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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(Mark One)
/X/ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the quarterly period ended June 30, 1997
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/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from _____ to_____
Commission file number: 0-27838
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FORTE SOFTWARE, INC.
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(Exact name of registrant as specified in its charter)
Delaware 94-3131872
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1800 Harrison Street
Oakland, California 94612
(510) 869-3400
(Address, including zip code, of Registrant's principal
executive offices and telephone number, including area code)
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $0.01 par value 19,266,988
(Class of common stock) (Shares outstanding at June 30, 1997)
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FORTE SOFTWARE, INC.
FORM 10-Q QUARTERLY REPORT
Table of Contents
PART I FINANCIAL INFORMATION
Item 1. Financial Statements Page
Condensed Consolidated Balance Sheets 3
At March 31, 1997 and June 30, 1997
Condensed Consolidated Statements of Operations 4
For the Three Months Ended June 30, 1996 and 1997
Condensed Consolidated Statements of Cash Flows 5
For the Three Months Ended June 30, 1996 and 1997
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial 8
Condition and Results of Operations
Part II OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities 21
Item 3. Defaults on Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits, Financial Statement Schedules and Reports on
Form 8-K 21
Signatures 22
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PART 1.
ITEM 1. FINANCIAL STATEMENTS
FORTE SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
March 31, June 30,
1997 1997
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(unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 35,103 $ 25,035
Short-term investments 13,154 17,547
Accounts receivable, net of allowances of $1,175
($941 at March 31,1997) 17,750 16,204
Prepaid expenses and other current assets 1,003 1,454
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Total current assets $ 67,010 $ 60,240
Equipment and leasehold improvements, net 6,489 6,809
Other assets 250 250
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Total assets $ 73,749 $ 67,299
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable 3,003 $ 1,421
Accrued expenses and other liabilities 10,190 7,331
Deferred revenue 9,247 8,512
Current portion of capital lease obligations 915 915
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Total current liabilities 23,355 18,179
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Capital lease obligations, due after one year 849 601
Deferred revenue 871 519
Commitments
Stockholders' equity:
Common Stock 188 193
Additional paid-in capital 64,169 65,567
Accumulated deficit (15,486) (17,732)
Foreign currency translation adjustments (197) (28)
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Total stockholders' equity 48,674 48,000
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Total liabilities and stockholders' equity $ 73,749 $ 67,299
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</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
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FORTE SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS; UNAUDITED)
Three months ended June 30,
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1996 1997
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Revenues:
License fees $ 8,023 $ 7,965
Maintenance and service 3,657 6,709
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Total revenues 11,680 14,674
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Operating expenses:
Cost of license fees 138 69
Cost of maintenance and service 2,378 4,129
Sales and marketing 5,765 9,257
Product development and engineering 2,284 3,046
General and administrative 1,279 1,547
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Total operating expenses 11,844 18,048
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Operating loss (164) (3,374)
Interest income, net 489 553
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Income (loss) before income taxes 325 (2,821)
Provision for income taxes (32) 575
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Net income (loss) $ 293 $(2,246)
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Net income (loss) per share $ 0.01 $ (0.12)
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Shares used in computing net
income (loss) Per share 21,136 19,105
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See accompanying notes to Condensed Consolidated Financial Statements.
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FORTE SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS; UNAUDITED)
Three months ended June 30,
-----------------------------
1996 1997
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OPERATING ACTIVITIES
Net income (loss) $ 293 $ (2,246)
Adjustments to reconcile net loss to net
cash used in operating
Activities:
Depreciation and amortization 494 884
Changes in operating assets and
liabilities:
Accounts receivable 2,184 1,636
Prepaid expenses and other assets 153 (451)
Accounts payable 384 (1,493)
Accrued expenses and other
liabilities (893) (2,859)
Deferred revenue (178) (1,087)
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Net cash provided by (used in)
operating activities 2,437 (5,616)
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INVESTING ACTIVITIES
Purchases of equipment and leasehold
improvements (1,139) (1,204)
Purchase of short-term investments (7,065) (5,653)
Maturities of short-term investments - 1,250
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Net used in investing activities (8,204) (5,607)
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FINANCING ACTIVITIES
Reduction in capital lease obligations (323) (248)
Proceeds from issuance of common stock 24 1,403
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Net cash (used in) provided by financing
activities (299) 1,155
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Decrease in cash and cash equivalents (6,066) (10,068)
Cash and cash equivalents at beginning
of period 35,081 35,103
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Cash and cash equivalents at end of
period $29,015 $ 25,035
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Supplemental disclosures:
Interest paid $ 67 $ 62
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Income taxes paid $ 41 $ 128
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Supplemental disclosures of noncash
investing and Financing activities:
Capital lease obligations incurred $ 90 $ -
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See accompanying notes to Condensed Consolidated Financial Statements.
5
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FORTE SOFTWARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements included herein
reflect all adjustments, consisting only of normal recurring accruals, which in
the opinion of management are necessary to fairly present the Company's
consolidated financial position, results of operations, and cash flows for the
periods presented. These financial statements should be read in conjunction with
the Company's audited consolidated financial statements as included in the
Annual Report on Form 10-K for the year ended March 31, 1997. Certain
information and footnote disclosures normally included in audited financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the Securities and Exchange
Commission rules and regulations. The consolidated results of operations for
the period ended June 30, 1997 are not necessarily indicative of the results to
be expected for any subsequent quarter or for the entire fiscal year ending
March 31, 1998. The March 31, 1997 balance sheet was derived from audited
financial statements, but does not include all disclosures required by generally
accepted accounting principles.
NET INCOME (LOSS) PER SHARE
Net income per share is computed using the weighted average number of
outstanding shares of common stock and the common stock equivalents from
outstanding stock options (when dilutive using the treasury stock method). In
February 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings per Share," which the Company will be required to adopt on
March 31, 1998. At that time the Company will be required to change the
method currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating primary earnings per
share, the dilutive effect of the stock options will be excluded. This change
is expected to have no impact on primary earnings per share for the first
quarter ended June 30, 1997 and will result in an increase of $0.01 in
primary earnings per share for the first quarter ended June 30, 1996. The
impact of Statement 128 on the calculation of fully diluted earnings per
share for those quarters is not expected to be material.
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FORTE SOFTWARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(UNAUDITED)
SHORT-TERM INVESTMENTS
As of June 30, 1997, all short-term investments were classified as
available-for-sale securities pursuant to the provisions of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." Available-for-sale securities are stated at estimated fair market
value. Differences between the estimated fair market value and cost were not
material.
The following is a summary of the Company's investments and reconciliation
of the Company's investments to the balance sheet at June 30, 1997 (in
thousands).
Estimated
Fair
Value
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Commercial Paper $ 17,376
Medium Term Notes 6,346
Corporate Bonds 1,131
Corporate Notes 6,044
Foreign Debt Securities Auction rate preferred stock 3,828
4,214
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Total investments $ 38,939
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Estimated
Fair
Value
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Cash equivalents $ 21,392
Short-term investments 17,547
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Total investments $ 38,939
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Cash 3,643
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Total cash, cash equivalents and short-term investments $ 42,582
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS
WHICH REFLECT THE COMPANY'S CURRENT VIEWS WITH RESPECT TO FUTURE EVENTS AND
FINANCIAL PERFORMANCE. IN THIS REPORT, THE WORDS "ANTICIPATE," "BELIEVES,"
"EXPECTS," "INTENDS," "FUTURE," "ESTIMATES," AND OTHER SIMILAR EXPRESSIONS
IDENTIFY FORWARD-LOOKING STATEMENTS. THESE FORWARD-LOOKING STATEMENTS ARE
SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES, INCLUDING THOSE DISCUSSED IN
"BUSINESS RISKS" BELOW AND IN "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS," THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM HISTORICAL RESULTS OR THOSE ANTICIPATED.
The following table sets forth certain consolidated statement of operations
data as a percentage of total revenues for the three months ended June 30, 1996
and 1997.
Three months ended June 30,
1996 1997
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(unaudited) (unaudited)
Revenues:
License 68.7% 54.3%
Maintenance and service 31.3 45.7
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Total revenues 100.0 100.0
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Cost of revenues:
License 1.2 0.5
Maintenance and service 20.4 28.1
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Total cost of revenues 21.5 28.6
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Gross profit 78.5 71.4
Operating expenses:
Sales and marketing 49.4 63.1
Product development and engineering 19.6 20.8
General and administrative 11.0 10.5
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Total operating expenses 79.9 94.4
Operating loss (1.4) (23.0)
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Interest income, net 4.2 3.8
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Income before income taxes 2.8 (19.2)
Provision for income taxes (0.3) (3.9)
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Net income (loss) 2.5% (15.3)%
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8
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RESULTS OF OPERATIONS
REVENUES. The Company's total revenues consist of license fees for its
Forte application environment and related products as well as associated
maintenance and service revenues. The Company licenses software under
non-cancelable license agreements and provides services including maintenance,
training and consulting. License revenues are recognized when a non-cancelable
license agreement has been signed, the product has been shipped, the fees are
fixed and determinable and collectibility is reasonably assured. Fees for
services are charged separately from the license of the Company's software
products. Maintenance revenues consist of fees for ongoing support and product
updates and are recognized ratably over the term of the contract, which is
typically twelve months. Revenues from training are recognized upon completion
of the related training class. Consulting revenues are recognized as the
services are performed. Allowances for credit risks and for estimated future
returns are provided for upon shipment. Returns to date have not been material.
Actual credit losses and returns may differ from the Company's estimates and
such differences could be material to the financial statements.
The Company's license agreements typically require the payment of a
nonrefundable, one-time license fee for a license of perpetual term. Customers
make separate payments for annual maintenance and other services. Customers can
terminate the license at any time but do not have a right to a refund of the
fees for licenses 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.
The Company's total revenues increased 26% from $11.7 million to $14.7
million for the quarters ended June 30, 1996 and 1997, respectively. The
Company's license revenues were $8.0 million in each of the quarters ended June
30, 1996 and 1997 representing 69% and 54% of total revenue for the quarters
ended June 30, 1996 and 1997, respectively. Total license revenues for the first
quarter in fiscal 1998 did not increase compared to the first quarter in fiscal
1997 primarily due to turnover in the sales force during fiscal 1997, longer
sales cycles and time required to train and assimilate new sales representatives
and managers.
Maintenance and service revenues increased 83% from $3.7 million or 31% of
total revenues, to $6.7 million, or 46% of total revenues, for the quarters
ended June 30, 1996 and 1997, respectively. These increases in total maintenance
and service revenues were primarily a result of the growing installed base the
Company's software products and the associated increase in demand for
maintenance, training and consulting services. Service revenues as a percentage
of total revenues may vary between periods due to changes in demand for the
Company's services and changes in the rate of growth of license revenue.
International revenues include all revenues other than from the United
States. International revenues include sales from the Company's direct sales
organizations in Europe and Australia and export sales through distributors and
resellers in Asia, Europe and other areas of the world, as well as international
sales made by the domestic direct sales organization. International revenues
increased 84% from $3.4 million to $6.2 million for the quarters ended June 30,
1996 and June 1997, representing 29% and 42% of total revenues, for the quarters
ended June 30, 1996 and 1997, respectively. The increase in international
revenues reflects a growing direct sales presence in Europe and Australia
through the Company's foreign subsidiaries and branches as well as growth from
distributors in Asia. 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
9
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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.
COST OF REVENUES
COST OF LICENSE REVENUES. Cost of license revenues consists primarily of
royalties paid to third-party vendors, product packaging, documentation and
production. Cost of license revenues was $138,000 and $69,000 for the quarters
ending June 30, 1996 and 1997, representing 2% and 1% of license revenues,
respectively. Cost of license revenues varies as a percentage of license revenue
because costs of media production and product packaging have not been material
and have been expensed as incurred. Such expenses are dependent on the number of
new releases in a given quarter.
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 $2.4 million and $4.1 million for the
quarters ending June 30, 1996 and 1997, representing 65% and 62% of maintenance
and service revenues, respectively. The decrease in cost of maintenance and
service revenues for the quarter ended June 30, 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 training,
support and consulting personnel. The Company does not expect its cost of
maintenance and service revenues to continue to materially decrease as a
percentage of maintenance and service revenues. The cost of services as a
percentage of services revenues may vary between periods due to the mix of
services provided by the Company and the extent to which external contractors
are used to provide those services.
OPERATING EXPENSES
SALES AND MARKETING. Sales and marketing expenses consist primarily of
salaries, commissions and bonuses earned by sales and marketing personnel, field
office expenses, travel and entertainment and promotional expenses and
advertising. Sales and marketing expenses increased from $5.8 million for the
quarter ended June 30, 1996 to $9.3 million for the quarter ended June 30, 1997.
These increases reflect the hiring of additional sales and marketing personnel,
and their related costs, as well as increased costs associated with expanded
promotional and advertising activities. Sales and marketing expenses represented
49% and 63% of total revenues for the quarters ended June 30, 1996 and 1997,
respectively. The increase in sales and marketing expenses as a percentage of
total revenue was primarily due to increased cost of hiring additional personal
in the direct sales force coupled with slower 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 the future.
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PRODUCT DEVELOPMENT. Product development expenses consist primarily of
salaries and other personnel-related expenses and depreciation of development
equipment. The Company believes that a significant level of investment for
product development is required to remain competitive. Product development
expenses increased from $2.3 million for the quarter ended June 30, 1996 to $3.0
million for the quarter ended June 30, 1997. This increase was primarily
attributable to additional hiring of product development personnel. Product
development expenses represented 20% and 21% of total revenues for the quarters
ended June 30, 1996 and 1997, respectively. The Company anticipates that it will
continue to devote substantial resources to product development and that product
development expenses will increase in dollar amount in the future. Because all
costs incurred in the research and development of software products and
enhancements to existing software products have been expensed as incurred, cost
of license revenues includes no amortization of capitalized software development
costs.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
from $1.3 million for the quarter ended June 30, 1996 to $1.5 million in for the
quarter ended June 30, 1997. These increases were primarily due to increased
staffing and associated expenses necessary to manage and support the Company's
increased scale of operations. General and administrative expenses represented
11% of total revenues for each of the quarters ended June 30, 1996 and 1997.
The Company believes that its general and administrative expenses will increase
in dollar amount in the future as a result of the expansion of the Company's
administrative staff to support its growing operations.
INTEREST INCOME, NET. Interest income, net, represents interest earned by
the Company on its cash and cash equivalents and short-term investments offset
by interest expense and capitalized leases. Interest income, net, increased
from $489,000 for the quarter ended June 30, 1996 to $553,000 for the quarter
ended June 30, 1997.
PROVISION FOR INCOME TAXES. The Company has recorded an effective tax rate
of approximately 20% in the quarter ended June 30, 1997 based on the Company's
annualized estimates. This rate differs from the federal statutory rate
primarily due to the utilization of the net operating loss carryovers and tax
credits. The rate could change based on the mix of the Company's geographic
locations and the amount of permanent reinvestment offshore of a portion of the
Company's earnings, or changes in the tax law.
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LIQUIDITY AND CAPITAL RESOURCES
The Company completed an initial public offering of common stock on
March 11, 1996 with net proceeds of $34.3 million. The common stock is trading
on the Nasdaq National Market under the symbol FRTE.
The Company used cash of $5.6 million in operating activities for the
quarter ended June 30, 1997 compared to cash provided by operating activities of
$2.4 million for the quarter ended June 30, 1996. For the quarter ended June 30,
1997, the decrease in cash flow from operations resulted primarily from the net
loss for the quarter and decreases in accounts payable, accrued expenses and
other liabilities and deferred revenue, partially offset by a decrease in
accounts receivable. For the quarter ended June 30, 1996, cash provided by
operating activities was primarily due to net income for the quarter, a decrease
in accounts receivable and an increase in accounts payable, partially offset by
an decrease in accrued expenses and other liabilities.
The Company's investing activities consisted of the purchases of
interest-bearing securities representing a shift from cash equivalents to short
term investments, as well as purchases of property and equipment. Capital
expenditures were $1.2 million for the quarter ended June 30, 1997 compared to
$1.1 million for the same period in fiscal 1996. Capital expenditures
consisted of purchases of computer equipment and office furniture to support its
growing employee base. The Company expects that its capital expenditures will
increase as the Company's employee base grows. At June 30, 1997 the Company did
not have any material commitments for capital expenditures.
At June 30, 1997, the Company had $42.6 million in cash, cash equivalents
and short term investments and $42.1 million in working capital. The Company
believes that its existing cash, cash equivalents, short-term investments will
be adequate to meet its cash needs for at least the next 12 months. Thereafter,
the Company may require additional funds to support its working capital
requirements or for other purposes and may seek to raise such additional funds
through public or private equity financings or from other sources. There can be
no assurance that additional financing will be available at all or that, if
available, such financing will be obtainable on terms favorable to the Company
and would not be dilutive.
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BUSINESS RISKS
IN EVALUATING THE COMPANY'S BUSINESS, READERS SHOULD CAREFULLY CONSIDER THE
BUSINESS RISKS DISCUSSED IN THIS SECTION IN ADDITION TO THE OTHER INFORMATION
PRESENTED IN THIS QUARTERLY REPORT ON FORM 10-Q. THIS REPORT ON FORM 10-Q
CONTAINS FORWARD-LOOKING STATEMENTS WHICH REFLECT THE COMPANY'S CURRENT VIEWS
WITH RESPECT TO FUTURE EVENTS AND FINANCIAL PERFORMANCE. IN THIS REPORT, THE
WORDS "ANTICIPATE," "BELIEVES," "EXPECTS," "INTENDS," "FUTURE," "ESTIMATES," AND
OTHER SIMILAR EXPRESSIONS IDENTIFY FORWARD-LOOKING STATEMENTS. THESE
FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES,
INCLUDING THOSE DISCUSSED BELOW, THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM HISTORICAL RESULTS OR THOSE ANTICIPATED.
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS; UNCERTAINTY OF
FUTURE OPERATING RESULTS; SEASONALITY; EXPECTED LOSS IN QUARTER ENDING
SEPTEMBER 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
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.
13
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To achieve its quarterly revenue objectives, the Company is dependent upon
obtaining orders in any given quarter for shipment in that quarter. Furthermore,
the Company has often recognized a substantial portion of its revenues in the
last month, or even weeks or days, of a quarter. The Company's expense levels
are based, in significant part, on the Company's expectations as to future
revenues and are therefore relatively fixed in the short term. If revenue levels
fall below expectations, net income is likely to be disproportionately adversely
affected because a proportionately smaller amount of the Company's expenses
varies with its revenues. There can be no assurance that the Company will be
able to achieve or maintain profitability on a quarterly or annual basis in the
future. Due to all the foregoing factors, it is likely that in some future
quarter the Company's operating results will be below the expectations of public
market analysts and investors. In such event, the price of the Company's Common
Stock would likely be materially adversely affected.
The operating results of many software companies reflect seasonal trends,
and the Company expects to be affected by such trends in the future. The Company
believes that it is likely that it will experience lower revenues in its
quarters ending June 30 as a result of efforts by its direct sales force to meet
the March 31 fiscal year-end sales quotas. Since international operations
constitute a significant percentage of the Company's total revenues, the Company
anticipates that it may also experience relatively weaker demand in the quarter
ending September 30 as a result of reduced sales activity in Europe during the
summer months. As a result of this seasonality coupled with the growth in
operating expenses, the Company expects to incur a net loss for the quarter
ending September 30, 1997.
LIMITED OPERATING HISTORY; HISTORY OF OPERATING LOSSES. The Company was
founded in February 1991 and first shipped product in August 1994. For the
quarter ended June 30, 1997 the Company had a net loss and a decrease in revenue
compared to the quarter ended March 31, 1997. For the each of the eleven
quarters prior to the quarter ended June 30, 1997, the Company's revenues had
increased and the Company had net income in each of the quarters ended December
31, 1995 through March 31, 1997. The Company has an accumulated deficit of $17.7
million as of June 30, 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.
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
14
<PAGE>
be no assurance that the Company will be successful in attracting and retaining
such personnel. Competitors and others have in the past and may in the future
attempt to recruit the Company's employees. Failure to attract and retain key
personnel could have a material adverse effect on the Company's business,
operating results and financial condition.
PRODUCT CONCENTRATION; DEPENDENCE ON EMERGING MARKET FOR DISTRIBUTED
APPLICATIONS. All of the Company's revenues have been attributable to sales of
Forte and related products and services. The Company currently expects Forte and
related products and services to account for all or substantially all of the
Company's future revenues. As a result, factors adversely affecting the pricing
of or demand for Forte and related products, such as competition or
technological change, could have a material adverse effect on the Company's
business, operating results and financial condition. The Company's future
financial performance will depend, in significant part, on the successful
development, introduction and customer acceptance of new and enhanced versions
of Forte and related products. There can be no assurance that the Company will
continue to be successful in marketing the Forte product, related products or
other products. Although the Company has recently experienced growth in sales of
Forte, there can be no assurance that the market for distributed applications
will continue to grow. If the distributed applications market fails to grow, or
grows more slowly than the Company currently anticipates, the Company's
business, operating results and financial condition would be materially and
adversely affected.
RISKS ASSOCIATED WITH EXPANDING DISTRIBUTION. To date, the Company has
sold its products through its direct sales force, distributors and value added
resellers. The Company's ability to achieve significant revenue growth in the
future will depend in large part on its success in recruiting and training
sufficient direct sales personnel and establishing and maintaining relationships
with distributors, resellers and system integrators. Although the Company is
currently investing, and plans to continue to invest significant resources to
expand its direct sales force and to develop distribution relationships with
third-party distributors and resellers, the Company has at times experienced and
continues to experience difficulty in recruiting and retaining qualified sales
personnel and in establishing necessary third-party relationships. There can be
no assurance that the Company will be able to successfully expand its direct
sales force or other distribution channels or that any such expansion will
result in an increase in revenues. Any failure by the Company to expand its
direct sales force or other distribution channels would materially adversely
affect the Company's business, operating results and financial condition.
COMPETITION. The market for distributed software used in the development,
deployment and management of distributed applications is intensely competitive
and characterized by rapidly changing technology, evolving industry standards,
frequent new product introductions and rapidly changing customer requirements.
Distributed applications that can be developed and deployed using the Company's
Forte environment can also be implemented 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, networking, database and 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
15
<PAGE>
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 Sterling Software Inc. 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.
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.
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. In addition, there
are a large number of alternative methods to develop applications which can
require significant time for potential customers to evaluate. For these and
other reasons, the sales cycle associated with the license of the Company's
products is often lengthy and subject
16
<PAGE>
to a number of significant delays over which the Company has little or no
control. There can be no assurance that the Company will not experience these
and additional delays in the future. Therefore, the Company believes that its
quarterly operating results are likely to vary significantly in the future.
RISK ASSOCIATED WITH NEW VERSIONS AND NEW PRODUCTS; RAPID TECHNOLOGICAL
CHANGE. The software market in which the Company competes is characterized by
rapid technological change, frequent introductions of new products, changes in
customer demands and evolving industry standards. The introduction of products
embodying new technologies and the emergence of new industry standards can
render existing products obsolete and unmarketable. For example, the Company's
customers have adopted a wide variety of hardware, software, database,
networking and Internet-based platforms, and as a result, to gain broad market
acceptance, the Company has had to support Forte on many of such platforms. The
Company's customers use the Company's proprietary development language to
develop applications using the Company's products, and customers may desire to
utilize other widely-used programming languages to develop Internet-based and
other distributed applications. The Company's future success will depend upon
its ability to address the increasingly sophisticated needs of its customers by
supporting existing and emerging hardware, software, programming language,
database, networking and Internet-based platforms and by developing and
introducing enhancements to Forte, related products and new products on a timely
basis that keep pace with such technological developments and emerging industry
standards and changing customer requirements. There can be no assurance that the
Company will be successful in developing and marketing enhancements to Forte and
related products that respond to technological change, evolving industry
standards or changing customer requirements, that the Company will not
experience difficulties that could delay or prevent the successful development,
introduction and sale of such enhancements or that such enhancements will
adequately meet the requirements of the marketplace and achieve any significant
degree of market acceptance. The Company has in the past experienced delays in
the release dates of enhancements to Forte. If release dates of any future Forte
enhancements or new products are delayed or if when released they fail to
achieve market acceptance, the Company's business, operating results and
financial condition would be materially adversely affected. In addition, the
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
17
<PAGE>
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 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 29% and 42% of the Company's total
revenues for the quarters ended June 30, 1996 and 1997, respectively. The
Company currently has international sales offices located in Australia, Belgium,
Canada, France, Germany, Switzerland, and the United Kingdom which have
generated substantially all direct international revenues recognized by the
Company to date. The Company believes that in order to increase sales
opportunities and profitability it will be required to continue to expand its
international operations. The Company has committed and continues to commit
significant management time and financial resources to developing direct and
indirect international sales and support channels. There can be no assurance,
however, that the Company will be able to maintain or increase international
market demand for Forte and related products. To the extent that the Company is
unable to do so in a timely manner, the Company's international sales will be
limited, and the Company's business, operating results and financial condition
would be materially and adversely affected.
International operations are subject to inherent risks, including the
impact of possible recessionary environments in economies outside the United
States, costs of localizing products for foreign markets, longer receivables
collection periods and greater difficulty in accounts receivable collection,
unexpected changes in regulatory requirements, difficulties and costs of
staffing and managing foreign operations, reduced protection for intellectual
property rights in some countries, potentially adverse tax consequences and
political and economic instability. There can be no assurance that the Company
or its distributors or resellers will be able to sustain or increase
international revenues from licenses or from maintenance and service, or that
the foregoing factors
18
<PAGE>
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
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.
19
<PAGE>
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
volatility that has particularly affected the market prices of equity securities
of many high technology companies and that often has been unrelated or
disproportionate to the operating performance of such companies. These market
fluctuations may adversely affect the price of the Common Stock.
EFFECT OF CERTAIN CHARTER PROVISIONS; ANTI-TAKEOVER EFFECTS OF RIGHTS PLAN,
CERTIFICATE OF INCORPORATION, DELAWARE LAW AND CERTAIN AGREEMENTS. The
Company's Board of Directors has the authority to issue up to 5,000,000 shares
of Preferred Stock and to determine the price, rights, preferences, privileges
and restrictions, including voting and conversion rights of such shares, without
any further vote or action by the Company's stockholders. The rights of the
holders of Common Stock will be subject to, and may be adversely affected by,
the rights of the holders of any Preferred Stock that may be issued in the
future. The issuance of Preferred Stock could have the effect of making it more
difficult for a third party to acquire a majority of the outstanding voting
stock of the Company. The Company has no current plans to issue shares of
Preferred Stock. Further, the Company has adopted a stockholder rights plan
that, in conjunction with certain provisions of the Company's Certificate of
Incorporation and of Delaware law, could delay or make more difficult a merger,
tender offer, or proxy contest involving the Company.
20
<PAGE>
PART II
ITEM 1. LEGAL PROCEEDINGS
The Company is not aware of any pending or threatened litigation that could
have a material adverse effect upon the Company's business, operating results or
financial condition.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS ON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 11.1 Statement Regarding Computation of Earnings Per Share
(b) Exhibit 27 Financial Data Schedule
(c) No reports on Form 8-K have been filed during the quarter ended June
30, 1997.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, as amended, the
Registrant has duly caused this Report on Form 10-Q to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Oakland, State of
California, on this 4th day of August, 1997.
FORTE SOFTWARE, INC.
By: /s/ RODGER E. WEISMANN
Rodger E. Weismann
VICE PRESIDENT, FINANCE AND ADMINISTRATION, CHIEF
FINANCIAL OFFICER AND SECRETARY
22
<PAGE>
EXHIBIT 11.1
FORTE SOFTWARE, INC.
COMPUTATION OF LOSS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED
JUNE 30,
---------
1996 1997
---- ----
Actual weighted average shares outstanding
for the period:
Common Stock 18,322 19,105
Common Stock Equivalents 2,814 -
-------- --------
--------
Total common and equivalents stock weighted
average shares outstanding 21,136 19,105
-------- --------
-------- --------
Net income (loss) 293 (2,246)
--------
Net income (loss) per share $0.01 $(0.12)
-------- --------
-------- --------
23
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