SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X} ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission file number: 0-29672
FORECROSS CORPORATION
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(Exact name of registrant as specified in its charter)
California 94-2823882
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(State or other jurisdiction (I.R.S. Employer
incorporation or organization Identification No.)
90 New Montgomery Street, San Francisco, California 94105
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (415) 543-1515
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
(Title of Class)
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 .
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (s229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting common stock held by
non-affiliates of the Registrant as of December 15, 1999 was $3,722,000.
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INFORMATION REQUIRED IN REGISTRATION STATEMENT
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-K of Forecross Corporation ("Forecross" or the "Company")
contains forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 (the "Litigation Reform Act") that are subject to
risks and uncertainties. Statements indicating that the Company "expects,"
"estimates" or "believes" are forward-looking, as are all other statements
concerning future financial results, product offerings or other events that have
not yet occurred. There are several important factors that could cause actual
results or events to differ materially from those anticipated by the forward-
looking statements contained in this Form 10-K. Such factors include, but are
not limited to, the Company's unprofitable operating history and limited
financial resources; potential requirements for additional financing; volatility
of the Company's common stock; fluctuation of its quarterly operating results;
existing and potential competition; dependence on a small number of customers;
market size; no assurance of success of the Company's marketing strategy;
dependence on year 2000 revenues; no assurance of the ability to continue
product development as required and in a timely manner; limited experience
of management in the management of growth; control by officers and directors;
dependence on key personnel; the ability to adequately protect its intellectual
property; and general economic and market conditions. Additional information
on these and other certain business concerns is included elsewhere in this
Form 10-K.
ITEM 1. BUSINESS
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GENERAL BUSINESS DESCRIPTION
Forecross is a software company that, together with its predecessor
corporations, has been in business since 1982. Forecross develops, markets and
sells sophisticated software and associated services to large organizations for
the automated conversion ("migration") of existing business software
applications to new computing environments. During the period from 1996 through
1999, Forecross also developed, marketed and sold similar software and services
to large organizations for the automated assessment and renovation of non-year
2000-compliant business software applications.
INDUSTRY BACKGROUND
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 ("clients") to the open systems hardware
("servers") for business applications has expanded over the past five 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, 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.
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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. Therefore, 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 may not be fully integrated with newer business applications, may
have data which is not easily accessible to users, or may operate on technology
platforms which are no longer cost-effective. 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 take advantage of the new technologies and
platforms, such as the Internet, while preserving all of their valuable business
functionality.
AVAILABLE SOLUTIONS
The Company's management believes that there are three basic options
available to an MIS manager wishing to take advantage of these developments.
One option is to acquire commercially available application software
packages specifically designed to operate on the new technology platforms.
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 rewrite the computer source code of the existing
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 embedded 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. The Company has
developed a proprietary and innovative technology for the automated migration
and on-going standards compliance of existing applications. This allows
businesses to replace existing technologies (i.e., the system is re-hosted to a
new technology platform) while leaving the application functionally intact (see
"-Products"). Consequently, this option usually has the lowest cost and least
risk associated with it. For the Company's experience competing against these
other solutions, see "Competition---Competitive Position".
MARKET
At its broadest, the potential worldwide market for Forecross products is
comprised of approximately 30,000 large computer-using organizations. Generally
referred to as "enterprise computing" users, they include the so-called Fortune
2,000 companies, and comparable government, financial services, healthcare,
education and other service organizations. Most of these organizations automated
their major business applications before the advent of the new technologies and,
hence, find themselves with a large inventory of crucial information systems
based on rapidly obsolescing technology.
Forecross initially focused its primary attention upon the portion of the
North American enterprise computing market that was, at the time, comprised of
approximately 1,000 users (now 450 users) of Computer Associates Integrated
Database Management System (CA-IDMS) (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 upon reports in the industry press, Forecross
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. The Company's initial estimates indicated that outside North
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America there were an additional 1,000 or more CA-IDMS organizations. The
estimate of current CA-IDMS users outside North America is approximately 400.
These users also represent a potential market in which Forecross has already had
some initial success.
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 (initially estimated at 20,000 users for all
products listed, this portion of the enterprise computing market is currently
estimated to be between 15,000 and 20,000 users for all products listed). These
additional areas create opportunities for Forecross to develop other products
and give the Company added flexibility in responding to changes and developments
in the marketplace.
PRODUCTS
The Company has licensed and delivered its products and ancillary services
to customers throughout North America, and in Taiwan, France, Belgium, Germany,
and South Africa. Historically, customers have included Aetna Life Insurance,
AT&T, Bank of America NT & SA, Bank of Montreal, Bear Stearns & Company, IBM
Corporation, Home Savings of America, Kimberly-Clark Corporation, New Brunswick
Telephone, Price Waterhouse LLP, Royal Bank of Canada and Union Gas Corporation.
Recent and current Forecross customers include Charles Schwab & Company, Inc.,
Brown Brothers Harriman & Co., Sapiens USA., Inc., Ciber, Inc., Electronic Data
Systems Corporation, BDM International (now part of TRW Inc.), Harris Trust and
Savings Bank, and ACS, Inc.
Forecross products are designed to automate up to 100% of the conversion of
an existing application. It has been the experience of the Company that 95%
or more of the business application programs commonly found in large
computerized organizations (see "-Market") can be converted with close to full
(100%) automation. The remaining 5% can usually be processed with a significant
degree of automation (80% or more), enough to make conversion with Forecross
products a cost-effective and lower risk alternative. Converted applications
are functionally equivalent to their unconverted counterparts, and, in the
experience of the Company, maintainability and performance in the new
environment are typically unaffected or enhanced. Each Forecross product
includes a significant number of customization options which can be selected
by the user to obtain results closest to the specific conversion or
renovation objectives.
During 1999, Forecross developed two additional products aimed at extending
the scope of its conversion solution offerings. One tool, called 'Sentinel/Test
Suite', is used to test the converted applications to ensure that they are
functionally equivalent to their un-converted counterparts. The second tool,
called 'Sentinel/Integrity Manager' is aimed at ensuring that coding standards
and rules which are implemented when programs are originally developed, remain
in force as those programs go through the normal life cycle of on-going
maintenance and enhancements. These tools are currently offered as services
only, but the Company intends to offer end-user licenses in the future.
UNDERLYING PROPRIETARY TECHNOLOGY
The Company's powerful and flexible technology known as the XCODE
architecture, has been refined over the last thirteen years and forms the
foundation for all Forecross products, tools, and associated services.
The proprietary XCODE architecture of Forecross supports all of the
functions ordinarily required to automate the conversion of existing systems.
This includes parsing the source code, storing the code in a common repository,
identifying areas of the code that require technology upgrades, transforming
the old technology and generating revised source code for the operation of the
application in the new environment.
Forecross began developing its 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, Forecross 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. The Company's 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.
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COMMERCIALLY AVAILABLE PRODUCTS
Forecross has, 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)
Forecross is the owner of six of these products. Ownership of the following
products is shared: IMSADF II to Cross System Product Facility, which was
developed by Forecross, but is owned jointly with IBM; Convert/IMSADF II to
APS/COBOL, which was developed by Forecross, but is owned jointly with Bank of
America; and Fastforward/VSAM to SUPRA which was developed by Forecross pursuant
to a Development and License Agreement dated April 22, 1991, with Cincom
Systems, Inc. (the "Cincom Agreement") and is jointly owned by the Company and
Cincom. Forecross and IBM have joint marketing rights to the first product,
Forecross 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 the Company's business or its
near-term business plans.
PRODUCT DEVELOPMENT
The Company's 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 Forecross undertakes the development of a new
product, it generally requires 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 the Company's ability to employ this
strategy is its proprietary XCODE architecture. The XCODE architecture has
historically enabled the Company 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 the Company to fund most or all
of the development cost from the license revenue generated by the initial
development-funding customer.
Research and development expenses were $728,239, $1,520,709, and $1,006,768
in the years ended September 30, 1999, 1998 and 1997, respectively.
PRODUCT LICENSING
MIGRATION PRODUCT LICENSING
Forecross grants its customers a non-exclusive, non-assignable license to
use its software, including programs, options, documentation, data and
information. While certain provisions in the license agreement (e.g., 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 Forecross against defects in
design, operation and usability in the customer's computer environment, and each
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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 upon
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/2000TM LICENSING AND FACTORY SERVICES
During the 1999 fiscal year, Forecross offered product licenses and
services related to its year 2000 business. While it is possible that the
Company may obtain additional year 2000 business in the its 2000 fiscal year,
this is not very likely. However, during the 1999 fiscal year which is the
subject of this document, year 2000 business was conducted. Therefore, the
following descriptions of the product offerings of the Company are applicable.
Forecross offers product licensing for its 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.
Forecross offers "factory" services for customers of its Complete/2000TM
renovation and confirmation software. By "factory", the Company means 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" also implies the methodology by
which customer code flows into Forecross, through the factory, to the rules
engineers for issue resolution, to quality assurance for final review, and back
to the customer. Licenses are not currently offered. Utilizing the factory
renovation services, a customer sends its application code to the Forecross
factory where the code is either renovated for year 2000-compliance, compiled,
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 completely and correctly. 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.
INTELLECTUAL PROPERTY
Forecross has chosen to protect the intellectual property value of its
products and its proprietary XCODE architecture through trade secret and
confidentiality provisions in its product licensing arrangements,
confidentiality agreements with its 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 provides 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. The Company's products are also
protected against unauthorized use by imbedded and external access control
codes. There can be no assurance, however, that the protection relied upon by
the Company will be effective. Monitoring and identifying unauthorized use of
the Company's technology may prove difficult, and the cost of litigation may
impair the Company's ability to guard adequately against such infringement. The
commercial success of the Company may also depend upon its products not
infringing any intellectual property rights of others and upon no such claims of
infringement being made. Even if such claims are found to be invalid, the
dispute process could have a materially adverse effect on the Company's
business, results of operations and prospects.
MARKETING AND SALES STRATEGY
EXISTING APPLICATION MIGRATIONS
The developments in computer technology described above (see "-Industry
Background: Significant Industry Developments") have converged to produce the
need and create the opportunity to convert existing applications. Because of
this, the Company has had to experiment with a number of different techniques to
create market awareness of its technology and products, and to provide an easy
way for potential customers to evaluate and license its products.
Between 1989 and 1992, Forecross experimented with two different approaches
using third parties to market and sell its products. One approach involved an
exclusive marketing and sales agreement with a large technology services firm
principally engaged in providing consulting services. The other approach
involved a technology transfer agreement relating to three specific software
products (Convert/ADSO to COBOL, Convert/IDMS-DC to CICS and Convert/IDMS-DB
to SQL), and an exclusive distribution agreement, with a start-up software
company, AdvantEdge Systems Group, Inc. ("ASG").
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In view of its experience with selling its products through third parties,
Forecross decided in 1992 to develop and implement its own direct marketing and
sales strategy. The Company's marketing and sales strategy has several elements
designed to overcome the problems previously encountered. It has expanded
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 Forecross from its competitors. Conventional techniques such as
trade publication notices, direct mail, telemarketing, and, most recently, its
own site (www.forecross.com) on the Internet are being used to bring the
Company's products and their benefits to the attention of prospective customers.
Additionally, Forecross has 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, Forecross has created a
strategy to simplify the process for potential customers to evaluate and invest
in its products. The Company has accordingly adopted a phased marketing
approach which 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.
The Company's principal marketing programs involve the Migration
Alternatives Planning Seminar ("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 the Forecross staff.
Evaluations of prior MAPS sessions suggest that many of the Company's MAPS
customers will decide to select Factory Compile or License-Only within twelve
months of the MAPS session.
Forecross offers its customers the option to use its 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. Forecross calls this type of
engagement a "Factory Compile." 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 Forecross
products and, with training and additional optional consulting provided by
Forecross, 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 the Company's 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 offerings (Factory Compile and License-Only), a
customer's use of Forecross 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 in the
1999 fiscal year, Forecross took an approach to marketing its year 2000 products
that was slightly different from its migration marketing.
The Company 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, Forecross
offered its Assess/2000 product through non-exclusive license arrangements with
consulting firms and other solution providers who did not market similar
software from other vendors. For the renovation and confirmation functions,
Forecross sought and entered into contractual arrangements with distributors
who, for a fee, obtained exclusive marketing rights for Complete/2000TM within
a geographic territory. Exclusivity was generally for an initial term of one
year and was automatically extended annually for a total of four subsequent
years, provided that the distributor had 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 received
a fee equal to twenty-five percent (25%) of collected revenues. In the case
of one contract, under which a substantial portion of the year 2000 projects
were conducted, the distributor's fee was fifty percent (50%) of collected
revenues until $1,500,000 had been received by the distributor and twenty-five
percent (25%) of revenue collected thereafter. During fiscal 1998, the
$1,500,000 amount had been earned, and all subsequent fees were earned at the
25% rate. Forecross has 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. While Forecross may
market its year 2000 products and services directly in territories not
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represented by distributors, its strategy was to leverage its ability to
penetrate the large nationwide market by using a network of licensees and
distributors.
In addition, the Company has formed alliances through teaming agreements
with consulting firms and service providers for year 2000 services. As of
September 30, 1999, Forecross had signed teaming agreements with BDM
International, Inc., Electronic Data Systems Corporation (EDS), NCR Corporation,
Sapiens USA, Inc., Ciber, Inc. SCB Computer Technology, Inc., as well as some
smaller firms.
SALES AND LICENSING REVENUES
From 1994 though 1996, the Company's revenues were generated primarily by
migration projects, with some revenues contributed by MAPS presentations.
During that period, the Company 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, 1999
1998 and 1997, year 2000 assessment projects, sales of licenses to the Assess/
2000 software, and fees associated with distributorships for Complete/2000TM
products and services accounted for eighty-eight percent, sixty-two percent and
forty-two percent, respectively, of total revenue.
COMPETITION
The marketplace for application migrations is served by both software
and services vendors. Forecross is not aware of any vendor, whether of software
or services, who offers the degree of automated conversion achievable through
use of Forecross products.
SOFTWARE VENDORS
The Company believes 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 Forecross is aware, the
software products do not provide the near-complete and comprehensive automated
conversion of business applications as those performed by Forecross products.
SERVICE SUPPLIERS
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.
The Company's 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 the Company's software automates significantly more of the conversion
(95% to 100%) than can be achieved with other products, management believes that
Forecross is able to compete effectively with such service suppliers. The
Company typically prices its Factory Compile offering (see "-Marketing and Sales
Strategy") below the prices quoted by the service suppliers who perform
conversions. Management believes that its 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.
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COMPETITIVE EXPERIENCE
The Company's experience in the competitive bidding process employed by
many of its prospective customers, leads it to believe that it has a price
advantage over a majority of the other bidders. Such bidders' costs are
typically higher due to their dependence on skilled people, as compared with the
Company's dependence on less costly automation. However, the Company has not
historically enjoyed the same degree of market recognition as many of its large
competitors, such as the national consulting or accounting firms against whom it
often competes.
Until the emergence of the year 2000 problem, some customers did not
embrace the idea that automation could help them solve their problem. 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. The Company has 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. Management believes that potential customers of these
tools and services are now more accustomed to dealing with such vendors. The
Company believes that it has the capability to compete favorably because of
these trends, and because it has steadily built its 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 the Company's chosen market. There are, in addition, certain other
elements of risk which bear upon the Company's competitive position (see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations: Certain Business Concerns: Additional Financing; Competition;
Market Size; No Assurance of Success of Marketing Strategy; Product Development;
and Limited Experience of Management in the Management of Growth"). Moreover,
(as indicated under "-Industry Background: Available Solutions") 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 the Company to assess how many potential customers have
availed themselves of the other alternatives (i.e., 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 Forecross does not
actively track prospects who fail to meet the Company's initial sales
qualification criteria. Among qualified prospects who ultimately do not purchase
from Forecross, the rewriting option generally prevails.
CORPORATE HISTORY AND EMPLOYEES
CORPORATE HISTORY
The Company was 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, Forecross succeeded to the business that had been carried
on by the predecessor corporations since 1982. References in this Form 10-K to
Forecross Corporation, Forecross, or the Company should be taken to include a
reference to its predecessor companies.
EMPLOYEES
As of September 30, 1999, Forecross had 39 employees. Of these, eleven
work primarily in the Factory or on customer Factory Compile projects, three
are engaged primarily in research and development work, six are in project
management, six are in technical support, three are in quality assurance, two
are in sales and marketing and eight 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 or have an interest in competing businesses, and
requires them to promptly disclose to Forecross the product of all work done by
them while employed by, and for, the Company, and to assign to the Company all
rights in such work product.
BACKLOG
Backlog was $1,172,000 at September 30, 1999 as compared to $531,000
at September 30, 1998. (See "Management's Discussion and Analysis of Financial
Condition and Results of Operations.)
8
<PAGE>
ITEM 2. PROPERTIES
- -------- ----------
The Company's principal executive offices are located at 90 New Montgomery
Street, San Francisco, California 94105, where it occupies approximately 6,200
square feet of leased space under a lease which expires in February 2002. Annual
base rent under the lease is approximately $152,000. The Company occupies an
additional 4,000 square feet space in its current location under a lease which
expires in December 2001. Annual base rent for this space is approximately
$143,000 per year. The Company also maintains a small sales office in San Diego,
California, and a small apartment in San Francisco for use by its out-of-town
staff while visiting the executive offices.
ITEM 3. LEGAL PROCEEDINGS
- -------- ------------------
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -------- ---------------------------------------------------
None.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
- -------- -------------------------------------------------------------
MATTERS
-------
As of September 30, 1999, the Company had issued and outstanding 12,191,944
shares of Common Stock held of record by 67 shareholders. The Company's Common
Stock is traded on the Over-the-Counter/Bulletin Board market under the symbol
FRXX. The Over-the-Counter/Bulletin Board quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commission, and may not necessarily
represent actual transactions. From August 1994 to October 28, 1998, the
Company's Common Stock was listed on the Vancouver Stock Exchange under the
symbol FRX.U. Listed below are the high and low bid prices (U.S. dollars) for
the Company's Common Stock for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED HIGH LOW
- ------------------ ------ ------
<S> <C> <C>
09/30/99 . . . . . $ 0.52 $ 0.30
06/30/99 . . . . . 0.55 0.23
03/31/99 . . . . . 1.50 0.45
12/31/98 . . . . . 1.56 1.00
09/30/98 . . . . . $ 8.00 $ 2.25
06/30/98 . . . . . 11.80 5.75
03/31/98 . . . . . 12.70 6.70
12/31/97 . . . . . 20.00 10.00
</TABLE>
The Company has not paid any dividends to date and does not anticipate that
any cash dividends will be declared in the foreseeable future.
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, 1999.
<TABLE>
<CAPTION>
NUMBER OF SHARES GROSS PROCEEDS ($U.S.) NATURE OF CONSIDERATION
- ---------------- ----------------------- -----------------------
<C> <C> <S>
282,000 $ 1,128,000 Cash(1)
14,000 39,550 Cash(2)
12,000 48,000 Cash(3)
10,000 0 Surrender of rights(4)
418,332 313,750 Cash(5)
<FN>
1. 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 family members of the president of the
Company. The Company incurred $5,275 of costs related to this sale.
9
<PAGE>
2. 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.
3. 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.
4. These shares were issued to warrant holders in exchange for the surrender
of certain demand registration rights currently held by the warrant holders.
5. These shares were issued January 1999 in a private placement of 418,332
shares at $0.75 per share. The company also issued to the placement agent, in
lieu of cash, warrants to purchase 30,000 shares of common stock at $0.75 per
share, expiring in five years. The company incurred $22,933 of cost related to
this sale.
</TABLE>
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 6. SELECTED FINANCIAL DATA
- -------- -----------------------
The selected financial data set forth below with respect to the fiscal
years ended September 30, 1999, 1998 and 1997 and the balance sheet data at
September 30, 1999 and 1998 are derived from the audited financial statements
included elsewhere in this Annual Report. The financial data for the years ended
September 30, 1996 and 1995 and the balance sheet data at September 30, 1997,
1996 and 1995 are derived from audited financial statements not included in this
Annual Report. The information set forth below should be read in conjunction
with the audited financial statements and notes included elsewhere in this
Annual Report and Management's Discussion and Analysis of Financial Condition
and Results of Operations included elsewhere herein.
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
--------------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
Net revenues:
Services and maintenance . . $ 2,915,347 $ 6,623,752 $ 4,930,456 $ 2,199,672 $ 1,445,009
Software licenses and
distributorship fees
- related parties. . . . . . 545,004 545,000 844,582 200,000 10,071
------------ ------------ ------------ ------------ ------------
Total net revenues . . . . . 3,460,351 7,168,752 5,775,038 2,399,672 1,455,080
Cost of services and
maintenance including fees
to related parties of
$166,000, $346,000, $213,000,
$0, and $0, respectively . . . 2,745,733 4,419,347 3,366,608 1,431,489 738,986
------------ ------------ ------------ ------------ ------------
Gross margin. . . . . . . . . . 714,618 2,749,405 2,408,430 968,183 716,094
------------ ------------ ------------ ------------ ------------
Operating expenses:
Sales and marketing
including fees to related
parties of $497,000,
$1,037,000, $640,000, $0,
and $0 respectively . . . 1,047,300 1,838,126 1,490,479 711,545 685,360
Research and development . . 728,239 1,520,709 1,006,768 253,743 358,133
General and administrative . 1,116,528 1,413,312 887,039 332,500 446,031
------------ ------------ ------------ ------------ ------------
Total operating expenses. . . . 2,892,067 4,772,147 3,384,286 1,297,788 1,489,524
------------ ------------ ------------ ------------ ------------
Loss from operations. . . . . . (2,177,449) (2,022,742) (975,856) (329,605) (773,430)
Other (expense), net . . (553,131) (305,110) (68,855) (129,141) (37,720)
------------ ------------ ------------ ------------ ------------
Loss before provision
for income taxes . . . . . . (2,730,580) (2,327,852) (1,044,711) (458,746) (811,150)
Provision for income taxes. . . (800) (800) (800) (2,300) (31,616)
------------ ------------ ------------ ------------ ------------
Net loss. . . . . . . . . . . . $(2,731,380) (2,328,652) $(1,045,511) $ (461,046) $ (842,766)
============ ============ ============ ============ ============
Net loss per share. . . . . . . $ (0.23) (0.20) $ (0.09) $ (0.04) $ (0.08)
============ ============ ============ ============ ============
Dividends . . . . . . . . . . . - - - - -
============ ============ ============ ============ ============
Shares used in computing
per share data. . . . . . . . . 12,060,919 11,761,920 11,681,035 11,370,804 10,344,934
============ ============ ============ ============ ============
BALANCE SHEET DATA:
Cash and cash equivalents . . . $ 2,740 $ 98,249 $ 275,243 $ 99,427 $ 14,474
Working capital (deficit) . . . (4,317,171) (1,735,813) 442,765 (1,077,531) (890,040)
Total assets. . . . . . . . . . 812,307 1,995,719 3,301,051 726,896 410,801
Deferred revenue, long-term . . 980,418 1,545,417 2,110,417 - -
Long-term debt and capital
lease obligations (net of current
portion). . . . . . . . . . . . 769,892 673,059 - 223,923 262,593
Shareholders' deficit . . . . . (5,678,877) (3,276,564) (995,912) (1,120,649) (999,092)
</TABLE>
10
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- -------- -------------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
The following summary of our material activities for the years ended
September 30, 1999, 1998 and 1997 is qualified by, and should be read
in conjunction with more detailed information along with the financial
statements and related notes and other information contained in this report.
Each recipient of this document is urged to read it in its entirety.
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 in this document, this Annual 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 risk and uncertainties include 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. See "Certain Business Concerns."
BACKGROUND AND OVERVIEW
From the commencement of operations of our predecessor companies in June
1982, our goal has been to focus a small group of skilled technicians on
providing automated solutions to the specialized niche requirements of
the MIS departments of medium to large enterprise computing organizations
seeking to adapt their business applications software to a changing technology,
economic and business environment.
From 1982 through 1988, we developed and licensed specialized migration
software products to service providers and other software vendors for delivery
to the MIS marketplace. Our customers during this period included Price
Waterhouse, LLP, KPMG Peat Marwick, IBM Corporation, On-Line Software
International, Inc., Pansophic Systems, Inc., Fujitsu, Ltd., Sterling Software
and Cincom Systems, Inc.
From 1989 through 1992, our revenues were derived from software development
contracts with other software vendors, royalties from various consulting firms,
and software product license fees. At the same time, we continued to develop
additional commercial migration software products.
From 1992 through 1997, we developed and implemented a strategy of using
internal sales and marketing resources instead of relying upon third parties,
and focused upon pursuing migration services contracts as compared to the
previous focus on development contracts. Major customers utilizing migration
services have included Bank of Montreal, Bear Stearns, Kimberly Clark, New
Brunswick Telephone and Union Gas.
In addition to the migration services contracts, and in response to our
customers' year 2000 migration demands and using the technology we had developed
over the past fifteen years, during 1996 and 1997 we introduced our
Complete/2000(TM) software products and related services and methodologies. In
June 1996, we authorized our first exclusive distributorship and sold our
first software license for the Assess/2000 product. Initial customer projects
commenced during fiscal 1997. During 1997, additional sets of Assess/2000
licenses were sold, additional exclusive distributorships were authorized, and
additional customer projects were signed and commenced. We recognize the fees
associated with exclusivity, software licenses, technical training and
maintenance and support over the contractual term.
In 1999, we commenced the development of additional tools that serve to
extend our offerings in the legacy migration area. These tools include a product
for testing the migrated applications, and a tool for ensuring that application
standards and rules remain in force as the applications are maintained. We
currently intend to 'productize' these tools and offer product licenses to them
to our customers.
RESULTS OF OPERATIONS
YEAR 2000 COMPLIANCE
We own or use computer software that could have been 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 included:
(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 conducted a project to identify all computer hardware and software,
other significant equipment, and services on which we rely that may be impacted.
Based on the results of this project, and the fact that the calendar has
already moved past January 1, 2000, we believe that the hardware, software,
services and equipment on which we rely are year-2000 compliant. We continue to
monitor this issue to ensure that no end-of-month or other similar date-related
issues arise.
11
<PAGE>
YEAR ENDED SEPTEMBER 30, 1999 COMPARED TO YEAR ENDED SEPTEMBER 30, 1998
Revenue for the year ended September 30, 1999 was $3,460,000 as
compared to $7,169,000 for the same period in 1998, a decrease of $3,709,000
or 52%. The components of this reduction were a decrease in migration services
revenue of $2,287,000 and a decrease in year 2000 services revenue of
$1,422,000. While it is possible that we may obtain additional year 2000
business in fiscal year 2000, it is not very likely that our future revenues
will consist of year 2000 revenues. One project, which began in 1997 and was
completed in February 1999, and which involved both migration and year 2000
services, provided $386,000 in revenue in 1999 compared to $2,804,000 in 1998.
Also contributing to the reduced year 2000 revenue w as the fact that the
majority of year 2000 projects completed in 1999 were the lower priced and less
difficult confirmation audits rather than renovations. Revenue for the three
months ended September 30, 1999 was $836,000 as compared to $1,513,000 for the
same period in 1998, and $903,000 for the three months ended June 30, 1999.
Backlog was $1,172,000 at September 30, 1999 as compared to $531,000 at
September 30, 1998.
12
<PAGE>
The increase in backlog is attributable primarily to the signing of several
contracts near the end of September 1999, including a consulting project for
$200,000 and a migration project for $150,000. Because year 2000 contracts,
unlike application migration projects, are generally of much shorter duration,
typically completed in eight weeks or less, a project may be booked, recognized
and completed without appearing in the quarterly or annual backlog amount.
Gross margin was $715,000 and $2,749,000 in 1999 and 1998, respectively.
The gross margin percentage was 21% in 1999 and 38% in 1998. Cost of revenue
was reduced to $2,745,000 in 1999 as compared to $4,420,000 in 1998, with
$837,000 of the reduction coming from eliminating the use of subcontractors
and consultants which were primarily involved in migration work, and $384,000 of
the reduction coming from salaries and benefits. While the revenue from the year
2000 products and services made up the bulk of 1999 revenue, it has not
reached the level anticipated by the Company and industry in general. We
maintained substantial resources in 1999 to address the year 2000 market, and
the lower than anticipated level of revenue adversely impacted gross margins.
Sales and marketing expenses were $1,047,000 in 1999 as compared to
$1,838,000 in 1998. Distributor fees were $497,000 in 1999 as compared to
$1,037,000 in 1998. Decreases in commissions on migration business reduced
expenses by $172,000 between 1999 and 1998.
Research and development expenses decreased to $728,000 in 1999 from
$1,521,000 in 1998, due to an decrease in the number of personnel to support
the development activity associated with the Complete/2000TM product and
enhancements to existing software products.
General and administrative expenses were $1,117,000 and $1,413,000 in 1999
and 1998, respectively, reflecting reductions in personnel and decreased use
of legal, audit, and other professional services in connection with our
Form 10 registration statement completed in 1998.
Net interest expense was $553,000 for the year ended September 30, 1999
as compared to $305,000 in 1998, reflecting the increased use in 1999 of
short-term receivables financing, loans from senior officers of the Company
to meet our working capital needs, and interest accrued on revenue sharing
amounts due to distributors.
The overall net loss for the year ended September 30, 1999 was $2,731,000
or $0.23 per share compared with a loss of $2,329,000 or $0.20 per share for the
year ended September 30, 1998 (based on the weighted average number of shares
outstanding during the respective periods). The net loss for the three months
ended September 30, 1999 was $853,000 as compared to a net loss of $669,000 in
1998, and a net loss of $543,000 for the three months ended June 30, 1999. The
net loss per share was $0.07 for the three months ended September 30, 1999,
$0.06 for the comparable period in 1998, and $0.04 for the three months ended
June 30, 1999.
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, 1999 and 1998 (see Notes 2 and 7 of
Notes to Financial Statements).
YEAR ENDED SEPTEMBER 30, 1998 COMPARED TO YEAR ENDED SEPTEMBER 30, 1997
Revenue for the year ended September 30, 1998 was $7,169,000 as
compared to $5,775,000 in 1997, an increase of 24%. This increase in revenue
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. Revenue for the three months ended September 30, 1998 was
$1,513,000 as compared to $1,368,000 for the same period in 1997, and $2,271,000
for the three months ended June 30, 1998. The decrease in revenue from the third
quarter ended June 30, 1998 was due primarily to the significant revenue earned
on one major year 2000 renovation project and the completion of another large
year 2000 renovation project during the June quarter. While other year 2000
13
<PAGE>
project revenue in the September 1998 quarter was comparable to the June 1998
quarter, these two major projects had no comparable projects in the September
quarter. 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.
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 than
its historical norms. Second is that 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
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 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 (see "Business: Available Solutions".) 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 fiscal year.
Gross margin was $2,749,000 and $2,408,000 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 the Company and industry in general. The Company 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, the Company had not
realized the efficiencies and cost savings originally anticipated for the
off-site work performed primarily by subcontractors on the migration services
projects. During the second quarter of fiscal 1998, the Company implemented
some modifications to its procedures for pricing, performing, and controlling
the migration services projects in order to improve the gross margin on those
projects and avoid any further decline in gross margins as compared with the
preceding year.
Sales and marketing expenses were $1,838,000 in 1998 as compared to
$1,490,000 in 1997. Distributor fees were $1,037,000 in 1998 as compared to
$640,000 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 $1,521,000 in 1998 from
$1,007,000 in 1997, or 51% due to an increase in the number of personnel to
support the development activity associated with the Complete/2000TM product
and enhancements to existing software products.
General and administrative expenses were $1,413,000 and $887,000 in 1998
and 1997, respectively, reflecting: additional personnel; increased use of
legal, audit, and other professional services in connection with the Company's
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 $305,000 for the year ended September 30, 1998
as compared to $69,000 in 1997, reflecting the increased use in 1998 of
short-term receivables financing and loans from senior officers of the Company
to meet its working capital needs.
The overall net loss for the year ended September 30, 1998 was $2,329,000
or $0.20 per share compared with a loss of $1,046,000 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 net loss for the three months
ended September 30, 1998 was $669,000 as compared to a net loss of $912,000 in
1997, and a net loss of $319,000 for the three months ended June 30, 1998. The
net loss per share was $0.06 for the three months ended September 30, 1998,
$0.08 for the comparable period in 1997, and $0.03 for the three months ended
June 30, 1998.
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).
LIQUIDITY AND CAPITAL RESOURCES
Through September 30, 1999, we have sustained recurring losses from
operations and, at September 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 year ended September 30, 1999, operations were funded through cash
derived from short-term receivables financing, loans totaling $192,000 from
the senior vice president of the Company, the collection of outstanding accounts
receivable, and the sale of our common stock in private transactions.
We need additional financing in order to meet our working capital
requirements. There is no assurance that additional financing will be available,
in timely fashion, in sufficient amounts, or at all. If additional financing is
not found, we will not be able to meet our short-term working capital needs.
Cash received from the sale of common stock and warrants, and the exercise
of warrants, amounted to $291,000, $48,000, and $1,162,000 in the years ended
September 30, 1999, 1998 and 1997, respectively.
In October 1995, we entered into a factoring agreement with a financial
organization whereby we are able to obtain financing by borrowing against our
accounts receivable on a recourse basis. At September 30, 1999, $861,000 was
outstanding, and 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.
In December 1997, we received a loan in the amount of $350,000 from the
president of the Company. The loan is for a term of two years, is unsecured and
accrues interest at a rate of 24% per annum.
In February 1998, we received a loan in the amount of $225,000 from the
senior vice president of the Company. The loan is for a term of two years, is
unsecured and accrues interest at a rate of 24% per annum.
In June 1999, we received a loan in the amount of $135,000 from the
senior vice president of the Company. The loan is for a term of two years, is
unsecured and accrues interest at a rate of 24% per annum.
In July 1999, we received a loan in the amount of $57,000 from the senior
vice president of the Company. The loan is for a term of two years, is unsecured
and accrues interest at a rate of 24% per annum.
14
<PAGE>
During the first quarter of 2000, our working capital was reduced to levels
that were lower than customary. This was due to the slowdown in our year 2000
business as most of our potential clients had completed their year 2000
compliance work but were postponing any new migration work until after December
31, 1999. In order to provide cash for continuing our operations we commenced
the sale of common stock through a private placement. A portion ($100,000) of
the expected total funds was made available in December 1999, and additional
funds should be received in January 2000. Although we are offering up to
$1,000,000 of stock in this private placement, it is uncertain how much
additional cash we will be able to raise, and whether such amounts raised will
be sufficient to fund our short-term working capital needs.
In addition, we are aggressively pursuing new opportunities for migration
services contracts as companies begin to consider new migration projects, and we
expect additional revenue in January and February, 2000 from some of the
migration services 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.
We continue to closely monitor our sales pipeline, work in progress,
collections and cash requirements to determine 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 our working capital and other cash requirements.
We believe that if we can obtain the anticipated level of new business,
continue the use of short-term receivables financing, and successfully complete
the private placement of the Company's securities in January 2000, we will have
sufficient funds to meet our operational needs through the balance of fiscal
2000. 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.
The Company anticipates that its capital expenditures for fiscal 2000 will
be approximately $50,000 to $100,000.
RECENT ACCOUNTING PRONOUNCEMENTS
During 1998, the Financial Accounting Standards Board released SFAS No.
132, Employers' Disclosures about Pensions and Other Postretirement Benefits,
which was adopted by us on October 1, 1998, and SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, which will be adopted by us on
July 1, 2000. We believe that these pronouncements will not have a material
effect upon the financial condition or results of operations of the Company
(see Note 2 of Notes to Financial Statements).
CERTAIN BUSINESS CONCERNS
UNPROFITABLE OPERATING HISTORY AND LIMITED FINANCIAL RESOURCES
The Company has not historically been profitable, and as of September 30,
1999, we had suffered cumulative operating losses aggregating to $10,723,000,
and at September 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. During fiscal 2000, we intend to meet our
15
<PAGE>
working capital and other cash requirements with cash derived from our
operations, short-term receivables, sale of common stock in a private
placement, and other financing as required. In addition, we must continue
to improve the efficiency of our operations to achieve and maintain positive
cash flow from operations. (see "-Liquidity and Capital Resources," and Note
1 of Notes to Financial Statements). There is no assurance, however, that cash
from operations and the other sources described above will be achieved or will
be sufficient for our needs, nor that we will be able to achieve profitability
on a consistent basis.
ADDITIONAL FINANCING
We may require additional funds to continue product development and
marketing, and to support our working capital requirements. We may seek such
additional financing through private placements of debt or equity financing, and
through collaborative arrangements with others. 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, which would adversely impact our ability to obtain new
business. If this were to become necessary, it would adversely affect our
business, results of operations and prospects (see "-Liquidity and Capital
Resources").
VOLATILITY OF COMMON STOCK
Our Company's stock price has been volatile since our initial public
offering on the Vancouver Stock Exchange in 1994. After the registration of
our stock in the United States during 1998, the stock has continued to
experience significant volatility. We believe that factors such as awareness
of the year 2000 problem, quarterly fluctuations in the results of 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. In addition, stock prices
of many technology companies fluctuate widely for reasons that may be
unrelated to operating results. Due to market and securities analysts'
expectations of continued growth and the higher price/earnings ratio at
which our stock may trade, any shortfall in meeting such expectations may have a
rapid and significant adverse effect on the price of our stock in the future.
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.
FLUCTUATION OF QUARTERLY RESULTS
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 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 operating expenses; personnel changes;
and fluctuations in economic and financial market conditions.
The timing, size and nature of our contracts with our customers are
important factors in our operating results. Many of these contracts involve
large dollar amounts, and the sales cycle is often lengthy and unpredictable.
Uncertainties include customers' budgetary constraints, the timing of their
budget cycles and their internal approval process. There can be no assurance
that we will be successful in closing such large contracts on a timely basis or
at all. As to the nature of the contracts, most of our migration contracts
are for a fixed fee. Our projects for year 2000 services are generally based
upon 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. A significant
percentage of our revenue that is derived from these contracts 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.
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. As a result, we may
be unable to adjust spending in a timely manner to compensate for any unexpected
revenue shortfall. Accordingly, any significant shortfall in revenue relative
to our expectations would have an immediate and material adverse effect on our
business.
Due to the foregoing factors, we believe that period-to-period comparisons
of our operating results are not necessarily meaningful and that such
comparisons cannot be relied upon as indicators of future performance. There
can be no assurance that future revenue and operating results will not vary
substantially. It is also possible that in some future period, our operating
results will be below the expectations of public market analysts and investors.
In either case, the price of our common stock could be materially adversely
affected.
16
<PAGE>
COMPETITION
We are not currently aware of any direct competitors that license, use
or sell fully automated, near-complete migration software. While certain vendors
do offer or use such software, none of the products currently available provides
the near-complete and comprehensive automated conversion performed by our
products. It is possible, however, that 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. We do have some indirect competitors in the
form of service organizations, such as the accounting and computer
consulting companies which provide a combination of automated and manual
conversion, and certain of these organizations have significantly greater
resources, both of capital and personnel, than we do, and much greater
general name recognition (see "Business: Competition" and "Business: Competitive
Position").
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. We are aware of far fewer vendors who currently address any
of the other major non-COBOL languages addressed by our year 2000 products. It
is possible, however, that these other software vendors, many of whom have
substantially more resources available to them than we do, may develop other
products to compete with the non-COBOL products that we offer (see "Business:
Competition - Software Vendors"). Further, we and our industry competitors
must compete with the internal information systems departments of our
potential customers for year 2000 renovation projects with those potential
customers.
There can be no assurance that our migration products and services will
compete effectively with those of our current and potential competitors, nor
that future competition for product sales and services will not have a material
adverse effect on the business, results of operations and our financial
condition (see "Business: Competition").
DEPENDENCE ON A SMALL NUMBER OF CUSTOMERS
The results of our operations are attributable to a limited number of
orders, the average size of which is under $500,000. During the year ended
September 30, 1999, Harris Trust (16%), our Distributors, when treated as one
customer (16%), Brown Brother Harriman & Company (12%), ACS (11%) and Sapiens
(11%) represented sixty-six percent (66%) of 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. During the year ended September 30, 1998, Brown Brothers
Harriman & Company (40%), Charles Schwab & Co., Inc. (12%), and our
Distributors, when treated as one customer (10%) represented sixty-two
percent (62%) of total revenues. 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 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 (see Notes 2 and 3 of Notes to
Financial Statements). While we believe that the market for our migration
services will offer the opportunity to expand the number of customers and
projects in process at any given time, there can be no assurance that we will
be successful in our sales efforts or that a weakening in customer demand,
particularly for year 2000 services, would not have an immediate material
adverse effect.
MARKET SIZE
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
(see "Business: Market"). If this should happen, it will have a direct impact
upon the rate of our growth.
NO ASSURANCE OF SUCCESS OF MARKETING STRATEGY
We have, over the years, experimented with a variety of approaches to the
marketing of our products. Our current strategy for our migration products and
services is based on direct marketing which has been in place for approximately
six years. While present indications are that the strategy is well-adapted to
the market which we have targeted, there can be no assurance that over the long
term it will be successful. Successful implementation of the marketing plan
requires, among other things, sales and marketing personnel with an ability
17
<PAGE>
to communicate clearly to potential customers our ability to complete
migration projects successfully, and this requires an understanding of both the
technology and the marketplace. (See "Business: Marketing and Sales Strategy").
DEPENDENCE ON YEAR 2000 REVENUES
Year 2000 services and related revenue increased from 42% in fiscal 1997 to
62% of our total revenues in fiscal 1998 and 88% of total revenues for the year
ended September 30, 1999. Should the demand for our year 2000 solutions and
products decline 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 anticipate that demand in the year
2000 market will decline, perhaps rapidly, following the year 1999.
We experienced a decline in revenue from our core migration services to
$408,000 in 1999 from $2,695,000 in 1998. We believe that new migration services
projects have been delayed by potential customers as they focus their efforts on
renovating their systems for year 2000 compliance. During fiscal 2000, we
believe that year 2000 projects will end and new migration services business
will increase. After January 1, 2000, it is our strategy to leverage customer
relationships and knowledge of customer application systems derived from our
year 2000 services solutions to continue to grow our migration and other
products and services offerings beyond the year 2000 market. However, there can
be no assurance that this strategy will be successful, and should we 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, our business, results of operations and financial condition will be
materially and adversely affected.
LIABILITY EXPOSURE
We market our products and services to customers for managing the
renovation of mission-critical computer software systems. As noted above in
"Dependence on Year 2000 Revenues", a significant 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. Although we
have 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 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 upon our business, operating results and
financial condition.
PRODUCT DEVELOPMENT
The development of complex, large-scale, multiple environment computer
software presents a difficult engineering challenge, and 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 targeted by us.
LIMITED EXPERIENCE OF MANAGEMENT IN THE MANAGEMENT OF GROWTH
While our present management, having been our founders, have been
principally responsible for the growth of our business to date, they may not be
in a position to provide the full range of skills required to manage the further
growth of the Company's business, and it may be necessary to recruit competent
personnel to supplement their skills and experience. While we believe that we
will be able to recruit competent personnel with the required skills,
competition for such personnel is intense and there can be no assurance that we
will be successful in finding, attracting and retaining them. Failure to do
so could have an adverse impact upon our business.
18
<PAGE>
CONTROL BY DIRECTORS AND OFFICERS
The current directors and officers of the Company beneficially own
approximately 27% of the actual Common Shares outstanding. As a result, our
current directors and officers will continue to exercise control over our
affairs.
DEPENDENCE ON 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 of the Company. 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
upon us. In addition, we sometimes rely upon qualified, experienced
subcontractors to support our migration services work. The inability to find
and retain sufficient qualified subcontractors may adversely impact our
operations.
INTELLECTUAL PROPERTY PROTECTION
While we believe that our products and technologies are adequately
protected against infringement by confidentiality agreements, licensing
agreements, copyright laws and the complex nature of the products and
technologies themselves, there can be no assurance of effective protection.
Monitoring and identifying unauthorized use of our technology may prove
difficult, and the cost of, distraction, and time required for litigation may
impair or completely frustrate our ability to guard adequately against such
infringement.
GENERAL ECONOMIC AND MARKET CONDITIONS
Forecross products are designed for large organizations which typically
make significant investments in their MIS departments. Expenditures by such
organizations 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 its target market, and which could affect the
capital spending or budget cycles of prospective customers.
EFFECT OF YEAR 2000 PROBLEM UPON COMPANY OPERATIONS
Forecross, like any other company, owns or uses computer software that
could have been impacted by the year 2000 problem. During 1998, we began a
review of the software we were using in order to identify any systems that
needed to be made year 2000-compliant. This review included a survey of vendors
of software and other service providers to ensure that their software and
services will also be year 2000-compliant. We ensured that all such software
was year 2000-compliant in advance of December 31, 1999. Based on the results
of our research, we do not believe that the expense or effect of such compliance
will be material to us. See also Item 7 "Management's Discussion and Analysis
of Financial Condition and Results of Operations: Results of Operations-Year
2000 Compliance".
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- --------- -----------------------------------------------
The financial statements required by this item are set forth on pages F-1
through F-15 hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- --------- ------------------------------------------------------------------
FINANCIAL DISCLOSURE
---------------------
None.
19
<PAGE>
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
- --------- -----------------------------------
The directors, executive officers and key employees of the Company are as
follows:
<TABLE>
<CAPTION>
Name Age Position
- --------------------------- --- -----------------------------------------------------------
<S> <C> <C>
Kim O. Jones. . . . . . . . 55 Chief Executive Officer, President and Director
Bernadette C. Castello. . . 45 Senior Vice President, Chief Financial Officer and Director
Richard A. Carpenter. . . . 57 Director
Richard L. Currier, Jr. (1) 54 Director
Ronald Herbst . . . . . . . 57 Director of Customer Care
Carl H. Johnson . . . . . . 54 Director of Project Management
Charles T. Nelson . . . . . 53 Director of Software Products
Kenneth J. Paris. . . . . . 52 Senior Database Specialist
Peggy A. Payne. . . . . . . 50 Director of Migration Services
<FN>
(1) Denotes member of audit committee.
</TABLE>
KIM O. JONES (55) founded Forecross together with Bernadette Castello in
1982 and has been in his present position since that time. Mr. Jones is the
chief architect of the Company's 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.
20
<PAGE>
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 the day
to day operations of the Company. 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 (57) 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 direct or indirect competitor of the Company.
RICHARD L. CURRIER, JR. (54) 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 direct or indirect
competitor of the Company.
RONALD HERBST (57) joined the Company 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 (54) joined the Company 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 (53) joined Forecross 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 Forecross,
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 the Company from
1989 through March 1996, and rejoined the Company in October 1996. From March
1996 through September 1996, Mr. Paris served as an independent software
consultant to various companies, including Forecross. Prior to joining
Forecross 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 (50) joined Forecross 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.
ITEM 11. EXECUTIVE COMPENSATION
- --------- -----------------------
The following table sets forth the amount of all compensation paid by the
Company during each of 1999, 1998 and 1997 to the person serving as the
Company's Chief Executive Officer, and to the Company's most highly compensated
executive officer, other than the Chief Executive Officer, whose compensation
exceeded $100,000 during any such year (the "Named Executive Officers").
21
<PAGE>
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
----------------------- ---------------
Name and Principal Position Year Salary(3) Bonus Securities All Other
- --------------------------- ---- ----------- ----------- Underlying Compensation
Option(#)(1)(2) ------------
---------------
<S> <C> <C> <C> <C> <C>
Kim O. Jones. . . . . . . . 1999 $ 131,813 $ None None None
Chief Executive Officer . . 1998 $ 185,000 $ None None None
1997 156,511 51,320 None None
Bernadette C. Castello. . . 1999 $ 131,813 $ None None None
Senior Vice President . . . 1998 $ 185,000 $ None None None
1997 156,511 56,970 None None
<FN>
(1) The stock options granted to the named officers are fully vested. The
options are exercisable at $1.43 per share and expire five years from the
date of grant.
(2) There are no other long-term incentive compensation plans which require
disclosure.
(3) Both Kim O. Jones and Bernadette C. Castello took a voluntary pay reduction
of 5% of 1998 salary, and additionally did not take a salary for the first
three months of fiscal year 1999. Salary for the last nine months of fiscal
year 1999 was accrued but not paid.
</TABLE>
Stock Option Grants in Last Fiscal Year. There were no grants of stock
options to either of the Company's Named Executive Officers during the fiscal
year ended September 30, 1999.
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, 1999 as well as the fiscal year end value of unexercised options
for each such person:
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options at
Options at 1999 Year End 1999 Year End
-------------------------- ---------------------------
Shares Acquired
Name on Exercise Value Received Exercisable Unexercisable Exercisable Unexercisable
- ------------- --------------- -------------- ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Kim O. Jones 0 0 250,000 0 $ 0 0
Bernadette C.
Castello . 0 0 250,000 0 $ 0 0
</TABLE>
DIRECTOR COMPENSATION
Directors receive no compensation for service on the Board of Directors.
Mr. Currier is paid a retainer of $817 per month for consulting services in
connection with the Company's 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 the Company's 1994 Stock Option Plan. During the year ended September 30,
1999, no options were granted to non-employee directors. 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, 1997, there were no
options granted to non-employee directors.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- --------- --------------------------------------------------------------
The following table sets forth certain information regarding the beneficial
ownership of the Company's outstanding shares of Common Stock as of September
30, 1999 by (i) each person known to the Company beneficially to own 5% or more
of the outstanding shares of its Common Stock, (ii) each of the Company's
directors, (iii) each of the Company's executive officers named in the Summary
Compensation Table below, and (iv) all directors and officers as a group.
Except as indicated in the footnotes to this table, 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.
22
<PAGE>
<TABLE>
<CAPTION>
Name of Owner Number of Shares Percent of Class
Beneficially Owned Beneficially Owned
- ------------------------------------- ------------------ ------------------
<S> <C> <C>
Kim O. Jones (1). . . . . . . . . . . 1,856,644 14.4%
Bernadette C. Castello (2). . . . . . 1,862,244 14.5%
Richard A. Carpenter (3) . . . . . . 37,500 0.3%
Richard L. Currier, Jr. (4) . . . . . 5,000 0.0%
All directors and executive officers
as a group (4 persons) (5). . . . . . 3,761,388 29.2%
<FN>
(1) Includes 250,000 shares subject to stock option exercisable as of
September 30, 1999
(2) Includes 250,000 shares subject to stock option exercisable as of
September 30, 1999
(3) Includes 7,500 shares subject to stock option exercisable as of
September 30, 1999
Mr. Carpenter's business address is 25 Marion Street, Hingham, MA 02043.
(4) Includes 5,000 shares subject to stock option exercisable as of
September 30, 1999
Mr. Currier's business address is P.O. Box 770-369, Park City, Utah 84060.
(5) Includes 512,500 shares subject to stock option exercisable as
of September 30, 1999
</TABLE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------- --------------------------------------------------
As of September 30, 1999 the Company had the following notes receivable
from/payable to its officers:
In December 1997, the Company borrowed $350,000 from Kim O. Jones, Chief
Executive Officer, under an unsecured promissory note due December 30, 1999.
The note bears interest at 24.0% per annum.
In February 1998, the Company borrowed $225,000 from Bernadette C.
Castello, Senior Vice President, under an unsecured promissory note due February
28, 2000. The note bears interest at 24.0% per annum.
In June 1999, the Company borrowed $135,000 from Bernadette C. Castello,
Senior Vice President, under an unsecured promissory note due June 30, 2001. The
note bears interest at 24.0% per annum.
In July 1999, the Company borrowed $57,000 from Bernadette C. Castello,
Senior Vice President, under an unsecured promissory note due July 31, 2001. The
note bears interest at 24.0% per annum.
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. Accrued interest
receivable amounted to $24,536 at September 30, 1997. The note receivable and
accrued interest receivable were paid in full on December 31, 1997.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- --------- ----------------------------------------------------------------
(a) Financial Statements
1. Financial Statements. The following Financial Statements of Forecross
- -- --------------------
Corporation, and the Report of Independent Public Accountants are included at
pages F-1 through F-15 of this Annual Report.
<TABLE>
<CAPTION>
DESCRIPTION PAGE NO.
- -------------------------------------------------------------- ----------------
<S> <C>
Report of BDO Seidman, LLP,
Independent Certified Public Accountants . . . . . . . . . . F-1
Balance Sheets as of September 30, 1999 and 1998 . . . . . . . F-2
Statements of Operations for each of the Three Years
in the Period Ended September 30, 1999. . . . . . . . . . . F-3
Statements of Shareholders' Deficit for each of the
Three Years in the Period Ended September 30, 1999 . . . . . F-4
Statements of Cash Flows for each of the Three Years
in the Period Ended September 30, 1999 . . . . . . . . . . . F-5
Notes to Financial Statements. . . . . . . . . . . . . . . . . F-6 through F-15
</TABLE>
2. Financial Statement Schedule. The following financial statement schedule
- -- ----------------------------
of Forecross Corporation for each of the three years in the period ended
September 30, 1999 is filed as part of this Annual Report and should be read in
conjunction with the Financial Statements of Forecross Corporation.
Valuation and Qualifying Accounts S-1
23
<PAGE>
3. 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, September 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>
(4) REPORTS ON FORM 8-K
- --- --------------------
None
24
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the registrant has duly caused this Annual Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Registrant
FORECROSS CORPORATION
January 13, 2000 BY: /S/ Bernadette C. Castello
---------------------------------
Bernadette C. Castello
Senior Vice President and Chief Financial Officer
25
<PAGE>
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS' REPORT
To the Stockholders and Board of Directors of Forecross Corporation
We have audited the accompanying balance sheets of Forecross Corporation as of
September 30, 1999 and 1998, and the related statements of operations,
shareholders' deficit and cash flows for each of the three years in the period
ended September 30, 1999. We have also audited the Schedule listed in the
accompanying index at Item 15. 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 and Schedule
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements and 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 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, 1999 and 1998, and the results of its operations and its cash
flows for each of the three years in the period ended September 30, 1999 in
conformity with generally accepted accounting principles.
Also, in our opinion, the Schedule presents fairly in all material respects the
information set forth therein.
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,
1999. 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
December 14, 1999
F-1
<PAGE>
<TABLE>
<CAPTION>
FORECROSS CORPORATION
BALANCE SHEETS
September 30,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,740 $ 98,249
Accounts receivable, including unbilled receivables of $77,384
and $489,808, net of allowances of $45,000 and
$136,650, respectively (Notes 3 and 6) . . . . . . . . . . . . . . . . 375,893 1,170,117
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . 45,070 49,628
------------ ------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . 423,703 1,317,994
Equipment and furniture, net (Notes 2, 4 and 5) . . . . . . . . . . . 277,532 568,235
Notes receivable from others . . . . . . . . . . . . . . . . . . . . . 68,707 67,131
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42,365 42,359
------------ ------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 812,307 $ 1,995,719
============ ============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 631,479 $ 224,991
Accrued compensation and related benefits (Note 11). . . . . . . . . . 682,533 235,135
Accrued liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . 158,090 73,301
Accrued commissions and distributors' fees (Note 4). . . . . . . . . . 1,514,650 1,228,375
Payable to factor (Note 6) . . . . . . . . . . . . . . . . . . . . . . 861,427 467,734
Accrued warranty costs . . . . . . . . . . . . . . . . . . . . . . . . 184,828 205,975
Capital lease obligations due within one year. . . . . . . . . . . . . 23,215 20,103
Deferred revenue (Notes 2 and 4) . . . . . . . . . . . . . . . . . . . 684,652 598,193
------------ ------------
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . 4,740,874 3,053,807
Deferred revenue, less current portion (Notes 2 and 4) . . . . . . . . 980,418 1,545,417
Notes payable to officers, net (Note 4). . . . . . . . . . . . . . . . 750,176 631,392
Capital lease obligations, less current portion. . . . . . . . . . . . 19,716 41,667
------------ ------------
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . 6,491,184 5,272,283
------------ ------------
Commitments and contingencies (Notes 2, 11 and 12)
Shareholders' deficit (Notes 8, 9 and 10):
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. . . . . . . . . . . . . . . . . . . . . . . . . . (10,723,459) (7,992,079)
------------ ------------
Total shareholders' deficit. . . . . . . . . . . . . . . . . . . . . . ( 5,678,877) (3,276,564)
------------ ------------
Total liabilities and shareholders' deficit. . . . . . . . . . . . . $ 812,307 $ 1,995,719
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
<TABLE>
<CAPTION>
FORECROSS CORPORATION
STATEMENTS OF OPERATIONS
For the Years Ended
September 30,
----------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net revenues (Notes 2, 3 and 4):
Services and maintenance . . . . . . . . $ 2,915,347 $ 6,623,752 $ 4,390,456
Software licenses and distributorship
fees-related parties. . . . . . . . . . 545,004 545,000 844,582
------------ ------------ ------------
Total net revenues . . . . . . . . . . 3,460,351 7,168,752 5,775,038
Cost of services and maintenance
including fees to related parties of
$166,000, $346,000, and $213,000,
respectively (Notes 2 and 4). . . . . . 2,745,733 4,419,347 3,366,608
------------ ------------ ------------
Gross margin . . . . . . . . . . . . . . 714,618 2,749,405 2,408,430
------------ ------------ ------------
Operating expenses:
Sales and marketing including fees to
related parties of $497,000,
$1,037,000, and $640,000, respectively
(Note 4) . . . . . . . . . . . . . . . 1,047,300 1,838,126 1,490,479
Research and development . . . . . . . . 728,239 1,520,709 1,006,768
General and administrative . . . . . . . 1,116,528 1,413,312 887,039
------------ ------------ ------------
Total operating expenses . . . . . . . . 2,892,067 4,772,147 3,384,286
------------ ------------ ------------
Loss from operations . . . . . . . . . . (2,177,449) (2,022,742) (975,856)
Interest expense, net. . . . . . . . . . (553,131) (305,110) (68,855)
------------ ------------ ------------
Loss before provision for income taxes . (2,730,580) (2,327,852) (1,044,711)
Provision for income taxes (Note 7). . . (800) (800) (800)
------------ ------------ ------------
Net loss . . . . . . . . . . . . . . . $(2,731,380) $(2,328,652) $(1,045,511)
============ ============ ============
Net loss per share - basic and diluted . $ (0.23) $ (0.20) $ (0.09)
============ ============ ============
Shares used in computing per share data. 12,060,919 11,761,920 11,681,035
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<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, 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. . . . . 14,000 39,550 - - 39,550
exercise of options (Note 10)
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)
Issuance of common stock to warrant
holders (Note 8). . . . . . . . . . . 10,000 11,250 - - 11,250
Warrants extended (Note 8) . . . . . . - 27,000 - -
27,000
Issuance of common stock for
cash, net of stock issuance costs of
$22,933 (Note 8). . . . . . . . . . . 418,332 290,817 - - 290,817
Net loss . . . . . . . . . . . . . . . - - - (2,731,380) (2,731,380)
----------- ----------- -------------- ------------ ------------
Balances at September 30, 1999. . . . 12,191,944 $5,044,582 $ - $(10,723,459) $(5,678,877)
=========== =========== ============== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
FORECROSS CORPORATION
STATEMENTS OF CASH FLOWS
For the Years
Ended September 30,
1999 1998 1997
------------ ----------- -----------
<S> <C> <C> <C>
Increase (decrease) in cash resulting from:
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . . . $(2,731,380) $(2,328,652) $(1,045,511)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities-
Provision for uncollectible amounts. . . . . . (65,001) 124,952 300,000
Value of common stock issued and value
assigned to extension of warrant term . . . . 38,250 - -
Depreciation and amortization. . . . . . . . . 290,703 277,938 115,873
Changes in operating assets and liabilities-
Accounts receivable. . . . . . . . . . . . . . 859,225 529,611 (2,020,177)
Other assets and accrued interest on notes
receivable from officers. . . . . . . . . . . 594 175,191 (148,552)
Accounts payable and accrued liabilities . . . 907,785 939,270 471,082
Deferred compensation. . . . . . . . . . . . . 416,972 - (156,834)
Deferred revenue . . . . . . . . . . . . . . . (478,540) (723,036) 2,713,193
------------ ----------- -----------
Net cash provided by (used in) operating
activities. . . . . . . . . . . . . . . . . . (761,392) (1,004,726) 229,074
------------ ----------- -----------
Cash used in investing activities:
Purchase of equipment and furniture. . . . . . - (234,423) (577,076)
Loans to officers. . . . . . . . . . . . . . . - - (35,000)
Payments received on loans to officers . . . . - - 35,000
Loans to key employees . . . . . . . . . . . . - - (62,057)
Payments received on loans to key employees. . 250 700 450
------------ ----------- -----------
Net cash provided by (used in)
investing activities. . . . . . . . . . . . 250 (233,723) (638,683)
------------ ----------- -----------
Cash flows from financing activities:
Proceeds from factoring of accounts receivable 3,916,279 4,714,085 785,200
Repayment of borrowings under factoring
arrangement . . . . . . . . . . . . . . . . . (3,522,586) (4,246,351) (905,200)
Borrowings under note payable to officers . . . 192,000 575,000 -
Repayment of borrowings under notes payable
- -officers. . . . . . . . . . . . . . . . . . . (192,038) - (6,800)
Repayment of borrowings under capitalized leases (18,839) (29,279) -
Repayment of borrowings under notes payable . - - (458,023)
Net proceeds from issuance of common shares . 290,817 48,000 1,162,275
Payments received from shareholders. . . . . . - - 7,973
------------ ----------- -----------
Net cash provided by financing activities. . 665,633 1,061,455 585,425
------------ ----------- -----------
Net increase (decrease) in cash. . . . . . . (95,509) (176,994) 175,816
Cash at beginning of year. . . . . . . . . . . 98,249 275,243 99,427
------------ ----------- -----------
Cash at end of year. . . . . . . . . . . . . . $ 2,740 $ 98,249 $ 275,243
============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
FORECROSS CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. THE COMPANY:
OPERATIONS:
Forecross Corporation ("Forecross" or the "Company") is a publicly held
California corporation whose common stock is traded on the Over-the-Counter/
Bulletin Board market. Prior to October 28, 1998, the Company's 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, the Company introduced its
Assess/2000 and Complete/2000TM 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). The Company's customers include
banks and other industrial and commercial corporations in Canada, the United
States and Europe.
BASIS OF PRESENTATION AND GOING CONCERN:
Through September 30, 1999, the Company had sustained recurring losses from
operations and, at September 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 fiscal 2000, 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 fiscal 1998 and fiscal 1999 should improve the
Company's profitability in 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 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 the Company's revenues in fiscal 1998 and 1997 resulted in large
part from increased 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 increased from 8% in the year
ended September 30, 1996 to 42% of the Company's total revenues in the year
ended September 30, 1997, 62% of total revenues for the year ended September
30, 1998, and 88% of total revenues for the year ended September 30, 1999.
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.
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
F-6
<PAGE>
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.
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:
The Company 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 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, such costs are capitalized 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.
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 $50,000 in the
years ended September 30, 1999 and 1998, respectively.
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, the Company 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. The Company's year 2000 projects have ranged from two to eighteen
months in duration. 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
F-7
<PAGE>
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.
The Company has authorized several exclusive distributor agreements for
specified areas for its Complete/2000TM 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,
the Company licenses the rights to use its Assess/2000 software, which as of
September 30, 1999, 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, 1999, there were no such customer
funded research and development projects.
WARRANTY EXPENSE:
The Company provides a reserve for warranty costs based upon its estimate 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 six months 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 September 30, 1999, 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 300,000 shares of common stock and options to purchase 670,300 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, the Company 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 its basic financial statements.
F-8
<PAGE>
FINANCIAL INSTRUMENTS:
At September 30, 1999 and 1998, 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
Company's notes payable to officers cannot be currently determined, as similar
borrowing sources and terms are unavailable. The carrying value of capitalized
leases approximates fair value at September 30, 1999, since the leases were
entered into during fiscal 1998 at rates which approximate the rates at
September 30, 1999.
RECLASSIFICATIONS:
Certain prior-year amounts have been reclassified to conform to current year
presentation.
OTHER RECENTLY ISSUED ACCOUNTING STATEMENTS:
During 1997, the Financial Accounting Standards Board (FASB)released SFAS No.
130 Reporting Comprehensive Income. SFAS No. 130, established 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, and therefore, it had no impact on the financial
condition or results of operation of the Company upon adoption as of October 1,
1998.
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. There was no significant
effect upon adoption as of October 1, 1998.
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 established
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 established 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. The Company operates under one business segment and accordingly,
there was no significant effect upon adoption as of October 1, 1998.
In October 1998, the FASB issued SFAS No. 132, Employers' Disclosures about
Pensions and Other Postretirement Benefits. SFAS No. 132, revised employers'
disclosures about pensions and other postretirement benefits. It did not
change the measurement of recognition of those plans, and, accordingly, had no
effect on results of operations and financial position upon adoption by the
Company as of October 1, 1998.
In June 1998, the FASB issued SFAS 133, Accounting for Derivative Instruments
and Hedging Activities. SFAS 133 requires companies to recognize all derivatives
contracts as either assets or liabilities in the balance sheet and to measure
and to measure them at fair value. If certain conditions are met, a derivative
may be specifically designated as a hedge, the objective of which is to match
the timing of gain or loss recognition on the hedging derivative with the
recognition of (i) the changes in the fair value of the hedged asset or
liability that are attributable to the hedged risk or (ii) the earnings' effect
of the hedged forecasted transaction. For a derivative not designated as a
hedging instrument, the gain or loss is recognized in income in the period of
change. SFAS 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 2000.
Historically, the Company has not entered into derivatives contracts either to
hedge existing risks or for speculative purposes. Accordingly, the Company does
not expect adoption of this new standard on July 1, 2000 to affect it financial
statements.
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 the
Company's customers are large, well-established companies. Four customers
accounted for approximately 30%, 18%, 16% and 13% of the accounts receivable
balance at September 30, 1999, and four customers accounted for approximately
30%, 17%, 14% and 12% of the accounts receivable balance at September 30,
1998. Additionally, five customers, including revenues from the Company's
Distributors treated as resulting from one customer (see Note 4), accounted for
approximately 16%, 16%, 12%, 11% and 11% of total revenues for the fiscal
year ended September 30, 1999. 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 the
Company's 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. Net revenues from Canadian and European customers were as
follows:
F-9
<PAGE>
<TABLE>
<CAPTION>
Years Ended
September 30,
-------------------
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Canada . . . . . . . . . . . . . . . . 2% 2% 9%
Europe . . . . . . . . . . . . . . . . 0% 1% 1%
</TABLE>
4. RELATED PARTY TRANSACTIONS:
The Company 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,
-------- ---------
1999 1998
-------- ---------
<S> <C> <C>
10% Uncollateralized notes receivable from president, due
December 31, 1997 . . . . . . . . . . . . . . . . . . . . . . $ - $ -
5.7 to 10% Uncollateralized notes receivable from Senior Vice
President, due in varying amounts through September 30, 1999 37,013 37,013
Accrued interest receivable. . . . . . . . . . . . . . . . . . 4,264 2,132
--------- ---------
Total receivable from officers . . . . . . . . . . . . . . . 41,277 39,145
--------- ---------
24% Uncollateralized notes payable to president, due
December 30, 1999 . . . . . . . . . . . . . . . . . . . . . . (262,536) (350,000)
24% Uncollateralized notes payable to senior vice president,
due February 28, 2000 . . . . . . . . . . . . . . . . . . . . (120,426) (225,000)
24% Uncollateralized notes payable to senior vice president,
due June 30, 2001 . . . . . . . . . . . . . . . . . . . . (135,000) -
24% Uncollateralized notes payable to senior vice president,
due July 31, 2001 . . . . . . . . . . . . . . . . . . . . ( 57,000) -
Accrued interest payable . . . . . . . . . . . . . . . . . . . (216,491) ( 95,537)
--------- ---------
Total payable to officers (1). . . . . . . . . . . . . . . . (791,453) (670,537)
--------- ---------
Notes Payable to officers, net . . . . . . . . . . . . . . . . (750,176) (631,392)
========= =========
<FN>
1. All net notes payable to offices have been classified as long-term, as the
noteholders have committed to extend them to at least October 1, 2000.
</TABLE>
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/2000TM, and related services. The
Distributors are related to each other through some common ownership and
management; a shareholder of the Company is a founding investor and officer of
each of the other entities.
At least one other shareholder of the Company 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 the Company using the Complete/2000TM software, and year 2000
assessment projects to be performed either by the Company 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. The Company 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 $1,410,000 and
F-10
<PAGE>
$1,955,000 is deferred at September 30, 1999, and September 30, 1998,
respectively. Additional fees of approximately $672,000 for training
programs, annual software maintenance, and customer support were received in
1997; of this amount, approximately $135,000 and $155,000 is deferred at
September 30, 1999 and September 30, 1998, 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 $166,000,
$346,000, and $213,000 for the years ended September 30, 1999, 1998 and 1997,
respectively. The year 2000 expenses related to the distributor contracts,
included in sales and marketing expenses, were approximately $497,000,
$1,037,000, and $640,000 for the years ended September 30, 1999, 1998 and 1997,
respectively.
Purchased Software:
- -------------------
During the year ended September 30, 1997, the Company 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
of the Company, another employee of the Company, and another shareholder.
5. EQUIPMENT AND FURNITURE:
Equipment and furniture is comprised of the following:
<TABLE>
<CAPTION>
September 30,
----------------------
1999 1998
---------- ----------
<S> <C> <C>
Computer equipment and software . . . . . $ 852,137 $ 852,137
Furniture and equipment . . . . . . . . . 310,890 310,890
Leasehold improvements . . . . . . . . . 77,117 77,117
---------- ----------
1,240,144 1,240,144
Accumulated depreciation and amortization (962,612) (671,909)
---------- ----------
$ 277,532 $ 568,235
========== ==========
</TABLE>
6. PAYABLE TO FACTOR:
In October 1995, the Company entered into a recourse factoring agreement with a
financial organization whereby the Company 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 the president and senior vice
president of the Company, who are significant shareholders of the Company. At
September 30, 1999 the Company's outstanding indebtedness under the agreement
was $861,000. At September 30, 1998 the Company's outstanding indebtedness under
the agreement was $468,000. The agreement may be terminated by either the
factor or the Company at any time.
7. INCOME TAXES:
The components of the provision for income taxes are summarized as follows:
<TABLE>
<CAPTION>
Years Ended
September 30,
----------------------
1999 1998 1997
----- ------ -------
<S> <C> <C> <C>
Current:
State. . . . . . . . . . . . . . . . . . $ 800 $ 800 $ 800
Foreign. . . . . . . . . . . . . . . . . - - -
----- ------ -------
Total provision for income
taxes . . . . . . . . . . . . . . . . . $ 800 $ 800 $ 800
===== ====== =======
</TABLE>
The effective income tax rate differs from the statutory federal income tax rate
primarily due to the full valuation allowance against the Company's deferred tax
assets arising from its net operating losses.
Significant components of the Company's net deferred tax balances are as
follows:
F-11
<PAGE>
<TABLE>
<CAPTION>
September 30,
--------------------------
1999 1998
------------ ------------
<S> <C> <C>
Deferred tax assets (liabilities):
Accrual vs. cash basis adjustment . . . . . . $ 141,000 $ 189,000
Deferred revenues . . . . . . . . . . . . . . 713,000 925,000
Deferred compensation . . . . . . . . . . . . 153,000 -
Net operating loss carryforwards . . . . . . . 2,537,000 1,793,000
State taxes and other . . . . . . . . . . . . 39,000 (25,000)
------------ ------------
Total deferred tax assets. . . . . . . . . . 3,583,000 2,882,000
Valuation allowance. . . . . . . . . . . . . . (3,583,000) (2,882,000)
------------ ------------
Net deferred tax assets. . . . . . . . . . . $ - $ -
============ ============
</TABLE>
Effective September 30, 1999, the Company changed from the cash basis method to
the accrual method for income tax purposes. Certain amounts will be amortized
into income over a four year period. Since the Company could not determine 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, 1999 and 1998. The increase (decrease) in the valuation
allowance was $701,000, ($778,000) and ($552,000) in the years ended September
30, 1999, 1998 and 1997, respectively.
At September 30, 1999, the Company has net operating loss carryforwards for
federal and California state income tax purposes of approximately $6,618,000 and
$3,239,000, respectively. These carryforwards expire in varying amounts
through 2013. 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 any greater than 50% change in the ownership of the
Company within a three-year period.
8. COMMON STOCK:
In connection with a May 1995 private placement in which the Company sold
735,000 of its shares of common stock, 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, the Company sold 282,000 shares of its common stock in a
private placement resulting in proceeds of $1,128,000. The Company incurred
$5,275 of costs related to this sale. In connection with the sale, the Company
issued to the investors 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, the Company extended the expiration date of 270,000 warrants,
scheduled to expire in December 1998, to a new expiration date of December 31,
1999. The value assigned to the warrant extension was $0.10 per warrant. Also,
in exchange for the surrender of certain demand registration rights which were
held by the same warrant holders, the company issued 10,000 shares of common
stock. The market value of those shares at December 31, 1998 was $1.125 per
share.
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.
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 1999, 1998,
1997, 1996, or 1995.
Shares purchased under the Plan are subject to a right of repurchase by the
Company 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, 1999 and
1998, no shares are subject to the Company's repurchase option under this
provision. No shares were repurchased during the years ended September 30, 1999,
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,
F-12
<PAGE>
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).
Stock option activity under the Plan is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
SHARES --------------------------------------------------------------
AVAILABLE AGGREGATE WEIGHTED AVG.
FOR GRANT NO. OF SHARES PRICE PER SHARE PRICE EXERCISE PRICE
---------- -------------- ---------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Balance, October 1, 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
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
Canceled during 1999 . . . . . . 53,500 ( 53,500) 4.75-11.50 ( 516,180) 9.65
---------- -------------- ---------------- ----------- ------------
Balance, September 30, 1999 . . . 266,200 670,300 $ 1.43-11.50 $2,040,191 $ 3.04
========== ============== ================ =========== ============
</TABLE>
The following table summarizes information with respect to stock options
outstanding at September 30, 1999
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- -------------------------------------------------------------------------------- -------------------------------------
RANGE OF NUMBER OUTSTANDING WEIGHTED AVG. REMAINING WEIGHTED AVG. NUMBER EXERCISABLE WEIGHTED AVG.
EXERCISE PRICE AT SEPTEMBER 30, 1999 CONTRACTUAL LIFE (YEARS) EXERCISE PRICE AT SEPTEMBER 30, 1999 EXERCISE PRICE
=============== ==================== ======================== =============== ==================== ===============
<S> <C> <C> <C> <C> <C>
1.43-$2.00 . . 517,500 1.40 $ 1.45 517,500 $ 1.45
4.75. . . . . . 51,000 2.17 4.75 51,000 4.75
8.02-11.50 . . 101,800 3.27 10.29 99,161 10.26
- --------------- -------------------- ------------------------ --------------- -------------------- ---------------
1.43-11.50 . . 670,300 1.75 $ 3.04 667,661 $ 3.01
=============== ==================== ======================== =============== ==================== ===============
</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.
The Company applies APB Opinion No. 25, Accounting for Stock Issued to
Employees, in accounting for its plan. Accordingly, no compensation cost has
been recognized for its stock option plan. Had compensation cost for the
Company's 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,
---------------------------------------
1999 1998 1997
------------ ------------ -----------
<S> <C> <C> <C> <C>
Net loss . . . . . . . . . . . . . . As reported $(2,731,380) $(2,328,652) $(1,045,511)
Pro forma $(2,771,871) $(2,893,374) $(2,043,097)
Net loss per share-basic and diluted As reported $ (0.23) $ (0.20) $ (0.09)
Pro forma $ (0.23) $ (0.25) $ (0.18)
</TABLE>
F-13
<PAGE>
The fair value of the Company's stock option grants is amortized over the
vesting period. The average fair values of options granted during the years
ended September 30, 1998 and 1997, (including repriced options) were $2.35 and
$10.09 respectively. There were no stock options granted in the year ended
September 30, 1999. 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 for 1998 and 1997:
<TABLE>
<CAPTION>
Years Ended
September 30,
----------------
1998 1997
----- -----
<S> <C> <C>
Expected life (years). . . . . . 2.1 2.5
Expected volatility. . . . . . . 116% 125%
Risk free interest rate. . . . . 5.60% 6.22%
</TABLE>
11. PROFIT SHARING AND RETIREMENT PLANS:
The Company has a 401(k) profit sharing plan covering substantially all
employees, and matches 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 $71,682, $73,499, and $66,670 in the fiscal years ended
September 30, 1999, 1998 and 1997, respectively.
The Company also has a Money Purchase Pension Plan (Pension Plan). The Company
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 1999, 1998
1997 or 1996. The Company's cost of the Pension Plan was $12,736 in the fiscal
year ended September 30, 1995.
12. LEASE COMMITMENTS:
The Company leases office space and equipment under operating leases. Rent
expense under operating leases was $302,495, $354,684, $184,344, in the
fiscal years ended September 30, 1999, 1998 and 1997, respectively. As of
September 30, 1999, future minimum lease payments under operating leases
are as follow:
<TABLE>
<CAPTION>
Years Ending September 30,
- --------------------------
<S> <C>
2000 . . . . . . . . . . . $315,000
2001 . . . . . . . . . . . 313,000
2002 . . . . . . . . . . . 95,000
----------
$ 723,000
==========
<FN>
Minimum payments to be received by Forecross for the sublease of office space are
$68,750, $68,750 and $17,190 for the years ended September 30, 2000, 2001 and
2002 respectively.
</TABLE>
13. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
Years Ended
September 30,
-------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Interest paid . . . . . . . . . $260,410 $220,053 $290,648
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
F-14
<PAGE>
<TABLE>
<CAPTION>
Years Ended
September 30,
-------- -------- --------
1999 1998 1997
-------- -------- --------
<S> <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 officers. . . . . 120,954 90,405 -
</TABLE>
F-15
<PAGE>
<TABLE>
<CAPTION>
FORECROSS CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
Additions -
---------------------
Balance, Charges to Revenues Deductions- Balance,
Beginning of or Costs and Write-offs End of
------------- ---------
Period Expenses (1) Charged to Reserve Period
------------- --------------------- ------------------- ---------
ALLOWANCES AGAINST RECEIVABLES:
- --------------------------------
<S> <C> <C> <C> <C>
Year Ended September 30,
1999. . . . . . . . . . . . . . $ 136,650 $ ( 65,001) $ 26,649 $ 45,000
1998. . . . . . . . . . . . . . 300,340 124,952 288,642 136,650
1997. . . . . . . . . . . . . . 340 300,000 - 300,340
DEFERRED TAX ASSET VALUATION ALLOWANCES:
- ---------------------------------------
Year Ended September 30,
1999. . . . . . . . . . . . . $ 2,882,000 $ - $ ( 701,000)* $3,583,000
1998. . . . . . . . . . . . . 2,104,000 - ( 778,000)* 2,880,000
1997 . . . . . . . . . . . . . . 1,552,000 - (552,000)* 2,104,000
* offset by change in deferred tax asset
<FN>
(1) Certain allowances related to contract estimations for amounts of revenue
recognized on percentage-of-completion basis are charged directly to revenues
</TABLE>
S-1
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
BALANCE SHEET AS OF SEPTEMBER 30, 1999 AND THE STATEMENT OF OPERATIONS FOR THE
YEAR ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> SEP-30-1999
<CASH> 2740
<SECURITIES> 0
<RECEIVABLES> 420893
<ALLOWANCES> 45000
<INVENTORY> 0
<CURRENT-ASSETS> 423703
<PP&E> 1240144
<DEPRECIATION> 962612
<TOTAL-ASSETS> 812307
<CURRENT-LIABILITIES> 4740874
<BONDS> 0
<COMMON> 5044582
0
0
<OTHER-SE> (10723459)
<TOTAL-LIABILITY-AND-EQUITY> 812307
<SALES> 0
<TOTAL-REVENUES> 3460351
<CGS> 2745733
<TOTAL-COSTS> 2745733
<OTHER-EXPENSES> 2892067
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 553131
<INCOME-PRETAX> (2730580)
<INCOME-TAX> 800
<INCOME-CONTINUING> (2731380)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2731380)
<EPS-BASIC> (0.23)
<EPS-DILUTED> (0.23)
</TABLE>
