-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RO+IHASp2jiYTnFHGVHJWs49Jj50WjyNtN+lxFgzd8Hd3DZW1bgwv/yLyNv4v0ch 6LA8Hw3LocEdwl7Y1VD35g== 0000912057-01-000952.txt : 20010123 0000912057-01-000952.hdr.sgml : 20010123 ACCESSION NUMBER: 0000912057-01-000952 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20010110 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FORTEL INC /CA/ CENTRAL INDEX KEY: 0000731647 STANDARD INDUSTRIAL CLASSIFICATION: PATENT OWNERS & LESSORS [6794] IRS NUMBER: 942566313 STATE OF INCORPORATION: CA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-12194 FILM NUMBER: 1506260 BUSINESS ADDRESS: STREET 1: 46328 LAKEVIEW BLVD CITY: FREMONT STATE: CA ZIP: 94538-6517 BUSINESS PHONE: 5104409600 MAIL ADDRESS: STREET 1: 46328 LAKEVIEW BLVD CITY: FREMONT STATE: CA ZIP: 94538-6517 10-K 1 a2034250z10-k.txt 10-K FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended September 30, 2000 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File No. 0-12194 FORTEL INC. (Exact name of Registrant as specified in its charter) CALIFORNIA 94-2566313 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 46832 Lakeview Blvd., Fremont, California 94538-6543 (Address of principal executive offices) (Zip Code) (510) 440-9600 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, no par value (Title of Class) Indicate by check mark whether the Registrant (1) has filed 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 [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the Registrant's Common Stock held by nonaffiliates on November 30, 2000 (based upon the closing sale price of stock on such date) was $11,654,864. As of November 30, 2000, 29,250,267 shares of the Registrant's Common Stock were outstanding. Documents Incorporated by Reference: Portions of the Company's 2000 Notice of Annual Meeting of Shareholders and Proxy Statement are incorporated by reference into Part III hereof. 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 "Fortel", "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. PART I Item 1: BUSINESS Fortel Inc. ("Fortel" or the "Company") is an information technology company specializing in computer and systems optimization, data correlation and search technology. Fortel acquires, develops and markets eBusiness performance management solutions. Product offerings include multi-platform performance analysis and automatic correlation software used to optimize performance in eBusiness infrastructure systems, professional Page 2 services for existing and new customers, and software-based Internet tools. Fortel's SightLine and predecessor ViewPoint suites of software have been sold, supported and enhanced for more than 10 years for hundreds of customers in finance and banking, defense management, manufacturing, retail services and government. The Company, originally named Zitel Corporation, was organized in 1979 to develop, market and sell semiconductor memory systems. It subsequently developed memory algorithms which it incorporated in high-performance data storage systems developed, marketed and sold by its data storage business. With the acquisition, in June 1997, of the business of Datametrics Systems Corporation, the Company commenced the transition to an information technology company. This transition was substantially accomplished in July 1998 when the Company sold its data storage business. In May 2000, the Company consolidated its businesses. Effective June 19, 2000 the Company completed a merger with Fortel Inc., a California corporation which merged into the Company. Effective June 19, 2000 the Company changed its name from Zitel Corporation to Fortel Inc. The Company's solution services business was launched during fiscal 1997 and provided Year 2000 conversion services. The primary code conversion methodology was based on MatriDigm Corporation's MAP2000 process. The Company invested in certain rights to utilize the MAP2000 process. The demand for such Year 2000 conversion services emerged more slowly than originally anticipated by industry sources and the Company suspended its solution services business and terminated a planned acquisition of MatriDigm in September 1999. General 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. With the re-launch of the Company in May 2000, the Company launched a new product suite called SightLine. SightLine is a blend of proven core technologies and new components that expand the functionality to provide advanced performance to the eBusiness marketplace. The Company markets and supports the Page 3 high-end performance management suite of SightLine software utilized by enterprise intranets and eBusinesses for infrastructure data management that automatically alerts, analyzes, correlates, investigates, and reports on data center performance for mainframe computers, open systems, servers, and distributed network elements. In addition, the Company provides professional services to solve customers' design, planning, and implementation needs. Training is available to assist customers in preparing their staff for the improved performance environment, including training on performance products and methodologies. The Company sells its products through a direct sales force in the United States and Europe, and through distributors and partners worldwide. The Company provides both direct and indirect customer maintenance and support for its software products. The Company also continues to support and sell its first generation product suite, ViewPoint. The Company markets software-based Internet tools to monitor and report on performance of Web sites, Web-hosting services, services offered by ISPs and ASPs, as well as Corporate Intranets (internal resources) and Extranets (links to partners and business-to-business eCommerce). These products and services are primarily marketed and supported via the Web. Products and Services Software Products On June 30, 1997, the Company concluded the acquisition of three companies primarily engaged in development and marketing of software products: Datametrics Systems Corporation, headquartered in Fairfax, Virginia; Palmer & Webb Systems, Limited, headquartered in the United Kingdom; and Palmer & Webb Systems, B.V., headquartered in the Netherlands. These entities combined with the Company's subsidiary, Performance & Modeling, Inc., to provide automated performance analysis and correlation software to solve computer performance problems of mainframe computers, open systems servers and distributed network systems. Corporate customers with significant investments in management information systems utilize these products to maximize efficiency of existing systems and planned system enhancements. Until the release of the SightLine suite of products in May 2000, the Company's primary suite of products was ViewPoint. The ViewPoint product suite automatically monitors, alerts, analyzes, and reports on potential performance problems before they happen, hence, improving service levels, minimizing risk, and facilitating planning for the future. ViewPoint is a real-time data collector Page 4 of approximately 2,000 different system attributes. It operates on select computer mainframes (backend and e-commerce systems) and all major open systems and server platforms. While the data is collected on the computer system, ViewPoint allows the user to replay the real-time data on any Windows-based PC. Included in ViewPoint are extensive comparative and automatic analysis capabilities and an automatic correlation engine. ViewPoint has entered its end of life phase and will be supported through May of 2002. The SightLine suite of software is a blend of proven core technologies from ViewPoint and new components that expand the functionality to provide advanced performance to the eBusiness marketplace. SightLine provides real-time eBusiness performance management solutions that assure the service-level management goals of eBusiness. It provides real-time analysis and correlation of end-to-end flows and critical paths, identifying key service level indicators in real-time and enabling proactive tuning and optimization. SightLine software is component based, which allows the software to collect and aggregate information from an eBusiness, independent of platforms, networks or applications. SightLine also integrates information from third party monitoring tools and can communicate with management frameworks and platforms. SightLine is made up of three major sets of components. SightLine Expert Advisor which analyzes and correlates heterogeneous information which highlight critical relationships between IT components in real-time. Advisor's progressive correlation and discovery capability provide true-cause and impact analysis, recommend and/or take corrective actions and alerts regarding critical service level functions. SightLine Vision provides diverse views of eBusiness service levels, based on the specific needs of the user. eBusiness summary views, showing high-level service level status, are available for eBusiness management. SightLine Vision provides detailed views for IT executives, who may desire to monitor an individual tier or a component status. SightLine Vision offers in-depth views for individual components and services for technical management. All views are customizable and are provided via web-based interfaces and management consoles. SightLine Agents monitor the critical service level indicators of a specific eBusiness component by providing three types of agents. Power Agents provide in-depth monitoring of a wide range Page 5 of indicators and are designed for situations where in-depth analysis or historical trending may be required. Summary Agents provide monitoring of critical indicators, and are designed for use where a snapshot "health" analysis is desired. Interface Agents integrate with third party monitoring tools and applications and collect information from these tools and consolidate the information with SightLine gathered information. SightLine Expert Advisor analyzes and transparently correlates third party information. SightLine interfaces to a variety of third party tools, including Unicenter from Computer Associates, TIVOLI from IBM, Remedy from Remedy Systems, Keynote from Keynote Systems. The complementary suite of Visual products (including the VisualRoute, VisualRoute Server, and VisualPulse products) provides Internet tools to monitor and report on service levels and response of Web sites, Web-hosting services, services offered by ISPs and ASPs, as well as Corporate Intranets (internal resources) and Extranets (links to partners and business-to-business E-Commerce). Included in these products are advanced technologies, including Java and other Web-based functionality. Marketing The Company's software products are sold through a direct sales force in the United States, the United Kingdom, the Netherlands, Germany, France and Switzerland, and through distributors and partners worldwide. The Company provides direct customer maintenance and support for its software products. Research and Product Developments During fiscal 2000, the Company invested in a number of development programs including Sightline suite of software. The Company's product family, SightLine, is made up of three major sets of components and accordingly pricing of product configurations varies widely. Expenditures for research and development activities were approximately $3,843,000, $3,022,000 and $6,419,000 in fiscal 2000, 1999 and 1998, respectively. The performance monitoring software industry, in general, and the markets for the Company's products, in particular, are subject to extreme price competition, rapid technological change and evolving standards, resulting in relatively short product life cycles and continuous erosion of average selling prices. As a result, the Company must continually enhance its existing products and develop and introduce new products in an effort to Page 6 maintain and increase net sales. The Company has experienced delays in completing the development of new products and may well encounter difficulties that could delay the products currently under development. There can be no assurance that the Company will be successful in its enhancement and development efforts or in achieving market acceptance of products developed. Competition The market for E-Business and Internet performance management tools in which the Company's software products business 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. New companies will appear and may compete with certain of the Company's products and services. The Company believes the important considerations for software customers are ease of use, automated functionality, product reliability, quality and price, as well as complementary services offered. There can be no assurance that the Company's current competitors or new companies 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. The Company believes that it competes favorably in each of these areas. Proprietary Technology The Company currently relies on a combination of copyright and trademark laws, trade secrets, confidentiality agreements and contractual provisions to protect its proprietary rights. The Company seeks to protect its software and written materials, including documentation, under trade secret and copyright laws, which afford only limited protection. The Company has registered its Fortel and SightLine 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 has one United States patent. 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. Page 7 Employees At the end of fiscal 2000, the Company employed 118 persons on a full-time basis: 23 in research and development, 9 in customer support, 9 in consulting services, 8 in operations, 40 in sales and marketing, and 29 in general management and administration. The Company believes that its further success will depend, in part, on its ability to attract and retain qualified employees, who are in great demand. None of the Company's employees are represented by a labor union and the Company believes that its employee relations are good. Investment in MatriDigm Corporation The Company invested $7.4 million to acquire a 31% interest in MatriDigm Corporation ("MatriDigm") from fiscal year 1996 through fiscal year 1998. The Company recorded approximately $624 thousand in losses under the equity method from the unconsolidated company during the year ended September 30, 1998. The Company also wrote off its investment in MatriDigm and fully reserved certain demand notes and bank guarantees during fiscal 1998. The Company advanced MatriDigm an additional $4.9 million during fiscal year 1999. The Company paid $250 thousand during the year ended September 30, 1999, for a non-exclusive, royalty-bearing license for the MatriDigm technology. The Company also entered into an agreement to acquire the balance of MatriDigm in August 1999. This agreement was terminated in September 1999 and MatriDigm filed Chapter 7 bankruptcy in October 1999. The Company recorded approximately $5.1 million during fiscal year 1999 in the write-off of the license and all advances to the company. An investment in the Company involves a high degree of risk. Please refer to information included under the caption "Risks Associated with Fortel's Business and Future Operating Results", below. Page 8 Risks Associated with Fortel's Business and Future Operating Results Recent Levels of Net Sales Have Been Insufficient Fortel 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 for a lump sum payment of $740,000. Fortel sustained substantial operating losses and net losses in the fiscal years 1997 through 2000. Fortel 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 Fortel can achieve these objectives. Significant Losses The Company reported a total net loss for fiscal year 2000 of $8,653,000. The Company reported total net losses of $13,103,000, $43,205,000 and $17,501,000 for fiscal years 1999, 1998 and 1997, 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. 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: Page 9 -The level of competition, the size, timing, cancellation or rescheduling of significant orders; -Market acceptance of new products and product enhancements; -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. Fortel Stock Price Has Been Volatile The price of Fortel's Common Stock during fiscal year 2000 remained volatile, ranging from the low closing bid price of $.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 Page 10 days as required. The Company will be provided 90 calendar days, or until March 19, 2001 to regain compliance. If at anytime 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 may affect the trading liquidity and the price of the Company's common stock. Competition The market for E-Business and Internet performance management tools in which the Company's software products business 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. New companies will appear and may compete with certain of the Company's products and services. The Company believes the important considerations for software customers are ease of use, automated functionality, product reliability, quality and price, as well as complementary services offered. There can be no assurance that the Company's current competitors or new companies 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. The Company believes that it competes favorably in each of these areas. 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 Page 11 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 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, operating results and financial condition. 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 Fortel and SightLine 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 Page 12 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 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 48%, 56% and 65% of the Company's net sales in fiscal 2000. 1999 and 1998, respectively. 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 Page 13 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 in Switzerland. Please refer to information included in Notes to Consolidated Financial Statements. 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. 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 Articles 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. Page 14 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 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 Page 15 Directors), (ii) a change of control, or (iii) the final expiration date of the rights. On July 18, 2000, the Company, through a private placement, issued 2,191,781 shares of common stock to two institutional investors, Deephaven Private Placement Trading Ltd. and Harp Investors LLC (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"), copies of which were filed with the Company's Current Report on Form 8-K filed on July 27, 2000. Proceeds of $4,726,500, net of placement agency and professional fees of $273,500, were received. Pursuant to the terms of the Agreements, the Investors have the right to demand additional warrants to purchase shares of common stock from the Company in the event the market price of the Company's stock falls below $2.28 per share. The Company has registered 5,341,126 shares of common stock of which 2,191,781 had been issued as of September 30, 2000. Should the market price of the Company's common stock fall below $1.12 per share, the Investors could demand that the Company request that shareholders authorize additional shares of common stock such that a $6,000,000 value be maintained by the Investors. In the event that such authorization not be obtained, the Investors could demand liquidating damages of up to $6,000,000. Item 2: PROPERTIES Fortel leases its operating facilities in Fremont, CA, Fairfax, VA, Leatherhead, United Kingdom, Rotterdam, the Netherlands, and Berne, Switzerland under non-cancelable operating leases which expire at various dates through the year 2010. Average annual rent is approximately $1.9 million per year for the next two years, less sublease income of approximately $929 thousand per year for the next two years. Item 3: LEGAL PROCEEDINGS During the quarter ended June 30, 2000, the Company's two outstanding legal proceedings were settled, resulting in a net gain of approximately $1.0 million, which was recorded in other income. In the first, the Company's filed a suit against a VLSI Technology, Inc.(in the Superior Court of the State of California in and for the County of Santa Clara) This was settled on May 15, 2000. The Company received $2.5 million in cash ($1.8 million after attorney fees) which was recorded in other income as a gain from settlement of a vendor lawsuit. Page 16 In the second, Lynx Venture Partners I, LLC filed a complaint for Breach of Contract, Declaratory Relief and Specific Performance (in the Superior Court of the State of California in and for the County of Alameda), against the Company. This was settled on May 31, 2000. The Company issued 387,500 shares of the Company's common stock, resulting in a charge of $787 thousand to other expense as a loss from settlement of litigation. As of September 30, 2000, there was no other pending legal proceedings against or in favor of the Company. 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 fourth quarter of the fiscal year ended September 30, 2000. Executive Officer of the Registrant Set forth below is information regarding the executive officer of the Company who is not a director.
Name Age Position - ---- --- -------- Henry C. Harris 52 Senior Vice President of Business Development, Chief Financial Officer, Corporate Secretary
Henry C. Harris, Senior Vice President, Business Development, Chief Financial Officer, Chief Accounting Officer and Corporate Secretary Henry C. Harris, CPA, was named Senior Vice President, Business Development, Chief Financial Officer and Corporate Secretary in September 2000. Mr. Harris held the position of Chief Operating Officer from May 2000 until he was named Chief Financial Officer in September, 2000. He had previously been named Senior Vice President of Strategic Planning & Alliances for Fortel in August 1997 and was named President of Datametrics Systems Corporation, a wholly-owned subsidiary of Fortel, in January 1999. He has also served as Vice President of Finance and Administration, Chief Financial Officer and Chief Accounting Officer from December 1986 through July 1997 and as Secretary of the Company from November 1987 through October 1997. Prior to joining Fortel, he was employed by Dynamic Disk, Inc. as Vice President of Finance and Administration and Chief Financial Officer from October 1983 until November 1986. Prior to Dynamic Disk, he spent over 10 years in financial management and public accounting positions. Page 17 PART II Item 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Fortel's common stock is traded in the over-the-counter market and is currently listed on the Nasdaq SmallCap Market under the symbol FRTL. The following table shows the quarterly high and low closing prices of the Nasdaq SmallCap Market:
Fiscal Years Ending September 30, 2000 1999 ------------------- ------------------- High Low High Low -------- -------- -------- -------- First Quarter 6 1/4 21/32 6 15/32 2 7/32 Second Quarter 6 5/8 2 13/31 5 2 1/16 Third Quarter 5 3/16 2 2 3/8 1 5/16 Fourth Quarter 2 3/4 15/16 2 11/16 1 7/32
The Company had approximately 682 shareholders of record of its Common Stock at September 30, 2000. The Company has paid no cash dividends on its common stock and does not plan to pay cash dividends to its shareholders in the foreseeable future. Item 6: SELECTED FINANCIAL DATA Five-Year Financial Summary (In thousands except per share data)
Fiscal Years Ending September 30, 2000 1999 1998 1997 1996 Total revenue $ 21,110 $20,890 $21,700 $17,966 $23,066 Net income (loss) (8,653) (13,103) (43,205) (17,501) 4,049 Basic net income (loss) per share (.33) (.59) (2.48) (1.15) .27 Diluted net income (loss) per share (.33) (.59) (2.48) (1.15) .26 Shares used in basic per share calculation 26,437 22,199 17,433 15,222 14,726 Shares used in diluted per share calculation 26,437 22,199 17,433 15,222 15,626 At year end: Working capital (818) 1,057 3,874 18,763 20,445 Total assets 9,707 11,652 18,070 49,294 30,699 Total long-term liabilities - - 4,585 24,161 - Redeemable common stock and warrants 5,301 - - - - Shareholders' equity (deficit) (1,926) 5,897 6,234 15,946 27,089
Page 18 Item 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS In addition to historical information, this Annual 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" 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. General 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. With the re-launch of the Company in May 2000, the Company launched a new product suite called SightLine. SightLine is a blend of proven core technologies and new components that expand the functionality to provide advanced performance to the eBusiness marketplace. The Company markets and supports the high-end performance management suite of SightLine software utilized by enterprise intranet and eBusinesses for infrastructure data management that automatically alerts, analyzes, correlates, investigates, and reports on data center performance for mainframe computers, open systems, servers, and Page 19 distributed network elements. In addition, professional services are provided to solve customers' design, planning, and implementation needs. Training is available to assist customers in preparing their staff for the improved performance environment, including training on performance products and methodologies. Products are sold through a direct sales force in the United States and Europe, and through distributors and partners worldwide. The Company provides both direct and indirect customer maintenance and support for its software products. The Company also continues to support and sell its first generation product suite, ViewPoint. The Company markets software-based Internet tools to monitor and report on performance of Web sites, Web-hosting services, services offered by ISPs and ASPs, as well as Corporate Intranets (internal resources) and Extranets (links to partners and business-to-business eCommerce). These products and services are primarily marketed and supported via the Web. Results of Operations Fiscal 2000 compared with Fiscal 1999 Total revenue for fiscal 2000 was $21,110,000 compared with total revenue of $20,890,000 in fiscal 1999, an increase of $220,000. The increase in revenue is primarily related to an increase in sales of software license and related maintenance, partially offset by a decrease in Year 2000 services. Combined software license and maintenance revenues in fiscal 2000 were $17,685,000, an increase of 47% over comparable revenue for fiscal 1999. In fiscal 2000, the Company generated $391,000 in net sales of Year 2000 services compared with $3,750,000 in fiscal 1999. In October 1999, the Company ceased providing Year 2000 services. Gross margin, as a percent of net sales, was 66% for the current year, compared to 56% in the prior year. The increase in gross margin percentage during the current year is primarily attributable to product mix. Net sales of software licenses increased 65% over the prior year versus the decline in Year 2000 services. Software licenses carry a much higher gross margin than the Year 2000 services. Research and development expenses for the year ended September 30, 2000 were 18% of net sales compared with 14% in the prior year. Actual dollars increased $821,000, primarily attributable to an increase in engineering personnel and related costs ($818,000), an increase in consulting costs related to ongoing Page 20 engineering development projects ($400,000), and severance costs related to a reduction in force ($110,000). These increases were offset in part by an increase in capitalization of engineering development projects ($479,000). Selling, general and administrative expenses for the year ended September 30, 2000 were $19,374,000 compared to $15,474,000 in fiscal 1999. Actual spending increased $3,900,000, primarily attributable to an increase in headcount in sales and marketing personnel and related costs ($1,650,000), an increase in travel and entertainment ($750,000), an increase in legal and professional services ($726,000), an increase in business promotion ($454,000), severance costs related to a reduction in force ($325,000) and an increase in communication costs ($132,000). These increases were offset in part by a decrease in facilities rent as a result of having relocated to a smaller facility ($315,000). For the year ended September 30, 2000, other income was $741,000 resulting primarily from the settlement of the Company's two outstanding legal proceedings. Interest expense related to a factoring arrangement in fiscal 2000 was $106,000 and interest income from invested funds was $208,000. In fiscal 1999, interest expense was $1,537,000, primarily from the discount on 3% convertible subordinated debentures outstanding. Interest income from invested funds in fiscal 1999 was $397,000. Fiscal 1999 Compared with Fiscal 1998 Total revenue for fiscal year 1999 was $20,890,000 compared with total revenue of $21,700,000 in fiscal year 1998, a decrease of approximately $810,000 or 4%. The decrease in revenue represents the net impact of an increase in revenue generated by the Company's software business during fiscal 1999, offset by the lack of royalty and product revenue from the storage business, which was sold in July 1998. Royalty revenue in fiscal year 1998 was $1,541,000 versus none for fiscal year 1999. Revenue generated by the storage business, prior to its sale in July 1998, was $5,698,000 for fiscal year 1998, compared to none in fiscal 1999. Net sales for fiscal 1999 were $20,890,000 versus $20,159,000 in fiscal 1998, an increase of $731,000 or 4%. The increase in net sales is attributable to an increase in net sales of the Company's software business, and an increase in net sales of the Company's former solution services business, offset by the loss of revenue from the storage business. Net sales of the Company's software business increased 24% from $13,794,000 in fiscal year 1998 to $17,140,000 in fiscal year 1999. The Year Page 21 2000 business contributed net sales of approximately $3,750,000 in fiscal 1999 compared to $667,000 in fiscal 1998. Gross margin, as a percent of net sales, was 56% in fiscal 1999, compared to 40% in fiscal 1998. The increase in gross margin percentage in fiscal 1999 is attributable to the increase in sales generated by the higher margin software business which generated a gross margin of approximately 62% in fiscal years 1999 and 1998. Research and development expenses in fiscal 1999 were 14% of net sales compared with 32% in fiscal 1998. Actual dollars decreased $3,397,000, attributable to the disposal of the storage business in July 1998. Selling, general and administrative expenses were $15,474,000 or 74% of net sales in fiscal 1999 versus $24,012,000 or 119% of net sales in fiscal 1998. Actual spending decreased $8,538,000. The decrease in spending is attributable to the disposal of the storage business in fiscal 1998 and the incurred or accrued costs associated with it. Loss from unconsolidated subsidiary of $5.1 million in fiscal 1999 included the write off of a license acquired from and advances to MatriDigm Corporation during fiscal 1999. In fiscal 1998, loss from unconsolidated subsidiary of $10.6 million included losses recognized under the equity method, the write off of the Company's investment in MatriDigm and fully reserving the related demand notes and bank guarantees. In fiscal 1999, interest expense was $1,537,000, substantially all of which relates to the discount on 3% convertible subordinated debentures. Interest expense was $3,466,000 in fiscal 1998; $1,111,000 related solely to the discount on the 3% convertible subordinated debentures and $2,355,000 related to the interest on both the 3% and 5% debentures. Interest income in fiscal 1999 was $397,000 versus $598,000 in fiscal 1998 due to lower cash and cash equivalent balances in fiscal 1999. 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 redeemable common stock and proceeds from borrowings against the accounts receivable revolving line of credit. Page 22 During the fiscal year just ended, cash utilized by operating activities was $4,399,000. The utilization of cash in operating activities resulted primarily from the net loss of $8,653,000 and a decrease in accounts payable of $252,000, offset in part by a decrease in other current assets of $672,000, an increase in deferred revenue of $351,000 and the add back of non-cash related charges for depreciation and amortization of $2,157,000, provision for doubtful accounts of $416,000 and the settlement of an outstanding lawsuit of $787,000. During the current year, net cash utilized in investing activities was $1,646,000. This amount was comprised of purchases of capital equipment in the amount of $762,000, capitalization of engineering development labor in the amount of $678,000. In addition, the Company purchased Telemetrics AG for $168,000, net of cash acquired. Net cash provided by financing activities was $5,264,000, primarily attributable to the private sale of redeemable common stock in exchange for $5,000,000. $264,000 was generated from the exercise of employee stock options and from the sale of stock under the Company's employee stock purchase plan. Additionally, during the fiscal year, the Company borrowed and repaid $7,106,000 through the utilization of its accounts receivable revolving line of credit. 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, cash flow from operations 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 require 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 action in scope to the reduction in Page 23 workforce undertaken 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. 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 In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, which establishes accounting and reporting standards for derivative instruments and hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. In June 1999, the FASB issued SFAS No. 137, Accounting for Derivative Instruments - Deferral of the Effective Date of SFAS Statements No. 133 and in June 2000, the FASB issued SFAS No. 138, Accounting for Certain Derivative Instruments - an amendment of FAS 133, Accounting for Derivative instruments and Hedging Activities. As a result of SFAS No. 137, SFAS No. 133 and SFAS No. 138 will be effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. The Company does not expect that the adoption of this standard will have a material impact on its financial position and results of operations. 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. Page 24 In March 2000, the Financial Accounting Standards Board issued FASB Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation - an Interpretation of APB Opinion No. 25. FIN 44 clarifies the application of Opinion 25 for (a) the definition of employee for purposes of applying Opinion 25, (b) the criteria for determining whether a plan qualifies as a noncompensatory plan, (c) the accounting consequence of various modifications to the terms of a previously fixed stock option or award, and (d) the accounting for an exchange of stock compensation awards in a business combination. The Company adopted FIN 44 effective July 1, 2000. The adoption of the provisions of FIN 44 did not have a material effect on the financial position or results of operations of the Company. In June 2000, the Financial Accounting Standards Board issued Financial Accounting Standard No. 138 (FAS 138), Accounting for Certain Derivative Instruments - an amendment of FAS 133, Accounting for Derivative Instruments and Hedging Activities. FAS 138 shall be effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. The Company does not expect this to have a material impact on its financial position and results of operations. Item 7A: 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 instruments at September 30, 2000 and 1999. A review of other financial instruments and risk exposures at that date revealed the Company did not have exposure to interest rate risk. Page 25 Item 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Consolidated Balance Sheets (In thousands)
Pro-Forma September 30, September 30, 2000 1999 2000 (unaudited) -------- -------- ----------- Assets Current assets: Cash and cash equivalents $ 889 $ 1,670 $ 889 Accounts receivable, less allowance for doubtful accounts of $292 in 2000 and $280 in 1999 3,362 3,719 3,362 Refundable taxes 125 205 125 Other current assets 1,138 1,218 1,138 -------- -------- -------- Total current assets 5,514 6,812 5,514 Fixed assets-net 854 738 854 Intangible assets-net 2,156 3,118 2,156 Other assets-net 1,183 984 1,183 -------- -------- -------- Total assets $ 9,707 $ 11,652 $ 9,707 ======== ======== ======== Liabilities, Redeemable Common Stock and Warrants, and Shareholders' Equity (Deficit) Current liabilities: Accounts payable $ 2,367 $ 2,568 $ 2,367 Accrued liabilities 1,076 1,114 1,076 Deferred revenue 2,889 2,073 2,889 -------- -------- -------- Total current liabilities 6,332 5,755 6,332 -------- -------- -------- Commitments (See note) Redeemable common stock, no par Value; 2,192 and none shares issued and outstanding at September 30, 2000 and 1999, respectively, and none pro-forma shares issued and outstanding 5,301 - - -------- -------- -------- Shareholders' equity (deficit): Preferred stock, no par value; 1,000 shares authorized, none and 200 shares issued and outstanding at September 30, 2000 and 1999, respectively, and none pro-forma shares issued and outstanding (liquidation value $2,000 at September 30, 1999) - 2,000 - Common stock, no par value; 40,000 shares authorized; 26,780 shares and 24,896 shares issued and outstanding at September 30, 2000 and 1999, respectively, and 28,972 pro-forma shares issued and outstanding 74,471 71,340 79,772 Accumulated deficit (76,397) (67,443) (76,397) -------- -------- -------- Total shareholders' equity (deficit) (1,926) 5,897 3,375 -------- -------- -------- Total liabilities, redeemable common stock and warrants, and shareholders' equity (deficit) $ 9,707 $ 11,652 $ 9,707 ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. Page 26 Consolidated Statements of Operations (In thousands except per share data)
Year Ended September 30, 2000 1999 1998 -------- -------- -------- Net product sales $ 12,672 $ 12,148 $ 12,480 Services and other revenue 8,438 8,742 7,679 -------- -------- -------- Net sales 21,110 20,890 20,159 Royalty revenue - - 1,541 -------- -------- -------- Total revenue 21,110 20,890 21,700 Costs and expenses: Cost of products sold 3,067 5,924 9,709 Cost of services and other 4,138 3,363 2,446 Research and development 3,843 3,022 6,419 Selling, general and administrative 19,374 15,474 24,012 Loss on impairment of assets - - 2,061 Loss from unconsolidated company - 5,098 10,616 -------- -------- -------- Operating loss (9,312) (11,991) (33,563) Interest income (208) (397) (598) Interest expense 106 1,537 3,466 Other (income) and expense, net (741) (28) 274 -------- -------- -------- Loss before income taxes (8,469) (13,103) (36,705) Provision for income taxes 184 - 6,500 -------- -------- -------- Net loss $ (8,653) $(13,103) $(43,205) ======== ======== ======== Basic net loss per share $ (0.33) $ (0.59) $ (2.48) ======== ======== ======== Diluted net loss per share $ (0.33) $ (0.59) $ (2.48) ======== ======== ======== Shares used in basic per share calculation 26,437 22,199 17,433 ======== ======== ======== Shares used in diluted per share calculation 26,437 22,199 17,433 ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. Page 27 Consolidated Statements of Shareholders' Equity (Deficit) (In thousands except per share data)
Preferred Preferred Common Common Total Stock Stock Stock Stock Accumulated Shareholders' Shares Amount Shares Amount Deficit Equity(Deficit) --------- --------- ------ ------- ------------ --------------- Balances at September 30, 1997 - $ - 15,603 $27,081 $(11,135) $15,946 Issuance of common stock: Stock options exercised ($0.34-$9.88 per share) - - 367 915 - 915 Employee stock purchase plan ($6.28 and $10.70 per share) - - 65 528 - 528 Conversion of subordinated debenture - - 4,566 30,325 - 30,325 Discount on $10 million convertible subordinated debenture - - - 1,111 - 1,111 Valuation of stock warrants issued in connection with $10 million convertible subordinated debenture - - - 614 - 614 Net loss - - - - (43,205) (43,205) --- ------ ------ ------- -------- -------- Balances at September 30, 1998 - - 20,601 60,574 (54,340) 6,234 Issuance of Series B preferred stock 200 2,000 - - - 2,000 Issuance of common stock: Stock options exercised ($1.38-$2.00 per share) - - 35 27 - 27 Employee stock purchase plan ($1.33 and $3.37 per share) - - 60 129 - 129 Conversion of subordinated debenture - - 4,200 9,927 - 9,927 Discount on $5 million convertible subordinated debenture - - - 555 - 555 Stock warrants issued in connection with a $5 million convertible subordinated debenture - - - 128 - 128 Net loss - - - - (13,103) (13,103) --- ------ ------ ------- -------- -------- Balances at September 30, 1999 200 2,000 24,896 71,340 (67,443) 5,897 Issuance of common stock: Stock options exercised ($0.72-$3.94 per share) - - 97 166 - 166 Employee stock purchase plan ($1.04 per share) - - 94 98 - 98 Conversion of Series B preferred stock (200) (2,000) 1,306 2,000 - - Common stock issued in settlement of lawsuit - - 387 787 - 787 Stock based compensation to consultants - - - 80 - 80 Amortization on redeemable common stock accretion - - - - (301) (301) Net loss - - - - (8,653) (8,653) --- ------ ------ ------- -------- -------- Balances at September 30, 2000 - $ - 26,780 $74,471 $(76,397) $(1,926) === ====== ====== ======= ======== ========
The accompanying notes are an integral part of these consolidated financial statements. Page 28
Consolidated Statements of Cash Flows (In thousands) Year Ended September 30, 2000 1999 1998 -------- -------- -------- Cash flows provided by (used in) operating activities: Net loss $ (8,653) $(13,103) $(43,205) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Sale of storage business - - (200) Loss on impairment of assets - - 2,061 Loss from unconsolidated company - 5,098 10,616 Writedown of inventory - - 1,095 Writeoff of patents - - 387 Writeoff of capitalized software - - 103 Adjustment of goodwill and purchased technology - - 909 Amortization of capitalized financing costs - 479 1,322 Discount amortization on subordinated debenture - 555 1,111 Depreciation and amortization 2,157 2,511 3,036 Provision for doubtful accounts 416 282 122 Provision for inventory allowances - - 160 Stock compensation of consultants 80 - - Deferred and refundable income taxes 80 3 6,509 Settlement of lawsuit 787 - - Change in operating assets and liabilities: Decrease (increase) in accounts receivable 38 (422) 2,846 Decrease in inventories - - 1,795 Decrease (increase) in other current assets 672 (469) 244 Decrease in accounts payable (252) (1,017) (1,183) Decrease in accrued liabilities (75) (504) (1,727) Increase (decrease) in deferred revenue 351 (66) 1,039 -------- -------- -------- Net cash used in operating activities (4,399) (6,653) (12,960) -------- -------- -------- Cash flows provided by (used in) investing activities: Acquisition of fixed assets (762) (189) (723) Investment in and advances to unconsolidated company - (5,098) (1,559) Purchase of Telemetrics AG, net of cash acquired (168) - - Proceeds from sale of short-term investments - - 9,596 Notes receivable from unconsolidated company - - (2,022) Bank guarantee for unconsolidated company - - (1,000) Proceeds from sale of storage business - - 200 Increase in other assets (716) (477) (1,351) -------- -------- -------- Net cash provided by (used in) investing activities (1,646) (5,764) 3,141 -------- -------- -------- Cash flows provided by (used in) financing activities: Issuance of redeemable common stock and warrants 5,000 - - Issuance of preferred stock - 2,000 - Issuance of common stock 264 156 1,443 Issuance of subordinated debenture - 5,342 10,741 Proceeds from borrowings 7,106 - - Repayment of borrowings (7,106) - - -------- -------- -------- Net cash provided by financing activities 5,264 7,498 12,184 -------- -------- -------- Net increase (decrease) in cash and cash equivalents (781) (4,919) 2,365 Cash and cash equivalents, beginning of year 1,670 6,589 4,224 -------- -------- -------- Cash and cash equivalents, end of year $ 889 $ 1,670 $ 6,589 ======== ======== ======== Supplemental cash flow information: Income taxes paid $ 3 $ 5 $ 27 Interest paid $ 106 $ 57 $ 35 Supplemental non-cash investing and financing activities: Amortization on redeemable common stock accretion $ 301 $ - $ - Capitalized financing costs $ - $ 219 $ 558 Conversion of subordinated debenture and accrued interest $ - $ 9,927 $ 30,325 Conversion of Series B preferred stock to common stock $ 2,000 $ - $ - Settlement of lawsuit $ 787 $ - $ - Common stock purchase warrants $ - $ 128 $ 614
The accompanying notes are an integral part of these consolidated financial statements. Page 29 Notes to Consolidated Financial Statements (In thousands except per share data) The Company: Fortel Inc. ("Fortel" or the "Company") is an information technology company specializing in computer and systems optimization, data correlation and search technology. Fortel acquires, develops and markets eBusiness performance management solutions. Product offerings include multi-platform performance analysis and automatic correlation software used to optimize performance in eBusiness infrastructure systems, professional services for existing and new customers, and software-based Internet tools. Fortel's SightLine and predecessor ViewPoint suites of software have been sold, supported and enhanced for more than 10 years for hundreds of customers in finance and banking, defense management, manufacturing, retail services and government. Summary of Significant Accounting Policies: Basis of Presentation: These consolidated financial statements contemplate the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred losses in each of the last three fiscal years and has an accumulated deficit at September 30, 2000 of $76,397 thousand, as well as a working capital deficit at September 30, 2000 of $818 thousand. These factors raise substantial doubt about the Company's ability to continue as a going concern. Fiscal year 1998 included losses from the storage business which was sold in July 1998 and the write off of the Company's investment in MatriDigm Corporation ("MatriDigm"). Fiscal year 1999 losses included amounts advanced to MatriDigm during 1999. MatriDigm filed Chapter 7 bankruptcy in October 1999 and no further advances were made. 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, cash flow from operations and utilize the available accounts receivable line of credit, which was increased from $2 million to $3 million on January 3, 2001. If the Company is unable to generate sufficient cash flows from operations or should management determine it to be prudent, the Company may seek additional sources of capital. There can be no assurance that in the event the Company require 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 action in scope to the reduction in workforce undertaken 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. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Page 30 Principles of Consolidation: The consolidated financial statements include the accounts of Fortel Inc. and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Pro-Forma Balance Sheet (unaudited): The unaudited Pro-Forma Balance Sheet as of September 30, 2000 gives effect to the reclassification of the redeemable common stock to permanent equity as if the amended terms described in the footnote "Private Placement of Common Stock", had been effective as of September 30, 2000. Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Cash Equivalents: For purposes of the statements of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. Fixed Assets: Fixed assets are stated at cost less accumulated depreciation, other than leasehold improvements, and are depreciated on a straight-line basis over their estimated useful lives (three years). Leasehold improvements are amortized over the lesser of their useful life or remaining term of the related lease. When assets are disposed of, the cost and related accumulated depreciation are removed from the accounts and the resulting gains and losses are included in the results of operations. Deferred Software Implementation Costs: The Company capitalizes substantially all costs related to the purchase of software and its implementation, which includes the cost of purchased software, consulting fees and the use of Page 31 certain specified Company resources. The Company amortizes such costs on a straight-line basis over the estimated life of the computer software, which is five years. The Company evaluates the fair value of the deferred software implementation costs at each balance sheet date and records write-downs to the recoverable costs. In June 1998, the Company wrote down the net book value of amounts capitalized, which related to all the manufacturing modules of the recently sold storage business. No such write-downs were deemed necessary in fiscal years 2000 and 1999. As of September 30, 2000, $351 thousand in costs had been capitalized and are included in other long-term assets. Amortization in the amount of $94 thousand, $94 thousand and $193 thousand was charged to expense during fiscal years 2000, 1999 and 1998, respectively. Revenue Recognition: The Company adopted the provisions of Statement of Position 97-2 ("SOP 97-2"), "Software Revenue Recognition", as amended by SOP 98-4, "Deferral of the Effective Date of Certain Provisions of SOP 97-2", effective October 1, 1998. SOP 97-2 delineates the accounting for software products, products including software that is not incidental to the product, and maintenance revenues. Under SOP 97-2, the Company recognizes product license revenue upon shipment if a signed contract exists, the fee is fixed and determinable, collection of the resulting receivables is probable and the product returns can be reasonably estimated. For contracts with multiple obligations (e.g., maintenance and consulting services), revenue from product licenses are recognized when delivery has occurred, collection of the resulting receivables is probable, the fee is fixed and determinable and the vendor-specific objective evidence exists to allocate the total fee to all delivered and undelivered elements of the arrangement. The Company recognizes revenue allocated to maintenance and support fees, for ongoing customer support and product updates, ratably over the period of the relevant contract. For revenue allocated to consulting services and for consulting services sold separately, the Company recognizes revenue as the related services are performed. Maintenance and consulting services are included in services and other revenue. Prior to the adoption of SOP 97-2, the Company recognized revenue from the sale of product licenses upon shipment if remaining obligations were insignificant and collection of the resulting receivables was probable. Revenue from software maintenance Page 32 contracts, including amounts unbundled from product sales, were deferred and recognized ratably over the period of the contract. The Company recognized revenue from Year 2000 conversion services when the conversion services were completed. Revenue from Year 2000 conversion services are included in services and other revenue. Revenue from the storage business was recognized at the time products were shipped to customers. Warranty: All of the Company's storage products, which were discontinued in fiscal 1998, were covered by a one-year limited warranty and accordingly, as of September 30, 2000, the Company no longer had any warranty exposure. Research and Development Expenditures: Research and development expenditures are charged to operations as incurred. Software Development Costs: SFAS No. 86 provides for the capitalization of certain software development costs after technological feasibility of the software is attained. Capitalized costs are amortized using the greater of the amount computed using the ratio that current gross revenues for a product bear to the total of current and anticipated gross revenues for that product, or on a straight-line basis over the estimated product life cycle (approximately three years). The Company evaluates the estimated net realizable value of each software product at each balance sheet date and records write-downs to net realizable value for any products with a net book value in excess of net realizable value. Software development costs capitalized in fiscal years 2000 and 1999 were $678 thousand and $381 thousand, respectively. Amortization of $240 thousand, $410 thousand and $62 thousand was charged to expense for fiscal years 2000, 1999 and 1998, respectively. Foreign Currency Translation: The U.S. dollar is considered to be the functional currency for the Company's foreign operations. Accordingly, non-monetary assets and liabilities have been translated into U.S. dollars at Page 33 a historical rate; monetary assets and liabilities have been translated into U.S. dollars using the exchange rate at the balance sheet date; and revenues and expenses have been generally translated into U.S. dollars at the weighted average exchange rate during the period. Foreign currency transaction gains and losses, as well as the effects of remeasurement (which have not been material in the aggregate), are included in the accompanying consolidated statements of operations. Intangible Assets: Intangible assets include goodwill and purchased technology, recorded in connection with the acquisition of the three software companies, which are being amortized on a straight-line basis over six and five years, respectively. The Company periodically assesses the recoverability of intangible assets by determining whether the amortization of the asset balance over its remaining life can be recovered through undiscounted future operating cash flows of the acquired operation. The amount of impairment, if any, is measured based on projected discounted future operating cash flows and is recognized as a write down of the asset. In fiscal year 1998, the Company reassessed the amortization period for goodwill and reduced the life from seven to six years based on future projections. Income Taxes: Deferred income taxes are recognized for temporary differences by applying enacted statutory rates applicable to future years to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. Comprehensive Loss: Effective October 1, 1998, the Company adopted the provisions of SFAS No. 130, "Reporting Comprehensive Income". There were no differences between comprehensive loss and net loss as reported for each of the fiscal years 2000, 1999 and 1998. Page 34 Recent Accounting Pronouncements: In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.133, Accounting for Derivative Instruments and Hedging Activities, which establishes accounting and reporting standards for derivative instruments and hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. In June 1999, the FASB issued SFAS No. 137, Accounting for Derivative Instruments - Deferral of the Effective Date of SFAS Statements No. 133 and in June 2000, the FASB issued SFAS No. 138, Accounting for Certain Derivative Instruments - an amendment of FAS 133, Accounting for Derivative instruments and Hedging Activities. As a result of SFAS No. 137, SFAS No. 133 and SFAS No. 138 will be effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. The Company does not expect that the adoption of this standard will have a material impact on its financial position and results of operations. 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. In March 2000, the Financial Accounting Standards Board issued FASB Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation - an Interpretation of APB Opinion No. 25. FIN 44 clarifies the application of Opinion 25 for (a) the definition of employee for purposes of applying Opinion 25, (b) the criteria for determining whether a plan qualifies as a noncompensatory plan, (c) the accounting consequence of various modifications to the terms of a previously fixed stock option or award, and (d) the accounting for an exchange of stock compensation awards in a business combination. The Company adopted FIN 44 effective July 1, 2000. The adoption of the provisions of FIN 44 did not have a material effect on the financial position or results of operations of the Company. Page 35 In June 2000, the Financial Accounting Standards Board issued Financial Accounting Standard No. 138 (FAS 138), Accounting for Certain Derivative Instruments - an amendment of FAS 133, Accounting for Derivative Instruments and Hedging Activities. FAS 138 shall be effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. The Company does not expect this to have a material impact on its financial position and results of operations. Net Loss Per Share: Basic loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding for the period. Diluted loss per common share is computed giving effect to all potentially dilutive common shares that were outstanding during the period. Dilutive common shares consist of the incremental common shares issuable upon the conversion of convertible subordinated debt (using the "if converted" method) and exercise of stock options and warrants for all periods. Concentrations of Credit Risk: Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and trade receivables. The Company places its cash investments with high credit quality financial institutions and limits the amount of exposure to any one financial institution. Concentrations of credit risk with respect to accounts receivables are limited due to the diversity of the Company's customers, both geographically and within different industry segments. The Company performs ongoing evaluations of its customers' financial condition and generally does not require collateral. The Company maintains allowances for potential credit losses. Page 36 Fair Value of Financial Instruments: Carrying value amounts of certain of the Company's financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, and other accrued liabilities approximate fair value due to their short maturities. Sale of Storage Business: Due to the lack of performance of the storage business, on July 24, 1998, the Company completed the sale of the net assets of the business, which totalled $2.1 million, for cash and a note totalling $1.0 million and royalties of up to $4.0 million, payable over four years based on the sales performance of the new company. Fixed assets in the amount of $1.3 million and deferred software implementation costs of $800 thousand, which related to manufacturing modules that would no longer be used, were taken as a loss on impairment of assets during fiscal year 1998. Inventory in the amount of $1.7 million and patents in the amount of $400 thousand were charged against cost of sales during fiscal year 1998.
Fixed Assets: September 30, 2000 1999 ------- ------- Fixed Assets: Furniture, fixtures and equipment $ 3,378 $ 3,065 Leasehold improvements 199 651 ------- ------- 3,577 3,716 Less accumulated depreciation and amortization (2,723) (2,978) ------- ------- $ 854 $ 738 ======= =======
Page 37 Depreciation expense was $678 thousand, $762 thousand and $1,600 thousand for fiscal years 2000, 1999 and 1998, respectively. Business Combinations: In October 1999, Fortel acquired all outstanding shares of Telemetrics Systems AG, a company domiciled in Berne, Switzerland, for approximately $1.2 million. Telemetrics Systems AG was primarily in the business of distributing Fortel products. The transaction was accounted for under the purchase method of accounting. Accordingly, the total purchase price of $1.2 million was allocated to the assets acquired and liabilities assumed, based upon their estimated fair values and no goodwill was recorded. The following table is a summary of an unaudited pro-forma financial information with respect to the combined companies as described above, disclosing pro-forma results of operations for the fiscal year ended September 30, 1999 as though the entities had been combined as of October 1, 1998. The pro-forma results do not reflect any non-recurring charges of approximately $65 thousand which resulted directly from the transaction. The acquisition was transacted at the beginning of the Company's fiscal year 2000 and, therefore, the results of operations for the fiscal year ended September 30, 2000 are included in the consolidated results of operations.
Fiscal Year 1999 (unaudited) ----------- Revenue $ 20,916 Net loss $(12,947) Net loss per share ($0.58)
Intangible Assets: Intangible assets include goodwill and purchased technology, recorded in connection with the acquisition of the three software companies, which are being amortized on a straight-line basis over six and five years, respectively. The Company periodically assesses the recoverability of the intangible assets by determining whether the amortization of the asset balance over its remaining life can be recovered through undiscounted future operating cash flows of the acquired operation. The amount of impairment, if any, is measured based on projected discounted future operating cash flows and is recognized as a write-down of the asset. At June 30, 1998, a write-down of a combined total of Page 38 $658 thousand was made to goodwill and purchased technology. In addition, the amortization period of goodwill was adjusted to six years from seven years. Intangible assets consist of the following as of:
September 30, 2000 1999 ------ ------ Intangible Assets: Goodwill $ 2,768 $ 2,768 Purchased technology 2,588 2,588 Less accumulated amortization (3,200) (2,238) ------- ------- $ 2,156 $ 3,118 ======= ======= Other Assets: Deferred software implementation costs $ 351 $ 351 Purchased software 550 550 Capitalized development projects 1,454 777 Other 144 104 ------- ------- 2,499 1,782 Less accumulated amortization (1,316) (798) ------- ------- $ 1,183 $ 984 ======= =======
Investment in Unconsolidated Company: The Company invested $7.4 million to acquire a 31% interest in MatriDigm Corporation ("MatriDigm") from fiscal year 1996 through fiscal year 1998. The Company recorded approximately $624 thousand in losses under the equity method from the unconsolidated company during the year ended September 30, 1998. Fortel also wrote off its investment in MatriDigm and fully reserved certain demand notes and bank guarantees during fiscal 1998. Fortel advanced MatriDigm an additional $4.9 million during fiscal year 1999. The Company paid $250 thousand during the year ended September 30, 1999, for a non-exclusive, royalty-bearing license for the MatriDigm technology. Fortel also entered into an agreement to acquire the balance of MatriDigm in August 1999. This agreement was terminated in September 1999 and MatriDigm filed Chapter 7 bankruptcy in October 1999. The Company recorded approximately $5.1 million during fiscal year 1999 in the write-off of the license and all advances to the company. Page 39 The following is a summary of unaudited financial information with respect to MatriDigm, as of and for the year ended September 30, 1998:
1998 --------- Net sales $ 5,479 Gross profit 2,194 Net loss (13,256) Current assets 2,160 Non-current assets 3,363 Current liabilities 7,990 Non-current liabilities 5,172
MatriDigm filed Chapter 7 bankruptcy in October 1999 and did not provide the Company with financial statements for the year ended September 30, 1999. Accrued Liabilities:
September 30, 2000 1999 ------ ------ Accrued payroll and related $ 141 $ 432 Accrued vacation 415 539 Accrued commissions 19 35 Other accrued liabilities 501 108 ------ ------ $1,076 $1,114 ====== ======
Credit Facility: The Company has a $2 million accounts receivable revolving line of credit. 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 fiscal year 2000, the Company had borrowed and repaid approximately $7.1 million. At September 30, 2000, there were no borrowings against the line. Page 40 Commitments: The Company leases its operating facilities in Fremont, CA, Fairfax, VA, Leatherhead, United Kingdom, Rotterdam, The Netherlands, and Berne, Switzerland, under non-cancelable operating leases that expire at various dates through the year 2010. Rent expense incurred under all operating leases and charged to operations was $955 thousand, net of sublease income of $632 thousand in fiscal year 2000, $1,279 thousand in fiscal year 1999 and $1,763 thousand in fiscal year 1998. Future minimum obligations under all facility leases at September 30, 2000 aggregate approximately $6.3 million, without regard to potential sublease income, and are payable as follows:
Facility Sublease Lease Income Fiscal Year Amount Amount ----------- -------- -------- 2001 $1,919 $ 966 2002 1,946 892 2003 1,250 432 2004 621 - Thereafter 568 -
3% Convertible Subordinated Debentures - 1998: On June 16, 1998, the Company issued a $10 million principal amount of 3% Convertible Subordinated Debentures (the "3% Debentures") which were due June 15, 1999, and five-year common stock purchase warrants for 150,000 shares of the Company's common stock at an exercise price of $5.10. The fair value of the warrants was determined using the Black Scholes option pricing model. The Consolidated Statement of Operations for fiscal year 1998 includes a charge to interest expense in the amount of $1.1 million related to the amortization of the total discount on the 3% Debentures. During fiscal 1998, approximately $5.1 million of principal and accrued interest were converted to 1.3 million shares of common stock. During fiscal year 1999, approximately $4.9 million was converted into 1.3 million shares of common stock. Page 41 3% Convertible Subordinated Debentures - 1999: On February 3, 1999, the Company issued a $5 million principal amount of 3% Convertible Subordinated Debentures (the "1999 Debentures") which would automatically convert on February 1, 2000; and five-year common stock purchase warrants to acquire 75,000 shares of the Company's common stock at an exercise price of $1.71. The fair value of the warrants was determined using the Black Scholes option pricing model. The 1999 Debentures accrued interest at the rate of 3% per annum. Principal and accrued interest were convertible into Common Stock of the Company at a price of $1.70 per share. Interest expense and amortization of the debt issuance costs in the amount of $555 thousand are included in the Consolidated Statement of Operations for the fiscal year 1999. The Debentures and accrued interest were fully converted into 2.9 million shares of common stock as of September 30, 1999. Private Placement of Common Stock: On July 18, 2000, the Company, through a private placement, issued 2,191,781 shares of common stock to two institutional investors, Deephaven Private Placement Trading Ltd. and Harp Investors LLC (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"), copies of which were filed with the Company's Current Report on Form 8-K filed on July 27, 2000. Proceeds of $4,726,500, net of placement agency and professional fees of $273,500, were received. Pursuant to the terms of the Agreements, the Investors have the right to demand additional warrants to purchase shares of common stock from the Company in the event the market price of the Company's stock falls below $2.28 per share. The Company has registered 5,341,126 shares of common stock of which 2,191,781 had been issued as of September 30, 2000. Should the market price of the Company's common stock fall below $1.12 per share, the Investors could demand that the Company request that shareholders authorize additional shares of common stock such that a $6,000,000 value be maintained by the Investors. In the event that such authorization not be obtained, the Investors could demand liquidating damages of up to $6,000,000. Page 42 Due to the redemption feature contained within the Agreement, this 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. The modification of these terms enabled the Company to reclassify the transaction from temporary equity into shareholders' equity. Preferred Stock: In October 1983, the Company authorized one million shares of preferred stock. The Board of Directors has the authority to establish all rights and terms with respect to the preferred stock without future vote or action by the shareholders. At September 30, 1999, 200 thousand shares of Series B preferred stock were issued and outstanding. In July 2000, all of the Series B preferred stock were converted into 1,306,000 shares of common stock valued at $2,000,000. Stock Option Plans: In November 1999, the Board of Directors approved the adoption of an amendment to the 1990 Stock Option Plan, as amended. It approved the 2000 Equity Incentive Plan whereby 1 million shares of common stock were authorized for issuance. At September 30, 2000, in aggregate, the Company had 7.7 million common shares reserved for issuance under its stock option plans, as amended. Under the Company's stock option plans, options become exercisable at dates and in amounts as specified by the Compensation Committee of the Board of Directors and expire two-to-ten years from the date of grant. Options may be granted to employees at prices not less than fair market value at the date of grant. At September 30, 2000 and 1999, there were 408 thousand and 795 thousand shares reserved for future grants, respectively. Page 43 Activity in the Company's option plans during fiscal years 1998, 1999 and 2000 is summarized as follows:
Weighted Number Average Options of Price Price Total Shares Per Share Per Share Amount ------ --------- ------------- ------- Balances, September 30, 1997 2,010 $10.29 $ .34-$44.38 $20,690 Granted 1,471 $11.51 $ 2.53-$16.63 16,928 Cancelled (1,024) $17.30 $ 1.50-$33.00 (17,712) Exercised (367) $ 2.49 $ .34-$ 9.88 (915) ----- ------------- ------- Balances, September 30, 1998 2,090 $ 9.09 $ 1.38-$23.25 18,991 Granted 1,092 $ 2.41 $ 1.22-$ 4.09 2,522 Cancelled (1,059) $ 9.94 $ 1.56-$23.25 (10,714) Exercised (35) $ 1.56 $ 1.38-$ 2.00 (27) ----- ------------- ------- Balances, September 30, 1999 2,088 $ 5.16 $ 1.22-$16.63 10,772 Granted 1,545 $ 3.04 $ 0.72-$ 6.63 4,691 Cancelled (779) $ 4.11 $ 0.72-$14.25 (3,200) Exercised (57) $ 2.92 $ 1.78-$ 6.00 (99) ----- ------------- ------- Balances, September 30, 2000 2,797 $ 4.35 $ 0.72-$16.63 $12,164 ===== ====== ============= =======
At September 30, 2000, 1999 and 1998, respectively, options for 1.1 million, 1.0 million and 1.3 million shares were exercisable at a weighted exercise price per share of $5.58, $5.56 and $8.48, respectively. 1995 Non-Employee Directors' Stock Option Plan: In April 1995, the Board of Directors approved the adoption of a Directors plan which provides for automatic grants of options to purchase an aggregate of 200 thousand shares of common stock. In March 2000 and 1999, the number of shares reserved for issuance under the Directors' Plan were increased by 150 thousand and 200 thousand, respectively. Options in the amount of 200 thousand, 70 thousand and 24 thousand were granted in fiscal years 2000, 1999 and 1998, respectively. The options granted in fiscal years 2000, 1999 and 1998 were at a weighted average exercise price of $4.07, $3.42 and $10.81, respectively. In fiscal 2000, there were 40 thousand shares of options exercised. There were no options exercised in fiscal years 1999 and 1998. At September 30, 2000, 1999 and 1998, 136 thousand, 144 thousand and 69 thousand shares, respectively, were exercisable. At September 30, 2000, 221 thousand shares were available for future grants. Page 44 Preferred Share Purchase Rights Plan: In June 1996, the Company adopted a Preferred Share Purchase Rights Plan whereby shareholders will receive one right to purchase one one-hundredth of a share of a new series of preferred stock ("Rights") for each outstanding share of the Company's common stock held at the date of record, July 1, 1996. The Rights do not become exercisable or transferable apart from the common stock until a person or group (a) acquires beneficial ownership of 15% or more of the Company's common stock or (b) announces a tender or exchange offer, the consummation of which would result in ownership by a person or group of 15% or more of the Company's common stock. The Rights will be distributed as a non-taxable dividend and will expire in ten years from the date of declaration of the dividend. The exercise price is $69.50 per 1/100 of a share of preferred stock. Stock Purchase Plan: In April 1984, the Board of Directors approved the adoption of an Employee Stock Purchase Plan under which 400 thousand shares of common stock were reserved for issuance to eligible employees. In January 1988, January 1990, January 1992, and January 1995, the shareholders approved amendments to increase the shares reserved for the Plan by 300 thousand shares, 400 thousand shares, 400 thousand shares, and 500 thousand shares, respectively. Employees who do not own 5% or more of the outstanding shares are eligible to participate through payroll deductions, which may not exceed 10% of an employee's compensation. At the end of each offering period, shares are purchased by the participants at 85% of the lower of the fair market value at the beginning or the end of the offering period. The 15% discount is treated as equivalent to the cost of issuing stock for financial reporting purposes. During fiscal years 2000, 1999 and 1998, shares issued under the Plan were 94 thousand, 60 thousand and 65 thousand shares, respectively. Since inception of the Plan, approximately 1.85 million shares have been issued. Page 45 As of September 30, 2000, options outstanding under both the stock option plans and 1995 Non-Employees Directors' Stock Option Plan were as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE - ---------------------------------------------------- ---------------------- Weighted Range Average Weighted Weighted of Remaining Average Average Exercise Number Contractual Exercise Number Exercise Prices Outstanding Life Price Exercisable Price - ------------- ----------- ----------- -------- ----------- -------- $ 0.72-$ 0.72 378 9.09 $ 0.72 67 $ 0.72 $ 1.17- 1.66 368 9.22 1.54 131 1.57 $ 1.69- 1.75 374 8.90 1.75 165 1.75 $ 2.00- 3.03 336 7.50 2.70 100 2.65 $ 3.06- 3.63 353 8.58 3.46 72 3.42 $ 4.06- 5.88 343 7.61 4.68 222 4.80 $ 6.03- 6.22 129 5.09 6.06 17 6.12 $ 6.38- 6.38 361 8.02 6.38 81 6.38 $ 6.63- 13.88 435 6.73 11.31 313 11.53 $14.19- 33.00 28 6.93 22.44 25 23.33 --------- ---- ------ --------- ------ $ 0.72-$33.00 3,105 8.05 $ 4.46 1,193 $ 5.82
Pro Forma Stock-Based Compensation: The Company has elected to continue to follow the provisions of Accounting Principles Board ("APB") No. 25, "Accounting for Stock Issued to Employees", for financial reporting purposes and has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation". Accordingly, no compensation cost has been recognized for the Company's stock option plans or employee stock purchase plan. Had compensation cost for the Company's stock option plans and employee stock purchase plan been determined based on the fair value at the grant date for awards consistent with the provisions of SFAS No. 123, the Company's net loss and net loss per share for fiscal years 2000, 1999 and 1998 would have been modified to the pro forma amounts indicated below (in thousands, except per share amounts):
Fiscal Years 2000 1999 1998 -------- -------- -------- Net loss - as reported $ (8,653) $(13,103) $(43,205) ======== ======== ======== Net loss - pro forma $(11,287) $(15,461) $(51,574) ======== ======== ======== Basic and diluted net loss per share - as reported $ (0.33) $ (0.59) $ (2.48) ======== ======== ======== Basic and diluted net loss per share - pro forma $ (0.43) $ (0.69) $ (2.96) ======== ======== ========
Page 46 The above pro forma disclosures are not necessarily representative of the effects on reported net income or loss for future years. The aggregate fair value and weighted average fair value of each option granted in fiscal years 2000, 1999 and 1998 were $5.3 million, $1.9 million and $5.3 million and $3.02, $1.58 and $6.75 per share, respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes Option Pricing Model with the following weighted average assumptions for fiscal years 2000, 1999 and 1998:
Fiscal Years 2000 1999 1998 -------- -------- -------- Expected volatility (%) 212 118 103 Risk-free interest rate (%) 6.46 5.16 5.52 Expected life (years) 4.87 5.06 5.42 Expected dividend yield (%) 0 0 0
The aggregate fair value and weighted average fair value of each purchase under the employee stock purchase plan in fiscal years 2000, 1999 and 1998 were $80 thousand, $73 thousand and $229 thousand and $0.88, $2.76 and $5.71 per share, respectively The Company has also estimated the fair value for the purchase rights under the employee stock purchase plan using the Black-Scholes Model, with the following assumptions for fiscal years 2000, 1999 and 1998:
Fiscal Years 2000 1999 1998 -------- -------- -------- Expected volatility (%) 229 119 77 Risk-free interest rate (%) 6.46 5.00 5.89 Expected life (years) 0.49 0.49 0.49 Expected dividend yield (%) 0 0 0
Savings and Investment Plan: The Company has a 401(k) plan provided to all regular full-time employees who desire to participate. Under the Plan, participating employees may elect up to 15 percent of their eligible compensation, subject to certain limitations. At the Page 47 discretion of the Board of Directors, the Company may make contributions to the Plan, however, it has not made any contributions to the Plan nor does it plan to make any contributions in the foreseeable future. Earnings Per Share ("EPS") Disclosures: In accordance with the disclosure requirements of SFAS 128, a reconciliation of the numerator and denominator of basic and diluted EPS is provided as follows (in thousands except per share amounts):
Fiscal Years 2000 1999 1998 -------- -------- -------- Numerator - basic and diluted EPS Net loss $ (8,653) $(13,103) $(43,205) -------- -------- -------- Denominator - basic and diluted EPS Common stock outstanding 26,437 22,199 17,433 -------- -------- -------- Total shares used in calculation of basic and diluted EPS 26,437 22,199 17,433 -------- -------- -------- Basic and diluted net loss per share $ (0.33) $ (0.59) $ (2.48) ======== ======== ========
Stock options to purchase 3.1 million, 2.3 million and 2.1 million shares of common stock in fiscal years 2000, 1999 and 1998, respectively, at prices ranging from $0.72 to $33.00 and warrants to purchase 225 thousand, 225 thousand and 150 thousand shares of common stock in fiscal years 2000, 1999 and 1998, respectively, at prices ranging from $1.71 to $5.10, were outstanding but not included in the computation of diluted net loss per share as they were antidilutive. In addition, the Company had $3 million and $4.9 million of convertible debentures outstanding in 1999 and 1998, respectively, which were convertible into approximately 4.2 million and 1.2 million shares of common stock but were not included in the computation of diluted net loss per share as they were antidilutive. Page 48 Income Taxes: The provision for income taxes for the fiscal years 2000, 1999 and 1998 is as follows:
2000 1999 1998 ------- ------- ------- Current expense: Federal $ - $ - $ - State - - - Foreign 184 - 189 ------- ------- ------- 184 - 189 ------- ------- ------- Deferred tax expense: Federal - - - State - - - ------- ------- ------- - - - ------- ------- ------- Change in valuation allowance - 6,311 ------- ------- ------- $ 184 $ - $ 6,500 ======= ======= =======
The Company's effective tax rate for fiscal years 2000, 1999 and 1998 differs from the U.S. federal statutory income tax rate as follows:
2000 1999 1998 ----- ----- ----- Federal income tax (benefit) at statutory rate (34.0)% (34.0)% (34.0)% State taxes, net of federal effect (3.0) (2.2) (3.4) Tax credits (1.5) (0.1) (1.5) Non-deductible interest expense - - - Other, net 1.2 3.1 2.0 Change in valuation allowance - - 17.2 Net operating losses and tax credits not benefited 38.2 33.2 37.0 Foreign taxes 1.2 - 0.4 ----- ----- ----- 2.1% 0.0% 17.7% ===== ===== =====
Page 49 The following table shows the major components of the deferred tax asset as of September 30, 2000 and 1999: Deferred tax assets and liabilities: Current: Write down of equity investment $ 2,889 $ 2,889 Accounts receivable, inventory and other accruals 1,182 4,466 Accrued liabilities 276 368 Net operating loss carryforwards 24,751 16,211 Tax credit carryforwards 3,199 3,592 ------- ------- Total before valuation allowance 32,297 27,526 Valuation allowance (32,297) (27,526) ------- ------- Net deferred tax asset $ - $ - ======= =======
At September 30, 2000, the Company has federal and state net operating loss ("NOL") carryforwards of approximately 57.6 million and 11.0 million, respectively, to reduce future taxable income. The Company has federal and state general business credit carryforwards of $2.5 million and $0.7 million, respectively, to reduce future taxable income. These carryforwards expire in 2001 through 2021 if not utilized. In addition, the Company has approximately $6.4 million of NOLs related to stock option exercises, the benefit of which will be credited to equity when utilized. Under the Tax Reform Act of 1986, the amount of tax benefits from net operating loss and credit carryforwards may be impaired or limited if the Company has incurred a cumulative ownership change of more than 50%, as defined under federal and state law, during a three year period. The Company may have gone through a change of ownership and therefore the Company's net operating loss and credit carryforwards may be subject to a limitation on utilization and such limitation may be material. Due to the net loss incurred in fiscal year 2000, accumulated deficit and lack of alternative tax planning strategies, there is uncertainty surrounding the realization of the favorable tax attributes in future tax returns. Accordingly, the Company placed a valuation allowance against its otherwise recognizable net deferred tax assets. Page 50 Research and Development Contract: During fiscal year 1992, the Company entered into a joint development contract to develop a product with a third party. The Company received funding from the third party based on completion milestones. In addition, upon completion of the project, the Company has received a royalty based on sales by the third party of the product developed. Royalties totalling approximately $1.5 million were received from the third party in fiscal year 1998. During fiscal year 1998, the Company negotiated and received the final payment for all royalty obligations from the third party. Segment Information: During fiscal years 2000,1999 and 1998, the Company had two reportable segments - - Software and Year 2000 Services. The software business segment develops and markets ebusiness performance management software solutions. At the start of the fiscal year 2000, the Company ceased its Year 2000 business segment. The Year 2000 business segment provided services which reviewed software code and identified areas within the code where year 2000 problems may occur. During fiscal year 1998, the Company also had the data storage business segment. The data storage segment was disposed of in July 1998. The data storage segment developed memory algorithms which it incorporated and sold in high performance data storage systems. Page 51 The following table presents certain segment financial information for the fiscal years 2000, 1999 and 1998 (in thousands):
Software Year 2000 Storage Total -------- --------- --------- --------- Fiscal Year 2000 Revenues from external customers $20,718 $ 392 $ - $ 21,110 ======= ======= ======== ======== Segment loss from operations $(9,094) $ (218) $ - $ (9,312) ======= ======= ======== ======== Segment assets $17,688 $ - $ - $ 17,688 ======= ======= ======== ======== Fiscal Year 1999 Revenues from external customers $17,140 $ 3,750 $ - $ 20,890 ======= ======= ======== ======== Segment income (loss) from operations $ 48 $(6,941) $ - $ (6,893) ======= ======= ======== ======== Segment assets $ 9,017 $ - $ - $ 9,017 ======= ======= ======== ======== Fiscal Year 1998 Revenues from external customers $13,794 $ 667 $ 7,239 $ 21,700 ======= ======= ======== ======== Segment loss from operations $(2,543) $(1,703) $(16,640) $(20,886) ======= ======= ======== ======== Segment assets $ 9,933 $ - $ - $ 9,933 ======= ======= ======== ========
During each of the fiscal years presented, the Company's financial system did not produce separate asset information for its business segments. Reconciliations of the segment financial information to the consolidated totals as of and for each of the fiscal years 2000, 1999 and 1998 are provided below (in thousands):
Fiscal Year 2000 1999 1998 -------- -------- -------- Total consolidated net revenues $ 21,100 $ 20,890 $ 21,700 ======== ======== ======== Loss from operations: Loss from operations for reportable segments $ (9,312) $ (6,893) $(20,886) Loss on impairment of assets - - (2,061) Loss from unconsolidated company - (5,098) (10,616) -------- -------- -------- Consolidated loss from operations $ (9,312) $(11,991) $(33,563) ======== ======== ========
Page 52
September 30, 2000 1999 1998 -------- -------- -------- Assets: Assets of software segment $ 17,688 $ 9,017 $ 9,933 Unallocated assets - 17,668 23,611 Eliminations Intercompany receivables (3,691) (2,720) (3,161) Investments in and advances to related parties (4,290) (12,313) (12,313) -------- -------- -------- Consolidated assets $ 9,707 $ 11,652 $ 18,070 ======== ======== ========
Net revenues to external customers are based on the location of the customer. Geographic information for fiscal years 2000, 1999 and 1998 is presented in the table below (dollars in thousands):
United States Europe Australia Other Total ------- ------- --------- ------ ------- Fiscal Year 2000 Net revenues $11,045 $ 7,928 $ 368 $1,769 $21,110 Long-lived assets 3,693 500 - - 4,193 Fiscal Year 1999 Net revenues $ 9,296 $ 7,340 $ 2,908 $1,346 $20,890 Long-lived assets 4,295 545 - - 4,840 Fiscal Year 1998 Net revenues $ 7,660 $10,681 $ 33 $3,326 $21,700 Long-lived assets 6,243 702 - - 6,945
Sales to one customer approximated 21.1% of net sales in 2000. In 1999, sales to one customer amounted to 10.6% of net sales. There were no sales to any one customer that exceeded 10% of net sales in 1998 Page 53 Report of Independent Accountants To the Board of Directors and Shareholders of Fortel Inc. In our opinion, the consolidated balance sheets and the related consolidated statements of operations, of shareholders' equity (deficit) and cash flows listed in the index appearing under Item 14(a)(1) on page 56 present fairly, in all material respects, the financial position of Fortel Inc. and subsidiaries at September 30, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2000, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 14(a)(2) on page 56 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in the "Basis of Presentation" note to the consolidated financial statements, the Company has suffered recurring losses from operations and has an accumulated deficit at September 30, 2000 of $76,397,000 that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in the "Basis of Presentation" note. The Company's ability to continue as a going concern is dependent upon, among other things, its ability to (a) achieve sufficient levels of net revenues to produce profitable operations and (b) generate adequate levels of liquidity through internally generated cash flows as well as additional sources of capital. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP San Jose, California January 8, 2001 Page 54 Item 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III Item 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information regarding directors under the caption "Election of Directors" of the Proxy Statement for the Annual Meeting of Shareholders to be held March 8, 2001, is incorporated herein by reference. The information regarding executive officers under the caption "Executive Officers of the Registrant" is incorporated herein by reference. Item 11: EXECUTIVE COMPENSATION The information under the caption "Executive Compensation" of the Proxy Statement for the Annual Meeting of Shareholders to be held on March 8, 2001, is incorporated herein by reference. Item 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information under the caption "Security Ownership of Certain Beneficial Owners and Management" of the Proxy Statement for the Annual Meeting of Shareholders to be held on March 8, 2001, is incorporated herein by reference. Item 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. PART IV Item 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Financial Statements and Schedules The consolidated financial statements, together with the report thereon from PricewaterhouseCoopers LLP, appear in Item 8 in this Form 10-K. Financial statement schedules not included in this Form 10-K have been omitted because they are not applicable or the required information is shown in the financial statements or the notes thereto. Page 55 (1) Financial Statements: Fortel Inc.: Consolidated Balance Sheets (p. 25) Consolidated Statements of Operations (p. 26) Consolidated Statements of Shareholders' Equity (Deficit) (p. 27) Consolidated Statements of Cash Flows (p. 29) Notes to Consolidated Financial Statements (pgs. 30-53) Report of Independent Accountants (p. 54) (2) Financial Statement Schedule: SCHEDULE VIII-Valuation and Qualifying Accounts (p. 64) All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. (3) Exhibits Exhibits filed as part of this report are listed below. Certain exhibits have been previously filed with the Commission and are incorporated by reference.
Exhibit Number Description - ------- ----------- 3.1 Restated Articles of Incorporation. (3) 3.1.1 Certificate of Ownership and Merger and Name Change (10) 3.2 Bylaws. (1) 3.3 Certificate of Determination of Preferences of Series A Junior Participating Preferred Stock (5) 3.4 Certificate of Amendment of Articles of Incorporation (11) 3.5 Certificate of Determination of Series B Convertible Preferred Stock (11) 10.1 1982 Incentive Stock Option Plan, as amended, and form of Stock Option Grant. (2) 10.2 1984 Supplemental Stock Option Plan and form of Stock Option Grant. (2) Page 56 10.3 1984 Stock Purchase Plan, as amended, through November 1987. (3) 10.4 Lease Agreement dated February 16, 1995 between the Company and Renco Investment Company. (4) 10.5 Rights Agreement, dated as of June 12, 1996, between Zitel Corporation and American Stock Transfer & Trust Company, with exhibits. (5) 10.6 Placement Agency Agreement. (6) 10.7 Lease Office Building for One Monument Place between Upland Industries Corporation and Collins Equities, Inc. and Datametrics Systems Corporation dated July 31, 1992. (7) 10.8 First Amendment to Lease between CMD Realty Investment Fund, L.P. and Datametrics Systems Corporation dated October 16, 1996. (7) 10.9 Form of Palmer & Webb Lease. (7) 10.10 Form of Common Stock Purchase Warrant. (8) 10.11 Registration Rights Agreement. (8) 10.12 Securities Purchase Agreement. (8) 10.13 Placement Agency Agreement. (8) 10.14 Agreement and Plan of Reorganization and Merger, dated as of October 5, 1998, by and among Zitel Corporation, Millennium Holding Corp., Zenith Acquisition Corp., Millennium Acquisition I Corp., and MatriDigm Corporation. (9) 10.15 Form of Shareholder Agreement, dated as of October 5, 1998, by and between, in each case, Zitel Corporation and a certain specified shareholder of MatriDigm Corporation. (9) 10.16 Form of Lock-Up Letter, dated as of October 5, 1998, addressed, in each case, to Millennium Holding Corp. from a certain specified shareholder of MatriDigm Corporation. (9) 10.17 Selected Summary Financial Data for the period ended June 30, 1998. (9) 10.18 Joint Press Release of Zitel Corporation and MatriDigm Corporation, dated October 5, 1998. (9) Page 57 10.19 Termination of Agreement and Plan of Merger and Reorganization with Millennium Holding. (12) 10.20 3% convertible Subordinated Debentures and Common Stock Purchase Warrants. (13) 10.21 Registration of common stock related to 3% Convertible Subordinated Debentures and Common Stock Purchase Warrants. (14) 10.22 Opinion on the Company's 1990 Stock Option Plan. (15) 10.22 1995 Non-Employee Directors' Stock Option Plan, as amended. (16) 10.24 Agreement and Plan of Merger and Reorganization with MatriDigm Corp. (17) 10.25 Conversion of Series B Convertible Preferred Stock. (18) 10.26 Registration of common stock issued in connection with lawsuit settlement. (19) 10.27 Lease Agreement dated February 16, 1995 between the Company and Renco Investment Company. (4) 10.28 Registration of common stock issued in connection with Securities Purchase Agreement. (21) 10.29 Registration of common stock for the 2000 Equity Incentive Plan. (22) 10.30 Registration of common stock for the 1995 Non-Employee Directors' Stock Option Plan. (23) 10.31 Letter of Agreement to replace redemption with specified liquidating damages. (24) 13 Quarterly Report, Form 10-Q for the quarter ended June 30, 2000. (25) 22.1 Subsidiaries of the Company. 23.1 Consent of Independent Accountants. 27 Financial Data Schedule.
Page 58 - ---------- (1) Incorporated by reference to the indicated exhibits to the Company's Registration Statement on Form S-8 (File No. 2-90366) filed on April 6, 1984. (2) Incorporated by reference to the indicated exhibits to the Company's Registration Statement on Form S-8 (File No. 2-96804) filed on March 29, 1985. (3) Incorporated by reference to the indicated exhibits to the Company's Annual Report on Form 10-K filed December 17, 1987. (4) Incorporated by reference to the indicated exhibits to the Company's Quarterly Report on Form 10-Q filed May 11, 1995. (5) Incorporated by reference to the indicated exhibits to the Company's Current Report on Form 8-K filed on June 25, 1996. (6) Incorporated by reference to the indicated exhibits to the Company's Current Report on Form 8-K filed May 29, 1997. (7) Incorporated by reference to the indicated exhibits to the Company's Current Report on Form 8-K filed July 14, 1997. (8) Incorporated by reference to the indicated exhibits to the Company's Current Report on Form 8-K filed June 25, 1998. (9) Incorporated by reference to the indicated exhibits to the Company's Current Report on Form 8-K filed October 6, 1998. (10) Incorporated by reference to the indicated exhibits to the Company's Current Report on Form 8-K filed June 29, 2000. (11) Incorporated by reference to the indicated exhibits to the Company's Annual Report on Form 10-K filed December 12, 1999. (12) Incorporated by reference to the indicated exhibits to the Company's Current Report on Form 8-K filed December 31, 1998. (13) Incorporated by reference to the indicated exhibits to the Company's Current Report on Form 8-K filed February 16, 1999. (14) Incorporated by reference to the indicated exhibits to the Company's Registration Statement on Form S-3 filed March 5, 1999. (15) Incorporated by reference to the indicated exhibits to the Company's Registration Statement on Form S-8 filed May 13, 1999. Page 59 (16) Incorporated by reference to the indicated exhibits to the Company's Registration Statement on Form S-8 filed May 13, 1999. (17) Incorporated by reference to the indicated exhibits to the Company's Current Report on Form 8-K filed August 25, 1999. (18) Incorporated by reference to the indicated exhibits to the Company's Registration Statement on Form S-3 filed January 13, 2000. (19) Incorporated by reference to the indicated exhibits to the Company's Registration Statement on Form S-3 filed June 29, 2000. (20) Incorporated by reference to the indicated exhibits to the Company's Current Report on Form 8-K filed July 27, 2000. (21) Incorporated by reference to the indicated exhibits to the Company's Registration Statement on Form S-3 filed August 14, 2000. (22) Incorporated by reference to the indicated exhibits to the Company's Registration Statement on Form S-8 filed November 1, 2000. (23) Incorporated by reference to the indicated exhibits to the Company's Registration Statement on Form S-8 filed November 1, 2000. (24) Incorporated by reference to the indicated exhibits to the Company's Current Report on Form 8-K filed November 17, 2000. (25) Incorporated by reference to the indicated exhibits to the Company's Quarterly Report on Form 10-Q filed August 10, 2000. For the purposes of complying with the amendments to the rules governing Form S-8 under the Securities Act of 1933, the undersigned Registrant hereby undertakes as follows, which undertaking shall be incorporated by reference into Registrant's Registration Statements on Form S-8 No.'s 33-40361 and 33-47697 (filed May 3, 1991 and May 6, 1992). Page 60 Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. Page 61 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. Fortel Inc. /s/ Asa W. Lanum ----------------- By: Asa W. Lanum President and Director Chief Executive Officer January 9, 2001 KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Asa W. Lanum and Henry C. Harris, jointly and severally, his or her attorneys-in-fact, each with the power of substitution, for him or her in any and all capacities, to sign any amendments to this Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection herewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. Page 62 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - --------- ----- ---- /s/ Asa W. Lanum President and Director January 9, 2001 Asa W. Lanum (Chief Executive Officer) /s/ Henry C. Harris Sr. Vice President of January 9, 2001 Henry C. Harris Business Development and Chief Financial Officer and Corporate Secretary /s/ Tsvi Gal Director January 9, 2001 Tsvi Gal /s/ Jack H. King Director January 9, 2001 Jack H. King /s/ William R. Lonergan Director January 9, 2001 William R. Lonergan /s/ William M. Regitz Director January 9, 2001 William M. Regitz /s/ Edward F. Thompson Director January 9, 2001 Edward F. Thompson
Page 63 SCHEDULE VIII Fortel Inc. VALUATION AND QUALIFYING ACCOUNTS FISCAL YEARS 1998, 1999 AND 2000
Column A Column B Column C Column D Column E -------- ----------- ----------- ---------- ----------- Additions Charged to Balance Revenues Write-offs Balance at Beginning and Costs and End of Description of Period and Expense Deductions Period ----------- ----------- ----------- ---------- ----------- 1998 - -------------- Allowance for Doubtful Accounts $ 175,000 $ 122,000 $175,000 $ 122,000 Provision for Obsolete Inventory $ 639,000 $ 160,000 $799,000 $ - Valuation Allowance on Deferred Tax Assets $ 2,475,000 $16,200,000 $ - $18,675,000 Reserve for excess capacity $ - $ 754,000 $227,000 $ 527,000 1999 - -------------- Allowance for Doubtful Accounts $ 122,000 $ 282,000 $124,000 $ 280,000 Valuation Allowance on Deferred Tax Assets $18,675,000 $ 8,851,000 $ - $27,526,000 Reserve for excess capacity $ 527,000 $ 387,000 $431,000 $ 483,000 2000 - -------------- Allowance for Doubtful Accounts $ 280,000 $ 253,000 $241,000 $ 292,000 Valuation Allowance on Deferred Tax Assets $27,526,000 $ 4,771,000 $ - $32,297,000 Reserve for excess capacity $ 483,000 $ 435,000 $378,000 $ 540,000
Page 64 EX-22.1 2 a2034250zex-22_1.txt EXHIBIT 22.1 EXHIBIT 22.1 SUBSIDIARIES OF Fortel INC. 1. Fortel Inc. (formerly Zitel Corporation) 46832 Lakeview Boulevard Fremont, CA 94538-6543 2. Fortel Inc. (formerly Datametrics Systems Corporation) 46832 Lakeview Boulevard Fremont, CA 94538-6543 3. Fortel (UK) Limited (formerly Datametrics Systems Limited) 46832 Lakeview Boulevard Fremont, CA 94538-6543 4. Fortel GmbH 46832 Lakeview Boulevard Fremont, CA 94538-6543 5. Fortel BV (formerly Datametrics BV) 46832 Lakeview Boulevard Fremont, CA 94538-6543 6. Datametrics Systems SAS (will be changed to Fortel SAS) 46832 Lakeview Boulevard Fremont, CA 94538-6543 7. Fortel AG 46832 Lakeview Boulevard Fremont, CA 94538-6543 8. Fortel Holding AG 46832 Lakeview Boulevard Fremont, CA 94538-6543 9. Zitel Export Corporation 46832 Lakeview Boulevard Fremont, CA 94538-6543 Page 65 EX-23.1 3 a2034250zex-23_1.txt EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Forms S-3 (File Numbers 333-43662, 333-40388 and 333-94607) and on Forms S-8 (File Numbers 333-78385 and 333-78387) of Fortel Inc. of our report dated January 8, 2001, relating to the consolidated financial statements and financial statement schedule, which appears in this Form 10-K. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP San Jose, California January 10, 2001 Page 66 EX-27 4 a2034250zex-27.txt EXHIBIT 27
5 1,000 YEAR SEP-30-2000 OCT-01-1999 SEP-30-2000 889 0 3,654 292 0 5,514 3,577 2,723 9,707 6,332 0 0 0 74,471 0 9,707 21,110 21,110 7,205 7,205 23,217 0 106 (8,469) 184 (8,653) 0 0 0 (8,653) (0.33) (0.33)
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