UNITED STATES
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 and
Exchange Act of 1934.
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998.
( ) 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 of (IRS 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 documents
and 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
-----
As of August 13, 1998, 11,763,612 shares of common stock, no par value, of
the registrant were outstanding.
<PAGE>
FORECROSS CORPORATION
FORM 10-Q
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets June 30, 1998 (unaudited) and September 30, 1997
Condensed Statements of Operations (unaudited) for the three and nine
months ended June 30, 1998 and 1997
Condensed Statements of Cash Flows (unaudited) for the nine months ended
June 30, 1998 and 1997
Notes to Unaudited Condensed 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
<PAGE>
PART I. FINANCIAL INFORMATION
<PAGE>
<TABLE>
<CAPTION>
FORECROSS CORPORATION
CONDENSED BALANCE SHEETS
JUNE 30, 1998 AND SEPTEMBER 30, 1997
June 30, 1998 September 30, 1997
--------------- --------------------
(Unaudited) (Restated)
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and short-term investments $ 73,725 $ 275,243
Accounts receivable, including unbilled 3,504,367 2,112,982
receivables of $1,923,946 and $1,754,691, net of
allowance of $360,000 and $300,340, respectively
Current portion of notes receivable from officers 0 112,504
Other current assets 62,877 128,582
TOTAL CURRENT ASSETS 3,640,969 2,629,311
--------------- --------------------
Equipment and furniture, net 613,921 540,804
Notes receivable from officers, less current portion
Notes receivable from others 65,254 63,150
Other assets 42,360 30,773
--------------- --------------------
TOTAL ASSETS $ 4,362,504 $ 3,301,051
=============== ====================
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 474,150 $ 452,651
Accrued liabilities 485,919 338,528
Accrued commissions and distributors' fees 1,681,588 639,138
Payable to factor 999,572 0
Capital lease obligations due within one year 19,394 0
Deferred revenue 978,184 756,229
--------------- --------------------
TOTAL CURRENT LIABILITIES 4,638,807 2,186,546
Deferred revenue, less current portion 1,686,667 2,110,417
Notes payable to officers, net 597,425 0
Capital lease obligations, less current portion 46,680 0
--------------- --------------------
TOTAL LIABILITIES 6,969,579 4,296,963
SHAREHOLDERS' DEFICIT:
Common stock:
Authorized shares - 20,000,000
Issued and outstanding shares -
11,763,612 at June 30, 1998 4,715,515 4,667,515
11,751,612 at September 30, 1997;
Accumulated deficit (7,322,590) (5,663,427)
--------------- --------------------
Total shareholders' equity (deficit) (2,607,075) (995,912)
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 4,362,504 $ 3,301,051
=============== ====================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FORECROSS CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 1998 AND 1997
(Unaudited)
Three month period ended Nine month period ended
30-Jun-98 30-Jun-97 30-Jun-98 30-Jun-97
------------ ------------ ------------- ------------
(Restated) (Restated)
<S> <C> <C> <C> <C>
Net revenues $ 2,270,675 $ 2,273,037 $ 5,656,094 $ 4,406,596
Cost of services and maintenance including 1,508,038 1,430,276 4,198,073 2,537,647
fees to related parties of $580,000, $537,000,
1,141,000, and $59,000, respectively
Gross margin 762,637 842,761 1,458,021 1,868,949
------------ ------------ ------------- ------------
Operating expenses:
Research and development 362,229 259,843 1,261,586 664,184
Sales and marketing 224,230 236,449 621,507 657,642
General and administrative 377,091 270,519 1,016,222 617,144
------------ ------------
Total operating expenses 963,550 766,811 2,899,315 1,938,970
------------ ------------ ------------- ------------
Income (loss) from operations (200,913) 75,950 (1,441,294) (70,021)
Other income (expense) (118,292) 5,111 (217,869) (63,649)
------------ ------------
Net income (loss) ($319,205) $ 81,061 ($1,659,163) ($133,670)
============ ============ ============= ============
Basic and diluted net income (loss) per share ($0.03) $ 0.01 ($0.14) ($0.01)
============ ============ ============= ============
Shares used in computing per share data 11,763,612 11,749,488 11,761,412 11,660,012
============ ============ ============= ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FORECROSS CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JUNE 30, 1998 AND 1997
(Unaudited)
Nine month period ended
30-Jun-98 30-Jun-97
------------- ------------
(Restated)
<S> <C> <C>
INCREASE (DECREASE) IN CASH RESULTING FROM:
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($1,659,163) ($133,670)
Adjustments to reconcile net loss to net cash
used in operating activities--
Depreciation and amortization 200,202 64,086
Provision for uncollectible amounts 59,660 0
Changes in operating assets and liabilities:
Accounts receivable (1,451,045) (1,976,473)
Other assets and accrued interest receivable 84,749 (118,395)
from officers
Accounts payable and accrued liabilities 1,270,778 154,474
Deferred revenue (201,795) 2,989,259
------------- ------------
NET CASH USED IN OPERATING ACTIVITIES (1,696,614) 979,281
------------- ------------
CASH USED IN INVESTING ACTIVITIES:
Purchase of equipment and furniture (276,108) (468,609)
Payments received on loans to key employees 700 0
Payments received on notes receivable from 81,858 (15,216)
officers
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (193,550) (483,825)
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from factoring of accounts receivable 3,604,835 785,200
Repayment of borrowings under factoring (2,605,263) (905,200)
agreement
Borrowings from officers 575,000 0
Proceeds from capital lease obligations, net of 66,074 0
repayments
Repayment of borrowings under notes payable 0 (10,000)
Repayment of borrowings from shareholders 0 (448,023)
Proceeds from issuance of common shares 48,000 1,147,725
Payment of stock notes by employees 0 7,973
------------- ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,688,646 577,675
------------- ------------
Net increase (decrease) in cash (201,518) 1,073,131
Cash at beginning of period 275,243 99,427
------------- ------------
Cash at end of period $ 73,725 $ 1,172,558
============= ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Interest payments $ 164,203 $ 266,539
</TABLE>
<PAGE>
FORECROSS CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
Through June 30, 1998, the Company had sustained recurring losses from
operations and, at June 30, 1998, 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 fiscal 1998, 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 licenses and other fees from distributors desiring access to the
Company's Complete/2000 product offerings. The Company's continued existence is
dependent upon its ability to achieve and maintain profitable operations by
controlling expenses and obtaining additional business. However, there can be
no assurance that the Company's efforts to achieve and maintain profitable
operations will be successful. Additionally, the Company 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.
The accompanying condensed balance sheet as of June 30, 1998, and the condensed
statements of operations for the three and nine month periods ended June 30,
1998 and 1997, and the condensed statements of cash flows for the nine months
ended June 30, 1998 and 1997 have not been audited. However, in the opinion of
management, they include all adjustments necessary for a fair presentation of
the financial position and results of operations for the periods presented. The
results of operations for the three and nine months ended June 30, 1998 are not
necessarily indicative of results to be expected for any future period.
2. RESTATEMENT OF FINANCIAL RESULTS:
The financial information for the six month period ended March 31, 1998 (which
is included in the results for the nine months ended June 30, 1998), and the
nine month and the three month periods ended June 30, 1997, was restated in July
1998 in connection with the filing of the Company's registration statement on
Form 10/A from amounts previously reported in order to reflect a modification of
the Company's accounting policies for the recognition of revenues associated
with certain year 2000-related software licenses and distributor agreements. In
applying the Company's previous accounting policy in prior periods, the Company
recognized revenue under these agreements ratably from execution of the
contracts until December 31, 1999, the period during which the Company
anticipated that it would perform substantially all services required under the
agreements.
The Company now recognizes revenues ratably over the entire contractual term
(including renewals) of the contracts in question instead of the date by which,
in the judgment of management, the work resulting from such contracts would be
substantially completed. The financial information for the three month period
ended June 30, 1998 was prepared in accordance with this revised accounting
policy for the recognition of revenues associated with certain year 2000-related
software licenses and distributor agreements. The net effect of the restatement
was to reduce revenues and increase net loss for the nine months ended June 30,
1998 (containing the six months ended March 31, 1998), and the three and nine
months ended June 30, 1997 by $240,093 $73,701and $73,701, and to increase net
loss per share by $0.02, $0.00 and $0.00, respectively.
<PAGE>
3. DEPENDENCE ON YEAR 2000 REVENUES:
The growth in the Company's revenues in fiscal 1997 and 1998 resulted in large
part from increased demand for Assess/2000 and Complete/2000 services and
licenses as awareness of the year 2000 century date conversion problem has
grown. Year 2000 services and related revenue increased from 8% in the
year ended September 30, 1996 to 42% of the Company's total revenues in
the year ended September 30, 1997, and 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 services 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.
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 core migration and other products and services
beyond the year 2000 market. However, there can be no assurance that this
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.
4. CONCENTRATIONS OF CREDIT RISK
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. One customer
accounted for approximately 62% of the accounts receivable balance at June
30, 1998, and four customers accounted for approximately 23%, 17%, 13% and
12% of the accounts receivable balance at September 30, 1997.
Additionally, three customers accounted for approximately 32%, 15%, and 13%
of total revenues for the three months ended June 30, 1998, and two customers
(including revenues from the Company's Distributors treated as resulting from
one customer) accounted for 33% and 13% of total revenues for the three months
ended June 30, 1997. Three customers (including revenues from the Company's
Distributors treated as resulting from one customer) accounted for
approximately 40%, 12% and 10% of total revenues for the nine months ended
June 30, 1998. Three customers (including revenues from the Company's
Distributors treated as resulting from one customer) accounted for
approximately 22%, 17% and 14% of total revenues for the nine months ended June
30, 1997.
<PAGE>
5. STOCK OPTION PLAN
In April 1998, at the request of the Board of Directors, the Vancouver Stock
Exchange approved a repricing of outstanding stock options for 42,000 shares of
common stock at $15.35 per share, and 21,000 shares of common stock at $19.00
per share to $11.15 per share. Other terms of those options remain the same.
In June 1998, at the request of the Board of Directors, the Vancouver Stock
Exchange approved a repricing of outstanding stock options for 32,800 share of
common stock at $9.70 per share, and 27,000 shares of common stock at $12.70 per
share to $8.02 per share. Other terms of those options remain the same.
<PAGE>
PART II. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The following discussion should be read in conjunction with the financial
statements and related notes and other information included in this report. The
financial results reported herein do not indicate the financial results that may
be achieved by the Company in any future period.
Other than the historical facts contained herein, this Quarterly Report contains
forward-looking statements that involve substantial risks and uncertainties.
For a discussion of such risks and uncertainties, please see the Company's
Registration Statement on Form 10/A filed July 23, 1998 for the six months ended
March 31, 1998 and the year ended September 30, 1997. In addition to the risks
and uncertainties discussed in the Registration Statement, the risks set forth
herein, including the Company's recent operating losses, net capital deficiency
and net working capital deficiency at June 30, 1998 should be considered. See
also Notes to Condensed Financial Statements in Part I of this Quarterly
Report.
BACKGROUND AND OVERVIEW
From the commencement of operations of its predecessor companies in June
1982, the goal of Forecross has been to focus a small group of skilled
technicians on providing automated solutions to the specialized niche
requirements of the MIS departments of medium to large enterprise computing
organizations seeking to adapt their business applications software to a
changing technology, economic and business environment.
From 1982 through 1988, the Company developed and licensed specialized
migration software products to service providers and other software vendors for
delivery to the MIS marketplace. The Company's customers during this period
included Price Waterhouse, LLP, KPMG Peat Marwick, IBM Corporation, On-Line
Software International, Inc., Pansophic Systems, Inc., Fujitsu, Ltd., Sterling
Software and Cincom Systems, Inc.
From 1989 through 1992, Forecross revenues were derived from software
development contracts with other software vendors, royalties from various
consulting firms, and software product license fees. At the same time, Forecross
continued to develop additional commercial migration software products.
From 1992 through 1997, Forecross developed and implemented a strategy of
utilizing internal sales and marketing resources instead of relying upon third
parties, and focused upon pursuing migration services contracts as compared to
the previous focus on development contracts. Major customers utilizing
migration services have included Bank of Montreal, Bear Stearns, Kimberly Clark,
New Brunswick Telephone and Union Gas.
In addition to the migration services contracts, and in response to its
customers' growing year 2000 migration demands and utilizing the technology it
had developed over the past fifteen years, during 1996 and 1997 the Company
introduced its Complete/2000(TM) software products and related services and
methodologies. In June 1996, the Company authorized its first exclusive
distributorship and sold its first software license for the Assess/2000 product.
Initial customer projects commenced during fiscal 1997. During 1997, additional
sets of Assess/2000 licenses were sold, additional exclusive distributorships
were authorized, and additional customer projects were signed and commenced.
Once collectibility of the distributor and license fees is reasonably assured,
and if there are no significant post-delivery obligations, the Company
recognizes the fees associated with the exclusivity and the software license
ratably over the contractual term (including renewals-generally five years)
commencing with the date of the respective signing of the agreements. Revenues
for technical and sales training, maintenance and support are recognized
ratably over the term of the support period.
<PAGE>
RESULTS OF OPERATIONS
YEAR 2000 COMPLIANCE
Forecross, like any other company, owns or uses computer software that may be
impacted by the year 2000 problem, and also relies upon vendors of equipment
and services whose products and services may be impacted by the year 2000
problem. The Company's year 2000 compliance issues include (i) the computer
hardware and internally developed software which it uses in the performance of
services for its customers, (ii) the hardware and third-party software which it
uses for corporate administration, (iii) the services of third-party providers
which it purchases for certain professional services, and (iv) the external
services such as telecommunications and electrical power. The Company has
initiated a project that will attempt to identify all computer hardware and
software, other significant equipment, and services upon which it relies that
may be impacted. After identification of such items, the Company will verify
whether those products and services are year 2000-compliant. The verification
process will include both accessing the websites of vendors and service
providers to verify such compliance, and, if necessary, contacting those vendors
and service providers to determine their compliance or plans to become compliant
prior to December 31, 1999. It is the intent of the Company to complete this
verification process by December 31, 1998.
The Company's administrative and operating systems are primarily PC-based,
utilizing commercially available software. Based on initial inquiries, which
have not yet been completed, management of the Company 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. The
Company has already purchased an upgrade to its accounting systems that will
make it year 2000-compliant, for less than $200. The Company's System 390
mainframe software is not year 2000-compliant, and the Company intends to obtain
an upgrade to such software from its vendor by September 30, 1998 at a cost of
less than $10,000.
A preliminary review of the Company's PC-based servers and computers has
indicated that several 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 will revert automatically to
January 1, 1980. The Company will execute a procedure, which it has already
tested on all of the non-compliant computers, to reset the date to the correct,
year 2000 date. If, nonetheless, the Company is not able to modify those
systems to become year-2000 compliant, it anticipates 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, the Company's other, compliant systems could be used to perform the
work normally performed by the systems being replaced.
The Company relies upon outside service providers for the processing and/or
administration of its payroll, 401(K) plan and benefits insurance programs.
Based on initial inquiries, which have not yet been completed, management of
the Company believes that those service providers will have systems that are
year 2000-compliant or that the Company 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 which the Company utilizes for performing the
migration projects, and the year 2000 assessment and renovation
projects, is year 2000-compliant.
The Company is developing a list of "non-computer" systems upon which it relies,
such as telecommunications equipment, building elevators, etc., in order to
determine whether such systems are in compliance with the year 2000. It is
anticipated that this review will be completed by December 31, 1998.
Preliminary review of such vendors' websites indicates that the Company's
vendors all have projects in process to ensure compliance well in advance of
December 31, 1999.
The Company has not deferred any information technology projects to date due to
the need to assess or ensure year 2000-compliance of its systems, and, based
upon its initial efforts to date as described herein, does not anticipate that
any other information technology projects will be delayed in the future due to
this year 2000 project.
For the foregoing reasons, the Company does not anticipate that it 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, management
believes that such costs will not be material. As previously indicated, with
respect to items (i) - (iii) outlined above, the Company believes that it has or
will have achieved year 2000 compliance in advance of December 31, 1999. With
respect to external services provided by third parties, the Company is 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 the Company's
computers would disrupt both the Company's ability to conduct business and to
communicate with its customers, vendors and other suppliers, since the Company's
telephone system also requires electrical power. In this event, the Company
would be required to purchase these services from alternative providers. The
Company intends, as part of its "non-computer" systems review, to determine any
extraordinary costs and the amount of implementation time associated with such
change of providers.
<PAGE>
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
Revenues for the three months ended June 30, 1998 were $2,270,675 as compared to
$2,273,037 in 1997. While the overall revenues remained approximately the same,
migration services revenues decreased to $398,401 in 1998 as compared to
$989,193 in 1997 as companies direct more of their information systems
expenditures to addressing the year 2000 issue and delay other projects. During
the same periods, year 2000 revenues, including assessment and renovation
services, and revenues from software licenses, distributor fees, and fees for
technical and sales training and support (recognized ratably over the entire
contractual term), increased to $1,872,274 from $1,283,844 in 1997. Backlog was
$1,604,000 at June 30, 1998 as compared to $2,269,000 in 1997.
Gross margin was $762,637 and $842,761 in 1998 and 1997, respectively. The
gross margin percentage was 34% in 1998 and 37% in 1997. While the revenues
from the year 2000 products and services have increased in 1998 as compared to
1997, they have not reached the level anticipated by the Company and industry in
general. The Company has added substantial resources to address the year 2000
market, and the lower than anticipated level of revenue adversely impacted gross
margins in 1998.
Research and development expenses increased to $362,229 in 1998 from $259,843 in
1997, or 39% due to an increase in the number of personnel to support the
development activity associated with the Complete/2000 product and potential
enhancements to existing software products. The increase in percentage between
1998 and 1997 for the three months ended June 30 was reduced from the percentage
increase experienced earlier in 1998 (and as reflected below for the nine month
periods ended June 30, 1998 and 1997) due to the diversion of some research and
development personnel to work on customer projects during the quarter ended June
30, 1998 in order to meet accelerated customer delivery requirements.
Sales and marketing expenses were $224,230 in 1998 as compared to $236,449 in
1997. Decreases in salaries in 1998 as compared to 1997, due to the increased
use of some personnel for research and development efforts, and reductions in
bonuses were offset somewhat by increased trade show and commission expenses in
1998.
General and administrative expenses were $377,091 and $270,519 in 1998 and 1997,
respectively, reflecting additional personnel, increased rent, insurance,
telephone, business and payroll taxes in 1998 to support the increased level of
business activity, and increased use of legal, audit, and other professional
services in connection with the Company's Registration Statement on Form 10/A.
Net interest expense was $118,292 for the three months ended June 30, 1998 as
compared to net interest income of $5,111 in 1997, reflecting the increased use
in 1998 of short-term receivables financing and loans from senior officers of
the Company to meet its working capital needs.
The overall net loss for the three months ended June 30, 1998 was $319,205 or
$0.03 per share compared with net income of $81,061 or $0.01 per share for the
three months ended June 30, 1997 (based on the weighted average number of
shares outstanding during the respective periods).
NINE MONTHS ENDED JUNE 30, 1998 COMPARED TO NINE MONTHS ENDED JUNE 30, 1997
Revenues for the nine months ended June 30, 1998 were $5,656,094 as compared to
$4,406,596 in 1997, an increase of 28%. Migration services revenues decreased
to $2,113,010 in 1998 as compared to $2,408,752 in 1997 as companies direct more
of their information systems expenditures to addressing the year 2000 issue and
delay other projects. During the same periods, year 2000 revenues, including
assessment and renovation services, and revenues from software licenses,
distributor fees, and fees for technical and sales training and support
(recognized ratably over the entire contractual term), increased to $3,543,084
from $1,997,844 in 1997.
<PAGE>
Gross margin was $1,458,021 and $1,868,949 in 1998 and 1997, respectively.
The gross margin percentage was 26% in 1998 and 42% in 1997. While the
revenues from the year 2000 products and services have increased in 1998
as compared to 1997, they have not reached the level anticipated by the
Company and industry in general. The Company has added substantial resources
to address the year 2000 market, and the lower than anticipated level of revenue
adversely impacted gross margins in 1998. During the nine months ended June
30, 1998, the Company provided reserves of $50,000 against revenues and
cost of services and maintenance, primarily against revenues recorded under
migration projects, which reserves adversely impacted the gross margin for the
nine months ended June 30, 1998. In addition, the Company had not realized the
efficiencies and cost savings originally anticipated for the off-site work
performed primarily by subcontractors on the migration services projects.
During the second quarter of fiscal 1998 (the three months ended March 31,
1998), the Company implemented some modifications to its procedures for pricing,
performing, and controlling the migration services projects in order to improve
the gross margin on those projects.
Research and development expenses increased to $1,261,586 in 1998 from $664,184
in 1997, or 90% due to an increase in the number of personnel to support the
development activity associated with the Complete/2000 product and
enhancements to existing software products.
Sales and marketing expenses were $621,507 in 1998 as compared to $657,642 in
1997. Decreases in salaries in 1998 as compared to 1997, due to the
increased use of some personnel for research and development efforts, and
reductions in bonuses were offset somewhat by increased trade show and
commission expenses in 1998.
General and administrative expenses were $1,016,222 and $617,144 in 1998 and
1997, respectively, reflecting in 1998 additional personnel, and increased
rent, insurance, telephone, business and payroll taxes in 1998 to support the
increased level of business activity, and increased use of legal, audit, and
other professional services in connection with the Company's Registration
Statement on Form 10/A.
Net interest expense was $217,869 and $63,649 for the nine months ended June
30, 1998 and 1997, respectively, reflecting the increased use in 1998 of
short-term receivables financing and loans from senior officers of the Company
to meet its working capital needs.
The overall net loss was $1,659,163 and $133,670 for the nine months ended June
30, 1998 and 1997, respectively, or $0.14 per share and $0.01 per share (based
on the weighted average number of shares outstanding during the respective
periods).
LIQUIDITY AND CAPITAL RESOURCES
Through June 30, 1998, the Company had sustained recurring losses from
operations and, at June 30, 1998, had a net capital deficiency and a net
working capital deficiency. These conditions raise substantial doubts about the
ability of the Company to continue as a going concern (see Note 1 of Notes to
Condensed Financial Statements).
For the three months ended June 30, 1998, operations were funded through cash
derived from short-term receivables financing. For the nine months ended
June 30, 1998, operations were funded through cash derived from short-term
receivables financing, proceeds from the exercise of warrants to purchase common
stock, and loans from senior officers of the Company.
Operations for the nine months ended June 30, 1997 were funded through cash
derived from short-term receivables financing, the sale of common stock, the
sale of software licenses for Assess/2000 and funds associated with distributor
agreements.
<PAGE>
Cash received from the sale of common stock and warrants, and the exercise of
warrants, amounted to $0, $0, $48,000 and $1,147,725 in the three months ended
June 30, 1998 and 1997, and the nine months ended June 30, 1998 and 1997,
respectively.
In October 1995, the Company entered into a factoring agreement with a
financial organization whereby the Company is able to obtain financing by
borrowing against its accounts receivable. At June 30, 1998, $999,572 was
outstanding under the agreement. At September 30, 1997, there was no
outstanding indebtedness under the agreement. The agreement may be terminated
by either the factor or the Company at any time.
The Company has relied periodically upon shareholder loans to fund operations.
These prior shareholder loans were repaid in full as of March 31, 1997.
In December 1997, the Company received a loan in the amount of $350,000 from
a senior officer of the Company. The loan is for a term of two years, is
unsecured and will earn interest at a rate of 24% per annum.
In February 1998, the Company received a loan in the amount of $225,000 from
another senior officer of the Company. The loan is for a term of two
years, is unsecured and will earn interest at a rate of 24% per annum.
In January 1997, the Company received a payment of $800,000 from Gardner
Solution 2000, L.L.C., under the terms of a Complete/2000(TM) solution exclusive
distributorship agreement announced July 2, 1996.
In March 1997, the Company received payments of $1,746,875, and in June 1997
received payments of $1,350,000, for the sale of software licenses for
Assess/2000, new exclusive distributor agreements, and software maintenance
agreements for Assess/2000.
From the various sources of proceeds described above, together with the
increased revenues, the Company was able to repay all of its outstanding
interest bearing debt as of September 30, 1997, pay certain other liabilities,
and fund the capital expenditures required to support the increased level of
operations. As indicated above, during the nine months ended June 30, 1998,
and subsequent to June 30, 1998, the Company has utilized short-term
receivables financing and loans from senior officers of the Company to fund
operations. During the balance of fiscal 1998, the Company expects to continue
to meet its working capital and other cash requirements with cash derived from
its operations, short-term receivables and other financing as required, and
software license and other fees from distributors desiring access to the
Company's Complete/2000 product offerings. In addition, the Company must
continue to improve the efficiency of its operations to achieve and maintain
positive cash flow from operations and support the increased volume of
contracts.
There can be no assurance, however, that cash from operations and the other
sources described above will be achieved or will be sufficient for the Company's
needs. Management believes that the loans from the senior officers of the
Company, combined with continued use of short-term receivables financing will be
sufficient to meet the Company's needs through the balance of fiscal 1998. In
the meantime, management is continuing to closely monitor the Company's
prospective year 2000 project volume to evaluate whether the existing sources of
financing are adequate to support the operations of the Company, or whether
additional means of financing, including debt or equity financing, may be
required to satisfy its working capital and other cash requirements.
<PAGE>
The Company anticipates that its capital expenditures for the next twelve
months will be approximately $100,000. The Company will evaluate the use of
additional lease financing, if necessary, to support those capital
expenditures.
<PAGE>
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 Reports on Form 8-K
a. Exhibits
Exhibit 27.1 Financial Data Schedule, June 30, 1998
b. Reports on Form 8-K
None
<PAGE>
SIGNATURE
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.
FORECROSS CORPORATION
Date: August 13, 1998 BY: /s/ Bernadette C. Castello
----------------------------------
Bernadette C. Castello
Senior Vice President and Chief Financial Officer
<PAGE>
EXHIBIT INDEX
Exhibit 27.1 Financial Data Schedule, June 30, 1998
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE UNAUDITED
BALANCE SHEET AS OF JUNE 30, 1998 AND THE STATEMENT OF OPERATIONS FOR THE NINE
MONTHS ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 73725
<SECURITIES> 0
<RECEIVABLES> 3864367
<ALLOWANCES> (360000)
<INVENTORY> 0
<CURRENT-ASSETS> 3640969
<PP&E> 1208094
<DEPRECIATION> (594173)
<TOTAL-ASSETS> 4362504
<CURRENT-LIABILITIES> 4638807
<BONDS> 0
<COMMON> 4715515
0
0
<OTHER-SE> (7322590)
<TOTAL-LIABILITY-AND-EQUITY> 4362504
<SALES> 0
<TOTAL-REVENUES> 5656094
<CGS> 4198073
<TOTAL-COSTS> 4198073
<OTHER-EXPENSES> 2899315
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 217869
<INCOME-PRETAX> (1659163)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1659163)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1659163)
<EPS-PRIMARY> (.14)
<EPS-DILUTED> (.14)
</TABLE>
