-----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, T1MeppKk7xQ7qd3/I+277Jp/PJyWtzai9igkrej2+ZnO+BRK5dnLT3gr8kZVT4hB JpbJeA17Ed1f1cP4NtL/5w== 0000912057-01-005528.txt : 20010223 0000912057-01-005528.hdr.sgml : 20010223 ACCESSION NUMBER: 0000912057-01-005528 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010214 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-Q SEC ACT: SEC FILE NUMBER: 000-12194 FILM NUMBER: 1541331 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-Q 1 a2038523z10-q.txt 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q (X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended December 31, 2000 or ( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File Number 0-12194 FORTEL INC. (Exact name of Registrant as specified in its charter) California 94-2566313 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 46832 Lakeview Blvd. 94538-6543 Fremont, California (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code: (510) 440-9600 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes __X__ No _____ The number of shares of the Registrant's Common Stock outstanding as of December 31, 2000 was 29,400,117. FORTEL INC. AND SUBSIDIARIES INDEX
Page Number PART I. Financial Information Item 1. Financial Statements Condensed Consolidated Balance Sheets (unaudited) - December 31, 2000 and September 30, 2000 .............. 3 Condensed Consolidated Statements of Operations (unaudited) - Three Months Ended December 31, 2000 and 1999 ..................... 4 Condensed Consolidated Statements of Cash Flows (unaudited) - Three Months Ended December 31, 2000 and 1999 ............................ 5 Notes to Condensed Consolidated Financial Statements .................................. 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations .................................. 12 Item 3. Quantitative and Qualitative Disclosures about Market Risk ................................. 22 PART II. Other Information Item 1. Legal Proceedings ................................. 23 Item 2. Changes in Securities ............................. 23 Item 3. Defaults Upon Senior Securities ................... 23 Item 4. Submission of Matters to a Vote of Security Holders .................................. 23 Item 5. Other Information ................................. 23 Item 6. Exhibits and Reports on Form 8-K .................. 23
Page 2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements FORTEL INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS ($000's) (UNAUDITED)
December 31, September 30, 2000 2000 ------------ ------------- Assets Current assets: Cash and cash equivalents $ 959 $ 889 Accounts receivable, net 5,957 3,362 Refundable taxes 10 125 Other current assets 743 1,138 -------- -------- Total current assets 7,669 5,514 Fixed assets, net 784 854 Other assets, net 2,968 3,339 -------- -------- Total assets $ 11,421 $ 9,707 ======== ======== Liabilities, Redeemable Common Stock and Warrants, and Shareholders' Equity (Deficit) Current liabilities: Accounts payable $ 3,060 $ 2,367 Accrued liabilities 1,247 1,076 Short-term debt 1,031 - Deferred revenue 4,237 2,889 -------- -------- Total current liabilities 9,575 6,332 -------- -------- Redeemable common stock and warrants - 5,301 -------- -------- Shareholders' equity (deficit): Common stock 79,514 74,471 Accumulated deficit (77,668) (76,397) -------- -------- Total shareholders' equity (deficit) 1,846 (1,926) -------- -------- Total liabilities, redeemable common stock and warrants, and shareholders' equity (deficit) $ 11,421 $ 9,707 ======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements. Page 3 FORTEL INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (In thousands except per share data)
Three Months Ended December 31, ------------------ 2000 1999 ------ ------ Net product sales $ 2,247 $ 3,332 Services and other 2,305 2,188 ------- ------- Net sales 4,552 5,520 Costs and expenses: Cost of products sold 217 221 Cost of services and other 1,086 1,621 Research and development expenses 1,017 651 Selling, general & administrative expenses 3,761 3,851 ------- ------- Operating loss (1,529) (824) Other expense, net 43 92 ------- ------- Net loss $(1,572) $ (916) ======= ======= Basic and diluted net loss per share $ (.05) $ (.04) ======= ======= Shares used in basic and diluted per share calculation 29,221 24,915 ======= =======
The accompanying notes are an integral part of these condensed consolidated financial statements. Page 4 FORTEL INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS ($000's) (UNAUDITED)
Three Months Ended December 31, 2000 1999 -------- ------- Cash flows provided by (used in) operating activities: Net loss $(1,572) $ (916) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 460 527 Provision for doubtful accounts 15 52 Stock-based compensation to consultants (3) - Change in operating assets and liabilities: Increase in accounts receivable (2,610) (6,107) Decrease in refundable taxes 115 2 Decrease (increase) in other current assets 395 (804) Increase in accounts payable 693 1,017 Increase in accrued liabilities 171 417 Increase in deferred revenue 1,348 5,212 ------- ------- Net cash used in operating activities (988) (600) ------- ------- Cash flows provided by (used in) investing activities: Acquisition of fixed assets (19) (81) Capitalized software development costs - (370) Purchase of companies net of cash acquired - 565 ------- ------- Net cash provided by (used in) investing activities (19) 114 ------- -------
Page 5 FORTEL INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) ($000's) (UNAUDITED)
Three Months Ended December 31, 2000 1999 ------- ------- Cash flows provided by (used in) financing activities: Proceeds from borrowings $ 1,527 $ 1,128 Repayment of borrowings (496) - Issuance of common stock 46 52 ------- ------- Net cash provided by financing activities 1,077 1,180 ------- ------- Net increase in cash and cash equivalents 70 694 Cash and cash equivalents, beginning of period 889 1,670 ------- ------- Cash and cash equivalents, end of period $ 959 $ 2,364 ======= ======= Supplemental non-cash investing and financing activities: Liability related to business acquisition $ - $ 619 ======= =======
The accompanying notes are an integral part of these condensed consolidated financial statements. Page 6 FORTEL INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Amounts in thousands except per share data) 1. General Fortel Inc. (the "Company" or "Fortel") is an information technology company specializing in computer and systems optimization, data correlation and search technology. Fortel develops and markets enterprise intranet and eBusiness performance management solutions through its product offerings which include: multi-platform performance analysis and correlation software used to optimize performance in eBusiness and enterprise backoffice infrastructure systems; professional services to enhance its offerings to existing and new customers; and software-based Internet tools. 2. Basis of Presentation The accompanying consolidated financial statements include the accounts of Fortel Inc. and all wholly-owned domestic and foreign subsidiaries. All material intercompany balances and transactions have been eliminated. The interim statements have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission and should be read in conjunction with the audited financial statements contained in the Company's annual report on Form 10-K for the fiscal year ended September 30, 2000. Certain information and footnote disclosures, normally included in financial statements prepared in accordance with generally accepted accounting principles, have been condensed or omitted although the Company believes the disclosures which are made are adequate to make the information presented not misleading. Further, the condensed consolidated financial statements reflect, in the opinion of management, all adjustments necessary to present fairly the financial position and results of operations as of and for the periods indicated. The results of operations for the period ended December 31, 2000 are not necessarily indicative of the results expected for the full year. The balance sheet as of September 30, 2000 is derived from the audited financial statements as of and for the year then ended but does not include all notes and disclosures required by accounting principles generally accepted in the United States of America. 3. Recent Accounting Pronouncements: On October 1, 2000, the Company adopted Statement of Financial Accounting Standard (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended. SFAS 133 establishes accounting and reporting standards for derivative Page 7 instruments and requires that all derivatives be recognized on the balance sheet at their fair value. The adoption of SFAS 133 had no effect on the accompanying financial statements. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial Statements, which provides guidance on the recognition, presentation and disclosure of revenue in financials filed with the SEC. SAB 101 outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosures related to revenue recognition policies. The Company is required to adopt SAB 101 in the fourth quarter of fiscal 2001. We are in the process of evaluating the Securities and Exchange Commission's interpretation of SAB 101 but believe that the implementation of SAB 101 will not have a material effect on the financial position or results of operations of the Company. 4. Other Assets: Other assets consist of the following as of:
December 31, September 30, 2000 2000 ------------ ------------- Goodwill $ 2,768 $ 2,768 Purchased technology 2,588 2,588 Deferred software implementation costs 351 351 Purchased software 550 550 Capitalized development projects 1,454 1,454 Other assets 143 144 Less accumulated amortization (4,886) (4,516) ------- ------- $ 2,968 $ 3,339 ======= =======
5. Credit Facility: As of December 31, 2000, the Company had a $2 million accounts receivable revolving line of credit. In January 2001, the line was increased to $3 million. Borrowings are based on 80% of certain eligible receivables which are aged 90 days or less. The interest rate approximates 18% per annum calculated on the average daily balance outstanding. Additionally, there is an administrative fee of 1/2 of one percent of each amount factored. The credit facility has no maturity; however, either party may terminate at any time. During the quarter ended December 31, 2000, the Company had borrowed approximately $1.5 million and repaid approximately $0.5 million. At December 31, 2000, approximately $1.0 million was outstanding against the line. Page 8 6. Common Stock: Common stock activity for the period from October 1, 2000 through December 31, 2000 (in thousands) is as follows:
Common Stock Common Stock Shares Amount ------------ ------------ Balance at September 30, 2000 26,780 $74,471 Reclassification of temporary equity 2,192 5,000 Repricing of warrants 353 - Employee stock purchase 75 46 Stock-based compensation - (3) ------ ------- Balance at December 31, 2000 29,400 $79,514 ====== =======
On July 18, 2000, the Company, through a private placement, issued 2,191,781 shares of common stock to two institutional investors, (the "Investors"), in exchange for $5,000,000. This private placement was pursuant to the Securities Purchase Agreement, Registration Rights Agreement and Repricing Warrants (collectively the "Agreements). Due to a redemption feature contained within the Agreements, the transaction was recorded in temporary equity on the balance sheet at September 30, 2000. On November 8, 2000, the Company entered into a letter agreement with the Investors to modify the Agreement to replace the redemption feature with specified liquidated damages as a remedy for certain breaches of and defaults under the Agreements. As a result of the modification of these terms, the transaction was reclassified from temporary equity into shareholders' equity at December 31, 2000. 7. Earnings Per Share ("EPS"): A reconciliation of the numerator and denominator of basic and diluted EPS is provided as follows (in thousands, except per share amounts) for the quarters ended December 31:
2000 1999 ------- ------- Numerator - Basic and Diluted EPS Net loss $(1,572) $ (916) ======= ======= Denominator - Basic EPS Weighted average common stock outstanding 29,221 24,915 ------- ------- Basic loss per share $ (.05) $ (.04) ======= =======
Page 9 Earnings Per Share (continued)
2000 1999 ------- ------- Denominator - Diluted EPS Denominator - Basic EPS 29,221 24,915 Effect of Dilutive Securities: Common stock options - - Convertible preferred stock - - ------- ------- 29,221 24,915 ------- ------- Diluted loss per share $ (.05) $ (.04) ======= =======
For the quarters ended December 31, 2000 and 1999, respectively, options to purchase 10 thousand and 147 thousand shares were not included in the computation of diluted EPS because of the anti-dilutive effect of including these shares in the calculation for both periods. 8. Segment Information Through October 1999, the Company had two reportable segments - Software and Year 2000 Services. The software business segment develops and markets E-business performance management software solutions. The Year 2000 business segment provided services which reviewed software code and identified areas within the code where Year 2000 problems might occur. Following completion of the remaining contract outstanding at September 30, 1999, the Company ceased providing these Year 2000 services in October 1999. The following table presents certain segment financial information (in thousands):
Three Months Ended December 31 2000 1999 ------- ------- Revenue: Software $ 4,552 $ 5,128 Year 2000 - 392 ------- ------- Total $ 4,552 $ 5,520 ======= ======= Income (loss) from operations: Software $(1,529) $ 669 Year 2000 - (1,493) ------- ------- Total $(1,529) $ (824) ======= =======
Page 10 The table below presents net sales (in thousands) by geographic area for the quarters ended December 31:
Three Months Ended December 31, 2000 1999 ------- ------- U.S. $ 2,451 $ 2,561 Europe 1,919 2,567 Other 182 392 ------- ------- Total $ 4,552 $ 5,520 ======= =======
The table below presents long-lived asset information (in thousands) by geographic area:
December 31, September 30, 2000 2000 ----------- ------------- Long-lived assets: U.S. $3,277 $3,693 International 475 500 ------ ------ Total $3,752 $4,193 ====== ======
9. Comprehensive Loss Comprehensive loss includes all changes in equity during a period except those resulting from investments by and distributions to shareholders. There were no material differences between comprehensive loss and net loss as reported for each of the periods presented in these condensed financial statements. Page 11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This report contains forward-looking statements that are not historical facts but rather are based on current expectations, estimates, projections, beliefs and assumptions about our industry, our company, our business and prospects. Words such as "anticipates", "expects", "intends", "plans", "believes", "seeks", "estimates" and variations of these words and similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and other factors, some of which are beyond our control, are difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements. These risks and uncertainties include those described in "Risks Associated With Fortel's Business and Future Operating Results", "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this report. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect our management's view only as of the date of this report. We undertake no obligation to update these statements or publicly release the results of any revisions to the forward-looking statements that we may make to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events. References in this document to "we", "our" and "us" refer to Fortel Inc., a California corporation, its predecessors, and each of its subsidiaries. Fortel and SightLine are trademarks of Fortel Inc. Zitel, Datametrics and ViewPoint are registered trademarks of Fortel Inc. VisualRoute, VisualPulse, VisualProfile, VisualAnalyze, VisualPoint, and the E-Business Performance Experts are trademarks of Fortel Inc. All other service marks, trademarks and registered trademarks are the property of their respective holders. Results of Operations The Company recorded a net loss of $1,572,000 ($0.05 per share) for the fiscal 2001 first quarter, compared with a net loss of $916,000 ($0.04 per share) for the same quarter of the prior year. Net sales for the current quarter were $4,552,000 versus net sales of $5,520,000 for the same period a year earlier, a decrease of $968,000. The decrease in net sales resulted primarily from a decrease in Year 2000 services of approximately $392,000, a decrease in hardware sales in the amount of approximately $225,000, and a decrease in training services in Page 12 the amount of approximately $150,000. In October of 1999, the Company ceased providing Year 2000 services. Additionally, the Company has wound down its lower margin hardware products business. As the last step in finalizing its efforts to focus the Company on its software business, on December 31, 2000, the Company sold its training division. Net sales of license and related maintenance revenues also declined approximately 4% compared to the comparable quarter a year earlier. Gross margin for the quarter ended December 31, 2000 was 71% of net sales compared to 67% of net sales for the same quarter of the prior year. The improvement in gross margin percentage is primarily attributable to product mix. The Company believes that the gross margins reported for the current quarter were somewhat depressed by the impact of the training division's net sales on product mix during the quarter. The Company expects gross margins to improve slightly in the future quarters. Research and development (R&D) expenses for the quarter ended December 31, 2000 were 22% of net sales compared to 12% for the same period of the prior year. Actual spending increased $366,000 and is primarily attributable to a decrease in capitalization of engineering development project costs during the current quarter. Selling, general and administrative ("SG&A") expenses for the quarter ended December 31, 2000 were 83% of net sales versus 70% for the same period a year earlier. Actual spending in SG&A decreased $90,000. Other expense was $43,000 for the quarter just ended versus $92,000 in the same quarter of the prior year. For the current quarter, other expense consisted primarily of interest expense. For the comparable quarter of the prior year, other expense consisted primarily of foreign currency translation losses ($110,000) and interest expense ($30,000), partially offset by interest income ($48,000.) Liquidity and Capital Resources Since fiscal year 1997, in addition to the working capital provided by product sales, the Company has augmented its cash needs to finance operations primarily through the issuance of convertible subordinated notes, the private sale of common stock and proceeds from borrowings against the accounts receivable revolving line of credit. During the quarter just ended, cash utilized by operating activities was $988,000. The utilization of cash in operating Page 13 activities resulted primarily from the net loss of $1,572,000 and an increase in accounts receivable of $2,610,000, offset in part by an increase in deferred revenue of $1,348,000, a decrease in other current assets and refundable taxes of $510,000, an increase in accounts payable and accrued liabilities of $864,000 and the add back of non-cash related charges for depreciation and amortization of $460,000. During the current quarter, net cash utilized in investing activities was $19,000, representing purchases of capital equipment. Net cash provided by financing activities during the current quarter was $1,077,000, primarily attributable to borrowings of $1,527,000 under its accounts receivable revolving line of credit, offset in part by repayments of $496,000. Additionally, $46,000 was generated from the sale of common stock under the Company's employee stock purchase plan. The Company currently plans to increase its revenues to a level that will finance expected expenditures and result in at least neutral cash flows from operations. However, until that stage is reached, the Company will continue to use its current cash on hand, working capital, and utilize the available accounts receivable line of credit. If the Company is unable to generate sufficient cash flow from operations or should management determine it to be prudent, it may attempt to raise additional debt or equity. There can be no assurance that in the event the Company requires additional financing, that such financing will be available on terms which are favorable or at all. In the event that the Company is unable to increase revenue levels or financing is unavailable, management has developed alternative plans which will entail the reduction of expenses to levels that could be financed by revenues generated. Such reductions in expenditures may include actions similar or greater in scope than the reduction in workforce undertaken by the Company in September 2000. There can be no assurance that the reduction in workforce undertaken in September 2000 or any further cost cutting exercises will be successful in completely eliminating the difference between expenditures and revenues or that such actions would not have a harmful effect on the Company's business and results of operations. Page 14 Based on its current plans, management believes that the Company will meet its cash requirements for the next twelve months from cash on hand, working capital, cash flow from operations, and utilization of the available accounts receivable line of credit. Recent Accounting Pronouncements: On October 1, 2000, the Company adopted Statement of Financial Accounting Standard (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended. SFAS 133 establishes accounting and reporting standards for derivative instruments and requires that all derivatives be recognized on the balance sheet at their fair value. The adoption of SFAS 133 had no effect on the accompanying financial statements. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial Statements, which provides guidance on the recognition, presentation and disclosure of revenue in financials filed with the SEC. SAB 101 outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosures related to revenue recognition policies. The Company is required to adopt SAB 101 in the fourth quarter of fiscal 2001. We are in the process of evaluating the Securities and Exchange Commission's interpretation of SAB 101 but believe that the implementation of SAB 101 will not have a material effect on the financial position or results of operations of the Company. Risks Associated with Fortel's Business and Future Operating Results: Set forth below and elsewhere in this Quarterly Report and in other documents we file with the SEC are risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements contained in this Quarterly Report. Fluctuations in Quarterly Results Fortel's quarterly operating results have in the past varied and may in the future vary significantly depending on a number of factors, including: -The level of competition, the size, timing, cancellation or rescheduling of significant orders; -Market acceptance of new products and product enhancements; Page 15 -New product announcements or introductions by Fortel's competitors; -Deferrals of customer orders in anticipation of new products or product enhancements; -Changes in pricing by Fortel or its competitors; -The ability of Fortel to develop, introduce and market new products and product enhancements on a timely basis; -Fortel's success in expanding its sales and marketing programs; -Technological changes in the market for Fortel's products; -Product mix and the mix of sales among Fortel's sales channels; -Levels of expenditures on research and development; -Changes in Fortel's strategy; personnel changes; and, -General economic trends and other factors. Due to all of the foregoing factors, Fortel believes that period-to-period comparisons of its results of operations are not necessarily meaningful and should not be relied upon as an indicator of future performance. It is possible that in some future quarter the Company's operating results may be below the expectations of public market analysts and investors. Recent Levels of Net Sales Have Been Insufficient The Company has not generated net sales sufficient to produce an operating profit in recent years. The Company has relied on significant financings to support its activities. Operations in prior years were also partially funded by a stream of royalty payments under an agreement with IBM. This agreement was terminated in April 1998. The Company sustained substantial operating losses and net losses in fiscal years 1997 through 2000. The Company must generate substantial additional net sales and gross margins on its products and services and must continue to successfully implement programs to manage cost and expense levels in order to remain a viable operating entity. There is no assurance that the Company can achieve these objectives. Page 16 Significant Losses For the first quarter of fiscal year 2001, the Company reported a net loss of $1,572,000. The Company reported total net losses of $8,653,000, $13,103,000 and $43,205,000 for fiscal years 2000, 1999 and 1998, respectively. The Company has taken a number of steps to attempt to return to profitability, although there is no assurance that it will be successful. A significant portion of the cumulative losses were caused by the funding of MatriDigm, and operations of the Company's former storage systems business, which was sold in July 1998. MatriDigm filed Chapter 7 bankruptcy in October 1999 so there will be no additional funding. The Company has subleased its Fremont, CA headquarters, and moved to substantially smaller and less costly premises. The Company continues to consider options and take actions necessary to bring costs into line with anticipated revenues. There can be no assurance that the Company will be successful in this effort and remain a viable operating entity. Fortel Stock Price Has Been Volatile The price of Fortel's common stock during the current quarter ranged from the low closing bid price of $0.2031 to the high closing bid price of $1.03125. During the fiscal year 2000, the price of the Company's common stock was volatile, ranging from the low closing bid price of $0.65625 to the high closing bid price of $6.625. The Company was notified on December 18, 2000 by NASDAQ that it no longer satisfied the minimum bid price listing requirements. The Company's common stock has failed to maintain a minimum bid price of $1.00 over the last 30 consecutive trading days as required. The Company will be provided 90 calendar days, or until March 19, 2001 to regain compliance. If at any time before March 19, 2001, the bid price of the Company's common stock is at least $1.00 for a minimum 10 consecutive trading days, NASDAQ will determine if the Company is in compliance. However, if the Company is unable to demonstrate compliance on or before March 19, 2001, NASDAQ will provide the Company with a written notification that NASDAQ has determined to delist the Company's common stock. At that time, however, the Company may request a review of NASDAQ's determination. The potential de-listing of the Company's common stock from the NASDAQ Small/Cap Market may affect the trading liquidity and the price of the Company's common stock. Page 17 Competition The market for system management tools in which the Company's software products business unit competes is intensely competitive. Many of the companies with which the Company competes, such as Computer Associates International, Inc., Hewlett-Packard Company, and BMC Software, Inc. have substantially larger installed bases and greater financial resources than the Company. There can be no assurance that the Company's competitors will not develop products comparable or superior to those developed by the Company or adapt more quickly than the Company to new technologies, evolving industry standards, new product introductions, or changing customer requirements. Dependence on New Products; Rapid Technological Change The markets in which the Company operates are characterized by rapid technological change, changing customer needs, frequent new product introductions and evolving industry standards. The introduction of products embodying new technologies and/or the emergence of new industry standards could render the Company's existing products and services obsolete and unmarketable. The Company's future success will depend upon its ability to develop and to introduce new products and services on a timely basis that keep pace with technological developments and emerging industry standards and address the increasingly sophisticated needs of its customers. There can be no assurance that the Company will be successful in developing and marketing products or services that respond to technological changes or evolving industry standards, that the Company will not experience difficulties that could delay or prevent the successful development, introduction and marketing of new products or services, or that its new products or services will adequately meet the requirements of the marketplace and achieve market acceptance. If the Company is unable, for technological or other reasons, to develop and introduce new products or services in a timely manner in response to changing market conditions or customer requirements, the Company's business, operating results and financial condition will be materially and adversely affected. Product Liability The Company's agreements with its customers typically contain provisions intended to limit the Company's exposure to potential product liability claims. It is possible that the limitation of liability provisions contained in the Company's agreements may Page 18 not be effective. Although the Company has not received any product liability claims to date, the sale and support of products by the Company and the incorporation of products from other companies may entail the risk of such claims. A successful product liability claim against the Company could have a material adverse effect on the Company's business and financial position, as well as operating results and cash flows. Dependence on Proprietary Technology The Company's success depends significantly upon its proprietary technology. The Company currently relies on a combination of patent, copyright and trademark laws, trade secrets, confidentiality agreements and contractual provisions to protect its proprietary rights. The Company seeks to protect its software, documentation and other written materials under trade secret and copyright laws, which afford only limited protection. The Company has registered its trademarks and will continue to evaluate the registration of additional trademarks as appropriate. The Company generally enters into confidentiality agreements with its employees and with key vendors and suppliers. The Company currently holds a United States patent on one of its software technologies. There can be no assurance that this patent will provide the Company with any competitive advantages or will not be challenged by third parties, or that the patents of others will not have a material adverse effect on the Company's ability to do business. The Company believes that the rapidly changing technology in the computer industry makes the Company's success depend more on the technical competence and creative skills of its personnel than on patents. There has also been substantial litigation in the computer industry regarding intellectual property rights, and litigation may be necessary to protect the Company's proprietary technology. The Company has not received significant claims that it is infringing third parties' intellectual property rights, but there can be no assurance that third parties will not in the future claim infringement by the Company with respect to current or future products, trademarks or other proprietary rights. The Company expects that companies in its markets will increasingly be subject to infringement claims as the number of products and competitors in the Company's target markets grows. Any such claims or litigation may be time-consuming and costly, cause product shipment delays, require the Company to redesign its products or require the Company to enter into royalty or licensing agreements, any of which could have a material adverse effect on the Company's business, operating results or financial Page 19 condition. Despite the Company's efforts to protect its proprietary rights, unauthorized parties may attempt to copy aspects of the Company's products or to obtain and use information that the Company regards as proprietary. There can be no assurance that the Company's means of protecting its proprietary rights will be adequate or that the Company's competitors will not independently develop similar technology, duplicate the Company's products or design around patents issued to the Company or other intellectual property rights of the Company. International Sales and Operations Sales to customers outside the United States have accounted for significant portions of the Company's net sales, and the Company expects that the acquisition of companies headquartered and operating in the United Kingdom, The Netherlands and Switzerland, respectively, will result in international sales representing an increasingly significant portion of the Company's net sales. International sales pose certain risks not faced by companies that limit themselves to domestic sales. Fluctuations in the value of foreign currencies relative to the U.S. dollar, for example, could make the Company's products less price competitive. If the Company, in the future, denominates any of its sales in foreign currencies, this could result in losses from foreign currency transactions. International sales also could be adversely affected by factors beyond the Company's control, including the imposition of government controls, export license requirements, restrictions on technology exports, changes in tariffs and taxes and general economic and political conditions. The laws of some countries do not protect the Company's intellectual property rights to the same extent as the laws of the United States. The Company does not believe these additional risks are significant in the United Kingdom, The Netherlands or Switzerland. Dependence on Key Personnel The Company's future performance depends significantly upon the continued service of its key technical and senior management personnel. The Company provides incentives such as salary, benefits and option grants (which are typically subject to vesting over four years) to attract and retain qualified employees. Recently the Company's stock price has been volatile and as such, many of the Company's employees hold options with exercise prices greater than the market price of the Company's Common Stock. As a result, the prior grants of options to the Page 20 Company's employees may not be a significant incentive to retain the services of these individuals. The loss of the services of one or more of the Company's officers or other key employees could have a material adverse effect on the Company's business, operating results and financial condition. The Company's future success depends on its continuing ability to retain highly qualified technical and management personnel. Competition for such personnel is intense, and there can be no assurance that the Company can retain its key technical and management employees or that it can attract, assimilate and retain other highly qualified key technical and management personnel in the future. The Company believes there is significant competition for the few software development professionals with the advanced technological skills necessary to perform the services offered by the Company's business. The Company's ability to maintain or renew existing relationships and obtain new business depends, in large part, on its ability to hire and retain technical personnel. An inability to hire such additional qualified personnel could impair the ability of the business to manage and complete its existing projects and to bid for and obtain new projects. Anti-Takeover Provisions Certain provisions of the Company's Certificate of Incorporation, as amended and restated, and Bylaws, as amended, California law and the Company's indemnification agreements with certain officers and directors of the Company may be deemed to have an anti-takeover effect. Such provisions may delay, defer or prevent a tender offer or takeover attempt that one or more stockholders consider to be in the best interests of same, including attempts that might result in a premium over the market price for the shares held by stockholders. The Company's Board of Directors may issue additional shares of Common Stock or establish one or more classes or series of Preferred Stock, having the number of shares, designations, relative voting rights, dividend rates, liquidation and other rights, preferences and limitations determined by the Board of Directors without stockholder approval. The Board of Directors of the Company has approved the adoption of a Preferred Share Purchase Rights Plan (the "Rights Plan"). Terms of the Rights Plan provide for a dividend distribution of one preferred share purchase right (a "Right") for each Page 21 outstanding share of common stock, no par value per share (the "Common Shares"), of the Company. Each Right entitles the registered holder to purchase from the Company one one-hundredth of a share of Series A Junior Participating Preferred Stock, no par value (the "Preferred Stock"), at an exercise price of $69.50 per one one-hundredth of a Preferred Share (the "Purchase Price"), subject to adjustment, and a redemption price of $.01 per Right. Each one one-hundredth of a share of Preferred Stock has designations and the powers, preferences and rights, and the qualifications, limitations and restrictions which make its value approximately equal to the value of a Common Share. The Rights are not exercisable until the earlier to occur of (i) 10 days following a public announcement that a person, entity or group of affiliated or associated persons (an "Acquiring Person") has acquired beneficial ownership of 15% or more of the outstanding Common Shares or (ii) 10 business days (or such later date as may be determined by action of the Board of Directors prior to such time as any person(s) or entity becomes an Acquiring Person) following the commencement of, or announcement of an intention to make, a tender offer or exchange offer the consummation of which would result in the beneficial ownership by an Acquiring Person of 15% or more of such outstanding Common Shares. The Rights have certain anti-takeover effects, as they would cause substantial dilution to a potential Acquiring Person that attempted to acquire the Company on terms not approved by the Company's Board of Directors. The Rights should not interfere with any merger or other business combination approved by the Board of Directors, since the Rights may be redeemed by the Company at $.01 per Right prior to the earliest of (i) the twentieth day following the time that an Acquiring Person has acquired beneficial ownership of 15% or more of the Common Shares (unless extended for one or more 10 day periods by the Board of Directors), (ii) a change of control, or (iii) the final expiration date of the rights. Item 3. Quantitative and Qualitative Disclosures about Market Risk The Company has considered the provisions of Financial Reporting Release No. 48, "Disclosure of Accounting Policies for Derivative Financial Instruments and Derivative Commodity Instruments, and Disclosure of Quantitative and Qualitative Information about Market Risk Inherent in Derivative Financial Instruments, Other Financial Instruments and Derivative Commodity Instruments". The Company had no holdings of derivative financial or commodity Page 22 instruments at December 31, 2000. A review of other financial instruments and risk exposures at that date revealed the Company did not have exposure to interest rate risk. The Company sells it products worldwide. Consequently, the financial results could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets. Because a major portion of the Company's revenue is currently denominated in U.S. dollars, a strengthening of the dollar could make the Company's products less competitive in foreign markets. PART II. OTHER INFORMATION Item 1. Legal Proceedings None Item 2. Changes in Securities None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders The Company did not submit any matters to a vote of security holders during the first quarter of the fiscal year ending September 30, 2001. Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits None (b) Reports on Form 8-K During the period ended October 1, 2000 through December 31, 2000, the Company filed the following current report on Form 8-K: Page 23 Date of Report - November 17, 2000 Item(s) Reported - On November 8, 2000, FORTEL INC. entered into a letter agreement with the two institutional purchasers to which it had sold 2,191,781 shares of its common stock on July 18, 2000, pursuant to the Securities Purchase Agreement, Registration Rights Agreement and Repricing Warrants (collectively the "Agreements"), copies of which were filed with the Company's Current Report on Form 8-K filed on or about July 27, 2000. Under the terms of the letter agreement, the Agreements were modified to replace redemption with specified liquidated damages as a remedy for certain breaches of and defaults under the Agreements. Page 24 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FORTEL INC. Date: February 14, 2001 By /s/Henry C. Harris Henry C. Harris Chief Financial Officer
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