SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X} QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-29672
FORECROSS CORPORATION
---------------------
(Exact name of registrant as specified in its charter)
California 94-2823882
---------- ----------
(State or other jurisdiction (I.R.S. Employer
incorporation or organization Identification No.)
90 New Montgomery Street, San Francisco, California 94105
----------------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(415) 543-1515
-----------------------------------------------------
(Registrant's telephone number, including area code)
N/A
-----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant ( 1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
Shares outstanding of the Registrant's common stock:
Class Outstanding at December 31, 1998
Common Stock, no par value 11,763,612
1
<PAGE>
PART I-FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- -------- --------------------
<TABLE>
<CAPTION>
FORECROSS CORPORATION
BALANCE SHEETS
December 31, September 30,
1998 1998
------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 42,244 $ 98,249
Accounts receivable, including unbilled receivables of $418,464
and $489,808, net of allowance of $136,650 and
$136,650, respectively . . . . . . . . . . . . . . . . . . . . . . . 710,481 1,170,117
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . 50,686 49,628
------------ ------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . 803,411 1,317,994
Equipment and furniture, net . . . . . . . . . . . . . . . . . . . . . 492,242 568,235
Notes receivable from others . . . . . . . . . . . . . . . . . . . . . 66,661 67,131
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43,015 42,359
------------ ------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,405,329 $ 1,995,719
============ ============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 193,605 $ 224,991
Accrued compensation and related benefits . . . . . . . . . . . . . . 209,019 235,135
Accrued liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . 108,651 73,301
Accrued commissions and distributors' fees . . . . . . . . . . . . . . 1,250,559 1,228,375
Payable to factor . . . .. . . . . . . . . . . . . . . . . . . . . . 678,691 467,734
Accrued warranty costs . . . . . . . . . . . . . . . . . . . . . . . . 199,612 205,975
Capital lease obligations due within one year. . . . . . . . . . . . . 20,839 20,103
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . 715,877 598,193
------------ ------------
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . 3,376,853 3,053,807
Deferred revenue, less current portion . . . . . . . . . . . . . . . . 1,404,166 1,545,417
Notes payable to officers, net ) . . .. . . . . . . . . . . . . . . . 595,264 631,392
Capital lease obligations, less current portion. . . . . . . . . . . . 36,471 41,667
------------ ------------
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . 5,412,754 5,272,283
------------ ------------
Shareholders' deficit:
Common stock, no par value; authorized 20,000,000 shares; issued and
outstanding 11,773,612 and 11,763,612, respectively . . . 4,726,765 4,715,515
Warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,000 -
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . . . . (8,761,190) (7,992,079)
------------ ------------
Total shareholders' deficit. . . . . . . . . . . . . . . . . . . . . . (4,007,425) (3,276,564)
------------ ------------
Total liabilities and shareholders' deficit. . . . . . . . . . . . . $ 1,405,329 $ 1,995,719
============ ============
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
FORECROSS CORPORATION
STATEMENTS OF OPERATIONS
For the Three Months Ended
December 31,
--------------------------
1998 1997
------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C>
Net revenues:
Services and maintenance . . . . . . . . $ 623,665 $ 1,247,988
Software licenses and distributorship
fees-related parties. . . . . . . . . . 136,250 136,250
------------ ------------
Total net revenues . . . . . . . . . . 759,915 1,384,238
Cost of services and maintenance
including fees to related parties of
$31,000, and $49,000, respectively . . . 642,606 1,153,265
------------ ------------
Gross margin . . . . . . . . . . . . . . 117,309 230,973
------------ ------------
Operating expenses:
Sales and marketing including fees to
related parties of $107,000,
and $148,000, respectively . . . . . . 224,860 337,780
Research and development . . . . . . . . 218,038 457,394
General and administrative . . . . . . . 309,534 268,822
------------ ------------
Total operating expenses . . . . . . . . 752,432 1,063,996
------------ ------------
Loss from operations . . . . . . . . . . (635,123) (833,023)
Interest and other expense, net. . . . . (133,988) (26,137)
------------ ------------
Loss before provision for income taxes . (769,111) (859,160)
Provision for income taxes . . . . . . . (0) (0)
------------ ------------
Net loss . . . . . . . . . . . . . . . $ (769,111) $ (859,160)
============ ============
Net loss per share - basic and diluted . $ (0.07) $ (0.07)
============ ============
Shares used in computing per share data 11,766,112 11,758,112
============ ============
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
FORECROSS CORPORATION
STATEMENTS OF CASH FLOWS
For the Three Months
Ended December 31,
1998 1997
------------ ------------
(Unaudited) (Unaudited)
<C> <C>
Increase (decrease) in cash resulting from:
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . . . $( 769,111) $ (859,160)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities-
Provision for uncollectible amounts. . . . . . - -
Depreciation and amortization. . . . . . . . . 75,993 49,470
Value of common stock issued and value
assigned to extension of warrant term . . . 38,250 -
Changes in operating assets and liabilities-
Accounts receivable. . . . . . . . . . . . . . 459,636 ( 314,121)
Other assets and accrued interest on notes
receivable from officers. . . . . . . . . . . (1,394) 91,345
Accounts payable and accrued liabilities . . . 25,697 254,138
Deferred revenue . . . . . . . . . . . . . . . (23,567) (97,351)
------------ ----------
Net cash provided by (used in) operating
activities. . . . . . . . . . . . . . . . . . (194,496) (875,679)
------------ ----------
Cash used in investing activities:
Purchase of equipment and furniture. . . . . . - ( 97,722)
Payments received on loans to officers . . . . - 81,858
Payments received on loans to key employees. . 150 300
------------ ----------
Net cash used in investing activities. . . . 150 ( 15,564)
------------ ----------
Cash flows from financing activities:
Proceeds from factoring of accounts receivable 1,090,336 760,320
Repayment of borrowings under factoring
arrangement . . . . . . . . . . . . . . . . . (879,379) (386,458)
Borrowings under note payable to officers . . . - 350,000
Repayment of borrowings under notes payable
-officers . . . . . . . . . . . . . . . . . . (67,420) -
Repayment of borrowings under capitalized leases (5,196) -
Net proceeds from issuance of common shares . - 48,000
------------ ----------
Net cash provided by financing activities. . 138,341 771,862
------------ ----------
Net increase (decrease) in cash. . . . . . . (56,005) 119,381
Cash at beginning of period. . . . . . . . . . 98,249 275,243
------------ ----------
Cash at end of period . . . . . . . . . . . . $ 42,244 $ 155,862
============ ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest . . . $ 30,712 $ 31,295
============ ==========
Supplemental disclosures of non-cash investing
and financing activities:
Accrued interest on notes payable to officers $ 31,292 $ 300
============ ==========
Value of common stock issued and assigned to
extension of warrant term in exchange for
surrender of certain demand registration
rights and certain other consideration $ 38,250 $ -
============ ==========
</TABLE>
4
<PAGE>
FORECROSS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. UNAUDITED INTERIM FINANCIAL STATEMENTS:
The unaudited interim financial statements of Forecross Corporation have been
prepared in conformity with generally accepted accounting principles, consistent
in all material respects with those applied in the Annual Report on Form 10-K
for the year ended September 30, 1998. The interim financial information is
unaudited, but, in the opinion of management, includes all adjustments
(consisting only of normal recurring adjustments) necessary to present fairly
the information set forth therein. The interim financial statements should be
read in connection with the financial statements and notes in the Company's
Annual Report on Form 10-K for the year ended September 30, 1998.
2. BASIS OF PRESENTATION AND GOING CONCERN:
Through December 31, 1998, the Company 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 doubt about the
ability of the Company to continue as a going concern. During fiscal 1999, the
Company expects to meet its working capital and other cash requirements with
cash derived from operations, short-term receivables and other financing as
required, and software license fees from organizations desiring access to the
Company's various product offerings. The Company's continued existence is
dependent upon 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 the
Company's 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 these uncertainties.
DEPENDENCE ON YEAR 2000 REVENUES:
The Company's revenues in fiscal 1999 and 1998 resulted in large part from
demand for Assess/2000 and Complete/2000TM services and licenses as awareness
of the year 2000 century date conversion problem has grown. Year 2000 services
and related revenue were 91% of the Company's total revenues in the three months
ended December 31, 1998 as compared to 51% of the Company's total revenues
in the three months ended December 31, 1997. Should the demand for the Company's
year 2000 solutions and products decline significantly as a result of new
technologies, competition or any other factors, the Company's professional
services fees and license revenues would be materially and adversely affected.
The Company anticipates that demand in the year 2000 market will decline,
perhaps rapidly, following the year 1999.
The Company 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 the Company be unable to market
other products and services as demand in the year 2000 market declines, whether
as a result of competition, technological change or other factors, the Company's
business, results of operations and financial condition will be materially and
adversely affected.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures,
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenue and expenses during the reporting period.
5
<PAGE>
Accordingly, actual results could differ from those estimates. The most
significant estimates subject to future uncertainties are those relating to
calculations of percentage of completion for projects in process and estimations
of warranty liability. It is at least reasonably possible that the significant
estimates used will change within a year.
RECLASSIFICATIONS:
Certain prior-year amounts have been reclassified to conform to current year
presentation.
4. CONCENTRATIONS OF CREDIT RISK AND FOREIGN SALES:
The Company performs ongoing credit evaluations of its customers and generally
does not require collateral on accounts receivable as the majority of the
Company's customers are large, well-established companies. Three customers
accounted for approximately 48%, 18% and 14% of the accounts receivable
balance at December 31, 1998, and four customers accounted for approximately
30%, 17%, 14% and 12% at September 30, 1998. Additionally, four customers,
including revenues from the Company's Distributors treated as resulting from
one customer, accounted for approximately 30%, 19%, 19% and 15% of total
revenues for the three months ended December 31, 1998. Two customers, including
revenues from the Company's Distributors treated as resulting from one customer,
accounted for 50% and 15% of total revenues for the three months ended December
31, 1997.
5. WARRANTS:
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: 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; 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.
6. SUBSEQUENT EVENT:
In January 1999, the Company sold in a private placement 418,333 shares of
common stock at $0.75 per share, resulting in gross proceeds of $313,750. In
connection with the private placement, the Company issued to a finder, in lieu
of cash, warrants to purchase 30,000 shares of common stock at $0.75 per share,
as a finder's fee, which warrants expire in five years.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS:
- ------- -----------------------------------------------------------------
The following summary of the Company's material activities for the three months
ended December 31, 1998 and 1997 is qualified by, and should be read in
conjunction with the financial statements and related notes and other
information contained in this report. The financial results reported herein do
not indicate the financial results that may be achieved by the Company in any
future period.
Other than the historical facts contained herein, this Quarterly Report contains
statements that are forward-looking, such as statements relating to plans for
future activities. Such forward-looking information involves important risks and
uncertainties that could significantly affect results in the future and,
accordingly, such results may differ from those expressed in any forward-looking
statements made by or on behalf of the Company. These risks and uncertainties
include, but are not limited to, those relating to the Company's growth
strategy, customer concentration, outstanding indebtedness, impact of expansion
and other activities of competitors, changes in federal or state laws
and the administration of such laws, protection of trademarks and other
proprietary rights, and the general condition of the economy and its effect on
the securities markets. For a discussion of such risks and uncertainties see
the Company's Annual Report on Form 10K for the fiscal year ended September 30,
1998.
BACKGROUND AND OVERVIEW
From the commencement of operations of its predecessor companies in June 1982,
the goal of Forecross has been to focus a small group of skilled technicians on
providing automated solutions to the specialized niche requirements of
the MIS departments of medium to large enterprise computing organizations
seeking to adapt their business applications software to a changing technology,
economic and business environment.
In response to its customers' growing year 2000 migration demands and using
the technology it had developed over the past fifteen years, during 1996 and
1997 the Company introduced its Complete/2000(TM) software products and
services. The Company has established 'factories' whereby it uses its software
products on its own premises and executes migration and year 2000 projects for
its customers. The Company continues to provide these automated application
migration and year 2000 services to its customers, using factories on its
premises as well as off-site factories that the Company can install at customer
locations to meet the specific demands of certain customers.
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. The Company's year
2000 compliance issues include (i) the computer hardware and internally
developed software which it uses in the performance of services for its
customers, (ii) the hardware and third-party software which it uses for
corporate administration, (iii) the services of third-party providers which it
purchases for certain professional services, and (iv) the external services
such as telecommunications and electrical power. The Company has initiated
a project that will attempt to identify all computer hardware and software,
other significant equipment, and services upon which it relies that may be
impacted. After identification of such items, the Company will verify whether
those products and services are year 2000-compliant. The verification process
will include both accessing the websites of vendors and service
providers to verify such compliance, and, if necessary, contacting those vendors
and service providers to determine their compliance or plans to become compliant
prior to December 31, 1999. It is the intent of the Company to complete this
verification process by early 1999.
The Company's administrative and operating systems are primarily PC-based,
utilizing commercially available software. Based on initial inquiries, which
have been substantially completed, management of the Company believes that
these commercial software applications are either year 2000-compliant now
or will have upgrades available at nominal cost which will be year
2000-compliant. The Company has already purchased an upgrade to its
accounting systems that will make it year 2000-compliant, for less than
$200. The Company's System 390 mainframe software is not year 2000-compliant,
however the Company has issued a purchase order for an upgrade to such software
from its vendor, to be performed in June 1999 at a cost of approximately
$8,500.
7
<PAGE>
A preliminary review of the Company's 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. The Company will execute a procedure, which
it has already tested on all of the non-compliant computers, to reset the date
to the correct, year 2000 date. If, nonetheless, the Company is not able to
modify those systems to become year-2000 compliant, it anticipates that the cost
of replacing such systems would be approximately $10,000, that the time required
to replace such systems would not exceed two weeks, and that, during the
replacement period, the Company's other, compliant systems could be used to
perform the work normally performed by the systems being replaced.
The Company relies on outside service providers for the processing and/or
administration of its payroll, 401(K) plan and benefits insurance programs.
Based on initial inquiries, which have not yet been completed, management of
the Company believes that those service providers will have systems that are
year 2000-compliant or that the Company will be able to select other
providers whose systems are year 2000-compliant with no significant increase in
the cost of those services. The internal software which the Company uses for
performing the migration projects, and the year 2000 assessment and renovation
projects, is year 2000-compliant.
The Company is developing a list of "non-computer" systems upon which it
relies, such as telecommunications equipment, building elevators, etc., in order
to determine whether such systems are in compliance with the year 2000. It is
anticipated that this review will be completed by March 31, 1999. Preliminary
review of such vendors' websites indicates that the Company's vendors all have
projects in process to ensure compliance well in advance of December 31, 1999.
The Company has not deferred any information technology projects to date due
to the need to assess or ensure year 2000-compliance of its systems, and,
based upon its initial efforts to date as described herein, does not anticipate
that any other information technology projects will be delayed in the future due
to this year 2000 project.
For the foregoing reasons, the Company does not anticipate that it will have
an incomplete or untimely resolution of the year 2000 issue. Although the
total costs of compliance have not as yet been definitely determined, management
believes that such costs will not be material. As previously indicated, with
respect to its internal systems as outlined above, the Company believes that it
has or will have achieved year 2000 compliance in advance of December 31, 1999.
With respect to external services provided by third parties, the Company is less
certain of the impact of year 2000 non-compliance. In the worst case scenario,
a failure of the electrical system which supplies power to the Company's
computers would disrupt both the Company's ability to conduct business and to
communicate with its customers, vendors and other suppliers, since the Company's
telephone system also requires electrical power. In this event, the Company
would be required to purchase these services from alternative providers. The
Company intends, as part of its "non-computer" systems review, to determine any
extraordinary costs and the amount of implementation time associated with such
change of providers.
THREE MONTHS ENDED DECEMBER 31, 1998 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
1997
Revenues for the three months ended December 31, 1998 were $759,915 as compared
to $1,384,238 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 $67,176 in the 1998 quarter as compared to $652,402
in the same quarter of 1997. Of the decrease, one major migration/renovation
project that was substantially completed during fiscal 1998 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, unlike application migration projects, are typically of
much shorter duration. 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 Forecross believes negatively affected
the backlog: (1) the temporary diversion of resources and attention away from
valuable but optional application migrations, into the mandatory resolution
of the year 2000 problem; and (2) the decision of some prospective
customers to attempt to perform the year 2000 renovation work internally,
or to delay commencing this work in favor of evaluating other
alternatives, such as purchasing a new software package that is year 2000
compliant and may operate on a new technology platform or rewriting the computer
source codes. While both of these developments appear to be temporary, they have
had the effect of slowing the rate at which Forecross has been able to obtain
contracts for such work, especially during the second half of the Company's 1998
fiscal year.
8
<PAGE>
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. 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 the Company and industry
in general. The Company 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, the Company 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 upon their
departures and laying off certain staff members who were hired in anticipation
of substantially more year 2000 business than the Company has 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 since one distributor had 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 the
Company focused its year 2000 sales efforts through its 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 48% due
to the completion during the 1998 fiscal year of a significant portion of the
development activity associated with the Complete/2000TM product and
enhancements to existing software products. This enabled the Company 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, the Company was 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 of the Company
to meet its 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 as discussed above in Note 5.
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, the Company 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
ability of the Company to continue as a going concern (see Note 2 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, the Company entered into a factoring agreement with a
financial organization whereby the Company is able to obtain financing by
borrowing against its accounts receivable 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 the Company at any time.
During the three months ended December 31, 1998, the Company's working capital
was reduced to levels that were lower than customary. This was due to the
slowdown in the Company's application migration business and the lack of a
substantial amount of year 2000 customer contracts (see "-Three months ended
December 31, 1998 compared to three months ended December 31, 1997".) The
Company has 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 upon their
departures and laying off certain staff members who were hired in anticipation
of substantially more year 2000 business than the Company has seen to date.
9
<PAGE>
These staff cuts, which affected 5 employees, do not negatively impact the
Company's ability to conduct its migration or year 2000 business. Moreover,
with the current staff complement, the Company has sufficient resources in all
required areas, to conduct all booked business and a substantial amount of
the business presently in its sales pipeline. Further, should a ramp-up of
resources be required to accommodate business in excess of the Company's
current capacity, such resources are readily available in the San Francisco
Bay area where the Company is located.
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, the Company completed private
placement of stock yielding gross proceeds of $313,750. Beyond these
immediate steps to address liquidity concerns, the Company expects 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, the Company does 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 December 31, 1998 (see "-Three
months ended December 31, 1998 compared to three months ended December 31,
1997"), the Company 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, the Company believes that it will be able to secure
such new renovation projects. In the meantime, management is continuing to
closely monitor the Company's prospective year 2000 project volume to evaluate
whether the existing sources of financing are adequate to support the operations
of the Company, or whether additional means of financing, including debt
or equity financing, may be required to satisfy its working capita and other
cash requirements.
Management believes that if it obtains the anticipated level of new
business, then continued use of short-term receivables financing, together with
the funds from the private placement referred to above, will be sufficient to
meet the Company's 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 the Company's needs.
The Company anticipates that its capital expenditures for fiscal 1999 will be
approximately $50,000 to $100,000.
10
<PAGE>
PART II-OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
- -------- ------------------
None.
ITEM 2. CHANGES IN SECURITIES
- -------- ---------------------
(a) On December 18, 1998, Forecross entered into a Warrant Expiration Agreement
with certain Forecross shareholders. The terms of that Agreement provided that
in exchange for the surrender of certain demand registration rights pertaining
to the warrants to purchase 270,000 shares of common stock at $4.60 per share
held by those shareholders, and certain other consideration, the Company agreed
to:
(1) extend the expiration date of the warrants to December 31, 1999 from
December 31, 1998, and
(2) issue an aggregate of 10,000 unregistered shares of common stock to
those warrant holders.
(c) On December 18, 1998, Forecross issued an aggregate of 10,000 shares of
common stock, no par value per share, to certain holders of warrants to purchase
Forecross common stock. These shares were issued in consideration of the
warrant holders surrendering certain demand registration rights pertaining to
their warrants and agreeing to not exercise the remaining demand registration
rights before March 31, 1999. The shares of common stock issued by Forecross
were exempt from the registration requirements of the Securities Act under
Section 4(2) of the Securities Act as a transaction by an issuer not involving a
public offering.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
- -------- -------------------------------
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -------- ---------------------------------------------------
None.
ITEM 5. OTHER INFORMATION
- -------- -----------------
None.
11
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -------- --------------------------------
(a). Index and Description of Exhibits
- ---- -------------------------------------
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- --------------------------------------------------------------------------------
<C> <S>
3.1+ Restated Articles of Incorporation
3.2+ By-Laws
10.1+ Lease Agreement, dated January 1, 1997
between the Company and The Canada Life Assurance Company
10.2+ Form of Indemnification Agreement entered into
between the Company and each of its officers and
directors
10.3+ 1993 Restricted Stock Purchase Plan
10.4+ 1994 Stock Option Plan and Form of Option Agreement
10.5*+ Exclusive Distributor Agreement between the
Company and Gardner Solution 2000, L.L.C., and
Amendment
10.6*+ Exclusive Distributor Agreement between the
Company and Y2K Solutions, L.P.,
10.7*+ Software License Agreement between the Company
and Y2K Solutions, L.P.
10.8+ Factoring Agreement, dated October 30, 1995, between
the Company and Silicon Valley Financial Services
10.9+ Lease Expansion Proposal dated November 17, 1997, between
the Company and The Canada Life Assurance Company
10.10+ Factoring Modification Agreement, dated January 13, 1998, between the Company
and Silicon Valley Financial Services
10.11*+ Exclusive Distributor Agreement between the Company and CY2K Solutions, L.L.C.
10.12*+ Software License Agreement between the Company and CY2K Solutions, L.L.C.
10.13*+ Exclusive Distributor Agreement between the Company and PY2K Solutions, L.L.C.
10.14*+ Software License Agreement between the Company and PY2K Solutions, L.L.C.
16.1+ Notice of Change of Auditor dated September 23, 1997, issued to all holders of
common shares of Forecross Corporation
16.2+ Letter dated September 23, 1997 from BDO Seidman, LLP to the British Columbia
Securities Commission and to the Vancouver Stock Exchange confirming the
accuracy of the information contained in the Notice of Change of Auditor of
Forecross Corporation dated September 23, 1997
16.3+ Letter dated September 23, 1997 from Coopers & Lybrand, L.L.P. to the British
Columbia Securities Commission and to the Vancouver Stock Exchange confirming
the accuracy of the information contained in the Notice of Change of Auditor of
Forecross Corporation dated September 23, 1997
16.4+ Letter dated September 23, 1997 from the Board of Directors of Forecross
Corporation to the shareholders of Forecross Corporation, the British Columbia
Securities Commission and the Vancouver Stock Exchange confirming the review of
the Board of Directors of the Notice of Change of Auditor and the related letter
dated September 23, 1997 from BDO Seidman, LLP and Coopers & Lybrand,
L.L.P.
27.1 Financial Data Schedule, 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.
</TABLE>
(b) REPORTS ON FORM 8-K
- --- --------------------
None
12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Registrant
FORECROSS CORPORATION
February 16, 1999 BY: /S/ Bernadette C. Castello
---------------------------------
Bernadette C. Castello
Senior Vice President and Chief Financial Officer
13
<PAGE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<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-30-1999
<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> 3376853
<BONDS> 0
<COMMON> 4726765
0
0
<OTHER-SE> (8734190)
<TOTAL-LIABILITY-AND-EQUITY> 1405329
<SALES> 0
<TOTAL-REVENUES> 759915
<CGS> 642606
<TOTAL-COSTS> 642606
<OTHER-EXPENSES> 752432
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 133988
<INCOME-PRETAX> (769111)
<INCOME-TAX> 0
<INCOME-CONTINUING> (769111)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (769111)
<EPS-BASIC> (0.07)
<EPS-DILUTED> (0.07)
</TABLE>
