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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 December 31, 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
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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
--- ---
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 19,478,507
(Class of common stock) (Shares outstanding at December 31, 1997)
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FORTE SOFTWARE, INC.
REPORT ON FORM 10-Q
Table of Contents
PART I FINANCIAL INFORMATION
Item 1. Financial Statements Page
Condensed Consolidated Balance Sheets 3
At March 31, 1997 and December 31, 1997
Condensed Consolidated Statements of Operations 4
For the Three and Nine Months Ended December 31, 1996 and 1997
Condensed Consolidated Statements of Cash Flows 5
For the Nine Months Ended December 31, 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 23
Item 2. Changes in Securities 23
Item 3. Defaults on Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 23
Signatures 24
2
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PART 1.
ITEM 1. FINANCIAL STATEMENTS
FORTE SOFTWARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1997
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(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 35,103 $ 23,091
Short-term investments 13,154 13,072
Accounts receivable, net of allowances of $1,034 ($941 at
March 31, 1997) 17,750 16,177
Prepaid expenses and other current assets 1,003 1,795
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Total current assets 67,010 54,135
Equipment and leasehold improvements, net 6,489 7,375
Other assets 250 400
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Total assets $ 73,749 $ 61,910
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,003 $ 1,772
Accrued expenses and other liabilities 10,190 9,532
Deferred revenue 9,247 9,328
Current portion of capital lease obligations 915 784
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Total current liabilities 23,355 21,411
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Capital lease obligations, due after one year 849 249
Deferred revenue 871 298
Commitments
Stockholders' equity:
Common stock 188 195
Additional paid-in capital 64,169 66,814
Accumulated deficit (15,486) (27,004)
Foreign currency translation adjustments (197) (58)
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Total stockholders' equity 48,674 39,947
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Total liabilities and stockholders' equity $ 73,749 $ 61,910
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</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
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FORTE SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS; UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Nine months ended
December 31, December 31,
1996 1997 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
License fees $ 12,205 $ 9,575 $ 30,061 $ 27,459
Maintenance and services 5,368 7,770 13,406 22,048
---------- --------- ---------- ----------
Total revenues 17,573 17,345 43,467 49,507
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Operating expenses:
Cost of license fees 228 220 494 460
Cost of maintenance and
services 3,211 4,874 8,131 13,512
Sales and marketing 7,697 12,365 20,063 32,374
Product development and
engineering 2,784 4,074 7,633 10,787
General and administrative 1,250 1,933 3,777 5,387
---------- --------- ---------- ----------
Total operating expenses 15,170 23,466 40,098 62,520
---------- --------- ---------- ----------
Income (loss) from operations 2,403 (6,121) 3,369 (13,013)
Interest income, net 488 462 1,497 1,530
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Income (loss) before income taxes 2,891 (5,659) 4,866 (11,483)
Provision for income taxes 342 630 579 35
------- ------- ------- -------
Net income (loss) $ 2,549 $ (6,289) $ 4,287 $ (11,518)
---------- --------- ---------- ----------
---------- --------- ---------- ----------
Net income (loss) per share - basic $ 0.14 $ (0.32) $ 0.23 $ (0.60)
---------- --------- ---------- ----------
---------- --------- ---------- ----------
Net income (loss) per share - diluted $ 0.12 $ (0.32) $ 0.20 $ (0.60)
---------- --------- ---------- ----------
---------- --------- ---------- ----------
Shares used to calculate net income
(loss) per share:
Basic 18,452 19,424 18,371 19,275
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------ ------ ------ ------
Diluted 21,156 19,424 21,124 19,275
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</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
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FORTE SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS; UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended December 31,
------------------------------
1996 1997
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<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 4,287 $(11,518)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,788 2,956
Changes in operating assets and liabilities:
Accounts receivable (5,472) 1,646
Prepaid expenses and other assets (154) (942)
Accounts payable 321 (1,159)
Accrued expenses and other liabilities 3,256 (658)
Deferred revenue 398 (492)
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Net cash provided by (used in) operating activities 4,424 (10,167)
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INVESTING ACTIVITIES
Purchases of equipment and leasehold improvements (3,149) (3,842)
Purchase of short-term investments (10,784) (10,774)
Maturities of short-term investments 4,856 10,850
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Net cash used in investing activities (9,077) (3,766)
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FINANCING ACTIVITIES
Reduction in capital lease obligations (869) (731)
Proceeds from issuance of common stock 1,432 2,652
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Net cash provided by financing activities 563 1,921
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Decrease in cash and cash equivalents (4,090) (12,012)
Cash and cash equivalents at beginning of period 35,081 35,103
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Cash and cash equivalents at end of period $ 30,991 $ 23,091
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Supplemental disclosures:
Interest paid $ 192 $ 133
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Income taxes paid $ 162 $ 458
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Supplemental disclosures of noncash investing and
financing activities:
Capital lease obligations incurred $ 90 $ -
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</TABLE>
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 December 31, 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.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"). SFAS 130 establishes standards for the reporting of comprehensive income
and its components in a full set of general-purpose financial statements for
fiscal years beginning after December 15, 1997. Reclassification of financial
statements for earlier periods for comparative purposes is required. The Company
will adopt SFAS 130 in fiscal year 1999 and does not expect such adoption to
have a material effect on the consolidated financial statements.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures About Segments of An
Enterprise and Related Information" ("SFAS 131"). SFAS 131 revises information
regarding the reporting of operating segments. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. The Company will adopt SFAS 131 in fiscal year 1999 and does not
expect such adoption to have a material effect on the consolidated financial
statements.
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,"("SFAS 128") which is effective for both interim and
annual financial periods ended after December 15,1997. SFAS 128 replaced the
previously reported primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options,
6
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warrants and convertible securities. Diluted earnings per share is similar to
the previously reported fully diluted earnings per share. All earnings per share
amounts for all periods have been presented, and where necessary, restated to
conform to the SFAS 128 requirements.
SHORT-TERM INVESTMENTS
As of December 31, 1997, all short-term investments were classified as
available-for-sale securities pursuant to the provisions of Financial Accounting
Standards Board Statement No. 115, "Accounting for Certain Investments in Debt
and Equity Securities." Available-for-sale securities are stated at estimated
fair market value. Differences between the estimated fair market value and cost
were not material.
The following is a summary of the Company's investments and reconciliation of
the Company's investments to the balance sheet at December 31, 1997 (in
thousands).
<TABLE>
<CAPTION>
Estimated
Fair
Value
-----------
<S> <C>
Commercial paper $ 19,648
Medium -term notes 4,884
Corporate notes 4,445
Foreign debt securities 3,825
-----------
Total investments $ 32,802
-----------
-----------
<CAPTION>
Estimated
Fair
Value
-----------
<S> <C>
Cash equivalents $ 19,730
Short-term investments 13,072
-----------
Total investments $ 32,802
-----------
-----------
Cash 3,361
-----------
Total cash, cash equivalents
and short-term investments $ 36,163
-----------
-----------
</TABLE>
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS WHICH
REFLECT THE COMPANY'S CURRENT VIEWS WITH RESPECT TO FUTURE EVENTS AND FINANCIAL
PERFORMANCE. IN THIS REPORT, THE WORDS "ANTICIPATE," "BELIEVES," "EXPECTS,"
"INTENDS," "FUTURE," "ESTIMATES," AND OTHER SIMILAR EXPRESSIONS IDENTIFY
FORWARD-LOOKING STATEMENTS. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO
CERTAIN RISKS AND UNCERTAINTIES, INCLUDING THOSE DISCUSSED IN "BUSINESS RISKS"
BELOW AND IN "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS," THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY
FROM HISTORICAL RESULTS OR THOSE ANTICIPATED.
The following table sets forth certain unaudited condensed consolidated
statement of operations data as a percentage of total revenues for the three and
the nine month periods ended December 31, 1996 and 1997.
<TABLE>
<CAPTION>
Three months ended Nine months ended
December 31, December 31,
1996 1997 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
License 69.4 % 55.2 % 69.2 % 55.5 %
Maintenance and service 30.6 44.8 30.8 44.5
--------- --------- --------- ---------
Total revenues 100.0 100.0 100.0 100.0
--------- --------- --------- ---------
--------- --------- --------- ---------
Cost of revenues:
License 1.3 1.3 1.1 0.9
Maintenance and service 18.3 28.1 18.7 27.3
--------- --------- --------- ---------
Total cost of revenues 19.6 29.4 19.8 28.2
Gross profit 80.4 70.6 80.2 71.8
Operating expenses:
Sales and marketing 43.8 71.3 46.2 65.4
Product development and
engineering 15.8 23.5 17.6 21.8
General and administrative 7.1 11.1 8.7 10.9
--------- --------- --------- ---------
Total operating expenses 66.7 105.9 72.5 98.1
Income (loss) from operations 13.7 (35.3) 7.7 (26.3)
--------- --------- --------- ---------
Interest income, net 2.8 2.7 3.4 3.1
--------- --------- --------- ---------
Income (loss) before income taxes 16.5 (32.6) 11.1 (23.2)
Provision for income taxes (1.9) (3.6) (1.3) (0.1)
--------- --------- --------- ---------
Net income (loss) 14.6 % (36.2) % 9.8 % (23.3) %
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
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 product shipment. Returns to date have not been material. Actual credit
losses and returns may differ from the Company's estimates and such differences
could be material to the financial statements.
The Company's license agreements typically require the payment of a
nonrefundable, one-time license fee for a license of perpetual term. Customers
make separate payments for annual maintenance and other services. Customers can
terminate the license at any time but do not have a right to a refund of the
fees for licenses or for services that have been performed. The Company can
terminate the license agreement only upon a material breach by the other party,
provided that the breach is not cured within a specified cure period.
The Company's total revenues decreased 1% from $17.6 million to $17.3 million
for the quarters ended December 31, 1996 and 1997, respectively. For the nine
months ended December 31, 1996 and 1997 total revenues increased by 14% from
$43.5 million to $49.5 million respectively. License revenues decreased by
22% from $12.2 million to $9.6 million for the quarters ended December 31,
1996 and 1997, respectively. For the nine months ended December 31, 1996 and
1997 license revenues decreased by 9% from $30.1 million to $27.5 million
respectively. The Company believes that the license revenue decrease is
primarily due to a slowdown in the overall market for enterprise application
development software, and the extended sales productivity ramp up needed for
the Company's new U.S. sales representatives. The Company believes the
market slowdown results from several factors, including but not limited to
(1) a diversion of customer resources from enterprise application development
to the Year 2000 problem, (2) a general shortage of qualified programmers and
a shift of available programming resources from corporate users to systems
integrators, (3) market confusion caused by the complex and rapidly changing
mix of alternative technologies for enterprise application development, and
(4) the increased availability and popularity of packaged software
applications. The Company believes that market factors have resulted in
progressively longer and more complex sales cycles for the Company's
products. While the overall sales force headcount grew substantially during
the first nine months of fiscal 1998, significant turnover resulted in an
overall reduction of the Forte-related experience level of the Company's
North American sales force. The Company experienced lower productivity per
sales representative during the first nine months of fiscal 1998 as compared
to the first nine months of fiscal 1997. The Company believes that this
reduction in productivity resulted from market factors and lengthening sales
cycles as discussed above, and the overall reduction in Forte-related
experience of the Company's North American sales force. See also DEPENDENCE
ON KEY PERSONNEL, PRODUCT CONCENTRATION; DEPENDENCE ON
9
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EMERGING MARKET AND RISKS ASSOCIATED WITH THE YEAR 2000, in the section entitled
"Business Risks," below.
Maintenance and services revenues increased 45% from $5.4 million, or 31% of
total revenues, to $7.8 million, or 45% of total revenues, for the quarters
ended December 31, 1996 and 1997, respectively. Maintenance and services revenue
for the nine months ended December 31, 1997, increased by 65% from $13.4 million
in 1996 to $22.0 million for the same period in 1997. These increases in total
maintenance and service revenues were primarily a result of the growing
installed base in the Company's software products and the associated increase in
demand for maintenance, training and consulting services. Services revenues as a
percentage of total revenues may vary between periods due to changes in demand
for the Company's services and changes in the rate of growth of license revenue.
International revenues include all revenues other than from the United States.
International revenues include sales from the Company's direct sales
organizations in Europe and Australia and export sales through distributors and
resellers in Asia, Europe and other areas of the world, as well as international
sales made by the domestic direct sales organization in Canada. International
revenues increased 8% from $7.8 million for the quarter ended December 31, 1996
to $8.5 million for the quarter ended December 31, 1997, representing 45% and
49% of total revenues, respectively. International revenues increased 39% from
$16.2 million for the nine months ended December 31, 1996 to $22.5 million for
the same period in 1997. The increase in international revenues reflects growing
direct sales presence in Europe through the Company's foreign subsidiaries,
partially offset by lower revenues in Asia and Latin America. The Company
expects that international license and related maintenance and service revenues
will continue to account for a significant portion of its total revenues in the
future. The Company believes that in order to increase sales opportunities and
profitability, it will be required to continue expanding its international
operations. The Company has committed and continues to commit significant
management time and financial resources to developing direct and indirect
international sales and support channels. There can be no assurance, however,
that the Company will be able to maintain or increase international market
demand for Forte and related products. To the extent that the Company is unable
to do so in a timely manner, the Company's international sales will be limited,
and the Company's business, operating results and financial condition would be
materially adversely affected.
COST OF REVENUES
COST OF LICENSE REVENUES. Cost of license revenues consists primarily of
production and documentation, royalties paid to third-party vendors and product
packaging. Cost of license revenues was $228,000 and $220,000 for the quarters
ended December 31, 1996 and 1997, respectively, representing 2% of license
revenues in each of the periods. Cost of license revenues for the nine months
ended December 31, 1996 and 1997 was $494,000 and $460,000, respectively,
representing 2% of total license fee revenue for each of the periods. Cost of
license revenues may vary as a percentage of license revenue due to changes in
the Company's royalty obligations to third party technology providers and the
number of new products and product releases in a given period.
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COST OF MAINTENANCE AND SERVICES REVENUES. Cost of maintenance and services
revenues consist primarily of personnel-related and facilities costs incurred in
providing customer support, training and consulting services, as well as costs
incurred in providing training and consulting services through third party
contractors. Cost of maintenance and services revenues was $3.2 million and $4.9
million for the quarters ended December 31, 1996 and 1997, respectively,
representing 60% and 63% of maintenance and services revenues, respectively. The
increase in cost of maintenance and service expense was primarily due to an
increase in the amount of consulting services provided by outside consultants.
Cost of maintenance for the nine months ended December 31, 1996 and 1997 was
$8.1 million and $13.5 million respectively, representing 61% of maintenance and
services revenues in each of the periods. The cost of services as a percentage
of services revenues may vary between periods due to the mix of services
provided by the Company and the extent to which external contractors are used to
provide those services.
OPERATING EXPENSES
SALES AND MARKETING. Sales and marketing expenses consist primarily of
salaries, commissions and bonuses earned by sales and marketing personnel,
field office expenses, travel and entertainment, promotional and lead
generation expenses, and advertising. Sales and marketing expenses increased
from $7.7 million for the quarter ended December 31, 1996 to $12.4 million
for the quarter ended December 31, 1997, and increased from $20.1 million
for the nine months ended December 31, 1996 to $32.4 million for the nine
months ended December 31, 1997. These increases reflect the hiring of
additional sales and marketing personnel, and their related costs, as well as
increased costs associated with expanded promotional, training, and lead
generation activities. Sales and marketing expenses represented 44% and 71%
of total revenues for the quarters ended December 31, 1996 and 1997,
respectively. Sales and marketing expenses represented 46% and 65% of total
revenues for the nine months ended December 31, 1996 and 1997, respectively.
The increase in sales and marketing expenses as a percentage of total revenue
was primarily due to heavy investment in marketing, pipeline development,
sales force headcount and training coupled with slower revenue growth in the
first nine months of fiscal 1998 compared to the first nine months of fiscal
1997. The Company expects that sales and marketing expenses will slightly
increase in dollar amount from quarter to quarter.
PRODUCT DEVELOPMENT AND ENGINEERING. Product development and Engineering
expenses consist primarily of salaries and other personnel-related expenses and
depreciation of development equipment. The Company believes that a significant
level of investment for product development is required to remain competitive.
Product development expenses increased from $2.8 million for the quarter ended
December 31, 1996 to $4.1 million for the quarter ended December 31, 1997.
Product development expenses increased from $7.6 million for the nine months
ended December 31, 1996 to $10.8 million for the nine months ended December 31,
1997. These increases were primarily attributable to additional hiring of
product development personnel and the outsourcing of certain development work.
Product development expenses represented 16% and 24% of total revenues for the
quarters ended December 31, 1996 and 1997, respectively. Product development
expenses represented 18% and 22% of total revenues for the nine months ended
December 31, 1996 and 1997, respectively. The increase in product development
expenses as a percentage of total revenues was primarily due to the Company's
continued commitment of investment on significant internet, Java and mainframe
initiatives, hiring of product development personnel, and the outsourcing of
certain development work, coupled with slower revenue growth in the first nine
11
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months of fiscal 1998 compared to the first nine months of fiscal 1997. The
Company anticipates that it will continue to devote substantial resources to
product development and that product development expenses will increase in
dollar amount in the future. Because all costs incurred in the research and
development of software products and enhancements to existing software products
have been expensed as incurred, cost of license revenues includes no
amortization of capitalized software development costs.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased from
$1.3 million for the quarter ended December 31, 1996 to $1.9 million in for
the quarter ended December 31, 1997. General and administrative expenses
increased from $3.8 million for the nine months ended December 31, 1996 to $5.4
million for the nine months ended December 31, 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 7% and 11% of total revenues for the
quarters ended December 31, 1996 and 1997, respectively. General and
administrative expenses represented 9% and 11% for the nine months ended
December 31, 1996 and 1997, respectively. The increase in general and
administration expenses as a percentage of total revenues was primarily due
slower revenue growth in the first nine months of fiscal 1998 compared to the
first nine months fiscal 1997, coupled with continuing improvements in the
Company's administrative infrastructure. The Company believes that its general
and administrative expenses will increase in dollar amount in the future as a
result of the expansion of the Company's administrative staff to support its
growing operations.
INTEREST INCOME, NET. Interest income, net, represents interest earned by
the Company on its cash and cash equivalents and short-term investments
offset by interest expense on capitalized leases. Interest income, net,
decreased from $488,000 for the quarter ended December 31, 1996 to $462,000
for the quarter ended December 31, 1997. The decrease was primarily due to a
lower average cash and short-term investments balances in the current quarter
compared to the quarter ended December 31, 1996. Interest income, net, was
$1.5 million for each of the nine month periods ended December 31, 1996 and
1997.
PROVISION FOR INCOME TAXES. The Company's financial results for the third
quarter ended December 31, 1997 included a $630,000 or $0.03 per share tax
expense as the Company adjusted its estimated tax rate for fiscal 1998, which
resulted in an adjustment to tax benefits recorded in earlier quarters. For
the nine months ended December 31, 1997, there was no provision for federal
or state income taxes as the Company incurred net operating losses and there
can be no assurance that the Company will realize the benefit of the net
operating loss carryforwards. The Company also recorded a provision related
to foreign income tax withholding on certain license fees paid to the Company
by foreign licensees.
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.
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At December 31, 1997, the Company had $36.2 million in cash, cash equivalents
and short term investments and $32.7 million in working capital, which is the
Company's primary source of liquidity.
The Company used cash of $10.2 million in operating activities for the nine
months ended December 31, 1997 compared to cash provided by operating activities
of $4.4 million for the nine months ended December 31, 1996. For the nine months
ended December 31, 1997, the decrease in cash flow from operations resulted
primarily from the net loss for the nine month period and decreases in accounts
payable, accrued expenses and other liabilities and deferred revenue, partially
offset by a decrease in accounts receivable.
The Company's investing activities consisted of the purchases of
interest-bearing securities as well as purchases of property and equipment.
Capital expenditures were $3.8 million for the nine months ended December 31,
1997 compared to $3.1 million for the same period in 1996. Capital expenditures
primarily consisted of purchases of computer equipment. At December 31, 1997 the
Company did not have any material commitments for capital expenditures.
The Company believes that its existing cash, cash equivalents, short-term
investments will be adequate to meet its cash needs for at least the next 12
months. Thereafter, the Company may require additional funds to support its
working capital requirements or for other purposes and may seek to raise such
additional funds through public or private equity financings or from other
sources. There can be no assurance that additional financing will be available
at all or that if available, such financing will be obtainable on terms
favorable to the Company and would not be dilutive.
BUSINESS RISKS
IN EVALUATING THE COMPANY'S BUSINESS, READERS SHOULD CAREFULLY CONSIDER THE
BUSINESS RISKS DISCUSSED IN THIS SECTION IN ADDITION TO THE OTHER INFORMATION
PRESENTED IN THIS QUARTERLY REPORT ON FORM 10-Q. THIS REPORT ON FORM 10-Q
CONTAINS FORWARD-LOOKING STATEMENTS WHICH REFLECT THE COMPANY'S CURRENT VIEWS
WITH RESPECT TO FUTURE EVENTS AND FINANCIAL PERFORMANCE. IN THIS REPORT, THE
WORDS "ANTICIPATE," "BELIEVES," "EXPECTS," "INTENDS," "FUTURE," "ESTIMATES," AND
OTHER SIMILAR EXPRESSIONS IDENTIFY FORWARD-LOOKING STATEMENTS. THESE
FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES,
INCLUDING THOSE DISCUSSED BELOW, THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM HISTORICAL RESULTS OR THOSE ANTICIPATED.
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS; UNCERTAINTY OF
FUTURE OPERATING RESULTS; SEASONALITY; POTENTIAL LOSS IN QUARTER ENDING MARCH
31, 1998. 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 due to intervening information
technology projects of a higher priority or in anticipation of enhancements or
new products offered
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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,
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 highly qualified sales personnel in the future. The timing
of the Company's hiring of new sales personnel and the rate at which new sales
people become productive could also cause material fluctuations in the Company's
quarterly operating results. Due to the foregoing factors, quarterly revenues
and operating results are difficult to forecast. Revenues are also difficult to
forecast because the market for distributed enterprise application development
software is rapidly evolving, and the Company's sales cycle, from initial
evaluation to purchase and the provision of support services, is lengthy and
varies substantially from customer to customer. Product orders are typically
shipped shortly after receipt, and consequently, order backlog at the beginning
of any quarter has in the past represented only a small portion of that
quarter's revenues. As a result, license revenues in any quarter are
substantially dependent on orders booked and shipped in that quarter. Due to all
of the foregoing, revenues for any future quarter are not predictable with any
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.
The prior revenue growth experienced by the Company 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 regain 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. Due to the
market slowdown and other factors discussed above in the "Results of Operations"
section of the Management's Discussion and Analysis of Financial Condition and
Results of Operations, the Company expects to incur a net loss for the quarter
ended March 31, 1998. 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
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percentage of the Company's total revenues, the Company anticipates that it may
also experience relatively weaker demand in the quarters ending September 30 as
a result of reduced sales activity in Europe during the summer months. Due to
the foregoing reasons, the Company could incur losses in the quarters ended June
30, 1998 and September 30, 1998.
LIMITED OPERATING HISTORY; HISTORY OF OPERATING LOSSES. The Company was
founded in February 1991 and first shipped product in August 1994. After
achieving profitability for two quarters through March 31, 1997, for the three
quarters ended June 30, 1997, September 30, 1997 and December 31, 1997, the
Company incurred net losses. At December 31, 1997 the Company had an accumulated
deficit of $27.0 million. A substantial portion of the accumulated deficit is
due to the significant commitment of resources to the Company's product
development, sales and marketing organizations. The Company expects to continue
to devote substantial resources in these areas and as a result will need to
recognize significant revenues to regain 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.
PRODUCT CONCENTRATION; IMPACT OF MARKET FACTORS. 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. The Company's prior growth in
sales of Forte should not be considered indicative of future growth, as there
can be no assurance that the market for products used in the development,
deployment and management of distributed applications will continue to grow.
Recently industry analysts and competitors have noted that market demand in the
enterprise application development sector appears to be slowing, and predicted
that the prior success achieved by that sector may not continue in future
periods, due to a variety of factors including but not limited to (1) a
diversion of customer resources from enterprise application development to the
Year 2000 problem and other higher priority information technology projects, (2)
a general shortage of qualified programmers and a shift of available programming
resources from corporate users to systems integrators, (3) market confusion
caused by the complex and rapidly changing mix of alternative technologies for
enterprise application development, and (4) the increased availability and
popularity of packaged software applications. Additionally, recent
instability in the Asian-Pacific economies and financial markets, which had
previously been cited as a potentially strong source of revenue growth, has
introduced additional uncertainty concerning the sector. If the market for
products used in the development, deployment and management of distributed
applications 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.
DEPENDENCE ON KEY PERSONNEL. The Company's success depends to a
significant degree upon the continuing contributions of its key management,
sales, marketing, software development
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and customer support personnel, and its ability to attract and retain such
highly-skilled personnel. The loss of key personnel could materially and
adversely affect the Company. Competition for qualified personnel is intense,
particularly in the sales and software development areas, and there can be no
assurance that the Company can retain its existing personnel or that it can
attract, assimilate and retain additional highly qualified personnel in the
future. The timing of the Company's hiring of new sales personnel 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. The Company experienced significant turnover in
its North America sales force during the first nine months of fiscal 1998.
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.
RISKS ASSOCIATED WITH EXPANDING DISTRIBUTION. To date, the Company has
sold its products through its direct and indirect sales force, systems
integrators, distributors and value added resellers. The Company's customers and
potential customers often rely on third-party system integrators and value added
resellers to develop and deploy distributed applications. The Company's ability
to achieve significant revenue growth in the future will depend in large part on
its success in recruiting, training and retaining sufficient sales personnel and
establishing and maintaining relationships with distributors, resellers and
systems integrators. Although the Company is currently investing, and plans to
continue to invest significant resources to maintain and selectively expand its
sales force and to develop relationships with third-party distributors,
resellers and systems integrators, 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 hire, train and
retain needed sales personnel or develop and maintain sufficient third party
relationships, or that such efforts will result in an increase in revenues. Any
failure by the Company to maintain a sufficiently large and trained sales force
and continue to establish other distribution channels would materially adversely
affect the Company's business, operating results and financial condition.
COMPETITION. The market for distributed software used in the development,
deployment and management of distributed applications is intensely competitive
and characterized by rapidly changing technology, evolving industry standards,
frequent new product introductions and rapidly changing customer requirements.
Distributed applications that can be developed and deployed using the Company's
Forte environment can also be implemented by integrating a combination of
application development tools and more powerful server programming techniques
such as stored procedures in relational databases and C or C++ programming,
along with networking and database middleware to connect the various components.
As such, the Company effectively experiences its primary competition from
potential customers' decisions to pursue this type of approach as opposed to
utilizing an application environment such as Forte. As a result, the Company
must continuously educate existing and prospective customers, and third party
systems integrators on whom prospective customers are increasingly relying for
expertise, on the advantages of the Company's products over the approach of
integrating a combination of products. There can be no assurance that these
customers, potential customers or
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systems integrators will perceive sufficient value in the Company's products to
justify purchasing or recommending them.
The Company has also experienced and expects to continue to experience increased
competition from a number of vendors that market software products specifically
targeted for building distributed applications. Actual and potential
competitors include: providers of application development software, such as
Compuware/Uniface, Dynasty Technologies, Inc., IBM, Microsoft Corporation, NAT
Systems, Inc., Oracle Corporation, Seer Technologies, Inc., Sterling Software,
Inc., and the Powersoft unit of Sybase, Inc.; web-based development tools
targeting production enterprise Internet applications; middleware companies
advocating a middleware-centric approach to building enterprise applications;
developers of packaged applications and application components, templates and
frameworks; and integration software vendors.
Many of these competing vendors have or will have significantly greater
financial, technical, marketing and other resources than the Company, and may be
able to respond more quickly to new or emerging technologies. Also, many
current and potential competitors have greater name recognition and more
extensive customer bases that could be leveraged, thereby gaining market share
to the Company's detriment. The Company expects to face additional competition
as other established and emerging companies enter the distributed application
development market and new products and technologies are introduced. Increased
competition could result in price reductions, fewer customer orders, reduced
gross margins and loss of market share, any of which could materially adversely
affect the Company's business, operating results and financial condition. In
addition, current and potential competitors may make strategic acquisitions or
establish cooperative relationships among themselves or with third parties,
thereby increasing the ability of their products to address the needs of the
Company's prospective customers. Accordingly, it is possible that new
competitors or alliances among current and new competitors may emerge and
rapidly gain significant market share. Such competition could materially
adversely affect the Company's ability to sell additional licenses and
maintenance and support renewals on terms favorable to the Company. Further,
competitive pressures could require the Company to reduce the price of Forte
licenses and related products and services, which could materially adversely
affect the Company's business, operating results and financial condition. There
can be no assurance that the Company will be able to compete successfully
against current and future competitors, and the failure to do so would have a
material adverse effect upon the Company's business, operating results and
financial condition.
The principal competitive factors affecting the market for Forte are ease of
application development, deployment and management functionality and features,
product architecture, product performance, reliability and scaleability, product
quality, price and customer support. The 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.
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NEW ACCOUNTING STANDARDS. In October 1997, the Financial Accounting Standards
Board issued Statement of Position No. 97-2, "Software Revenue Recognition"
("SOP 97-2"). The Company will be required to adopt this standard in its
first quarter of fiscal year 1999 ending June 30, 1998 and restatement of
prior financial statements is prohibited. SOP 97-2 supersedes SOP 91-1, and
addresses software revenue recognition matters primarily from a conceptual
level and does not include specific implementation guidance. Detailed
implementation guidelines have not yet been issued. The Company believes that
the implementation guidelines could result in changes to the Company's
revenue recognition policies and procedures, which could have a material
adverse effect on the Company's revenues and operating results.
LENGTHY SALES CYCLE. The Company's products are typically used to develop
applications that are critical to a customer's business and the purchase of the
Company's products is often part of a customer's larger business process
reengineering initiative or implementation of distributed computing. As a
result, the license and implementation of the Company's software products
generally involves a significant commitment of management attention and
resources by prospective customers. Accordingly, the Company's sales process is
often subject to delays associated with a long approval process that typically
accompanies significant initiatives or capital expenditures. In addition, there
are a large number of alternative methods or technologies to develop
applications which can require significant time for potential customers to
evaluate, and implementation of a favorable decision to license the Company's
products may be subject to delay due to higher priority projects such as Year
2000 compliance. 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.
RISKS ASSOCIATED WITH THE YEAR 2000. Many currently installed computer
systems and software products are coded to accept only two digit entries in the
date code field. These date code fields will need to accept four digit entries
to distinguish 21st century dates from 20th century dates. As a result, in less
than two years, computer systems and/or software used by many companies may need
to be upgraded to comply with such "Year 2000" requirements. There are
several aspects to the Year 2000 issue, as follows:
a. IMPACT ON REVENUE. The Company believes that the purchasing
patterns of customers and potential customers may be affected by Year 2000
issues in a variety of ways. Many companies are expending significant resources
to correct or patch their current software systems for Year 2000 compliance.
These expenditures may result in reduced funds available to purchase enterprise
application software products such as those offered by the Company.
Conversely, Year 2000 issues may cause other companies to accelerate purchases
of application development and deployment software to replace non-Year 2000
compliant applications, causing a short-term increase in demand for the
Company's products. There is no assurance that such increase in demand will be
realized, or that companies will resume application development if and when they
resolve their Year 2000 problems. Either of the foregoing could have a material
adverse effect upon the Company's business, operating results and financial
condition.
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b. YEAR 2000 COMPLIANCE. The Company believes that its products are
fully Year 2000 compliant. All Forte products use four digit years for all
internal manipulations and representations. In addition, for customers who
require the storage and manipulation of two digit years, the Company's current
products provide the ability to specify a range of years for comparison and
calculation. For example, the customer may specify that the years 0-39 are
interpreted as 2000-2039 and the years 40-99 are interpreted as 1940-1999.
Using this feature a customer can save on the amount of data stored and
manipulated by Forte. The Company regularly runs regression tests on its
software, including tests for the above functionality at the Year 2000
rollover. Based on the above, it is not expected that the Company's products
will be adversely affected by date changes in the year 2000. However there can
be no assurance that the Company's products contain and will contain all
features and functionality considered necessary by customers, distributors,
resellers and systems integrators to be Year 2000 compliant.
c. INTERNAL SYSTEMS. Although the Company is not aware of any
material operational issues or costs associated with preparing its internal
systems for the year 2000, there can be no assurance that the Company will not
experience serious unanticipated negative consequences and /or material costs
caused by undetected errors or defects in the technology used in its internal
systems, which include third party software and hardware technology.
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
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Forte and related products, which could have a material adverse effect on the
Company's business, operating results and financial condition.
LIMITED DEPLOYMENT; DEPENDENCE ON SYSTEM INTEGRATORS AND VALUE ADDED
RESELLERS. The Company first shipped Forte in August 1994. To date, only a
limited number of the Company's customers have completed the development and
deployment of distributed applications using Forte and related products. If any
of the Company's customers are not able to successfully develop and deploy
distributed applications with Forte and related products, the Company's
reputation could be damaged, which could have a material adverse effect on the
Company's business, operating results and financial condition. In addition, the
Company expects that a significant percentage of its future revenues will be
derived from sales to existing customers. If existing customers have difficulty
deploying applications built with Forte and related products or for any other
reason are not satisfied with Forte products, the Company's business, operating
results and financial condition would be materially adversely affected. The
Company's customers and potential customers often rely on third-party system
integrators and value added resellers to develop and deploy distributed
applications. If the Company is unable to adequately train a sufficient number
of system integrators and value added resellers or if, for any reason, a large
number of such integrators and value added resellers adopt a product or
technology other than Forte, the Company's business, operating results and
financial condition would be materially and adversely affected.
RISK OF SOFTWARE DEFECTS. Software products as internally complex as Forte
and related products frequently contain errors or defects, especially when first
introduced or when new versions or enhancements are released. The Company
introduced Release 2.0 of Forte in November 1995, Release 3.0 of Forte in August
in 1997 and the initial release of Forte Conductor in September 1997. Despite
extensive product testing by the Company, the Company has discovered software
errors in its releases after their introduction. Although the Company has not
experienced material adverse effects resulting from any such defects or errors
to date, there can be no assurance that, despite testing by the Company and by
current and potential customers, defects and errors will not be found in current
versions, new versions, new product or enhancements to existing products after
commencement of commercial shipments, resulting in loss of revenues or delay in
market acceptance, which could have a material adverse effect upon the Company's
business, operating results and financial condition.
PRODUCT LIABILITY. The Company markets Forte to customers for the
development, deployment and management of distributed applications. The
Company's license agreements with its customers typically contain provisions
designed to limit the Company's exposure to potential product liability claims.
It is possible, however, that the limitation of liability provisions contained
in the Company's license agreements may not be effective as a result of existing
or future federal, state or local laws or ordinances or unfavorable judicial
decisions. Although the Company has not experienced any product liability claims
to date, the sale and support of Forte by the Company may entail the risk of
such claims, which are likely to be substantial in light of the use of Forte in
business-critical applications. A successful product liability claim brought
against the Company could have a material adverse effect upon the Company's
business, operating results and financial condition.
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RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS. Revenues from foreign
subsidiaries and export sales accounted for 45% and 49% of the Company's total
revenues for the quarters ended December 31, 1996 and 1997, respectively, and
37% and 45% for the nine months ended December 31, 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
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Company. The Company has obtained registration of the FORTE trademark in one
country and has trademark registration applications pending in numerous
additional countries. Despite the Company's efforts to protect its proprietary
rights, unauthorized parties may attempt to copy aspects of the Company's
products or to obtain and use information that the Company regards as
proprietary. Policing unauthorized use of the Company's products is difficult,
and while the Company is unable to determine the extent to which piracy of its
software products exists, software piracy can be expected to be a persistent
problem. In addition, the laws of some foreign countries do not protect the
Company's proprietary rights as fully as do the laws of the United States. There
can be no assurance that the Company's means of protecting its proprietary
rights in the United States or abroad will be adequate or that competition will
not independently develop similar technology. The Company has entered into
source code escrow agreements with a limited number of its customers and
resellers requiring release of source code in certain circumstances. Such
agreements generally provide that such parties will have a limited,
non-exclusive right to use such code in the event that there is a bankruptcy
proceeding by or against the Company, if the Company ceases to do business or if
the Company fails to meet its support obligations. In addition, Digital
Equipment Corporation ("Digital") and Mitsubishi Corporation ("Mitsubishi") each
currently possesses copies of Forte source code for certain limited purposes,
subject to the terms of separate written agreements each company has entered
into with the Company. Digital has an option to purchase a non-exclusive,
fully-paid license of the Forte source code. Digital's option becomes
exercisable if the Company is acquired and the acquiror fails to agree to assume
the Company's contractual obligations to Digital. The provision of source code
may increase the likelihood of misappropriation by third parties.
The Company is not aware that it is infringing any proprietary rights of
third parties. There can be no assurance, however, that third parties will not
claim infringement by the Company of their intellectual property rights. The
Company expects that software product developers will increasingly be subject to
infringement claims as the number of products and competitors in the Company's
industry segment grows and the functionality of products in different industry
segments overlaps. Any such claims, with or without merit, could be time
consuming to defend, result in costly litigation, divert management's attention
and resources, cause product shipment delays or require the Company to enter
into royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to the Company, if at all. In
the event of a successful claim of product infringement against the Company and
failure or inability of the Company to license the infringed or similar
technology, the Company's business, operating results and financial condition
would be materially adversely affected.
The Company relies upon certain software that it licenses from third
parties, including software that is integrated with the Company's internally
developed software and used in Forte to perform key functions. There can be no
assurance that these third-party software licenses will continue to be available
to the Company on commercially reasonable terms. The loss of, or 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
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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.
PART II
ITEM 1. LEGAL PROCEEDINGS
The Company is not aware of any pending or threatened litigation that could have
a material adverse effect upon the Company's business, operating results or
financial condition.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS ON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
23
<PAGE>
(a) Exhibit 11.1 Statement Regarding Computation of Earnings Per Share
Exhibit 27 Financial Data Schedule
(b) No reports on Form 8-K have been filed during the quarter ended
December 31, 1997.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, as amended, the
Registrant has duly caused this Report on Form 10-Q to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Oakland, State of
California, on this the 13th day of February, 1997.
FORTE SOFTWARE, INC.
By: /s/ RODGER E. WEISMANN
Rodger E. Weismann
SENIOR VICE PRESIDENT, FINANCE AND ADMINISTRATION,
CHIEF FINANCIAL OFFICER AND SECRETARY
24
<PAGE>
EXHIBIT 11.1
FORTE SOFTWARE, INC.
COMPUTATION OF LOSS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
1996 1997 1996 1997
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
BASIC
Weighted average common shares outstanding 18,452 19,424 18,371 19,275
Shares used in calculation of net income per share - basic 18,452 19,424 18,371 19,275
------------ ------------- ------------- --------------
------------ ------------- ------------- --------------
Net income (loss) $ 2,549 $ (6,289) $ 4,287 $ (11,518)
------------ ------------- ------------- --------------
------------ ------------- ------------- --------------
Net income (loss) per share - basic $ 0.14 $ (0.32) $ 0.23 $ (0.60)
------------ ------------- ------------- --------------
------------ ------------- ------------- --------------
DILUTED
Weighted average common shares outstanding 18,452 19,424 18,371 19,275
Weighted average common equivalent shares assuming 2,704 2,753 -
conversion of stock options under the treasury stock method
------------ ------------- ------------- --------------
Shares used in calculation of net income (loss) per share - diluted 21,156 19,424 21,124 19,275
------------ ------------- ------------- --------------
------------ ------------- ------------- --------------
Net income (loss) $ 2,549 $ (6,289) $ 4,287 $ (11,518)
------------ ------------- ------------- --------------
------------ ------------- ------------- --------------
Net income (loss) per share - diluted $ 0.12 $ (0.32) $ 0.20 $ (0.60)
------------ ------------- ------------- --------------
------------ ------------- ------------- --------------
</TABLE>
25
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> MAR-31-1998 MAR-31-1998
<PERIOD-START> OCT-01-1997 APR-01-1997
<PERIOD-END> DEC-31-1997 DEC-31-1997
<CASH> 23,091 23,091
<SECURITIES> 13,072 13,072
<RECEIVABLES> 17,211 17,211
<ALLOWANCES> 1,034 1,034
<INVENTORY> 0 0
<CURRENT-ASSETS> 54,135 54,135
<PP&E> 14,964 14,964
<DEPRECIATION> 7,589 7,589
<TOTAL-ASSETS> 61,910 61,910
<CURRENT-LIABILITIES> 21,411 21,411
<BONDS> 0 0
0 0
0 0
<COMMON> 195 195
<OTHER-SE> 39,752 39,752
<TOTAL-LIABILITY-AND-EQUITY> 61,910 61,910
<SALES> 17,345 49,507
<TOTAL-REVENUES> 17,345 49,507
<CGS> 5,094 13,972
<TOTAL-COSTS> 5,094 13,972
<OTHER-EXPENSES> 18,372 48,548
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (5,659) (11,483)
<INCOME-TAX> 630 35
<INCOME-CONTINUING> (6,289) (11,518)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (6,289) (11,518)
<EPS-PRIMARY> (.32) (.60)
<EPS-DILUTED> (.32) (.60)
</TABLE>
