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, 2000
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. [X]
The aggregate market value of the voting common stock held by
non-affiliates of the Registrant as of December 19, 2000 was $3,862,000. As of
December 19, 2000, there are 15,053,380 shares of common stock outstanding.
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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;
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 our predecessor
corporations, has been in business since 1982. We develop, market and sell
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, we also
developed, marketed and sold similar software and services to large
organizations for the automated assessment and renovation of business software
applications that were not year 2000 compliant.
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
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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.
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
Our 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.
Our products represent a third solution. We have 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. We believe that this option
will ordinarily be the least expensive and least risky alternative.
MARKET
At its largest, we estimate that the potential worldwide market for our
products includes approximately 30,000 large computer-using organizations,
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including the so-called Fortune 2,000 companies, and comparable government,
financial services, healthcare, education and other service organizations. Most
of these organizations automated their major business applications before the
advent of current technologies. These organizations characteristically have a
large inventory of crucial information systems based on rapidly obsolescing
technology.
We believe that the portion of the North American enterprise computing
market comprised of users of Computer Associates Integrated Database Management
System, or CA-IDMS, amounts to approximately 275 users, based on information
supplied in March 2000 by Harte-Hanks Market Intelligence, Inc., an industry
research organization. CA-IDMS includes a database management system -
CA-IDMS/DB, user interface language - CA-IDMS/DC, and fourth-generation language
- CA-ADSO which, together with certain other related products, were originally
developed and marketed by Cullinane Corporation, later by Cullinet Corporation,
and now by Computer Associates International. Based on reports in the industry
press, we believe 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
275 users will have decided to move to newer, more cost-effective and flexible
computing environments. We currently estimate that there are approximately 300
CA-IDMS users outside North America.
In addition to the CA-IDMS portion of the enterprise computing market,
there are also additional portions related to other proprietary technology
platforms. They include areas related to computer languages such as
CA-Easytrieve from Computer Associates, CSP from IBM Corporation, CA-UFO from
Computer Associates and ADF from IBM Corporation, and databases such as IMS from
IBM and Adabas from SoftwareAG. We currently estimate that there are between
15,000 and 20,000 users for all of those products. These additional areas create
opportunities for us to develop other products and give us added flexibility in
responding to changes and developments in the marketplace.
PRODUCTS
We have licensed and delivered our 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 & Co., 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 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.
Our products are designed to automate up to 100% of the conversion of an
existing application. It has been our experience 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 our products a cost-effective and
lower risk alternative. Converted applications are functionally equivalent to
their unconverted counterparts, and, in our experience, maintainability and
performance in the new environment are typically unaffected or enhanced. Each
of our products includes a significant number of customization options which can
be selected by the user to obtain results closest to its specific conversion
objectives.
During 1999, we added two new products aimed at extending the scope of our
conversion solution offerings. One tool, called 'TestSentinel', is used to test
the converted applications to ensure that they are functionally equivalent to
their un-converted counterparts. The second tool, called 'SourceSentinel', 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. We intend to offer end-user licenses in the
future.
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UNDERLYING PROPRIETARY TECHNOLOGY
Our powerful and flexible technology known as the XCODE architecture, has
been refined over the last fourteen years and forms the foundation for all of
our products, tools, and associated services.
Our proprietary XCODE architecture 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.
We began developing our technology in 1982. The prototype for the XCODE
architecture was built in 1985 to permit a customer to convert a major
application from a proprietary language to COBOL. The first generation of XCODE
was developed and enhanced between 1985 and 1986, in connection with language
conversion projects undertaken for Price Waterhouse, LLP. This resulted in the
first version of the Convert/ADSO to COBOL product. In response to a
requirement of Chemical Bank of New York, a second generation of XCODE was
developed in 1987, resulting in the development of the first version of the
Convert/IDMS-DB to SQL product.
In 1990, we developed the first version of Convert/IDMS-DC to CICS in
connection with a migration project undertaken for American President Lines. In
the same year, under a contract with IBM, the third generation of XCODE was
produced. In 1992-93, in connection with a project for Cincom Systems, Inc. of
Ohio, we developed the Fastforward/VSAM to SUPRA database conversion software.
At that time, all the components of XCODE were redeveloped to operate in a PC
environment.
The XCODE architecture is modular in design. Modular architecture refers
to the design of a system into separate components that can be connected and
combined together in many different configurations. The strength of modular
architecture is that any one component can be replaced, added or moved without
altering the rest of the system. Our modular XCODE architecture is, therefore,
readily adaptable to the development of new migration products. This lowers the
cost, shortens the time and reduces the risk of new product development.
COMMERCIALLY AVAILABLE PRODUCTS
We have, to date, developed nine migration products. Migration products
are named by reference to the source language or database and the target
language or database:
- Convert/IDMS-DC to CICS (user interface language conversion)
- Convert/ADSO to COBOL (language conversion)
- Convert/IDMS-DB to SQL (database conversion)
- Convert/VSAM to SQL (database conversion)
- Convert/CSP to COBOL (language conversion)
- Redirect II COBOL/VS to COBOL II (language conversion)
- IMSADF II to Cross System Product Migration Facility (language
conversion)
- Convert/IMSADF II to APS/COBOL (language conversion)
- Fastforward/VSAM to SUPRA (database conversion)
We are the owner of six of these products. Ownership of the following
products is shared: IMSADF II to Cross System Product Facility, which we
developed, but is owned jointly with IBM; Convert/IMSADF II to APS/COBOL, which
we developed, but is owned jointly with Bank of America; and Fastforward/VSAM to
SUPRA which we developed pursuant to a Development and License Agreement dated
April 22, 1991, with Cincom Systems, Inc. and is jointly owned by the Company
and Cincom. We and IBM have joint marketing rights to the first product, we and
Bank of America have joint marketing rights to the second product, and Cincom
has exclusive marketing rights to the third product. None of these jointly owned
products is presently material to our business or near-term business plans.
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PRODUCT DEVELOPMENT
Our strategy in developing new migration software and services for existing
applications is to respond to the particular needs of a specific customer after
research has determined that there is an identifiable potential for further
licensing of the product and delivery of associated services, to other
organizations. Before undertaking the development of a new product, we generally
require that the customer agree to share the development cost. One example of
this strategy is the Convert/CSP to COBOL product which was developed for
Kimberly-Clark Corporation in 1994, under an agreement whereby Kimberly-Clark
contributed $300,000 of the total $350,000 in development costs. Another example
is the Convert/IMSADF II to APS/COBOL product which was developed for and
financed by Bank of America in 1994 and 1995 at a cost of $480,000.
One factor that greatly enhances our ability to employ this strategy is our
proprietary XCODE architecture. The XCODE architecture has historically enabled
us 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 us to fund most or all of the development cost from the license revenue
generated by the initial development-funding customer.
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, a tool for ensuring that
application standards and rules remain in force as the applications are
maintained and a suite of tools aimed at moving legacy applications to the
internet. Called L2X-SmartXML, these tools provide the native software
infrastructure to enable large-scale commerce projects to succeed with a second
generation technical solution. SmartXML inserts the functionality for XML data
exchange directly into mainframe programs, eliminating middleware, decreasing
costs and increasing business flexibility. SmartXML consists of software modules
applicable to mainframe CICS programs, batch programs, reports, data file
exchanges and support for mainframe programmers. SmartXML is available now as a
part of our product and service offerings. We currently intend to commercialize
these tools and offer product licenses to them to our customers.
Research and development expenses were $913,000, $728,000 and $1,520,000 in
the years ended September 30, 2000, 1999 and 1998, respectively.
PRODUCT LICENSING
MIGRATION PRODUCT LICENSING
We grant our customers a non-exclusive, non-assignable license to use our
software, including programs, options, documentation, data and information.
While certain provisions in the license agreement (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 of these
agreements. Each agreement contains a warranty by us against defects in design,
operation and usability in the customer's computer environment, and each
contains a covenant by the licensee not to attempt to decipher, develop source
code, copy, modify, duplicate, create or recreate all or any part of it except
to the extent required by its normal operating procedures. The licensee also
agrees to take reasonable steps to prevent access by anyone whose access is not
reasonably necessary and to ensure that authorized persons with access refrain
from duplicating, reproducing or disclosing information with respect to the
licensed software.
The license is granted for the conversion of a specified number of
application programs, and may be terminated on fifteen days notice for
non-payment of amounts payable under it, on twenty-four hours notice by either
party if the other becomes insolvent or (except in certain circumstances) if
bankruptcy or other similar proceedings are commenced against it, or it makes an
assignment for the benefit of creditors. The agreement is also terminable 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/2000 LICENSING AND FACTORY SERVICES
During the first quarter of the 2000 fiscal year (October 1, 1999 through
December 31, 1999), we offered product licenses and services related to our year
2000 business. Since this activity occurred during the 2000 fiscal year which is
the subject of this document, the following descriptions of our product
offerings are applicable.
We offered "factory" services for customers of our Complete/2000 renovation
and confirmation software. By "factory", we mean an array of multiple server-
class computers operated by a small number of computer operators, running two to
three shifts per day, up to seven days per week, depending on work volume.
"Factory services" also implies the methodology by which customer code flows
through the Forecross factory, to the rules engineers for issue resolution, to
quality assurance for final review, and back to the customer. Licenses are not
currently offered. Using the factory renovation services, a customer sends its
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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
We have chosen to protect the intellectual property value of our products
and our proprietary XCODE architecture through trade secret and confidentiality
provisions in our product licensing arrangements, confidentiality agreements
with our employees and through copyright protection for system externals such as
display formats and documentation. Additional protection is provided by the
complex nature of both the XCODE architecture, and the products themselves. This
approach is consistent with standard practice in the industry, and 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. Our products are also protected against unauthorized use by
imbedded and external access control codes. However, the protection on which
we rely may not be effective. Monitoring and identifying unauthorized use of our
technology may prove difficult, and the cost of litigation may impair our
ability to guard adequately against such infringement. Our commercial success
may also depend upon our products not infringing any intellectual property
rights of others and on no claims of infringement being made against us. Even
if such claims are found to be invalid, the dispute process could have a
materially adverse effect on our business, results of operations and prospects.
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. After
experimentation with different marketing techniques, we decided in 1992 to
develop and implement our own direct marketing and sales strategy. Our strategy
includes having multiple product offerings to include a broad range of service
and license alternatives that better adapt to meet the needs of the marketplace
and serve to differentiate us from our competitors. Conventional techniques
including trade publication notices, direct mail, telemarketing , and, most
recently, our own web-site, www.forecross.com, on the internet are being used to
bring our products and their benefits to the attention of prospective customers.
Additionally, we have focused on building a reference base of satisfied
customers.
Recognizing that aversion to risk is one of the major characteristics of
the decision making process for many MIS organizations, we have created a phased
marketing approach to simplify the process for potential customers to evaluate
and invest in our products. This strategy allows a potential customer to pursue
its interest in automated migration in a series of measured steps, with each
step in the process providing demonstrable value.
Our principal marketing programs involve the Migration Alternatives
Planning Seminar ("MAPS") and either Factory Compile or License-Only sales.
MAPS is an introduction, for a fee, to the conversion process through an
intensive two-day customer-site program for those considering a migration
project. Designed to address conversion issues, it includes formal technical
briefings, expert consulting, an evaluation of the risks, costs and benefits of
various alternatives and a feasibility analysis of the automated migration of a
selection of the customer's application software. MAPS is promoted by
telemarketing and is conducted by two senior members of our staff.
Evaluations of prior MAPS sessions suggest that many of our MAPS customers will
decide to select Factory Compile or License-Only within twelve months of the
MAPS session.
We offer our customers the option for us to use our proprietary software on
behalf of the customer to perform the entire conversion process, thus relieving
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the customer of the requirements for allocating the personnel and time necessary
to learn to perform the migration. We call this type of engagement a "Factory
Compile." By "factory," we mean an array of multiple server-class computers
operated by a small number of computer operators, running two to three shifts
per day, up to seven days per week, depending on work volume. "Factory services"
implies the methodology by which customer code flows to us, through the factory,
to the rules engineers for issue resolution, to quality assurance for final
review, and back to the customer. The customer's role is limited to testing the
converted application in its new environment. The average Factory Compile
project requires one senior and two junior technical staff members for
approximately four months.
License-Only is an offering in which the customer licenses our products
and, with training and additional optional consulting provided by us, performs
the entire conversion process with its own personnel. As in the Factory Compile
option, the customer also tests the converted application in the new
environment. No customer has chosen the License-Only offering in the past few
years, preferring to use our automated factory facilities.
Although there are no separately chargeable software license fees, Factory
Compile projects require the customer to sign a standard Forecross Product
License Agreement. For both offerings (Factory Compile and License-Only), a
customer's use of our products is limited to the conversion of a specified
maximum number of application programs, at which time the license expires.
SALES AND LICENSING REVENUES
In the fiscal years ended September 30, 2000, 1999, 1998 and 1997, year
2000 assessment projects, sales of licenses to the Assess/2000 software, and
fees associated with distributorships for Complete/2000 products and services
accounted for forty-one percent, eighty-eight percent, sixty-two percent and
forty-two percent, respectively, of total revenue. Migration projects in 2000
accounted for fifty-one percent 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
We believe that the principal focus of other software vendors has been on
the development and licensing of software which speeds the rewriting alternative
for migration. Examples of software delivering this type of migration solution
assistance include ViaSoft Inc.'s tools for application re-engineering, and
Carleton Corporation's software to support data migration. In both of these
cases, as in all others of which we are aware, the software products do not
provide the near-complete and comprehensive automated conversion of business
applications as those performed by our products after various individual options
and parameters have been established.
SERVICE SUPPLIERS
Service organizations such as accounting firms and companies like Perot
Systems, 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%
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of the source code, with the balance of the conversion being performed manually.
We believe that any manual conversion is subject to inconsistency, high risk of
error, high cost and delays. Since they are service providers, these companies
tend to focus on turnkey projects costing several millions of dollars which can,
therefore, support the high manpower costs involved.
Since our software automates significantly more of the conversion (95% to
100%) than can be achieved with other products, we believe that we are able to
compete effectively with such service suppliers. We typically price our Factory
Compile offering (see "-Marketing and Sales Strategy") below the prices quoted
by the service suppliers who perform conversions. We believe that our Factory
Compile offering can be marketed successfully, because it can be presented to
the marketplace as the solution which uses a significantly greater degree of
automation than is offered by service suppliers, thereby reducing the costs,
time and risks of the project.
COMPETITIVE EXPERIENCE
Our experience in the competitive bidding process employed by many of our
prospective customers leads us to believe that we have a price advantage over a
majority of the other bidders. Other bidders' costs are typically higher due to
their dependence on skilled people, as compared with our dependence on less
costly automation. However, we have not historically enjoyed the same degree
of market recognition as many of our large competitors, such as the national
consulting or accounting firms against whom we often compete.
Until the emergence of the year 2000 problem, some customers did not
embrace the idea that automation could help them solve their problem. We believe
that such uncertainty would sometimes cause a customer to award a contract to
the more recognizable bidder, in spite of the higher price. This extra cost was
often viewed as an "insurance policy" against any problems in the future. We
have observed a shift in this trend over the past years, and many customers now
will not entertain bids which do not contain the use of automated software
tools. We believe that we have the capability to compete favorably because
of these trends, and because we have steadily built our reputation and name
recognition over the same period of time.
COMPETITIVE POSITION
It is possible that other software or services companies may attempt to
develop new proprietary conversion software or service offerings or to enhance
existing proprietary conversion software or service offerings, to compete
directly in our chosen market. There are, in addition, certain other elements of
risk which bear upon our 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 us to assess how many potential customers have availed
themselves of the other alternatives (i.e., the purchase of a new software
package that operates on new technology platforms or rewriting the computer
source code), since we do not actively track prospects who fail to meet our
initial sales qualification criteria. Among qualified prospects who ultimately
do not purchase from us, the rewriting option generally prevails.
CORPORATE HISTORY AND EMPLOYEES
CORPORATE HISTORY
We were formed on January 1, 1987 by a merger pursuant to the provisions
of the California Corporations Code of two predecessor corporations, Jonescast,
Inc., and its wholly owned subsidiary, Genasys Software Systems, Inc.
(subsequently renamed Genasys Technologies, Inc., and later changed to Forecross
Corporation), each incorporated under the laws of California in June, 1982. As a
result of the merger, we succeeded to the business that had been carried on by
the predecessor corporations since 1982. References in this Form 10-K to
Forecross Corporation, Forecross, or the Company should be taken to include a
reference to its predecessor companies.
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EMPLOYEES
As of September 30, 2000, we had 32 employees. Of these, seven work
primarily in the Factory, five are engaged primarily in research and development
work, three are in project management, four are in technical support of customer
projects, two are in quality assurance, six are in sales and marketing and five
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
us the product of all work done by them while employed by and for us, and to
assign to us all rights in such work product.
BACKLOG
Backlog was $993,000 at September 30, 2000 as compared to $1,172,000 at
September 30, 1999. (See "Management's Discussion and Analysis of Financial
Condition and Results of Operations.)
ITEM 2. PROPERTIES
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Our principal executive offices are located at 90 New Montgomery Street,
San Francisco, California 94105, where we occupy approximately 10,200 square
feet of leased space under two leases which expire in December 2001. Annual base
rent under the leases is approximately $298,000. We also maintain a sales office
in Salem, New Hampshire, and a small apartment in San Francisco for use by our
out-of-town staff while visiting the executive offices.
On August 4, 1999, we entered into a sublease agreement, under which we
sublet approximately 2,500 square feet of unused office space at 90 New
Montgomery Street for a period of twenty-eight months. This agreement was
entered into with the approval of our landlord. The space currently occupied by
our staff is adequate for our needs.
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, 2000, we had issued and outstanding 15,053,380 shares
of Common Stock held of record by 98 shareholders. Our 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, our 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 our Common Stock for the periods
indicated.
9
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED HIGH LOW
------------------ ------ ------
<S> <C> <C>
09/30/00 . . . . . $ 2.00 $ 0.56
06/30/00 . . . . . 2.66 0.72
03/31/00 . . . . . 5.81 0.27
12/31/99 . . . . . 0.75 0.11
09/30/99 . . . . . $ 0.70 $ 0.27
06/30/99 . . . . . 0.91 0.19
03/31/99 . . . . . 1.50 0.45
12/31/98 . . . . . 3.00 1.00
</TABLE>
We have not paid any dividends to date and do 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 our issuances of
Common Stock during the three years ended September 30, 2000.
<TABLE>
<CAPTION>
NUMBER OF SHARES GROSS PROCEEDS ($U.S.) NATURE OF CONSIDERATION
---------------- ----------------------- -----------------------
<C> <C> <S>
12,000 48,000 Cash(1)
10,000 0 Surrender of rights(2)
418,332 313,750 Cash(3)
1,175,000 235,000 Cash(4)
613,530 1,632,000 Cash(5)
1,063,006 2,827,596 Conversion of notes payable, expenses(6)
9,900 19,800 Exercise of options(7)
<FN>
1. 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.
2. These shares were issued to warrant holders in exchange for the surrender
of certain demand registration rights held by the warrant holders.
3. These shares were issued January 1999 in a private placement of 418,332
shares at $0.75 per share. We also issued to the placement agent, in lieu of
cash, warrants to purchase 35,000 shares of common stock at $0.75 per share,
expiring in five years. We incurred $22,933 of costs related to this sale.
4. These shares were issued between December 1999 and January 2000 in a
private placement of 1,175,000 shares at $0.20 per share. We incurred $18,626
in costs related to this sale.
5. These shares were issued in March 2000 in a private placement of 613,530
shares at $2.66 per share. We incurred $36,099 in costs related to this sale.
With each share, we also issued a warrant to purchase one half share of stock at
$2.66 per share, expiring in three years. We also issued to a finder warrants
to purchase 200,000 shares of common stock at $2.66 per share, expiring in 3
years.
6. These shares were issued in March 2000 to certain of our senior officers
and employees, year 2000 distributors and a director, converting Company debt
from loans, deferred payroll, travel expenses and year 2000 distributor revenue
sharing to equity at a conversion price of $2.66 per share. With each share we
also issued a warrant to purchase one half share of stock at $2.66 per share,
expiring in three years.
7. These shares were issued in April 2000 upon the exercise of employee
stock options. 9,900 shares were issued at $2.00 per share
</TABLE>
We have issued shares of our Common Stock to certain employees (including
officers) pursuant to our compensation benefit plans. The transactions described
in this paragraph were exempt from the registration requirements of the
Securities Act based upon Rule 701 promulgated thereunder.
10
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
-------- -----------------------
The selected financial data set forth below with respect to the fiscal
years ended September 30, 2000, 1999, and 1998 and the balance sheet data at
September 30, 2000, and 1999 are derived from the audited financial statements
included elsewhere in this Annual Report. The financial data for the years ended
September 30, 1997 and 1996 and the balance sheet data at September 30, 1998,
1997 and 1996 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,
--------------------------------------------------------------------
2000 1999 1998 1997 1996
------------ ------------ ------------ ------------ ------------
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
Net revenues:
Services and maintenance . . $ 3,393,802 $ 2,915,347 $ 6,623,752 $ 4,930,456 $ 2,199,672
Software licenses and
distributorship fees
- related parties. . . . . . 544,995 545,004 545,000 844,582 200,000
------------ ------------ ------------ ------------ ------------
Total net revenues . . . . . 3,938,797 3,460,351 7,168,752 5,775,038 2,399,672
Cost of services and
maintenance including fees
to related parties of $18,000
$166,000, $346,000, $213,000,
and $0, respectively . . . . 1,355,671 2,745,733 4,419,347 3,366,608 1,431,489
------------ ------------ ------------ ------------ ------------
Gross margin. . . . . . . . . . 2,583,126 714,618 2,749,405 2,408,430 968,183
------------ ------------ ------------ ------------ ------------
Operating expenses:
Sales and marketing
including fees to related
parties of $55,000,
$497,000, $1,037,000,
$640,000, and $0,
respectively . . . . . . . 719,843 1,047,300 1,838,126 1,490,479 711,545
Research and development . . 913,064 728,239 1,520,709 1,006,768 253,743
General and administrative . 1,913,832 1,116,528 1,413,312 887,039 332,500
------------ ------------ ------------ ------------ ------------
Total operating expenses. . . . 3,546,739 2,892,067 4,772,147 3,384,286 1,297,788
------------ ------------ ------------ ------------ ------------
Loss from operations. . . . . . (963,613) (2,177,449) (2,022,742) (975,856) (329,605)
Other (expense), net . . . . . (313,251) (553,131) (305,110) (68,855) (129,141)
------------ ------------ ------------ ------------ ------------
Loss before provision
for income taxes . . . . . . (1,276,864) (2,730,580) (2,327,852) (1,044,711) (458,746)
Provision for income taxes. . . - (800) (800) (800) (2,300)
------------ ------------ ------------ ------------ ------------
Net loss. . . . . . . . . . . . $(1,276,864) $(2,731,380) (2,328,652) $(1,045,511) $ (461,046)
============ ============ ============ ============ ============
Net loss per share. . . . . . . (0.09) $ (0.23) (0.20) $ (0.09) $ (0.04)
============ ============ ============ ============ ============
Dividends . . . . . . . . . . . - - - - -
============ ============ ============ ============ ============
Shares used in computing
per share data. . . . . . . . . 13,951,186 12,060,919 11,761,920 11,681,035 11,370,804
============ ============ ============ ============ ============
BALANCE SHEET DATA:
Cash and cash equivalents . . . $ 18,833 $ 2,740 $ 98,249 $ 275,243 $ 99,427
Working capital (deficit) . . . (1,246,989) (4,317,171) (1,735,813) 442,765 (1,077,531)
Total assets. . . . . . . . . . 1,516,422 812,307 1,995,719 3,301,051 726,896
Deferred revenue, long-term . . 415,419 980,418 1,545,417 2,110,417 -
Long-term debt and capital
lease obligations (net of
current portion) . . . . . . . 102,692 769,892 673,059 - 223,923
Shareholders' deficit . . . . . (1,339,270) (5,678,877) (3,276,564) (995,912) (1,120,649)
</TABLE>
11
<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, 2000, 1999 and 1998 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 risks and uncertainties include concentration of credit,
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 on pursuing migration services contracts as compared to the
previous focus on development contracts. Major customers using our 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 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, a tool for ensuring that
application standards and rules remain in force as the applications are
maintained and a suite of tools aimed at moving legacy applications to the
internet. Called L2X-SmartXML, these tools provide the native software
12
<PAGE>
infrastructure to enable large-scale commerce projects to succeed with a second
generation technical solution. SmartXML inserts the functionality for XML data
exchange directly into mainframe programs, eliminating middleware, decreasing
costs and increasing business flexibility. SmartXML consists of software modules
applicable to mainframe CICS programs, batch programs, reports, data file
exchanges and support for mainframe programmers. SmartXML is available now as a
part of our product and service offerings. We currently intend to commercialize
these tools and offer product licenses to them to our customers.
RESULTS OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 2000 COMPARED TO YEAR ENDED SEPTEMBER 30, 1999
Total revenue for the year ended September 30, 2000 was $3,939,000 as
compared to $3,460,000 for the same period of 1999, an increase of 14%.
Migration services revenue for the year contributed $2,048,000 as compared to
$248,000 a year ago, due primarily to the signing and execution of two contracts
during 2000. Year 2000 services revenue accounted for $1,077,000 of the total
as compared to $2,507,000 for the same period of 1999. Revenue from consulting
totaled $270,000 as compared to $160,000 in 1999, and revenue from the
amortization of deferred year 2000 distributor licenses and fees remained at
$545,000 for both periods. Project revenue is recognized on the cost-of-
completion method, using estimates of the costs remaining. Total revenue for the
three months ended September 30, 2000 was $1,016,000 as compared to $837,000
for the same period in 1999. Backlog was $993,000 at September 30, 2000 and
$1,172,000 at September 30, 1999.
Gross margin was $2,583,000 and $715,000 for years ended September 30, 2000
and 1999, respectively. Gross margin percentages were 66% and 21% for these
periods. The increased gross margin percentage was due to reductions in cost of
revenue and reflects, in part, efforts over the past year to control costs and
improve efficiencies through attrition and by adjusting staff levels for the
reduction and end of year 2000 business, reductions in contractors, and the end
of fees to year 2000 distributors.
Sales and marketing expenses were $720,000 for 2000 and $1,047,000 for
1999. Year 2000 distributor commissions, which ended at December 31, 1999,
accounted for $442,000 of the change between years.
Research and development expenses were $913,000 for 2000 as compared to
$728,000 in the prior year, which reflect the increase in development efforts in
2000 for enhancements to our migration products and new XML-related offerings.
General and administrative expenses were $1,914,000 and $1,117,000 at the
respective year ends. Most of this increase was due to non-recurring $652,000
non-cash compensation expenses related to the issuance of common stock and
warrants in a March 2000 private placement, and the value assigned to options
issued to consultants in April 2000. The $652,000 non-cash compensation expense
was initially reported as $954,000 in our filings on Form 10Q for the March and
June 2000 periods due to a clerical error in calculating the Black-Scholes value
of the warrants related to the transaction.
Net interest and other expense was $313,000 for the year ended September
30, 2000, as compared to $553,000 in 1999. This reduction reflects the benefit
of the conversion of much of our non-bank debt to equity in March 2000, and the
reduced use of bank borrowings.
The overall net loss for the year was $1,277,000 or $0.09 per share in
2000, and the loss was $2,731,000 or $0.23 per share in 1999, based on the
weighted average number of shares outstanding during the respective periods. The
net loss for the three months ended September 30, 2000 was $147,000 or $0.01 per
share compared to the net loss of $853,000 or $0.07 per share for the same
period in 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, 2000 and 1999 (see Notes 2 and 7 of
Notes to Financial Statements).
13
<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 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 was the fact that the
majority of year 2000 projects completed in 1999 were the lower priced and less
difficult confirmation audits rather than renovations. Backlog was $1,172,000
at September 30, 1999, as compared to $531,000 at September 30, 1998.
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 a decrease in the number of personnel to support
our development activities associated with the Complete/2000 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. The net loss per share was $0.07 for the three months ended September 30,
1999, $0.06 for the comparable period in 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, 1999 and 1998 (see Notes 2 and 7 of
Notes to Financial Statements).
14
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Through September 30, 2000, we have sustained recurring losses from
operations and, at September 30, 2000, 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 1 of the notes to financial
statements. The opinion of our independent certified public accountants on
the audited financial statements for the year ended September 30, 2000 also
contained an explanatory paragraph regarding this doubt about our ability to
continue as a going concern.
For the year ended September 30, 2000, operations were funded primarily by
cash derived from the sale of stock in two private placement transactions, by
deferrals of senior employee compensation, and by a loan from a related party.
See note 8 of the notes to the financial statements. During the quarter ended
March 31, 2000, we also converted a significant amount of our debt to equity.
We believe this move strengthens our balance sheet, reduces interest expense and
improves our future ability, as needed, to obtain additional financing and
attract investors.
The need to obtain additional funds through a private placement of stock
was required due to our expected transition period between the end of year 2000
contract business and the resumption of our core migration business. While many
companies completed their year 2000 analysis and renovation work well in advance
of the December 31, 1999 deadline, we believe that most companies postponed
consideration and commencement of new migration projects until the actual
outcome of the year 2000 issue was known. Additionally, we believe that many
companies are re-evaluating the status and direction of their information
systems investments based on the analysis performed for year 2000 and the rapid
paradigm shift towards web-oriented and capable businesses.
We are aggressively pursuing new opportunities for migration services,
including developing products and services specifically marketable to businesses
currently using legacy systems but needing to migrate to more web-friendly
platforms. We expect additional revenue in the first quarter of fiscal
2001 from some of the migration contracts currently under negotiation. We are
closely monitoring our sales pipeline, work in progress, collections and cash
requirements to determine whether the existing sources of financing are adequate
to support our operations or whether additional means of financing, including
debt or equity financing, may be required to satisfy our working capital and
other cash requirements.
If we can obtain the anticipated level of new business, and continue the
use of short-term receivables financing, we believe we will have sufficient
funds to meet our needs through the balance of fiscal 2001. Cash from
operations and the other sources described above may not be achieved or may not
be sufficient for our needs.
A factoring agreement with a financial organization allows us to obtain
financing by borrowing against our accounts receivable on a recourse basis. At
September 30, 2000, $501,000 was outstanding under the agreement and at
September 30, 1999, $861,000 was outstanding. The agreement, established in
October 1995, may be terminated by either the factor or us at any time.
In August 2000, we received a loan in the amount of $100,000 from an
employee of the company. The loan is for a term of two years, is secured by
the XML software technology developed and owned by Forecross, and accrues
interest at a rate of 11.5% per year.
We anticipate that our capital expenditures for fiscal 2001 will be between
$25,000 and $50,000.
Cash and cash equivalents on hand at September 30, 2000 were $19,000
as compared to $3,000 at September 30, 1999.
15
<PAGE>
RECENT ACCOUNTING PRONOUNCEMENTS
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. In June 1999, the FASB issued SFAS 137, Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133, which amends SFAS 133 to be effective for all fiscal quarters
of all fiscal years beginning after June 15, 2000. In June 2000, the FASB
issued SFAS 138, Accounting for Derivative Instruments and Hedging Activities -
An Amendment of FASB Statement No. 133, which addressed certain implementation
issues of SFAS 133.
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 to have a material impact on its
financial position, results of operations or cash flows.
In December 1999, the SEC staff released Staff Accounting Bulletin (SAB) No.
101, Revenue Recognition in Financial Statements, which provides interpretive
guidance on the recognition, presentation and disclosure of revenue in financial
statements. SAB 101 must be applied to financial Statements no later than the
quarter ended September 20, 2000. There was no material impact from the
application of SAB 101 on the Company's financial position, results of
operations or cash flows.
In March 2000, the FASB issued Interpretation No. 44 (FIN 44), Accounting for
Certain Transactions Involving Stock Compensation, an interpretation of APB
Opinion No. 25. FIN 44 clarifies the application of Opinion NO. 25 for (a) the
definition of an employee for purposes of applying Opinion No. 25, (b) the
criteria for determining whether a plan qualifies as a non-compensatory plan,
(c) the accounting consequences of various modifications to the terms of a
previously fixed stock option or award, and (d) the accounting for an exchange
of stock compensation awards in a business combination. FIN 44 became effective
July 2, 2000, but certain conclusions cover specific events that occur after
either December 15, 1998, or January 12, 2000. FIN 44 did not have a material
impact on the Company's financial position, results of operations or cash flows.
CERTAIN BUSINESS CONCERNS
UNPROFITABLE OPERATING HISTORY AND LIMITED FINANCIAL RESOURCES
We have not historically been profitable, and as of September 30, 2000, we
had suffered cumulative operating losses aggregating $12,000,000, and at
September 30, 2000, 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 2001, we intend to meet our working
16
<PAGE>
capital and other cash requirements with cash derived from operations, short-
term receivables, 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 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. 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.
17
<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").
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 over $500,000. During the year ended
September 30, 2000, the University of California (26%), MetLife (21%), our
Distributors, when treated as one customer (14%), and Nate Murphy and Associates
(13%), represented seventy-four percent (74%) of total revenue. 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 revenue. 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 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
seven 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
18
<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 AND MIGRATION REVENUES
Year 2000 services and related revenue increased from 42% in fiscal 1997 to
62% in fiscal 1998 to 88% of total revenue for the year ended September 30,
1999. In the year ended September 30, 2000, year 2000 services and related
revenue decreased to 41% of total revenue. While the demand for year 2000
services ended abruptly on December 31, 1999, we continue to recognize revenue
due to the amortization of distributorship, licensing and maintenance fees paid
for by our year 2000 services distributors.
During the year ended September 30, 2000, migration services generated
$2,048,000 in revenue or 52% of total revenue. We had experienced a decline in
revenue from our core migration services to $248,000 in 1999 from $2,695,000 in
1998. We believe that new migration services projects were delayed by potential
customers as they focused their efforts on renovating their systems for year
2000 compliance. 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, 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. 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 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.
19
<PAGE>
CONTROL BY DIRECTORS AND OFFICERS
The current directors and officers of the Company beneficially own
approximately 22% 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 our 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
--------- -----------------------------------------------
The financial statements required by this item are set forth on pages F-1
through F-16 hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
--------- ------------------------------------------------------------------
FINANCIAL DISCLOSURE
---------------------
None.
20
<PAGE>
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
--------- -----------------------------------
The directors, executive officers and key employees of our Company are as
follows:
<TABLE>
<CAPTION>
Name Age Position
--------------------------- --- -----------------------------------------------------------
<S> <C> <C>
Kim O. Jones. . . . . . . . 56 Chief Executive Officer, President and Director
Bernadette C. Castello. (1) 46 Senior Vice President, Chief Financial Officer and Director
Richard A. Carpenter. . (1) 58 Director
Richard L. Currier, Jr. (2) 55 Director
Donald Estes. . . . . . . . 52 Director of Product Architecture
Ronald Herbst . . . . . . . 58 Director of Customer Care
Carl H. Johnson . . . . . . 55 Director of Project Management
Charles T. Nelson . . . . . 54 Director of Software Products
Kenneth J. Paris. . . . . . 53 Senior Database Specialist
Peggy A. Payne. . . . . . . 51 Director of Migration Services
Robert E. Theurer . . . . . 55 Director of Sales
<FN>
(1) Denotes member of audit committee. Ms. Castello, as Chief Financial
Officer, is not independent of any financial decisions of our Company.
(2) We accepted Mr. Currier's resignation from our board of directors effective
January 1, 2000.
</TABLE>
KIM O. JONES (56) 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 our products. He has been active as a software industry
entrepreneur and industry participant since 1971. Prior to the establishment of
Forecross, Mr. Jones served from 1980 to 1982 as a Director and Vice President
of Computer Systems Design, Inc., of San Francisco, California, in charge of
software product development and marketing. In 1970 Mr. Jones co-founded Genasys
Systems, Inc., a software and services firm based in San Francisco, California,
for which he worked initially as Chief Technology Officer and, later, as
President until 1980. From 1967 to 1970, he was a Vice President of Liberty
National Bank of San Francisco, California, responsible for data processing.
Mr. Jones was a member of the Board of Directors of the American Software
Association, a division of the Information Technology Association of America.
21
<PAGE>
BERNADETTE C. CASTELLO (46) co-founded Forecross with Kim Jones in 1982 and
has been in her present position since that time. Ms. Castello manages our day
to day corporate operations. From 1973 to 1977, Ms. Castello worked for
KPMG Peat Marwick in New York, designing and managing the installation and use
of some of the earliest automated applications in that firm. Thereafter, until
1980, she worked as an analyst in Peat Marwick's computer resources department.
From 1980 to 1982, when she left to found Forecross with Mr. Jones, Ms. Castello
was a Senior Consultant at Computer Systems Design, Inc. in San Francisco,
developing applications for the financial and manufacturing industries.
RICHARD A. CARPENTER (58) 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 ours.
DONALD ESTES (52) joined us in April 2000 as Director of Product
Architecture. For the last 10 of his 27 years in the industry, he specialized
in the design and implementation of products and projects for the mass
modification and automated testing of large bodies of source code using language
processing technologies. He has chief responsibility for legacy-to-web products
and projects. Mr. Estes holds degrees from the Massachusetts Institute of
Technology and the University of Texas. From May 1997 through March 2000, Mr.
Estes was the Chief Technical Officer of 2000 Technologies Corp., in Lexington,
Massachusetts, where he built an automated testing system for platform migration
and Year 2000 renovation projects. He also served as a year 2000 advisor to the
State of Rhode Island. From September 1995 through April 1997, he was President
of Don Estes and Associates, in Lexington, Massachusetts, where he designed and
managed the implementation of a mainframe / open systems peer - to - peer
communications product family. Mr. Estes is a member of the Cutter Consortium.
RONALD HERBST (58) joined us in December 1995 as Director of Project
Management and currently serves as Director of Customer Care. From November
1993 through December 1995, Mr. Herbst was an independent software consultant
providing such services as conceptual and detailed system design and
implementation and system programming. From August 1993 through October 1993,
Mr. Herbst was Vice President, Research and Development for Dynamic Bytes, Inc.
From July 1989 through July 1993, Mr. Herbst served as Vice President, Windsor
Technologies, Inc. Mr. Herbst has over twenty years of senior management
experience serving the information technology industry.
CARL H. JOHNSON (55) joined us in March 1997 as Director of Project
Management. In August, 2000, Mr. Johnson assumed responsibility for all third
party relationships, including teaming partners and other services firms. Prior
to joining Forecross, 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 (54) joined us in December 1991 and has served in a
variety of technical and research and development capacities. In June 1996, Mr.
Nelson was named Director of Software Products. Prior to joining Forecross,
Mr. Nelson had over twenty years' experience managing and supervising software
and hardware technical support activities for several large corporations.
KENNETH J. PARIS (53) Senior Database Specialist, worked with us from
1989 through March 1996, and rejoined us in October 1996. From March 1996
through September 1996, Mr. Paris served as an independent software consultant
to various companies, including Forecross. Prior to joining us in 1989,
Mr. Paris spent eleven years with KPMG Peat Marwick, both as Database
Administrator and as director of database research and development for the
consulting department of KPMG Peat Marwick's National Technology Center. From
1985 to 1986, Mr. Paris served as Director of Product Development at Pansophic
Systems, Inc. of Oak Brook, Illinois. He was also for six years a member of
the database committee of the American National Standards Institute (ANSI) which
developed the SQL standard. Mr. Paris was the initial Conference Chairman and
then President of the International DB2 Users Group.
22
<PAGE>
PEGGY A. PAYNE (51) joined us in May 1996 as Director of Migration
Services. From February 1993 through May 1996, Ms. Payne was Director of
Information Management and Technology for Revo Corporation. From July 1988 to
February 1993, Ms. Payne was manager, information systems for Westinghouse
Security Electronics. Ms. Payne has over twenty years of technical experience
and has served in various capacities for technical organizations including
Association of Corporate Computing Professionals, Bay Area MAPICS Users Group,
and Information Technology Executives Association.
ROBERT E. THEURER (58) joined us in April 2000 as Director of Sales. He has
35 years of experience in the computer industry in many capacities including
technical, corporate management and sales and marketing. From October 1997 until
joining Forecross, Mr. Theurer was Senior Vice President of Sales for 2000
Technologies Corporation, a company that develops and markets automated testing
technology. From 1994 through 1997, he was the Director of Sales for MSS
International, a UK based company that specializes in platform migrations
primarily from Unisys mainframes to UNIX platforms.
Our executive officers and directors are required under the Securities
Exchange Act of 1934, as amended, to file reports of ownership and changes in
ownership with the Securities and Exchange Commission. Copies of those reports
must also be furnished to our Company. Based solely on our review of the copies
of such reports we have received, we believe that all of our executive officers
and directors and greater than ten percent beneficial owners complied with all
filing requirements applicable to them.
ITEM 11. EXECUTIVE COMPENSATION
--------- -----------------------
The following table sets forth the amount of all compensation paid by us
during each of 2000, 1999, and 1998 to the person serving as our Chief
Executive Officer, and to our most highly compensated executive officer, other
than the Chief Executive Officer, whose compensation exceeded $100,000 during
any such year (the "Named Executive Officers").
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
----------------------- ---------------
Securities
Underlying All Other
Name and Principal Position Year Salary(3) Bonus Option(#)(1)(2) Compensation
--------------------------- ---- ---------- ----------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Kim O. Jones. . . . . . . . 2000 $ 185,000 $ None None None
Chief Executive Officer 1999 $ 131,813 $ None None None
1998 $ 185,000 $ None None None
Bernadette C. Castello. . . 2000 $ 185,000 $ None None None
Senior Vice President 1999 $ 131,813 $ None None None
1998 $ 185,000 $ None None None
<FN>
(1) There are no other long-term incentive compensation plans which require
disclosure.
(2) 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, 2000.
23
<PAGE>
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, 2000 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
Shares Options at 2000 Year End 2000 Year End
Acquired Value -------------------------- ---------------------------
Name on Exercise 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
<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.
</TABLE>
DIRECTOR COMPENSATION
Non-employee directors are reimbursed for reasonable out-of-pocket expenses
incurred in connection with the attendance of board meetings. Non-employee
directors are entitled to participate in our 1994 Stock Option Plan. During the
year ended September 30, 1998, Mr. Carpenter received a stock option grant for
7,500 shares at $11.50 per share. During the years ended September 30, 1997 and
1999, no options were granted to non-employee directors. During the nine
month-period ended June 30, 2000, Mr. Carpenter received a stock option grant
of 80,000 shares at an exercise price of $3.25 per share, with a vesting period
of one-fifth immediately and the remainder over four years on a monthly basis.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------- --------------------------------------------------------------
The following table sets forth certain information regarding the beneficial
ownership of our Company's outstanding shares of Common Stock as of September
30, 1999 by (i) each person known to us beneficially to own 5% or more of the
outstanding shares of our Common Stock, (ii) each of our directors, (iii) each
of our 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.
24
<PAGE>
<TABLE>
<CAPTION>
Name of Owner Number of Shares Percent of Class
Beneficially Owned Beneficially Owned
------------------------------------- ------------------ ------------------
<S> <C> <C>
Kim O. Jones (1). . . . . . . . . . . 1,691,434 11.0%
Bernadette C. Castello (2). . . . . . 1,639,404 10.7%
Richard A. Carpenter (3) . . . . . . 74,290 0.5%
All directors and executive officers
as a group (3 persons) (4). . . . . . 3,405,128 21.6%
<FN>
(1) Includes a fully vested and exercisable stock option covering 250,000 shares
and a warrant to purchase 101,530 shares.
(2) Includes a fully vested and exercisable stock option covering 250,000 shares
and a warrant to purchase 71,820 shares.
(3) Includes a fully vested and exercisable stock option covering 32,167 shares
and a warrant to purchase 4,041 shares. Mr. Carpenter's business address is
25 Marion Street, Hingham, MA 02043.
(4) Includes fully vested and exercisable stock options covering 532,167 shares
and warrants to purchase 177,391 shares.
</TABLE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
--------- --------------------------------------------------
As of September 30, 2000 the Company had the following note payable to a
related party of the company:
In August 2000, the Company borrowed $100,000 from an employee of the
company under a secured promissory note due August 27, 2002. The note bears
interest at 11.5% per annum, and is secured by certain company technology.
In March 2000, the Company completed a private placement of 613,530 shares at
$2.66 per share, resulting in gross proceeds of $1,632,000. Additionally,
1,063,006 shares were issued to the Company's senior officers and employees,
year 2000 distributors and a director, converting Company debt from loans,
deferred payroll, travel expenses and year 2000 distributor revenue sharing, to
equity at a conversion price of $2.66 per share. The total debt converted into
equity was $2,827,596. With each share issued to investors in this private
placement and to those converting debt, the Company also issued a warrant to
purchase one half share of stock at $2.66 per share at a future date for a total
of 838,268 warrant shares. The warrants expire upon the earlier of three years,
or 30 days after the 10-day trading average closing price of the Company's
common stock equals or exceeds $7.98 per share (if a registration statement
covering the underlying shares has been declared effective). In connection with
this private placement, the Company also issued to a finder warrants to purchase
200,000 shares of common stock at $2.66 per share which expire in three years.
A total of $652,000 in non-cash compensation expense was recorded for the
beneficial pricing effect to senior officers, employees, year 2000 distributors
and a director.
Notes receivable and payable from officers consist of the following:
25
<PAGE>
<TABLE>
<CAPTION>
September 30,
--------------------
2000 1999
--------- ---------
<S> <C> <C>
5.7 to 10% Uncollateralized notes receivable from Senior Vice
President, due in varying amounts through September 30, 1999 - 37,013
Accrued interest receivable. . . . . . . . . . . . . . . . . . - 4,264
--------- ---------
Total receivable from officers . . . . . . . . . . . . . . . - 41,277
--------- ---------
24% Uncollateralized notes payable to president, due
December 30, 1999 . . . . . . . . . . . . . . . . . . . . . . - (262,536)
24% Uncollateralized notes payable to senior vice president,
due February 28, 2000 . . . . . . . . . . . . . . . . . . . . - (120,426)
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)
11.5% Collateralized notes payable to a related party,
due August 27, 2002 . . . . . . . . . . . . . . . . . . . . . (100,000) -
Accrued interest payable . . . . . . . . . . . . . . . . . . . ( 1,082) -
--------- ---------
Total payable to officers and related parties. . . . . . . . (101,082) (791,453)
--------- ---------
Notes Payable to officers and related parties, net . . . . . . $(101,082) $(750,176)
<FN>
All net notes payable to officers at September 30, 1999 were classified as long-
term, as the noteholders committed to extend them to at least October 1, 2000.
These notes were converted to equity during March, 2000. (See Note 8).
</TABLE>
Software Licenses and Distributorships:
-----------------------------------------
The Company entered into agreements with several entities (the "Distributors")
for licenses and distributorship arrangements for its year 2000 software
products, Assess/2000 and Complete/2000, and related services. The Distributors
are related to each other through some common ownership and management; a
shareholder of the Company 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. Under the distributorship
agreements, the Distributors received territorially exclusive rights to market
year 2000 renovation projects to be performed by the Company using the
Complete/2000 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 received 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 were generally for an initial one-year period, but were renewable
for up to four additional years based on certain performance conditions. The
Distributors generally had separate agreements for license rights for unlimited
usage of the Assess/2000 product. In the case of one contract, fees payable were
50% of collected revenues until $1,500,000 was 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 earned at the 25% rate.
26
<PAGE>
The licensing and distributorship fees received from the Distributors, totaling
$3,125,000 and $200,000 in 1997 and 1996, respectively, were generally deferred
and recognized over a five year period commencing with the signing of the
respective agreements. Of these amounts, approximately $865,000 and $1,410,000
is deferred at September 30, 2000 and 1999, respectively. Additional fees of
approximately $672,000 for training programs, annual software maintenance, and
customer support were received in 1997; of this amount, approximately $115,000
and $135,000 is deferred at September 30, 2000 and September 30, 1999,
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 $18,000, $166,000 and $346,000 for the years ended
September 30, 2000, 1999 and 1998, respectively. The year 2000 expenses related
to the distributor contracts, included in sales and marketing expenses, were
approximately $55,000, $497,000, and $1,037,000 for the years ended September
30, 2000, 1999 and 1998.
ITEM 14. 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-16 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, 2000 and 1999 . . . . . . . F-2
Statements of Operations for each of the Three Years
in the Period Ended September 30, 2000 . . . . . . . . . . . F-3
Statements of Shareholders' Deficit for each of the
Three Years in the Period Ended September 30, 2000 . . . . . F-4
Statements of Cash Flows for each of the Three Years
in the Period Ended September 30, 2000 . . . . . . . . . . . F-5
Notes to Financial Statements. . . . . . . . . . . . . . . . . F-6 through F-16
</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, 2000 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
27
<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, 2000
<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
28
<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, 2001 BY: /S/ Bernadette C. Castello
---------------------------------
Bernadette C. Castello
Senior Vice President and Chief Financial Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this Report on Form 10-K has been signed on behalf of the Registrant by the
following persons and in the capacities and on the dates indicated:
SIGNATURE TITLE DATE
--------- ----- -----
/s/ Kim O. Jones Chief Executive Officer, January 16, 2000
-------------------------- President and Director
KIM O. JONES (principal executive officer)
/s/ Bernadette C. Castello Senior Vice President, Chief January 16, 2000
-------------------------- Financial Officer and Director
BERNADETTE C. CASTELLO (principal financial and
accounting officer)
Director January 16, 2000
--------------------------
RICHARD A. CARPENTER
29
<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, 2000 and 1999, and the related statements of operations,
shareholders' deficit and cash flows for each of the three years in the period
ended September 30, 2000. 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, 2000 and 1999, and the results of its operations and its cash
flows for each of the three years in the period ended September 30, 2000 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,
2000. 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 8, 2000, except for Note 14, which is as of January 11, 2001
F-1
<PAGE>
<TABLE>
<CAPTION>
FORECROSS CORPORATION
BALANCE SHEETS
September 30,
2000 1999
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 18,833 $ 2,740
Accounts receivable, including unbilled receivables of $722,000
and $77,000, net of allowances of $20,000 and
$45,000, respectively (Notes 3 and 6). . . . . . . . . . . . . . . . . 1,043,260 375,893
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . 28,499 45,070
------------ ------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . 1,090,592 423,703
Equipment and furniture, net (Notes 2, 4 and 5) . . . . . . . . . . . 310,639 277,532
Notes receivable from employees . . . . . . . . . . . . . . . . . . . 72,445 68,707
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42,746 42,365
------------ ------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,516,422 $ 812,307
============ ============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 356,685 $ 631,479
Accrued compensation and related benefits (Note 11). . . . . . . . . . 634,903 682,533
Accrued liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . 122,149 158,090
Accrued commissions and distributors' fees (Note 4). . . . . . . . . . 68,375 1,514,650
Payable to factor (Note 6) . . . . . . . . . . . . . . . . . . . . . . 501,243 861,427
Accrued warranty costs . . . . . . . . . . . . . . . . . . . . . . . . 33,922 184,828
Capital lease obligations, current portion . . . . . . . . . . . . . . 18,094 23,215
Deferred revenue, deferred portion (Notes 2 and 4) . . . . . . . . . . 602,210 684,652
------------ ------------
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . 2,337,581 4,740,874
Deferred revenue, less current portion (Notes 2 and 4) . . . . . . . . 415,419 980,418
Notes payable to officers and related parties, net (Note 4) . . . . . 101,082 750,176
Capital lease obligations, less current portion. . . . . . . . . . . . 1,610 19,716
------------ ------------
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . 2,855,692 6,491,184
------------ ------------
Commitments and contingencies (Notes 2, 10, 11 and 12)
Shareholders' deficit (Notes 8, 9 and 10):
Common stock, no par value; authorized 20,000,000 shares; issued and
outstanding 15,053,380 and 12,191,944, respectively . . . . . . . . . 9,677,253 5,017,582
Additional paid in capital . . . . . . . . . . . . . . . . . . . . . . 983,800 27,000
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . . . . (12,000,323) (10,723,459)
------------ ------------
Total shareholders' deficit. . . . . . . . . . . . . . . . . . . . . . ( 1,339,270) ( 5,678,877)
------------ ------------
Total liabilities and shareholders' deficit. . . . . . . . . . . . . $ 1,516,422 $ 812,307
============ ============
</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,
----------------------------------------
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
Net revenues (Notes 2, 3 and 4):
Services and maintenance . . . . . . . . $ 3,393,802 $ 2,915,347 $ 6,623,752
Software licenses and distributorship
fees-related parties. . . . . . . . . . 544,995 545,004 545,000
------------ ------------ ------------
Total net revenues . . . . . . . . . . 3,938,797 3,460,351 7,168,752
Cost of services and maintenance
including fees to related parties of
$18,000, $166,000, and $346,000,
respectively (Notes 2 and 4). . . . . . 1,355,671 2,745,733 4,419,347
------------ ------------ ------------
Gross margin . . . . . . . . . . . . . . 2,583,126 714,618 2,749,405
------------ ------------ ------------
Operating expenses:
Sales and marketing including fees to
related parties of $55,000, $497,000,
and $1,037,000, respectively
(Note 4) . . . . . . . . . . . . . . . 719,843 1,047,300 1,838,126
Research and development . . . . . . . . 913,064 728,239 1,520,709
General and administrative . . . . . . . 1,913,832 1,116,528 1,413,312
------------ ------------ ------------
Total operating expenses . . . . . . . . 3,546,739 2,892,067 4,772,147
------------ ------------ ------------
Loss from operations . . . . . . . . . . (963,613) (2,177,449) (2,022,742)
Interest expense, net. . . . . . . . . . (313,251) (553,131) (305,110)
------------ ------------ ------------
Loss before provision for income taxes . (1,276,864) (2,730,580) (2,327,852)
Provision for income taxes (Note 7). . . - (800) (800)
------------ ------------ ------------
Net loss . . . . . . . . . . . . . . . (1,276,864) $(2,731,380) $(2,328,652)
============ ============ ============
Net loss per share - basic and diluted . $ (0.09) $ (0.23) $ (0.20)
============ ============ ============
Shares used in computing per share data. 13,951,186 12,060,919 11,761,920
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
FORECROSS CORPORATION
STATEMENTS OF SHAREHOLDERS' DEFICIT
Additional Paid
Common Stock in Accumulated Total
Shares Amount Capital Deficit Deficit
----------- ---------- -------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Balances at October 1, 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 $5,017,582 $ 27,000 $(10,723,459) $(5,678,877)
Issuance of common stock for
cash, net of stock issuance costs of
$18,626 (Note 8). . . . . . . . . . . 1,175,000 216,374 - - 216,374
Issuance of common stock for
cash, net of stock issuance costs of
$36,099 (Note 8). . . . . . . . . . . 613,530 1,595,901 - - 1,595,901
Issuance of common stock for debt
conversion (Note 8) . . . . . . . . . 1,063,006 2,827,596 - - 2,827,596
Warrants issued (Note 8) . . . . . . . - - 652,000 - 652,000
Exercise of employee stock options . . 9,900 19,800 - - 19,800
Issuance of Options to Consultants . . - - 304,800 - 304,800
Net loss . . . . . . . . . . . . . . . - - - (1,276,864) (1,276,864)
----------- ----------- ------------- ------------- ------------
Balances at September 30, 2000 . . . . 15,053,380 $9,677,253 $ 983,800 $(12,000,323) $(1,339,270)
=========== =========== ============= ============= ============
</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,
2000 1999 1998
------------- ------------- -------------
<S> <C> <C> <C>
Increase (decrease) in cash resulting from:
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . . . $ (1,276,864) $ (2,731,380) $ (2,328,652)
Adjustments to reconcile net loss to
net cash used in operating activities-
Provision for uncollectible amounts. . . . . . (25,000) (65,001) 124,952
Value of common stock issued and value
assigned to extension of warrant term . . . . - 38,250 -
Non-cash compensation expense related
to Private Placement. . . . . . . . . . . . . 652,000 - -
Non-cash compensation to consultants . . . . . 29,300 - -
Depreciation and amortization. . . . . . . . . 249,724 290,703 277,938
Changes in operating assets and liabilities-
Accounts receivable. . . . . . . . . . . . . . (642,368) 859,225 529,611
Other assets and accrued interest on notes
receivable from officers. . . . . . . . . . . 12,452 594 175,191
Accounts payable and accrued liabilities . . . (83,475) 907,785 939,270
Deferred compensation. . . . . . . . . . . . . 257,701 416,972 -
Deferred revenue . . . . . . . . . . . . . . . (647,441) (478,540) (723,036)
------------- ------------- -------------
Net cash provided by (used in) operating
activities. . . . . . . . . . . . . . . . . . (1,473,971) (761,392) (1,004,726)
------------- ------------- -------------
Cash used in investing activities:
Purchase of equipment and furniture. . . . . . (7,332) - (234,423)
Payments received on loans to key employees. . - 250 700
------------- ------------- -------------
Net cash provided by (used in)
investing activities. . . . . . . . . . . . (7,332) 250 (233,723)
------------- ------------- -------------
Cash flows from financing activities:
Proceeds from factoring of accounts receivable 1,647,042 3,916,279 4,714,085
Repayment of borrowings under factoring
arrangement . . . . . . . . . . . . . . . . . (2,007,225) (3,522,586) (4,246,351)
Borrowings under note payable to officers or
Related parties . . . . . . . . . . . . . . . 100,000 192,000 575,000
Repayment of borrowings under notes payable
-officers. . . . . . . . . . . . . . . . . . . (51,269) (192,038) -
Repayment of borrowings under capitalized leases (23,227) (18,839) (29,279)
Net proceeds from issuance of common shares . 1,832,075 290,817 48,000
------------ ------------- -------------
Net cash provided by financing activities. . 1,497,396 665,633 1,061,455
------------- ------------- -------------
Net increase (decrease) in cash. . . . . . . 16,093 (95,509) (176,994)
Cash at beginning of year. . . . . . . . . . . 2,740 98,249 275,243
------------- ------------- -------------
Cash at end of year. . . . . . . . . . . . . . $ 18,833 $ 2,740 $ 98,249
============= ============= =============
</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/2000 automated conversion software products and
related services, which addressed the year 2000 problem. Forecross year 2000
software products assisted in identifying, analyzing and correcting in a highly
automated manner those computer programs that contained date logic incapable of
correctly process dates in the year 2000 and beyond. 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 licensed 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, 2000, the Company had sustained recurring losses from
operations and, at September 30, 2000, 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 2001, 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 return of migration contracts combined with increased automation of its
services for migration projects and cost reduction actions previously
implement should improve the Company's profitability in fiscal 2001. However,
there can be no assurance that the Company's efforts to achieve and maintain
profitable operations will be, successful. The financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
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.
F-6
<PAGE>
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 which
can be used both in connection with its internally developed software products
and in alternative standalone applications (see Note 10.) Accordingly, these
rights are included with other purchased software in fixed assets, and are being
amortized over their estimated useful life of three years.
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 generally range from six to eighteen months
in duration. The Company's year 2000 projects 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
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.
F-7
<PAGE>
The Company has authorized several exclusive distributor agreements for
specified areas for its Complete/2000 automated conversion software products
and related services and methodologies. Under the agreements, the distributor
retains exclusive rights for the territory for a specified period. In addition,
the Company licensed the rights to use its Assess/2000 software, which as of
September 30, 2000, 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, 2000, 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 months to one
year for application migration projects, and six months for year 2000 projects.
Amortization for year 2000 projects commenced January 2000 and completed June
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.
Options and warrants to purchase 2,524,268, 975,300 and 993,800 shares of common
stock were outstanding at years ended 2000, 1999 and 1998, respectively. These
were not included in the calculation of net loss per share as they were anti-
dilutive due to losses in all years. 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
SFAS No. 123, Accounting for Stock-Based Compensation, which requires pro forma
F-8
<PAGE>
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.
FINANCIAL INSTRUMENTS:
At September 30, 2000 and 1999, 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 carrying value of
capitalized leases approximates fair value at September 30, 2000, since the
leases were entered into during fiscal 1998 at rates which approximate the
rates at September 30, 2000.
RECLASSIFICATIONS:
Certain prior-year amounts have been reclassified to conform to current year
presentation.
RECENTLY ISSUED ACCOUNTING STATEMENTS:
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
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. In June 1999, the FASB issued SFAS 137, Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133, which amends SFAS 133 to be effective for all fiscal quarters
of all fiscal years beginning after June 15, 2000. In June 2000, the FASB
issued SFAS 138, Accounting for Derivative Instruments and Hedging Activities -
An Amendment of FASB Statement No. 133, which addressed certain implementation
issues of SFAS 133.
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 to have a material impact on its
financial position, results of operations or cash flows.
In December 1999, the SEC staff released Staff Accounting Bulletin (SAB) No.
101, Revenue Recognition in Financial Statements, which provides interpretive
guidance on the recognition, presentation and disclosure of revenue in financial
statements. SAB 101 must be applied to financial Statements no later than the
quarter ended September 20, 2000. There was no material impact from the
application of SAB 101 on the Company's financial position, results of
operations or cash flows.
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. Two customers
F-9
<PAGE>
accounted for approximately 75% and 22% of the accounts receivable balance at
September 30, 2000, and four customers accounted for approximately 30%, 18%, 16%
and 13% of the accounts receivable balance at September 30, 1999. Additionally,
four customers, including revenues from the Company's Distributors treated
as resulting from one customer (see Note 4), accounted for approximately 26%,
21%, 14% and 13% of total revenues for the fiscal year ended September 30,
2000. 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.
Net revenues from Canadian and European customers were as follows:
F-10
<PAGE>
<TABLE>
<CAPTION>
Years Ended
September 30,
-------------------
2000 1999 1998
----- ----- -----
<S> <C> <C> <C>
Canada . . . . . . . . . . . . . . . . 0% 2% 2%
Europe . . . . . . . . . . . . . . . . 0% 0% 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,
----------------------
2000 1999
---------- ----------
<S> <C> <C>
5.7 to 10% Uncollateralized notes receivable from Senior Vice
President, due in varying amounts through September 30, 1999 - 37,013
Accrued interest receivable. . . . . . . . . . . . . . . . . . - 4,264
--------- ---------
Total receivable from officers . . . . . . . . . . . . . . . - 41,277
--------- ---------
24% Uncollateralized notes payable to president, due
December 30, 1999 . . . . . . . . . . . . . . . . . . . . . . - (262,536)
24% Uncollateralized notes payable to senior vice president,
due February 28, 2000 . . . . . . . . . . . . . . . . . . . . - (120,426)
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)
11.5% Collateralized notes payable to a related party,
due August 27, 2002 . . . . . . . . . . . . . . . . . . . . . (100,000) -
Accrued interest payable . . . . . . . . . . . . . . . . . . . ( 1,082) -
--------- ---------
Total payable to officers and related parties. . . . . . . . (101,082) (791,453)
--------- ---------
Notes Payable to officers and related parties, net . . . . . . $(101,082) $(750,176)
========== ==========
<FN>
All net notes payable to officers at September 30, 1999 were classified as long-
term, as the noteholders committed to extend them to at least October 1, 2000.
These notes were converted to equity during March, 2000. (See Note 8).
</TABLE>
F-10
<PAGE>
Software Licenses and Distributorships:
-----------------------------------------
The Company entered into agreements with several entities (the "Distributors")
for licenses and distributorship arrangements for its year 2000 software
products, Assess/2000 and Complete/2000, and related services. The Distributors
are related to each other through some common ownership and management; a
shareholder of the Company 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. Under the distributorship
agreements, the Distributors received territorially exclusive rights to market
year 2000 renovation projects to be performed by the Company using the
Complete/2000 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 received 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 were generally for an initial one-year period, but were renewable
for up to four additional years based on certain performance conditions. The
Distributors generally had separate agreements for license rights for unlimited
usage of the Assess/2000 product. In the case of one contract, fees payable were
50% of collected revenues until $1,500,000 was 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 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, were generally deferred
and recognized over a five year period commencing with the signing of the
respective agreements. Of these amounts, approximately $865,000 and $1,410,000
is deferred at September 30, 2000 and 1999, respectively. Additional fees of
approximately $672,000 for training programs, annual software maintenance, and
customer support were received in 1997; of this amount, approximately $115,000
and $135,000 is deferred at September 30, 2000 and September 30, 1999,
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 $18,000, $166,000 and $346,000 for the years ended
September 30, 2000, 1999 and 1998, respectively. The year 2000 expenses related
to the distributor contracts, included in sales and marketing expenses, were
approximately $55,000, $497,000, and $1,037,000 for the years ended September
30, 2000, 1999 and 1998.
F-11
<PAGE>
5. EQUIPMENT AND FURNITURE:
Equipment and furniture is comprised of the following:
<TABLE>
<CAPTION>
September 30,
-------------------------
2000 1999
----------- -------------
<S> <C> <C>
Computer equipment and software
(See Note 10) . . . . . . . . . . . . $ 1,133,067 $ 852,137
Furniture and equipment . . . . . . . . . 310,890 310,890
Leasehold improvements . . . . . . . . . 77,117 77,117
----------- ------------
Total Assets 1,521,074 1,240,144
Accumulated depreciation and amortization (1,210,435) (962,612)
----------- ------------
$ 310,639 $ 277,532
============ ============
</TABLE>
The net book value of internally developed software, including certain purchased
software technology rights, at September 30, 2000 and 1999, are $275,000 and $0
respectively. Amortization of purchased software technology rights was $76,406,
$50,000 and $50,000 in the years ended September 30, 2000, 1999 and 1998,
respectively.
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 incurs 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, 2000 the Company's outstanding indebtedness under the agreement
was $501,000. At September 30, 1999 the Company's outstanding indebtedness under
the agreement was $861,000. The agreement may be terminated by either the
factor or the Company at any time. The Company is in the process of negotiating
lower interest and administrative fee rates in exchange for issuing to the
lender warrants to purchase common stock.
7. INCOME TAXES:
The components of the provision for income taxes are summarized as follows:
<TABLE>
<CAPTION>
Years Ended
September 30,
----------------------
2000 1999 1998
------ ------ -------
<S> <C> <C> <C>
Current:
State . . . . . . . . . . . . . . . . . . $ - $ 800 $ 800
Foreign . . . . . . . . . . . . . . . . . - - -
------ ------ ------
Total provision for income
Taxes. . . . . . . . . . . . . . . . . . $ - $ 800 $ 800
====== ====== ======
</TABLE>
F-12
<PAGE>
The effective income tax rate differs from the statutory federal income tax rate
as follows:
<TABLE>
<CAPTION>
Years Ended
September 30,
-------------------------
2000 1999 1998
------ ------ -------
<S> <C> <C> <C>
Federal Statutory Rate . . . . . . . . . (34.0)% (34.0)% (34.0)%
Beneficial stock and warrant pricing. . . 17.4 - -
State taxes and other . . . . . . . . . . 9.4 10.5 0.6
Valuation account changes . . . . . . . . 7.2 23.5 33.4
======= ======= =======
</TABLE>
Significant components of the Company's net deferred tax balances are as
follows:
<TABLE>
<CAPTION>
September 30,
--------------------------
2000 1999
------------ ------------
<S> <C> <C>
Deferred tax assets (liabilities):
Accrual vs. cash basis adjustment . . . . . . $ 94,000 $ 141,000
Deferred revenues . . . . . . . . . . . . . . 436,000 713,000
Deferred compensation . . . . . . . . . . . . 82,000 158,000
Net operating loss carryforwards . . . . . . . 3,050,000 2,492,000
State taxes and other . . . . . . . . . . . . (44,000) 21,000
------------ ------------
Total deferred tax assets. . . . . . . . . . 3,618,000 3,525,000
Valuation allowance. . . . . . . . . . . . . . (3,618,000) (3,525,000)
------------ ------------
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 if it was more likely than not that the
deferred tax assets would be realized, a 100% valuation allowance has been
provided to eliminate the deferred tax assets at September 30, 2000 and 1999.
The increase (decrease) in the valuation allowance was $93,000, $643,0000 and
($778,000) in the years ended September 30, 2000, 1999 and 1998, respectively.
At September 30, 2000, the Company has net operating loss carryforwards for
federal and California state income tax purposes of approximately $8,143,000 and
$4,011,000, respectively. These carryforwards expire in varying amounts
through 2020. 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.
F-13
<PAGE>
8. COMMON STOCK:
In connection with a December, 1996 private placement, the Company issued to the
investors nontransferable warrants to purchase 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 the remaining
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 valued at $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, warrants to purchase 30,000 shares of common stock at $0.75 per share,
expiring in five years.
In January 2000, the Company completed a private placement of 1,175,000 shares
of common stock at $0.20 per share, resulting in gross proceeds of $235,000.
In March 2000, the Company completed a private placement of 613,530 shares at
$2.66 per share, resulting in gross proceeds of $1,632,000. Additionally,
1,063,006 shares were issued to the Company's senior officers and employees,
year 2000 distributors and a director, converting Company debt from loans,
deferred payroll, travel expenses and year 2000 distributor revenue sharing, to
equity at a conversion price of $2.66 per share. The total debt converted into
equity was $2,827,596. With each share issued to investors in this private
placement and to those converting debt, the Company also issued a warrant to
purchase one half share of stock at $2.66 per share at a future date for a total
of 838,268 warrant shares. The warrants expire upon the earlier of three years,
or 30 days after the 10-day trading average closing price of the Company's
common stock equals or exceeds $7.98 per share (if a registration statement
covering the underlying shares has been declared effective). In connection with
this private placement, the Company also issued to a finder warrants to purchase
200,000 shares of common stock at $2.66 per share which expire in three years.
A total of $652,000 in non-cash compensation expense was recorded for the
beneficial pricing effect to senior officers, employees, year 2000 distributors
and a director.
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. No shares were sold under the Plan in 2000, 1999 or
1998.
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, 2000 and
1999, no shares are subject to the Company's repurchase option under this
provision. No shares were repurchased during the years ended September 30, 2000,
1999 or 1998.
F-14
<PAGE>
10. STOCK OPTIONS:
In April 1994, the Board of Directors approved the 1994 Stock Option Plan,
whereby employees and consultants may be granted incentive and non-statutory
stock options. Depending on the employee's stock ownership percentage,
incentive stock options are granted with exercise prices ranging from 100% to
110% of the fair value of stock at the date of grant. Depending on stock
ownership percentage, non-statutory stock options are granted with exercise
prices ranging from 85% to 110% of the fair value of stock at the date of grant.
The maximum aggregate number of shares of common stock which may be optioned and
sold under the plan is 950,500. The term of each option is that stated in each
specific option agreement provided that the term does not exceed ten years from
the date of grant (five years in the case of an optionee already owning common
stock representing 10% or more of the voting power).
Stock option activity under the Plan is as follows:
<TABLE>
<CAPTION>
SHARES OPTIONS OUTSTANDING
AVAILABLE ---------------------------------------------------------
FOR GRANT NUMBER PRICE AGGREGATE WEIGHTED AVG.
UNDER PLAN OF SHARES PER SHARE PRICE EXERCISE PRICE
---------- ----------- -------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
Balance, October 1, 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
Cancelled 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
Cancelled 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
Granted during 2000, including
629,400 shares outside of the
plan . . . . . . . . . . . . . . (231,800) 861,200 0.58-3.25 2,121,099 2.46
Exercised during 2000 . . . . . . - (9,900) 2.00 (19,800) 2.00
Cancelled during 2000 including
22,000 shares outside of the
plan . . . . . . . . . . . . . . 48,600 (70,600) 0.58-11.50 (375,555) 5.32
---------- ----------- -------------- ----------- ---------------
Balance, September 30, 2000 . . . 83,000 1,451,000 $ 0.58-11.50 $3,765,935 $ 2.60
========== =========== ============== =========== ===============
</TABLE>
The following table summarizes information with respect to stock options
outstanding at September 30, 2000
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------------------------------------- ------------------------
NUMBER WEIGHTED AVG. NUMBER
RANGE OF OUTSTANDING AT REMAINING CONTRACTUAL WEIGHTED AVG. EXERCISABLE AT WEIGHTED AVG.
EXERCISE PRICE SEPTEMBER 30, 2000 LIFE (YEARS) EXERCISE PRICE SEPTEMBER 30, 2000 EXERCISE PRICE
=============== ================== ===================== =============== ================== ==============
<S> <C> <C> <C> <C> <C>
$0.58-2.00. . . 669,800 0.68 $ 1.23 645,140 $ 1.04
2.66-4.75 . . . 702,900 4.13 3.06 256,022 3.20
8.02-11.50. . . 78,300 1.98 10.09 77,329 10.07
--------------- ----------------- -------------------- --------------- ------------------ --------------
$0.58-11.50 . . 1,451,000 2.92 $ 2.60 978,491 $ 2.32
=============== ================= ==================== ================ ================== ==============
</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.
F-15
<PAGE>
In February 2000, the Company's Board of Directors approved the grant of options
to purchase an aggregate of 151,800 shares of its common stock to various
employees under its 1994 Stock Option Plan. These options are fully vested upon
issuance and are exercisable at a price of $0.58 per share for a period of five
years. In addition, on March 17, 2000, the Company's Board of Directors approved
the grant of options to purchase 80,000 shares of its common stock to a member
of its Board of Directors under its 1994 Stock Option Plan and the grant of
options to purchase an aggregate of 258,900 shares of its common stock to
various employees outside the 1994 Stock Option Plan. All of these options vest
over various periods of up to four years, and are exercisable at a price of
$3.25 per share for a period of five years.
In April 2000, the Company's Board of Directors approved the grant of options to
purchase an aggregate of 340,000 shares of its common stock to two principals
of 2000 Technologies,. Inc. 140,000 of these options, valued at $249,000, were
issued in exchange for perpetual, exclusive rights to a software product owned
and marketed by them, and were fully vested upon issuance. The remainder, which
relate to services to be received by the Company, vest ratably on the first,
second and third anniversaries of the date of issuance. All of these options
were issued outside the 1994 Stock Option Plan, and are exercisable at a price
of $2.66 per share for a period of five years. The $249,000 fair value of the
options issued for capitalized software is included with other purchased
software in fixed assets, and is amortized over a three-year life.
In addition, throughout the 2000 fiscal year, the Company's Board of Directors
approved the grant of options to purchase 30,500 shares of its common stock to
various employees. All of these options were issued outside the 1994 Stock
Option Plan, and are exercisable at various prices from $1.00 to $1.44 per share
for a period of five years.
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 unaudited pro forma amounts indicated below:
<TABLE>
<CAPTION>
Years Ended
September 30,
---------------------------------------
2000 1999 1998
------------ ------------ -----------
<S> <C> <C> <C> <C>
Net loss . . . . . . . . . . . . . . As reported $(1,276,864) $(2,731,380) $(2,328,652)
Pro forma $(1,477,568) $(2,771,871) $(2,893,374)
Net loss per share-basic and diluted As reported $ (0.09) $ (0.23) $ (0.20)
Pro forma $ (0.11) $ (0.23) $ (0.25)
</TABLE>
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, 2000 and 1998, (including repriced options) were $1.90 and
$2.35 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 2000 and 1998:
F-16
<PAGE>
<TABLE>
<CAPTION>
Years Ended
September 30,
---------------
2000 1998
------- -------
<S> <C> <C>
Expected life (years). . . . . . 2.25 2.10
Expected volatility. . . . . . . 185 % 116 %
Risk free interest rate. . . . . 6.00% 5.60%
</TABLE>
11. PROFIT SHARING AND RETIREMENT PLANS:
The Company has a 401(k) profit sharing plan covering substantially all
employees, under which employees may defer their eligible compensation (up to
the statutorily and 401(k) plan prescribed limits) and have the amount of the
deferral contributed to the 401(k) plan. Employees who have completed one
year of service may, at the company's sole discretion, receive a matching
contribution from the company up to a maximum of 4% of the participants
eligible compensation. The Company's cost of the 401(k) profit sharing plan
was $61,010 (of which $11,940 is non-discretionary), $71,682, and $73,499 in
the fiscal years ended September 30, 2000, 1999 and 1998, respectively. For
the plan years ended December 31, 2000 and 1999, respectively, $66,149 and
$84,337, plus penalties and interest, have not yet been funded by the Company.
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 401(k)
Plan as described above. There were no contributions to this Plan during 2000,
1999 or 1998.
12. LEASE COMMITMENTS:
The Company leases office space and equipment under operating leases. Rent
expense under operating leases was $318,277, $302,495, and $354,684 in the
fiscal years ended September 30, 2000, 1999 and 1998, respectively. As of
September 30, 2000, future minimum lease payments under operating leases
are as follows:
<TABLE>
<CAPTION>
Years Ending September 30,
--------------------------
<S> <C>
2001 . . . . . . . . . . . $ 299,000
2002 . . . . . . . . . . . 75,000
----------
$ 374,000
==========
<FN>
Minimum payments to be received by the Company for the sublease of office space
are $68,750 and $17,190 for the years ended September 30, 2001 and 2002
respectively.
</TABLE>
F-17
<PAGE>
13. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
Years Ended
September 30,
----------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Interest paid . . . . . . . . . $184,430 $260,410 $220,053
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
<TABLE>
<CAPTION>
Years Ended
September 30,
----------------------------
2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
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 and
related parties. . . . . . . . . . . . . . . . . . . 1,082 120,954 90,405
Options issued to purchase software . . . . . . . . . 275,500 - -
</TABLE>
14. QUARTERLY INFORMATION (unaudited)
The summarized quarterly financial data presented below reflect all adjustments
which, in the opinion of management, are of a normal and recurring nature
necessary to present fairly the results of operations for the periods presented.
<TABLE>
<CAPTION>
Second Third
Quarter Quarter
First (as revised (as revised Fourth
Quarter see below) see below) Quarter 2000
----------- ------------ ----------- ----------- ------------
Year Ended 2000
<S> <C> <C> <C> <C> <C>
Net revenue $1,416,905 $ 512,816 $ 993,567 $1,015,509 $ 3,938,797
Gross profit 864,852 296,551 790,885 630,838 2,583,126
Operating income (loss) 107,268 (912,305) (48,347) (110,229) (963,613)
Net loss $ (34,586) $(1,029,364) $ (66,155) $ (146,759) $(1,276,864)
Basic and diluted loss
per common share $(0.00) $(0.08) $(0.00) $(0.01) $(0.09)
First Second Third Fourth
Quarter Quarter Quarter Quarter 1999
----------- ------------ ----------- ----------- ------------
Year Ended 1999
<S> <C> <C> <C> <C> <C>
Net revenue $ 759,915 $ 960,618 $ 903,123 $ 836,695 $ 3,460,351
Gross profit 117,309 263,507 343,440 (9,638) 714,618
Operating loss (635,123) (452,906) (392,339) (697,081) (2,177,449)
Net loss $ (769,111) $ (566,701) $ (542,744) $ (852,824) $(2,731,380)
Basic and diluted loss per
common share $(0.07) $(0.05) $(0.04) $(0.07) $(0.23)
</TABLE>
F-18
<PAGE>
The 2000 results have been retroactively restated for the second and third
quarters to reflect certain corrections as follows:
<TABLE>
<CAPTION>
Second Quarter Third Quarter
------------------------------------------- -----------------------------------------
As As
Originally As Originally As
Reported Adjustments Adjusted Reported Adjustments Adjusted
----------- ----------- -- ----------- ---------- ----------- --- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Revenue . . . . . $ 512,816 $ $ 512,816 $ 993,567 $ $993,567
Gross Margin . . . . 296,550 296,551 790,885 790,885
Loss from operations. (1,214,305) 302,000 a (912,305) (11,957) (36,390) b,c (48,347)
Net Loss. . . . . . . $(1,331,364) $ 302,000 a $(1,029,364) $ (29,765) $(36,390) b,c $(66,155)
Basic and Diluted
loss per common
share. . . . . . . . $(0.10) $0.02 $(0.08) $(0.00) $(0.00) $(0.00)
-------------------------------------------- -----------------------------------------
<FN>
Second Third
Quarter Quarter
a. The beneficial pricing effect discussed in Note 8
related to the purchase of stock by certain officers, a
director, employees and Company distributors was inadvertently
incorrectly calculated $(302,000) $ -
b. Amortization of purchased software costs discussed in
Note 10 was inadvertently not recorded timely - 21,740
c. Options issued related to services discussed in Note 10
were inadvertently not recorded timely - 14,650
--------- ---------
Required adjustments $(302,000) $36,390
========== =========
</TABLE>
<TABLE>
<CAPTION>
FORECROSS CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
Additions - Deductions-
Balance, Charges to Write-offs Balance,
Beginning of Revenues or Costs Charged to End of
Period and Expenses (1) Reserve Period
------------- ----------------- ----------------- ------------
ALLOWANCES AGAINST RECEIVABLES:
--------------------------------
<S> <C> <C> <C> <C>
Year Ended September 30,
2000. . . . . . . . . . . . . . $ 45,000 $ (25,000) $ - $ 20,000
1999. . . . . . . . . . . . . . 136,650 (65,001) 26,649 45,000
1998. . . . . . . . . . . . . . 300,340 124,952 288,642 136,650
DEFERRED TAX ASSET VALUATION ALLOWANCES:
---------------------------------------
Year Ended September 30,
2000 . . . . . . . . . . . . . $3,525,000 $ - $ (93,000) $ 3,618,000
1999 . . . . . . . . . . . . . 2,882,000 - (643,000)* 3,525,000
1998. . . . . . . . . . . . . 2,104,000 - (778,000)* 2,880,000
* 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>
<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, 2000
<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>
