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