UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(X) Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarterly period ended December 31, 2000
or
( ) Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Commission File Number 0-12194
FORTEL INC.
(Exact name of Registrant as specified in its charter)
California 94-2566313
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
46832 Lakeview Blvd. 94538-6543
Fremont, California (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (510) 440-9600
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 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 _____
The number of shares of the Registrant's Common Stock outstanding as of December
31, 2000 was 29,400,117.
FORTEL INC. AND SUBSIDIARIES
INDEX
Page
Number
PART I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (unaudited) -
December 31, 2000 and September 30, 2000 .............. 3
Condensed Consolidated Statements of
Operations (unaudited) - Three Months
Ended December 31, 2000 and 1999 ..................... 4
Condensed Consolidated Statements of
Cash Flows (unaudited) - Three Months Ended
December 31, 2000 and 1999 ............................ 5
Notes to Condensed Consolidated
Financial Statements .................................. 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results
of Operations .................................. 12
Item 3. Quantitative and Qualitative Disclosures
about Market Risk ................................. 22
PART II. Other Information
Item 1. Legal Proceedings ................................. 23
Item 2. Changes in Securities ............................. 23
Item 3. Defaults Upon 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
Page 2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
FORTEL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
($000's)
(UNAUDITED)
December 31, September 30,
2000 2000
------------ -------------
Assets
Current assets:
Cash and cash equivalents $ 959 $ 889
Accounts receivable, net 5,957 3,362
Refundable taxes 10 125
Other current assets 743 1,138
-------- --------
Total current assets 7,669 5,514
Fixed assets, net 784 854
Other assets, net 2,968 3,339
-------- --------
Total assets $ 11,421 $ 9,707
======== ========
Liabilities, Redeemable Common Stock and Warrants,
and Shareholders' Equity (Deficit)
Current liabilities:
Accounts payable $ 3,060 $ 2,367
Accrued liabilities 1,247 1,076
Short-term debt 1,031 -
Deferred revenue 4,237 2,889
-------- --------
Total current liabilities 9,575 6,332
-------- --------
Redeemable common stock and warrants - 5,301
-------- --------
Shareholders' equity (deficit):
Common stock 79,514 74,471
Accumulated deficit (77,668) (76,397)
-------- --------
Total shareholders' equity (deficit) 1,846 (1,926)
-------- --------
Total liabilities, redeemable common stock
and warrants, and shareholders' equity (deficit) $ 11,421 $ 9,707
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 3
FORTEL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands except per share data)
Three Months Ended
December 31,
------------------
2000 1999
------ ------
Net product sales $ 2,247 $ 3,332
Services and other 2,305 2,188
------- -------
Net sales 4,552 5,520
Costs and expenses:
Cost of products sold 217 221
Cost of services and other 1,086 1,621
Research and development expenses 1,017 651
Selling, general & administrative expenses 3,761 3,851
------- -------
Operating loss (1,529) (824)
Other expense, net 43 92
------- -------
Net loss $(1,572) $ (916)
======= =======
Basic and diluted net loss per share $ (.05) $ (.04)
======= =======
Shares used in basic and diluted
per share calculation 29,221 24,915
======= =======
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 4
FORTEL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
($000's)
(UNAUDITED)
Three Months Ended
December 31,
2000 1999
-------- -------
Cash flows provided by (used in) operating activities:
Net loss $(1,572) $ (916)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 460 527
Provision for doubtful accounts 15 52
Stock-based compensation to consultants (3) -
Change in operating assets and liabilities:
Increase in accounts receivable (2,610) (6,107)
Decrease in refundable taxes 115 2
Decrease (increase) in other current assets 395 (804)
Increase in accounts payable 693 1,017
Increase in accrued liabilities 171 417
Increase in deferred revenue 1,348 5,212
------- -------
Net cash used in operating activities (988) (600)
------- -------
Cash flows provided by (used in) investing activities:
Acquisition of fixed assets (19) (81)
Capitalized software development costs - (370)
Purchase of companies net of cash acquired - 565
------- -------
Net cash provided by (used in)
investing activities (19) 114
------- -------
Page 5
FORTEL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
($000's)
(UNAUDITED)
Three Months Ended
December 31,
2000 1999
------- -------
Cash flows provided by (used in)
financing activities:
Proceeds from borrowings $ 1,527 $ 1,128
Repayment of borrowings (496) -
Issuance of common stock 46 52
------- -------
Net cash provided by financing activities 1,077 1,180
------- -------
Net increase in cash and cash equivalents 70 694
Cash and cash equivalents, beginning of period 889 1,670
------- -------
Cash and cash equivalents, end of period $ 959 $ 2,364
======= =======
Supplemental non-cash investing and
financing activities:
Liability related to business acquisition $ - $ 619
======= =======
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 6
FORTEL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Amounts in thousands except per share data)
1. General
Fortel Inc. (the "Company" or "Fortel") is an information technology company
specializing in computer and systems optimization, data correlation and search
technology. Fortel develops and markets enterprise intranet and eBusiness
performance management solutions through its product offerings which include:
multi-platform performance analysis and correlation software used to optimize
performance in eBusiness and enterprise backoffice infrastructure systems;
professional services to enhance its offerings to existing and new customers;
and software-based Internet tools.
2. Basis of Presentation
The accompanying consolidated financial statements include the accounts of
Fortel Inc. and all wholly-owned domestic and foreign subsidiaries.
All material intercompany balances and transactions have been eliminated.
The interim statements have been prepared by the Company, without audit,
pursuant to the rules and regulations of the Securities and Exchange
Commission and should be read in conjunction with the audited financial
statements contained in the Company's annual report on Form 10-K for the fiscal
year ended September 30, 2000. Certain information and footnote disclosures,
normally included in financial statements prepared in accordance with generally
accepted accounting principles, have been condensed or omitted although the
Company believes the disclosures which are made are adequate to make the
information presented not misleading. Further, the condensed consolidated
financial statements reflect, in the opinion of management, all adjustments
necessary to present fairly the financial position and results of operations as
of and for the periods indicated. The results of operations for the period ended
December 31, 2000 are not necessarily indicative of the results expected for the
full year. The balance sheet as of September 30, 2000 is derived from the
audited financial statements as of and for the year then ended but does not
include all notes and disclosures required by accounting principles generally
accepted in the United States of America.
3. Recent Accounting Pronouncements:
On October 1, 2000, the Company adopted Statement of Financial Accounting
Standard (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities", as amended. SFAS 133 establishes accounting and reporting standards
for derivative
Page 7
instruments and requires that all derivatives be recognized on the balance sheet
at their fair value. The adoption of SFAS 133 had no effect on the accompanying
financial statements.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial
Statements, which provides guidance on the recognition, presentation and
disclosure of revenue in financials filed with the SEC. SAB 101 outlines the
basic criteria that must be met to recognize revenue and provides guidance for
disclosures related to revenue recognition policies. The Company is required to
adopt SAB 101 in the fourth quarter of fiscal 2001. We are in the process of
evaluating the Securities and Exchange Commission's interpretation of SAB 101
but believe that the implementation of SAB 101 will not have a material effect
on the financial position or results of operations of the Company.
4. Other Assets:
Other assets consist of the following as of:
December 31, September 30,
2000 2000
------------ -------------
Goodwill $ 2,768 $ 2,768
Purchased technology 2,588 2,588
Deferred software implementation costs 351 351
Purchased software 550 550
Capitalized development projects 1,454 1,454
Other assets 143 144
Less accumulated amortization (4,886) (4,516)
------- -------
$ 2,968 $ 3,339
======= =======
5. Credit Facility:
As of December 31, 2000, the Company had a $2 million accounts receivable
revolving line of credit. In January 2001, the line was increased to $3 million.
Borrowings are based on 80% of certain eligible receivables which are aged 90
days or less. The interest rate approximates 18% per annum calculated on the
average daily balance outstanding. Additionally, there is an administrative fee
of 1/2 of one percent of each amount factored. The credit facility has no
maturity; however, either party may terminate at any time. During the quarter
ended December 31, 2000, the Company had borrowed approximately $1.5 million and
repaid approximately $0.5 million. At December 31, 2000, approximately $1.0
million was outstanding against the line.
Page 8
6. Common Stock:
Common stock activity for the period from October 1, 2000 through December
31, 2000 (in thousands) is as follows:
Common Stock Common Stock
Shares Amount
------------ ------------
Balance at September 30, 2000 26,780 $74,471
Reclassification of temporary equity 2,192 5,000
Repricing of warrants 353 -
Employee stock purchase 75 46
Stock-based compensation - (3)
------ -------
Balance at December 31, 2000 29,400 $79,514
====== =======
On July 18, 2000, the Company, through a private placement, issued 2,191,781
shares of common stock to two institutional investors, (the "Investors"), in
exchange for $5,000,000. This private placement was pursuant to the Securities
Purchase Agreement, Registration Rights Agreement and Repricing Warrants
(collectively the "Agreements). Due to a redemption feature contained within the
Agreements, the transaction was recorded in temporary equity on the balance
sheet at September 30, 2000.
On November 8, 2000, the Company entered into a letter agreement with the
Investors to modify the Agreement to replace the redemption feature with
specified liquidated damages as a remedy for certain breaches of and defaults
under the Agreements. As a result of the modification of these terms, the
transaction was reclassified from temporary equity into shareholders' equity at
December 31, 2000.
7. Earnings Per Share ("EPS"):
A reconciliation of the numerator and denominator of basic and diluted EPS
is provided as follows (in thousands, except per share amounts) for the quarters
ended December 31:
2000 1999
------- -------
Numerator - Basic and Diluted EPS
Net loss $(1,572) $ (916)
======= =======
Denominator - Basic EPS
Weighted average common stock outstanding 29,221 24,915
------- -------
Basic loss per share $ (.05) $ (.04)
======= =======
Page 9
Earnings Per Share (continued)
2000 1999
------- -------
Denominator - Diluted EPS
Denominator - Basic EPS 29,221 24,915
Effect of Dilutive Securities:
Common stock options - -
Convertible preferred stock - -
------- -------
29,221 24,915
------- -------
Diluted loss per share $ (.05) $ (.04)
======= =======
For the quarters ended December 31, 2000 and 1999, respectively, options to
purchase 10 thousand and 147 thousand shares were not included in the
computation of diluted EPS because of the anti-dilutive effect of including
these shares in the calculation for both periods.
8. Segment Information
Through October 1999, the Company had two reportable segments - Software and
Year 2000 Services. The software business segment develops and markets
E-business performance management software solutions. The Year 2000 business
segment provided services which reviewed software code and identified areas
within the code where Year 2000 problems might occur. Following completion of
the remaining contract outstanding at September 30, 1999, the Company ceased
providing these Year 2000 services in October 1999.
The following table presents certain segment financial information (in
thousands):
Three Months Ended
December 31
2000 1999
------- -------
Revenue:
Software $ 4,552 $ 5,128
Year 2000 - 392
------- -------
Total $ 4,552 $ 5,520
======= =======
Income (loss) from operations:
Software $(1,529) $ 669
Year 2000 - (1,493)
------- -------
Total $(1,529) $ (824)
======= =======
Page 10
The table below presents net sales (in thousands) by geographic area for the
quarters ended December 31:
Three Months Ended
December 31,
2000 1999
------- -------
U.S. $ 2,451 $ 2,561
Europe 1,919 2,567
Other 182 392
------- -------
Total $ 4,552 $ 5,520
======= =======
The table below presents long-lived asset information (in thousands) by
geographic area:
December 31, September 30,
2000 2000
----------- -------------
Long-lived assets:
U.S. $3,277 $3,693
International 475 500
------ ------
Total $3,752 $4,193
====== ======
9. Comprehensive Loss
Comprehensive loss includes all changes in equity during a period except
those resulting from investments by and distributions to shareholders. There
were no material differences between comprehensive loss and net loss as reported
for each of the periods presented in these condensed financial statements.
Page 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
This report contains forward-looking statements that are not historical facts
but rather are based on current expectations, estimates, projections, beliefs
and assumptions about our industry, our company, our business and prospects.
Words such as "anticipates", "expects", "intends", "plans", "believes", "seeks",
"estimates" and variations of these words and similar expressions are intended
to identify forward-looking statements. These statements are not guarantees of
future performance and are subject to certain risks, uncertainties and other
factors, some of which are beyond our control, are difficult to predict and
could cause actual results to differ materially from those expressed or
forecasted in the forward-looking statements. These risks and uncertainties
include those described in "Risks Associated With Fortel's Business and Future
Operating Results", "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and elsewhere in this report. Readers are cautioned
not to place undue reliance on these forward-looking statements, which reflect
our management's view only as of the date of this report. We undertake no
obligation to update these statements or publicly release the results of any
revisions to the forward-looking statements that we may make to reflect events
or circumstances after the date of this report or to reflect the occurrence of
unanticipated events. References in this document to "we", "our" and "us" refer
to Fortel Inc., a California corporation, its predecessors, and each of its
subsidiaries.
Fortel and SightLine are trademarks of Fortel Inc. Zitel, Datametrics and
ViewPoint are registered trademarks of Fortel Inc. VisualRoute, VisualPulse,
VisualProfile, VisualAnalyze, VisualPoint, and the E-Business Performance
Experts are trademarks of Fortel Inc. All other service marks, trademarks and
registered trademarks are the property of their respective holders.
Results of Operations
The Company recorded a net loss of $1,572,000 ($0.05 per share) for the fiscal
2001 first quarter, compared with a net loss of $916,000 ($0.04 per share) for
the same quarter of the prior year. Net sales for the current quarter were
$4,552,000 versus net sales of $5,520,000 for the same period a year earlier, a
decrease of $968,000. The decrease in net sales resulted primarily from a
decrease in Year 2000 services of approximately $392,000, a decrease in hardware
sales in the amount of approximately $225,000, and a decrease in training
services in
Page 12
the amount of approximately $150,000. In October of 1999, the Company ceased
providing Year 2000 services. Additionally, the Company has wound down its lower
margin hardware products business. As the last step in finalizing its efforts
to focus the Company on its software business, on December 31, 2000, the Company
sold its training division. Net sales of license and related maintenance
revenues also declined approximately 4% compared to the comparable quarter a
year earlier.
Gross margin for the quarter ended December 31, 2000 was 71% of net sales
compared to 67% of net sales for the same quarter of the prior year. The
improvement in gross margin percentage is primarily attributable to product
mix. The Company believes that the gross margins reported for the current
quarter were somewhat depressed by the impact of the training division's net
sales on product mix during the quarter. The Company expects gross margins to
improve slightly in the future quarters.
Research and development (R&D) expenses for the quarter ended December 31,
2000 were 22% of net sales compared to 12% for the same period of the prior
year. Actual spending increased $366,000 and is primarily attributable to a
decrease in capitalization of engineering development project costs during
the current quarter.
Selling, general and administrative ("SG&A") expenses for the quarter ended
December 31, 2000 were 83% of net sales versus 70% for the same period a year
earlier. Actual spending in SG&A decreased $90,000.
Other expense was $43,000 for the quarter just ended versus $92,000 in the same
quarter of the prior year. For the current quarter, other expense consisted
primarily of interest expense. For the comparable quarter of the prior year,
other expense consisted primarily of foreign currency translation losses
($110,000) and interest expense ($30,000), partially offset by interest income
($48,000.)
Liquidity and Capital Resources
Since fiscal year 1997, in addition to the working capital provided by product
sales, the Company has augmented its cash needs to finance operations primarily
through the issuance of convertible subordinated notes, the private sale of
common stock and proceeds from borrowings against the accounts receivable
revolving line of credit.
During the quarter just ended, cash utilized by operating activities was
$988,000. The utilization of cash in operating
Page 13
activities resulted primarily from the net loss of $1,572,000 and an increase in
accounts receivable of $2,610,000, offset in part by an increase in deferred
revenue of $1,348,000, a decrease in other current assets and refundable taxes
of $510,000, an increase in accounts payable and accrued liabilities of $864,000
and the add back of non-cash related charges for depreciation and amortization
of $460,000.
During the current quarter, net cash utilized in investing activities was
$19,000, representing purchases of capital equipment.
Net cash provided by financing activities during the current quarter was
$1,077,000, primarily attributable to borrowings of $1,527,000 under its
accounts receivable revolving line of credit, offset in part by repayments of
$496,000. Additionally, $46,000 was generated from the sale of common stock
under the Company's employee stock purchase plan.
The Company currently plans to increase its revenues to a level that will
finance expected expenditures and result in at least neutral cash flows from
operations. However, until that stage is reached, the Company will continue to
use its current cash on hand, working capital, and utilize the available
accounts receivable line of credit.
If the Company is unable to generate sufficient cash flow from operations or
should management determine it to be prudent, it may attempt to raise additional
debt or equity. There can be no assurance that in the event the Company requires
additional financing, that such financing will be available on terms which are
favorable or at all.
In the event that the Company is unable to increase revenue levels or financing
is unavailable, management has developed alternative plans which will entail the
reduction of expenses to levels that could be financed by revenues generated.
Such reductions in expenditures may include actions similar or greater in scope
than the reduction in workforce undertaken by the Company in September 2000.
There can be no assurance that the reduction in workforce undertaken in
September 2000 or any further cost cutting exercises will be successful in
completely eliminating the difference between expenditures and revenues or that
such actions would not have a harmful effect on the Company's business and
results of operations.
Page 14
Based on its current plans, management believes that the Company will meet its
cash requirements for the next twelve months from cash on hand, working capital,
cash flow from operations, and utilization of the available accounts receivable
line of credit.
Recent Accounting Pronouncements:
On October 1, 2000, the Company adopted Statement of Financial Accounting
Standard (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities", as amended. SFAS 133 establishes accounting and reporting standards
for derivative instruments and requires that all derivatives be recognized on
the balance sheet at their fair value. The adoption of SFAS 133 had no effect on
the accompanying financial statements.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial
Statements, which provides guidance on the recognition, presentation and
disclosure of revenue in financials filed with the SEC. SAB 101 outlines the
basic criteria that must be met to recognize revenue and provides guidance for
disclosures related to revenue recognition policies. The Company is required to
adopt SAB 101 in the fourth quarter of fiscal 2001. We are in the process of
evaluating the Securities and Exchange Commission's interpretation of SAB 101
but believe that the implementation of SAB 101 will not have a material effect
on the financial position or results of operations of the Company.
Risks Associated with Fortel's Business and Future Operating Results:
Set forth below and elsewhere in this Quarterly Report and in other documents we
file with the SEC are risks and uncertainties that could cause actual results to
differ materially from the results contemplated by the forward-looking
statements contained in this Quarterly Report.
Fluctuations in Quarterly Results
Fortel's quarterly operating results have in the past varied and may in the
future vary significantly depending on a number of factors, including:
-The level of competition, the size, timing, cancellation or rescheduling of
significant orders;
-Market acceptance of new products and product enhancements;
Page 15
-New product announcements or introductions by Fortel's competitors;
-Deferrals of customer orders in anticipation of new products or product
enhancements;
-Changes in pricing by Fortel or its competitors;
-The ability of Fortel to develop, introduce and market new products and
product enhancements on a timely basis;
-Fortel's success in expanding its sales and marketing programs;
-Technological changes in the market for Fortel's products;
-Product mix and the mix of sales among Fortel's sales channels;
-Levels of expenditures on research and development;
-Changes in Fortel's strategy; personnel changes; and,
-General economic trends and other factors.
Due to all of the foregoing factors, Fortel believes that period-to-period
comparisons of its results of operations are not necessarily meaningful and
should not be relied upon as an indicator of future performance. It is possible
that in some future quarter the Company's operating results may be below the
expectations of public market analysts and investors.
Recent Levels of Net Sales Have Been Insufficient
The Company has not generated net sales sufficient to produce an operating
profit in recent years. The Company has relied on significant financings to
support its activities. Operations in prior years were also partially funded by
a stream of royalty payments under an agreement with IBM. This agreement was
terminated in April 1998. The Company sustained substantial operating losses and
net losses in fiscal years 1997 through 2000. The Company must generate
substantial additional net sales and gross margins on its products and services
and must continue to successfully implement programs to manage cost and expense
levels in order to remain a viable operating entity. There is no assurance that
the Company can achieve these objectives.
Page 16
Significant Losses
For the first quarter of fiscal year 2001, the Company reported a net loss of
$1,572,000. The Company reported total net losses of $8,653,000, $13,103,000 and
$43,205,000 for fiscal years 2000, 1999 and 1998, respectively.
The Company has taken a number of steps to attempt to return to profitability,
although there is no assurance that it will be successful. A significant portion
of the cumulative losses were caused by the funding of MatriDigm, and operations
of the Company's former storage systems business, which was sold in July 1998.
MatriDigm filed Chapter 7 bankruptcy in October 1999 so there will be no
additional funding. The Company has subleased its Fremont, CA headquarters, and
moved to substantially smaller and less costly premises.
The Company continues to consider options and take actions necessary to bring
costs into line with anticipated revenues. There can be no assurance that the
Company will be successful in this effort and remain a viable operating entity.
Fortel Stock Price Has Been Volatile
The price of Fortel's common stock during the current quarter ranged from
the low closing bid price of $0.2031 to the high closing bid price of $1.03125.
During the fiscal year 2000, the price of the Company's common stock was
volatile, ranging from the low closing bid price of $0.65625 to the high closing
bid price of $6.625.
The Company was notified on December 18, 2000 by NASDAQ that it no longer
satisfied the minimum bid price listing requirements. The Company's common stock
has failed to maintain a minimum bid price of $1.00 over the last 30 consecutive
trading days as required. The Company will be provided 90 calendar days, or
until March 19, 2001 to regain compliance. If at any time before March 19, 2001,
the bid price of the Company's common stock is at least $1.00 for a minimum 10
consecutive trading days, NASDAQ will determine if the Company is in compliance.
However, if the Company is unable to demonstrate compliance on or before March
19, 2001, NASDAQ will provide the Company with a written notification that
NASDAQ has determined to delist the Company's common stock. At that time,
however, the Company may request a review of NASDAQ's determination. The
potential de-listing of the Company's common stock from the NASDAQ Small/Cap
Market may affect the trading liquidity and the price of the Company's common
stock.
Page 17
Competition
The market for system management tools in which the Company's software products
business unit competes is intensely competitive. Many of the companies with
which the Company competes, such as Computer Associates International, Inc.,
Hewlett-Packard Company, and BMC Software, Inc. have substantially larger
installed bases and greater financial resources than the Company. There can be
no assurance that the Company's competitors will not develop products comparable
or superior to those developed by the Company or adapt more quickly than the
Company to new technologies, evolving industry standards, new product
introductions, or changing customer requirements.
Dependence on New Products; Rapid Technological Change
The markets in which the Company operates are characterized by rapid
technological change, changing customer needs, frequent new product
introductions and evolving industry standards. The introduction of products
embodying new technologies and/or the emergence of new industry standards
could render the Company's existing products and services obsolete and
unmarketable. The Company's future success will depend upon its ability to
develop and to introduce new products and services on a timely basis that
keep pace with technological developments and emerging industry standards and
address the increasingly sophisticated needs of its customers. There can be
no assurance that the Company will be successful in developing and marketing
products or services that respond to technological changes or evolving
industry standards, that the Company will not experience difficulties that
could delay or prevent the successful development, introduction and marketing
of new products or services, or that its new products or services will
adequately meet the requirements of the marketplace and achieve market
acceptance. If the Company is unable, for technological or other reasons, to
develop and introduce new products or services in a timely manner in response
to changing market conditions or customer requirements, the Company's
business, operating results and financial condition will be materially and
adversely affected.
Product Liability
The Company's agreements with its customers typically contain provisions
intended to limit the Company's exposure to potential product liability claims.
It is possible that the limitation of liability provisions contained in the
Company's agreements may
Page 18
not be effective. Although the Company has not received any product liability
claims to date, the sale and support of products by the Company and the
incorporation of products from other companies may entail the risk of such
claims. A successful product liability claim against the Company could have a
material adverse effect on the Company's business and financial position, as
well as operating results and cash flows.
Dependence on Proprietary Technology
The Company's success depends significantly upon its proprietary technology. The
Company currently relies on a combination of patent, copyright and trademark
laws, trade secrets, confidentiality agreements and contractual provisions to
protect its proprietary rights. 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 has registered its trademarks
and will continue to evaluate the registration of additional trademarks as
appropriate. The Company generally enters into confidentiality agreements with
its employees and with key vendors and suppliers. The Company currently holds a
United States patent on one of its software technologies. There can be no
assurance that this patent will provide the Company with any competitive
advantages or will not be challenged by third parties, or that the patents of
others will not have a material adverse effect on the Company's ability to do
business. The Company believes that the rapidly changing technology in the
computer industry makes the Company's success depend more on the technical
competence and creative skills of its personnel than on patents.
There has also been substantial litigation in the computer industry regarding
intellectual property rights, and litigation may be necessary to protect the
Company's proprietary technology. The Company has not received significant
claims that it is infringing third parties' intellectual property rights, but
there can be no assurance that third parties will not in the future claim
infringement by the Company with respect to current or future products,
trademarks or other proprietary rights.
The Company expects that companies in its markets will increasingly be subject
to infringement claims as the number of products and competitors in the
Company's target markets grows. Any such claims or litigation may be
time-consuming and costly, cause product shipment delays, require the Company to
redesign its products or require the Company to enter into royalty or licensing
agreements, any of which could have a material adverse effect on the Company's
business, operating results or financial
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condition. 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. There
can be no assurance that the Company's means of protecting its proprietary
rights will be adequate or that the Company's competitors will not
independently develop similar technology, duplicate the Company's products or
design around patents issued to the Company or other intellectual property
rights of the Company.
International Sales and Operations
Sales to customers outside the United States have accounted for significant
portions of the Company's net sales, and the Company expects that the
acquisition of companies headquartered and operating in the United Kingdom, The
Netherlands and Switzerland, respectively, will result in international sales
representing an increasingly significant portion of the Company's net sales.
International sales pose certain risks not faced by companies that limit
themselves to domestic sales. Fluctuations in the value of foreign currencies
relative to the U.S. dollar, for example, could make the Company's products less
price competitive. If the Company, in the future, denominates any of its sales
in foreign currencies, this could result in losses from foreign currency
transactions. International sales also could be adversely affected by factors
beyond the Company's control, including the imposition of government controls,
export license requirements, restrictions on technology exports, changes in
tariffs and taxes and general economic and political conditions. The laws of
some countries do not protect the Company's intellectual property rights to the
same extent as the laws of the United States. The Company does not believe these
additional risks are significant in the United Kingdom, The Netherlands or
Switzerland.
Dependence on Key Personnel
The Company's future performance depends significantly upon the continued
service of its key technical and senior management personnel. The Company
provides incentives such as salary, benefits and option grants (which are
typically subject to vesting over four years) to attract and retain qualified
employees. Recently the Company's stock price has been volatile and as such,
many of the Company's employees hold options with exercise prices greater than
the market price of the Company's Common Stock. As a result, the prior grants of
options to the
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Company's employees may not be a significant incentive to retain the services of
these individuals. The loss of the services of one or more of the Company's
officers or other key employees could have a material adverse effect on the
Company's business, operating results and financial condition.
The Company's future success depends on its continuing ability to retain highly
qualified technical and management personnel. Competition for such personnel is
intense, and there can be no assurance that the Company can retain its key
technical and management employees or that it can attract, assimilate and retain
other highly qualified key technical and management personnel in the future.
The Company believes there is significant competition for the few software
development professionals with the advanced technological skills necessary to
perform the services offered by the Company's business. The Company's ability to
maintain or renew existing relationships and obtain new business depends, in
large part, on its ability to hire and retain technical personnel. An inability
to hire such additional qualified personnel could impair the ability of the
business to manage and complete its existing projects and to bid for and obtain
new projects.
Anti-Takeover Provisions
Certain provisions of the Company's Certificate of Incorporation, as amended and
restated, and Bylaws, as amended, California law and the Company's
indemnification agreements with certain officers and directors of the Company
may be deemed to have an anti-takeover effect. Such provisions may delay, defer
or prevent a tender offer or takeover attempt that one or more stockholders
consider to be in the best interests of same, including attempts that might
result in a premium over the market price for the shares held by stockholders.
The Company's Board of Directors may issue additional shares of Common Stock or
establish one or more classes or series of Preferred Stock, having the number of
shares, designations, relative voting rights, dividend rates, liquidation and
other rights, preferences and limitations determined by the Board of Directors
without stockholder approval.
The Board of Directors of the Company has approved the adoption of a Preferred
Share Purchase Rights Plan (the "Rights Plan"). Terms of the Rights Plan provide
for a dividend distribution of one preferred share purchase right (a "Right")
for each
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outstanding share of common stock, no par value per share (the "Common Shares"),
of the Company. Each Right entitles the registered holder to purchase from the
Company one one-hundredth of a share of Series A Junior Participating Preferred
Stock, no par value (the "Preferred Stock"), at an exercise price of $69.50 per
one one-hundredth of a Preferred Share (the "Purchase Price"), subject to
adjustment, and a redemption price of $.01 per Right. Each one one-hundredth of
a share of Preferred Stock has designations and the powers, preferences and
rights, and the qualifications, limitations and restrictions which make its
value approximately equal to the value of a Common Share.
The Rights are not exercisable until the earlier to occur of (i) 10 days
following a public announcement that a person, entity or group of affiliated or
associated persons (an "Acquiring Person") has acquired beneficial ownership of
15% or more of the outstanding Common Shares or (ii) 10 business days (or such
later date as may be determined by action of the Board of Directors prior to
such time as any person(s) or entity becomes an Acquiring Person) following the
commencement of, or announcement of an intention to make, a tender offer or
exchange offer the consummation of which would result in the beneficial
ownership by an Acquiring Person of 15% or more of such outstanding Common
Shares.
The Rights have certain anti-takeover effects, as they would cause substantial
dilution to a potential Acquiring Person that attempted to acquire the Company
on terms not approved by the Company's Board of Directors. The Rights should not
interfere with any merger or other business combination approved by the Board of
Directors, since the Rights may be redeemed by the Company at $.01 per Right
prior to the earliest of (i) the twentieth day following the time that an
Acquiring Person has acquired beneficial ownership of 15% or more of the Common
Shares (unless extended for one or more 10 day periods by the Board of
Directors), (ii) a change of control, or (iii) the final expiration date of the
rights.
Item 3. Quantitative and Qualitative Disclosures about
Market Risk
The Company has considered the provisions of Financial Reporting Release No. 48,
"Disclosure of Accounting Policies for Derivative Financial Instruments and
Derivative Commodity Instruments, and Disclosure of Quantitative and Qualitative
Information about Market Risk Inherent in Derivative Financial Instruments,
Other Financial Instruments and Derivative Commodity Instruments". The Company
had no holdings of derivative financial or commodity
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instruments at December 31, 2000. A review of other financial instruments and
risk exposures at that date revealed the Company did not have exposure to
interest rate risk.
The Company sells it products worldwide. Consequently, the financial results
could be affected by factors such as changes in foreign currency exchange rates
or weak economic conditions in foreign markets. Because a major portion of the
Company's revenue is currently denominated in U.S. dollars, a strengthening of
the dollar could make the Company's products less competitive in foreign
markets.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
The Company did not submit any matters to a vote of security holders
during the first quarter of the fiscal year ending September 30, 2001.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
During the period ended October 1, 2000 through December 31, 2000, the Company
filed the following current report on Form 8-K:
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Date of Report - November 17, 2000
Item(s) Reported - On November 8, 2000, FORTEL INC. entered into a letter
agreement with the two institutional purchasers to which it had sold 2,191,781
shares of its common stock on July 18, 2000, pursuant to the Securities Purchase
Agreement, Registration Rights Agreement and Repricing Warrants (collectively
the "Agreements"), copies of which were filed with the Company's Current Report
on Form 8-K filed on or about July 27, 2000. Under the terms of the letter
agreement, the Agreements were modified to replace redemption with specified
liquidated damages as a remedy for certain breaches of and defaults under the
Agreements.
Page 24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, Registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
FORTEL INC.
Date: February 14, 2001 By /s/Henry C. Harris
Henry C. Harris
Chief Financial Officer
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