-----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, LZi2E+Zmd49/0jF1fhgvBuj60akmbFkmh4NmpkqpSRnHwZ/FoV85Kcpf5TP+hmjt opKQT5mIrrcrfb2ow9Rd4g== 0000916513-99-000016.txt : 19990817 0000916513-99-000016.hdr.sgml : 19990817 ACCESSION NUMBER: 0000916513-99-000016 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990816 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FORECROSS CORP CENTRAL INDEX KEY: 0000916513 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 942823882 STATE OF INCORPORATION: CA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-29672 FILM NUMBER: 99693801 BUSINESS ADDRESS: STREET 1: 90 NEW MONGOMERY STREET CITY: SAN FRANCISCO STATE: CA ZIP: 94105 BUSINESS PHONE: 4155431515 MAIL ADDRESS: STREET 1: 90 NEW MONTGOMERY ST CITY: SAN FRANCISCO STATE: CA ZIP: 94105 10-Q 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 0-29672 FORECROSS CORPORATION CALIFORNIA 94-2823882 (State or other jurisdiction (I.R.S. Employer incorporation or organization) Identification No.) 90 NEW MONTGOMERY STREET SAN FRANCISCO, CALIFORNIA 94105 Address of principal executive offices) TELEPHONE: (415) 543-1515 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . Shares outstanding of the Registrant's common stock: Class Outstanding at June 30, 1999 Common Stock, no par value 12,191,944 FORECROSS CORPORATION FORM 10-Q TABLE OF CONTENTS PART I. FINANCIAL INFORMATION Item 1. Financial Statements Balance Sheets June 30, 1999 (unaudited) and September 30, 1998 Statements of Operations (unaudited) for the three and nine months ended June 30, 1999 and 1998 Statements of Cash Flows (unaudited) for the nine months ended June 30, 1999 and 1998 Notes to Unaudited Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations PART II. OTHER INFORMATION Item 1. Legal Proceedings Item 2. Changes in Securities Item 3. Defaults Upon Senior Securities Item 4. Submission of Matters to a Vote of Security Holders Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K Signature Page Exhibit Index PART I. FINANCIAL INFORMATION
FORECROSS CORPORATION BALANCE SHEETS June 30, Sept. 30, 1999 1998 ------------ ----------- (Unaudited) (Unaudited) ASSETS Current assets: Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 19,241 $ 98,249 Accounts receivable, including unbilled receivables of $46,333 and $489,808, net of allowance of $20,000 and $136,650, respectively . . . . . . . . . . . . . . . . . . . . . . . 482,824 1,170,117 Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . 37,760 49,628 ------------ ----------- Total current assets . . . . . . . . . . . . . . . . . . . . . . . . 539,825 1,317,994 Equipment and furniture, net . . . . . . . . . . . . . . . . . . . . . 342,469 568,235 Notes receivable from others . . . . . . . . . . . . . . . . . . . . . 68,430 67,131 Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34,080 42,359 ------------ ----------- Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 984,804 $ 1,995,719 ============ =========== LIABILITIES AND SHAREHOLDERS' DEFICIT Current liabilities: Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 309,136 $ 224,991 Accrued compensation and related benefits . . . . . . . . . . . . . . 498,932 235,135 Accrued liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . 188,329 73,301 Accrued commissions and distributors' fees . . . . . . . . . . . . . . 1,241,842 1,228,375 Payable to factor . . . . . . . . . . . . . . . . . . . . . . . . . . 865,618 467,734 Accrued warranty costs . . . . . . . . . . . . . . . . . . . . . . . . 183,903 205,975 Capital lease obligations due within one year. . . . . . . . . . . . . 22,394 20,103 Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . 656,618 598,193 ------------ ----------- Total current liabilities. . . . . . . . . . . . . . . . . . . . . . 3,966,772 3,053,807 Deferred revenue, less current portion . . . . . . . . . . . . . . . . 1,121,667 1,545,417 Notes payable to officers, net . . . . . . . . . . . . . . . . . . . 696,915 631,392 Capital lease obligations, less current portion. . . . . . . . . . . . 25,503 41,667 ------------ ----------- Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . 5,810,857 5,272,283 ------------ ----------- Shareholders' deficit: Common stock, no par value; authorized 20,000,000 shares; issued and outstanding 12,191,944 and 11,763,612, respectively . . . 5,044,582 4,715,515 Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . . . . (9,870,635) (7,992,079) ------------ ----------- Total shareholders' deficit. . . . . . . . . . . . . . . . . . . . . . (4,826,053) (3,276,564) ------------ ----------- Total liabilities and shareholders' deficit. . . . . . . . . . . . . $ 984,804 $ 1,995,719 ============ ============
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FORECROSS CORPORATION STATEMENTS OF OPERATIONS For the Three Months Ended For the Nine Months Ended June 30, June 30, -------------------------- ------------------------- 1999 1998 1999 1998 ------------ ------------ ------------ ----------- (Unaudited) (Unaudited) (Unaudited) (Unaudited) Net revenues: Services and maintenance . . . . . . . . $ 766,872 $ 2,134,425 $ 2,214,903 $ 5,247,345 Software licenses and distributorship fees-related parties. . . . . . . . . . 136,251 136,250 408,753 408,749 ------------ ------------ ------------- ------------ Total net revenues . . . . . . . . . . 903,123 2,270,675 2,623,656 5,656,094 Cost of services and maintenance including fees to related parties of $44,000, $145,000, $107,000 and $285,000, respectively . . . . . . . . . . . . . . 559,683 1,073,105 1,899,400 3,342,490 ------------ ------------ ------------- ------------ Gross margin . . . . . . . . . . . . . . 343,440 1,197,570 724,256 2,313,604 ------------ ------------ ------------- ------------ Operating expenses: Sales and marketing including fees to related parties of $132,000, $435,000, $333,000 and $856,000, respectively. . 311,123 659,503 766,899 1,477,430 Research and development . . . . . . . . 170,025 362,229 574,684 1,261,586 General and administrative . . . . . . . 254,631 376,751 863,041 1,015,882 ------------ ------------ ------------- ------------ Total operating expenses . . . . . . . . 735,779 1,398,483 2,204,624 3,754,898 ------------ ------------ ------------- ------------ Loss from operations . . . . . . . . . . (392,339) (200,913) (1,480,368) (1,441,294) Interest expense, net. . . . . . . . . . (150,405) (118,292) (397,388) (217,069) ------------ ------------ ------------- ------------ Loss before provision for income taxes . (542,744) (319,205) (1,877,756) (1,658,363) Provision for income taxes . . . . . . . - - (800) (800) ------------ ------------ ------------- ------------ Net loss . . . . . . . . . . . . . . . $ (542,744) $ (319,205) $(1,878,556) $(1,659,163) ============ ============ ============= ============ Net loss per share - basic and diluted . $ (0.04) $ (0.03) $ (0.16) $ (0.14) ============ ============ ============= ============ Shares used in computing per share data. 12,191,944 11,763,612 12,021,611 11,761,412 ============ ============ ============= ============
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FORECROSS CORPORATION STATEMENTS OF CASH FLOWS For the Nine Months Ended June 30, 1999 1998 ------------ ------------ (Unaudited) (Unaudited) Increase (decrease) in cash resulting from: Cash flows from operating activities: Net loss . . . . . . . . . . . . . . . . . . . $(1,878,556) $(1,659,163) Adjustments to reconcile net loss to net cash provided by (used in) operating activities- Provision for uncollectible amounts. . . . . . (116,650) 59,660 Value of common stock issued and value assigned to extension of warrant term. . . . 38,250 - Depreciation and amortization. . . . . . . . . 225,766 200,202 Changes in operating assets and liabilities- Accounts receivable. . . . . . . . . . . . . . 803,943 (1,451,045) Other assets and accrued interest on notes receivable from officers. . . . . . . . . . . 16,999 84,749 Accounts payable and accrued liabilities . . . 543,491 1,270,778 Deferred revenue . . . . . . . . . . . . . . . (365,325) (201,795) ------------ ---------- Net cash used in operating activities. . . . . (732,082) (1,696,614) ------------ ---------- Cash used in investing activities: Purchase of equipment and furniture. . . . . . - (276,108) Payments received on loans to officers . . . . - 81,858 Payments received on loans to key employees. . 250 700 ------------ ---------- Net cash provided by (used in) investing activities . . . . . . . . . . . . 250 (193,550) ------------ ---------- Cash flows from financing activities: Proceeds from factoring of accounts receivable 3,070,250 3,604,835 Repayment of borrowings under factoring arrangement . . . . . . . . . . . . . . . . . (2,672,366) (2,605,263) Borrowings under note payable to officers . . . 180,000 575,000 Repayment of borrowings under notes payable -officers . . . . . . . . . . . . . . . . . . (199,713) - Proceeds from capital lease obligations. . . . - 66,074 Repayment of borrowings under capitalized leases (16,164) - Net proceeds from issuance of common shares . 290,817 48,000 ------------ ---------- Net cash provided by financing activities. . 652,824 1,688,646 ------------ ---------- Net (decrease) in cash . . . . . . . . . . . (79,008) (201,518) Cash at beginning of period. . . . . . . . . . 98,249 275,243 ------------ ---------- Cash at end of period . . . . . . . . . . . . $ 19,241 $ 73,725 ============ ========== Supplemental disclosures of cash flow information: Cash paid during the period for interest . . . $ 169,892 $ 164,203 ============ ========== Supplemental disclosures of non-cash investing and financing activities: Accrued interest on notes payable to officers $ 86,835 $ 26,537 ============ ==========
4 FORECROSS CORPORATION NOTES TO FINANCIAL STATEMENTS (Unaudited) 1. UNAUDITED INTERIM FINANCIAL STATEMENTS: The unaudited interim financial statements of Forecross Corporation have been prepared in conformity with generally accepted accounting principles, consistent in all material respects with those applied in the Annual Report on Form 10-K for the year ended September 30, 1998. The interim financial information is unaudited, but in the opinion of management, includes all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the information set forth therein. The interim financial statements should be read in connection with the financial statements and notes in the Company's Annual Report on Form 10-K for the year ended September 30, 1998. 2. BASIS OF PRESENTATION AND GOING CONCERN: Through June 30, 1999, the Company had sustained recurring losses from operations and, at June 30, 1999, had a net capital deficiency and a net working capital deficiency. These conditions raise substantial doubt about the ability of the Company to continue as a going concern. During the remainder of fiscal 1999, the Company expects to meet its working capital and other cash requirements with cash derived from operations, short-term receivables and other financing as required, and software license fees from organizations desiring access to the Company's various product offerings. The Company's continued existence is dependent on its ability to achieve and maintain profitable operations by controlling expenses and obtaining additional business. Management believes that the combination of increased automation of its services for both migration projects and year 2000 renovation projects, the creation of additional year 2000 renovation and verification products, cost reduction actions maintained throughout fiscal 1999, and the early signs of renewed customer interest in migration projects should improve the Company's profitability in late fiscal 1999 and fiscal 2000. However, there can be no assurance that the Company's efforts to achieve and maintain profitable operations will be successful. Additionally, the Company currently is highly dependent on revenues from year 2000 contracts. The financial statements do not include any adjustments that might result from the outcome of these uncertainties. DEPENDENCE ON YEAR 2000 REVENUES: The Company's revenues in fiscal 1999 and 1998 resulted in large part from demand for Assess/2000 and Complete/2000TM services and licenses as awareness of the year 2000 century date conversion problem has grown. Year 2000 services and related revenue were 95% in the three months ended June 30,1999 as compared to 82% of the Company's total revenues in the three months ended June 30, 1998, and 85% of total revenues for the nine months ended June 30, 1999 as compared to 63% of total revenues for the nine months ended June 30, 1998. Should the demand for the Company's year 2000 solutions and products decline significantly as a result of new technologies, competition or any other factors, the Company's professional service fees and license revenues would be materially and adversely affected. The Company anticipates that demand in the year 2000 market will decline, perhaps rapidly, following the year 1999. The Company has experienced a decline in its core migration services business. The Company considers this a temporary development resulting from the pressure placed on many of its prospective customers to address their year 2000 problem to the exclusion of most or all other non-mission-critical projects. Nonetheless, it is the Company's strategy to leverage customer relationships and knowledge of customer application systems derived from its year 2000 services solutions to continue to grow its migration and other products and services beyond the year 2000 market. While the Company has observed some early indication of some renewed customer interest in migration projects, there can be no assurance that the Company will be successful in obtaining such projects or that the Company's strategy will be successful, and should the Company be unable to market other products and services as demand in the year 2000 market declines, whether as a result of competition, technological change or other factors, the Company's business, results of operations and financial condition will be materially and adversely affected. The Company markets its products and services to customers for managing the maintenance and redevelopment of mission-critical computer software systems. As noted above, a large and increasing portion of the Company's business is devoted to addressing the year 2000 problem, which affects the performance and reliability of many mission-critical systems. The Company's agreements with its customers typically contain provisions designed to limit the Company's exposure to potential product and service liability claims. It is possible, however, that the limitation of liability provisions contained in the Company's customer agreements may not be effective as a result of existing or future federal, state, local or foreign laws or ordinances or unfavorable judicial decisions. Although the Company has not experienced any material product or service liability claims to date, the sale and support of its products and services may entail the risk of such claims, particularly in the year 2000 market, which could be substantial in light of the use of its products and services in mission-critical applications. A successful product or service liability claim brought against the Company could have a material adverse effect upon the Company's business, operating results and financial condition. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: 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 amounts of assets and liabilities and disclosures; contingent assets and liabilities at the date of the financial statements; and, the reported amounts of revenue and expenses during the reporting period. Accordingly, actual results could differ from those estimates. The most significant estimates subject to future uncertainties are those relating to calculations of percentage of completion for projects in process and estimations of warranty liability. It is at least reasonably possible that the significant estimates used will change within a year. RECLASSIFICATIONS: Certain prior-year amounts have been reclassified to conform to current year presentation. 5 4. CONCENTRATIONS OF CREDIT RISK AND FOREIGN SALES: The Company performs ongoing credit evaluations of its customers and generally does not require collateral on accounts receivable as the majority of the Company's customers are large, well-established companies. Three customers accounted for approximately 43%, 24% and 14% of the accounts receivable balance at June 30, 1999, and four customers accounted for approximately 30%, 17%, 14% and 12% at September 30, 1998. Additionally, four customers, including revenues from the Company's Distributors treated as resulting from one customer, accounted for approximately 35%, 20%, 16% and 13% of total revenues for the three months ended June 30, 1999. Three customers accounted for approximately 32%, 15%, and 13% of total revenues for the three months ended June 30, 1998. Five customers, including revenues from the Company's Distributors treated as resulting from one customer, accounted for 16%, 15%, 15%, 12% and 10% of total revenues for the nine months ended June 30, 1999. Three customers, including revenues from the Company's Distributors treated as resulting from one customer, accounted for 40%, 12% and 10% of total revenues for the nine months ended June 30, 1998. 5. COMMON STOCK: In January 1999, the Company sold in a private placement 418,332 shares of common stock at $0.75 per share, resulting in gross proceeds of $313,750. In connection with the private placement, the Company issued to the placement agent, in lieu of cash, warrants to purchase 30,000 shares of common stock at $0.75 per share, which warrants expire in five years. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------------------------- The following summary of our material activities for the three and nine months ended June 30, 1999 and 1998 is qualified by, and should be read in conjunction with the financial statements and related notes and other information contained in this report. The financial results reported herein do not indicate the financial results that we may achieve in any future period. Other than the historical facts contained herein, this Quarterly Report contains statements that are forward-looking, such as statements relating to plans for future activities. Such forward-looking information involves important risks and uncertainties that could significantly affect results in the future and, accordingly, such results may differ from those expressed in any forward-looking statements made by or on our behalf. These risks and uncertainties include, but are not limited to, those relating to our growth strategy, customer concentration, outstanding indebtedness, dependence on expansion, activities of competitors, changes in federal or state laws and the administration of such laws, protection of trademarks and other proprietary rights and the general condition of the economy and its effect on the securities markets. For a discussion of such risks and uncertainties see our Annual Report on Form 10K for the fiscal year ended September 30, 1998. 6 RESULTS OF OPERATIONS YEAR 2000 COMPLIANCE We own or use computer software that may be impacted by the year 2000 problem, and we also rely on vendors of equipment and services whose products and services may be impacted by the year 2000 problem. Our year 2000 compliance issues include: (1) the computer hardware and internally developed software which we use in the performance of services for our customers, (2) the hardware and third-party software which we use for corporate administration, (3) the services of third-party providers which we purchase for certain professional services, and (4) the external services we require, such as telecommunications and electrical power. We have conducted a project to attempt to identify all computer hardware and software, other significant equipment, and services on which we rely that may be impacted. As part of this project, we have verified whether those products and services are year 2000-compliant. Our process included both accessing the websites of vendors and service providers to verify such compliance, and, where necessary, contacting those vendors and service providers to determine their compliance or plans to become compliant prior to December 31, 1999. Based on the results of this project, we believe that the majority of the hardware, software, services and equipment on which we rely are year-2000 compliant, and those that are not yet compliant are planned to be compliant prior to December 31, 1999. We continue to monitor the status of those products and services that are not yet compliant. Our administrative and operating systems are primarily PC-based, using commercially available software. Based on inquiries we made to the software vendors, our management believes that these commercial software applications are either year 2000-compliant now or will have upgrades available at nominal cost which will be year 2000-compliant. We have already purchased an upgrade to our accounting systems that will make it year 2000-compliant, for less than $200. Our System 390 mainframe software is not year 2000-compliant. Earlier this year, we issued a purchase order for the required upgrade. However, due to a decline in our use of the System 390, we have canceled this purchase order, and will not upgrade the System 390 for the foreseeable future. We believe that this decision will have no negative affect on our operations or our ability to conduct projects now, in the year 2000 or beyond. A review of our PC-based servers and other computers has indicated that several hardware systems are not currently year 2000-compliant, but that there is a simple procedure to make them compliant in the year 2000 at no cost. On January 1, 2000, the dates in these computers revert automatically to January 1, 1980. We will execute a procedure, which we have already tested on all of the non-compliant computers, to reset the date to the correct, year 2000 date. If, nonetheless, we are not able to modify those systems to become year 2000-compliant, we anticipate that the cost of replacing such systems would be approximately $10,000, that the time required to replace such systems would not exceed two weeks, and that, during the replacement period, our other, compliant systems could be used to perform the work normally performed by the systems being replaced. We rely on outside service providers for the processing and/or administration of our payroll, 401(K) plan and benefits insurance programs. Based on our inquiries, management believes that those service providers will have systems that are year 2000-compliant or that we will be able to select other providers whose systems are year 2000-compliant with no significant increase in the cost of those services. The internal software we use for performing the migration projects, and the year 2000 assessment and renovation projects, is year 2000-compliant. We have developed a list of "non-computer" systems on which we rely, such as telecommunications equipment, electrical power, heating and cooling systems, building elevators, etc., in order to determine whether such systems are in compliance with the year 2000. Review of vendors' websites, and discussions with vendors and building management indicate that all have projects in process to ensure compliance well in advance of December 31, 1999. We have not deferred any information technology projects to date due to the need to assess or ensure year 2000-compliance of our systems, and, based on our initial efforts to date as described herein, do not anticipate that any other information technology projects will be delayed in the future due to this year 2000 project. For the foregoing reasons, we do not anticipate that we will have an incomplete or untimely resolution of the year 2000 issue. Although the total costs of compliance have not as yet been definitely determined, our management believes that such costs will not be material. As previously indicated, with respect to our internal systems as outlined above, we believe that we have or will have achieved year 2000 compliance in advance of December 31, 1999. With respect to external services provided by third parties, we are less certain of the impact of year 2000 non-compliance. In the worst case scenario, a failure of the electrical system which supplies power to our computers would disrupt both our ability to conduct business and to communicate with our customers, vendors and other suppliers, since our telephone system also requires electrical power. In this event, we would be required to purchase these services from alternative providers. We intend, as part of our "non-computer" systems review, to determine any extraordinary costs and the amount of implementation time associated with such change of providers. 7 THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998 Revenues for the three months ended June 30, 1999 were $903,000 as compared to $2,271,000 in 1998, a decrease of 60%. This decrease in revenues for the period reflected primarily the decrease in Year 2000 services revenues to $856,000 as compared to $1,872,000 in 1998. In addition, migration services revenue decreased to $47,000 in 1999 as compared to $399,000 in 1998. Of the decreases, one major migration and renovation project that was substantially completed during fiscal 1998 had accounted for more than half of the Year 2000 services revenues during the three months ended June 30, 1998. Backlog was $783,000 at June 30, 1999 as compared to $1,604,000 in 1998. The reduction in backlog is attributable to numerous factors. First is the substantial completion of one major migration/renovation project during fiscal 1998. This project was significantly larger in terms of dollar value than most Forecross contracts, and therefore made the backlog substantially larger in 1998 than its historical norm. Second is that year 2000 contracts, unlike application migration projects, are typically of much shorter duration. This is a significant factor with Year 2000 services representing 95% of the quarter's revenues as compared with 82% in the corresponding 1998 period. The average application migration project takes from six to eighteen months to complete, whereas the average year 2000 project can be completed in eight weeks or less. Therefore, revenue associated with year 2000 projects may be booked, recognized and completed without appearing in the quarterly or annual backlog amount. Third is that there were two developments in the marketplace which Forecross believes negatively affected the backlog: (1) the temporary diversion of resources and attention away from valuable but optional application migrations, into the mandatory resolution of the year year 2000 problem; and (2) the decision of some prospective customers to attempt to perform the year 2000 renovation work internally, or to delay commencing this work in favor of evaluating other alternatives, such as purchasing a new software package that is year 2000 compliant and may operate on a new technology platform or rewriting the computer source codes. While both of these developments appear to be temporary, they have had the effect of slowing the rate at which Forecross has been able to obtain contracts for such work, especially since the second half of our 1998 fiscal year. Gross margin was $343,000 and $1,198,000 in the three months ended June 30, 1999 and 1998, respectively. The gross margin percentage was 38% in 1999 and 53% in 1998. The revenues from the year 2000 products and services have not reached the level anticipated by us or by the industry in general. During the three months ended June 30, 1999, we significantly increased our efforts to obtain new migration and year 2000 services projects, in addition to maintaining tight control over our expenses. However, in 1998, we had added significant resources, in terms of both personnel and facilities, to address the anticipated requirements to support the year 2000 business, and the lower than anticipated level of revenue has adversely impacted gross margins in both 1999 and 1998. The cost reduction efforts that we implemented during the three months ended December 31, 1998 have been extended through the current period. Those reductions included decreases in payroll of approximately 20% through a reduction in pay for certain members of management, not replacing certain staff members upon their departures and laying off certain staff members who were hired in anticipation of substantially more year 2000 business than we have seen to date. Sales and marketing expenses were $311,000 in the three months ended June 30, 1999 as compared to $660,000 in 1998. Distributor fees were $132,000 in 1999 as compared to $435,000 in 1998 due to the fact that one distributor had earned fees at a rate of 50% of related revenues in 1998, and at a 25% rate in 1998 after the contractual limit had been reached in fiscal 1998 for the 50% rate. Commission expense decreased by $58,000 in 1999 due to the reduction in migration services revenue. Research and development expenses decreased to $170,000 in 1999 from $362,000 in 1998, or 53%, due to the completion during fiscal 1998 of a significant portion of the development activity associated with the Complete/2000TM product and enhancements to existing software products. This enabled us to eliminate the use of subcontractors in fiscal 1999, saving $39,000 as compared to the three months ended June 30, 1998. In addition, we were able to reduce the number of personnel devoted to development and enhancement activities. General and administrative expenses were $255,000, and $377,000, in the three months ended June 30, 1999 and 1998, respectively. Legal, accounting, and audit fees were reduced approximately $75,000 in 1999 as compared to 1998, primarily due to the extensive efforts associated with the filing of the Company's Form 10/A registration statement in 1998. Net interest expense was $150,000 for the three months ended June 30, 1999 as compared to $118,000 in 1998, reflecting the increased use in 1999 of short-term receivables financing, loans from our senior officers, and extended payment terms from our distributors to meet our working capital needs. The overall net loss for the three months ended June 30, 1999 was $543,000 or $0.04 per share compared with a loss of $319,000 or $0.03 per share for the three months ended June 30, 1998 (based on the weighted average number of shares outstanding during the respective periods). 8 NINE MONTHS ENDED JUNE 30, 1999 COMPARED TO NINE MONTHS ENDED JUNE 30, 1998 Revenues for the nine months ended June 30, 1999 were $2,624,000 as compared to $5,656,000 in 1998, a decrease of 54%. This decrease in revenues for the period reflected primarily the decrease in migration services revenue to $384,000 in 1999 as compared to $2,113,000 in 1998. In addition, Year 2000 services revenue in the nine months ended June 30, 1999 decreased to $2,240,000 in 1999 as compared to $3,543,000 in the nine months ended June 30, 1998. Of the decreases, one major migration/renovation project that was substantially completed during fiscal 1998 had accounted for more than half of the Year 2000 services revenue during the nine months ended June 30, 1998, as well as a significant percentage of the migration services revenue. Gross margin was $724,000 and $2,314,000 in the nine months ended June 30, 1999 and 1998, respectively. The gross margin percentage was 28% in 1999 and 41% in 1998. As discussed above, we have taken a number of steps to reduce our expenses in addition to increasing our efforts to obtain new projects in response to the lower than anticipated level of both migration and year 2000 services revenues. Sales and marketing expenses were $767,000 in the nine months ended June 30, 1999 as compared to $1,477,000 in 1998. Distributor fees were $333,000 in 1999 as compared to $856,000 in 1998 due to the decreased Year 2000 services revenues in 1999 and to the fact that one distributor had earned fees at a rate of 50% of related revenues in 1998, and at a 25% rate in 1998 after the contractual limit had been reached in fiscal 1998 for the 50% rate. Commission decreased by $144,000 in 1999 due to the reduction in migration services revenue Trade show expenses decreased by $89,000 in the nine months ended June 30, 1999 as compared to 1998, as we focused our sales efforts primarily through increased direct sales activities for migration projects and direct mail and increased distributor efforts for our year 2000 services. Research and development expenses decreased to $575,000 in 1999 from $1,262,000 in 1998, or 54%, due to the completion during fiscal 1998 of a significant portion of the development activity associated with the Complete/2000TM product and enhancements to existing software products. This enabled us to eliminate the use of subcontractors in fiscal 1999, saving $154,000 as compared to the nine months ended June 30, 1998. In addition, we were able to reduce the number of personnel devoted to development and enhancement activities, which accounted for substantially the balance of the cost reduction in 1999 as compared to 1998. General and administrative expenses were $863,000 and $1,016,000 in the nine months ended June 30, 1999 and 1998, respectively. Legal, accounting, and audit fees were reduced approximately $114,000 in 1999 as compared to 1998 primarily due to the extensive efforts associated with the filing of the Company's Form 10/A registration statement in 1998. Net interest expense was $397,000 for the nine months ended June 30, 1999 as compared to $217,000 in 1998, reflecting the increased use in 1999 of short-term receivables financing, loans from our senior officers, and extended payment terms from our distributors to meet our working capital needs. The overall net loss for the nine months ended June 30, 1999 was $1,879,000 or $0.16 per share compared with a loss of $1,659,000 or $0.14 per share for the nine months ended June 30, 1998 (based on the weighted average number of shares outstanding during the respective periods). 9 LIQUIDITY AND CAPITAL RESOURCES Through June 30, 1999, we have sustained recurring losses from operations and, at June 30, 1999, we had a net capital deficiency and a net working capital deficiency. These conditions raise substantial doubts about our ability to continue as a going concern. See Note 2 of Notes to Financial Statements. For the three months ended June 30, 1999, operations were funded through cash derived from short-term receivables financing, a loan of $180,000 from the senior vice president of the Company, and the collection of outstanding accounts receivable. In October 1995, we entered into a factoring agreement with a financial organization that allows us to obtain financing by borrowing against our accounts receivable on a recourse basis. At June 30, 1999, $866,000 was outstanding under the agreement. At September 30, 1998, $468,000 was outstanding under the agreement. The agreement may be terminated by either the factor or us at any time. During the nine months ended June 30, 1999, our working capital was reduced to levels that were lower than customary. This was due to the slowdown in our application migration business and the lack of a substantial amount of year 2000 customer contracts. We took steps in the first quarter of fiscal 1999 to reduce costs and have continued with those actions through the current period. These include payroll reductions of approximately 20% through a voluntary reduction in pay for certain members of management, not replacing certain staff members upon their departures and laying off certain staff members who were hired in anticipation of substantially more year 2000 business than we have seen to date. Further cost reduction efforts are still under consideration but will not result in savings as substantial as the payroll reductions described above. In addition to cost reductions, in January 1999, we completed a private placement of stock yielding gross proceeds of $313,750. Beyond these immediate steps to address liquidity concerns, we are aggressively pursuing new opportunities for migration services contracts as companies begin to consider new migration projects. While these actions should cause liquidity to improve somewhat, we do not expect that working capital will return in the short term to the levels seen during 1996 and 1997, when revenue from distributorships inflated historical norms. While backlog increased somewhat at June 30, 1999 as compared to March 31, 1999, we must continue our efforts to obtain new Year 2000 services and migration projects to improve our operating results and liquidity. Although we believe that we will be able to obtain such new projects, our management is continuing to closely monitor our prospective year 2000 project volume to evaluate whether the existing sources of financing are adequate to support our operations, or whether additional means of financing, including debt or equity financing, may be required to satisfy our working capital and other cash requirements. Our management believes that if we obtain the anticipated level of new business, then those revenues, together with continued use of short-term receivables financing, and the funds from the private placement referred to above, will be sufficient to meet our needs through the balance of calendar 1999. There can be no assurance, however, that cash from operations and the other sources described above will be achieved or will be sufficient for our needs. We anticipate that our capital expenditures for fiscal 1999 will be less than $50,000. 10 PART II-OTHER INFORMATION Item 1. Legal Proceedings None. Item 2. Changes in Securities None. Item 3. Defaults Upon Senior Securities Not Applicable. Item 4. Submission of Matters to a Vote of Security Holders None. Item 5. Other Information None. Item 6. Exhibits and Report on Form 8-K (a). Index and Description of Exhibits
Exhibit No. Description - ----------- -------------------------------------------------------------------------------- 3.1+ Restated Articles of Incorporation 3.2+ By-Laws 10.1+ Lease Agreement, dated January 1, 1997 between the Company and The Canada Life Assurance Company 10.2+ Form of Indemnification Agreement entered into between the Company and each of its officers and directors 10.3+ 1993 Restricted Stock Purchase Plan 10.4+ 1994 Stock Option Plan and Form of Option Agreement 10.5* Exclusive Distributor Agreement between the Company and Gardner Solution 2000, L.L.C., and Amendment 10.6* Exclusive Distributor Agreement between the Company and Y2K Solutions, L.P., 10.7* Software License Agreement between the Company and Y2K Solutions, L.P. 10.8+ Factoring Agreement, dated October 30, 1995, between the Company and Silicon Valley Financial Services 10.9+ Lease Expansion Proposal dated November 17, 1997, between the Company and The Canada Life Assurance Company 10.10+ Factoring Modification Agreement, dated January 13, 1998, between the Company and Silicon Valley Financial Services 10.11* Exclusive Distributor Agreement between the Company and CY2K Solutions, L.L.C. 10.12* Software License Agreement between the Company and CY2K Solutions, L.L.C. 10.13* Exclusive Distributor Agreement between the Company and PY2K Solutions, L.L.C. 10.14* Software License Agreement between the Company and PY2K Solutions, L.L.C. 16.1+ Notice of Change of Auditor dated September 23, 1997, issued to all holders of common shares of Forecross Corporation 10 16.2+ Letter dated September 23, 1997 from BDO Seidman, LLP to the British Columbia Securities Commission and to the Vancouver Stock Exchange confirming the accuracy of the information contained in the Notice of Change of Auditor of Forecross Corporation dated September 23, 1997 16.3+ Letter dated September 23, 1997 from Coopers & Lybrand, L.L.P. to the British Columbia Securities Commission and to the Vancouver Stock Exchange confirming the accuracy of the information contained in the Notice of Change of Auditor of Forecross Corporation dated September 23, 1997 16.4+ Letter dated September 23, 1997 from the Board of Directors of Forecross Corporation to the shareholders of Forecross Corporation, the British Columbia Securities Commission and the Vancouver Stock Exchange confirming the review of the Board of Directors of the Notice of Change of Auditor and the related letter dated September 23, 1997 from BDO Seidman, LLP and Coopers & Lybrand, L.L.P. 27.1 Financial Data Schedule, June 30, 1999 + Previously filed as part of the Company's Form 10/A, effective June 16, 1998. * The Company has requested that certain portions of the documents be given confidential treatment. The entire documents, including the redacted portions, have been filed with the SEC.
(b). Reports on Form 8-K None 11 SIGNATURES Pursuant to the requirements 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. Registrant FORECROSS CORPORATION August 16, 1999 BY: /S/ Bernadette C. Castello --------------------------------- Bernadette C. Castello Senior Vice President and Chief Financial Officer 12 EX-27.1 2
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE UNAUDITED BALANCE SHEET AS OF JUNE 30, 1999 AND THE STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1 9-MOS SEP-30-1999 OCT-01-1998 JUN-30-1999 19241 0 502824 20000 0 539825 1240144 897675 984804 3966772 0 5044582 0 0 (9870635) 984804 0 2623656 1899400 1899400 2204624 0 397388 (1877756) 800 (1878556) 0 0 0 (1878556) (0.16) (0.16)
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