AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH __, 1999
REGISTRATION NO. 333-
=====================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
________
FORECROSS CORPORATION
(Exact name of Registrant as specified in its charter)
CALIFORNIA 7372 94-2823882
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Number) Identification No.)
incorporation
or organization)
90 NEW MONTGOMERY STREET
SAN FRANCISCO, CALIFORNIA 94105
TELEPHONE: 415 543-1515; FACSIMILE: 415 543-6701
(Address, including zip code, and telephone number, including area code,
of Registrant's principal executive offices)
BERNADETTE CASTELLO,
SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
90 NEW MONTGOMERY STREET
SAN FRANCISCO, CALIFORNIA 94105
TELEPHONE: (415) 543-1515; FACSIMILE: (415) 543-6701
(Name, address, including zip code, and telephone number, including area
code, of agent for service)
____________
COPIES OF COMMUNICATIONS TO:
ANDREW J. COSENTINO, ESQ.
GREENBERG TRAURIG
200 PARK AVENUE, 15TH FLOOR
NEW YORK, NEW YORK 10166
TELEPHONE: (212) 801-9304; FACSIMILE: (212) 801-6400
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering.
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box.
____________
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
PROPOSED
MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF OFFERING PRICE AGGREGATE OFFERING
SECURITIES TO BE REGISTERED AMOUNT TO BEREGISTERED(1) PER SHARE(2) PRICE(2) AMOUNT OFREGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, no par value 418,333 $ 0.50 $ 209,167 $ 58.00
- --------------------------- ------------------------- ---------------- -------------------- --------------------------
Common Stock, no par value 30,000 $ 0.50 $ 15,000 $ 4.17
------------------------- ---------------- -------------------- --------------------------
Total 448,333 $ 0.50 $ 224,167 $ 62.17
=========================== ========================= ================ ==================== ==========================
<FN>
(1) In the event of a stock split, stock dividend, or similar transaction
involving our common stock, in order to prevent dilution, the number of
shares of common stock registered in this offering shall be automatically
increased to cover additional shares of common stock in accordance with
Rule 416 under the Securities Act of 1933, as amended.
(2) Estimated solely for purposes of determining the registration fee pursuant
to Rule 457 under the Securities Act. Represents the average bid and asked
prices (rounded to the nearest cent) reported for our common stock on the
Nasdaq OTC Bulletin Board on March 25, 1999.
</TABLE>
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON THE DATE OR
DATES AS MAY BE NECESSARY TO DELAY OUR EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON THE DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT
TO SAID SECTION 8(A), MAY DETERMINE.
<PAGE>
The information contained in this prospectus is not complete and may be changed.
These securities may not be sold until the registration statement filed with the
Securities and Exchange Commission is effective. This preliminary prospectus is
not an offer to sell nor does it seek an offer to buy these securities in any
jurisdiction where the offer or sale is not permitted.
Subject to Completion, Dated March __, 1999
448,333 SHARES OF COMMON STOCK
FORECROSS CORPORATION
This prospectus relates to an aggregate of 448,333 shares of common stock,
no par value per share of Forecross Corporation, consisting of (1) the proposed
offer and resale from time to time by certain selling stockholders of an
aggregate of up to 418,333 shares of our common stock which were previously
acquired by the selling stockholders in a private placement, and (2) the
proposed offer and resale from time to time by a selling stockholder of up to
30,000 shares of common stock to be issued upon exercise of a warrant. The
shares registered hereby have been registered pursuant to our obligations
contained in written agreements with the selling stockholders. We are
registering the shares to provide the holders of such shares with fully tradable
shares of common stock. There can be no assurance, despite registration of the
shares, that any of the shares will be sold by the selling stockholders, or that
the warrant will be exercised.
We will not receive any proceeds from the sale of the shares by the selling
stockholders. We will pay all of the expenses, estimated to be approximately
$_________, in connection with this offering, other than underwriting and
brokerage commissions, discounts, fees and counsel fees and disbursements and
expenses attributed solely to the selling stockholders. See "Use of Proceeds,"
"Selling Stockholders" and "Plan of Distribution."
Our common stock is currently quoted on the Nasdaq OTC Bulletin Board under
the symbol "FRXX." On March __, 1999, the average of the bid and ask prices of
the common stock as quoted on the OTCBB was $_____ per share.
The shares being offered hereby by the selling stockholders have not been
registered for sale under the securities laws of any state or jurisdiction as of
the date of this prospectus. Brokers or dealers effecting transactions in the
shares should confirm the registration of those shares under the securities laws
of the state in which those transactions occur, or the existence of any
exemption from registration.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense
Investing in our securities involves numerous risks. See "Risk Factors"
beginning on page .
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page Page
---- ----
<S> <C> <C> <C>
PROSPECTUS SUMMARY MANAGEMENT
RISK FACTORS PRINCIPAL STOCKHOLDERS
USE OF PROCEEDS RELATED PARTY TRANSACTIONS
DIVIDEND POLICY DESCRIPTION OF SHARE CAPITAL
CAPITALIZATION TAXATION
DILUTION SHARES ELIGIBLE FOR FUTURE SALE
SELECTED FINANCIAL DATA SELLING STOCKHOLDERS
MANAGEMENT'S DISCUSSION AND PLAN OF DISTRIBUTION
ANALYSIS OF FINANCIAL CONDITION LEGAL MATTERS
AND RESULTS OF OPERATIONS EXPERTS
BUSINESS ADDITIONAL INFORMATION
INDEX TO FINANCIAL STATEMENTS
</TABLE>
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY BE USED ONLY WHERE IT IS LEGAL
TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE
ON THE DATE OF THIS DOCUMENT.
IN CONNECTION WITH AN UNDERWRITTEN OFFERING, THE SEC RULES PERMIT THE
UNDERWRITERS TO ENGAGE IN TRANSACTIONS THAT STABILIZE THE PRICE OF OUR
SECURITIES. THESE TRANSACTIONS MAY INCLUDE, AMONG OTHER THINGS, PURCHASES FOR
THE PURPOSE OF FIXING OR MAINTAINING THE PRICE OF OUR SECURITIES AT A LEVEL THAT
IS HIGHER THAN THE MARKET WOULD DICTATE IN THE ABSENCE OF SUCH TRANSACTIONS. IF
THE SECURITIES COVERED BY THIS REGISTRATION STATEMENT ARE OFFERED BY
UNDERWRITERS, WE DO NOT KNOW WHETHER THE UNDERWRITERS WILL ENGAGE IN ANY
TRANSACTIONS OF THAT SORT. IF THE UNDERWRITERS ENGAGE IN ANY TRANSACTIONS OF
THAT TYPE, THEY MAY DISCONTINUE THEM.
<PAGE>
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding us and the securities being offered for sale by means of
this prospectus and our financial statements and notes thereto appearing
elsewhere in this prospectus. The summary highlights information contained
elsewhere in this prospectus. It is not complete and may not contain all of the
information that you should consider before investing in our company.
Assess/2000, Renovate/2000, Confirm/2000, and Complete/2000 are our trademarks.
This prospectus may also contain tradenames or trademarks of other companies.
<PAGE>
THE COMPANY
GENERAL BACKGROUND
We develop, market and sell sophisticated software and associated services to
large computer-using organizations for the automated conversion of existing
business software applications to new computing environments. This conversion
process is usually referred to as migration from one software platform to
another. We also develop, market and sell similar software and services to
large organizations for the automated assessment and renovation of non-year
2000-compliant business software applications.
Our products are designed to automate, after various individual parameters and
options are established, up to 100% of the actual migration from one database or
source language to another and the year 2000 assessment and renovation of
existing applications. Our automated processing contrasts with slower and more
error-prone traditional migration and year 2000 assessment/renovation
technologies which rely upon programmers replacing existing code manually on a
line-by-line basis. It has been our experience that 95% or more of the business
application programs commonly found in large computerized organizations can be
migrated or made year 2000-compliant with 100% automation. The remaining 5% can
usually be processed with 80% or more automation. Migrated applications are
functionally equivalent to their unconverted counterparts, and, in our
experience, maintainability and performance in the new environment are typically
unaffected or enhanced. Each of our products includes a significant number of
customization options which can be selected by the user to achieve specific
conversion or renovation objectives.
In response to our customers' requirements, we have established our factory
processing concept. Each factory is distinguished not by bricks and mortar but
as a working environment in which we use our software products to execute
migration and year 2000-compliance projects for our customers. We continue to
provide these automated application migration and year 2000 factory services to
our customers, using factories we have established for this purpose on our
premises as well as off-site factories that we can install at customer locations
to meet the specific demands of certain customers.
MARKET AND PRODUCTS
At its largest, our management estimates that the potential worldwide market for
our products includes approximately 30,000 large organizations, including the
so-called Fortune 2,000 companies and comparable government, financial services,
healthcare, education, and other service organizations. Most of these
organizations automated their business and data processing functions before the
advent of current technologies. These organizations characteristically have a
large inventory of crucial information systems based on rapidly obsolescing
technology.
We have licensed and delivered our products and ancillary services to customers
throughout North America, and in Taiwan, France, Belgium, Germany, and South
Africa. Companies such as Aetna Life Insurance, AT&T, Bank of America NT & SA,
Bank of Montreal, Bear Stearns & Company, International Business Machines
Corporation, Home Savings of America, Kimberly-Clark Corporation, New Brunswick
Telephone, Price Waterhouse LLP, Royal Bank of Canada, and Union Gas Corporation
have used our products and services. Recent and current customers include
Charles Schwab & Company, Inc., Brown Brothers Harriman & Co., Sapiens USA,
Inc., Ciber, Inc., Electronic Data Systems Corporation, and BDM International
(now part of TRW Inc.).
We have developed and market nine migration products to convert source language
or databases to other language or databases. We share ownership of three of
those products.
We have also developed and market three year 2000 renovation products for
thirteen languages (plus 2 languages for which we no longer market products):
Assess/2000, Renovate/2000, and Confirm/2000, which are integrated into our
Complete/2000 software solution.
OUR STRATEGY
We intend to continue to develop and market proprietary and innovative
technology for the automated migration and year 2000
assessment/renovation/confirmation of existing applications. Our management
believes that the market will increasingly perceive that highly automated
solutions to their migration and year 2000 needs cost less and are more reliable
than less automated solutions
CORPORATE BACKGROUND
Our predecessor company, Jonescast, Inc., was organized in 1982 under the laws
of the state of California. We are a corporation organized in 1985 under the
laws of the State of California. Our principal executive offices are at 90 New
Montgomery Street, San Francisco, California 94105; telephone number (415)
543-1515; facsimile number (415) 543-6701.
USE OF PROCEEDS
We will not receive any of the proceeds of this offering.
RISK FACTORS
An investment in the securities involves a high degree of risk. Prospective
investors should carefully review the section entitled "Risk Factors" as well
as other information provided in this prospectus.
THE OFFERING
We are registering for resale by selling shareholders (1) 418,333 shares of our
common stock, and (2) 30,000 shares of common stock which may be acquired upon
the exercise of an outstanding warrant. We have been advised that the selling
stockholders may from time to time sell all or part of the shares of common
stock in one or more transactions on the Nasdaq OTCBB or whatever may be the
principal market for our shares at the time. The shares may also be offered in
negotiated transactions, at fixed prices which may be changed, at market prices
prevailing at the time of sale, or at negotiated prices. The selling
stockholders may effect those transactions by selling the shares in negotiated
transactions, on the applicable securities market or through broker-dealers.
The broker-dealers may receive compensation in the form of discounts,
concessions or commissions from the selling stockholders and/or the purchasers
of the shares for whom such broker-dealers may act as agents or to whom they
sell as principal, or both, which compensation as to a particular broker-dealer
might be in excess of customary commissions. Alternatively, the selling
stockholders may from time to time offer the shares through underwriters,
dealers or agents, who may receive compensation in the form of underwriting
discounts, concessions or commissions from the selling stockholders and/or the
purchasers of securities for whom they act as agents. The selling stockholders
have agreed to certain restrictions on their sale of the shares. See "Selling
Stockholders" and "Plan of Distribution."
Shares offered by Selling Stockholders 448,333 shares of common stock
Common stock outstanding before the
offering 12,221,945 shares
Common stock outstanding after the
offering 12,221,945 shares
Use of Proceeds We will not receive any proceeds from
the sale of the shares being registered
in this offering by the Selling
Stockholders. See "use of Proceeds."
Nasdaq OTCBB Trading Symbol "FRXX"
<PAGE>
The shares of common stock which may be offered by this prospectus have
been or may be acquired by the selling stockholders pursuant to an exemption
from the registration requirements of the Securities Act of 1933 provided by
Section 4(2) of the Securities Act. The 418,333 shares of common stock were
acquired by the selling stockholders in a private placement that closed in
January 1999. They are being registered pursuant to the terms of a registration
rights agreement entered into at that time between us and certain of the selling
stockholders. The 30,000 shares underlying the warrant are being registered
pursuant to the terms of a warrant dated as of January 19, 1999 by and between
us and the warrant holder. See "Selling Stockholders" and "Plan of
Distribution."
______________________
<PAGE>
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that have been made
pursuant to the provisions of the Private Securities Reform Act of 1995. These
forward-looking statements are not historical facts, but rather are based on our
current expectations, estimates and projections about our industry, our beliefs
and assumptions. Words like "may," "could," "would," "will," "anticipates,"
expects," "intends," "plans," "projects," "believes," "seeks," "estimates" 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 are described in "Risk Factors" and elsewhere in this
prospectus. We caution you not to place undue reliance on these forward-looking
statements, which reflect our management's view only as of the date of this
prospectus. We are not obligated to update these statements or publicly release
the result of any revisions to them to reflect events or circumstances after the
date of this prospectus or to reflect the occurrence of unanticipated events.
______________________
<PAGE>
SUMMARY FINANCIAL DATA
----------------------
The data below has been prepared in accordance with generally accepted
accounting principles, and is derived from the financial statements and the
notes thereto appearing elsewhere in this prospectus, except for the balance
sheet data as of September 30, 1996 and December 31, 1997, which do not appear
in this prospectus. The adjusted unaudited balance sheet data as at December 31,
1998 gives effect to the sale by us in a January, 1999 private placement, of
418,333 of the shares of common stock offered hereby at a price of $0.75 per
share, net of offering expenses of approximately $23,000 in the private
placement.
<TABLE>
<CAPTION>
Year Ended September 30, Three Months Ended December 31,
---------------------------------------- --------------------------
1998 1997 1996 1998 1997
------------ ------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Statements of Operations Data:
Total net revenues $ 7,168,752 $ 5,775,038 $ 2,399,672 $ 759,915 $ 1,384,238
Gross margin 2,749,405 2,408,430 968,183 117,309 230,973
Loss from operations (2,022,742) (975,856) (329,605) (635,123) (833,023)
Net loss (2,328,652) (1,045,511) (461,046) (769,111) (859,160)
Net loss per share - basic and diluted
$ (0.20) $ (0.09) $ (0.04) $ (0.07) $ (0.07)
Shares used in computing per share data
11,761,920 11,681,035 11,370,804 11,766,112 11,758,112
</TABLE>
<TABLE>
<CAPTION>
September 30, December 31, 1998
--------------------------------------- -------------------------------------
1998 1997 1996 Actual As Adjusted Pro Forma
------------ ----------- ------------ ------------ -----------------------
(Unaudited (Unaudited)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents $ 98,249 $ 275,243 $ 99,427 $ 42,244 $ 332,994
Working capital (deficit) (1,735,813) 442,765 (1,077,531) (2,933,636) (2,642,886)
Total assets 1,995,719 3,301,051 726,896 1,405,329 1,696,079
Deferred revenue, long-term 1,545,417 2,110,417 - 1,404,166 1,404,166
Long-term debt and capital
lease obligations (net of
current portion) 673,059 - 223,923 271,541 271,541
Shareholders' deficit (3,276,564) (995,912) (1,120,649) (4,007,425) (3,716,675)
</TABLE>
<PAGE>
RISK FACTORS
You should carefully consider the risks described below before making a
decision to invest in us. If any of the following risks actually occur, our
business, financial condition or results of operations could be materially
adversely affected. If that happens, the trading price of our stock could
decline, and you may lose all or part of your investment. This prospectus
contains forward-looking statements that involve risks and uncertainties. Our
actual results could differ materially from those anticipated in the
forward-looking statements as a result of many factors, including the risks
faced by us described below and elsewhere in this prospectus.
<PAGE>
WE HAVE INCURRED NET LOSSES SINCE COMMENCING BUSINESS AND MAY NOT ACHIEVE
PROFITABILITY
We have not historically been profitable. As of December 31, 1998, we had
suffered cumulative operating losses aggregating $8,761,190. There is no
assurance that we will be able to achieve profitability on a consistent basis
or at all.
WE HAVE LIMITED WORKING CAPITAL AND MAY NEED TO RAISE ADDITIONAL CAPITAL IN THE
FUTURE IN ORDER TO CONTINUE AS A GOING CONCERN
At December 31, 1998, we had a net shareholder's deficit of $4,007,425, and a
net working capital deficiency of $2,933,636. Our working capital has fallen
below levels that were customary for our business previously. These conditions
raise substantial doubts about our ability to continue as a going concern. There
is no assurance that we will meet our working capital and other cash
requirements with cash derived from operations, short-term receivables and other
financing as required. We also must continue to improve the efficiency of our
operations to achieve and maintain positive cash flow from operations. If
adequate funds are not available when required or on acceptable terms, we may be
required to delay, scale back or eliminate our product development activities
and sales and marketing efforts. If this were to become necessary, it could
adversely affect our business, results of operations and prospects. See
"-Liquidity and Capital Resources," and Note 1 of Notes to Financial
Statements.
THE PRICE OF OUR COMMON STOCK HAS BEEN HIGHLY VOLATILE AND MAY CONTINUE TO BE
VOLATILE IN THE FUTURE
Our stock price has been volatile since our initial public offering on the
Vancouver Stock Exchange in 1994. We believe that factors such as awareness of
the year 2000 problem, quarterly fluctuations in the results of our operations,
announcements of new products by us or our competitors, changes in revenue or
earnings estimates by securities analysts, changes in accounting principles or
their application and other factors may cause the market price of our stock to
continue to fluctuate, perhaps substantially. We may experience sharp decreases
in the price of our securities no matter how well or poorly we perform.
Fluctuations in our stock may, in turn, adversely affect our ability to attract
and retain qualified personnel, and to gain access to capital and financing if
needed.
OUR FUTURE REVENUES ARE UNPREDICTABLE AND OUR FINANCIAL RESULTS MAY FLUCTUATE
We have experienced quarterly and other fluctuations in revenues and operating
results and expect these fluctuations to continue in the future. We believe that
these fluctuations have been attributable, in significant part, to the timing,
size and nature of our contracts with our customers; the performance of our
distributors; the timing of the introduction of new products or services by our
competitors; the decision of potential customers to perform such projects using
internal resources; changes in our operating expenses; personnel changes; and
fluctuations in economic and financial market conditions.
WE BEAR THE RISK OF CONTRACTUAL COST OVERRUNS AND INFLATION
Most of our migration contracts are for a fixed fee. Our projects for year 2000
services are generally based on a fixed price per line of code assessed and/or
renovated. Although the contracts contain provisions allowing us to charge
additional fees to our customers in the event that unanticipated or "out of
scope" work must be done, we nevertheless bear the risk of cost overruns and
inflation.
OUR OPERATING RESULTS COULD VARY UNEXPECTEDLY IF WE INACCURATELY ESTIMATE
CONTRACT COMPLETION COSTS
A significant percentage of our revenue that is derived from migration contracts
and projects for year 2000 services is recognized on the
percentage-of-completion method, which requires revenue to be recorded over the
term of the contract. A loss is recorded at the time when current estimates of
project costs exceed unrecognized revenue. Our operating results may be
adversely affected by inaccurate estimates of contract completion costs.
WE MAY BE UNABLE TO ADJUST OUR EXPENSE LEVELS IN TIMELY FASHION TO COMPENSATE
FOR UNEXPECTED REVENUE SHORTFALLS
Our expense levels are based, in part, on our expectations as to future revenue
and are fixed, to a large extent, in the short term. Accordingly, any
significant shortfall in revenue relative to our expectations would have an
immediate and material adverse effect on our business.
FUTURE PRODUCTS OR THE OCCURRENCE OF EVENTS OR CIRCUMSTANCES WHICH REDUCE THE
ADVANTAGES OF MIGRATION USING HIGHLY AUTOMATED SOFTWARE PROCESSES COULD REDUCE
THE COMPETITIVENESS OF OUR PRODUCTS
We are not currently aware of any direct competitors that license, use or sell
fully automated, near-complete migration software, although we are aware of some
vendors who offer or use migration software which is less automated than our
own. However, other software developers and vendors may create such software
directed at our market. If this should happen, or if the costs and risks
associated with an enterprise rewriting its business applications for the new
technologies are otherwise significantly reduced, it is possible that
significantly fewer enterprises will choose the migration alternative using our
products.
MANY ACTUAL AND POTENTIAL COMPETITORS FOR MIGRATION PROJECTS HAVE STRONGER BRAND
NAMES AND GREATER RESOURCES THAN US
We have competitors in the form of service organizations, such as accounting
and computer consulting companies, which provide a combination of automated and
manual conversion. Many of those organizations have substantially greater human
and financial resources, and greater brand recognition, than we do. These
companies may have significant competitive advantages through other lines of
business and existing business relationships.
THE YEAR 2000 ASSESSMENT AND RENOVATION MARKET IS HIGHLY COMPETITIVE
In the year 2000 renovation market, we are aware of various software vendors
whose products currently address COBOL, one of the languages addressed by our
products. It is possible that these other software vendors, many of whom have
substantially more human and financial resources and better brand name
recognition than we have, may develop other products to compete with the
non-COBOL products that we offer. Further, we and our industry competitors must
compete with the internal information systems departments of potential customers
for year 2000 renovation projects with those potential customers.
WE DEPEND ON A SMALL NUMBER OF CUSTOMERS AND A RELATIVELY SMALL NUMBER OF
PROJECTS FOR OUR REVENUES
Our results of operations are attributable to a limited number of orders, the
average size of which exceeds $500,000. During the year ended September 30,
1998, Brown Brothers Harriman & Company (40%), Charles Schwab & Co., Inc. (12%),
and our Distributors, treated as one customer (10%) represented sixty-two
percent (62%) of our total revenues. The President and Chief Executive Officer
of Gardner Solution 2000, L.L.C., is also the Chief Executive Officer of Y2K
Solutions, L.P., CY2K Solutions, L.L.C. and PY2K Solutions, L.L.C., all of whom
are our distributors for year 2000 renovation offerings using our Complete/2000
software and services.
During the fiscal year ended September 30, 1997, our distributors, treated as
one customer (17%), NCR Corporation (15%), Aetna Life Insurance Company (11%)
and Brown Brothers Harriman & Company (10%) represented fifty-three percent
(53%) of our total revenues. During 1996, Bear Stearns & Company, Inc. (20%),
Humana Incorporated (14%), New Brunswick Telephone (13%) and Aetna Life
Insurance Company (10%) represented fifty-seven percent(57%) of our total
revenues. During the three months ended December 31, 1998, Brown Brothers
Harriman & Company (30%), our distributors, treated as one customer (19%),
Bombardier Capital Group (19%), and Sapiens USA, Inc. (15%) represented
eighty-three percent (83%) of our total revenues. During the three months ended
December 31, 1997, Brown Brothers Harriman & Company (50%) and our Distributors,
treated as one customer (15%), represented sixty-five percent (65%) of our total
revenues. The loss or deferral of one or more significant sale(s) or failure to
collect on a significant accounts receivable from any customer could cause
substantial fluctuations in our results of operations.
THE MARKET DEMAND FOR OUR PRODUCTS MAY BE MORE LIMITED THAN WE ESTIMATE
The market for our migration products may be smaller than we project, whether
because companies in the marketplace elect for budgetary or other reasons not to
pursue automated migration or any other form of software conversion, or because
they do so at a rate that is much lower than we expect.In addition, although
the overall market for year 2000 renovation is estimated to be very large, the
number of competing software products being offered and developed, the number of
service suppliers actively soliciting year 2000 projects and the limited time
available in which to address the year 2000 problem may reduce the number of
year 2000 renovation projects that we are able to obtain below levels that we
currently anticipate.
OUR MARKETING STRATEGY MAY BE UNSUCCESSFUL
We market our migration products and services directly. Successful
implementation of the marketing plan requires, among other things, that our
sales and marketing personnel clearly communicate to potential customers our
ability to complete migration projects successfully. There is no assurance
that our sales and marketing personnel will have the necessary understanding of
the technology and the marketplace and communication skills to implement this
marketing strategy successfully, or that the marketing strategy will otherwise
be successful. For the year 2000 renovation market, we have sold several
licenses to our Assess/2000 product, entered into several distributorship
arrangements and several assessment and renovation projects. There is no
assurance that this strategy will be successful, particularly given the
relatively limited time period during which we anticipate there will be
additional year 2000 compliance projects.
WE CURRENTLY DEPEND ON YEAR 2000 REVENUES WHICH MAY DECLINE DRAMATICALLY AS
DEMAND IN THE YEAR 2000 MARKET DECLINES AFTER 1999
The growth in our revenues in fiscal 1998 resulted in large part from increased
demand for Assess/2000 and Complete/2000 services and licenses as awareness of
the year 2000 problem has grown. Year 2000 services and related revenue
increased from 8% in fiscal 1996 to 42% of our total revenues in fiscal 1997 and
62% of total revenues for the year ended September 30, 1998. Year 2000 services
and related revenues were 51% and 91% of our total revenues for the three months
ended December 31, 1997 and 1998, respectively. We anticipate that demand in
the year 2000 market will decline, perhaps rapidly, following the year 1999. If
the demand for our year 2000 solutions and products declines significantly as a
result of new technologies, competition or any other factors, our professional
services fees and license revenues would be materially and adversely affected.
We believe that current customer focus on year 2000 compliance issues is
adversely affecting our core migration services business and may continue to do
so through 1999.
We experienced a decline in revenue from our core migration services to
$2,695,000 in 1998 from $3,326,000 in 1997. Further, migration services revenues
were $67,176 and $684,902 in the three months ended December 31, 1998 and 1997,
respectively. We believe that new migration services projects are being delayed
by potential customers as they focus their efforts on renovating their systems
for year 2000 compliance. During fiscal 1999, we believe that focus by our
customers on year 2000 projects may continue to impact our ability to
significantly increase revenues from our core migration services.
WE MAY HAVE SIGNIFICANT EXPOSURE TO PRODUCT AND SERVICE LIABILITY CLAIMS
We market our products and services to customers for managing the renovation of
mission-critical computer software systems. A large and currently increasing
portion of our business is devoted to addressing the year 2000 problem, which
affects the performance and reliability of many mission-critical systems. Our
agreements with our customers typically contain provisions designed to limit our
exposure to potential product and service liability claims. It is possible,
however, that the limitation of liability provisions contained in our 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.
We have not experienced any material product or service liability claims to
date, but the sale and support of our 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 our products and services in mission-critical
applications. We do not presently maintain insurance coverage for our products
and services and a successful product or service liability claim brought against
us could have a material adverse effect on our business, operating results and
financial condition.
WE MAY BE UNABLE TO FULFILL MARKET REQUIREMENTS FOR THE DEVELOPMENT OF COMPLEX
COMPUTER SOFTWARE
The development of the complex, large-scale, multiple environment computer
software required in our business presents a difficult engineering challenge.
It is possible that we may not be able to continue to develop products
responsive to market requirements on a timely or cost-effective basis, or at
all. If that should happen, there is a risk that other competing products might
be launched earlier and capture a significant part of the market we target.
Because of the time constraints posed by the year 2000 market, there is a
particularly substantial risk in that market that we will be able to develop
products in a timely manner in order to obtain sufficient projects using those
products.
WE MAY REQUIRE ADDITIONAL MANAGEMENT TO SUCCESSFULLY GROW OUR BUSINESS
The present management has been responsible for the growth of the business to
date, but does not have significant experience in managing the growth of
maturing businesses. The competition for personnel with the required skills is
intense, and there can be no assurance that we will be able to locate, attract
and retain such management personnel. Failure to do so could have an adverse
impact on our business.
WE ARE CONTROLLED BY OUR DIRECTORS AND OFFICERS
Our current directors and officers beneficially own approximately 35% of our
outstanding common shares. As a result, our current directors and officers will
continue to exercise control over the affairs of the Company.
WE DEPEND ON CERTAIN KEY PERSONNEL
Our progress to date has to a significant extent been dependent on the skills of
certain key personnel, including Kim O. Jones and Bernadette C. Castello, the
founders and principal shareholders and, respectively, the President and Chief
Executive Officer and the Senior Vice President and Chief Financial Officer. We
have not entered into employment contracts with these or any other members of
management or other employees. In addition, competition for highly skilled
technical, management, financial, marketing and sales, and other personnel in
the computer industry is intense. Loss of the services of any of our present
key personnel, or an inability to attract and retain needed additional personnel
could have a materially adverse effect on us. In addition, we sometimes rely on
qualified, experienced subcontractors to support both our migration services and
year 2000 renovation work. The inability to find and retain sufficient
qualified subcontractors may adversely impact our operations.
WE MAY BE UNABLE TO PROTECT THE INTELLECTUAL PROPERTY WHICH IS CRUCIAL TO OUR
BUSINESS
The protection of our intellectual property rights in our software and operating
methodology is crucial to our business. There can be no assurance that we will
be able to adequately protect our products and technologies by law and contract
against infringement by others. In addition, monitoring and identifying
unauthorized use of our technology may prove to be difficult for us. The cost,
distraction, and time required to do so, including litigation against possible
infringers, may be so substantial as to frustrate our ability to guard
adequately against such infringement.
OTHER COMPANIES MAY CLAIM WE ARE INFRINGING UPON THEIR PROPRIETARY TECHNOLOGY
Given the nature of our business, we cannot give assurance that third parties
will not bring infringement claims against us or claim that our use of certain
technologies violates a patent. We are not aware of any claims. However, any
claim of infringement, with or without merit, could be time consuming to defend,
result in costly litigation, divert management attention, require us to enter
into costly royalty or licensing arrangements or prevent us from using important
technologies or methods. If any of those conditions should occur, our business
and financial condition could be materially and adversely affected.
GENERAL ECONOMIC AND MARKET CONDITIONS MAY AFFECT OUR BUSINESS
Our products are designed for large organizations which typically make
significant investments in their MIS departments. Expenditures by such
organizations on their MIS departments tend to vary in cycles that reflect
overall economic conditions. Our business is, therefore, vulnerable to
variations in economic conditions generally, or to those variations which affect
the economic prospects of corporations and organizations in our target market,
and which could affect the capital spending or budget cycles of prospective
customers. The time period during which companies may address and correct their
year 2000 issues is limited. Consequently, such companies may feel an urgency to
contract for assessment and renovation services with other companies before we
are able to address a sufficient portion of the market through our direct
marketing, distributors, and licensed service providers. This could adversely
affect our ability to obtain year 2000 renovation projects.
YEAR 2000 RISK MAY ADVERSELY AFFECT US
We own and use computer software that may be impacted by the year 2000 problem.
During 1998, we began a review of the software we currently use in order to
identify any systems that need to be made year 2000-compliant. We anticipate
that this review will include a survey of vendors of software or services to
ensure that their software will also be year 2000-compliant. We are also
assessing the extent to which the year 2000 issue will affect the systems of
companies on which we rely for other services. Our management has not yet
completed its assessment of our potential year 2000 compliance costs and related
potential on our operations, however, we do not believe that the expense or
effect of such compliance will be material to us and we expect that our internal
systems will be year 2000 compliant before the end of 1999. We cannot currently
estimate the costs or potential risks arising from our suppliers' handling of
their own year 2000 issues. Because our business depends on the operation of
complex electronic equipment in a controlled environment, we would be unable to
operate during interruptions of power for our computer and related equipment.
Our operations would be adversely affected by interruptions of heating, cooling
and lighting services, or of telecommunication links for more than brief periods
of any day. We do not currently have any business interruption service and our
property insurance may not cover that type of loss.
<PAGE>
USE OF PROCEEDS
We will not receive any of the proceeds of this offering. However, an
aggregate of up to 30,000 shares of common stock (subject to adjustment) covered
by this prospectus are issuable upon the exercise of a warrant. If the warrant
is exercised in full by payment of its stated exercise price in cash, we will
receive gross proceeds of approximately $22,500 from the exercise of the
warrant, which we will use for working capital and general corporate purposes.
Expenses we are expected to incur in connection with this registration are
estimated at approximately $_______. The selling stockholders will pay all of
their underwriting commissions and discounts and counsel fees and expenses in
connection with the sale of the shares covered by this prospectus.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our securities. We
currently intend to retain future earnings, if any, to finance the development
and expansion of our business and, therefore, we do not anticipate paying any
cash dividends on our securities in the foreseeable future.
CAPITALIZATION
The following table shows our short-term debt and capitalization as of
December 31, 1998, as follows: (1) our actual short term debt and
capitalization, and (2) on a pro forma basis after giving effect to the sale of
418,333 shares of common stock in a private placement in January 1999 at a price
of $0.75 per share, after deducting expenses of $23,000 associated with the
private placement. This table should be read in conjunction with our financial
statements and the notes to those financial statements included elsewhere in
this prospectus.
<TABLE>
<CAPTION>
December 31, 1998
Actual Pro Forma
------------------- ------------
<S> <C> <C>
Short term payable to factor $ 678,691 $ 678,691
=================== ============
Notes payable to officers, net $ 595,264 $ 595,264
------------------- ------------
Common stock no par value; 20,000,000 shares authorized,
11,773,612 shares issued and outstanding, actual; 20,000,000
shares authorized, and 12,191,945 shares issued and outstanding,
pro forma.
4,753,765 5,044,515
Accumulated deficit (8,761,190) (8,761,190)
------------------- ------------
Total shareholders' deficit (4,007,425) (3,716,675)
------------------- ------------
Total capitalization $ (3,412,161) $(3,121,411)
=================== ============
</TABLE>
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data set forth below with respect to the fiscal
years ended September 30, 1998, 1997 and 1996 and the balance sheet data at
September 30, 1998 and 1997 are derived from the audited financial statements
included elsewhere in this prospectus. The financial data for the years ended
September 30, 1995 and 1994 and the balance sheet data at September 30, 1996,
1995 and 1994 are derived from audited financial statements not included in this
prospectus. The financial data for the three month periods ended December 31,
1998 and 1997, and the balance sheet data at December 31, 1998, are derived from
unaudited financial statements included elsewhere in this prospectus. The
balance sheet data at December 31, 1997 is derived from unaudited financial
statements not included in this prospectus. The unaudited financial statements
have been prepared on the same basis as the audited financial statements and, in
the opinion of management, include all adjustments (consisting only of normal
recurring adjustments) necessary to present fairly the information set forth
therein. The operating results for the three months ended December 31, 1998 are
not necessarily indicative of the results that may be expected for the year
ending September 30, 1999 or any other future period. The information set forth
below should be read in conjunction with the audited financial statements and
notes included elsewhere in this prospectus and Management's Discussion and
Analysis of Financial Condition and Results of Operations following this table.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED SEPTEMBER 30, DECEMBER 31,
1998 1997 1996 1995 1994 1998
<S> <C> <C> <C> <C> <C> <C>
(Unaudited)
STATEMENTS OF OPERATIONS DATA:
Net revenues:
Services and maintenance $ 6,623,752 $ 4,930,456 $ 2,199,672 $ 1,445,009 $ 1,785,035 $ 623,665
Software licenses and
distributorship fees - related
parties 545,000 844,582 200,000 10,071 - 136,250
Total net revenues 7,168,752 5,775,038 2,399,672 1,455,080 1,785,035 759,915
Cost of services and maintenance
including fees to related parties of
$346,000, $213,000, $0, $0, $0,
$31,000, and $49,000,
respectively 4,419,347 3,366,608 1,431,489 738,986 983,298 642,606
Gross margin 2,749,405 2,408,430 968,183 716,094 801,737 117,309
Operating expenses:
Sales and marketing including
fees to related parties of
$1,037,000, $640,000, $0, $0,
$0, $107,000, and $148,000,
respectively 1,838,126 1,490,479 711,545 685,360 682,454 224,860
Research and development 1,520,709 1,006,768 253,743 358,133 628,023 218,038
General and administrative 1,413,312 887,039 332,500 446,031 704,302 309,534
Total operating expenses 4,772,147 3,384,286 1,297,788 1,489,524 2,014,779 752,432
Loss from operations (2,022,742) (975,856) (329,605) (773,430) (1,213,042) (635,123)
Interest and other (expense), net (305,110) (68,855) (129,141) (37,720) (51,825) (133,988)
Loss before provision for income
taxes (2,327,852) (1,044,711) (458,746) (811,150) (1,264,867) (769,111)
Provision for income taxes (800) (800) (2,300) (31,616) (800) -
Net loss $(2,328,652) $(1,045,511) $ (461,046) $ (842,766) $(1,265,667) $ (769,111)
Net loss per share - basic and
diluted $ (0.20) $ (0.09) $ (0.04) $ (0.08) $ (0.15) $ (0.07)
Dividends - - - - - -
Shares used in computing per share
data 11,761,920 11,681,035 11,370,804 10,344,934 8,366,350 11,766,112
============ ============ ============ ============ ============ ============
BALANCE SHEET DATA:
Cash and cash equivalents $ 98,249 $ 275,243 $ 99,427 $ 14,474 $ 332,683 $ 42,244
Working capital (deficit) (1,735,813) 442,765 (1,077,531) (890,040) (437,183) (2,933,636)
Total assets 1,995,719 3,301,051 726,896 410,801 1,010,628 1,405,329
Deferred revenue, long-term 1,545,417 2,110,417 - - - 1,404,166
Long-term debt and capital lease
obligations (net of current
portion) 673,059 - 223,923 262,593 280,393 271,541
Shareholders' deficit (3,276,564) (995,912) (1,120,649) (999,092) (551,434) (4,007,425)
THREE MONTHS ENDED
DECEMBER 31,
1997
<S> <C>
(Unaudited)
STATEMENTS OF OPERATIONS DATA:
Net revenues:
Services and maintenance $ 1,247,988
Software licenses and
distributorship fees - related
parties 136,250
Total net revenues 1,384,238
Cost of services and maintenance
including fees to related parties of
$346,000, $213,000, $0, $0, $0,
$31,000, and $49,000,
respectively 1,153,265
Gross margin 230,973
Operating expenses:
Sales and marketing including
fees to related parties of
$1,037,000, $640,000, $0, $0,
$0, $107,000, and $148,000,
respectively 337,780
Research and development 457,394
General and administrative 268,822
Total operating expenses 1,063,996
Loss from operations (833,023)
Interest and other (expense), net (26,137)
Loss before provision for income
taxes (859,160)
Provision for income taxes -
Net loss $ (859,160)
Net loss per share - basic and
diluted $ (0.07)
Dividends -
Shares used in computing per share
data 11,758,112
============
BALANCE SHEET DATA:
Cash and cash equivalents $ 155,862
Working capital (deficit) (209,416)
Total assets 3,333,526
Deferred revenue, long-term 1,969,167
Long-term debt and capital lease
obligations (net of current
portion) 312,687
Shareholders' deficit (1,807,072)
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations includes forward-looking statements with respect to
our future financial performance. These forward-looking statements are subject
to various risks and uncertainties, including the factors described under "Risk
Factors" and elsewhere in this prospectus, that could cause our actual results
to differ materially from historical results or those currently anticipated.
OVERVIEW
The following summary of our material activities for the years ended
September 30, 1998, 1997 and 1996, and the three month periods ended December
31, 1998 and 1997, are qualified by, and should be read in conjunction with more
detailed information along with the financial statements and accompanying notes
to the financial statements included at the end of this prospectus. Each
recipient of this prospectus is urged to read this prospectus in its entirety.
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain information included in the
registration statement of which this prospectus is a part contain statements
that are forward-looking, such as statements relating to plans for future
activities. Forward-looking information involves important risks and
uncertainties that could significantly affect results in the future and,
accordingly, 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, working capital
needs, customer concentration, outstanding indebtedness, 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 market for our products and
services and on the securities markets.
BACKGROUND AND OVERVIEW
From the commencement of operations of our predecessor companies in June
1982, the goal of our business has been to focus a small group of skilled
tchnicians 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.
RESULTS OF OPERATIONS
YEAR 2000 COMPLIANCE
Forecross owns or uses computer software that may be impacted by the year
2000 problem, and also relies 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 are conducting 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 begun to
verify whether those products and services are year 2000-compliant. Our
verification process includes 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. It is our intent to complete this
verification process by mid 1999.
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, and we have issued
a purchase order for an upgrade to such software from our vendor, to be
performed in June 1999 at a cost of approximately $8,500.
A preliminary review of our PC-based servers and 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, our 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 are developing 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. It is anticipated that this review will be
completed by April 30, 1999. Preliminary review of such vendors' websites
indicates that our vendors 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 if available. 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.
YEAR ENDED SEPTEMBER 30, 1998 COMPARED TO YEAR ENDED SEPTEMBER 30, 1997
Revenues for the year ended September 30, 1998 were $7,168,752 as compared
to $5,775,038 in 1997, an increase of 24%. This increase in revenues for the
period reflected several factors: first, revenue of $4,364,000 from year 2000
assessment and renovation contracts and the amortization of Assess/2000
software licenses in 1998 as compared to $1,788,000 in 1997; second, the
decrease in revenue from the amortization of exclusive distributorship
agreements of $110,000 in 1998 compared to $660,000 in 1997; and, third, the
decrease in migration services revenue to $2,695,000 in 1998 as compared to
$3,326,000 in 1997. Backlog was $531,000 at September 30, 1998 as compared to
$4,281,000 (including approximately $615,000 to be performed after fiscal 1998)
in 1997.
Our management believes that the reduction in backlog is attributable to
numerous factors. First, during fiscal 1998 we substantially completed one
major migration/renovation project. This project was significantly larger in
terms of dollar value than most of our migration/renovation contracts, and
therefore made our backlog substantially larger than our historical norms.
Second, year 2000 contracts are typically of much shorter duration than
application migration projects. 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. This is significant because
year 2000 compliance projects generated a substantially greater proportion of
our revenues in fiscal 1998 than in prior periods. Third, there were two
developments in the marketplace which we believe negatively affected our
backlog: (1) the temporary diversion of resources and attention away from
valuable but optional application migrations, into the mandatory resolution of
the 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. While both of
these developments appear to be temporary, they have had the effect of slowing
the rate at which we have been able to obtain contracts for such work,
especially during the second half of our 1998 fiscal year.
Gross margin was $2,749,405 and $2,408,430 in 1998 and 1997, respectively.
The gross margin percentage was 38% in 1998 and 42% in 1997. While the revenues
from the year 2000 products and services increased significantly in 1998
compared to 1997 as discussed above, they have not reached the level anticipated
by us and our industry in general. We added substantial resources to address the
year 2000 market, and the lower than anticipated level of revenue adversely
impacted gross margins in 1998. In addition, we did not realize 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, we modified our procedures for pricing,
performing, and controlling migration services projects in order to improve the
gross margin on those projects.
Sales and marketing expenses were $1,838,126 in 1998 as compared to
$1,490,479 in 1997. Distributor fees were $1,037,008 in 1998 as compared to
$639,715 in 1997. Increases in commission and trade show expenses in 1998 as
compared to 1997 were offset by reductions in bonuses and consultant expenses in
1998.
Research and development expenses increased to $1,520,709 in 1998 from
$1,006,768 in 1997, or 51% 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.
General and administrative expenses were $1,413,312 and $887,039 in 1998
and 1997, respectively, reflecting: additional personnel; increased use of
legal, audit, and other professional services in connection with our Form 10
registration statement in 1998; and, increased rent and insurance in 1998 to
support the increased level of business activity.
Net interest expense was $305,110 for the year ended September 30, 1998 as
compared to $68,855 in 1997, reflecting the increased use in 1998 of short-term
receivables financing and loans from our senior officers to meet our working
capital needs.
The overall net loss for the year ended September 30, 1998 was $2,328,652
or $0.20 per share compared with a loss of $1,045,511 or $0.09 per share for the
year ended September 30, 1997 (based on the weighted average number of shares
outstanding during the respective periods).
The provision for income tax expense is the tax payable for the period plus
the change during the period in deferred tax assets and liabilities. Due to the
uncertainty of realization, a valuation allowance has been provided to eliminate
the net deferred tax assets at September 30, 1998 and 1997 (see Notes 2 and 7 of
Notes to Financial Statements).
YEAR ENDED SEPTEMBER 30, 1997 COMPARED TO YEAR ENDED SEPTEMBER 30, 1996
Revenues for the year ended September 30, 1997 were $5,775,000 as compared
to $2,400,000 in 1996, an increase of 141%. This increase in revenues for the
year reflected several factors: first, the significant increase in migration
services revenue ($3,326,000 in 1997 compared to $2,200,000 in 1996); second,
revenue from year 2000 assessment and renovation contracts and the revenue
recognized from Assess/2000 software licenses of $1,788,000 in 1997 as compared
to $200,000 in 1996; and third, revenue recognized from exclusive
distributorship agreements of $660,000 in 1997 compared to no comparable revenue
in 1996. Backlog was $4,281,000 at September 30, 1997, including approximately
$615,000 to be performed after fiscal 1998, as compared to $1,709,000 in 1996.
Gross margin was $2,408,430 and $968,183 in 1997 and 1996, respectively.
The gross margin percentage was 42% in 1997 and 40% in 1996. The gross margins
reflect the impact of both initial inefficiencies of additional personnel and
subcontractors hired during 1996 and 1997, and new methods of performing work on
both the migration services and year 2000 assessment and renovation projects,
which methods we introduced during 1996. While the methods adopted for use at
our main San Francisco facility were performing substantially as planned during
1997, we did not realize the efficiencies and cost savings anticipated for the
off-site work performed primarily by subcontractors on the migration services
projects.
Sales and marketing expenses were $1,490,479 in 1997 as compared to
$711,545 in 1996. The increase in 1997 was due primarily to distributor fees
earned on year 2000 projects in 1997, commissions on the increased migration
project sales, and participation in trade shows and other costs associated with
the initial and marketing of the Complete/2000 and Assess/2000 products and
services.
Research and development expenses increased to $1,006,768 in 1997 from
$253,743 in 1996, or 297% due to an increase in the number of personnel to
support the development activity associated with the Complete/2000 products,
enhancements to existing software products and the decreased use of some of the
research and development personnel on migration services contracts in 1997.
General and administrative expenses were $887,039 and $332,500 in 1997 and
1996, respectively, reflecting additional personnel, increased use of legal,
audit, and other professional services, and increased insurance, telephone,
business and payroll taxes in 1997 to support the increased level of business
activity.
Net interest expense was $68,855 in 1997 as compared to $129,141 in 1996,
reflecting the decreased use in 1997 of short-term receivables financing to meet
our working capital needs, as well as the repayment of our interest bearing debt
in March 1997.
The overall net loss for the year ended September 30, 1997 was $1,045,511
or $0.09 per share compared with a loss of $461,046 or $0.04 per share for the
year ended September 30, 1996 (based on the weighted average number of shares
outstanding during the respective periods).
THREE MONTHS ENDED DECEMBER 31, 1998 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
1997
Revenues for the three months ended December 31, 1998 were $760,000 as
compared to $1,384,000 in the same quarter of 1997, a decrease of 45%. This
decrease in revenues for the period reflected primarily the decrease in
migration services revenue to $67,000 in the 1998 quarter as compared to
$685,000 in the same quarter of 1997. One factor in the decrease was one major
migration/renovation project that was substantially completed during fiscal 1998
and which had accounted for more than half of the migration services revenues
during the three months ended December 31, 1997. Backlog was $424,000 at
December 31, 1998 as compared to $3,395,000 (including approximately $615,000 to
be performed after fiscal 1998) at December 31, 1997.
The reduction in backlog is attributable to numerous factors. First, the
substantial completion of the major migration/renovation project referred to
above during fiscal 1998. This project was significantly larger in terms of
dollar value than most Forecross contracts, and therefore made the backlog at
December 31, 1997 substantially larger than historical norms. Second, year 2000
contracts are typically of much shorter duration than application migration
contracts. 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, there were two developments in the marketplace which we
believe 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 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 we have been able to obtain
contracts for such work, especially during the second half of our 1998 fiscal
year, which adversely impacted our revenues in the first quarter of fiscal 1999.
Gross margin was $117,309 and $230,973 in the three months ended December
31, 1998 and 1997, respectively. The gross margin percentage was 15% and 17% in
the three months ended December 31, 1998 and 1997, respectively. The gross
margins reflect the impact of both initial inefficiencies of additional
personnel and subcontractors hired during 1997, and new methods of performing
work on both the migration services and year 2000 assessment and renovation
projects, which we introduced during 1996. While the methods we adopted for our
San Francisco facility were performing substantially as planned during 1997, we
did not realize the efficiencies and cost savings anticipated for the off-site
work performed primarily by subcontractors on the migration services projects.
Revenues from the year 2000 products and services, although they increased
approximately 10% in the three months ended December 31, 1998 as compared to the
same period of 1997, have not reached the level anticipated by us and industry
in general. We 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 adversely impacted
gross margins in calendar 1998. During the three months ended December 31, 1998,
we took steps to reduce costs. These included payroll reductions of
approximately 20% through a reduction in pay for certain members of the
management, not replacing certain staff members on their departures and laying
off certain staff members who were hired in anticipation of substantially more
year 2000 business than we have experienced to date.
Sales and marketing expenses were $224,860 in the three months ended
December 31, 1998 as compared to $337,780 in the same period of 1997.
Distributor fees were $106,791 in the three months ended December 31, 1998 as
compared to $148,241 in the same period of 1997. One distributor earned fees at
a rate of 50% of related revenues throughout calendar 1997, and at a 25% rate in
1998 after the contractual limit had been reached in the 1998 fiscal year for
the 50% rate. Trade show expenses were reduced by $48,000 in the three months
ended December 31, 1998, as compared to the same period in 1997, as we focused
our year 2000 efforts on making sales through our distributors and teaming
partners, as well as focused mailing campaigns. Commission expense decreased by
$23,000 in the three months ended December 31, 1998 due to the reduction in
migration services revenue.
Research and development expenses decreased to $218,038 in the three months
ended December 31, 1998 from $457,394 in the same period of 1997, or 52% due to
the completion during the 1998 fiscal year of a significant portion of the
development activity associated with the Complete/2000 product and enhancements
to existing software products. This enabled us to eliminate the use of
subcontractors in the three months ended December 31, 1998, saving $80,000 as
compared to the three months ended December 31, 1997. In addition, we were able
to reduce the number of personnel devoted to development and enhancement
activities.
General and administrative expenses were $309,534 and $268,822 in the three
months ended December 31, 1998 and 1997, respectively, primarily due to the
increased facilities costs associated with resources added to support the
anticipated year 2000 business.
Net interest and other expense was $133,988 for the three months ended
December 31, 1998 as compared to $26,137 in the same period of 1997, reflecting
the increased use in the three months ended December 31, 1998 of short-term
receivables financing and loans from senior officers to meet our working capital
needs. Included in other expense for the three months ended December 31, 1998
was $38,250 representing the value assigned to the common stock issued to
warrant holders, and the extension of the expiration term of the warrants in
exchange for the surrender of certain registration rights held by existing
warrant holders, and certain other consideration, as discussed in Note 8 to the
financial statements.
The overall net loss for the three months ended December 31, 1998 was
$769,111 or $0.07 per share compared with a loss of $859,160 or $0.07 per share
for the three months ended December 31, 1997 (based on the weighted average
number of shares outstanding during the respective periods).
LIQUIDITY AND CAPITAL RESOURCES
Through December 31, 1998, we had sustained recurring losses from
operations and, at December 31, 1998, had a net capital deficiency and a net
working capital deficiency. These conditions raise substantial doubts about the
our ability to continue as a going concern. See Note 1 of Notes to Financial
Statements.
For the three months ended December 31, 1998, operations were funded
through cash derived from short-term receivables financing 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 December 31, 1998, $678,691 was
outstanding under the agreement. At September 30, 1998, $467,734 was outstanding
under the agreement. The agreement may be terminated by either the factor or us
at any time.
During the three months ended December 31, 1998, our working capital was
reduced to levels that were lower than customary. This was primarily due to the
slowdown in our application migration business and the lack of a substantial
amount of year 2000 customer contracts. We have therefore taken steps to reduce
costs. These include payroll reductions of approximately 20% through a reduction
in pay for certain members of the management, not replacing certain staff
members on 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 expect additional revenue in February and March,
1999 from a number of year 2000 contracts currently under negotiation. 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.
With the significant reduction in the backlog at September 30, 1998 as
discussed above, we must obtain a significant amount of new projects to achieve
revenue levels in fiscal 1999 comparable to fiscal 1998. As discussed above in
"Three months ended December 31, 1998 compared to three months ended December
31, 1997", Year 2000 renovation projects are typically shorter in duration than
comparable migration projects, and thus could generate revenues more quickly
than migration projects. With the deadline for year 2000 renovation rapidly
approaching, we believe that we will be able to secure such new renovation
projects. In the meantime, our management is continuing to closely monitor our
prospective year 2000 project volume to evaluate whether our 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, together with the funds from the private placement
referred to above, will be sufficient to meet our needs through the balance of
fiscal 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
approximately $50,000 to $100,000.
RECENT ACCOUNTING PRONOUNCEMENTS
During 1997, the Financial Accounting Standards Board released SFAS No.
130, Reporting Comprehensive Income, and SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information, both of which are effective
for a fiscal year beginning after December 15, 1997. We adopted these
pronouncements for the fiscal year ended September 30, 1999 and these
pronouncements did not have a material effect on our financial condition or
results of operations (see Note 2 of Notes to Financial Statements) upon
adoption.
In 1997, the American Institute of Certified Public Accountants released
Statement of Position 97-2, effective for fiscal years beginning after December
15, 1997, which provides revised guidance for recognizing revenue on certain
software transactions. We adopted this SOP for the fiscal year ending September
30, 1999. We believe that our policies for recognizing revenue on software
transactions are in compliance with the requirements of SOP 97-2, and that the
new guidance will not have a material effect on our financial condition or
results of operations (see Note 2 of Notes to Financial Statements).
In October 1998, the FASB issued SFAS No. 132, Employers' Disclosures about
Pensions and Other Postretirement Benefits. SFAS No. 132, which is effective for
fiscal years beginning after December 31, 1997, revises employers' disclosures
about pensions and other postretirement benefits. It does not change the
measurement of recognition of those plans, and, accordingly, will have no effect
on results of operations and financial position when it is adopted by us.
<PAGE>
BUSINESS
OVERVIEW
We develop, market and sell sophisticated software and associated services
to large organizations for the automated migration of existing business software
applications to new computing environments. We also develop, market and sell
similar software and services to large organizations for the automated
assessment and renovation of non-year 2000-compliant business software
application.
INDUSTRY BACKGROUND AND TRENDS
In recent years, dramatic and fundamental changes have taken place in the
computer industry. These developments have had a significant impact on the way
in which business applications are developed, have extended the useful life of
existing applications and have presented unique challenges to Management
Information Systems ("MIS") departments.
SIGNIFICANT INDUSTRY DEVELOPMENTS
First, there has been a dramatic reduction in the cost of computer
processing power. This has led to the "downsizing" from larger "mainframe" and
"super-mini" computers to smaller computers capable of processing the same
amount of work at significantly lower cost.
Second, standard computing environments, referred to as "open systems"
architecture, have increasingly dominated the market. Previously, large scale
MIS organizations were forced to implement business applications using database
software and languages proprietary to particular vendors. Open systems
architecture has, to a significant extent, freed the MIS manager from this
constraint by permitting the components of an overall hardware and software
solution to be acquired from a number of different, and frequently competing,
vendors. Examples of these new standards include the UNIX operating system, the
database language called SQL and programming languages such as COBOL, C++ and
JAVA.
Third, the network which each business establishes to connect the personal
computers on the desks of each user, sometimes referred to as clients, to the
business' open systems hardware, often referred to as servers, for business
applications has expanded over the past four years to include connections to,
and often web sites on, the Internet. The World-Wide Web enables a business to
connect all of its employees to each other and to the company's vendors and
customers easily and inexpensively. This unprecedented level of connectivity is
driving a rapid evolution in the way businesses inter-relate.
Fourth, over the past few years the computer industry has been shaken by a
latent problem imbedded in many existing applications, known as the "year 2000
problem." Historically, computer disk space was extremely expensive and storage
capacity was very small. To lessen the cost impact and increase the available
capacity, dates in many applications were stored in an abbreviated form. For
example, 1997 was stored as '97' and programs assumed the century was '19' even
though it was not stored as part of the date. When presented with the
abbreviated date '00', many applications assume the complete date is 1900, when
it should be 2000, resulting in incorrect ordering, comparisons and
calculations.
Fifth, even though there has been a decrease in the cost of some computer
hardware, there has also been a reduction in many MIS budgets with no
corresponding reduction in the costs of software or technical personnel.
Finally, the broad-based application assessment that has been necessitated
by the year 2000 problem has brought unparalleled awareness to MIS management of
the attributes, costs and risks inherent in their business application
portfolios. What has been discovered is a hodge-podge of environmental and
development software that has resulted in: immense, yet unnecessary, complexity;
duplicated and high costs of ownership; and serious risks of future maintenance
failures caused by a lack of personnel knowledgeable in the older installed
software.
BUSINESS IMPACT
Existing systems represent a huge financial investment and are often
functionally rich and mission-critical to the business. Due to this, many
applications which would have been rewritten after three-to-five years are now
remaining in service for ten years or more. However, due to their underlying
technologies, they may not be meeting all of the needs of the organization. For
example, they (1) may not be fully integrated with newer business applications,
(2) may have data which is not easily accessible to users, (3) may operate on
technology platforms which are no longer cost-effective, or (4) may not have
been designed to correctly handle the year 2000 problem. Furthermore, personnel
who understand and can maintain applications developed using older technologies
are becoming more difficult to find and retain, and are, therefore, more
expensive.
The challenge for businesses is to find a cost-effective way to upgrade
these sizable existing systems to be year 2000-compliant and to take advantage
of the new technologies which are often more flexible and feature-rich and have
a more readily available pool of personnel familiar with their installation, use
and maintenance, while preserving all of the valuable functionality of the
existing systems.
AVAILABLE SOLUTIONS
Our management believes that there are three options available to an MIS
manager wishing to take advantage of these developments and upgrade a system to
be year 2000-compliant.
One option is to acquire commercially available application software
packages specifically designed to operate on the new technology platforms and to
be year 2000-compliant. However, a suitable package may not always be available
and, even when it is, the new software package will commonly require adaptation
to the distinctive business policies and practices of the user organization. In
addition to the initial cost of the package, these adaptations are frequently
expensive and may take too long to implement as well as require specialized
technical resources.
Another option is to manually rewrite the computer source code of the
existing possibly non-year 2000-compliant application to make it usable in the
new computing environment. This course is time consuming to implement, can be
error-prone, requires significant and specialized personnel resources not
routinely available, and may, therefore, be expensive and risky.
Both of these choices also involve the risk that business-specific rules
and functionality currently imbedded in the existing application will not be
accurately or completely incorporated into the adapted software package or the
rewritten application.
The products of Forecross represent a third solution. We have developed a
proprietary and innovative technology for the automated migration and
assessment/renovation/confirmation of existing applications. This allows
businesses to replace existing technologies, whether by re-hosting the system to
a new technology platform or making it year 2000-compliant, while leaving the
application functionally intact We believe that this option will ordinarily be
the least expensive and least risky alternative.
MARKET
At its largest, our management estimates that the potential worldwide
market for our products includes approximately 30,000 large computer-using
organizations, including the so-called Fortune 2,000 companies and comparable
government, financial services, healthcare, education and other service
organizations. Most of these organizations automated their business and data
processing functions before the advent of current technologies. These
organizations characters a large inventory of crucial information systems based
on rapidly obsolescing technology.
We believe that the portion of the North American enterprise computing
market comprised of users of Computer Associates Integrated Database Management
System, or CA-IDMS, amounts to approximately 450 users, based on information
supplied in July 1998 by Computer Intelligence Corporation, an industry research
organization. CA-IDMS includes a database management system, CA-IDMS/DB, user
interface language, CA-IDMS/DC and fourth-generation language, CA-ADSO, which,
together with certain other related products, were originally developed and
marketed by Cullinane Corporation, later by Cullinet Corporation, and now by
Computer Associates International. Based on reports in the industry press, our
management believes that there is a growing shift of enterprise computing users
away from CA-IDMS and that over the next ten years a substantial number of the
450 users will have decided to move to newer, more cost-effective and flexible
computing environments. We currently estimate that there are approximately 400
CA-IDMS users outside North America
In addition to the CA-IDMS portion of the enterprise computing market,
there are also additional portions related to other proprietary technology
platforms. They include areas related to computer languages such as
CA-Easytrieve from Computer Associates, CSP from IBM Corporation, CA-UFO from
Computer Associates and ADF from IBM Corporation, and databases such as IMS from
IBM and Adabas from SoftwareAG. Our management currently estimates that there
are between 15,000 and 20,000 users for all of those products. These additional
areas create opportunities for us to develop other products and give us added
flexibility in responding to changes and developments in the marketplace.
One other market to which we have responded is the large market of
computer-using organizations affected by the year 2000 problem. A uniquely large
market has been created by the fact that virtually all 30,000 enterprise
computing organizations have one or more applications that are not year
2000-compliant and need to become so in the near future.
UNDERLYING PROPRIETARY TECHNOLOGY
Our powerful and flexible technology known as the XCODE architecture, has
been refined over the last thirteen years and forms the foundation for all our
products, tools, and associated services.
Our proprietary XCODE architecture supports all of the functions ordinarily
required to automate the conversion, assessment and renovation of existing
systems. This includes parsing the source code, storing the code in a common
repository, identifying areas of the code that require technology or year 2000
upgrades, transforming the old technology and/or non-year-2000-compliant
elements of the source code and generating revised source code for the operation
of the application in the new year 2000-compliant environment.
We began developing our technology in 1982. The prototype for the XCODE
architecture was built in 1985 to permit a customer to convert a major
application from a proprietary language to COBOL. The first generation of XCODE
was developed and enhanced between 1985 and 1986, in connection with language
conversion projects undertaken for Price Waterhouse, LLP. This resulted in the
first version of the Convert/ADSO to COBOL product. In response to a requirement
of Chemical Bank of New York, a second generation of XCODE was developed in
1987, resulting in the development of the first version of the Convert/IDMS-DB
to SQL product.
In 1990, we developed the first version of Convert/IDMS-DC to CICS in
connection with a migration project undertaken for American President Lines. In
the same year, under a contract with IBM, the third generation of XCODE was
produced. In 1992-93, in connection with a project for Cincom Systems, Inc. of
Ohio, Forecross developed the Fastforward/VSAM to SUPRA database conversion
software. At that time, all the components of XCODE were redeveloped to operate
in a PC environment.
The XCODE architecture is modular in design. Modular architecture refers to
the design of a system into separate components that can be connected and
combined together in many different configurations. The strength of modular
architecture is that any one component can be replaced, added or moved without
altering the rest of the system. Our modular XCODE architecture is, therefore,
readily adaptable to the development of new migration and new year 2000
products. This lowers the cost, shortens the time and reduces the risk of new
product development.
COMMERCIALLY AVAILABLE PRODUCTS
We have, to date, developed nine migration products. Migration products are
named by reference to the source language or database and the target language or
database:
- - Convert/IDMS-DC to CICS (user interface language conversion)
- - Convert/ADSO to COBOL (language conversion)
- - Convert/IDMS-DB to SQL (database conversion)
- - Convert/VSAM to SQL (database conversion)
- - Convert/CSP to COBOL (language conversion)
- - Redirect II COBOL/VS to COBOL II (language conversion)
- - IMSADF II to Cross System Product Migration Facility (language conversion)
- - Convert/IMSADF II to APS/COBOL (language conversion)
- - Fastforward/VSAM to SUPRA (database conversion)
We are the sole owner of six of these products. Ownership of the following
products is shared: IMSADF II to Cross System Product Facility, which was
developed by us, but is owned jointly with IBM; Convert/IMSADF II to APS/COBOL,
which we developed, but is owned jointly with Bank of America; and
Fastforward/VSAM to SUPRA which we developed pursuant to a Development and
License Agreement dated April 22, 1991, with Cincom Systems, Inc. and is jointly
owned by us and Cincom. We and IBM have joint marketing rights to the first
product, we and Bank of America have joint marketing rights to the second
product, and Cincom has exclusive marketing rights to the third product. None of
these jointly owned products is presently material to our business or our
near-term business plans.
We have, to date, developed three year 2000 renovation products for
thirteen languages (plus 2 products that we no longer market, for the REXX and
CLIST languages): Assess/2000, Renovate/2000 and Confirm/2000, which are
integrated into the Complete/2000 software solution. Languages currently
supported by these products include COBOL, C, C++, PL/I, CA-Easytrieve,
PowerBuilder, CSP, IMSADF II, CA-ADS, CA-UFO, APS, CA-Ideal and CA-Telon.
Assess/2000 is used to automatically analyze computer program source code and
identify all instances where year 2000 issues must be addressed. Renovate/2000
is used to automatically modify all code found to be non-year-2000-compliant.
Confirm/2000 is used to automatically analyze code which has been determined to
be year 2000 compliant, thereby providing an audit or independent validation
function, to ensure that no year 2000 issues have been missed or not properly
renovated. We are the sole owner of all of these products.
PRODUCT DEVELOPMENT
Our strategy in developing new migration software and services for existing
applications is to respond to the particular needs of a specific customer after
research has determined that there is an identifiable potential for further
licensing of the product, and delivery of associated services to other
organizations. Before we undertake the development of a new product, we
generally require that the customer agree to share the development cost. One
example of this strategy is the Convert/CSP to COBOL product which was developed
for Kimberly-Clark Corporation in 1994, under an agreement whereby
Kimberly-Clark contributed $300,000 of the total $350,000 in development costs.
Another example is the Convert/IMSADF II to APS/COBOL product which was
developed for and financed by Bank of America in 1994 and 1995 at a cost of
$480,000.
One factor which greatly enhances our ability to employ this strategy is
our proprietary XCODE architecture. The XCODE architecture enables we to develop
a new migration product in an average of approximately six months of elapsed
time, with three persons employed full-time on the project. This is a
considerably shorter and less costly development cycle than traditional industry
experience for products of comparable scope and complexity. It also allows we to
fund most or all of the development cost from the license revenue generated by
the initial development-funding customer.
Extension of the Complete/2000 products to support new languages has also
been greatly facilitated by the XCODE architecture. As requirements have
dictated, and may dictate in the future, new languages have been added to
Complete/2000 in an average of eight-weeks with two developers.
Research and development expenses were $1,520,709, $1,006,768, $253,743,
$218,038 and $457,394 in the years ended September 30, 1998, 1997 and 1996, and
the three months ended December 31, 1998 and 1997, respectively.
PRODUCT LICENSING
MIGRATION PRODUCT LICENSING
We grant our customers a non-exclusive, non-assignable license to use our
software, including programs, options, documentation, data and information.
While certain provisions in the license agreement - for example, as to the
number of locations at which the licensed software may be used, and the extent
of the customer's right to receive upgrades and enhancements without charge,
vary according to the circumstances, certain general terms are common to all
such agreements. Each contains a warranty by us against defects in design,
operation and usability in the customer's computer environment, and each
contains a covenant by the licensee not to attempt to decipher, develop source
code, copy, modify, duplicate, create or recreate all or any part of it except
to the extent required by its normal operating procedures. The licensee also
agrees to take reasonable steps to prevent access by anyone whose access is not
reasonably necessary and to ensure that authorized persons with access refrain
from duplicating, reproducing or disclosing information with respect to the
licensed software.
The license is granted for the conversion of a specified number of
application programs, and may be terminated on fifteen days notice for
non-payment of amounts payable under it, on twenty-four hours notice by either
party if the other becomes insolvent or (except in certain circumstances) if
bankruptcy or other similar proceedings are commenced against it, or it makes an
assignment for the benefit of creditors. The agreement is also terminable on
fifteen days notice in the event of a material breach being committed, unless
the breach is cured before the expiration date of the notice period.
COMPLETE/2000 LICENSING
We offer product licensing for our Assess/2000 products. These licenses are
identical to the migration licenses described above with two exceptions. First,
they are granted for the assessment of an unlimited number of application
programs and related components. Second, they may be purchased in single-user or
multiple-user configurations, priced accordingly.
We offer "factory" services for customers of our Complete/2000 renovation
and confirmation software. Licenses are not currently offered for factory
services.
MARKETING AND SALES STRATEGY
EXISTING APPLICATION MIGRATIONS
The developments in computer technology described above have converged to
produce the need and create the opportunity to convert existing applications.
After experimentation with different marketing techniques, we decided in 1992 to
develop and implement our own direct marketing and sales strategy. Our strategy
includes having multiple product offerings to include a broad range of service
and license alternatives that better adapt to meet the needs of the marketplace
and serve to differentiate us from our competitors. Conventional techniques such
as trade publication notices, direct mail, telemarketing, and, most recently,
our own site (www.forecross.com) on the Internet are being used to bring our
products and their benefits to the attention of prospective customers.
Additionally, we have focused on building a reference base of satisfied
customers.
Recognizing that aversion to risk is one of the major characteristics of
the decision making process for many MIS organizations, we have created a phased
marketing approach to simplify the process for potential customers to evaluate
and invest in our products. This strategy allows a potential customer to pursue
its interest in automated migration in a series of measured steps, with each
step in the process providing demonstrable value.
Our principal marketing programs involve the Migration Alternatives
Planning Seminar, or MAPS, and either Factory Compile or License-Only sales.
MAPS is an introduction, for a fee, to the conversion process through an
intensive two-day customer-site program for those considering a migration
project. Designed to address conversion issues, it includes formal technical
briefings, expert consulting, an evaluation of the risks, costs and benefits of
various alternatives and a feasibility analysis of the automated migration of a
selection of the customer's application software. MAPS is promoted by
telemarketing and is conducted by two senior members of our staff. Evaluations
of prior MAPS sessions suggest that many of our MAPS customers will decide to
select Factory Compile or License-Only within twelve months of the MAPS session.
We offer our customers the option of hiring Forecross to use our
proprietary software on behalf of the customer to perform the entire conversion
process, thus relieving the customer of the requirements for allocating the
personnel and time necessary to learn to perform the migration. We call this
type of engagement a Factory Compile. By "factory", we mean an array of multiple
server-class computers operated by a small number of computer operators, running
two to three shifts per day, up to seven days per week, depending on work
volume. "Factory services" implies the methodology by which customer code flows
to us, through the factory, to the rules engineers for issue resolution, to
quality assurance for final review, and back to the customer. The customer's
role is limited to testing the converted application in its new environment. The
average Factory Compile project requires one senior and two junior technical
staff members for approximately four months.
License-Only is an offering in which the customer licenses our products
and, with training and additional optional consulting provided by us, performs
the entire conversion process with its own personnel. As in the Factory Compile
option, the customer also tests the converted application in the new
environment. No customer has chosen the License-Only offering in the past few
years, preferring to use our automated factory facilities.
Although there are no separately chargeable software license fees, Factory
Compile projects require the customer to sign a standard Forecross Product
License Agreement. For both Factory Compile and License-Only offerings, a
customer's use of our products is limited to the conversion of a specified
maximum number of application programs, at which time the license expires.
YEAR 2000 RENOVATION
Because of the potentially massive scope of the year 2000 problem and the
relatively short period of time left in which to solve the problem, we have
taken a slightly different approach to marketing our year 2000 products.
We adopted a two-pronged strategy designed to rapidly reach the broadest
possible market without having to hire, train and manage a large sales,
marketing and customer support staff. For the assessment function, we offer our
Assess/2000 product through non-exclusive license arrangements with consulting
firms and other solution providers who do not market similar software from other
vendors. For the renovation and confirmation functions, we seek and enter into
contractual arrangements with distributors who, for a fee, obtain exclusive
marketing rights for Complete/2000 within a geographic territory. Exclusivity is
generally for an initial term of one year and is automatically extended annually
for a total of four subsequent years provided that the distributor has caused at
least a specified number of year 2000 contracts of at least a specified value to
be closed during the year. In exchange for marketing, project management
services and staffing for substantially all on-site work, the distributor
generally receives a fee equal to twenty-five percent (25%) of collected
revenues. In the case of one contract, under which a substantial portion of the
current year 2000 projects are conducted, the distributor's fee was fifty
percent (50%) of collected revenues until $1,500,000 has been received by the
distributor and twenty-five percent (25%) of revenue collected thereafter.
During fiscal 1998, the $1,500,000 amount was earned, with all subsequent fees
to be earned by the distributor at the lower 25% rate. At the present time, we
have four distributors: Gardner Solution 2000, L.L.C. in New York and New
Jersey; Y2K Solutions, L.P. in Texas; CY2K Solutions, L.L.C. in California; and
PY2K Solutions, L.L.C. in North Carolina, South Carolina, Georgia and Florida.
The President and Chief Executive Officer of Gardner Solution 2000, L.L.C., is
also the Chief Executive Officer of Y2K Solutions, L.P., CY2K Solutions, L.L.C.
and PY2K Solutions, L.L.C. Additional distributorships are contemplated for the
United States and eventually various international locations. While we may
market our year 2000 products and services directly in territories not
represented by distributors, our strategy is to leverage our ability to
penetrate the large nationwide market by using a network of licensees and
distributors.
A year 2000 compliance customer using factory renovation services sends its
application code to our factory where the code is either renovated for year 2000
compliance, then shipped back to the customer for testing and production
implementation, or analyzed to confirm that all year 2000 renovations previously
made, have been made correctly and completely. The factory uses a combination of
procedures, processes and software that allow for up to 100% automation of all
phases of code renovation and confirmation, except for the initial review by
rules engineers and the final review by quality assurance personnel.
In addition, we have formed alliances through teaming agreements with
consulting firms and service providers. As of March 26, 1999, we had signed
teaming agreements with BDM International, Inc., Electronic Data Systems
Corporation (EDS), NCR Corporation, Sapiens USA, Inc., Ciber, Inc., Alydaar
Software Corporation and SCB Computer Technology, Inc., as well as some smaller
firms.
SALES AND LICENSING REVENUES
From 1994 though 1996, our revenues were generated primarily by migration
projects, with some revenues contributed by MAPS presentations. During that
period, we performed work on between ten and twenty projects per year, of which
four projects typically represented in excess of fifty per cent of total
revenues. In the fiscal years ended September 30, 1998 and 1997, and the three
month periods ended December 31, 1998 and 1997, year 2000 assessment projects,
sales of licenses to the Assess/2000 software, and fees associated with
distributorships for Complete/2000 products and services accounted for 62%,
42%, 91% and 51%, respectively, of total revenue.
COMPETITION
The marketplace for application migrations and year 2000 solutions is
served by both software and services vendors. We are not aware of any vendor,
whether of software or services, who offers the degree of automated conversion
achievable through use of our products.
SOFTWARE VENDORS
We believe that the principal focus of other software vendors has been on
the development and licensing of software which speeds the rewriting alternative
for migration. Examples of software delivering this type of migration solution
assistance include ViaSoft Inc.'s tools for application re-engineering, and
Carleton Corporation's software to support data migration. In both of these
cases, as in all others of which we are aware, the software products do not
provide the near-complete and comprehensive automated conversion of business
applications as those performed by Forecross products after various individual
options and parameters are established.
In the year 2000 market, we believe that the principal focus of software
vendors has been on the semi-automated or automated analysis of applications
written in the COBOL language. We believe that many vendors also assess other
languages, but most use a rudimentary text scanning approach similar to the
"Find and Replace" function commonly found in most word processing software
today. With respect to renovation, there are a number of software vendors whose
products address COBOL with a relatively high degree of automation, but we are
aware of very few vendors who address any of the other dozen major languages
used in most large MIS organizations without substantial manual effort
augmenting semi-automated tools. Our Complete/2000 product already addresses
fourteen of the non-COBOL languages, although we have decided not to market our
products for two of these, and we believe that we can add additional languages
within eight to twelve weeks per language. Examples of software vendors
delivering automated or semi-automated assessment tools include ViaSoft, Inc.,
Micro Focus Group, P.L.C., and Platinum Technologies, Inc. Vendors with
automated or semi-automated renovation products include Computer Associates
International, Inc., Peritus Software, Alydaar Software and Eleventh Hour
Systems.
SERVICE SUPPLIERS
In both the migration and year 2000 renovation markets, service
organizations such as accounting firms and companies like BDM International,
EDS, IBM, Computer Horizons Corporation, Case Consult, GmbH and Computer Task
Group offer conversion services. Automated conversion facilities provided by
these service organizations typically embrace between 25% and 80% of the source
code, with the balance of the conversion being performed manually. Our
management believes that any manual conversion is subject to inconsistency,
high risk of error, high cost and delays. Since they are service providers,
these companies tend to focus on turnkey projects costing several millions of
dollars which can, therefore, support the high manpower costs involved.
Since our software automates significantly more of the conversion (95% to
100%) than can be achieved with other products, our management believes that we
are able to compete effectively with such service suppliers. We typically price
our Factory Compile offering below the prices quoted by the service suppliers
who perform conversions. Our management believes that the Factory Compile
offering can be marketed successfully, because it can be presented to the
marketplace as the solution which uses a significantly greater degree of
automation than is offered by service suppliers, thereby reducing the costs,
time and risks of the project.
COMPETITIVE EXPERIENCE
Our experience in the competitive bidding process employed by many of our
prospective customers, leads us to believe that we have a price advantage over a
majority of the other bidders. Other bidders' costs are typically higher due to
their dependence on skilled people, as compared with our dependence on less
costly automation. However, we have not historically enjoyed the same degree of
market recognition as many of our large competitors, such as the national
consulting or accounting firms against whom we often compete.
Until the emergence of the year 2000 problem, some customers did not
embrace the idea that automation could help them solve their problem. Our
management believes that such uncertainty would sometimes cause a customer to
award a contract to the more recognizable bidder, in spite of the higher price.
This extra cost was often viewed as an "insurance policy" against any problems
in the future. We have observed a shift in this trend over the past years, and
many customers now will not entertain bids which do not contain the use of
automated software tools. In addition, a number of the year 2000 solution
vendors, particularly those offering software tools, are small, heretofore
unrecognized companies. Our management believes that potential customers of
these tools and services are now more accustomed to dealing with such vendors.
We believes that we have the capability to compete favorably because of these
trends, and because we have steadily built our reputation and name recognition
over the same period of time.
COMPETITIVE POSITION
It is possible that other software or services companies may attempt to
develop new proprietary conversion software or service offerings or to enhance
existing proprietary conversion software, or service offerings, to compete
directly in our chosen market. There are, in addition, certain other elements of
risk which bear on our competitive position. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Risk Factors."
Moreover, there are alternatives to migration as a means of adapting to
technological change, and there can be no assurance that enterprise computing
users will not prefer one of these alternatives.
It is difficult for us to assess how many potential customers have availed
themselves of the other alternatives, such as the purchase of a new software
package that is year 2000 compliant and operates on new technology platforms or
rewriting the computer source codes), since we do not actively track prospects
who fail to meet our initial sales qualification criteria. Among qualified
prospects who ultimately do not purchase from us, the rewriting option generally
prevails.
INTELLECTUAL PROPERTY
We have chosen to protect the intellectual property value of our products
and proprietary XCODE architecture through trade secret and confidentiality
provisions in our product licensing arrangements, confidentiality agreements
with our employees and through copyright protection for system externals such as
display formats and documentation. Additional protection is provided by the
complex nature of both the XCODE architecture, and the products themselves. This
approach is consistent with standard practice in the industry, and our
management believes that this provides us reasonable assurance against
misappropriation. Software theft, which can be a serious problem in the consumer
software market, is relatively rare in the large-scale software products market.
Large corporate buyers tend not to engage in product piracy with regard to
products of this type. Our products are also protected against unauthorized use
by imbedded and external access control codes. There can be no assurance,
however, that the protection on which we rely will be effective. Monitoring and
identifying unauthorized use of our technology may prove difficult, and the cost
of litigation may impair our ability to guard adequately against such
infringement. Our commercial success may also depend on our products not
infringing any intellectual property rights of others and on no such claims of
infringement being made against us. Even if such claims are found to be invalid,
the dispute process could have a materially adverse effect on our business,
results of operations and prospects.
CORPORATE HISTORY
We were formed on January 1, 1987 by a merger pursuant to the provisions of
the California Corporations Code of two predecessor corporations, Jonescast,
Inc., and its wholly owned subsidiary, Genasys Software Systems, Inc.
(subsequently renamed Genasys Technologies, Inc., and later changed to Forecross
Corporation), each incorporated under the laws of California in June, 1982. As
a result of the merger, we succeeded to the business that had been carried on by
the predecessor corporations since 1982.
EMPLOYEES
As of December 31, 1998, we had 48 employees. Of these, sixteen work
primarily in our factory or on customer Factory Compile projects, ten are
engaged primarily in research and development work, three are in project
management, two are in technical support, seven are in quality assurance, four
are in sales and marketing and six are in finance and administration. All
employees are required to enter into a Confidentiality and Proprietary Rights
Agreement which requires that they not disclose any confidential information,
restricts their right to engage in or have an interest in competing businesses,
and requires them to promptly disclose to us the product of all work done by
them while employed by and for us, and to assign to us all rights in such work
product.
PROPERTIES
Our principal executive offices are located at 90 New Montgomery Street,
San Francisco, California 94105, where we occupy approximately 6,200 square feet
of leased space under a lease which expires in February 2002. Annual base rent
under the lease is approximately $150,000. We occupy an additional 4,000 square
feet space in our current location under a lease which expires in December 2001.
Annual base rent for this space is approximately $143,000 per year. We also
maintain a small sales office in San Diego, California, and a small apartment in
San Francisco for use by our out-of-town staff while visiting the executive
offices.
On January 15, 1999, we entered into a sublease agreement, under which we
sublet approximately 2,500 square feet of unused office space to a tenant for a
period of seven months. This agreement was entered into with the approval of our
landlord.
LEGAL PROCEEDINGS
We are not involved in any pending or, to our knowledge, threatened legal
proceedings. We may from time to time become a party to various legal
proceedings arising in the ordinary course of business.
CHANGE IN ACCOUNTANTS
On July 2, 1997, we received the resignation of our independent auditor,
Coopers & Lybrand, L.L.P. Prior to receipt of the resignation, the decision
to change auditors was not discussed, recommended or approved by any committee
of the board of directors or by the board of directors. By resolution dated
September 10, 1997, our board of directors appointed BDO Seidman, LLP as the new
independent auditor of the Company, effective September 10, 1997.
There have been no reservations in the auditor's reports of Coopers &
Lybrand for the last two fiscal years reported on by Coopers & Lybrand ended
September 30, 1996 and 1995. The auditor's reports of Coopers & Lybrand as of
and for the years ended September 30, 1996 and 1995 were modified to reflect
their conclusion that an uncertainty existed at those dates about the Company's
ability to continue as a going concern.
There were no disagreements of any kind with Coopers & Lybrand during the
two fiscal years reported on by Coopers & Lybrand ended September 30, 1996 and
1995.
Subsequent to the release of our unaudited financial statements for the
quarter and six months ended March 31, 1997, Coopers & Lybrand advised us that
it disagreed with our accounting for two specific transactions entered into in
March 1997. Both transactions involved the licensing of software and the
granting of certain exclusive marketing rights to two of the Company's
distributors. It was the view of Coopers & Lybrand that we did not have
sufficient information to support the allocation and recognition of revenue
between the software licenses and the exclusive marketing rights because we had
never sold these two elements separately. We believed that our reporting was
appropriate and consistent with advice, but Coopers & Lybrand continued to
disagree.
Subsequent to the resignation of Coopers & Lybrand, we retained BDO Seidman
to advise us on a recommended method of accounting for the two transactions in
question as well as a subsequent similar transaction. BDO Seidman has
recommended a method of accounting whereby the total dollar amount of the
software license and distributor agreements will be amortized over periods
commencing with the dates of their respective signing and ending December 31,
1999. We accepted this recommendation and accordingly restated our interim
financial statements for the period ended March 31, 1997.
We have authorized Coopers & Lybrand to fully respond to any inquiries of
BDO Seidman concerning the disagreement.
We have never been advised by Coopers & Lybrand that: (1) we do not have
the internal controls necessary for the development of reliable financial
statements; or (2) any information came to the attention of Coopers & Lybrand
that led it to conclude that it could no longer rely on our management's
representations, or made it unwilling to be associated with financial statements
prepared by our management; or (3) there was any need to increase the scope of
its audits.
We have been advised by Coopers & Lybrand that except for the disagreement
regarding the two specific transactions described above, nothing had come to the
attention of Coopers & Lybrand that in its opinion materially impacts the
fairness of previously audited financial statements for the fiscal years ended
September 30, 1996 and 1995.
In connection with the filing of a Registration Statement on Form 10/A, the
Company in June 1998, modified its accounting policy and recognizes revenues
ratably over the contractual term (including renewals) of the software license
and distributor agreements. As a result, the Company restated the financial
information reported in the Registration Statement from amounts previously
reported.
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our directors, executive officers and key employees are as follows:
<TABLE>
<CAPTION>
Name Age Position
- --------------------------- --- -----------------------------------------------------------
<S> <C> <C>
Kim O. Jones 54 Chief Executive Officer, President and Director
Bernadette C. Castello 45 Senior Vice President, Chief Financial Officer and Director
Richard A. Carpenter 56 Director
Richard L. Currier, Jr. (1) 53 Director
Ronald Herbst 56 Director of Customer Care
Carl H. Johnson 53 Director of Project Management
Charles T. Nelson 52 Director of Software Products
Kenneth J. Paris 52 Senior Database Specialist
Peggy A. Payne 49 Director of Migration Services
</TABLE>
Each of our directors is elected at our annual shareholders meeting to
serve for a term of one yer or until a successor is chosen and is qualified. We
anticipate that our next annual meeting will be hold on ______________.
KIM O. JONES (54) founded Forecross Corporation together with Bernadette
Castello in 1982 and has been in his present position since that time. Mr. Jones
is the chief architect of our products. He has been active as a software
industry entrepreneur and industry participant since 1971. Prior to the
establishment of Forecross, Mr. Jones served from 1980 to 1982 as a Director and
Vice President of Computer Systems Design, Inc., of San Francisco, California,
in charge of software product development and marketing. In 1970 Mr. Jones
co-founded Genasys Systems, Inc., a software and services firm based in San
Francisco, California, for which he worked initially as Chief Technology Officer
and, later, as President until 1980. From 1967 to 1970, he was a Vice President
of Liberty National Bank of San Francisco, California, responsible for data
processing. Mr. Jones was a member of the Board of Directors of the American
Software Association, a division of the Information Technology Association of
America.
BERNADETTE C. CASTELLO (45) co-founded Forecross with Kim Jones in 1982 and
has been in her present position since that time. Ms. Castello manages our day
to day operations. From 1973 to 1977, Ms. Castello worked for KPMG Peat Marwick
in New York, designing and managing the installation and use of some of the
earliest automated applications in that firm. Thereafter, until 1980, she worked
as an analyst in Peat Marwick's computer resources department. From 1980 to
1982, when she left to found Forecross with Mr. Jones, Ms. Castello was a Senior
Consultant at Computer Systems Design, Inc. in San Francisco, developing
applications for the financial and manufacturing industries.
RICHARD A. CARPENTER (56) is the President of Carpenter Associates, a
consulting firm which provides strategic planning and product marketing
assistance to early stage software companies. Mr. Carpenter also serves as
Chairman of the Board of two companies which he co-founded: Corex Technologies;
and, Healthcourt Technologies. Prior to co-founding these companies, Mr.
Carpenter had co-founded Index Systems (now CSC/Index) in 1969, and Index
Technology (now part of Intersolv) in 1983 where he served as Chairman/CEO until
its merger with Sage Software in 1991 to form Intersolv Software. Mr. Carpenter
became a director in March 1998. Mr. Carpenter does not provide consulting
services to any of our direct or indirect competitors.
RICHARD L. CURRIER, JR. (53) is the Chairman of Strategic Marketing, an
independent software marketing consulting firm based in Park City, Utah, which
supplies strategic sales and marketing consulting services to the software
industry. Mr. Currier has over 20 years of senior management experience in the
software industry, including positions as Chairman of Panoramic Inc., of San
Jose, California, and President of Walker Interactive Systems of San Francisco.
Mr. Currier's technical background includes service as Director of Data
Communications Software Development for Project Apollo of the National
Aeronautics and Space Administration, and as a consultant to the Departments of
Defense and Agriculture and the Executive Offices of the President of the United
States. Originally engaged as a consultant to provide advice on sales and
marketing strategies, Mr. Currier became a director of Forecross on October 1,
1993. He does not provide consulting services to any of our direct or indirect
competitors.
RONALD HERBST (56) joined us in December 1995 as Director of Project
Management and currently serves as Director of Customer Care. From November 1993
through December 1995, Mr. Herbst was an independent software consultant
providing such services as conceptual and detailed system design and
implementation and system programming. From August 1993 through October 1993,
Mr. Herbst was Vice President, Research and Development for Dynamic Bytes, Inc.
From July 1989 through July 1993, Mr. Herbst served as Vice President, Windsor
Technologies, Inc. Mr. Herbst has over twenty years of senior management
experience serving the information technology industry.
CARL H. JOHNSON (53) joined us in March 1997 as Director of Project
Management. From 1993 to 1997, Mr. Johnson was Director, General Accounts for
Affiliated Computer Services, Inc. From 1988 to 1993, Mr. Johnson was Manager,
Corporate Applications for Amdahl Corporation. Mr. Johnson has over twenty years
of senior management experience serving the information technology industry.
CHARLES T. NELSON (52) joined us in December 1991 and has served in a
variety of technical and research and development capacities. In June 1996, Mr.
Nelson was named Director of Software Products. Prior to joining us, Mr. Nelson
had over twenty years' experience managing and supervising software and hardware
technical support activities for several large corporations.
KENNETH J. PARIS (52) Senior Database Specialist was with us from 1989
through March 1996, and rejoined us in October 1996. From March 1996 through
September 1996, Mr. Paris served as an independent software consultant to
various companies, including us. Prior to joining us in 1989, Mr. Paris spent
eleven years with KPMG Peat Marwick, both as Database Administrator and as
director of database research and development for the consulting department of
KPMG Peat Marwick's National Technology Center. From 1985 to 1986, Mr. Paris
served as Director of Product Development at Pansophic Systems, Inc. of Oak
Brook, Illinois. He was also for six years a member of the database committee of
the American National Standards Institute (ANSI) which developed the SQL
standard. Mr. Paris was the initial Conference Chairman and then President of
the International DB2 Users Group.
PEGGY A. PAYNE (49) joined us in May 1996 as Director of Migration
Services. From February 1993 through May 1996, Ms. Payne was Director of
Information Management and Technology for Revo Corporation. From July 1988 to
February 1993, Ms. Payne was manager, information systems for Westinghouse
Security Electronics. Ms. Payne has over twenty years of technical experience
and has served in various capacities for technical organizations including
Association of Corporate Computing Professionals, Bay Area MAPICS Users Group,
and Information Technology Executives Association.
COMMITTEES OF THE BOARD OF DIRECTORS
Our audit committee consists of Bernadette Castello and Richard Currier.
This committee has responsibility for, among other things, the planning and
review of our annual and periodic reports and accounts and the involvement of
our certified public accountants in that process, focusing particularly on
compliance with legal requirements and accounting standards and the rules of the
Commission, and the establishment of an effective system of internal financial
controls. The audit committee makes recommendations to our board of directors
regarding the independent certified public accountants to be nominated for
ratification by our shareholders and those other matters, but the ultimate
responsibility for those matters remains with our board of directors.
Our board of directors does not currently have and does not currently
intend to establish an executive committee, a compensation committee or a
nominating committee, as those functions are to be performed by our entire board
of directors.
DIRECTOR COMPENSATION
In payment for a year's service on our board, on April 6, 1998, Mr.
Carpenter received options to purchase 7500 shares of our stock. These options
are fully vested and exercisable at US$11.50 per share at any time within 5
years of the grant. In addition, if at the end of Mr. Carpenter's year of
service, the price of Forecross stock is less than the option price, Mr.
Carpenter has the option to request payment of US$1200 per board meeting in
which he participated during that year. Directors receive no other compensation
for service on our Board of Directors.
Mr. Currier is paid a retainer of $817 per month for consulting services in
connection with our marketing strategy. Non-employee directors are reimbursed
for reasonable out-of-pocket expenses incurred in connection with the attendance
of board meetings. Non-employee directors are entitled to participate in our
1994 Stock Option Plan. During the year ended September 30, 1998, Mr. Carpenter
received a stock option grant for 7,500 shares at $11.50 per share. During the
year ended September 30, 1996, Mr. Currier received a stock option grant for
5,000 shares at $4.75 per share. During the year ended September 30, 1997 and
during the three month period ended December 31, 1998, no options were granted
to non-employee directors.
EXECUTIVE COMPENSATION
The following table sets forth the amount of all compensation paid by us
during each of 1998, 1997 and 1996 to the person serving as our Chief Executive
Officer, and to our only other executive officer, other than the Chief
Executive Officer, whose compensation exceeded $100,000 during any such year.
The stock options granted to the named executive officers are fully vested. The
options are exerciseable at $1.43 per share and expire five years from the date
of grant. There are no other long-term incentive compensation plans which
require disclosure.
<TABLE>
<CAPTION>
Long Term
Compensation -
Name and Principal Annual Compensation Securities All Other
Position Year Salary Bonus Underlying Options Compensation
<S> <C> <C> <C> <C> <C>
Kim O. Jones 1998 $185,000 $ None None None
Chief Executive Officer 1997 156,511 51,320 None None
1996 129,515 None 250,000 None
Bernadette C. Castello 1998 $185,000 None None None
Senior Vice President 1997 156,511 56,970 None None
1996 129,515 None 250,000 None
</TABLE>
STOCK OPTION GRANTS IN LAST FISCAL YEAR. There were no grants of stock
options to either of our named executive officers during the fiscal year ended
September 30, 1998.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES. The following table sets forth for each named executive officer
information regarding stock option exercises during the fiscal year ended
September 30, 1998 as well as the fiscal year end value of unexercised options
for each such person:
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised In-the-Money
Options at 1998 Year End Options at 1998 Year End
- --------------------------------------- -------------------------- ---------------------------
Shares
Acquired
on
Name Exercise Value Received Exercisable Unexercisable Exercisable Unexercisable
- ------------- -------- -------------- ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Kim O. Jones 0 0 250,000 0 $ 405,000 0
Bernadette C.
Castello 0 0 250,000 0 $ 405,000 0
</TABLE>
EMPLOYMENT AGREEMENTS
The Company has entered into no employment agreements.
RESTRICTED STOCK PURCHASE PLAN
In June 1993, the Board of Directors approved the 1993 Restricted Stock
Purchase Plan. The Plan allows employees and consultants to purchase shares of
our common stock at a price not less than the fair value. The maximum aggregate
number of shares which may be sold under the Plan is 1,000,000 shares of common
stock. During the year ended September 30, 1994, 50,000 shares were sold under
the Plan. No shares were sold under the Plan in 1998, 1997 1996, or 1995.
Shares purchased under the Plan are subject to a right of repurchase by us
at the original purchase price upon the termination of the purchaser's
employment or consulting relationship with us. Except for the initial stock
purchases in 1993, for which the vesting commenced on June 25, 1992, the right
to repurchase generally lapses at the rate of one-third (1/3) after one year
from the date of purchase, and one-thirty-sixth (1/36) of the original number of
shares purchased per month thereafter. At September 30, 1998 and 1997, no shares
are subject to our repurchase option under this provision. No shares were
repurchased during the years ended September 30, 1998, 1997 or 1996.
In partial consideration for stock purchased under the Plan, we received
promissory notes with an aggregate balance of $7,973 as of September 30, 1996.
These notes were paid in full during 1997.
EMPLOYEE STOCK OPTION PLAN
In April 1994, the board of directors approved the 1994 Stock Option Plan,
whereby employees and consultants may be granted incentive and non-statutory
stock options. Depending on the employee's stock ownership percentage,
incentive stock options are granted with exercise prices ranging from 100% to
110% of the fair value of stock at the date of grant. Depending on stock
ownership percentage, non-statutory stock options are granted with exercise
prices ranging from 85% to 110% of the fair value of stock at the date of grant.
The maximum aggregate number of shares of common stock which may be optioned and
sold under the plan is 950,500. The term of each option is that stated in each
specific option agreement provided that the term does not exceed ten years from
the date of grant (five years in the case of an optionee already owning common
stock representing 10% or more of the voting power). As of December 31, 1998,
options for the purchase of 697,300 shares of common stock at a weighted average
exercise price of $3.26 per share are outstanding, options for the purchase of
688,686 shares at a weighted average exercise price of $3.16 per share are
exercisable, and 239,200 shares of common stock are reserved for future grants.
PROFIT SHARING AND RETIREMENT PLANS
401(K) PLAN
We have a 401(k) profit sharing plan covering substantially all employees,
under which employees may defer their eligible compensation up to the
statutorily and 401(k) plan prescribed limits and have the amount of such
deferral contributed to the 401(k) plan. Employees who have completed one year
of service may receive a matching contribution from us up to a maximum of 4% of
the participant's eligible compensation. The 401(k) plan is intended to qualify
under Section 401(k) of the Internal Revenue Code. Participants in the 401(k)
plan direct the investment of their individual account balances among the
various offered investment funds. Our cost of the 401(k) profit sharing plan
was $73,499, $66,670 and $25,556 in the fiscal years ended September 30, 1998,
1997 and 1996, and $17,473 and $6,557 in the three months ended December 31,
1998 and 1997, respectively.
MONEY PURCHASE PENSION PLAN
We also have a Money Purchase Pension Plan. We were required to contribute
10% of total participant compensation through December 1992 and 6% of total
participant compensation from January 1, 1993 through December 31, 1994.
Effective January 1, 1995, contributions to the Pension Plan were discontinued
as we now contribute to the 401K Plan as described above. There were no
contributions to this Plan during 1998, 1997 or 1996. Our cost of the Pension
Plan was $12,736 in the fiscal year ended September 30, 1995.
BOARD ACTION AND POWERS
Our Articles of Incorporation in effect on completion of this offering
provide that, unless otherwise determined by a resolution of our board of
directors, our board of directors shall consist of not less than three nor more
than five members.
The board of directors may at any time appoint any person to be a director
either to fill a vacancy or as an additional director, provided that the number
of directors does not exceed five. Any person so appointed by the board of
directors shall hold office only until the next annual general meeting of
shareholders and shall then be eligible for election by the shareholders.
Directors shall not be required to hold any of our shares by way of
qualification. A director who is not a shareholder shall nevertheless be
entitled to attend and speak at shareholders' meetings.
Indemnification and Insurance. Every director or other officer of our
company (excluding certified public accountants) shall be indemnified by us out
of our own funds against all costs, charges, losses, expenses and liabilities
incurred by him in the actual or purported execution and/or discharge of his
duties and/or the exercise or purported exercise of his powers and/or otherwise
in relation to or in connection with his duties, powers or office. This
indemnification includes (without prejudice to the generality of the foregoing)
any liability incurred by him in investigating, preparing for and defending any
inquiries or investigation, claim or proceedings, civil or criminal, which
relate to anything done or omitted or alleged to have been done or omitted by
him as an officer, director, or employee of our company and in which judgment is
given in his favor (or the proceedings are otherwise disposed of without any
finding or admission of any material breach of duty on his part) or in which he
is acquitted or in connection with any application under any statute for relief
from liability with respect to any such act or omission in which relief is
granted to him by a court. In that regard, we shall have the power to advance
funds to any such officer, director or employee in payment of all costs,
charges, losses, expenses, and liabilities incurred by him in investigating,
preparing for or defending any such inquiries, investigations, claims or
proceedings whatsoever. Our ability to indemnify our officers and directors from
liability is limited by the provisions of the Corporations Code of California.
In addition, the board of directors shall have power to purchase and maintain
insurance for or for the benefit of any person who is or was at any time a
director or officer of any "relevant company" (as defined below) or who is or
was at any time a trustee of any pension fund or 401K plan in which employees of
any relevant company are interested including (without prejudice to the
generality of the foregoing) insurance against any liability incurred by such
person in respect of any act or omission in the actual or purported execution
and/or discharge of his or her duties and/or in the exercise or purported
exercise of his or her powers and/or otherwise in relation to his or her duties,
power, or offices in relation to any relevant company, or any such pension fund
or employees' share scheme. For purposes of this paragraph, "relevant company"
shall mean us, any holding company of ours or any other body, whether or not
incorporated, in which we or such holding company or any of our predecessors or
predecessors of such holding company has or had any interest whether direct or
indirect or which is in any way allied to or associated with us, or any of our
subsidiaries, or of such other body.
At present, there is no pending litigation or proceeding involving a
director or executive officer of ours where indemnification will be required or
permitted. We are not aware of any threatened litigation or proceeding which may
result in a claim for such indemnification.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of our company
under the provisions, described above, or otherwise, we have been advised that
in the opinion of the Commission, this type of indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of our outstanding shares of common stock as of December 31, 1998 by
(1) each person we know to beneficially own 5% or more of the outstanding shares
of our Common Stock, (2) each of our directors, (3) each of our executive
officers named in the summary compensation table above, and (4) all directors
and officers as a group. Except as indicated in the table below, the persons
named in the table have sole voting and investment power with respect to all
shares of common stock shown as beneficially owned by them, subject to community
property laws where applicable. Unless otherwise indicated, the address of each
beneficial owner is c/o Forecross Corporation, 90 New Montgomery Street, San
Francisco, California 94105.
<TABLE>
<CAPTION>
Number of Shares
Beneficially Percent of Class
Name of Owner Owned Beneficially Owned
- ----------------------------------------------------------- ---------------- ------------------
<S> <C> <C>
Kim O. Jones 2,168,344 18.4%
Bernadette C. Castello 2,173,944 18.5%
Richard A. Carpenter 32,100 0.3%
Richard L. Currier, Jr. 5,000 0.0%
All directors and executive officers as a group (4 persons) 4,379,388 37.2%
</TABLE>
Mr. Jones' holdings as of December 31, 1998 Include a fully vested and
exerciseable stock option covering 250,000 shares.
Ms. Castello's holdings as of December 31, 1998 Include a fully vested and
exerciseable stock option covering 250,000 shares.
Mr. Carpenter's address is 25 Marion Street, Hingham, Massachusetts 02043.
His holdings include a fully vested and exerciseable stock option covering 7,500
shares.
Mr. Currier's address is P.O. Box 770-369, Park City, Utah 84060. His
holdings include a fully vested and exerciseable stock option covering 5,000
shares.
The holdings of all directors and executive officers as a group include
fully vested and exerciseable stock options covering 512,500 shares. The
percentage of class beneficially owned was calculated on the basis of 11,773,612
shares of our common stock outstanding as of December 31, 1998.
RELATED PARTY TRANSACTIONS
NOTES RECEIVABLE FROM/PAYABLE TO OFFICERS:
As of December 31, 1998, we had the following notes receivable from/payable
to certain of our executive officers:
(1) In December 1997, we borrowed $350,000 from Kim O. Jones, our Chief
Executive Officer, under an unsecured promissory note due December 30,
1999. The note bears interest at 24.0% per annum.
(2) In February 1998, we borrowed $225,000 from Bernadette C. Castello, our
Senior Vice President, under an unsecured promissory note due February 28,
2000. The note bears interest at 24.0% per annum.
(3) The Company has a note receivable from Kim O. Jones, Chief Executive
Officer, of $65,429, with interest at 10%, due December 31, 1997. This
represents the balance due from amounts advanced at various times between
1987 and 1993 principally to assist in the purchase of a principal
residence by Mr. Jones. The note receivable and accrued interest receivable
were paid in full on December 31, 1997.
As of September 30, 1998, the accrued interest payable to Mr. Jones and Ms.
Castello was an aggregate of $95,537.
SOFTWARE LICENSES AND DISTRIBUTORSHIPS:
We have entered into agreements with several entities for licenses and
distributorship arrangements for our year 2000 software products, Assess/2000
and Complete/2000, and related services. The distributors are related to each
other through some common ownership and management; a shareholder of ours who
owns less than 1% of our securities and is not an officer or director of our
Company, is a founding investor and officer of each of the other entities.
To our knowledge, at least one other shareholder of Forecross who owns less
than 5% of our securities and is not an officer or director of our Company, is
also an investor in at least one of the Distributors. As of September 30, 1996,
this shareholder pledged 150,000 shares of his stock in our Company as
collateral for $800,000 due under the terms of the first of the contracts; the
entire amount was collected in January 1997.
Under the distributorship agreements, the distributors receive
territorially exclusive rights to market year 2000 renovation projects to be
performed by us using our Complete/2000 software, and year 2000 assessment
projects to be performed either by us or by the distributor using the
Assess/2000 software.
PURCHASED SOFTWARE:
During the year ended September 30, 1997, we commissioned and purchased a
$150,000 data analysis module for use with our year 2000 software products. The
software developer is an entity owned in part by our senior vice president,
another employee of ours, and another shareholder.
<PAGE>
DESCRIPTION OF SHARE CAPITAL
GENERAL
Our authorized capital stock consists of 20,000,000 shares of common
stock, no par value. There were 11,773,612 shares of common stock issued and
outstanding as of December 31, 1998. In January 1999, we sold an additional
418,333 shares of our common stock in a private placement. There are 12,191,945
shares of common stock outstanding as of the date of this prospectus. There
are also 300,000 warrants and 697,300 options to purchase shares of common stock
presently outstanding.
COMMON STOCK
Our authorized share capital consists of 20,000,000 shares of common stock,
no par value per share As of the date of this prospectus, 12,191,945 of our
shares are issued and outstanding. Upon the completion of this offering,
12,191,945 shares will be issued and outstanding, assuming that none of the
outstanding warrants are exercised.
Holders of our shares of common stock are entitled to receive dividends
ratably, if, as and when declared by the directors, and to participate ratably
in any distribution of property or assets on our liquidation, winding up or
other dissolution. The shares of common stock have no preemptive or conversion
rights. There are no provisions in our Articles of Incorporation or By-Laws, or
any provisions of the laws of the State of California to which we are subject,
that would discourage a business combination or other takeover of us.
Holders of our shares of common stock are entitled to one vote per share at
all meetings of shareholders. The holders of our common stock do not have
cumulative voting rights. Accordingly, holders of more than half of the
outstanding shares of common stock can elect all of the directors to be elected
in any election, if they choose to do so. In such event, the holders of the
remaining shares of common stock would not be able to elect any directors. The
board of directors is empowered to fill any vacancies and the board created by
the resignation, death or removal of directors.
WARRANTS
There are presently outstanding warrants to purchase 30,000 shares of
common stock at an exercise price of $.75 per share. These warrants were issued
in connection with the private placement in January, 1999. They have a
five-year term and expire on January 18, 2004. There are also outstanding
warrants to purchase 270,000 shares of common stock at an exercise price of
$4.60 per share. These warrants expire on December 31, 1999. Certain relatives
of our President, not his parents, spouse, brothers, sisters or their children,
are the holders of those warrants.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
Our Articles of Incorporation limit the liability of officers and directors
to the fullest extent permitted by the California Corporations Code. In
addition, the Articles of Incorporation provide that we shall indemnify our
directors and officers to the fullest extent permitted by the California
Corporations Code.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to our directors, officers or persons controlling us
pursuant to the foregoing provisions, we have been informed that in the opinion
of the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is therefore unenforceable.
TRANSFER AGENT
The transfer agent for the common stock is Continental Stock Transfer and
Trust Company, New York, New York.
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
There can be no assurance that a significant public market for any of our
securities will be sustained after this offering. Sales of the shares of common
stock covered by this prospectus in the public market or otherwise, or the
possibility of those sales occurring, could adversely affect prevailing market
prices of our stock or our future ability to raise capital through an offering
of equity securities. We are unable to predict the number of shares covered by
this prospectus that will be sold, whether in the public markets or under Rule
144 under the Securities Act or otherwise, as this will depend on the market
price of our securities, personal circumstances of the seller, and other
factors.
Upon the completion of this offering, we will have 12,191,945 shares of
common stock issued and outstanding, assuming that none of the outstanding
warrants or options are exercised.
The 418,333 shares that were issued in a private placement in January, 1999
and the 30,000 shares issuable upon exercise of the warrant issued in connection
with that private placement and the shares which may be acquired upon exercise
of our other outstanding warrants and options, are "restricted securities," as
defined in Rule 144 under the Securities Act. These restricted securities were
issued and sold by us in private transactions in reliance on exemptions from
registration under the Securities Act. Restricted securities may be sold in the
public market only if they are registered or if they qualify for an exemption
from registration under Rules 144 or 701 under the Securities Act, which are
summarized below.
In general, under Rule 144, as amended, beginning 90 days after the
completion of this offering, a person, or persons whose shares are aggregated,
who has beneficially owned restricted securities for at least one year,
including the holding period of any prior owner who is not an affiliate of ours,
would be entitled to sell within any three-month period a number of shares that
does not exceed the greater of (1) one percent of the then outstanding shares,
12,191,945 shares following this offering, or (2) the average weekly trading
volume of the shares during the four calendar weeks preceding that sale. Sales
under Rule 144 are also subject to certain manner of sale and notice
requirements and to the availability of current public information about us.
Under Rule 144(k), a person who is not deemed to have been an affiliate of ours
at any time during the 90 days preceding a sale and who has beneficially owned
the shares proposed to be sold for at least two years, including the holding
period of any prior owner who is not an affiliate of ours, is entitled to sell
such shares without complying with the manner of sale, public information,
volume limitation or notice provisions of Rule 144. Non-affiliates may resell
securities issued under Rule 701 in reliance on Rule 144 without having to
comply with Rule 144's public information, holding, volume, and notice
requirements. Our affiliates may resell securities issued under Rule 701 in
reliance on Rule 144 without compliance with Rule 144's holding period
requirements.
<PAGE>
SELLING STOCKHOLDERS
The following table sets forth the name of each selling stockholder, the
number of shares owned by the selling stockholder, and the number of shares
which may be offered for resale pursuant to this prospectus. The information
included below is based upon information provided by the selling stockholders.
The actual number of shares owned or offered could be materially less or more
than such estimated amount depending upon factors which cannot be predicted at
this time and, if required, will be reflected in a supplement to this
prospectus. Because each selling stockholder may offer all, some or none of the
shares it holds, and because there are currently no agreements, arrangements or
understandings with respect to the sale of any of the shares, no definitive
estimate as to the number of shares that will be held by each selling
stockholder after such offering can be provided. The following table has been
prepared on the assumption that all shares offered under this prospectus will be
sold to parties unaffiliated with the selling stockholders. Except as
indicated, none of the selling stockholders has had a material relationship with
us within the past three years, other than as a result of the ownership of our
shares or other securities. Unless otherwise indicated, the selling
stockholders have sole voting and investment power with respect to their
respective shares. Percentages in the table below are based on 12,121,945 shares
of our common stock outstanding as of January 31, 1999, plus 697,300 options
and 300,000 warrants exerciseable within 60 days of Jannuary 31, 1999.
<TABLE>
<CAPTION>
SHARES NUMBER OF SHARES SHARES
OWNED PRIOR TO WHICH MAY BE SOLD OWNED AFTER
THE OFFERING THE OFFERING
------------------- ---------------
NAME NUMBER PERCENT IN THIS OFFERING NUMBER PERCENT
- ---------------------------- --------- -------- ---------------- ------ -------
<S> <C> <C> <C> <C> <C>
Avalon Research Inc. 30,000(2) % 30,000 * *
Kien Hean Chen and Yung * *
San Chen 26,666 % 26,666
Constance Fretz IRA 10,000 % 10,000 * *
Stanley A. Steiner, Trustee 26,666 % 26,666 * *
Pinetree Capital Corporation 100,000 % 100,000 * *
Lancaster Investment
Partners, LP 50,000 % 50,000 * *
William B. Fretz IRA 10,000 % 10,000 * *
The William B. Fretz, Jr.
Irrevocable Deed of Trust
FBO Heather Nicole Fretz 5,000 % 5,000 * *
The William B. Fretz, Jr.
Irrevocable Deed of Trust
FBO Christopher Bradley
Fretz 10,000 % 10,000 * *
Keith Fretz 20,000 % 20,000 * *
David S. Callan IRA 10,000 % 10,000 * *
EDJ Limited 100,000 % 100,000 * *
Larry Colvin 50,000 % 50,000 * *
_________________
<FN>
* Represents less than 1% of our outstanding shares of common stock.
</TABLE>
The holdings of Avalon Research include the number of shares of common
stock that would be owned by it if it had exercised its warrants to purchase
shares of our common stock in full as of the date hereof.
The actual number of shares that may be received by the selling
stockholders and resold hereby could differ materially from the foregoing
estimated amounts depending upon factors which cannot be predicted at this time.
If required, the actual number of shares to be received by the selling
stockholders will be reflected in a supplement to this prospectus.
<PAGE>
PLAN OF DISTRIBUTION
All or a portion of the shares offered hereby may be sold, from time to
time, by the selling stockholders in or more transactions on the Nasdaq OTCBB or
any other market on which our shares are traded, in transactions independent of
the Nasdaq OTCBB, in separately negotiated transactions, or otherwise. Such
sales may be made either at fixed prices which may be changed, at market prices
prevailing at the time of sale, at prices related to prevailing market prices or
at negotiated prices. The shares may be sold by the selling stockholders by one
or more of the following methods, without limitation:
- block trades in which a broker or dealer will attempt to sell the
shares as agent, but may position and resell a portion of the block as
principal to facilitate the transaction;
- purchases by a broker or dealer as principal and resale by such broker
or dealer for its account pursuant to this prospectus;
- an exchange distribution in accordance with the rules of such
exchange;
- ordinary brokerage transactions and transactions in which a broker may
solicit purchasers;
- privately negotiated transactions;
- short sales; and
- a combination of any of the above methods of sale.
In effecting sales, brokers and dealers engaged by the selling stockholders
may arrange for other brokers or dealers to participate. Brokers or dealers may
receive compensation in the form of discounts, concessions or commissions from
the selling stockholders or, if a broker-dealer acts as agent for the purchaser
of shares, from the purchaser, in amounts to be negotiated which may be less
than, or in excess of, those customary in the types of transactions involved.
Broker-dealers may agree with the selling stockholders to sell a specified
number of shares at a stipulated price per share, and, to the extent the
broker-dealer is unable to do so acting as agent for a selling stockholder, to
purchase as principal any unsold shares at the price required to fulfill the
broker-dealer commitment to the selling stockholder. Broker-dealers who acquire
the shares as principal may then resell those shares from time to time in
transactions, which may involve block transactions and sales to and through
other broker-dealers, including transactions of the nature described above, on
the Nasdaq OTCBB or any other market on which our shares are traded, in
transactions independent of the Nasdaq OTCBB, in separately negotiated
transactions, or otherwise, at fixed prices which may be changed, at market
prices prevailing at the time of sale, at prices related to prevailing market
prices or at negotiated prices. In connection with such resales, the
broker-dealers may pay to or receive from the purchasers of those shares
compensation as described above.
Any or all of the sales or other transactions involving the common stock
described above, whether effected by a selling stockholder, any broker dealer or
others, may be made pursuant to this prospectus. In addition, any shares of
common stock that qualify for sale pursuant to Rule 144 under the Securities Act
may be sold under Rule 144 rather than pursuant to this prospectus.
In order to comply with the securities laws of certain states, if
applicable, the shares of common stock will be sold in those jurisdictions only
through registered or licensed brokers or dealers.
The selling stockholders and any broker dealers or agents that participate
with the selling stockholders in the distribution of the shares may be deemed to
be underwriters within the meaning of the Securities Act, and any commissions
received by them and any profit received by them may be deemed to be
underwriting commissions or discounts under the Securities Act.
Under applicable rules and regulations under the Exchange Act, any person
engaged in the distribution of the common stock may not simultaneously engage in
market-making activities with respect to our common stock for a period of one
business day prior to the commencement of that distribution. In addition and
without limiting the foregoing, each selling stockholder will be subject to
applicable provisions of the Exchange Act and the rules and regulations
thereunder, including, without limitation, Regulation M, which provisions may
limit the timing of purchases and sales of shares of common stock by the selling
stockholders. All of the foregoing may limit the marketability of the shares.
<PAGE>
To our knowledge, no underwriting arrangements have been entered into by
the selling stockholders with respect to their shares as of the date hereof.
Upon notification of us by a selling stockholder that any material arrangement
has been entered into with a broker or dealer for the sale of shares through a
block trade, special offering or secondary distribution, or a purchase by a
broker or dealer, a supplement to this prospectus will be filed, if required,
pursuant to Rule 424(b) under the Securities Act, disclosing (a) the name of
each that selling stockholder and of the participating broker or dealer, (b) the
number of shares involved, (c) the price at which such shares were sold, (d) the
commissions paid or the discounts or concessions allowed to the broker or
dealer, where applicable, (e) that the broker or dealer did not conduct any
investigation to verify the information set out or incorporated by reference in
this prospectus, and (f ) other facts material to the transaction.
We will maintain the effectiveness of the registration statement of which
this prospectus is a part until the earlier of (1) 90 days after the effective
date of the registration statement, or (2) such time as all the shares of common
stock registered hereby have been sold or are no longer subject to volume or
manner of sale restrictions under the Securities Act.
We and the selling stockholders each have agreed to indemnify each other
and our respective officers and directors and certain other persons against
liabilities in connection with any offering of the shares, including liabilities
arising under the Securities Act.
By agreement with the selling stockholders, we will pay all of the expenses
incurred in connection with the registration of the common stock, estimated to
be approximately $__________, other than underwriting commissions, discounts and
counsel fees and expenses.
LEGAL MATTERS
The validity of the common stock offered by this prospectus and certain
legal matters relating to this offering will be passed on for us by Greenberg
Traurig, New York, New York
EXPERTS
Our financial statements and schedule included in this prospectus and in
the registration statement have been audited by BDO Seidman, LLP, independent
certified public accountants, to the extent and for the periods set forth in
their reports, which contain an explanatory paragraph regarding the Company's
ability to continue as a going concern, and which appear elsewhere herein and in
the registration statement, and are included in reliance upon that report given
upon the authority of that firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
We have filed with the Commission a registration statement on Form S-1
under the Securities Act, with respect to the securities offered by this
prospectus. In this prospectus we generally refer to that registration
statement, together with all amendments, exhibits and schedules to that
registration statement, as "the registration statement."
As is permitted by the rules and regulations of the Commission, this
prospectus, which is part of the registration statement, omits certain
information, exhibits, schedules and undertakings set forth in the registration
statement. For further information with respect to us, and the securities
offered by this prospectus, reference is made to the registration statement.
Statements contained in this prospectus as to the contents of any contract or
other document referred to herein are not necessarily complete and, in each
instance, reference is made to the copy of the contract or other document filed
as an exhibit to the registration statement, each such statement being qualified
in all respects by this reference.
We are subject to the reporting requirements of the Securities Exchange Act
of 1934. In accordance with the requirements, we file annual reports on Form
10-K, quarterly reports on Form 10-Q and other information under cover of Form
8-K with the Commission. Our reports and other information may be inspected and
copied at the following public reference facilities maintained by the
Commission:
- 450 Fifth Street, N.W., Washington, D.C. 20549
<PAGE>
- Northwest Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661
- 7 World Trade Center, Room 1400, 13th Floor, New York, New York 10048.
Copies of this material may also be obtained from the Public Reference Room
of the SEC at 450 Fifth Street, N.W. Washington, D.C. 20549 at prescribed rates.
Information on the operation of the Public Reference Room may be obtained by
calling the Commission at 1 (800) 732-0330. Our filings, including the
registration statement of which this prospectus is a part, will also be
available to you on the Commission's Internet site (http://www.sec.gov).
<PAGE>
<TABLE>
<CAPTION>
FORECROSS CORPORATION
INDEX TO FINANCIAL STATEMENTS
Page
----
<S> <C>
Report of BDO Seidman, LLP, Independent Certified Public F-2
Accountants
Balance Sheets as of September 30, 1998 and 1997, and December 31,
1998 (Unaudited) F-3
Statements of Operations for Each of the Three Years in the Period
Ended September 30, 1998, and the Three Month Periods Ended
December 31, 1998 and December 31, 1997 (Unaudited) F-4
Statements of Stockholders' Equity (Deficit) for Each of the Three
Years in the Period Ended September 30, 1998, and the Three Month
Period Ended December 31, 1998 (Unaudited) F-5
Statements of Cash Flows for each of the Three Years in the Period
Ended September 30, 1998, and the Three Month Periods Ended
December 31, 1998 and 1997 (Unaudited) F-6
Notes to the Financial Statements F-7
Through
F-16
Schedule II F-17
</TABLE>
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS'
To the Stockholders and Board of Directors of Forecross Corporation
We have audited the accompanying balance sheets of Forecross Corporation as of
September 30, 1998 and 1997, and the related statements of operations,
shareholders' deficit and cash flows for each of the three years in the period
ended September 30, 1998. We have also audited the Schedule listed in the
accompanying index. These financial statements and the Schedule are the
responsibility of Forecross Corporation's management. Our responsibility is to
express an opinion on these financial statements and the Schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. These standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements and the
Schedule. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the financial statements and the Schedule. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Forecross Corporation at
September 30, 1998 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended September 30, 1998 in
conformity with generally accepted accounting principles.
Also, in our opinion, the Schedule presents fairly in all material respects the
information set forth herein.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has sustained recurring losses from operations
and has net capital deficiencies and negative working capital at September 30,
1998. These conditions raise substantial doubt about the ability of the Company
to continue as a going concern. Management's plans as to these matters are also
discussed in Note 1. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/ BDO Seidman, LLP
BDO SEIDMAN, LLP
San Francisco, California
November 19, 1998
<PAGE>
<TABLE>
<CAPTION>
FORECROSS CORPORATION
BALANCE SHEETS
September 30, December 31,
1998 1997 1998
---------- ---------- ------------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash $ 98,249 $ 275,243 $ 42,244
Accounts receivable, including unbilled
receivables of $489,808, $1,754,691, and
418,464, net of allowances of $136,650,
300,340, and $136,650, respectively
(Note 3) 1,170,117 2,112,982 710,481
Current portion of notes receivable from
officers (Note 4) - 112,504 -
Other current assets 49,628 128,582 50,686
---------- ---------- ------------
Total current assets 1,317,994 2,629,311 803,411
Equipment and furniture, net
(Notes 2, 4 and 5) 568,235 540,804 492,242
Notes receivable from officers, net, less
current portion (Note 4) - 37,013 -
Notes receivable from others 67,131 63,150 66,661
Other assets 42,359 30,773 43,015
---------- ---------- ------------
Total assets $1,995,719 $3,301,051 $ 1,405,329
========== ========== ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' DEFICIT
<S> <C> <C> <C>
Current liabilities:
Accounts payable $ 224,991 $ 452,651 $ 193,605
Accrued compensation and related benefits (Note 11) 235,135 152,421 209,019
Accrued liabilities 73,301 89,518 108,651
Accrued commissions and distributors' fees
(Note 4) 1,228,375 639,138 1,250,559
Payable to factor (Note 6) 467,734 - 678,691
Accrued warranty costs 205,975 96,589 199,612
Capital lease obligations due within one year 20,103 - 20,839
Current portion of notes payable to officers,
net - - 360,194
Deferred revenue (Notes 2 and 4) 598,193 756,229 715,877
------------ ------------ ------------
Total current liabilities 3,053,807 2,186,546 3,737,047
Deferred revenue, less current portion (Notes
2 and 4) 1,545,417 2,110,417 1,404,166
Notes payable to officers, net, less current
portion (Note 4). 631,392 - 235,070
Capital lease obligations, less current portion 41,667 - 36,471
------------ ------------ ------------
Total liabilities 5,272,283 4,296,963 5,412,754
------------ ------------ ------------
Commitments and contingencies (Notes 2
and 12)
Shareholders' deficit (Notes 8, 9 and 10):
Common stock, no par value; authorized
20,000,000 shares; issued and outstanding
11,763,612, 11,751,612 and 11,773,612 4,715,515 4,667,515 4,753,765
Accumulated deficit (7,992,079) (5,663,427) (8,761,190)
------------ ------------ ------------
Total shareholders' deficit (3,276,564) (995,912) (4,007,425)
------------ ------------ ------------
Total liabilities and shareholders' deficit . $ 1,995,719 $ 3,301,051 $ 1,405,329
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
FORECROSS CORPORATION
STATEMENTS OF OPERATIONS
For the Three Months
For the Years Ended Ended
September 30, December 31,
1998 1997 1996 1998 1997
(Unaudited) (Unaudited)
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net revenues (Notes 2, 3 and 4):
Services and maintenance $ 6,623,752 $ 4,930,456 $ 2,199,672 $ 623,665 $ 1,247,988
Software licenses and distributorship
fees-related parties 545,000 844,582 200,000 136,250 136,250
----------- ------------ ------------ ------------ -----------
Total net revenues 7,168,752 5,775,038 2,399,672 759,915 1,384,238
Cost of services and maintenance,
including fees to related parties of
346,000, $213,000, $0, $31,000 and
49,000, respectively (Notes 2 and 4) 4,419,347 3,366,608 1,431,489 642,606 1,153,265
------------ ------------ ------------ ------------ ------------
Gross margin 2,749,405 2,408,430 968,183 117,309 230,973
------------ ------------ ------------ ------------ ------------
Operating expenses:
Sales and marketing, including fees to
related parties of $1,037,000,
640,000, $0, $107,000, and
148,000, respectively (note 4) 1,838,126 1,490,479 711,545 224,860 337,780
Research and development 1,520,709 1,006,768 253,743 218,038 457,394
General and administrative 1,413,312 887,039 332,500 309,534 268,822
------------ ------------ ------------ ------------ ------------
Total operating expenses 4,772,147 3,384,286 1,297,788 752,432 1,063,996
------------ ------------ ------------ ------------ ------------
Loss from operations (2,022,742) (975,856) (329,605) (635,123) (833,023)
Interest and other expense, net (305,110) (68,855) (129,141) (133,988) (26,137)
------------ ------------ ------------ ------------ ------------
Loss before provision for income (2,327,852) (1,044,711) (458,746) (769,111) (859,160)
taxes
Provision for income taxes (Note 7) (800) (800) (2,300) - -
------------ ------------ ------------ ------------ ------------
Net loss $(2,328,652) $(1,045,511) $ (461,046) $ (769,111) $ (859,160)
============ ============ ============ ============ ============
Net loss per share - basic and diluted $ (0.20) $ (0.09) $ (0.04) $ (0.07) $ (0.07)
============ ============ ============ ============ ============
Weighted Average Shares used in 11,761,920 11,681,035 11,370,804 11,766,112 11,758,112
============ ============ ============ ============ ============
computing per share data
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
FORECROSS CORPORATION
STATEMENTS OF SHAREHOLDERS' DEFICIT
Notes
Receivable
Common Stock from Accumulated Total
Shares Amount Shareholders Deficit Deficit
---------- ---------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Balances at October 1, 1995 10,904,362 $3,176,818 $ (19,040) $(4,156,870) $ (999,092)
Issuance of common stock upon
exercise of warrants, net of
stock issuance costs of $2,328
(Note 8) 551,250 328,422 - - 328,422
Payments received from
shareholders (Note 9) - - 11,067 - 11,067
Net loss - - - (461,046) (461,046)
---------- ---------- -------------- ------------ ------------
Balances at September 30, 1996 11,455,612 3,505,240 (7,973) (4,617,916) (1,120,649)
Issuance of common stock for
cash, net of stock issuance
costs of $5,275 (Note 8) 282,000 1,122,725 - - 1,122,725
Issuance of common stock upon
exercise of options (Note 10) 14,000 39,550 - - 39,550
Payments received from
shareholders (Note 9) - - 7,973 - 7,973
Net loss - - - (1,045,511) (1,045,511)
---------- ---------- -------------- ------------ ------------
Balances at September 30, 1997 11,751,612 4,667,515 - (5,663,427) (995,912)
Issuance of common stock upon
exercise of warrants (Note 8) 12,000 48,000 - - 48,000
Net loss - - - (2,328,652) (2,328,652)
---------- ---------- -------------- ------------ ------------
Balances at September 30, 1998 11,763,612 4,715,515 - (7,992,079) (3,276,564)
Value assigned to issuance of
common stock and extension
of warrant term in exchange
for registration rights and
certain other consideration
(Note 8) (Unaudited) 10,000 38,250 - - 38,250
Net loss (Unaudited) - - - (769,111) (769,111)
---------- ---------- -------------- ------------ ------------
Balances at December 31, 1998 11,773,612 $4,753,765 $ - $(8,761,190) $(4,007,425)
========== ========== ============== ============ ============
(Unaudited)
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
FORECROSS CORPORATION
STATEMENTS OF CASH FLOWS
For the Years For the Three Months
Ended September 30, Ended December 31,
1998 1997 1996 1998 1997
------------ ------------ ---------- ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Increase (decrease) in cash resulting from:
Cash flows from operating activities:
Net loss $(2,328,652) $(1,045,511) $(461,046) $ (769,111) $ (859,160)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities -
Provision for uncollectible amounts 124,952 300,000 (3,160) - -
Value of common stock issued and value
assigned to extension of warrant term - - - 38,250 -
Depreciation and amortization 277,938 115,873 53,918 75,993 49,470
Changes in operating assets and liabilities-
Accounts receivable 529,611 (2,020,177) (199,067) 459,636 (314,121)
Other assets and accrued interest on notes
receivable from officers 175,191 (148,552) (9,021) (1,394) 91,345
Accounts payable and accrued liabilities 939,270 471,082 233,974 25,697 254,138
Deferred compensation - (156,834) - - -
Deferred revenue (723,036) 2,713,193 128,678 (23,567) (97,351)
------------ ------------ ---------- ------------ ------------
Net cash provided by (used in) operating
activities (1,004,726) 229,074 (255,724) (194,496) (875,679)
------------ ------------ ---------- ------------ ------------
Cash provided by (used in) investing
activities:
Purchase of equipment and furniture (234,423) (577,076) (73,812) - (97,722)
Loans to officers - (35,000) - - -
Payments received on loans to officers - 35,000 - - 81,858
Loans to key employees - (62,057) - - -
Payments received on loans to key
employees 700 450 - 150 300
------------ ------------ ---------- ------------ ------------
Net cash provided by (used in) investing
activities (233,723) (638,683) (73,812) 150 (15,564)
------------ ------------ ---------- ------------ ------------
Cash flows from financing activities:
Proceeds from factoring of accounts
receivable 4,714,085 785,200 830,400 1,090,336 760,320
Repayment of borrowings under factoring
arrangement (4,246,351) (905,200) (710,400) (879,379) (386,458)
Borrowings under notes payable to officers 575,000 - - - 350,000
Repayment of notes payable to officers - (6,800) - (67,420) -
Repayment of capitalized leases (29,279) - - (5,196) -
Repayment of notes payable - (458,023) (45,000) - -
Net proceeds from issuance of common
shares 48,000 1,162,275 328,422 - 48,000
Payments received from shareholders - 7,973 11,067 - -
------------ ------------ ---------- ------------ ------------
Net cash provided by financing activities 1,061,455 585,425 414,489 138,341 771,862
------------ ------------ ---------- ------------ ------------
Net increase (decrease) in cash (176,994) 175,816 84,953 (56,005) 119,381
Cash at beginning of period 275,243 99,427 14,474 98,249 275,243
------------ ------------ ---------- ------------ ------------
Cash at end of period $ 98,249 $ 275,243 $ 99,427 $ 42,244 $ 155,862
============ ============ ========== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
FORECROSS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(INFORMATION FOR DECEMBER 31, 1998 AND 1997 IS UNAUDITED)
1. OPERATIONS:
Forecross Corporation is a publicly held California corporation whose
common stock is traded on the Nasdaq Over-the-Counter/ Bulletin Board market.
Prior to October 28, 1998, its common stock had been traded on the Vancouver
Stock Exchange. The Company provides comprehensive automated conversion
solutions for migrating existing software applications to new computing
platforms, including downsized and client server environments. In addition,
during fiscal 1996, Forecross introduced its Assess/2000 and Complete/2000
automated conversion software products and related services and methodologies,
which address the year 2000 problem. The year 2000 problem exists because many
existing computer programs use only two digits to identify a year in the date
field. These programs were designed and developed before the impact of the
upcoming change in the century was fully appreciated by their developers. If
not corrected, many computer applications could fail or create erroneous
results. Forecross year 2000 software products assist in identifying, analyzing
and correcting these problems in a highly automated manner. The Company's
migration services and software products have been designed to meet the
specialized requirements of management information systems departments of
medium-sized to large commercial and governmental organizations. Forecross also
licenses its Assess/2000 software product for use by customers and distributors
(see Note 4). Forecross customers include banks and other industrial and
commercial corporations in Canada, the United States and Europe.
BASIS OF PRESENTATION AND GOING CONCERN:
Through December 31, 1998, the Company sustained recurring losses from
operations and, at December 31, 1998, had a net capital deficiency and a net
working capital deficiency. These conditions raise substantial doubt about its
ability to continue as a going concern. During fiscal 1999, Forecross 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 its 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 potential year 2000 renovation products to address
additional software languages, and cost reduction actions implemented in late
fiscal 1998 and early fiscal 1999 should improve its profitability in fiscal
1999. 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
this uncertainty.
DEPENDENCE ON YEAR 2000 REVENUES:
The growth in revenues in fiscal 1998 and 1997 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 total revenues in the year ended September 30, 1997, and 62%
of total revenues for the year ended September 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, its professional services
fees and license revenues would be materially and adversely affected. Forecross
anticipates that demand in the year 2000 market will decline, perhaps rapidly,
following the year 1999.
<PAGE>
Forecross has experienced a decline in its core migration services. 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. However, there can be no assurance that this
strategy will be successful, and should Forecross 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 business,
results of operations and financial condition of the Company will be materially
and adversely affected.
Forecross 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 its exposure to
potential product and service liability claims. It is possible, however, that
the limitation of liability provisions contained in these 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 Forecross
has not experienced any material product or service liability claims to date,
the sale and support of our 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 Forecross could
have a material adverse effect upon the business, operating results and
financial condition of the Company.
2. 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.
CASH:
Forecross maintains its cash balances with one financial institution. At
times, such balances may be in excess of the FDIC insurance limit.
EQUIPMENT AND FURNITURE:
Equipment and furniture is recorded at cost. Depreciation and amortization
is calculated using the straight-line method over the assets' estimated useful
lives, which range from three to five years. Leasehold improvements are
amortized over the shorter of useful life or life of the lease, generally five
years.
CAPITALIZED SOFTWARE COSTS:
Costs incurred internally in creating computer software products to be
sold, leased, or otherwise marketed are charged to expense when incurred as
research and development until technological feasibility has been established
for the product. Thereafter, the Company capitalizes such costs until the
product is available for general release to customers and amortized based on
either estimated current and future revenue for each product or straight-line
amortization over the remaining estimated life of the product, whichever
produces the higher expense for the period. Purchased computer software to be
sold, leased, or otherwise marketed is treated the same if it has no alternative
future use, or, if it has an alternative future use, it is capitalized when
acquired and amortized over its estimated useful life. No costs have been
capitalized for internally developed software products because the amount of
development costs eligible for capitalization was not significant. Non-
capitalizeable development and marketing costs related to the software licenses
are included in research and development expense or sales and marketing expense,
as discussed in "Net Revenues and Cost of Services and Maintenance" below.
<PAGE>
The Company has capitalized certain purchased software technology rights
(see Note 4) which can be used both in connection with its internally developed
software products and in alternative standalone applications. Accordingly, these
rights are included with other purchased software in fixed assets, and are being
amortized over their estimated useful life of three years. Amortization of these
purchased software technology rights was $50,000 and $12,500 in the years ended
September 30, 1998 and 1997.
LONG-LIVED ASSETS:
Long-lived assets are assessed for possible impairment whenever events or
changes in circumstances indicate that the carrying amounts may not be
recoverable, or whenever management has committed to a plan to dispose of the
assets. Such assets are carried at the lower of book value or fair value as
estimated by management based on appraisals, current market value, and
comparable sales value, as appropriate. Assets to be held and used affected by
such impairment loss are depreciated or amortized at their new carrying amount
over the remaining estimated life; assets to be sold or otherwise disposed of
are not subject to further depreciation or amortization. In determining whether
an impairment exists, Forecross uses undiscounted future cash flows compared to
the carrying value of the asset.
NET REVENUES AND COST OF SERVICES AND MAINTENANCE:
The Company's migration projects have ranged from six to eighteen months in
duration. Its year 2000 projects have ranged from two to eighteen months in
duration, although they are typically much shorter than migration projects.
Revenues for migration services and year 2000 assessment or renovation projects
are recognized using the percentage of completion method in the ratio that
actual costs incurred to date bear to total estimated costs at completion.
Provisions for estimated losses on uncompleted contracts are recognized in the
period in which the likelihood of such losses is determined. Reserves provided
for estimated adjustments of contract revenues are included as reductions of
gross revenues. Cost of revenues is primarily comprised of subcontractors' fees
and salaries and benefits of employees assigned to the contracts, and
distributors' fees. Subcontractors' fees, salaries and benefits are allocated
based on the amount of time devoted to each contract by the subcontractors and
employees; distributors' fees are accrued based on revenues earned for specific
projects for which the distributors provide services. Billings are issued based
upon specific contractual terms which may or may not relate to the percentage of
completion for the respective contracts. Unbilled receivables represent revenue
recognized in excess of amounts billed. Amounts for billings in excess of
revenue recognized are included in deferred revenue.
Forecross has authorized several exclusive distributor agreements for
specified areas for its Complete/2000 automated conversion software products and
related services and methodologies. Under the agreements, the distributor
retains exclusive rights for the territory for a specified period. In addition,
Forecross licenses the rights to use its Assess/2000 software, which as of
September 30, 1998, had been sold primarily to the exclusive distributors above.
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. Costs
associated with the licenses for Assess/2000 have been included in research and
development expense as such costs did not qualify for capitalization. Costs
associated with the marketing and negotiation of distributor customer proposals
and/or sales contracts have been included in sales and marketing expense.
Revenues for technical and sales training, maintenance and support are
recognized ratably over the term of the support period.
RESEARCH AND DEVELOPMENT EXPENSE:
Research and development costs are expensed as incurred. In prior years,
certain research and development projects have been funded in part by
customers. In such cases, the Company retains ownership of the resulting
products, which are developed for resale to multiple customers; both the
initial and subsequent customers acquire licenses to use the developed products.
During the three years ended September 30, 1998, and during the three months
ended December 31, 1998, there were no such customer funded research and
development projects.
<PAGE>
WARRANTY EXPENSE:
Forecross provides a reserve for warranty costs based upon estimates of
such related costs and expenses. The reserve is accrued ratably as revenues are
earned. The accrued warranty reserve is amortized over the related warranty
period for the respective contract, typically a period of three to six months
for application migration projects, and one year for year 2000 projects.
Amortization for year 2000 projects will commence January 1, 2000.
INCOME TAXES:
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes,
which requires recognition of deferred tax liabilities and assets for the
expected future tax consequences of events that have been recognized in the
financial statements or tax returns. Under this method, deferred tax
liabilities and assets are determined based on the difference between the
financial statement and tax bases of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to affect
taxable income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized. The provision for
income tax expense is the tax payable for the period plus the change during the
period in deferred tax assets and liabilities.
NET LOSS PER SHARE:
Basic earnings per share is computed by dividing income or loss available
to common shareholders by the weighted average number of shares outstanding for
the period. Diluted earnings per share reflect the potential dilution of
securities that could share in the earnings of an entity. Due to the losses,
there were no includable equivalents in any period presented.
Securities outstanding at December 31, 1998, the future potential dilutive
effect of which would be dependent upon the exercise price of the securities and
the market price of the Company's common stock at that time, include warrants to
purchase 270,000 shares of common stock and options to purchase 697,300 shares
of common stock. See Note 8 "Common Stock" and Note 10 "Stock Option Plan" for
details on these securities.
STOCK-BASED COMPENSATION:
Effective October 1, 1996, Forecross adopted the disclosure provisions of
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation, which requires pro forma disclosure of net income and
earnings per share as if the SFAS No. 123 fair value method had been applied.
The Company continues to apply the provisions of Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock Issued to Employees, for the
preparation of our basic financial statements.
FINANCIAL INSTRUMENTS:
At September 30, 1998 and 1997, the Company's financial instruments consist
of cash, and accounts and notes receivable. The carrying value of cash and
accounts receivable approximate fair value based upon the liquidity and
short-term nature of the assets. The carrying value of notes receivable
substantially approximate fair value based upon current market interest rates,
the short-term maturity of certain of the notes and relative amounts owed. The
fair value of the our notes payable to officers cannot be currently determined,
as similar borrowing sources and terms are unavailable.
RECLASSIFICATIONS:
Certain prior-period amounts have been reclassified to conform to current
period presentation.
OTHER RECENTLY ISSUED ACCOUNTING STATEMENTS:
<PAGE>
During 1997, the Financial Accounting Standards Board (FASB)released SFAS
No. 130, Reporting Comprehensive Income. SFAS No. 130, which is effective for
fiscal years beginning December 15, 1997, establishes standards for reporting
and display of comprehensive income and its components in an entity's financial
statements. The objective of SFAS No. 130 is to report a measure of all changes
in the equity of an enterprise that result from transactions and other economic
events of the period. Comprehensive income is the total of net income and all
other non-owner changes in equity. SFAS No. 130 does not address issues of
recognition or measurement for comprehensive income and its components.
Therefore, it had no impact on the Company's financial condition or results of
operation upon adoption as of October 1, 1998 for the Company's year ending
September 30, 1999.
In 1997, the American Institute of Certified Public Accountants released
Statement of Position (SOP) 97-2, which provides revised guidance for
recognizing revenue on certain software transactions. This SOP is required to be
adopted in fiscal years beginning after December 15, 1997, and, thus, has been
adopted for the year ending September 30, 1999. Forecross believes that its
policies for recognizing revenue on software transactions are in compliance with
the requirements of SOP 97-2, and that the new guidance will not have a material
effect upon our financial condition or results of operations.
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information, which supersedes SFAS No. 14, Financial
Reporting for Segments of a Business Enterprises. SFAS No. 131 establishes
standards for the way that public companies report information about operating
segments in annual financial statements and requires reporting of selected
information about operating segments in interim financial statements issued to
the public. It also establishes standards for disclosures regarding products and
services, geographic areas and major customers. SFAS No. 131 defines operating
segments as components of a company about which separate financial information
is available that is evaluated regularly by the chief operating decision maker
in deciding how to allocate resources and in assessing performance.
SFAS No.131 is effective for financial statements for periods beginning
after December 15, 1997, and, thus, was adopted for the year ending September
30, 1999. The Company believes that it operates under one business segment and
has already substantially complied with the required financial statement
disclosures. Results of operations and financial position were unaffected by
implementation of this standard.
In October 1998, the FASB issued SFAS No. 132, Employers' Disclosures about
Pensions and Other Postretirement Benefits. SFAS No. 132, which is effective for
fiscal years beginning after December 31, 1997, revises employers' disclosures
about pensions and other postretirement benefits. It does not change the
measurement of recognition of those plans, and, accordingly, had no effect on
results of operations and financial position when SFAS No. 132 was adopted for
the Company's year ending September 30, 1999.
3. 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
our customers are large, well-established companies. Four customers accounted
for approximately 30%, 17%, 14% and 12% of the accounts receivable balance at
September 30, 1998, and four customers accounted for approximately 23%, 17%, 13%
and 12% at September 30, 1997. Additionally, three customers, including
revenues from the Company's Distributors treated as resulting from one customer
(see Note 4), accounted for approximately 40%, 12% and 10% of total revenues for
the fiscal year ended September 30, 1998. Four customers, including revenues
from our Distributors treated as resulting from one customer (see Note 4),
accounted for 17%, 15%, 11% and 10% of total revenues for the fiscal year ended
September 30, 1997, and four customers accounted for 20%, 14%, 13% and 10% of
total revenues for the fiscal year ended September 30, 1996. Net revenues from
Canadian and European customers were as follows:
<TABLE>
<CAPTION>
For the Years Ended September 30,
---------------------------------
1998 1997 1996
----------------
<S> <C> <C> <C>
Canada 2% 9% 15%
Europe 1% 1% --
</TABLE>
<PAGE>
4. RELATED PARTY TRANSACTIONS:
Forecross has certain transactions with related parties in the ordinary
course of business as set forth below.
NOTES RECEIVABLE AND PAYABLE:
Notes receivable and payable from officers consist of the following:
<TABLE>
<CAPTION>
September 30,
1998 1997
---------- --------
<S> <C> <C>
10% Uncollateralized notes receivable from
president, due December 31, 1997 $ -- $ 65,429
5.7 to 10% Uncollateralized notes receivable from
Senior Vice President, due in varying amounts
through September 30, 1999 37,013 53,442
Accrued interest receivable 2,132 30,646
---------- --------
Total receivable from officers 39,145 149,517
---------- -------
24% Uncollateralized notes payable to president,
due December 30, 1999 (350,000) --
24% Uncollateralized notes payable to senior vice
president, due February 28, 2000 (225,000) --
Accrued interest payable (95,537) --
----------
Total payable to officers (670,537) --
----------
Notes receivable from (payable to) officers, net (631,392) 149,517
Less current portion under original terms -- 112,504
---------- --------
$(631,392) $ 37,013
========== ========
</TABLE>
<PAGE>
SOFTWARE LICENSES AND DISTRIBUTORSHIPS:
The Company has entered into agreements with several entities (the
"Distributors") for licenses and distributorship arrangements for its year 2000
software products, Assess/2000 and Complete/2000, and related services. The
Distributors are related to each other through some common ownership and
management; a shareholder of the Company who owns less than 1% of its
outstanding securities and is not an officer or director of Forecross, is a
founding investor and officer of each of the other entities.
At least one other shareholder of Forecross, who owns less than 5% of its
outstanding securities and is not an officer or director of Forecross, is also
an investor in at least one of the Distributors. As of September 30, 1996, this
shareholder pledged 150,000 shares of Company stock as collateral for $800,000
due under the terms of the first of the contracts; the entire amount was
collected in January 1997.
Under the distributorship agreements, the Distributors receive
territorially exclusive rights to market year 2000 renovation projects to be
performed by Forecross using the Complete/2000 software, and year 2000
assessment projects to be performed either by Forecross or the Distributor using
the Assess/2000 software. In exchange for sales and marketing services and
support, customer contact, project management services and staffing for a
portion of the on-site work, the Distributor generally receives a fee equal to
25% of collected revenues. Forecross allocates those fees 25% to cost of
services and maintenance, and 75% to sales and marketing expense. The
exclusivity rights under these contracts are generally for an initial one-year
period, but are renewable for up to four additional years based on certain
performance conditions. The Distributors generally have separate agreements for
license rights for unlimited usage of the Assess/2000 product. In the case of
one contract, fees payable are 50% of collected revenues until $1,500,000 has
been received by the Distributor, and 25% of revenue collected thereafter.
During fiscal 1998, the $1,500,000 amount had been earned, with all subsequent
fees to be earned at the 25% rate.
The licensing and distributorship fees received from the Distributors,
totaling $3,125,000 and $200,000 in 1997 and 1996, respectively, have generally
been deferred and recognized over a five year period commencing with the signing
of the respective agreements. Of these amounts, approximately $1,955,000 and
$2,500,000 is deferred at September 30, 1998 and 1997 respectively. Additional
fees of approximately $672,000 for training programs, annual software
maintenance, and customer support were received in 1997; of this amount,
approximately $155,000 and $332,000 is deferred at September 30, 1998 and 1997
respectively. The year 2000 project fee expense related to the distributor
contracts, included in cost of revenues in the accompanying statements of
operations, was approximately $346,000, $213,000 and $0 for the years ended
September 30, 1998, 1997 and 1996, respectively. The year 2000 expenses related
to the distributor contracts, included in sales and marketing expenses, were
approximately $1,037,000, $640,000 and $0 for the years ended September 30,
1998, 1997 and 1996, respectively.
PURCHASED SOFTWARE:
During the year ended September 30, 1997, Forecross commissioned and
purchased a $150,000 data analysis module for use with its year 2000 software
products. The software developer is an entity owned in part by the senior vice
president, another employee of the Company, and another shareholder.
5. EQUIPMENT AND FURNITURE:
Equipment and furniture is comprised of the following:
<TABLE>
<CAPTION>
September 30,
-----------------------
1998 1997
----------- ----------
<S> <C> <C>
Computer equipment and software $ 852,137 $ 700,554
Furniture and equipment 310,890 218,971
Leasehold improvements 77,117 25,599
----------- ----------
1,240,144 945,124
Accumulated depreciation and amortization (671,909) (404,320)
----------- ----------
$ 568,235 $ 540,804
=========== ==========
</TABLE>
<PAGE>
6. PAYABLE TO FACTOR:
In October 1995, Forecross entered into a recourse factoring agreement with
a financial organization whereby its is able to obtain financing of up to 80% of
purchased trade accounts receivable, with a maximum available limit of
$1,250,000. In addition to an administrative fee of 1% of each invoice financed,
the Company will incur interest at the rate of 2% per month on the outstanding
gross amount of the receivables financed. The Company's obligations under this
agreement have been personally guaranteed by its president and senior vice
president, who are significant shareholders. At September 30, 1998 and December
31, 1998 the Company's outstanding indebtedness under the agreement was
$468,000 and $679,000, respectively. There was no outstanding indebtedness under
the agreement as of September 30, 1997. The agreement may be terminated by
either the factor or Forecross at any time.
7. INCOME TAXES:
The components of the provision for income taxes are summarized as follows:
<TABLE>
<CAPTION>
For the Years Ended September 30,
---------------------------------
1998 1997 1996
-----
<S> <C> <C> <C>
Current:
State $ 800 $ 800 $ 800
Foreign -- -- 1,500
-----
Total provision for income taxes $ 800 $ 800 $2,300
=====
</TABLE>
The effective income tax rate differs from the statutory federal income tax rate
primarily due to the full valuation allowance against our deferred tax assets
arising from its net operating losses.
Significant components of our net deferred tax balances are as follows:
<TABLE>
<CAPTION>
September 30,
-------------------------
1998 1997
------------ ------------
<S> <C> <C>
Deferred tax assets (liabilities):
Accrual to cash adjustment $ 1,236,000 $ 804,000
Net operating loss carryforwards 1,793,000 1,422,000
State taxes, net of federal benefit, and other (147,000) (122,000)
------------ ------------
Total deferred tax assets 2,882,000 2,104,000
Valuation allowance (2,882,000) (2,104,000)
------------ ------------
Net deferred tax assets $ -- $ --
============ ============
</TABLE>
Since the Company could not determine if it was more likely than not that
the deferred tax assets would be realized, a 100% valuation allowance has been
provided to eliminate the deferred tax assets at September 30, 1998 and 1997.
The increase in the valuation allowance was $778,000, $552,000 and $715,000 in
the years ended September 30, 1998, 1997 and 1996, respectively. Of the 1996
increase, $448,000 represented a change in the expected federal rate at date of
realization from 20% to 34%.
<PAGE>
At September 30, 1998, Forecross has net operating loss carryforwards for
federal and California state income tax purposes of approximately $4,660,000 and
$2,269,000 respectively. These carryforwards expire in varying amounts between
1999 and 2012. Pursuant to the provisions of the Tax Reform Act of 1986,
utilization of these net operating loss carryforwards may be subject to an
annual limitation due to a greater than 50% change in the ownership of our
Company within a three-year period.
8. COMMON STOCK:
In connection with a May 1995 private placement in which 735,000 shares of
common stock were sold, the Company issued 735,000 warrants to purchase
additional shares of common stock at $.40 and $.60 per share if exercised prior
to August 31, 1995 and November 30, 1995, respectively. In August 1995, warrants
were exercised to purchase 183,750 shares at $.40 per share. Warrants to
purchase the remaining 551,250 shares of common stock at $.60 per share were
exercised in November 1995.
In December 1996, Forecross sold 282,000 shares of common stock in a
private placement resulting in proceeds of $1,128,000, and incurred $5,275 of
costs related to this sale. In connection with the sale, the investors received
nontransferable warrants to purchase an additional 282,000 shares of common
stock. The warrants are exercisable for a period of two years, at a price of
$4.00 per share during the first year and at $4.60 per share during the second
year. During the year ended September 30, 1998, warrants to purchase 12,000
shares of common stock were exercised, resulting in proceeds of $48,000.
In December 1998, in exchange for the surrender of certain demand
registration rights currently held by the warrant holders, and certain other
consideration, the Board of Directors approved the following: a one year
extension to December 31, 1999 of the expiration date of warrants to purchase
the remaining 270,000 shares of common stock at $4.60 per share; and, the
issuance of 10,000 shares of common stock to the warrant holders. Under FAS 123,
the value attributable to the extension of the term of the warrants was
determined to be $27,000, and the value of the common stock was determined to
be $11,250. Those amounts have been included in other expense in the statement
of operations for the three months ended December 31, 1998.
9. RESTRICTED STOCK PURCHASE PLAN:
In June 1993, the Board of Directors approved the 1993 Restricted Stock
Purchase Plan (the "Plan"). The Plan allows employees and consultants to
purchase shares of the Company's common stock at a price not less than the fair
value. The maximum aggregate number of shares which may be sold under the Plan
is 1,000,000 shares of common stock. During the year ended September 30, 1994,
50,000 shares were sold under the Plan. No shares were sold under the Plan in
1998, 1997, 1996, or 1995.
Shares purchased under the Plan are subject to a right of repurchase by
Forecross at the original purchase price upon the termination of the purchaser's
employment or consulting relationship with the Company. Except for the initial
stock purchases in 1993, for which the vesting commenced on June 25, 1992, the
right to repurchase generally lapses at the rate of one-third (1/3) after one
year from the date of purchase, and one-thirty-sixth (1/36) of the original
number of shares purchased per month thereafter. At September 30, 1998 and 1997,
no shares are subject to repurchase under this provision. No shares were
repurchased during the years ended September 30, 1998, 1997 or 1996.
In partial consideration for stock purchased under the Plan, the Company
received promissory notes with an aggregate balance of $7,973 as of September
30, 1996. These notes were paid in full during 1997.
10. STOCK OPTION PLAN:
In April 1994, the Board of Directors approved the 1994 Stock Option Plan,
whereby employees and consultants may be granted incentive and non-statutory
stock options. Depending on the employee's stock ownership percentage,
incentive stock options are granted with exercise prices ranging from 100% to
110% of the fair value of stock at the date of grant. Depending on stock
ownership percentage, non-statutory stock options are granted with exercise
prices ranging from 85% to 110% of the fair value of stock at the date of grant.
The maximum aggregate number of shares of common stock which may be optioned and
sold under the plan is 950,500. The term of each option is that stated in each
specific option agreement provided that the term does not exceed ten years from
the date of grant (five years in the case of an optionee already owning common
stock representing 10% or more of the voting power).
<PAGE>
Stock option activity under the Plan is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
WEIGHTED
SHARES AGGREGATE AVG.
AVAILABLE NO. OF PRICE PER EXERCISE EXERCISE
FOR GRANT SHARES SHARE PRICE PRICE
----------
<S> <C> <C> <C> <C> <C>
Balance, September 30, 1995 908,000 42,500 $ 2.00 $ 85,000 $ 2.00
Granted during 1996 (561,500) 561,500 1.43-4.75 1,007,125 1.79
Canceled during 1996 10,000 (10,000) 2.00 (20,000) 2.00
---------- ----------- ------------ ---------
Balance, September 30, 1996 356,500 594,000 1.43-4.75 1,072,125 1.80
Granted during 1997 (131,800) 131,800 9.70-19.00 1,809,010 13.73
Exercised during 1997 -- (14,000) 2.00-9.70 (39,550) 2.83
Canceled during 1997 8,500 (8,500) 2.00-4.75 (33,500) 3.94
---------- ----------- ------------ ---------
Balance, September 30, 1997 233,200 703,300 1.43-19.00 2,808,085 3.99
Granted or repriced during 1998 (164,800) 164,800 8.02-11.50 1,663,996 10.10
Exercised during 1998 -- -- -- -- --
Canceled during 1998 144,300 (144,300) 4.75-19.00 (1,915,710) 13.28
---------- ----------- ------------ ---------
Balance, September 30, 1998 212,700 723,800 1.43-11.50 2,556,371 3.53
========== ========= =========== ============ =========
</TABLE>
The following table summarizes information with respect to stock options
outstanding at September 30, 1998.
<TABLE>
<CAPTION>
NUMBER
NUMBER WEIGHTED AVG. WEIGHTED EXERCISABLE WEIGHTED
RANGE OF OUTSTANDING AT REMAINING AVG. AT AVG.
EXERCISE SEPTEMBER 30, CONTRACTUAL EXERCISE SEPTEMBER EXERCISE
PRICE 1998 LIFE (YEARS) PRICE 30, 1998 PRICE
- ---------- -------------- -------------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
1.43-$2.00 517,500 2.40 $ 1.45 517,500 $ 1.45
4.75 52,500 3.17 4.75 52,500 4.75
8.02-11.50 153,800 4.24 10.12 118,686 9.945
1.43-11.50 723,800 2.85 $ 3.53 688,686 $ 3.16
</TABLE>
In April 1998, at the request of the Board of Directors, the Vancouver
Stock Exchange approved a repricing of the options then outstanding at $15.35
and $19.00 per share to $11.15 per share, which equaled the market price at the
date of the repricing grant. 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 the options then outstanding at $9.70 and
$12.70 per share to $8.02 per share, which equaled the market price at the date
of the repricing grant. Other terms of those options remain the same.
Forecross applied APB Opinion No. 25, Accounting for Stock Issued to Employees,
in accounting for the option plan. Accordingly, no compensation cost has been
recognized for our stock option plan. Had compensation cost for our stock
option plan been determined consistent with SFAS No. 123, Accounting for
Stock-Based Compensation, the Company's net loss and net loss per share would
have been the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Years Ended September 30,
----------------------------------
1998 1997 1996
<S> <C> <C> <C> <C>
Net loss As reported $(2,328,652) $(1,045,511) $ (461,046)
Pro forma (2,893,374) (2,043,097) (1,038,641)
Net loss per share- As reported (0.20) (0.09) (0.04)
basic and diluted
Pro forma (0.25) (0.18) (0.09)
</TABLE>
<PAGE>
The fair value of stock option grants is amortized over the vesting period.
The average fair values of options granted during the years ended September 30,
1998, 1997 and 1996 (including repriced options) were $2.35, $10.09 and $1.03,
respectively. The fair value was estimated as of the date of grant using a
modified Black-Scholes option pricing method based upon the following weighted
average assumptions:
<TABLE>
<CAPTION>
September 30,
-------------------
1998 1997 1996
-------------------
<S> <C> <C> <C>
Expected life (years) 2.1 2.5 2.5
Expected volatility 116% 125% 102%
Risk free interest rate 5.60% 6.22% 5.70%
</TABLE>
11. PROFIT SHARING AND RETIREMENT PLANS:
Forecross has a 401(k) profit sharing plan covering substantially all
employees, and match employee salary deferrals up to a maximum of 4% of the
participant's eligible compensation. The Company's cost of the 401(k) profit
sharing plan was $73,499, $66,670 and $25,556 in the fiscal years ended
September 30, 1998, 1997 and 1996, respectively.
Forecross also has a Money Purchase Pension Plan (Pension Plan). It was
required to contribute 10% of total participant compensation through December
1992 and 6% of total participant compensation from January 1, 1993 through
December 31, 1994. Effective January 1, 1995, contributions to the Pension Plan
were discontinued as the Company now contributes to the 401K Plan as described
above. There were no contributions to this Plan during 1998, 1997 or 1996.
12. LEASE COMMITMENTS:
Forecross leases office space and equipment under operating leases. Rent
expense under operating leases was $354,684, $184,344 and $125,820 in the fiscal
years ended September 30, 1998, 1997 and 1996, respectively. As of September
30, 1998, future minimum lease payments under operating leases are as follow:
<TABLE>
<CAPTION>
Years Ending September 30,
<S> <C>
1999 $ 331,564
2000 315,923
2001 312,726
2002 94,550
2003 209
----------
$1,054,972
==========
</TABLE>
13. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
Three Months Ended
December 31,
Years Ended September 30, (Unaudited)
------------------------------ ------------------
1998 1997 1996 1998 1997
-------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Interest paid $220,053 $290,648 $59,647 $30,712 $31,295
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
<TABLE>
<CAPTION>
Three Months Ended
December 31,
Years Ended September 30, (Unaudited)
---------------------------- ------------------
1998 1997 1996 1998 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Outstanding travel advances converted to
a note receivable from the Senior Vice
President $ - $37,013 $ - $ - $ -
Writeoff of accounts receivable against
accrued distributors' fees related thereto 288,302 - - - -
Acquisition of equipment and furniture - -
through capital lease 70,946 - -
Accrued interest on notes payable to 93,405 - - 31,292 300
officers
</TABLE>
<PAGE>
SCHEDULE II
-----------
FORECROSS CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
ALLOWANCES AGAINST RECEIVABLES:
<TABLE>
<CAPTION>
Additions
----------------------
Charges to Deductions -
Balance, Revenues or Write-offs Balance, End
Beginning of Costs and Charged to of
Period Expenses(1) Reserve Period
----------- ----------- ----------- -----------
Year Ended September 30,
<S> <C> <C> <C> <C>
1998 $300,340 $124,952 $288,642 $136,650
1997 340 300,000 - 300,340
1996 3,500 - 3,160 340
<FN>
(1) Certain Allowances Related To Contract Estimations For Amounts Of Revenue
Recognized On Percentage-Of-Completion Basis Are Charged Directly To Revenues.
See Summary Of Significant Accounting Policies
</TABLE>
<PAGE>
NO DEALER, SALESPERSON OR OTHER PERSON IS AUTHORIZED TO
GIVE ANY INFORMATION OR TO REPRESENT ANYTHING NOT
CONTAINED IN THIS PROSPECTUS. YOU MUST NOT RELY ON
ANY UNAUTHORIZED INFORMATION OR REPRESENTATIONS.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE
MADE UNDER THIS PROSPECTUS IMPLIES THAT THERE HAS BEEN
NO CHANGE IN OUR AFFAIRS SINCE THE DATE OF THIS
PROSPECTUS OR THAT THE INFORMATION CONTAINED IN THIS
PROSPECTUS IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE
DATE OF THIS PROSPECTUS. THIS PROSPECTUS IS AN OFFER
TO SELL ONLY THE SECURITIES OFFERED HEREBY, BUT ONLY
UNDER CIRCUMSTANCES AND IN JURISDICTIONS WHERE IT IS
LAWFUL TO DO SO. THE INFORMATION CONTAINED IN THIS
PROSPECTUS IS CURRENT ONLY AS OF ITS DATE.
_____________________________________________
TABLE OF CONTENTS 448,333 Shares
Page
----
Prospectus Summary
Risk Factors Common Stock
Use of Proceeds
Dividend Policy
Capitalization
Dilution [INSERT LOGO]
Selected Financial Data
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Business FORECROSS CORPORATION
Management
Principal Stockholders
Related Party Transactions
Description of Share Capital _______________
Shares Eligible for Future Sale Prospectus
Selling Stockholders _______________
Plan of Distribution
Legal Matters
Experts
Additional Information
Index to Financial Statements F-1
_____________________________________________
UNTIL ________, 1999 (25 DAYS AFTER THE DATE OF THIS
PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE
REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION
TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. , 1999
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
--------------------------------------
Item 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth all costs and expenses payable by Forecross
Corporation in connection with the sale and distribution of the securities being
registered, other than underwriting discounts and commissions. All amounts
shown are estimates except the Securities and Exchange Commission registration
fee.
<TABLE>
<CAPTION>
<S> <C>
Securities and Exchange Commission registration fee $xxx
Accounting fees and expenses xxx
Legal fees and expenses xxx
Printing and engraving expenses xxx
Transfer agent and registrar fees xxx
Blue Sky fees and expenses xxx
Miscellaneous expenses xxx
Total $xxx
</TABLE>
Item 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article ________ of the Articles of Incorporation of Forecross
Corporation eliminates the personal liability of directors and/or officers to
Forecross or its stockholders for monetary damages for breach of fiduciary duty
as a director; provided that such elimination of the personal liability of a
director and/or officer of Forecross does not apply to (i) any breach of such
person's duty of loyalty to Forecross or its stockholders, (ii) acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) actions prohibited under Section ____of the California
Corporations Code (i.e., liabilities imposed upon directors who vote for or
assent to the unlawful payment of dividends, unlawful repurchases or redemption
of stock, unlawful distribution of assets of Forecross to the stockholders
without the prior payment or discharge of Forecross' debts or obligations, or
unlawful making or guaranteeing of loans to directors and/or officers), or (iv)
any transaction from which the director derived an improper personal benefit.
In addition, Article _______ of Forecross' Articles of Incorporation, and
Article ____of Forecross' By-Laws, provide that Forecross shall indemnify its
corporate personnel, directors and officers to the fullest extent permitted by
the California Corporations Code, as amended from time to time.
Item 15. RECENT SALES OF UNREGISTERED SECURITIES.
The following table sets forth information regarding issuances of common stock
by the Company during the three years ended September 30, 1998 and during the
three months ended December 31, 1998. (6).
<TABLE>
<CAPTION>
Number Of Shares Gross Proceeds ($U.S.) Nature Of Consideration
- ---------------- ---------------------- ----------------------------
<C> <C> <S>
551,250 330,750 Cash (1)
282,000 1,128,000 Cash (2)
14,000 39,550 Cash (3)
12,000 48,000 Cash (4)
10,000 11,250 Other (5)
</TABLE>
1. These shares were issued in November 1995 upon the exercise of warrants
issued in connection with the private placement of 735,000 common shares in
May 1995. Previously, warrants for the purchase of 183,750 common shares were
exercised in August 1995. The Company incurred $2,328 of costs related to this
sale.
2. These shares were issued in connection with a private placement completed
in December 1996 of Units consisting of one share of Common Stock and one
non-transferable share purchase warrant to purchase an additional share of
Common Stock for a period of two years from the date of issuance at an exercise
price of $4.00 per share in the first year and $4.60 per share in the second
year. The purchasers of the shares are relatives of the president of the
Company, but not members of his immediate family. The Company incurred $5,275
of costs related to this sale.
3. These shares were issued during the fiscal year ended September 30, 1997
upon the exercise of stock options for 12,500 shares at $2.00 per share, and
1,500 shares at $9.70 per share.
4. These shares were issued in October and November 1997 upon the exercise
of warrants issued in connection with the private placement of 282,000 shares
in December 1996.
5. These shares were issued in December 1998 in exchange for the surrender
of certain demand registration rights held at the time by existing warrant
holders, and certain other consideration. Under FAS 123, the value of the
common stock was determined to be $11,250. In addition, in connection with this
issuance, the Board of Directors approved the extension to December 31, 1999 of
the expiration date of warrants to purchase 270,000 shares of common stock at
$4.60 per share, which warrants were originally scheduled to expire December 31,
1998. Under FAS 123 the value attributable to the extension of the term of the
warrants was determined to be $27,000.
6. Subsequent to December 31, 1998, the Company issued 418,333 shares of
its common stock for $0.75 per share in a private placement. As part of the
private placement, the Company also issued a warrant for the acquisition of
30,000 shares of common stock.
The Company has issued shares of its common stock to certain employees
(including officers) pursuant to compensation benefit plans of the Company. The
transactions described in this paragraph were exempt from the registration
requirements of the Securities Act based upon Rule 701 promulgated thereunder.
Item 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
- --- --------
<TABLE>
<CAPTION>
Exhibit No. Description
- ------------------- --------------------------------------------------------------------------------
<C> <S>
3.1+ Restated Articles of Incorporation.
3.2+ By-Laws.
5.1*** Opinion of Greenberg Traurig
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
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
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.
23.1*** Consent of Greenberg Traurig (included in Exhibit 5.1)
23.2** Consent of BDO Seidman LLP
27.1** Financial Data Schedule, December 31, 1998
<FN>
- ----------------------
+ 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.
** Filed herewith.
*** To be filed by amendment.
</TABLE>
Item 17. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement;
<PAGE>
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof; and
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 that is incorporated by reference in the
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers, and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer, or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-1 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of San Francisco, California, on the 26th day of March
1999.
FORECROSS CORPORATION
By /s/ Bernadette C. Castello
------------------------
Bernadette C. Castello
Senior Vice President and Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Kim O. Jones and Bernadette C. Castello, and each
of them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments (including post-effective
amendments) to this registration statement, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, and any other regulatory authority, granting
unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or their substitutes, may lawfully
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------- ------------------------------------------ --------------
<S> <C> <C>
/s/ Kim O. Jones
- ----------------------- Chief Executive Officer, President and March 29, 1999
KIM O. JONES Director (principal executive officer)
/s/ Bernadette C. Castello
- ----------------------- Senior Vice President, Chief Financial March 29, 1999
BERNADETTE C. CASTELLO Officer and Director (principal financial
and accounting officer)
- ----------------------- Director March 29, 1999
RICHARD A. CARPENTER
- ----------------------- Director March 29, 1999
RICHARD L. CURRIER, JR.
</TABLE>
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________
EXHIBITS
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
__________
FORECROSS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use in the prospectus constituting a part of this
registration statement of our report which is contained in that prospectus dated
November 19, 1998, relating to the financial statements and schedule of
Forecross Corporation which is contained in that prospectus. Our report contains
an explanatory paragraph regarding the Company's ability to continue as a going
concern.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
/s/ BDO Seidman, LLP
BDO SEIDMAN, LLP
San Francisco, California
March 29, 1999
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE UNAUDITED
BALANCE SHEET AS OF DECEMBER 31, 1998 AND THE STATEMENT OF OPERATIONS FOR THE
THREE MONTHS ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 42244
<SECURITIES> 0
<RECEIVABLES> 847131
<ALLOWANCES> 136650
<INVENTORY> 0
<CURRENT-ASSETS> 803411
<PP&E> 1240144
<DEPRECIATION> 747902
<TOTAL-ASSETS> 1405329
<CURRENT-LIABILITIES> 3737047
<BONDS> 0
<COMMON> 4753765
0
0
<OTHER-SE> (8761190)
<TOTAL-LIABILITY-AND-EQUITY> 1405329
<SALES> 0
<TOTAL-REVENUES> 759915
<CGS> 642606
<TOTAL-COSTS> 642306
<OTHER-EXPENSES> 752432
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 133988
<INCOME-PRETAX> (769111)
<INCOME-TAX> 0
<INCOME-CONTINUING> (769111)
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (769111)
<EPS-PRIMARY> (.07)
<EPS-DILUTED> (.07)
</TABLE>
