SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-29672
FORECROSS CORPORATION
CALIFORNIA 94-2823882
(State or other jurisdiction (I.R.S. Employer
incorporation or organization) Identification No.)
90 NEW MONTGOMERY STREET
SAN FRANCISCO, CALIFORNIA 94105
Address of principal executive offices)
TELEPHONE: (415) 543-1515
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
Shares outstanding of the Registrant's common stock:
Class Outstanding at December 31, 2000
Common Stock, no par value 15,053,380
FORECROSS CORPORATION
FORM 10-Q
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets at December 31, 2000 (unaudited) and September 30, 2000
Statements of Operations (unaudited) for the three months ended
December 31, 2000 and 1999
Statements of Cash Flows (unaudited) for the three months ended
December 31, 2000 and 1999
Statements of Shareholders' Deficit (unaudited) for the three months ended
December 31, 2000 and 1999
Notes to Unaudited Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Recent Sales of Unregistered Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signature Page
Exhibit Index
PART I. FINANCIAL INFORMATION
FORECROSS CORPORATION
BALANCE SHEETS
Dec.31, Sept. 30,
2000 2000
------------ -----------
(Unaudited) (Audited)
ASSETS
Current assets:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,166 $ 18,833
Accounts receivable, including unbilled receivables of $469,000
and $722,000, net of allowance of $20,000 and $20,000, respectively . 737,418 1,043,260
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . 35,986 28,499
------------ -----------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . 774,570 1,090,592
Equipment and furniture, net . . . . . . . . . . . . . . . . . . . . . 282,075 310,639
Notes receivable from others . . . . . . . . . . . . . . . . . . . . . 73,380 72,445
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42,746 42,746
------------ -----------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,172,771 $ 1,516,422
============ ===========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 298,127 $ 356,685
Accrued compensation and related benefits . . . . . . . . . . . . . . 728,131 634,903
Accrued liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . 150,825 122,149
Accrued commissions and distributors' fees . . . . . . . . . . . . . . 64,057 68,375
Payable to factor . . . . . . . . . . . . . . . . . . . . . . . . . . 545,242 501,243
Accrued warranty costs . . . . . . . . . . . . . . . . . . . . . . . . 39,026 33,922
Capital lease obligations due within one year. . . . . . . . . . . . . 13,705 18,094
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . 864,990 602,210
------------ -----------
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . 2,704,103 2,337,581
Deferred revenue, less current portion . . . . . . . . . . . . . . . . 274,170 415,419
Notes payable to related parties, net . . . . . . . . . . . . . . . . 103,957 101,082
Capital lease obligations, less current portion. . . . . . . . . . . . - 1,610
------------ -----------
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . 3,082,230 2,855,692
------------ -----------
Shareholders' deficit:
Common stock, no par value; authorized 20,000,000 shares; issued and
outstanding 15,053,380. . . . . . . . . . . . . . . . . . . . . . . . 9,677,253 9,677,253
Additional paid in capital . . . . . . . . . . . . . . . . . . . . . . 1,013,089 983,800
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . . . . (12,599,802) (12,000,323)
------------ -----------
Total shareholders' deficit. . . . . . . . . . . . . . . . . . . . . . (1,909,459) (1,339,270)
------------ -----------
Total liabilities and shareholders' deficit. . . . . . . . . . . . . $ 1,172,771 $ 1,516,422
============ ============
2
FORECROSS CORPORATION
STATEMENTS OF OPERATIONS
For the Three Months Ended
December 31,
--------------------------
2000 1999
------------ ------------
(Unaudited) (Unaudited)
Net revenue:
Services and maintenance . . . . . . . . $ 335,333 $ 1,280,654
Software licenses and distributorship
fees-related parties . . . . . . . . . 136,248 136,251
------------ ------------
Total net revenue. . . . . . . . . . . 471,581 1,416,905
Cost of services and maintenance
including fees to related parties of
$0 and $41,000 . . . . . . . . . . . . 404,201 552,052
------------ ------------
Gross margin . . . . . . . . . . . . . . 67,380 864,853
------------ ------------
Operating expenses:
Sales and marketing including fees to
related parties of $0 and $123,000 . . 156,631 276,725
Research and development . . . . . . . . 186,719 198,391
General and administrative . . . . . . . 275,461 282,469
------------ ------------
Total operating expenses . . . . . . . . 618,811 757,585
------------ ------------
Income (loss) from operations . . . . . (551,431) 107,268
Interest expense, net. . . . . . . . . . (46,447) (141,854)
------------ ------------
Loss before provision for
income taxes . . . . . . . . . . . . . (597,878) (34,586)
Provision for income taxes . . . . . . . (1,600) -
------------ ------------
Net loss . . . . . . . . . . . . . . . $ (599,478) $ (34,586)
============ ============
Net loss per share - basic
and diluted . . . . . . . . . . . . . $ (0.04) $ (0.00)
============ ============
Weighted average shares used in
computing per share data . . . . . . . 15,053,380 12,316,944
============ ============
3
FORECROSS CORPORATION
STATEMENTS OF CASH FLOWS
For the Three Months
Ended December 31,
2000 1999
------------ ------------
(Unaudited) (Unaudited)
Increase (decrease) in cash resulting from:
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . . . $ (599,478) $ (34,586)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities-
Non-Cash compensation to consultants . . . . . 14,650 -
Depreciation and amortization. . . . . . . . . 43,203 65,997
Changes in operating assets and liabilities-
Accounts receivable. . . . . . . . . . . . . . 305,842 (36,047)
Other assets and accrued interest on notes
receivable from officers . . . . . . . . . . (8,422) 16,480
Accounts payable and accrued liabilities . . . (8,921) 364,422
Deferred Compensation. . . . . . . . . . . . . 75,928 118,631
Deferred Distributor revenue . . . . . . . . . (141,249) (141,252)
Other deferred revenue (net) . . . . . . . . . 262,780 7,435
------------ ----------
Net cash provided by (used in) operating
activities . . . . . . . . . . . . . . . . . . (55,667) 361,080
------------ ----------
Cash flows from financing activities:
Proceeds from factoring of accounts receivable 545,243 643,925
Repayment of borrowings under factoring
arrangement . . . . . . . . . . . . . . . . . (501,244) (1,062,409)
Repayment of borrowings under notes payable
-officers. . . . . . . . . . . . . . . . . . - (27,171)
Repayment of borrowings under capitalized leases (5,999) (5,146)
Net proceeds from issuance of common shares . - 100,000
------------ ----------
Net cash provided by (used in) financing
activities . . . . . . . . . . . . . . . . . 38,000 (350,801)
------------ ----------
Net increase (decrease) in cash. . . . . . . (17,667) 10,279
Cash at beginning of period. . . . . . . . . . 18,833 2,740
------------ ----------
Cash at end of period . . . . . . . . . . . . $ 1,166 $ 13,019
============ ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest . . . $ 45,775 $ 79,427
============ ==========
Supplemental disclosures of non-cash investing
and financing activities:
Accrued interest on notes payable to officers
and related parties . . . . . . . . . . . . . $ 2,875 $ 34,088
============ ==========
Options issued for software development. . . . $ 14,638 $ -
============ ==========
4
FORECROSS CORPORATION
STATEMENTS OF SHAREHOLDERS' DEFICIT
(unaudited)
Common Stock Additional Accumulated
Shares Amount Paid in Capital Deficit Total
----------- ----------- --------------- ------------- ------------
Balances at October 1, 2000. . . . . 15,053,380 $9,677,253 $ 983,800 $(12,000,323) $(1,339,270)
Issuance of Options to Consultants . - - 29,289 - 29,289
Net loss . . . . . . . . . . . . . . - - - (599,478) (599,478)
----------- ----------- ------------- -------------- ------------
Balances at December 31, 2000. . . . 15,053,380 $9,677,253 $ 1,013,089 $ (12,599,801) $(1,909,459)
=========== =========== ============= ============== ============
FORECROSS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. UNAUDITED INTERIM FINANCIAL STATEMENTS:
The unaudited interim financial statements of Forecross Corporation have been
prepared in conformity with generally accepted accounting principles, consistent
in all material respects with those applied in the Annual Report on Form 10-K
for the year ended September 30, 2000. The interim financial information is
unaudited, but in the opinion of management, includes all adjustments
(consisting only of normal recurring adjustments) necessary to present fairly
the information set forth therein. The interim financial statements should be
read in connection with the financial statements and notes in the Company's
Annual Report on Form 10-K for the year ended September 30, 2000.
2. BASIS OF PRESENTATION AND GOING CONCERN:
Through December 31, 2000, the Company had sustained recurring losses from
operations and, at December 31, 2000, had a shareholders' deficit of $1,909,000
and a net working capital deficiency of $1,930,000. In addition, revenues for
the quarter ended December 31, 2000 declined approximately $472,000 from
$1,417,000 during the same period in 1999, and at December 31, 2000, the
Company's cash had declined significantly. 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 implemented 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.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures;
contingent assets and liabilities at the date of the financial statements; and
the reported amounts of revenue and expenses during the reporting period.
Accordingly, actual results could differ from those estimates. The most
significant estimates subject to future uncertainties are those relating to
calculations of percentage of completion for projects in process and estimations
of warranty liability. It is at least reasonably possible that the significant
estimates used will change within a year.
RECLASSIFICATIONS:
Certain prior-year amounts have been reclassified to conform to current year
presentation.
5
4. CONCENTRATIONS OF CREDIT RISK AND FOREIGN SALES:
The Company performs ongoing credit evaluations of its customers and generally
does not require collateral on accounts receivable as the majority of the
Company's customers are large, well-established companies. Two customers
accounted for approximately 83% and 10% of the accounts receivable balance at
December 31, 2000, and two customers accounted for approximately 75% and 22% at
September 30, 2000. Additionally, four customers, including revenue from the
Company's Distributors treated as resulting from one customer, accounted for
approximately 30%, 26%, 21% and 15% of total revenue for the three months ended
December 31, 2000. Four customers, including revenue from the Company's
Distributors treated as resulting from one customer, accounted for approximately
35%, 23%, 11% and 10% of total revenue for the three months December 31, 1999.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
------- -------------------------------------------------
The following summary of our material activities for the three months ended
December 31, 2000 and 1999 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 Quarterly Report contains statements that are forward-
looking, such as statements relating to plans for future activities. Such
forward-looking information involves important risks and uncertainties that
could significantly affect results in the future and, accordingly, such results
may differ from those expressed in any forward-looking statements made by us 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. For a discussion of such
risks and uncertainties see our Annual Report on Form 10-K for the fiscal year
ended September 30, 2000.
6
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 2000 COMPARED TO THREE MONTHS ENDED
DECEMBER 31, 1999
Total revenue for the three months ended December 31, 2000 was $472,000 as
compared to $1,417,000 for the same period of 1999, a decrease of 67%.
Migration services revenue for the period contributed $247,000 as compared to
$111,000 a year ago. Year 2000 services revenue accounted for $1,057,000 in
1999 with no revenue in 2000. Revenue from consulting totaled $83,000 as
compared to $108,000 in 1999, and revenue from the amortization of deferred year
2000 distributor licenses and fees remained at $141,000 for both periods.
Two factors contributed to our migration revenue in the 2000 period being
less than forecast. First, we experienced delays in signing new business until
late in the reporting period. We also had unanticipated challenges in processing
non-standard and unique programming in a portion of one of our client's
applications, resulting in a slowing in completion of billable and revenue
generating milestones and lower gross margins. We believe this issue has been
substantially resolved and represented a non-recurring anomaly in the nature of
the client code. Project revenue is recognized on the cost-of-completion method,
using estimates of the costs remaining. Backlog was $1,402,000 at December 31,
2000, as compared to $993,000 at September 30, 2000 and $282,000 at December 31,
1999.
Gross margin was $67,000 and $865,000 for the three months ended December 31,
2000 and 1999, respectively. Gross margin percentages were 14% and 61% for the
these periods. The decrease in gross margin and gross margin percentage was due
to the end of the higher-margin year 2000 services, and to the previously
mentioned challenges, where unanticipated costs were being incurred in the
current quarter to analyze and provide a solution for the non-standard
programming.
Sales and marketing expenses were $157,000 in the three months ended December
31, 2000 as compared to $277,000 in the same period of 1999. Distributor fees
of $123,000 were included in the 1999 quarter.
Research and development expenses decreased to $187,000 at December 31, 2000
from $198,000 in the corresponding quarter of 1999. Development efforts in the
2000 quarter generally related to our XML-related offerings, while work
performed in the quarter ended December 31, 1999 were for enhancements to our
migration products.
General and administrative expenses were $275,000 and $282,000, in the three
months ended December 31, 2000 and 1999, respectively.
Net interest expense was $46,000 for the three months ended December 31, 2000
as compared to $142,000 in the 1999 quarter, reflecting the elimination of
debt to the company's senior officers and to year 2000 distributors as part of
the debt to equity conversion completed in March 2000.
The overall net loss for the three months ended December 31, 2000 was $599,000
or $0.04 per share compared with a loss of $35,000 or $0.00 per share for the
three months ended December 31, 1999 (based on the weighted average number of
shares outstanding during the respective periods).
7
LIQUIDITY AND CAPITAL RESOURCES
Through December 31, 2000, we sustained recurring losses from operations and,
at December 31, 2000, we had a shareholders' deficit of $1,909,000 and a net
working capital deficiency of $1,930,000. In addition, revenues for the quarter
ended December 31, 2000 declined approximately $472,000 from $1,417,000 during
the same period in 1999, and at December 31, 2000, our cash had declined
significantly. These conditions raise substantial doubts about our ability to
continue as a going concern. See Note 2 of 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 three months ended December 31, 2000, operations were funded by a
payment received for future consulting services, by cash derived from short-term
receivables financing, by deferral of salaries of senior officers, and by the
collection of accounts receivable.
In December 2000 we received $300,000 from a client, of which approximately 75%
was an advance payment against future XML-related consulting services. We
expect the advance portion will be earned and billed over the next two quarters.
A factoring agreement with a financial institution allows us to obtain
financing by borrowing against our accounts receivable on a recourse basis. At
December 31, 2000, $545,000 was outstanding under the agreement and at
September 30, 2000, $501,000 was outstanding. The agreement, established in
October 1995, may be terminated by either the factor or us at any time.
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 second 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. While we have not experienced difficulty in attracting or retaining
qualified personnel in the past, any future problems in this area may have a
material negative affect on our results of operations.
We anticipate that our capital expenditures for fiscal 2001 will be
under $75,000. Cash and cash equivalents on hand at December 31, 2000 were
$1,166 as compared to $18,833 at September 30, 2000.
8
PART II-OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Recent Sales of Unregistered Securities
None.
Item 3. Defaults Upon Senior Securities
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Report on Form 8-K
(a). Index and Description of Exhibits
Exhibit No. Description
- ----------- --------------------------------------------------------------------------------
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
9
16.2+ Letter dated September 23, 1997 from BDO Seidman, LLP to the British Columbia
Securities Commission and to the Vancouver Stock Exchange confirming the
accuracy of the information contained in the Notice of Change of Auditor of
Forecross Corporation dated September 23, 1997
16.3+ Letter dated September 23, 1997 from Coopers & Lybrand, L.L.P. to the British
Columbia Securities Commission and to the Vancouver Stock Exchange confirming
the accuracy of the information contained in the Notice of Change of Auditor of
Forecross Corporation dated September 23, 1997
16.4+ Letter dated September 23, 1997 from the Board of Directors of Forecross
Corporation to the shareholders of Forecross Corporation, the British Columbia
Securities Commission and the Vancouver Stock Exchange confirming the review of
the Board of Directors of the Notice of Change of Auditor and the related letter
dated September 23, 1997 from BDO Seidman, LLP and Coopers & Lybrand,
L.L.P.
27.1 Financial Data Schedule, December 31, 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.
(b). Reports on Form 8-K
None
10
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Registrant
FORECROSS CORPORATION
February 20, 2000 BY: /S/ Bernadette C. Castello
---------------------------------
Bernadette C. Castello
Senior Vice President and Chief Financial Officer
11