxes (continued)
Utilization of net operating losses and credits may be subject to annual
limitations due to the ownership change limitations provided by the Internal
Revenue Code of 1986 and similar state provisions. Management does not expect
such limitations, if any, to impact the ultimate utilization of the
carryforwards.
5. Profit Sharing Plan
The Company has a retirement plan under Section 401(k) of the Internal Revenue
Code (the "401(k) Plan") for its eligible employees. All employees, as defined,
are eligible to participate after completion of one month of employment with the
Company. Employee contributions to the Plan are subject to certain statutory
limitations. The pre-tax voluntary contributions are limited to 15% of the
aggregate compensation paid to the employee in all the years since participation
in the Plan. The Company's contribution to the 401(k) Plan is discretionary. The
Company has not contributed any amounts to the 401(k) Plan to date.
6. Commitments
The Company has entered into operating leases for office space with original
terms ranging from 12 to 42 months. The facility leases generally contain
renewal options and provisions adjusting the lease payments based upon changes
in operating costs of the building.
The Company also entered into capital leases with original terms of 42 months
for certain furniture, fixtures and equipment.
Capital lease obligations represent the present value of future rental payments
under various lease agreements for equipment. The Company has options to
purchase the leased assets at the end of the lease terms for their fair market
value.
<PAGE>
Forte Software, Inc.
Notes to Consolidated Financial Statements (continued)
6. Commitments (continued)
The future minimum lease payments under all noncancelable leases having initial
terms longer than one year at March 31, 1997 are as follows (in thousands):
Capital Operating
Leases Leases
------- --------
Years ending March 31:
1998 $1,057 $2,123
1999 735 3,261
2000 114 3,167
2001 -- 909
2002 and thereafter -- 87
------ ------
Total minimum lease payments 1,906 $9,547
======
Less interest 142
------
Present value of minimum lease payments 1,764
Less current portion 915
------
Capital lease obligations, due after one year $ 849
======
Rent expense for the years ended March 31, 1995, 1996 and 1997 was $469,000,
$1,461,000 and $2,305,000, respectively.
7. Subsequent Event
In April 1997, the Company initiated a voluntary stock option repricing program
under which options to acquire 638,000 common shares which were originally
issued with exercise prices ranging from $8.83 to $54.75 per share were reissued
with an exercise price of $8.31 per share, the fair market value of the
Company's stock at the repricing date. These options will continue to vest under
the original terms of the option grant, except that no options may be exercised
for a period of one year from the repricing date.
<PAGE>
SCHEDULE II
FORTE SOFTWARE, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED MARCH 31, 1995, 1996 and 1997
Allowance for Doubtful Accounts Receivable
Year Ended March 31, Balance at Additions Charged Deductions Balance at End
- -------------------- ---------- ----------------- ---------- --------------
Beginning of to Costs and Write-offs of Year
------------ ------------ ---------- -------
Year Expenses
---- --------
1995 ............... $ -- $365,000 $ -- $365,000
1996 ............... 365,000 288,000 122,000 531,000
1997 ............... 531,000 494,000 84,000 941,000
Exhibit 10.11
SECOND AMENDMENT TO STANDARD FORM LEASE
THIS SECOND AMENDMENT TO STANDARD FORM LEASE (the "Amendment") is made
as of January 16, 1997, by and between STATE OF CALIFORNIA PUBLIC EMPLOYEES'
RETIREMENT SYSTEM, an Agency of the State of California ("Landlord"), and FORTE
SOFTWARE, INC., a Delaware corporation ("Tenant"), with reference to the
following facts:
A. Landlord and Tenant entered into that certain Standard Form Lease,
dated for reference purposes as of December 1, 1994, as amended by that certain
First Amendment to Standard Form Lease, dated as of January 31, 1996
(collectively, the "Lease"). Each capitalized term used in this Amendment, but
not defined herein, shall have the meaning ascribed to it in the Lease.
B. Tenant is concurrently entering into a Sublease with ICF Kaiser
Engineers, Inc., an Ohio corporation (the "Sublease"), to sublease certain
premises in the Building located on the 6th and 7th floors thereof (the
"Sublease Premises"). In connection with entering into the Sublease, Tenant
desires to extend the Term of the Lease pursuant to Lease Addendum No. 1
attached to the Lease so that the Term Expiration Date under the Lease and the
expiration of the term of the Sublease coincide.
C. Landlord and Tenant desire to enter into this Amendment to evidence
Tenant's exercise of its option to extend the Term (as modified by this
Amendment), and to make certain other modifications to the Lease, all as more
particularly set forth herein.
NOW, THEREFORE, the parties agree as follows:
1. Extension of Term. Tenant hereby exercises its option to extend the
Term pursuant to Lease Addendum No. 1; provided, however, notwithstanding the
provisions of Lease Addendum No. 1, Landlord and Tenant agree that the Term
Expiration Date shall be June 30, 2000. Accordingly, the Lease is amended as
follows:
(a) The description of the Term Expiration Date in the Basic Lease
Information is hereby deleted and restated in its entirety as follows: "June 30,
2000 for all of the Leased Premises"; and
(b) Lease Addendum No. 1 is hereby deleted in its entirety and shall be
of no further force or effect.
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<PAGE>
2. Base Rent. The description of Base Rent set forth in the Basic Lease
Information is hereby deleted and restated in its entirety as follows:
"During the period beginning on the Term Commencement Date and
ending on October 31, 1998: $1.65 per square foot of Net Rentable Area
per month for the 15th Floor Premises and the 17th Floor Premises;
$1.75 per square foot of Net Rentable Area per month for the 17th Floor
Expansion Premises; and $1.10 per square foot of Net Rentable Area per
month for the 24th Floor Premises for the first month Tenant occupies
the 24th Floor Premises and $1.71 per square foot of Net Rentable Area
per month thereafter for the 24th Floor Premises. During the period
beginning on November 1, 1998 and ending on the Term Expiration Date:
$1.85 per square foot of Net Rentable Area per month for the Leased
Premises."
3. Security Deposit. Concurrently herewith, Tenant shall deliver to
Landlord the amount of twenty-two thousand eight hundred one dollars ($22,801),
which amount shall be held by Landlord as part of Tenant's Security Deposit. The
amount of the Security Deposit set forth in the Basic Lease Information is
hereby deleted and restated in its entirety as follows: "$96,428."
4. Basic Services.
(a) Section 4.1(b)(iv) of the Lease is hereby deleted and restated in
its entirety as follows:
"(iv) Electrical facilities to provide sufficient power for personal
computers and other office machines of similar low electrical
consumption, but not including electricity required for data
processing, communications, UPS or power conditioning or supplementary
air conditioning. Any electrical load which singly consumes more than
0.5 kilowatts at rated capacity or requires a voltage other than 120
volts single-phase shall be conclusively deemed to require extra
services. Total convenience outlet circuits that are loaded in excess
or 0.73 kilowatts per hour per square foot per month (assessed on a per
floor basis for full floor occupancy and pro rata share for
multi-tenant occupancy) shall be conclusively deemed to require extra
services. All panels, circuits and disconnects which are subject to the
above conditions shall be installed with check meters that shall be
monitored by Landlord and used as a means for billing monthly the
excess services based on the average cost per kilowatt hour for the
Building for the month that electrical consumption exceeded any such
standard. Such check meters shall be installed at Tenant's sole cost
and expense."
(b) Notwithstanding any contrary provision set forth in the Sublease:
Landlord and Tenant agree that the provisions of this section 4 shall also apply
to Tenant's consumption of electricity in the Sublease Premises; and Tenant
agrees to pay to Landlord, as Additional Rent, for any excess electrical service
provided to Tenant in the Sublease Premises in accordance with the Lease as if
the Sublease Premises were demised to Tenant pursuant to the Lease.
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<PAGE>
5. Wiring and Cables.
(a) The following new subsection is hereby added to the end of Section
5.8 of the Lease:
"(d) In no event shall Tenant install any electrical wiring or
voice or data cables above any ceiling in any portion of the Leased
Premises unless such wiring or cables are installed within existing
raceways and chases, or such other raceways, chases or equipment as may
be acceptable to Landlord in its sole and absolute discretion. If at
any time Landlord determines that Tenant has violated the foregoing
provisions, then Landlord may, at its option, require Tenant (at
Tenant's sole cost and expense) to remove all such wiring, cables and
any related equipment that was not previously approved by Landlord in
accordance with this Section 5.8(d), and to repair all damage resulting
from such installation or removal. Tenant's obligations under this
Section 5.8(d) shall survive the expiration or earlier termination of
this Lease."
(b) Notwithstanding any contrary provision set forth in the Sublease,
Landlord and Tenant agree that the provisions of this section 5 shall also apply
to Tenant's installation of wiring and cables in the Sublease Premises.
6. Termination Right.
(a) Section 6.21 of the Lease (Termination Right) is hereby deleted and
restated in its entirety as follows:
"6.21 Termination Right. Provided Tenant is not in default under or
breach of this Lease either at the time Tenant delivers its Termination
Notice (as defined below) or on the Termination Date (as defined
below), then Tenant may elect to terminate this Lease as of the last
day of any calendar month on or after June 30, 1999 (the 'Termination
Date') by delivering to Landlord written notice of Tenant's election
(the 'Termination Notice'). The Termination Notice must specify the
Termination Date and must be received by Landlord on or before December
31, 1998. If Landlord does not receive the Termination Notice on or
before December 31, 1998, then Tenant shall not have any termination
rights under this Lease and the provisions of this Section 6.21 shall
be of no further force or effect. As consideration for Tenant's
termination of this Lease, Tenant shall pay to Landlord, concurrently
with Tenant's delivery of its Termination Notice, by certified or bank
cashier's check or by a wire transfer of funds, an amount equal to the
sum of the following amounts: (a) an amount equal to two (2) months'
Base Rent in effect on the Termination Date; plus (b) the amount set
forth on Schedule 1 attached hereto and incorporated herein by
reference next to the month during which the Termination Date will
occur (for example, if the Termination Date selected by Tenant is July
31, 1999, then Tenant shall pay the sum of two (2) months' Base Rent at
the rate applicable to July, 1999, plus the
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<PAGE>
amount set forth on Schedule 1 for July 31, 1999. Landlord and Tenant
agree that Schedule 1 attached hereto is calculated based upon a tenant
improvement allowance of $521,230, amortized over the remaining Term of
this Lease at an interest rate of eleven percent (11%) per annum, and
each amount set forth on Schedule 1 is the remaining balance due as of
the last day of the corresponding month. Tenant's right to terminate
this Lease under this Section 6.21 is personal to Tenant, may not be
exercised by or be assigned to any person or entity other than Tenant
(including, without limitation, any subtenant), and shall terminate and
be of no further effect upon any assignment of this Lease."
(b) Schedules 1, 2 and 3 attached to the Lease are hereby deleted and
replaced in their entirety with Schedule 1 attached to this Amendment.
7. Waiver of Jury Trial. The following new section is hereby added to
the Lease as Section 6.24:
"6.24 Mutual Waivers of Jury Trial and Certain Damages. Tenant
and Landlord each hereby expressly, irrevocably, fully and forever
releases, waives and relinquishes any and all right to trial by jury
and all right to receive punitive, exemplary and consequential damages
from the other (or any past, present or future board member, trustee,
director, officer, employee, agent, representative, or advisor of the
other) in any claim, demand, action, suit, proceeding or cause of
action in which Tenant and Landlord are parties, which in any way
(directly or indirectly) arises out of, results from or relates to any
of the following, in each case whether now existing or hereafter
arising and whether based on contract or tort or any other legal basis:
this Lease; any past, present or future act, omission, conduct or
activity with respect to this Lease; any transaction, event or
occurrence contemplated by this Lease; the performance of any
obligation or the exercise of any right under this Lease; or the
enforcement of this Lease. Tenant and Landlord each agrees that this
Lease constitutes written consent that trial by jury shall be waived in
any such claim, demand, action, suit, proceeding or other cause of
action pursuant to California Code of Civil Procedure section 631 and
agrees that Tenant and Landlord each shall have the right at any time
to file this Lease with the clerk or judge of any court in which any
such claim, demand, action, suit, proceeding or other cause of action
may be pending as statutory written consent to waiver of trial by jury
in accordance with California Code of Civil Procedure section 631.
Initials: ____________________"
8. Tenant Improvements. The provisions of Exhibit A (Construction
Agreement) attached hereto (the "Construction Agreement") are incorporated
herein by reference with regard to improvements that Tenant may elect to make to
the Leased Premises or the Sublease Premises. All references in the Lease to the
Construction Agreement shall hereafter mean Exhibit A to this Amendment rather
than Exhibit B to the Lease.
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<PAGE>
9. Brokers. Landlord has engaged the services of Alliance Management &
Leasing in connection with this Amendment. Tenant represents and warrants that
it has not engaged the services of or agreed to compensate any broker, finder or
other person in connection with this Amendment. Each party shall indemnify,
defend and hold the other party harmless from and against any claims,
liabilities, damages and expenses (including, without limitation, attorneys'
fees and costs of defense) for fees, commissions or other amounts sought on the
basis of any agreement or other commitment made or alleged to have been made by
the party giving the indemnity.
10. No Other Amendment; Conflict. Except as set forth in this
Amendment, the provisions of the Lease shall remain in full force. If the
provisions of this Amendment conflict with the provisions of the Lease, then the
provisions of this Amendment shall prevail.
11. Counterparts. This Amendment may be signed in multiple counterparts
which, when signed by all parties, shall constitute a binding agreement.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
date first set forth above.
LANDLORD: STATE OF CALIFORNIA PUBLIC EMPLOYEES'
RETIREMENT SYSTEM, an Agency
of the State of California
By LaSalle Advisors Limited Partnership,
its authorized agent
By Joseph R. Shea
-----------------
Its Vice President
----------------
By Richard C. Cunningham
----------------------
Its Vice President
--------------
TENANT: FORTE SOFTWARE, INC., a California corporation
By Robert Gorlin
Its Director of Legal Affairs
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<PAGE>
Schedule 1
----------
Termination Payments
--------------------
Termination Date Amount
---------------- ------
June 30, 1999 $324,076
July 31, 1999 $298,404
August 31, 1999 $272,497
September 30, 1999 $246,353
October 31, 1999 $219,969
November 30, 1999 $193,343
December 31, 1999 $166,473
January 31, 2000 $139,356
February 29, 2000 $111,991
March 31, 2000 $ 84,375
April 30, 2000 $ 56,507
May 31, 2000 $ 28,382
June 30, 2000 $ 0
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<PAGE>
Exhibit A
Construction Agreement
This Construction Agreement ("Agreement") is made as of
January 16, 1997, between STATE OF CALIFORNIA PUBLIC EMPLOYEES' RETIREMENT
SYSTEM, an Agency of the State of California ("Landlord"), and FORTE SOFTWARE,
INC., a California corporation ("Tenant"), in connection with the execution of
that certain Second Amendment to Standard Form Lease between Landlord and
Tenant, dated as of January 16, 1997 (the "Amendment"). The Amendment amends
that certain Standard Form Lease, dated for reference purposes as of December 1,
1994, between Landlord and Tenant, as amended by that certain First Amendment to
Standard Form Lease, dated as of January 31, 1996 (collectively, the "Original
Lease"). The Original Lease and the Amendment are collectively referred to
herein as the "Lease." Each capitalized term used in this Agreement, but not
defined herein, shall have the meaning ascribed to it in the Lease. Landlord and
Tenant hereby agree as follows:
General
The purpose of this Agreement is to set forth: how
improvements to the Leased Premises or the Sublease Premises that Tenant may
desire to construct from time to time (the "Improvements") are to be
constructed; who will do the construction of the Improvements; who will pay for
the construction of the Improvements; and the time schedule for Substantial
Completion of the construction of the Improvements.
The provisions of the Lease, except where clearly inconsistent
or inapplicable to this Agreement, are incorporated into this Agreement.
Landlord and Tenant acknowledge that Tenant will not take
possession of the entire Sublease Premises at the commencement of the Sublease
and, therefore, that the Improvements in the Sublease Premises will be
constructed in phases. As used in this Agreement, a "Phase of Construction"
means a period commencing when Contractor (as defined in Section 5(I)) begins
work on Improvements within the Leased Premises or the Sublease Premises and
ending when Contractor substantially completes such work and withdraws all of
its equipment and personnel from the Premises. Landlord and Tenant further
acknowledge that Tenant presently intends to have the Improvements to the
Sublease Premises conducted in two Phases of Construction, with the first Phase
of Construction encompassing the Improvements to one-half of the seventh floor
of the Building and the second Phase of Construction encompassing the
Improvements to the second half of the seventh floor and all of the sixth floor
of the Building. The foregoing shall not, however, limit the Phases of
Construction for Tenant's Improvements under this Agreement.
Delivery of Premises to Tenant and Condition of Premises. Landlord has
previously delivered possession of the Leased Premises to Tenant in accordance
with the Lease; and Landlord has no obligation to deliver to Tenant possession
of the Sublease Premises. Tenant agrees that Landlord has no obligation to cause
the Leased Premises or the Sublease Premises to comply with any Laws (as defined
in Section 4) (including, without limitation, the Americans with Disabilities
Act of 1990, Pub. L. 101-336) which are applicable solely due to the
construction of any Improvements; and Tenant, at its sole cost, shall cause the
Leased Premises and the Sublease Premises to comply with all such Laws in
connection with the construction of any Improvements. Except as set forth in
this Section 2, nothing in this Agreement shall be construed to limit Landlord's
obligation to comply with Laws in accordance with the Lease.
Preparation/Approval of Space Plans. When Tenant desires that any
Improvements be constructed, Tenant shall provide Designer (as defined in
Section 4) with such information as is reasonably requested by Designer to
permit preparation of a space plan (the "Space Plan") for such Improvements.
Tenant, at its sole cost, shall cause Designer to deliver to Landlord such Space
Plan for Landlord's approval, which approval shall not be unreasonably withheld
or delayed.
Selection of Designer/Architect. Subject to Landlord's prior written
approval (which approval shall not be unreasonably withheld or delayed), Tenant
shall select a designer or architect (collectively, "Designer") who is familiar
with the Building and with all applicable laws, statutes, codes, rules and
regulations of governmental agencies and authorities having jurisdiction
(collectively, "Laws"), and with the regulations and procedures promulgated by
Landlord, in each instance applicable to tenant construction in the Building.
Designer shall prepare working drawings and specifications for the applicable
Improvements at Tenant's sole
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<PAGE>
cost and expense (the "Working Drawings"). Landlord acknowledges that Tenant
initially has selected SPACE as its Designer and Landlord hereby approves of
such selection.
Preparation of Plans and Construction Schedule and Procedures.
Landlord, at Landlord's sole cost and expense, shall provide instructions and
Building background drawings to Designer to complete the Working Drawings for
the applicable Improvements. Landlord shall be responsible for the construction
of such Improvements, in accordance with the following schedule:
Tenant shall cause Designer to submit to Landlord the
applicable Working Drawings prepared by Designer with respect to the
Improvements to be constructed pursuant thereto.
Landlord shall, as soon as reasonably possible but in all
events within ten (10) business days of receipt, approve the Working Drawings or
designate by notice to Tenant the specific changes Landlord reasonably requires
to be made to the Working Drawings as a condition to Landlord's approval
thereof. Tenant shall cause Designer to make such changes as soon as reasonably
possible and re-submit the Working Drawings for Landlord's review. Landlord
shall, as soon as reasonably possible but in all events within ten (10) business
days of receipt, approve the revised Working Drawings or designate by notice to
Tenant what further changes Landlord reasonably requires to be made to the
Working Drawings, whereupon Tenant shall cause Designer to make such further
changes and re-submit the Working Drawings. This procedure shall be repeated
until the Working Drawings are finally approved by Landlord. Tenant's failure to
receive Landlord's notice designating changes to the Working Drawings (or any
revision thereof) within the applicable time frame specified above shall be
conclusively deemed Landlord's approval thereof.
Tenant, at its sole cost, shall cause the Engineer (as defined
below) to submit to Landlord, after Landlord has approved the Working Drawings,
engineering drawings showing complete plans for telephone outlets, electrical,
plumbing work, heating, ventilating and air conditioning in connection with such
Improvements (the "Engineering Drawings"). The Engineering Drawings shall be
prepared by a mechanical and electrical engineer (the "Engineer") selected by
Tenant and approved by Landlord, which approval shall not be unreasonably
withheld or delayed. Landlord acknowledges that Tenant initially has selected
Flack + Kurtz Consulting Engineers LLP as its Engineer and Landlord hereby
approves of such selection.
Landlord shall, as soon as reasonably possible but in all
events within ten (10) business days of receipt, approve the Engineering
Drawings or designate by notice to Tenant the specific changes Landlord
reasonably requires to be made to the Engineering Drawings. Tenant shall cause
its engineer to make such changes as soon as reasonably possible and re-submit
the Engineering Drawings for Landlord's review. Landlord shall, as soon as
reasonably possible but in all events within ten (10) business days of receipt,
approve the revised Engineering Drawings or designate by notice to Tenant what
further changes Landlord reasonably requires to be made to the Engineering
Drawings, whereupon Tenant shall cause Designer to make such further changes and
re-submit the Engineering Drawings. This procedure shall be repeated until the
Engineering Drawings are finally approved by Landlord. Tenant's failure to so
receive Landlord's notice designating changes to the Engineering Drawings (or
any revision thereof) within the applicable time frame specified above shall be
conclusively deemed Landlord's approval thereof.
After Landlord has approved the Engineering Drawings, Tenant,
at its sole cost, shall submit to Landlord final plans ("Plans"), which shall be
defined as, and shall consist of, complete architectural plans (inclusive of the
approved Working Drawings and the approved Engineering Drawings) and
specifications necessary to allow the Contractor to build the applicable
Improvements in accordance with those final Plans.
Landlord shall, as soon as reasonably possible but in all
events within ten (10) business days of receipt, approve those elements of the
Plans not previously approved by Landlord by delivering to Tenant a notice in
the form of Exhibit 1 attached hereto, or designate by notice to Tenant the
specific changes Landlord reasonably requires to be made to such Plans. Tenant
shall cause such changes to be made as soon as reasonably possible and re-submit
the Plans for Landlord's review. Landlord shall, as soon as reasonably possible
but in all events within ten (10) business days of receipt, approve the revised
Plans or designate by notice to Tenant what further changes Landlord reasonably
requires to be made to the Plans, whereupon Tenant shall cause such further
changes to be made and re-submit the Plans. This procedure shall be repeated
until the Plans are finally approved by Landlord. Tenant's failure to so receive
Landlord's notice designating changes to the Plans (or revisions thereof) within
the applicable time frame specified above shall be conclusively deemed
Landlord's approval thereof.
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<PAGE>
On or before the date that Landlord finally approves the
Plans, Landlord may elect by notice to Tenant (which notice, if not previously
delivered, shall be included in Landlord's notice approving the Plans in the
form of Exhibit 1 attached hereto), to advise Tenant that Landlord shall have
the right to require Tenant to remove such Improvements on the expiration or
earlier termination of the Term of the Lease, or upon expiration of the
scheduled term of the Sublease or earlier termination thereof if Tenant does not
remain in possession of the Sublease Premises pursuant to the Non-Disturbance
Agreement dated of even date herewith, as applicable (the "Removal Notice"). In
determining whether to deliver a Removal Notice for Improvements to be made in
any subsequent Phase of Construction, Landlord shall apply the same criteria
applied by Landlord in determining which of the Improvements in the first Phase
of Construction are subject to a Removal Notice. (Such criteria may include,
without limitation, special purpose areas, the quality of construction, density
of use, and the balance between private offices and open spaces.)
Notwithstanding any contrary provision of the Sublease or the ICF Lease (as
defined in the Sublease): Landlord agrees that Tenant shall not be obligated to
remove any Improvements from the Sublease Premises unless Landlord has delivered
to Tenant the Removal Notice; and Tenant agrees that if Landlord has delivered
to Tenant the Removal Notice, Landlord shall have the right to require Tenant to
remove such Improvements on the expiration of the scheduled term of the
Sublease, or upon earlier termination thereof if Tenant does not remain in
possession of the Sublease Premises pursuant to the Non-Disturbance Agreement,
and Tenant shall restore the Sublease Premises to the condition existing prior
to the installation of such Improvements and shall repair all damage resulting
therefrom. Where Landlord has delivered a Removal Notice with respect to
particular Improvements, Landlord shall have sole discretion to enforce or to
waive the requirement that Tenant remove such Improvements; provided, however,
that any waiver of such removal requirement may apply to less than all of the
Improvements initially designated in such Removal Notice only where the partial
application of such removal requirement will not materially increase Tenant's
costs of complying with the Removal Notice.
Within fifteen (15) days after Landlord finally approves the
Plans for any Improvements, and within fifteen (15) days after Landlord approves
any change thereto in accordance with Section 6, and within fifteen (15) days
after any such Improvements are Substantially Complete, Tenant shall deliver to
Landlord invoices or other reasonably satisfactory evidence of all costs and
expenses incurred by Tenant in connection with such Improvements.
Landlord shall cause the general contractor selected by
Landlord ("Contractor") to construct the applicable Improvements strictly in
accordance with the approved Plans and the schedule established pursuant to
Section 6, at Tenant's sole and entire cost (subject to Tenant's ability to
utilize the Tenant Improvement Allowance (as defined in Section 7)). Landlord
initially has elected to use Paradigm as the Contractor. If Landlord elects to
use any Contractor other than Paradigm, Tenant shall have the right to approve
such Contractor, which approval will not be unreasonably withheld or delayed.
Landlord agrees that any subcontractors who will perform work estimated to cost
in excess of five thousand dollars ($5,000) shall be selected by Landlord or
Contractor, from a list approved by Tenant, based on competitive bidding in
accordance with Landlord's current competitive bidding practices. Tenant also
shall have the right to approve the construction contract between Landlord and
Contractor ("Construction Contract"), which approval will not be unreasonably
withheld or delayed. Landlord shall include in the Construction Contract such
provisions governing incentives for completion or penalties for delayed
completion as may be mutually acceptable to Tenant and Contractor, provided that
any delay in the commencement of work under the Construction Contract which is
requested by Tenant to accommodate the negotiation of such incentives or
penalties shall be a Tenant Delay.
Landlord shall provide customary construction management and
supervision services with respect to all work performed by or under the
direction of Contractor. In connection therewith, with respect to each Phase of
Construction of the Improvements to be constructed hereunder, Tenant shall pay
to Landlord a construction supervision fee (the "Supervision Fee") equal to the
sum of (i) five and one-half percent (5.5%) of the first one hundred thousand
dollars ($100,000) of all costs to construct the Improvements in such Phase of
Construction, plus (ii) four and one-half percent (4.5%) of all costs to
construct the Improvements in such Phase of Construction in excess of one
hundred thousand dollars ($100,000) up to a maximum of one million dollars
($1,000,000), plus (iii) two and one-half percent (2.5%) of all costs to
construct the Improvements in such Phase of Construction in excess of one
million dollars ($1,000,000). For purposes of calculating the Supervision Fee,
the costs to construct the Improvements in a particular Phase of Construction
shall be the amount payable to the Contractor under the Construction Contract,
which does not include the fees of the Designer and the Engineer. The
Supervision Fee shall be included in the Estimated Costs (as defined in
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<PAGE>
Section 7) and shall be paid in accordance with Section 7. Any failure by Tenant
to comply with the dates and time limits in this Agreement, or failure to pay
when due any sums due to the Contractor, which causes a delay in such
construction, shall automatically constitute Tenant Delays (as defined in
Section 8).
Tenant agrees and understands that Landlord shall not be the
guarantor of, nor responsible for, the correctness or accuracy of any Working
Drawings, Engineering Drawings or Plans or compliance of any Working Drawings,
Engineering Drawings or Plans with Laws. The foregoing notwithstanding, Landlord
shall promptly notify Tenant if Landlord discovers any incorrectness or
inaccuracy in the Working Drawings, Engineering Drawings or Plans, or the
failure of same to comply with Laws.
Any change which Tenant makes to any Plans shall be subject to
Landlord's prior written approval in accordance with Section 6. Any such change
which delays Landlord in causing any Improvements to be Substantially Complete
beyond the time that it would have otherwise taken to cause such Improvements to
be Substantially Complete shall also constitute Tenant Delays.
Construction.
The Improvements indicated on the applicable Plans shall be
constructed by Contractor under the supervision and management of Landlord, in
accordance with the Schedule (as defined below) and the Construction Contract.
Landlord shall exercise and cause Contractor to exercise reasonable efforts to
minimize any interference with use of the Leased Premises, the Sublease Premises
and the areas adjacent to the Sublease Premises occupied by ICF Kaiser Engineers
in connection with the construction of the Improvements. The parties
acknowledge, however, that some degree of interference with the use of such
areas is unavoidable given the circumstances under which the Improvements will
be completed.
As used in this Agreement, the "Schedule" shall mean the
schedule for commencement and Substantial Completion of the construction of
Improvements called for under the applicable Plans. The Schedule shall in all
events allow for construction of such Improvements to commence only after: the
Plans for the Improvements have been approved by Landlord as provided in this
Agreement; all necessary permits and approvals for the construction of the
Improvements have been issued by appropriate governmental authorities; the
Construction Contract has been approved by Tenant; and the total costs of
constructing the Improvements have been approved by Tenant. The Schedule shall
be established in each case as follows:
With respect to the Improvements to be constructed in
the first Phase of Construction, the parties currently anticipate (based upon
Contractor's estimate) that construction will commence on or about January 16,
1997, and that such Improvements will be Substantially Complete within ten (10)
weeks after the commencement of construction.
With respect to the Improvements to be constructed
after the first Phase of Construction, Landlord shall provide Tenant, at the
time Landlord approves the Working Drawings, with an estimate of the Schedule
for the applicable Improvements. Thereafter, when Landlord approves the
Engineering Drawings, and again when Landlord approves the Plans, Landlord shall
notify Tenant of any revisions to the estimated Schedule for the applicable
Improvements. Landlord's estimates regarding the Schedule shall be prepared in
consultation with Contractor and shall incorporate reasonable assumptions (based
on information available from Tenant and other sources) as to the commencement
date for construction of the applicable Improvements.
In the event that Tenant requests any changes to the Plans,
Landlord shall not unreasonably withhold its consent to any such changes,
provided the changes do not adversely affect the Building's structure, systems,
equipment, security system or appearance, but if such changes increase the total
cost of the Improvements shown on such Plans, Tenant shall pay such increased
costs to Landlord as provided in Section 7. The costs charged by Landlord to
Tenant caused by Tenant's requesting changes to such Improvements shall be the
amount of money (if any) Landlord has to pay to cause such Improvements, as
reflected by revised Plans, to be constructed above the costs that Landlord
would have had to pay to cause such Improvements to be constructed if no changes
had been made to such Plans, plus any resulting increase in the Supervision Fee.
If such changes delay Landlord's Substantial Completion of the work shown on the
Plans, then such delay shall constitute Tenant Delays. Any other actions of
Tenant, or inaction by Tenant, which delays Landlord in completing such
Improvements shown on the applicable Plans shall also constitute Tenant Delays.
Whenever possible and practical, Landlord will utilize, for the construction of
such Improvements, the items and materials designated in the applicable Plans.
However, whenever Landlord determines in its reasonable judgment that it is
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<PAGE>
not practical or efficient to use such materials, Landlord shall have the right,
upon receipt of Tenant's consent, which consent shall not be unreasonably
withheld or delayed, to substitute comparable items and materials. If Tenant
refuses to grant such consent, and Landlord is delayed in causing such
Improvements to be Substantially Complete because of Tenant's failure to permit
the substitution of comparable items and materials, such delay shall constitute
Tenant Delays.
If the Improvements are not Substantially Completed by the
deadline established in the Schedule (as such deadline may be extended for
Tenant Delays and for Force Majeure), Tenant shall have the following rights and
remedies:
Landlord shall enforce against Contractor, for the benefit of
Tenant, all such rights and remedies as may be included in the Construction
Contract for delays in the completion of construction which are attributable to
Contractor.
Where the delay is attributable to Landlord's failure or delay
in performing its obligations under the Construction Contract or this Agreement,
Tenant reserves all rights and remedies (including, without limitation, the
right to recover damages) as may be available at law or in equity which are
caused by Landlord's failure or delay in performing such obligations.
Tenant Improvement Allowance.
Notwithstanding any contrary provision of this Agreement
requiring Tenant to bear all costs of the Improvements, Landlord agrees to pay
costs and expenses incurred (including reimbursement to Tenant for its costs and
expenses) in connection with the design and construction of any Improvements
(including, without limitation, all costs and expenses of plans, permits,
licenses and approvals, demolition expenses, and the Supervision Fee), designed
and constructed pursuant to this Agreement (collectively, "Tenant Improvement
Costs") up to the aggregate amount of five hundred twenty-one thousand two
hundred thirty dollars ($521,230) (based upon ten dollars ($10.00) per square
foot of Net Rentable Area of the Leased Premises) (the "Tenant Improvement
Allowance"). The Tenant Improvement Costs shall not include costs incurred by
Landlord or its agents in reviewing and approving Space Plans, Working Drawings,
Engineering Drawings and Plans. Landlord and Tenant agree such Tenant
Improvement Allowance may be used for the construction of the Improvements;
provided, however, in no event shall the Tenant Improvement Allowance be used to
pay for Tenant's personal property, equipment, furniture, fixtures (including,
without limitation, work stations), telephone equipment or cabling, computer
equipment or cabling, or any similar items, regardless of whether or not such
items are affixed to or built inside interior partitions of the Leased Premises
or the Sublease Premises. Furthermore, Tenant agrees that it shall have no right
to the balance of the Tenant Improvement Allowance, and Landlord shall have no
further obligation to pay any costs or expenses for any Improvements, made or
constructed after December 31, 1998.
As soon as practical after any Plans are approved by Landlord
pursuant to Section 5(f), Landlord shall cause Contractor to determine the
estimated Tenant Improvement Costs in connection with the Improvements called
for thereunder (the "Estimated Costs"), and shall advise Tenant in writing of
the amount of Estimated Costs. Tenant shall approve or disapprove the Estimated
Costs within ten (10) business days after receipt thereof. Landlord's failure to
receive Tenant's notice disapproving the Estimated Costs within the applicable
time frame specified above shall be conclusively deemed Tenant's approval
thereof. Once the Estimated Costs have been approved by Tenant, the same shall
not increase except as a result of (i) changes to the Plans requested or
approved by Tenant, (ii) changes or additions to the Plans required to comply
with Laws as required by Section 2 of this Agreement, (iii) substitutions of
materials requested or approved by Tenant, or (iv) Tenant Delays. If the
Estimated Costs approved by Tenant exceed the amount of the remaining balance of
the Tenant Improvement Allowance, the excess (referred to herein as "Tenant's
Share of Estimated Costs") shall be paid by Tenant as follows:
(1) Tenant's Share of Estimated Costs shall be paid in three
equal installments. The first installment shall be due at the commencement of
the construction work, the second installment shall be due on that date which is
the midpoint between commencement and Substantial Completion of construction
under the applicable Schedule, and the final installment shall be due upon
Substantial Completion of the Improvements. Tenant shall pay the installments of
Tenant's Share of Estimated Costs in cash or immediately available funds.
(2) Promptly after such Improvements are Substantially
Complete, Landlord shall advise Tenant of the actual Tenant Improvement Costs in
connection therewith (the "Actual Costs"). If the Tenant's Share of the
Estimated Costs exceed the Actual Costs for which Tenant is responsible, then
such difference shall be returned to Tenant by Landlord's
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check payable to Tenant. If the Actual Costs for which Tenant is responsible
exceed what Tenant previously has paid as Tenant's Share of Estimated Costs,
Tenant shall pay such excess as Additional Rent in cash or immediately available
funds within ten (10) business days after Landlord delivers to Tenant an invoice
therefor. In the event Tenant must pay any amounts under this Agreement before
any such Improvements are Substantially Complete, then Landlord, at its option,
may cease construction until such amounts are paid, and any delay resulting
therefrom shall be Tenant Delays.
Delays.
The term "Tenant Delays" as used in this Agreement and the
Lease shall mean any delay in the completion of any such Improvements which is
due to any: (1) delay in the giving of authorizations or approvals by Tenant;
(2) delay attributable to the acts or failures to act, whether willful,
negligent or otherwise, of Tenant, its agents or contractors, where such acts or
any failures to act delay the completion of the Improvements; (3) delay
attributable to the interference of Tenant, its agents or contractors with the
completion of any Improvements; or (4) other matter set forth in this Agreement
or the Lease as Tenant Delays.
The term "Force Majeure Delay" as used in the Lease shall mean
and delay in the completion of any Improvements which is attributable to any:
(1) actual delay or failure to perform attributable to any strike, lockout or
other labor or industrial disturbance (whether or not on the part of the
employees of either party hereto), civil disturbance, future order claiming
jurisdiction, act of a public enemy, war, riot, sabotage, blockade, embargo,
inability to secure customary materials, supplies or labor through ordinary
sources by reason of regulation or order of any government or regulatory body;
(2) delay attributable to the failure of Landlord and/or Tenant to secure
building permits and approvals; (3) delay in the Substantial Completion of any
Improvements because of changes in any Laws (including, without limitation, the
Americans with Disabilities Act of 1990, Pub. L. 101-336), or the interpretation
thereof; or (4) delay attributable to lightning, earthquake, fire, storm,
hurricane, tornado, flood, washout, explosion, or any other cause beyond the
reasonable control of the party from whom performance is required, or any of its
contractors or other representatives. Any prevention, delay or stoppage due to
any Force Majeure Delay shall excuse the performance of the party affected for a
period of time equal to any such prevention, delay or stoppage (except the
obligations of either party to pay money, including rent and other charges,
pursuant to this Agreement or the Lease).
IN WITNESS WHEREOF, the parties have executed the Construction
Agreement as of the date first written above.
LANDLORD:
STATE OF CALIFORNIA
PUBLIC EMPLOYEES' RETIREMENT SYSTEM,
an Agency of the State of California
By LaSalle Advisors Limited Partnership, its authorized agent
By Joseph R. Shea
----------------------------------------
Its Vice President
-------------------------------
By Richard C. Cunningham
----------------------------------------
Its Vice President
--------------------------------
TENANT:
FORTE SOFTWARE, INC.,
a California corporation
By Robert Gorlin
----------------------------------------
Its Director of Legal Affairs
--------------------------------
-7-
<PAGE>
Exhibit 1
ALLIANCE MANAGEMENT & LEASING
1800 Harrison Street
Oakland, California 94612
____________________, 199__
VIA HAND DELIVERY
Forte Software, Inc.
1800 Harrison Street, Suite 2400
Oakland, California 94612
Attn:
Re: Approval of Plans Pursuant to Construction Agreement, dated as of
January __, 1997 (the "Agreement")
Dear _____________________________________ :
Pursuant to the Agreement, the undersigned, on behalf of Landlord (as
defined in the Agreement), hereby approves the following final plans and
specifications: [Insert Title of Plans], dated as of , 199___, prepared by
[Insert Name of Architect], bearing Job No. _______________, and consisting of
________ sheets (the "Plans").
[Pursuant to Section 5(g) of the Agreement, Landlord shall have the right
to require Tenant (as defined in the Agreement) to remove the improvements
{described on Schedule 1 attached hereto}{shown on the approved Plans identifed
on Schedule 1 attached hereto}{shown on the approved Plans attached hereto} and
incorporated herein by reference on the expiration or earlier termination of the
term of the Lease (as defined in the Agreement) or the Sublease (as defined in
the Agreement), as applicable.]
Very truly yours,
ALLIANCE MANAGEMENT & LEASING
By
Its __
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<PAGE>
SCHEDULE 1
Improvements Which May have to be Removed
[If none, insert the word "NONE."]
-9-
Exhibit 10.12
SUBLEASE
1. PARTIES
This Sublease ("Sublease"), dated for -reference purposes only January
16, 1997, is entered into between ICF Kaiser Engineers, Inc., an Ohio
corporation ("ICF"), and Forte Software, Inc., a Delaware corporation ("Forte").
2. DEMISE OF SUBLEASE PREMISES
2.1 ICF Kaiser Engineers, Inc., an Ohio corporation, and the State of
California Public Employees Retirement System, a Unit of the State and Consumer
Services Agency of the State of California ("Landlord"), successor-in-interest
to 1800 Harrison Limited Partnership, a Texas limited partnership, are parties
to an Amended And Restated Lease Agreement dated as of July 1, 1988 (the
"Restated Lease"), as modified and supplemented by Amendment to Amended and
Restated Lease Agreement dated March 27, 1991, Second Amendment to Lease dated
June 30, .1992, and Third Amendment to Lease dated April 27, 1993. The Restated
Lease, as so amended, is referred to in this Sublease as the " ICF Lease". A
true and complete copy of the ICF Lease is attached as Exhibit 1 to this
Sublease.
2.2 The ICF Lease demises to ICF certain premises in the building
commonly known as 1800 Harrison Street, Oakland, California (the "Building").
ICF desires to sublet a portion of the premises, as more particularly defined
below (tile "Sublease Premises") to Forte, and Forte also desires to take and
sublease the Sublease Premises.
2.3 Forte also occupies office space in the Building pursuant to a
Lease with Landlord dated December 1, 1994 (the "Forte Lease").,.
2.4 [Reserved]
2.5 In consideration of these facts and the mutual covenants of ICF and
Forte, and for other valuable consideration. ICF hereby sublets and demises to
Forte, and Forte hereby takes and hires from 1CF, the Sublease Premises on and
subject to the terms, covenants, and conditions set forth in this Sublease.
3. DEFINITIONS
3.1 As used in this Sublease, the following terms shall have the
meanings given in this Paragraph 3. 1:
"ICF Kaiser Engineers, Inc.", herein referred to as "ICF".
"Affiliate" means (i) a company which controls or is
controlled by a Party or is under common control with a Party, or (ii) is a
successor by merger or consolidation to a Party, or (iii) acquires all or
substantially all of the assets of a Party as a going concern at a time when
such Party is not in default under this Sublease.
"Building" means the 25-story office tower identified in
Paragraph 2.1 above and the related Parking Garage, all as more particularly
described in the ICF Lease.
"Base Rent" means the amounts payable pursuant to Paragraphs
7.1 and 7.2.
"Building" means the 25-story office tower identified in
Paragraph 2.1 above and the related Parking Garage, all as more particularly
described in the ICF Lease.
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<PAGE>
"Commencement Date" means January 1, 1997.
"Forte Lease" has the meaning given in Paragraph 2.3,
"ICF Lease" has the meaning given in Paragraph 2.1 above-
"Initial Alterations" has the meaning given in Paragraph 10. 1.
"Landlord's Consent and Agreement" means that certain Consent
to Sublease and Nondisturbance, Recognition and Attornment Agreement to be
executed by Forte, ICF, and Landlord in the form attached as Exhibit 2 to this
Sublease-
"Lease" means either the ICF Lease or the Forte Lease, depending on the
context in which such word is used.
"Operating Expenses" means with respect to the Sublease Premises those
items defined in the ICF Lease as "Basic Costs."
"Party" means each of ICF and Forte and the authorized assignees of
each of them, and "Parties" refers to both of them.
"Phase One" means the first phase of Forte's occupancy of the
Sublease Space beginning on the Commencement Date and continuing until January
31, 1998,; and "Phase One Space" means that portion of the Sublease Premises,
located on the 7th Floor and consisting of a significant portion of the
northeast and southeast quadrants of such Floor, containing approximately 16,636
square feet of Net Rentable Area, as depicted on Exhibit 4 to this Sublease. The
subleased premises shall include a pro rata portion of ICF's basement storage at
a rate of $0.675 per square foot per month.
"Phase Two" means the second phase of Forte's occupancy of the
Sublease Space beginning February1, 1998, and continuing until June 30, 2000;
and "Phase Two Space" means (i) that portion of the Sublease Premises located on
the 7th Floor, consisting of the remaining Net Rentable Area of such Floor,
containing approximately 22,066 square feet of Net Rentab1e Area and (ii) the
entire 6th Floor containing approximately 38,702 square feet of Net Rentable
Area. The Phase Two Space shall include all of ICF's basement storage space
(2,500 square feet of Net Rentable Area), at $0.675 per square foot/month..
During Phase Two, Forte shall continue to occupy the Phase One Space.
"Rent" means all amounts due from Forte to ICF under this
Sublease including, without limitation, Base Rent, Operating Expenses, and
Taxes.
"Sublease" means this Sublease and all exhibits referred to
herein and attached to this Sublease, which are incorporated herein by reference
as if set forth in full and made a part of this Sublease.
"Sublease Date" means the date upon which this Sublease is
fully executed by the Parties and all contingencies to its effectiveness are
satisfied.
"Sublease Premises" means these portions of the Building which
Forte is entitled to possess pursuant to this Sublease.
"Sublease Term" has the meaning given in Paragraph 6.1.
"Taxes" means: (i) with respect to the Sublease Premises those
items defined in the ICF Lease as "Tax Expenses."
3.2 Capitalized words and phrases used in this Sublease and not
otherwise defined herein shall have the meanings given them in the ICF Lease
where applicable to the Sublease Premises.
4. DELIVERY OF PREMISES
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<PAGE>
4.1 ICF shall deliver to Forte possession of the Sublease Premises
according to the following schedule:
4.1.1 ICF shall deliver the Phase One Space to Forte on
January 1, 1997.
4.1.2. ICF shall deliver the Phase Two Space to Forte on
February 1, 1998.
4.2 [Reserved]
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<PAGE>
5. CONDITION OF PREMISES UPON DELIVERY
5.1 At the time ICF delivers possession of any portion of the Sublease
Premises to Forte (i) ICF shall have removed all personal property, trade
fixtures, and equipment owned or controlled by ICF, and shall have repaired all
damage to the Sublease Premises occurring in connection with such removal, and
(ii) the Sublease Premises shall be in a clean, functioning order with all
Building systems serving the Sublease Premises in proper operating condition.
Subject to ICF's compliance with the covenants contained in the preceding
sentence, and without waiving or otherwise limiting Forte's right to rely on
ICF's representations and warranties elsewhere in this Sublease, Forte agrees to
accept possession of the Sublease Premises in the same condition as exists on
the Sublease Date, "AS IS", and "WITH ALL FAULTS," and ICF shall have no duty to
alter or otherwise improve the Sublease Premises prior to Forte's occupancy
under this Sublease.
5.2 [Reserved]
5.3 [Reserved]
5.4 ICF represents and warrants with respect to the Sublease
Premises that:
(a) The Sublease Premises are now, and on the date possession
is to be delivered under this Sublease the Sublease Premises shall be, in
compliance with all municipal, county, state, federal and other applicable laws,
ordinances, and regulations (collectively, "Laws"), governing or pertaining to
the Sublease Premises (but without regard to any change in the use or occupancy
of the Sublease Premises or alterations or improvements thereto occurring after
the delivery of possession hereunder to Forte under this Sublease or any other
sublease prior to the Commencement Date).
(b) The Sublease Premises, and all elements, systems, and
equipment serving the Sublease Premises, have been maintained in accordance with
the requirements imposed on ICF by the ICF Lease.
5.5 [Reserved]
6. SUBLEASE TERM
6.1 The term of this Sublease (the "Sublease Term") shall begin on the
Commencement Date and shall expire on June 30, 2000. If the commencement date
has not occurred by January 15, 1997, Forte may thereafter upon ten (10) day's
prior written notice to ICF terminate this sublease and all rights and
obligations of the parties hereunder.
7. BASE RENT
7.1 Beginning on the Commencement Date, Forte shall pay to ICF Base
Rent on the first day of each calendar month during the Sublease Term, in
advance and without prior notice, set off or demand, other than as permitted by
this Sublease. as follows:
7.1.1 During Phase One the Base Rent shall be Thirty Thousand
Seven Hundred Seventy-Six and 60/100's Dollars ($30,776.60) per month. Plus any
storage space occupied.
7.1.2. During Phase Two, the Base Rent shall be One Hundred
Forty Four Thousand Eight Hundred Eighty-four and 90/10's Dollars ($144,884.90)
per month. This includes the basement storage space.
7.2 Notwithstanding anything to the contrary in this Agreement, upon
any default by ICF of its obligations hereunder, at Forte's option upon written
notice to ICF, Forte may pay Base Rent and other amounts owed herein directly to
Landlord for the account of ICF.
7.3 [Reserved]
7.4 Upon execution of the Sublease, Forte shall deposit the amount of
Thirty Thousand Seven Hundred Seventy Six and 60/100's Dollars ($30,776.60),
with ICF as Trustee of the Security
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<PAGE>
Deposit. Said Deposit shall be held in a non-interest-bearing account which
shall be held as security during the Sublease Term for the faithful performance
by Forte of its obligations under this Sublease including, but not limited to,
payment of rent. As the Sublease Premises increase during Phase Two, so will the
amount of the deposit; the total deposit shall be increased to One Hundred
Fourteen Thousand One Hundred Eight and 30/100th's Dollars ($114,108.30), upon
the commencement of Phase Two on February 1, 1998.. Upon expiration of the
Sublease, ICF shall promptly return the deposited funds to Forte provided Forte
is not in default under the Sublease.
7.5 If the Commencement Date or any other day upon which Forte is to
commence paying Base Rent for an element of the Sublease Premises is a day other
than the first day of a calendar month, or if the Sublease Term with respect to
a portion of the Sublease Premises ends on a day other than the last day of a
calendar month, the Base Rent for such Sublease Premises during such calendar
month shall be prorated based upon a thirty (30) day month.
7.6 Base Rent and all other Rent shall be paid in immediately available
funds to the same place as is set forth below for the delivery of notices to ICF
subject, however, to Forte's right to pay Rent directly to Landlord as permitted
in Section 7.2.
8. OPERATING EXPENSES AND TAXES
8.1 Forte shall pay to ICF (or directly to Landlord for the account of
ICF as permitted in Section 7.2), Operating Expenses as follows:
8.1.1 No Operating Expenses or Taxes shall be payable for the
Sublease Premises during Phase One.
8.1.2. During Phase Two, Forte shall pay the Operating
Expenses and Taxes for the Sublease Premises as follows: Forte shall pay the
Operating Expenses and Taxes on the Phase One Space which are in excess of a
1997 Base Year and Forte shall pay the Operating Expenses and Taxes on the Phase
Two Space which are in excess of a 1998 Base Year.
8.2 [Reserved]
8.3 In determining the Operating Expenses and Taxes payable by Forte
hereunder, Landlord's statement of Operating Expenses and Taxes shall be used as
the basis for such calculations. However, ICF agrees, upon written request by
Forte, to exercise such audit rights as may be granted to ICF under the ICF
Lease and to contest any discrepancy in Landlord's statements of Operating
Expenses or Taxes disclosed by such audit by appropriate means. Reasonable costs
of such audit or contest shall be borne by the Parties in proportion to the
benefit derived by each of them therefrom, or shall be borne by Forte if there
is no benefit to such audit or contest.
8.4 Forte shall reimburse ICF within thirty (30) days after written
notice (accompanied by a copy of Landlord's invoice and satisfactory evidence of
payment by ICF), for any amounts paid to the Landlord as a consequence of
services provided to the Sublease Premises, or the acceleration of depreciation
of building systems which are in excess of that typically provided to tenants of
the Building and for which Landlord retains a right to separately charge ICF
under the ICF Lease. Such additional charges may be imposed only for
extraordinary electrical, heating, ventilating, and air conditioning, and other
Building services, with no overhead or mark-up beyond what is due Landlord under
the ICF Lease.
9. ASSIGNMENT AND SUBLETTING
9.1 Forte may assign its rights and interests under this Sublease, or
further sublet all or a portion of the Sublease Premises occupied by Forte, to
an Affiliate of Forte, provided (i) notice of such assignment or subletting is
given to ICF at least thirty (30) days in advance of the effective date, and
(ii) any consent or approval of Landlord required by the ICF Lease is first
obtained.
9.2 Where Forte desires to assign this Sublease, or further sublet all
or any part of the Sublease Premises to a person or entity other than an
Affiliate, Forte shall first obtain the written consent of ICF. Such consent
shall not be unreasonably withheld. However, ICF may reasonably withhold consent
under this Paragraph 9.2 where Landlord's consent also is required under the ICF
Lease and Landlord fails or refuses to give such consent (although nothing
herein shall relieve Landlord of liability for failure to give such consent
where the same is required by the ICF Lease).
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<PAGE>
9.3 If the ICF Lease imposes a right of recapture or a right of
Landlord to obtain or participate in any consideration received in excess of the
Rent payable under the ICF Lease, ICF shall be permitted to impose these same
requirements as a condition to consenting to an assignment or further subletting
under this Sublease.
9.5 No assignment of this Sublease or further subletting of
the Sublease Premises shall relieve Forte of its liability under this Sublease,
which shall remain the primary obligation of Forte.
10. ALTERATIONS
10.1 Forte shall have the right (subject to Landlord's consent, which
is to be obtained pursuant to Landlord's Consent and Agreement), to
substantially alter the Sublease Premises, as conceptually described in Exhibit
6 to this Sublease (the "Initial Alterations"). ICF shall make available to
Forte all plans and drawings (including CAD materials) pertaining to the
existing improvements in the Sublease Premises. Forte shall have no duty to
remove the Initial Alterations or restore the Sublease Premises except to the
extent such removal and restoration is required by Landlord's Consent and
Agreement.
10.2 Forte may at its option and expense during Phase One install
temporary wall and lockable doors between the Phase One Space to be occupied by
Forte and the remainder of the 7th Floor which will be occupied by ICF during
Phase One. ICF acknowledges and agrees that during Phase One Forte personnel and
invitees to the Phase One Space will pass through ICF's 7th Floor offices to
gain access to the Phase One Space and the 7th Floor kitchen facilities.
10.3 Forte's Initial Alterations in the Phase One Space will be
conducted while ICF is occupying the other half of the 7th Floor. Forte shall
undertake all reasonable efforts to mitigate disruption to ICF's use while such
work is being performed.
11. APPLICABLE LEASE PROVISIONS
11.1 1CF and Forte acknowledge that this Sublease, as it pertains to
the Sublease Premises, is subject and subordinate to the ICF Lease, and the
Parties agree with respect to the ICF Lease that:
11.1.1 The following Sections of the Restated Lease are hereby
incorporated as provisions of this Sublease applicable to the demise of the
Sublease Premises, with the same force and effect as if such incorporated
Sections were set forth word for word herein: 6.01, 6.02, 7.01, 7.02, 7.03,
8.01, 8.02, 8.03, 9.01, 9.02, 10.01, 10.02, 10.03, 11.01, 11.02, 11.03, 12.01,
12.02, 12.03, 13.01, 13.02, 13.03, 14.01, 14.03, 15.01, 15.02, 17.01, 17.02,
19.01, 20.01, 21.01, 22.01, 24.01, 25.01, and 27.01.
11.1.2 The incorporated sections of the ICF lease referenced in
paragraph 11.1.1 are amended or qualified as follows:
(a) Without limiting any of its other obligations under this
Sublease, ICF specifically agrees to pass through to Forte
all financial and other benefits received by ICF under
section 6.02 of the ICF lease.
(b) Forte shall obtain the use of eleven (11) parking spaces
during Phase I of the sublease term and the use of
thirty-eight (38) additional parking spaces during Phase
II.
(c) Notwithstanding any contrary provision of Subsection 14.01
(a) of the Restated Lease; Forte's vacation of the
Sublease Premises shall not be an event of default under
subpart (i) of Subsection 14.01(a) so long as Forte is
performing all other covenants and obligations imposed by
this Sublease, including without limitation, the payment
of all Rent; on no more than two (2) occasions during any
twelve (12) month period commencing on November 1 and
ending on October 31 of each calendar year. Forte shall be
entitled to a written notice of delinquency in the payment
of Rent and a three (3) business day grace period before
an event of default is declared under subpart (ii) of
Subsection 14.01 (a); the reference to "thirty (30) days"
in subpart (iii) of Subsection 14.01 (a) is changed to
"fifteen (15) business days"; and subparts (ix) and (x) of
Subsection 14.01 (a) are not incorporated as part of this
Sublease.
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<PAGE>
(d) The second sentence of Section 14.03 of the Restated Lease
are not incorporated as part of this Sublease.
(e) Subsection 27.01 (g) of the Restated Lease is not
incorporated as part of this Sublease.
11.1.3 Wherever the words " Landlord " and " Tenant " appear
in those provisions of the ICF Lease which are incorporated by reference in this
Sublease, they are changed to read 'ICF" and "Forte, respectively.
11.3 [Reserved]
11.3 In case of any conflict between the incorporated provisions of the
ICF Lease and the other terms and conditions of this Sublease which are
applicable to the Sublease Premises governed by the ICF Lease, the latter shall
control. If any incorporated provision of the ICF Lease cross-references another
provision of the ICF Lease which is not expressly incorporated in this Sublease,
such cross-referenced ICF Lease provision shall not be a part of this Sublease
except to the extent the same is integral to a fair and reasonable
interpretation of the incorporated ICF Lease provision.
12. MISCELLANEOUS
12.1 ICF represents and warrants with respect to the ICF Lease that:
(i) the attached Exhibit A is a true, correct and complete copy of the ICF
Lease; (ii) there are no other or additional documents forming a part of the ICF
Lease or constituting an amendment thereto; (iii) the ICF Lease is in full force
and effect and has not been amended or modified; (iv) ICF is not now, and as of
the Commencement Date will not be, in default or breach of any of the provisions
of the ICF Lease; and (v) ICF has no knowledge of any claim by Landlord that ICF
is in default or breach of any of the provisions of the ICF Lease.
12.2 Each of ICF and Forte further represents and warrants that there
is no brokerage commission, finder's fee ,or other similar compensation due to
any person as a result of the Parties' entry into this Sublease, except for such
fees as may be payable solely by ICF (and not by Forte), to Colliers Damner
Pike. Each of ICF and Forte shall defend, indemnify, and hold harmless the other
of and from all loss, cost, liability, and expense arising due to any actual or
alleged breach of the foregoing representation and warranty by the indemnifying
Party.
12.3 Whenever this Sublease calls for a Party to perform. any act, such
Party shall be obligated to do so at its sole cost and expense unless otherwise
expressly provided herein. Whenever this Sublease calls for either Party to give
its consent or approval, such consent or approval shall not be unreasonably
withheld or delayed.
12.4 So long as this Sublease remains in effect, ICF shall fully
observe, perform, and discharge all covenants and obligations imposed on ICF by
the ICF Lease. So lung as Forte is not in default under this Sublease after
notice and passage of the applicable grace period, Forte shall be entitled to
quiet and peaceable possession of the Sublease Premises, without interference or
hindrance by persons claiming by, through, or under ICF.
12.5 All notices required or permitted to be given hereunder shall be
in writing and shall be (i) delivered personally; (ii) sent by first class mail,
postage prepared, and simultaneously transmitted by facsimile; (iii) sent by
registered or certified mail, return receipt requested; or (iv) sent by
overnight courier with receipted delivery, in each case to ICF or Forte at its
address indicated below or at such other place or places as either ICF or Forte
may hereafter designate by written notice to the other.
To ICF: ICF Kaiser International, Inc.
9300 Lee Highway
Fairfax, VA 22031-1207
Attn.: Rex Akins
Facsimile No.: 703/934-9740
-16-
<PAGE>
To Forte: Forte Software, Inc.
1800 Harrison Street
Oakland, CA 94612
Attn.: Chief Financial Officer
Facsimile No.: 510/869-3480
With a copy to. Forte Software, Inc.
1800 Harrison Street
Oakland, CA 94612
Attn.: Director of Legal Affairs
Facsimile No.: 510/869-3480
Any notice delivered or sent shall be deemed to have been delivered under this
Sublease as follows: (a) on the date such notice is personally delivered; or (b)
on the next business day in the case of delivery pursuant to clause (ii) or (iv)
above; and (c) on the date shown on the return-receipt or, if no date is shown,
three days after the mailing of notice pursuant to clause (iii) above.
13. CONTINGENCY
This Sublease is contingent upon Landlord executing and delivering the Consent
to Sublease and Agreement, which ICF and Forte hereby agree to execute.
IN WITNESS WHEREOF, ICF and Forte have duly executed this Sublease on the dates
set forth below.
ICF Forte
ICF Kaiser Engineers, Inc., Forte Software, Inc.,
an Ohio corporation a Delaware Corporation
BY: Rex Akins BY: Robert Gorlin
Its: Vice President Its: Director of Legal Affairs
-17-
Exhibit 11.1
<TABLE>
FORTE SOFTWARE, INC.
COMPUTATION OF NET INCOME (LOSS) PER SHARE
(in thousands, except per share data)
<CAPTION>
Years Ended March 31,
---------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Actual weighted average shares outstanding for the period:
Weighted average common shares outstanding .............................. 3,395 3,785 18,458
Weighted average common shares attributable to stock options and warrants 237 430 2,652
SAB 83, Cheap stock ..................................................... 1,697 1,272 _
Conversion of outstanding preferred stock ............................... _ 602 _
------- ------- -------
Total common and cheap stock weighted average shares outstanding ........ 5,329 6,089 21,110
------- ------- -------
Net income (loss) ....................................................... $(7,350) $(1,988) $ 7,249
======= ======= =======
Net income (loss) per share ............................................. $ (1.38) $ (0.33) $ 0.34
======= ======= =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 35,103
<SECURITIES> 13,154
<RECEIVABLES> 18,691
<ALLOWANCES> 941
<INVENTORY> 0
<CURRENT-ASSETS> 67,010
<PP&E> 11,122
<DEPRECIATION> 4,633
<TOTAL-ASSETS> 73,749
<CURRENT-LIABILITIES> 23,355
<BONDS> 0
0
0
<COMMON> 188
<OTHER-SE> 64,169
<TOTAL-LIABILITY-AND-EQUITY> 73,749
<SALES> 63,051
<TOTAL-REVENUES> 63,051
<CGS> 12,461
<TOTAL-COSTS> 12,461
<OTHER-EXPENSES> 44,290
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 244
<INCOME-PRETAX> 8,288
<INCOME-TAX> 1,039
<INCOME-CONTINUING> 7,249
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,249
<EPS-PRIMARY> 0.34
<EPS-DILUTED> 0.34
</TABLE>
