SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10
General Form for Registration of Securities
Pursuant to Section 12(b) or 12(g) of
The Securities Exchange Act of 1934
FORECROSS CORPORATION
(Exact name of registrant as specified in its charter)
California 94-2823882
(State or other jurisdiction (I.R.S. Employer Identification No.)
incorporation or organization)
90 New Montgomery Street, San Francisco, California 94105
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (415) 543-1515
Securities to be registered pursuant to Section 12(b) of the Act: None
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock
(Title of Class)
INFORMATION REQUIRED IN REGISTRATION STATEMENT
ITEM 1. BUSINESS
______ ________
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10 of Forecrossr Corporation ("Forecross" or the "Company")
contains forward-looking statements 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. Such factors include,
but are not limited to, the Company's unprofitable operating history and
limited financial resources; potential requirements for additional financing;
volatility of the Company's common stock; fluctuation of its quarterly
operating results; existing and potential competition; dependence on a small
number of customers; market size; no assurance of success of the Company's
marketing strategy; dependence on year 2000 revenues; no assurance of the
ability to continue product development as required and in a timely manner;
limited experience of management in the management of growth; control by
officers and directors; dependence on key personnel; the ability to
adequately protect its intellectual property; and general economic and market
conditions. Additional information on these and other certain business
concerns is included elsewhere in this Form 10.
GENERAL BUSINESS DESCRIPTION
Forecross is a software company that, together with its predecessor
corporations, has been in business since 1982. Forecross develops, markets
and sells sophisticated software and associated services to large
organizations for the automated conversion ("migration") of existing
business software applications to new computing environments. Forecross
also develops, markets and sells similar software and services to large
organizations for the automated assessment and renovation of non-year
2000-compliant business software applications.
INDUSTRY BACKGROUND
In recent years, dramatic and fundamental changes have taken place in the
computer industry. These developments have had a significant impact on the
way in which business applications are developed, have extended the useful
life of existing applications and have presented unique challenges to
Management Information Systems ("MIS") departments.
SIGNIFICANT INDUSTRY DEVELOPMENTS
First, there has been a dramatic reduction in the cost of computer
processing power. This has led to the "downsizing" from larger "mainframe"
and "super-mini" computers to smaller computers capable of processing
the same amount of work at significantly lower cost.
Second, standard computing environments, referred to as "open systems"
architecture, have increasingly dominated the market. Previously, large
scale MIS organizations were forced to implement business applications using
database software and languages proprietary to particular vendors. Open
systems architecture has, to a significant extent, freed the MIS manager
from this constraint by permitting the components of an overall hardware and
software solution to be acquired from a number of different, and frequently
competing, vendors. Examples of these new standards include the UNIX
operating system, the database language called SQL and programming languages
such as COBOL, C++ and JAVA.
Third, with downsized, open systems hardware ("server") and personal
computers on the desk of each user ("client"), a new distributed
architecture called "client-server" has emerged. Previously, the computing
facilities of most MIS organizations consisted of "dumb" terminals connected
to large mini or mainframe computers. This new distributed client-server
solution provides a more effective way for MIS departments to scale their
computing resources to the changing needs of their businesses.
Fourth, the network which each business establishes to connect clients and
servers for business applications has expanded over the past four years to
include connections to, and often web sites on, the Internet. The
"world-wide web" enables a business to connect all of its employees to each
other and to the company's vendors and customers easily and inexpensively.
This unprecedented level of connectivity is driving a rapid evolution in the
way businesses inter-relate.
Fifth, over the past few years the computer industry has been shaken by a
latent problem imbedded in many existing applications, known as the "year 2000
problem." Historically, computer disk space was extremely expensive and
storage capacity was very small. To lessen the cost impact and increase
the available capacity, dates in many applications were stored in an
abbreviated form. For example, 1997 was stored as `97' and programs assumed
the century was `19' even though it was not stored as part of the date. When
presented with the abbreviated date `00', many applications assume the
complete date is 1900, when it should be 2000, resulting in incorrect
ordering, comparisons and calculations.
Sixth, 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. Due to this, 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, may
operate on technology platforms which are no longer cost-effective, or may
not have been designed to correctly handle the year 2000 problem.
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 be year 2000-compliant and to take advantage
of the new technologies which have a more readily available manpower pool,
while preserving all of their valuable functionality.
AVAILABLE SOLUTIONS
There are three options available to an MIS manager wishing to take advantage
of these developments and upgrade a system to be year 2000-compliant.
One option is to acquire commercially available application software packages
specifically designed to operate on the new technology platforms and to be year
2000-compliant. 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
possibly non-year 2000-compliant 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 imbedded in the existing application will not be
accurately or completely incorporated into the adapted software package or
the rewritten application.
The products of Forecross represent a third solution. The Company has
developed a proprietary and innovative technology for the automated migration
and assessment/renovation of existing applications. This allows businesses
to replace existing technologies (i.e., the system is re-hosted to a new
technology platform or made year 2000-ready) while leaving the application
functionally intact (see "-Products"). Consequently, this option usually has
the lowest cost and least risk associated with it.
MARKET
At its broadest, the potential worldwide market for Forecross products is
comprised of approximately 30,000 large computer-using organizations.
Generally referred to as "enterprise computing" users, they include the
so-called Fortune 2,000 companies with annual revenues in excess of $100
million, and is comparably-sized government, financial services,
healthcare, education and other service organizations. Most of these
organizations automated their major business applications before the
advent of the new technologies and, hence, find themselves with a large
inventory of crucial information systems based on rapidly obsolescing
technology.
Forecross initially focused its primary attention upon the portion of the
North American enterprise computing market that is comprised of approximately
1,000 users of Computer Associates Integrated Database Management System
(CA-IDMS) (based on information supplied in July 1996 by Computer
Intelligence Corporation, an industry research organization). CA-IDMS
includes a database management system (CA-IDMS/DB), user interface language
(CA-IDMS/DC) and fourth-generation language (CA-ADSO) which, together
with certain other related products, were originally developed and marketed
by Cullinane Corporation, later by Cullinet Corporation, and now by Computer
Associates International. Based upon reports in the industry press,
Forecross believes that there is a growing shift of enterprise computing
users away from CA-IDMS and that over the next ten years a substantial number
of the 1,000 users will have decided to move to newer, more cost-effective and
flexible computing environments. The Company estimates that outside North
America there are an additional 1,000 CA-IDMS organizations. These users also
represent a potential market in which Forecross has already had some initial
success.
In addition to the CA-IDMS portion of the enterprise computing market, there
are also additional portions related to other proprietary technology platforms.
They include areas related to computer languages such as CA-Easytrieve from
Computer Associates (an estimated 7,000 users), CSP from IBM Corporation (an
estimated 1,000 users), CA-UFO from Computer Associates (an estimated 1,500
users) and ADF from IBM Corporation (an estimated 1,000 users), and databases
such as IMS from IBM (an estimated 10,000 users) and Adabase from SoftwareAG
(an estimated 1,000 users). These additional areas create opportunities for
Forecross to develop other products and give the Company added flexibility in
responding to changes and developments in the marketplace.
One other market to which the Company has responded is the large market of
computer-using organizations affected by the year 2000 problem. A uniquely
large market has been created by the fact that virtually all 30,000 enterprise
computing organizations have one or more applications that are not year
2000-compliant and need to become so in the near future.
PRODUCTS
The Company has licensed and delivered its products and ancillary services to
customers throughout North America, and in Taiwan, France, Belgium, Germany, and
South Africa. Recent and current Forecross customers include Aetna Life
Insurance,Charles Schwab & Company, Inc., AT&T, Bank of America, Bank of
Montreal, Bear Stearns & Company, Brown Brothers Harriman & Co., Fujitsu, Ltd.,
Home Savings of America, IBM Corporation, Kimberly-Clark Corporation, New
Brunswick Telephone, Price Waterhouse, LLP, Royal Bank of Canada, and Union
Gas.
Forecross products are designed to automate up to 100% of the conversion and
year 2000 assessment and renovation of an existing application. It has been the
experience of the Company that 95% or more of the business application
programs commonly found in large computerized organizations (see "-Market")
can be converted, assessed and renovated with full (100%) automation. The
remaining 5% can usually be processed with a significant degree of automation
(80% or more), enough to make conversion with Forecross products a
cost-effective and lower risk alternative. Converted applications can be
easily maintained, perform well in the new environment, and, with the exception
of the year 2000 corrections, are functionally equivalent to the original
application. Each Forecross product includes a significant number of
customization options which can be selected by the user to achieve specific
conversion or renovation objectives.
UNDERLYING PROPRIETARY TECHNOLOGY
The Company's powerful and flexible technology known as the XCODE
architecture, has been refined over the last thirteen years and forms the
foundation for all Forecross products, tools, and associated services.
The proprietary XCODE architecture of Forecross supports all of the
functions ordinarily required to automate the conversion's assessment and
renovation of existing systems. This includes parsing the source code,
storing the code in a common repository, identifying areas of the code that
require technology or year 2000 uprades, transforming the old technology
and/or non-year 2000-compliant elements of the source code and generating
revised source code for the operation of the application in the new year
2000-compliant environment.
Forecross began developing its technology in 1982. The prototype for the
XCODE architecture was built in 1985 to permit a customer to convert a major
application from a proprietary language to COBOL. The first generation of XCODE
was developed and enhanced between 1985 and 1986, in connection with language
conversion projects undertaken for Price Waterhouse, LLP. This resulted in the
first version of the Convert/ADSO to COBOL product. In response to a
requirement of Chemical Bank of New York, a second generation of XCODE was
developed in 1987, resulting in the development of the first version
of the Convert/IDMS-DB to SQL product.
In 1990, Forecross developed the first version of Convert/IDMS-DC to CICS in
connection with a migration project undertaken for American President Lines.
In the same year, under a contract with IBM, the third generation of XCODE
was produced. In 1992-93, in connection with a project for Cincom Systems,
Inc. of Ohio, Forecross developed the Fastforward/VSAM to SUPRA database
conversion software. At that time, all the components of XCODE were
redeveloped to operate in a PC environment.
The XCODE architecture is modular in design. Modular architecture refers to
the design of a system into separate components that can be connected and
combined together in many different configurations. The strength of modular
architecture is that any one component can be replaced, added or moved
without altering the rest of the system. The Company's modular XCODE
architecture is, therefore, readily adaptable to the development of new
migration and new year 2000 products. This lowers the cost, shortens the
time and reduces the risk of new product development.
In 1990, Forecross developed the first version of Convert/IDMS-DC to CICS in
connection with a migration project undertaken for American President Lines.
In the same year, under a contract with IBM, the third generation of XCODE
was produced. In 1992-93, in connection with a project for Cincom Systems,
Inc. of Ohio, Forecross developed the Fastforward/VSAM to SUPRA database
conversion software. At that time, all the components of XCODE were
redeveloped to operate in a PC environment.
The XCODE architecture is modular in design. Modular architecture refers to
the design of a system into separate components that can be connected and
combined together in many different configurations. The strength of modular
architecture is that any one component can be replaced, added or moved
without altering the rest of the system. The Company's modular XCODE
architecture is, therefore, readily adaptable to the development of new
migration and new year 2000 products. This lowers the cost, shortens the
time and reduces the risk of new product development.
COMMERCIALLY AVAILABLE PRODUCTS
Forecross has, to date, developed nine migration products. Migration products
are named by reference to the source language or database and the target
language or database:
Convert/IDMS-DC to CICS (user interface language conversion)
Convert/ADSO to COBOL (language conversion)
Convert/IDMS-DB to SQL (database conversion)
Convert/VSAM to SQL (database conversion)
Convert/CSP to COBOLT (language conversion)
Redirect II COBOL/VS to COBOL II (language conversion)
IMSADF II to Cross System Product Migration Facility (language conversion)
Convert/IMSADF II to APS/COBOL (language conversion)
Fastforward/VSAM to SUPRA (database conversion)
Forecross is the owner of six of these products. Ownership of the following
products is shared: IMSADF II to Cross System Product Facility, which was
developed by Forecross, but is owned jointly with IBM; Convert/IMSADF II
to APS/COBOL, which was developed by Forecross, but is owned jointly with
Bank of America; and Fastforward/VSAM to SUPRA which was developed by
Forecross pursuant to a Development and License Agreement dated April 22,
1991, with Cincom Systems, Inc. (the "Cincom Agreement") and is jointly owned
by the Company and Cincom. Forecross and IBM have joint marketing rights to
the first product, Forecross and Bank of America have joint marketing rights
to the second product, and Cincom has exclusive marketing rights to the third
product. None of these jointly owned products is presently material to the
Company's business or its near-term business plans.
Forecross has, to date, developed two year 2000 renovation products for
fifteen languages: Assess/2000 and Renovate/2000, which are integrated into
the Complete/2000 software solution. Languages currently supported by these
products include COBOL, C, C++, PL/I, CA-Easytrieve, PowerBuilder, CSP,
IMSADF II, CA-ADSO, CA-UFO, CLIST, APS, REXX, CA-Ideal and CA-Telon.
Forecross is the owner of these products.
PRODUCT DEVELOPMENT
The Company's strategy in developing new migration software and services for
existing applications is to respond to the particular needs of a specific
customer after research has determined that there is an identifiable
potential for further licensing of the product's and delivery of associated
services to other organizations. Before Forecross undertakes the development of
a new product, it generally requires that the customer agree to share the
development cost. One example of this strategy is the Convert/CSP to COBOL
product which was developed for Kimberly-Clark Corporation, 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 at a cost of $480,000.
One factor which greatly enhances the Company's ability to employ this
strategy is its proprietary XCODE architecture. The XCODE architecture
enables the Company to develop a new migration product in an average of
approximately six months of elapsed time, with three persons employed
full-time on the project. This is a considerably shorter and less costly
development cycle than traditional industry experience for products of
comparable scope and complexity. It also allows the Company to fund most or all
of the development cost from the license revenue generated by the initial
development-funding customer.
Extension of the Complete/2000 products to support new languages has also
been greatly facilitated by the XCODE architecture. As requirements have
dictated, and may dictate in the future, new languages have been added
to Complete/2000 in an average of eight-weeks with two developers.
Research and development expenses were $1,006,768, $253,743 and $358,133 in the
years ended September 30, 1997, 1996 and 1995, respectively. Additional
expenses of $29,067 and $352,633 in 1996 and 1995, respectively, were incurred
on products funded by customers and are included in cost of revenues. There
were no such costs in 1997.
PRODUCT LICENSING
MIGRATION PRODUCT LICENSING
Forecross grants its customers a non-exclusive, non-assignable license to
use its software, including programs, options, documentation, data and
information. While certain provisions in the license agreement (e.g., as to
the number of locations at which the licensed software may be used, and the
extent of the customer's right to receive upgrades and enhancements without
charge) vary according to the circumstances, certain general terms are common
to all such agreements. Each contains a warranty by Forecross against defects
in design, operation and usability in the customer's computer environment,
and each 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 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.
ASSESSMENT AND RENOVATION LICENSING AND FACTORY SERVICES
Forecross offers product licensing for its Assess/2000 products. These
licenses are identical to the migration licenses described above with two
exceptions. First, they are granted for the assessment of an unlimited
number of application programs and related components. Second, they may be
purchased in single-user or multiple-user configurations, priced accordingly.
Forecross offers "factory renovation" services for customers of its
Complete/2000 renovation software. Licenses are not currently offered.
Utilizing the factory renovation services, a customer sends its application
code to the Forecross factory where the code is renovated for year
2000-compliance, compiled, then shipped back to the customer for testing and
production implementation. The factory uses a combination of procedures,
processes and software that allow for up to 100% automation of all phases of
code renovation.
INTELLECTUAL PROPERTY
Forecross has chosen to protect the intellectual property value of its
products and its proprietary XCODE architecture through trade secret and
confidentiality provisions in its product licensing arrangements,
confidentiality agreements with its employees and through copyright
protection for system externals such as display formats and documentation.
Additional protection is provided by the complex nature of both the XCODE
architecture, and the products themselves. This approach is consistent with
standard practice in the industry, and provides reasonable assurance against
misappropriation. Software theft, which can be a serious problem in the
consumer software market, is relatively rare in the large-scale software
products market. Large corporate buyers tend not to engage in product piracy.
The Company's products are also protected against unauthorized use by
imbedded and external access control codes. There can be no assurance,
however, that the protection relied upon by the Company will be effective.
Monitoring and identifying unauthorized use of the Company's technology may
prove difficult, and the cost of litigation may impair the Company's ability
to guard adequately against such infringement. The commercial success of the
Company may also depend upon its products not infringing any intellectual
property rights of others and upon no such claims of infringement being made.
Even if such claims are found to be invalid, the dispute process could have
a materially adverse effect on the Company's business, results of operations
and prospects.
MARKETING AND SALES STRATEGY
EXISITING APPLICATION MIGRATIONS
The developments in computer technology described above (see "-Industry
Background: Significant Industry Developments") have converged to produce the
need and create the opportunity to convert existing applications. Because of
this, the Company has had to experiment with a number of different techniques
to create market awareness of its technology and products, and to provide an
easy way for potential customers to evaluate and license its products.
Between 1989 and 1992, Forecross experimented with two different approaches
using third parties to market and sell its products. Neither proved
successful. Initially, Forecross entered into an exclusive marketing and sales
agreement with a large technology services firm principally engaged in
providing consulting services, including software conversion, for proposed
fees rarely below $1,000,000 per project. Since the Forecross license fee
represented only a small portion of the overall project fee, the firm had
little incentive to market Forecross products energetically, and the
"bundling" of the Company's software with the service provider's services
obscured the fact that the software could be licensed independently of those
services. The agreement was accordingly terminated, and in 1990, Forecross
entered into a technology transfer agreement relating to three specific
software products (Convert/ADSO to COBOL, Convert/IDMS-DC to CICS and
Convert/IDMS-DB to SQL), and an exclusive distribution agreement,with a
start-up software company, AdvantEdge Systems Group, Inc. ("ASG"). This
initiative was also unsuccessful due principally to the fact that the sales
and marketing strategy adopted by ASG proved ill-adapted to the market for
Forecross products. The principal reason was that ASG sought to market the
products exclusively as software offerings, without any related consulting
services that potential customers seemed to require. Due to lack of funds,
ASG discontinued operations early in 1992.
Following ASG's cessation of operations in 1992, Forecross resumed using and
licensing the technology originally transferred to ASG, with ASG's knowledge
and consent. The Company then, pursuant to an agreement with ASG (the "ASG
Agreement"), effective as of March 23, 1994, reacquired their original
software assets. Under the ASG Agreement, Forecross paid ASG $56,613 and, in
addition, agreed to pay royalties on the net software license revenue
derived by the Company from the three products that had been reacquired. The
royalty rate is 30% until an aggregate of $600,000 in royalties has been
paid. Upon royalty payments of $600,000, the royalty rate dropped to 20%
until January 1, 1995, and 10% thereafter. From 1994 through September 30,
1997, Forecross derived no license revenues from the three products, and
accordingly no royalties were payable. The Company does not expect that
significant future royalties will become payable under the ASG Agreement,
since they would only be payable on License-Only sales (see below) of those
three specific products, which have represented and are expected to continue to
comprise a maximum of 10% of the total revenues of Forecross. Moreover, the
gross margin on License-Only sales is 90% before (and hence would be 60% after)
payment of any royalties that might become payable to ASG.
In view of its experience with selling its products through third parties,
Forecross decided in 1992 to develop and implement its own direct marketing
and sales strategy. The Company's marketing and sales strategy has several
elements designed to overcome the problems previously encountered. It has
expanded product offerings to include a broad range of service and license
alternatives that better adapt to meet the needs of the marketplace and
serve to differentiate Forecross from its competitors. Conventional
techniques such as trade publication notices, direct mail, telemarketing, and,
most recently, its own site (www.forecross.com) on the Internet are being
used to bring the Company's products and their benefits to the attention of
prospective customers. Additionally, Forecross has focused on building
a reference base of satisfied customers.
Recognizing that aversion to risk is one of the major characteristics of the
decision making process for many MIS organizations, Forecross has created a
strategy to simplify the process for potential customers to evaluate and
invest in its products. The Company has accordingly adopted a phased
marketing approach which allows a potential customer to pursue its interest
in automated migration in a series of measured steps, with each step in the
process providing demonstrable value.
The Company's principal marketing programs involve the Migration
Alternatives Planning Seminar ("MAPS") and either Factory Compile or
License-Only sales.
MAPS is an introduction, for a fee, to the conversion process through an
intensive two-day customer-site program for those considering a migration
project. Designed to address conversion issues, it includes formal technical
briefings, expert consulting, an evaluation of the risks, costs and benefits
of various alternatives and a feasibility analysis of the automated migration
of a selection of the customer's application software. MAPS is promoted by
telemarketing and is conducted by two senior members of the Forecross staff.
Evaluations of prior MAPS sessions suggest that many of the Company's MAPS
customers will decide to select Factory Compile or License-Only within
twelve months of the MAPS session.
Factory Compile is a comprehensive program in which the customer engages
Forecross to use its proprietary software on behalf of the customer to
perform the entire conversion process, thus relieving the customer of the
requirements for allocating the personnel and time necessary to learn to
perform the migration. 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 a program in which the customer licenses Forecross products
and, with training and additional optional consulting provided by Forecross,
performs the entire conversion process with its own personnel. As in the
Factory Compile program, the customer also tests the converted application in
the new environment. No customer has chosen the License-Only program in the
past few years, preferring to use the Company's automated factory facilities.
Although there are no separately chargeable software license fees, Factory
Compile programs require the customer to sign a standard Forecross Product
License Agreement. In both programs (Factory Compile and License-Only), a
customer's use of Forecross products is limited to the conversion of a
specified maximum number of application programs, at which time the license
expires.
YEAR 2000 RENOVATION
The year 2000 market may be viewed as consisting of marketing to provide two
distinct services: assessment and renovation. Presently, bids are often
sought for each phase independent of the other. There are more vendors
who provide automated or semi-automated software for assessment than for
renovation, and the fee charged for assessment is a small fraction of that
for renovation. Consistent with industry-wide pricing techniques, fees
are based on a price per line of code basis.
Because of the potentially massive scope of the year 2000 problem and the
relatively short period of time left in which to solve the problem (less than
700 days), Forecross has taken an approach to marketing its Complete/2000
products that is slightly different from its migration marketing. The year
2000 market has a more acute sense of urgency than the migration market.
This factor has caused most MIS directors of large organizations to seek
outside assistance from year 2000 consulting firms and software vendors in
the identification and resolution of the problem. Traditional marketing is,
therefore, not effective because it takes too much of the time remaining
until the year 2000. In addition, there are far too few solution providers
to service all of the potential customers in time and the potential customers
are already seeking assistance from the vendors.
To accommodate these differences, Forecross has adopted a two-pronged
strategy designed to rapidly reach the broadest possible market without having
to hire, train and manage a large sales, marketing and customer support staff.
For the assessment function,Forecross offers its Assess/2000 product through
non-exclusive license arrangements with consulting firms and other solution
providers who do not market similar software from other vendors. For the
renovation function, Forecross seeks and enters into contractual arrangements
with distributors who, for a fee, obtain exclusive marketing rights for
Complete/2000 within a geographic territory. Exclusivity is for a term of one
year and is automatically extended for a subsequent year provided that the
distributor has caused at least a specified number of year 2000 contracts of at
least a specified value to be closed during the year. In exchange for
marketing, project management services and staffing for substantially all
on-site work, the Distributor generally receives a fee equal to twenty-five
percent (25%) of collected revenues. In the case of one contract, under which a
substantial portion of the current year 2000 projects are conducted, the
Distributor's fee is fifty percent (50%) of collected revenues until
$1,500,000 has been received by the Distributor and twenty-five percent (25%) of
revenue collected thereafter. At the present time, Forecross has four
distributors: Gardner Solution 2000, L.L.C. in New York and New Jersey; Y2K
Solutions, L.P.in Texas; CY2K Solutions, L.L.C. in California; and, PY2K
Solutions, L.L.C. in North Carolina, South Carolina, Georgia and Florida.
The President and Chief Executive Officer of Gardner Solution 2000, L.L.C., is
also the Chief Executive Officer of Y2K Solutions, L.P., CY2K Solutions,
L.L.C. and PY2K Solutions, L.L.C. Additional distributorships are contemplated
for the United States and eventually various international locations. While
Forecross may market its year 2000 products and services directly in
territories not represented by distributors, its strategy is to leverage its
ability to penetrate the large nationwide market by using a network of
licensees and distributors. The Company believes that it will receive a
meaningful amount of follow-on renovation work as a result of licensees'
assessment efforts, as well as significant combined assessment and renovation
work from its full-service distributors.
In addition, the Company has formed alliances through teaming agreements
with consulting firms and service providers. As of December 31, 1997,
Forecross has signed teaming agreements with BDM International, Inc.,
Electronic Data Systems Corporation (EDS), NCR Corporation and SCB Computer
Technology, Inc.
SALES AND LICENSING REVENUES
From 1994 though 1996, the Company's revenues were generated primarily by
migration projects, with some revenues contributed by MAPS presentations.
During that period, the Company performed work on between ten and twenty
projects per year, of which four projects typically represented in excess of
fifty per cent of total revenues. In the fiscal year ended September 30,
1997, the initial 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-four percent of
total revenue.
COMPETITION
The marketplace for application migrations and year 2000 solutions is served
by both software and services vendors. Forecross is not aware of any vendor,
whether of software or services, who offers the degree of automated conversion
achievable through use of Forecross products.
SOFTWARE VENDORS
The 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 to support data migration. In both of these cases,
as in all others of which Forecross is aware, the software products do not
provide the near-complete and comprehensive automated conversion of business
applications as those performed by Forecross products.
In the year 2000 market, the principal focus of software vendors has been on
the semi-automated or automated analysis of applications written in the COBOL
language. Many vendors also assess other languages, but most use a
rudimentary text scanning approach similar to the "Find and Replace"function
commonly found in most word processing software today. With respect to
renovation, there is a growing number of software vendors whose products
address COBOL, but Forecross is aware of very few vendors who address
any of the other dozen major languages used in most large MIS organizations.
The Company's Complete/2000 product already addresses fourteen of the
non-COBOL languages, and others can be added within eight to twelve weeks.
Examples of software vendors delivering automated or semi-automated assessment
tools include Viasoft, Inc., Micro Focus Group, P.L.C., and Platinum
Technologies, Inc. Vendors with automated or semi-automated renovation
products include Computer Associates International, Inc., Peritus Software and
Eleventh Hour Systems.
SERVICE SUPPLIERS
In both the migration and year 2000 renovation markets, service
organizations such as accounting firms and companies like BDM International,
EDS, IBM, Computer Horizons Corporation and Computer Task Group offer
conversion services. Automated conversion facilities provided by these
service organizations typically embrace between 25% and 80% of the source
code, with the balance of the conversion being performed manually, making
it subject to the inconsistency, high risk of error, high cost and delays
that accompany any manual conversion. Since these organizations are
principally in the business of supplying services, they tend to focus on
turnkey projects costing several millions of dollars which can, therefore,
support the high manpower costs involved.
Since the Company's software automates significantly more of the conversion
(95% to 100%) than can be achieved with other products, Forecross is able to
compete effectively with such service suppliers. The Company can price its
Factory Compile service offering (see "-Marketing and Sales Strategy") at or
below the prices quoted by the service suppliers because it can be presented
to the marketplace as the only solution which permits a significantly greater
degree of automation than is achievable otherwise, thereby reducing the
costs, time and risks of the project.
COMPETITIVE POSITION
It is possible that other software or services companies may attempt to
develop new proprietary conversion software or service offerings or to
enhance existing proprietary conversion software, or service offerings,
to compete directly in the Company's chosen market. There are, in addition,
certain other elements of risk which bear upon the Company's competitive
position (see "-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.
Because Forecross has been developing comprehensive automated migration
software since 1985, and, hence, has a proven base of technology and
experience in the field, the Company believes that it has a significant
competitive edge. The Company believes that its combination of a mature
proprietary architecture and broad-based automated migration experience
enables it to respond rapidly and effectively to newly emerging needs of
customers seeking to adapt to recent technology developments with minimum
risk and cost.
In addition, the Company believes that the large size of the potential
market for year 2000 solutions and the short and ever-decreasing amount of
time left in which to effect the solutions combine to mitigate the otherwise
negative effect of new competitors entering this market.
CORPORATE HISTORY AND EMPLOYEES
CORPORATE HISTORY
The Company was formed on January 1, 1987 by a merger pursuant to the
provisions of the California Corporations Code of two predecessor
corporations, Jonescast, Inc., and its wholly owned subsidiary, Genasys
Software Systems, Inc. (subsequently renamed Genasys Technologies, Inc., and
later changed to Forecross Corporation), each incorporated under the laws of
California in June, 1982. As a result of the merger, Forecross succeeded to
the business that had been carried on by the predecessor corporations since
1982. References in this Form 10 to Forecross Corporation, Forecross, or the
Company should be taken to include a reference to its predecessor companies.
EMPLOYEES
As of September 30, 1997, Forecross had 50 employees. Of these, eleven work
primarily in the Factory or on customer Factory Compile projects, nine are
engaged primarily in research and development work, five are in project
management, seven are in technical support, five are in quality assurance,
three are in sales and marketing and ten are in finance and administration.
All employees are required to enter into a Confidentiality and Proprietary
Rights Agreement which requires that they not disclose any confidential
information, restricts their right to engage or have an interest in competing
businesses, and requires them to promptly disclose to Forecross the
product of all work done by them while employed by, and for, the Company, and
to assign to the Company all rights in such work product.
BACKLOG
Backlog was $4,281,000 at September 30, 1997, including approximately
$615,000 to be performed after fiscal 1998, as compared to $1,709,000 at
September 30, 1996.
CERTAIN BUSINESS CONCERNS
UNPROFITABLE OPERATING HISTORY AND LIMITED FINANCIAL RESOURCES
The Company has not historically been profitable, and as of September 30,
1997, had suffered cumulative operating losses aggregating $5,469,679, and
at September 30, 1997, had a net capital deficiency and a net working capital
deficiency. These conditions raise substantial doubts about the ability of
the Company to continue as a going concern. During fiscal 1998, 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 and other fees from distributors desiring early
access to the Company's Complete/2000 product offerings. The Company
must continue to improve the efficiency of its operations to achieve and
maintain positive cash flow from operations and support the increased volume
of contracts (see "Management's Discussion and Analysis of Financial
Condition and Results of Operations: 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 the Company's needs, nor that the Company
will be able to achieve profitability on a consistent basis.
ADDITIONAL FINANCING
Forecross may require additional funds to continue product development and
marketing, and to continue the expansion of its administrative and managerial
staff. The Company may seek such additional financing through private
placements and public offerings, including equity financing, and through
collaborative arrangements with others. If adequate funds are not available
when required or on acceptable terms, the Company may be required to delay,
scale back or eliminate its product development activities and sales and
marketing efforts. If this were to become necessary, it would adversely
affect the Company's business, results of operations and prospects (see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations: Liquidity and Capital Resources").
VOLATILITY OF COMMON STOCK
The Company's stock price has been volatile since its initial public
offering on the Vancouver Stock Exchange in 1994. The Company believes that
factors such as awareness of the year 2000 problem, quarterly fluctuations in
the results of operations, announcements of new products by the Company or its
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 the Company's 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 the Company's stock may trade, any
shortfall in meeting such expectations may have a rapid and significant
adverse effect on the price of the Company's stock in the future.
Fluctuations in the Company's stock may in turn adversely affect the
Company's ability to attract and retain qualified personnel, and to gain
access to capital and financing if needed.
FLUCTUATION OF QUARTERLY RESULTS
The Company has experienced quarterly and other fluctuations in revenues and
operating results and expects these fluctuations to continue in the future.
The Company believes that these fluctuations have been attributable to the
timing, size and nature of the Company's contracts with its customers; the
performance of its distributors; the timing of the introduction of new
products or services by its competitors; changes in the Company's operating
expenses; personnel changes; and fluctuations in economic and financial
market conditions.
The timing, size and nature of the Company's contracts with its customers are
important factors in the Company's 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 the Company will be successful in closing such large
contracts on a timely basis or at all. As to the nature of the contracts,
most of the Company's migration contracts are for a fixed fee. The Company's
projects for year 2000 services are generally based upon a fixed price per
line of code assessed and/or renovated. Although the contracts contain
provisions allowing the Company to charge additional fees to its customers in
the event that unanticipated or `out of scope' work must be done, the Company
nevertheless bears the risk of cost overruns and inflation. A significant
percentage of the Company's 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. The
Company's operating results may be adversely affected by inaccurate estimates
of contract completion costs. The Company's expense levels are based, in
part, on its expectations as to future revenue and are fixed, to a large
extent, in the short term. As a result, the Company 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 the
Company's expectations would have an immediate and material adverse
effect on the Company's business.
Due to the foregoing factors, the Company believes that period-to-period
comparisons of its 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, the Company's operating
results will be below the expectations of public market analysts and
investors. In either case, the price of the Company's common stock could
be materially adversely affected (see "Management's Discussion and Analysis
of Financial Condition and Results of Operations").
COMPETITION
Forecross is 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
the Company's products. It is possible, however, that other software
developers and vendors may create such software directed at the Company's
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 the Company's products.
The Company does 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 the Company, and much greater general name recognition
(see " Business: Competition").
In the year 2000 renovation market, the Company is aware of various software
vendors whose products currently address COBOL, one of the languages
addressed by the Company's products. The Company is aware of far fewer
vendors who currently address any of the other major non-COBOL languages
addressed by the Company's year 2000 products. It is possible, however, that
these other software vendors, many of whom have substantially more resources
available to them than the Company, may develop other products to compete
with the non-COBOL products offered by the Company (see "Business:
Competition - Software Vendors").
There can be no assurance that the Company's migration and year 2000
products and services will compete effectively with those of its 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 financial condition of the Company (see "Business:
Competition").
DEPENDENCE ON A SMALL NUMBER OF CUSTOMERS
The Company's results of operations are attributable to a limited number of
orders, the average size of which exceeds $500,000. During the fiscal year
ended September 30, 1997, the Company's Distributors, treated as one
customer (19%), NCR Corporation (15%) and Aetna Life Insurance Company (11%)
represented forty-five percent (45%) of total revenues. During 1996, Bear
Stearns & Company, Inc. (20%), Humana Incorporated (14%), The New Brunswick
Telephone Co. (13%) and Aetna Life Insurance Company (10%) represented
fifty-seven percent (57%) of total revenues. During the year ended September
30, 1995, BDM International, Inc. (26%), Union Gas Limited (21%) and the City
of Chicago (10%) accounted for fifty-seven percent (57%) of total revenues.
The loss or deferral of one or more significant sale(s) or failure to
collect on a significant accounts receivable from any customer could cause
substantial fluctuations in the Company's results of operations (see Notes 2
and 3 of Notes to Financial Statements). While the Company believes that the
year 2000 market will offer it the opportunity to expand the number of
customers and projects in process at any given time, there can be no
assurance that it will be successful in its sales efforts or that a weakening
in customer demand would not have an immediate material adverse effect on the
Company.
MARKET SIZE
The market for Forecross migration products may be smaller than the Company
projects, 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 Forecross
expects (see "Business: Market"). If this should happen, it will have a
direct impact upon the rate of the Company's growth. Although the overall
market for renovation in the year 2000 renovation market is estimated to be
very large, the number of competing software products being offered and
developed, the number of service suppliers actively soliciting year 2000
projects and the limited time available in which to address the year 2000
problem may serve to limit the number of year 2000 renovation opportunities
that the Company is able to obtain.
NO ASSURANCE OF SUCCESS OF MARKETING STRATEGY
Forecross has, over the years, experimented with a variety of approaches to
the marketing of its products. The Company's current strategy for its
migration products and services is based on direct marketing which has been
in place for approximately five years. While present indications are that
the strategy is well-adapted to the market which has been targeted by
Forecross, 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 to communicate
clearly to potential customers the ability of the Company to complete
migration projects successfully, and this requires an understanding of both
the technology and the marketplace. For the year 2000 renovation market, the
Company's strategy has been developed over the past year. While the Company
has been able to sell several licenses to its Assess/2000 product, several
distributorships and several assessment and renovation projects, the
Company's experience in this market is too limited at the current time to
determine whether the strategy being pursued for this market will be
successful (see "Business: Marketing and Sales Strategy").
DEPENDENCE ON YEAR 2000 REVENUES
The growth in the Company's revenues in fiscal 1997 resulted in large part
from increased demand for Assess/2000 and Complete/2000 services and
licenses as awareness of the year 2000 problem has grown. Year 2000 services
and related revenue increased from 8% in fiscal 1996 to 44% of the Company's
total revenues in fiscal 1997. Should the demand for the Company's year 2000
solutions and products decline significantly as a result of new technologies,
competition or any other factors, the Company's professional services fees
and license revenues would be materially and adversely affected. The Company
anticipates that demand in the year 2000 market will decline, perhaps rapidly,
following the year 1999.
The Company has also experienced significant growth in its core migration
services. It is the Company's strategy to leverage customer relationships
nd knowledge of customer application systems derived from its year 2000
services solutions to continue to grow its 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 the Company be
unable to market other products and services as demand in the year 2000
market declines, whether as a result of competition, technological change or
other factors, the Company's business, results of operations and financial
condition will be materially and adversely affected.
LIABILITY EXPOSURE
The Company markets its products and services to customers for managing the
renovation of mission-critical computer software systems. As noted above in
Dependence on Year 2000 Revenues, a large and increasing portion of the
Company's business is devoted to addressing the year 2000 problem, which
affects the performance and reliability of many mission-critical systems.
The Company's agreements with its customers typically contain provisions
designed to limit the Company's exposure to potential product and service
liability claims. It is possible, however, that the limitation of liability
provisions contained in the Company's customer agreements may not be
effective as a result of existing or future federal, state, local or foreign
laws or ordinances or unfavorable judicial decisions. Although the Company
has not experienced any material product or service liability claims to date,
the sale and support of its products and services may entail the risk of such
claims, particularly in the year 2000 market, which could be substantial in
light of the use of its products and services in mission-critical
applications. A successful product or service liability claim brought
against the Company could have a material adverse effect upon the Company's
business, operating results and financial condition.
PRODUCT DEVELOPMENT
The development of complex, large-scale, multiple environment computer
software presents a difficult engineering challenge, and it is possible
that Forecross 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 the
Company. Because of the time constraints posed by the year 2000 market,
there is no assurance that the Company will be able to develop products in a
timely manner in order to obtain sufficient projects using those products.
LIMITED EXPERIENCE OF MANAGEMENT IN THE MANAGEMENT OF GROWTH
While the present management of the Company, having been its founders, have
been principally responsible for the growth of its 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
the Company believes that it will be able to recruit competent personnel with
the required skills, competition for such personnel is intense and there can
be no assurance that Forecross will be successful in finding, attracting and
retaining them. Failure to do so could have an adverse impact upon the
Company's business.
CONTROL BY DIRECTORS AND OFFICERS
The current directors and officers of the Company beneficially own
approximately 34% of the Common Shares outstanding. As a result, the current
directors and officers of the Company will continue to exercise control over
its affairs.
DEPENDENCE ON KEY PERSONNEL
The Company's progress to date has to a significant extent been dependent on
the skills of certain key personnel, including Kim O. Jones and Bernadette C.
Castello, the founders and principal shareholders and, respectively, the
President and Chief Executive Officer and the Senior Vice President and Chief
Financial Officer of the Company. The Company has 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 the Company's present key personnel, or an
inability to attract and retain needed additional personnel could have a
materially adverse effect upon the Company. In addition, the Company relies
on qualified, experienced subcontractors to support both its migration
services and year 2000 renovation work. The inability to find and retain
sufficient qualified subcontractors may adversely impact the Company's
operations.
INTELLECTUAL PROPERTY PROTECTION
While the Company believes that its 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 the Company's technology may
prove difficult, and the cost of, distraction, and time required for
litigation may impair or completely frustrate the Company's 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. The business of the Company 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. The time period during which companies may address
and correct their year 2000 issues is limited. Consequently, such companies
may feel an urgency to contract for assessment and renovation services with
other companies before the Company is able to address a sufficient portion of
the market through its direct marketing, distributors, and licensed service
providers. This could adversely affect the Company's ability to obtain year
2000 renovation projects.
ITEM 2. FINANCIAL INFORMATION
______ _____________________
SELECTED FINANCIAL DATA
The selected financial data set forth below with respect to the fiscal years
ended September 30, 1997, 1996 and 1995 and the balance sheet data at
September 30, 1997 and 1996 are derived from the audited financial statements
included elsewhere in this Form 10. The financial data for the years ended
September 30, 1994 and 1993 and the balance sheet data at September 30, 1994
and 1993 are derived from unaudited financial statements, and the balance
sheet data at September 30, 1995 are derived from audited financial
statements, not included in this Form 10. The unaudited financial statements
have been prepared on the same basis as the audited financial statements and,
in the opinion of management, include all adjustments (consisting only of
normal recurring adjustments) necessary to present fairly the information set
forth therein. The information set forth below should be read in conjunction
with the audited financial statements and notes included elsewhere in this
Form 10 and Management's Discussion and Analysis of Financial Condition and
Results of Operations included elsewhere herein.
YEAR ENDED SEPTEMBER 30,
_____________________________________________________________
1997 1996 1995 1994 1993
_________ _________ __________ __________ __________
Statement of Operations Data:
(Unaudited) (Unaudited)
<S)
Net revenues:
Services
and maintenance $4,930,456 $2,199,672 $1,445,009 $1,785,035 $670,700
Software licenses and distributorship
fees 1,038,330 200,000 10,071 - 157,350
Total net
revenues 5,968,786 2,399,672 1,455,080 1,785,035 828,050
Cost of revenues 4,006,323 1,431,489 738,986 983,298 387,735
Gross margin 1,962,463 968,183 716,094 801,737 440,315
Operating expenses:
Research and
development 1,006,768 253,743 358,133 628,023 747,640
Sales and
marketing 850,764 711,545 685,360 682,454 529,368
General and
administrative 887,039 332,500 446,031 704,302 532,298
Total operating
expenses 2,744,571 1,297,788 1,489,524 2,014,779 1,809,306
Loss from
operations (782,108) (329,605) (773,430) (1,213,042) (1,368,991)
Other income (expense),
net (68,855) (129,141) (37,720) (51,825) 16,826
Loss before provision
for income taxes (850,963) (458,746) (811,150) (1,264,867) (1,352,165)
Provision for income
taxes (800) (2,300) (31,616) (800) (800)
Net loss $(851,763 $(461,046) $(842,766) $(1,265,667) $(1,352,965)
Net loss per
share $ (0.07) $ (0.04) $ (0.08) $ (0.15) $ (0.25)
Shares used in computing
per share data 11,681,035 11,370,804 10,344,934 8,366,350 5,407,515
Balance Sheet Data:
Cash and cash
equivalents $275,243 $ 99,427 $ 14,474 $332,683 $ 48,640
Working capital
(deficit) (41,587) (1,077,531) (890,040) (437,183) (472,104)
Total assets 3,301,051 726,896 410,801 1,010,628 547,680
Deferred revenue,
long-term 1,432,317 - - - -
Long-term debt (net of current
portion) - 223,923 262,593 280,393 284,864
Shareholders'
deficit (802,164)(1,120,649) (999,092) (551,434) (575.946)
Dividends - - - - -
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following summary of the Company's material activities for the years
ended September 30, 1997, 1996 and 1995 is qualified by, and should be read
in conjunction with more detailed information along with the financial
statements and accompanying notes to the financial statements included at the
end of this Form 10. Each recipient of this Form 10 is urged to read this
Form 10 in its entirety.
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. Certain information included in this Form 10
contains statements that are forward-looking, such as statements relating to
plans for future activities. Such forward-looking information involves
important risks and uncertainties that could significantly affect results in
the future and, accordingly, such results may differ from those expressed in
any forward-looking statements made by or on behalf of the Company. These
risks and uncertainties include, but are not limited to, those relating to the
Company's growth strategy, customer concentration, outstanding indebtedness,
dependence on expansion and other activities of competitors, changes in
federal or state laws and the administration of such laws, protection of
trademarks and other proprietary rights and the general condition of the
economy and its effect on the securities markets. See "Certain Business
Concerns."
BACKGROUND AND OVERVIEW
From the commencement of operations of its predecessor companies in June
1982, the goal of Forecross has been to focus a small group of skilled
technicians on providing automated solutions to the specialized niche
requirements of the MIS departments of medium to large enterprise computing
organizations seeking to adapt their business applications software to a
changing technology, economic and business environment.
From 1982 through 1988, the Company developed and licensed specialized
migration software products to service providers and other software vendors
for delivery to the MIS marketplace. The Company's 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, Forecross 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,
Forecross continued to develop additional commercial migration software
products.
From 1992 through 1997, Forecross developed and implemented a strategy of
using internal sales and marketing resources instead of relying upon third
parties, and focused upon pursuing migration services contracts as compared
to the previous focus on development contracts. Major customers using
migration services have included Bank of Montreal, Bear Stearns & Company,
Kimberly-Clark Corporation, The New Brunswick Telephone Co. and Union Gas
Limited.
In addition to the migration services contracts, and in response to its
customers' growing year 2000 migration demands and using the technology it
had developed over the past fifteen years, during 1996 and 1997 the Company
introduced its Complete/2000 software products and related services and
methodologies. In June 1996, the Company authorized its first exclusive
distributorship and sold its 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. 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 period commencing with the date of
the respective signing of the agreements and ending on December 31, 1999.
Revenues for technical and sales training, maintenance and support are
recognized ratably over the term of the support period.
Forecross, like any other company, owns or uses computer software that may be
impacted by the year 2000 problem. During 1998, the Company will perform a
review of the software it is currently using in order to identify any systems
that need to be made year 2000-compliant. It is anticipated that this review
will include a survey of vendors of software or services to the Company to
ensure that their software will also year 2000-compliant. The Company
intends to ensure that all such software will be year 2000-compliant well in
advance of December 31, 1999. Management has not yet assessed the year 2000
compliance expense and related potential effect on the Company's operations,
although it does not believe that the expense or effect will be material.
RESULTS OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1997 COMPARED TO YEAR ENDED SEPTEMBER 30, 1996
Revenues for the year ended September 30, 1997 were $5,968,786 as compared to
$2,399,672 in 1996, an increase of 149%. This increase in revenues for the
year reflected several factors: first, the significant increase in its
migration services revenue ($3,326,172 in 1997 compared to $2,199,672 in 1996);
second, revenue from year 2000 assessment and renovation contracts and the
revenue recognized from Assess/2000 software licenses of $1,946,087 in 1997
as compared to $200,000 in 1996; and third, revenue recognized from exclusive
distributorship agreements of $696,527 in 1997 compared to no comparable
revenue in 1996. Backlog was $4,281,000 at September 30, 1997, including
approximately $615,000 to be performed after fiscal 1998, as compared to
$1,709,000 in 1996.
Gross margin was $1,962,463 and $968,183 in 1997 and 1996, respectively. The
gross margin percentage was 33% in 1997 and 40% in 1996. The gross margins
reflect the impact of both initial inefficiencies of additional personnel and
subcontractors hired during 1996 and 1997, and new methods of performing work
on both the migration services and year 2000 assessment and renovation projects,
which methods were introduced by the Company during 1996. While the methods
adopted for use at its main San Francisco facility were performing
substantially as planned during 1997, the Company did not realize the
efficiencies and cost savings anticipated for the off-site work performed
primarily by subcontractors on the migration services projects. As a result,
the Company is in the process of implementing some modifications to its
procedures for pricing, performing and controlling the migration services
projects in order to improve the gross margin on those projects.
During the three months ended September 30, 1997, the Company provided
reserves of $300,000 against revenues, primarily attributable to year 2000
projects in process during the fourth quarter. These reserves adversely impacted
the gross margin for the year ended September 30, 1997.
Research and development expenses increased to $1,006,768 in 1997 from
$253,743 in 1996, or 297% due to an increase in the number of personnel to
support the development activity associated with the Complete/2000 products,
enhancements to existing software products and the decreased use of some of
the research and development personnel on migration services contracts in 1997.
Sales and marketing expenses were $850,764 in 1997 as compared to $711,545 in
1996. The increase in 1997 was due primarily to commissions on the increased
sales, participation in trade shows and other costs associated with the
initial marketing of the Complete/2000 and Assess/2000 products and services.
General and administrative expenses were $887,039 and $332,500 in 1997 and
1996, respectively, reflecting additional personnel, increased use of legal,
audit, and other professional services, and increased insurance, telephone,
business and payroll taxes in 1997 to support the increased level of business
activity.
Net interest expense was $68,855 in 1997 as compared to $129,141 in 1996,
reflecting the decreased use in 1997 of short-term receivables financing to
meet its working capital needs, as well as the repayment of the Company's
interest bearing debt in March 1997.
The overall net loss for the year ended September 30, 1997 was $851,763 or
$0.07 per share compared with a loss of $461,046 or $0.04 per share for the
year ended September 30, 1996 (based on the weighted average number of shares
outstanding during the respective periods).
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, 1997 and 1996 (see
Notes 2 and 7 of Notes to Financial Statements).
YEAR ENDED SEPTEMBER 30, 1996 COMPARED TO YEAR ENDED SEPTEMBER 30, 1995
Revenues for the year ended September 30, 1996 were $2,399,672 as compared to
$1,455,080 in 1995, an increase of 65%. This increase in revenues for the
year reflected two factors: first, the increase in bookings, together with
the increased size of the contracts, both of which began in the fourth
quarter of fiscal 1995, continued through 1996; second, in 1996 the Company
recognized $200,000 of revenue associated with the initial distributorship of
its Complete/2000 product. Backlog was $1,709,000 at September 30, 1996 as
compared to $1,107,000 in 1995.
Gross margin was $968,183 and $716,094 in 1996 and 1995, respectively. The
gross margin percentage was 40% in 1996 and 49% in 1995, reflecting the
initial inefficiencies incurred in hiring additional personnel and new
sub-contractors, and establishing a new method of performing the work on the
increased volume of contracts.
For the year, operating expenses decreased by $191,736 or 13% ($1,297,788 in
1996 compared to $1,489,524 in 1995). Research and development expenses
decreased to $253,743 in 1996 from $358,133 in 1995, or 29% due to a decrease
in the level of development activity and the increased use of some of the
research and development personnel on migration services contracts in the
first half of 1996. Sales and marketing expenses increased by 4% ($711,545 in
1996 compared to $685,360) as commissions on the increased sales, and trade
show and other costs associated with the Complete/2000 product offset savings
achieved from a reduced headcount in 1996. General and administrative
expenses were $332,500 and $446,031 in 1996 and 1995, respectively reflecting
overall cost reduction efforts implemented during the second half of 1995.
Net interest expense was $129,141 in 1996 as compared to $37,720 in 1995,
reflecting the use in 1996 of short-term receivables financing and increased
use of shareholder loans to meet its working capital needs.
The overall net loss for the year ended September 30, 1996 was $461,046 or
$0.04 per share compared with a loss of $842,766 or $0.08 per share for the
year ended September 30, 1995 reflecting the increased revenue in 1996.
LIQUIDITY AND CAPITAL RESOURCES
Through September 30, 1997, the Company had sustained recurring losses from
operations and, at September 30, 1997, had a net working capital deficiency
and a working capital deficiency. These conditions raise substantial doubts
about the ability of the Company to continue as a going concern (see Note 1
of Notes to Financial).
Operations for the year ended September 30, 1997 were funded through cash
derived from short-term receivables financing, the sale of common stock, the
sale of software licenses for Assess/2000 and funds associated with
distributor agreements.
Cash received from the sale of common stock and warrants amounted to
$1,162,275, $328,422, and $362,010 in the years ended September 30, 1997,
1996 and 1995, respectively.
In October 1995, the Company entered into a factoring agreement with a
financial organization whereby the Company is able to obtain financing by
borrowing against its accounts receivable. At September 30, 1997, there was
no outstanding indebtedness under the agreement. The agreement may be
terminated by either the factor or the Company at any time.
The Company has relied periodically upon shareholder loans to fund
operations. These shareholder loans were repaid in full as of March 31,
1997.
In January 1997, the Company received a payment of $800,000 from Gardner
Solution 2000, L.L.C., under the terms of a Complete/2000 solution exclusive
distributorship agreement announced July 2, 1996.
In March 1997, the Company received payments of $1,746,875, and in June 1997
received payments of $1,350,000, for the sale of software licenses for
Assess/2000, new exclusive distributor agreements, and software maintenance
agreements for Assess/2000.
From the various sources of proceeds described above, together with the
increased revenues, the Company was able to repay all of its outstanding
interest bearing debt as of September 30, 1997, pay certain other
liabilities, and fund the capital expenditures required to support the
increased level of operations. During fiscal 1998, the Company expects to
meet its working capital and other cash with cash derived from its
operations, short-term receivables and other financing as required, and
software license and other fees from distributors desiring early access to
the Company's Complete/2000 product offerings. In addition, the Company must
continue to improve the efficiency of its operations to achieve and maintain
positive cash flow from operations and support the increased volume of
contracts.
There can be no assurance, however, that cash from operations and the other
sources described above will be achieved or will be sufficient for the
Company's needs, and, accordingly, the Company will continue to evaluate
additional means of financing, including debt or equity financing, to satisfy
its working capital and other cash requirements.
RECENT ACCOUNTING PRONOUNCEMENTS
During 1997, the Financial Accounting Standards Board released SFAS No. 130,
Reporting Comprehensive Income, and SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information, both of which are effective for a
fiscal year beginning after December 15, 1997. The Company believes that
these pronouncements will not have a material effect upon the financial
condition or results of operations of the Company (see Note 2 of Notes to
Financial Statements).
In 1997, the American Institute of Certified Public Accountants released
Statement of Position (SOP) 97-2, effective for fiscal years beginning after
December 15, 1997, which provides revised guidance for recognizing revenue on
certain software transactions. The Company has not yet evaluated the
effect, if any, that the new guidance will have on future operating results
and financial position (see Note 2 of Notes to Financial Statements).
ITEM 3. PROPERTIES
______ __________
The Company's principal executive offices are located at 90 New Montgomery
Street, San Francisco, California 94105, where it occupies approximately
6,200 square feet of leased space under a lease which expires in February
2002. In addition, the Company occupies approximately 900 square feet of
leased space in the same building under a lease which expires in May, 1998.
Annual base rent under the lease is approximately $150,000. The Company also
maintains a small sales office in San Diego, California. In November 1997,
the Company signed an agreement to occupy an additional 4,000 square feet of
leased space in its current location for a three-year period. It anticipates
occupying the additional space by April 1, 1998. Annual base rent for the
expansion space is approximately $143,000 per year.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANANGEMENT
______ _______________________________________________________________
The following table sets forth certain information regarding the beneficial
ownership of the Company's outstanding shares of Common Stock as of December 31,
1997 by (i) each person known to the Company beneficially to own 5% or more
of the shares of its Common Stock, (ii) each of the Company's directors,
(iii) each of the Company's executive officers named in the Summary
Compensation Table below, and (iv) all directors and officers as a group.
Except as indicated in the footnotes to this table, the persons named in the
table have sole voting and investment power with respect to all shares of
Common Stock shown as beneficially owned by them, subject to community
property laws where applicable.
Name of Owner Number of Shares
Percent of Class
Beneficially Owned Beneficially Owned
_____________ __________________ __________________
Kim O. Jones (1) 2,219,944 18.1%
Bernadette C. Castello (2) 2,223,944 18.2%
Richard L. Currier, Jr. (3) 5,000 0.0%
All directors and executive officers
as a group (3 persons) (4) 4,448,888 36.3%
(1) Includes 250,000 shares subject to stock option which is
exercisable as of December 31, 1997.
(2) Includes 250,000 shares subject to stock option which is
exercisable as of December 31, 1997.
(3) Includes 5,000 shares subject to stock option which is exercisable as of
December 31, 1997. Mr. Currier's business address is P.O. Box 770-369, Park
City, Utah 84060.
(4) Includes 505,000 shares subject to stock options which are
exercisable as of December 31, 1997.
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS
______ ________________________________
The directors, executive officers and key employees of the Company are as
follows:
Name Age Position
Kim O. Jones 53 Chief Executive Officer,
President and Director
Bernadette C. Castello 43 Senior Vice President,
Chief Financial Officer
and Director
Richard L. Currier, Jr. (1) 52 Director
Ronald Herbst 55 Director of Customer Care
Carl H. Johnson 52 Director of Project Management
Charles T. Nelson 51 Director of Software Products
Kenneth J. Paris 50 Senior Database Specialist
Peggy A. Payne 48 Director of Migration Services
(1) Denotes member of audit committee.
Kim O. Jones (53) founded Forecross together with Bernadette C. Castello in 1982
and has been in his present position since that time. Mr. Jones is the chief
architect of the Company's products. He has been active as a software
industry entrepreneur and industry participant since 1971. Prior to the
establishment of Forecross, Mr. Jones served from 1980 to 1982 as a Director
and Vice President of Computer Systems Design, Inc., of San Francisco,
California, in charge of software product development and marketing. In 1970
Mr. Jones co-founded Genasys Systems, Inc., a software and services firm
based in San Francisco, California, for which he worked initially as Chief
Technology Officer and, later, as President until 1980. From 1967 to 1970, he
was a Vice President of Liberty National Bank of San Francisco, California,
responsible for data processing. Mr. Jones was a member of the Board of
Directors of the American Software Association, a division of the Information
Technology Association of America.
Bernadette C. Castello (43) co-founded Forecross with Kim Jones in 1982 and
has been in her present postion since that time. Ms. Castello manages the
day to day operations of the Company. From 1973 to 1977, Ms. Castello worked
for KPMG Peat Marwick in New York, designing and managing the installation
and use of some of the earliest automated applications in that firm.
Thereafter, until 1980, she worked as an analyst in Peat Marwick's computer
resources department. From 1980 to 1982, when she left to found Forecross
with Mr. Jones, Ms. Castello was a Senior Consultant at Computer Systems
Design, Inc. in San Francisco, developing applications for the financial and
manufacturing industries.
RICHARD L. CURRIER, JR. (52) is the Chairman of Strategic Marketing, an
independent software marketing consulting firm based in Park City, Utah, which
supplies strategic sales and marketing consulting services to the software
industry. Mr. Currier has over 20 years of senior management experience in
the software industry, including positions as Chairman of Panoramic Inc., of
San Jose, California, and President of Walker Interactive Systems of San
Francisco. Mr. Currier's technical background includes service as Director of
Data Communications Software Development for Project Apollo of the National
Aeronautics and Space Administration, and as a consultant to the Departments of
Defense and Agriculture and the Executive Offices of the President of the
United States. Originally engaged as a consultant to provide advice on sales
and marketing strategies, Mr. Currier became a director of Forecross on
October 1, 1993. He does not provide consulting services to any direct or
indirect competitor of the Company.
RONALD HERBST (55) joined the Company in December 1995 as Director of Project
Management and currently serves as Director of Customer Care. From November
1993 through December 1995, Mr. Herbst was an independent software consultant
providing such services as conceptual and detailed system design and
implementation and system programming. From August 1993 through October 1993,
Mr. Herbst was Vice President, Research and Development for Dynamic Bytes,
Inc. From July 1989 through July 1993, Mr. Herbst served as Vice President,
Windsor Technologies, Inc. Mr. Herbst has over twenty years of senior
management experience serving the information technology industry.
CARL H. JOHNSON (52) joined the Company in March 1997 as Director of Project
Management. From 1993 to 1997, Mr. Johnson was Director, General Accounts for
Affiliated Computer Services, Inc. From 1988 to 1993, Mr. Johnson was Manager,
Corporate Applications for Amdahl Corporation. Mr. Johnson has over twenty
years of senior management experience serving the information technology
industry.
CHARLES T. NELSON (51) joined Forecross in December 1991 and has served in a
variety of technical and research and development capacities. In June 1996,
Mr. Nelson was named Director of Software Products. Prior to joining
Forecross, Mr. Nelson had over twenty years' experience managing and
supervising software and hardware technical support activities for several
large corporations.
KENNETH J. PARIS (50), Senior Database Specialist, was with the Company
from 1989 through March 1996, and rejoined the Company in October 1996. From
March 1996 through September 1996, Mr. Paris served as an independent
software consultant to various companies, including Forecross. Prior to
joining Forecross in 1989, Mr. Paris spent eleven years with KPMG Peat
Marwick, both as Database Administrator and as director of database research
and development for the consulting department of KPMG Peat Marwick's National
Technology Center. From 1985 to 1986 Mr. Paris served as Director of Product
Development at Pansophic Systems, Inc. of Oak Brook, Illinois. He was also
for six years a member of the database committee of the American National
Standards Institute (ANSI) which developed the SQL standard. Mr. Paris was
the initial Conference Chairman and then President of the International DB2
Users Group.
PEGGY A. PAYNE (48) joined Forecross in May 1996 as Director of Migration
Services. From February 1993 through May 1996, Ms. Payne was Director of
Information Management and Technology for Revo Corporation. From July 1988 to
February 1993, Ms. Payne was manager, information systems for Westinghouse
Security Electronics. Ms. Payne has over twenty years of technical experience
and has served in various capacities for technical organizations including
Association of Corporate Computing Professionals, Bay Area MAPICS Users Group,
and Information Technology Executives Association.
ITEM 6. EXECUTIVE COMPENSATION
______ ______________________
The following table sets forth the amount of all compensation paid by the
Company during each of 1997, 1996 and 1995 to the person serving as the
Company's Chief Executive Officer, and to the Company's most highly
compensated executive officer, other than the Chief Executive Officer,
whose compensation exceeded $100,000 during any such year (the "Named
Executive Officers").
Annual Compensation Long-Term
Compensation
Name and Principal
Position Year Salary Bonus Securities All Other
Underlying Compensation
Option(#)(1)(2)
______________ ____ ________ _______ _______________ ____________
Kim O. Jones 1997 $156,511 $51,320 None None
Chief Executive
Officer 1996 129,515 None 250,000 None
1995 127,400 None None None
Bernadette C.
Castello 1997 $156,511 $56,970 None None
Senior Vice
President 1996 129,515 None 250,000 None
1995 127,400 None None None
(1) The stock options granted to the named officers are fully vested. The
options are exercisable at $1.43 per share and expire five years from the date
of grant.
(2) There are no other long-term incentive compensation plans which require
disclosure.
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, 1997.
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, 1997 as well as the fiscal year end value of unexercised
options for each such person:
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options at
Options at 1997 Year End 1997 Year End
Name Shares Acquired Value
on Exercise Received Exercisable Unexercisable Exercisable Unexer-
cisable
_____ _______________ ________ ___________ _____________ ___________ _________
Kim O.
Jones 0 0 250,000 0 $4,330,000 0
Bernadette C.
Castello 0 0 250,000 0 $4,330,000 0
DIRECTOR COMPENSATION
Directors receive no compensation for service on the Board of Directors. Mr.
Currier is paid a retainer of $817 per month for consulting services in
connection with the Company's marketing strategy. Mr. Currier is reimbursed
for reasonable out-of-pocket expenses incurred in connection with the
attendance of Board meetings. Non-employee directors are entitled to
participate in the Company's 1994 Stock Option Plan. During the year ended
September 30, 1996, Mr. Currier received a stock option grant for 5,000
shares at $4.75 per share. During the year ended September 30, 1997, no
options were granted to non-employee directors.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
_______ ______________________________________________
As of September 30, 1997 the Company had the following notes receivable
from its officers:
Note receivable from Kim O. Jones, Chief Executive Officer, of $65,429,
with interest at 10%, due December 31, 1997. This represents the
balance due from amounts advanced at various times between 1987 and 1993
principally to assist in the purchase of a principal residence by Mr.
Jones. Accrued interest receivable amounted to $24,536 at September 30,
1997. The note receivable and accrued interest receivable were paid in
full on December 31, 1997.
In July 1997, the Company loaned Kim O. Jones, Chief Executive Officer,
$35,000 in exchange for a note receivable bearing interest at 6.07% and
due in July 1998. The note receivable and accrued interest receivable
were paid in full in September 1997.
Note receivable from Bernadette C. Castello, Senior Vice President, of
$16,429, with interest at 10%, due December 31, 1997. This represents the
balance due from amounts advanced at various times between 1987 and 1993
principally to assist in the purchase of a principal residence by Ms.
Castello. Accrued interest receivable amounted to $6,161 at September 30,
1997. The note receivable and accrued interest receivable were paid in full
on December 15, 1997.
At September 30, 1997, travel advances of $37,013 to Bernadette C. Castello,
Senior Vice President, were converted to a note receivable with interest at
5.7%, due in September, 1999.
As of September 30, 1996, the Company had several notes payable to Kim O.
Jones, Chief Executive Officer, totaling $6,800 plus $2,328 of accrued
interest. The notes bear interest at 12% and had various maturities through
November 19, 1994. The notes and accrued interest were repaid in full in
June, 1997.
At various times the Company has borrowed funds from Lawrence J. Schoenberg
and Associates ("Schoenberg"), an associate of Lawrence J. Schoenberg, a
former director of the Company. As of September 30, 1996, the Company had an
uncollateralized note payable to Schoenberg of $240,000, with interest at
14%. Beginning in 1995, principal and interest payments of varying amounts
were due semiannually through October 1998. Through September 30, 1996, the
Company had made no principal or interest payments on this note. The Company
also had at September 30, 1996 an uncollateralized note payable to Schoenberg
of $20,000, with interest at 24% and principal and interest originally due
April 29, 1995. During 1996, the Company paid $25,000 against this note. As
of September 30, 1996, accrued but unpaid interest on these two notes
amounted to $188,023. As of March 31, 1997, the Company paid in full the
outstanding principal and accumulated interest on both notes described above.
In connection with the Company's initial public offering in British Columbia,
Canada, a total of 285,115 of the previously issued and outstanding shares
of common stock were placed in escrow pursuant to escrow agreements dated
April 8, 1994 between the Company, the trustee and certain shareholders of
the Company. All such shares were released from escrow by the Vancouver
Stock Exchange during the year ended September 30, 1997.
ITEM 8. LEGAL PROCEEDINGS
_______ _________________
None.
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY
_______ ___________________________________________________________________
AND RELATED STOCKHOLDER MATTERS
_______________________________
As of December 31, 1997, the Company had issued and outstanding 11,763,612
shares of Common Stock held by 60 shareholders. The Company's Common Stock
is traded on the Vancouver Stock Exchange under the symbol FRX.U. Listed
below are the high and low bid prices (U.S. dollars) for the Company's Common
Stock for the periods indicated.
Three Months Ended High Low
__________________ ____ ____
09/30/97 $ 20.00 $ 11.65
06/30/97 25.00 13.05
03/31/97 16.95 6.00
12/31/96 7.00 3.00
09/30/96 $ 6.87 $ 3.15
06/30/96 9.75 1.19
03/31/96 1.80 0.58
12/31/95 1.38 0.80
The Company has not paid any dividends to date and does not anticipate that
any cash dividends will be declared in the foreseeable future.
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES
________ _______________________________________
The following table sets forth information regarding issuances of Common Stock
by the Company during the three years ended September 30, 1997.
Number of Shares Gross Proceeds ($U.S.) Nature of Consideration
________________ __________________ _______________________
735,000 $ 294,000 Cash(1)
62,553 29,400 Services(2)
183,750 73,500 Cash(3)
551,250 330,751 Cash(4)
282,000 1,128,000 Cash(5)
14,000 39,550 Cash(6)
12,000 48,000 Cash(7)
1. In May 1995, these shares were sold in a private placement. The Company
incurred $34,890 of costs related to this sale.
2. These shares were issued in lieu of cash for services associated with the
private placement in May 1995. The $29,400 value of the services is included
in the total cost of $34,890 incurred in connection with the private placement.
3. These shares were issued in August 1995 upon the exercise of warrants
issued in connection with the private placement of 735,000 common shares
in May 1995.
4. These shares were issued in November 1995 upon the exercise of warrants
issued in connection with the private placement of 735,000 common shares in
May 1995.
5. These shares were issued in connection with a private placement completed
in December 1996 of Units consisting of one share of Common Stock and one
non-transferable share purchase warrant to purchase an additional share of
Common Stock for a period of two years from the date of issuance at an
exercise price of $4.00 per share in the first year and $4.60 per share in
the second year. The Company incurred $5,275 of costs related to this sale.
6. These shares were issued during the fiscal year ended September 30, 1997
upon the exercise of stock options for 12,500 shares at $2.00 per share, and,
1,500 shares at $9.70 per share.
7. 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.
The Company has issued shares of its Common Stock to certain employees
(including officers) pursuant to compensation benefit plans of the Company.
The transactions described in this paragraph were exempt from the registration
requirements of the Securities Act based upon Rule 701 promulgated thereunder.
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED
________ _______________________________________________________
The Company's authorized capital stock consists of 20,000,000 shares of
Common Stock, of which 11,763,612 were issued and outstanding as of December
31, 1997. The holders of the Common Stock are entitled to vote at all
meetings of shareholders, to receive dividends, if, as and when declared by
the directors, and to participate ratably in any distribution of property or
assets on the liquidation, winding up or other dissolution of the Company.
The shares of Common Stock have no preemptive or conversion rights.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar in Canada for the Common Stock is The
Montreal Trust Company, British Columbia, Canada, which will continue to
provide such services as long as the Company's Common Stock is listed for
trading on the Vancouver Stock Exchange. The Company is currently reviewing
possible candidates to serve as the Transfer Agent and Registrar in the
United States for the Common Stock.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS
________ _________________________________________
The Company's Articles of Incorporation limit, to the maximum extent
permitted by the California General Corporation Law ("California Law"), the
personal liability of directors for monetary damages for breach of their
fiduciary duties as directors. The Company's Bylaws provide that the Company
shall indemnify its directors and officers and may indemnify its employees
and other agents to the fullest extent permitted by law.
California Law does not permit a corporation to eliminate a director's duty
of care, and the indemnification provisions contained in the Company's
Articles of Incorporation have no effect on the availability of equitable
remedies, such as injunction or rescission, for a director's breach of the
duty of care.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent of the Company which may give rise to
liability for the Company to provide indemnification, and the Company is not
aware of any threatened litigation or proceeding that may result in a claim
for such indemnification.
ITEM 13. FINANCIAL STATEMENT AND SUPPLEMENTARY DATA
________ __________________________________________
The financial statements required by this item are set forth on pages F-1
through F-16 hereof.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
_______ _______________________________________________________________
FINANCIAL DISCLOSURE
____________________
On July 2, 1997, the Company received the resignation of its independent
auditor, Coopers & Lybrand, L.L.P. ("Coopers & Lybrand"). Prior to receipt of
the resignation, the decision to change auditors was not discussed,
recommended or approved by any committee of the Board of Directors or by the
Board of Directors. By resolution dated September 10, 1997, the Board of
Directors of the Company appointed BDO Seidman, L.L.P. ("BDO Seidman") as the
new independent auditor of the Company, effective September 10, 1997.
There have been no reservations in the auditor's reports of Coopers & Lybrand
for the last two fiscal years reported on by Coopers & Lybrand ended
September 30, 1996 and 1995. The auditor's reports of Coopers & Lybrand as
of and for the years ended September 30, 1996 and 1995 were modified to
reflect their conclusion that an uncertainty existed at those dates about the
Company's ability to continue as a going concern.
There were no disagreements of any kind with Coopers & Lybrand during the
two fiscal years reported on by Coopers & Lybrand ended September 30, 1996
and 1995.
Subsequent to the release of the Company's unaudited financial statements for
the quarter and six months ended March 31, 1997, Coopers & Lybrand advised
the Company that Coopers & Lybrand disagreed with the Company's accounting
for two specific transactions entered into in March 1997. Both transactions
involved the licensing of software and the granting of certain exclusive
marketing rights to two of the Company's distributors. It was the view of
Coopers & Lybrand that the Company did not have sufficient information to
support the allocation and recognition of revenue between the software
licenses and the exclusive marketing rights because the Company had never
sold these two elements separately. The Company believed that its reporting
was appropriate and consistent with advice, but Coopers & Lybrand continued
to disagree.
Subsequent to the resignation of Coopers & Lybrand, BDO Seidman was retained
to advise the Company on a recommended method of accounting for the two
transactions in question as well as a subsequent similar transaction. BDO
Seidman has recommended a method of accounting whereby the total dollar
amount of the software license and distributor agreements will be amortized
over periods commencing with the dates of their respective signing and ending
December 31, 1999. The Company accepted this recommendation and accordingly
restated its interim financial statements for the period ended March 31,
1997. The Company has authorized Coopers & Lybrand to fully respond to any
inquiries of BDO Seidman concerning the disagreement.
The Company has never been advised by Coopers & Lybrand that: (1) it does not
have the internal controls necessary for the development of reliable
financial statements; or (2) any information came to the attention of Coopers
& Lybrand that led it to conclude that it could no longer rely on
management's representations, or made it unwilling to be associated with
financial statements prepared by management; or (3) there was any need to
increase the scope of its audits.
The Company has been advised by Coopers & Lybrand that except for the
disagreement regarding the two specific transactions described above, nothing
has come to the attention of Coopers & Lybrand that in its opinion materially
impacts the fairness of previously audited financial statements for the
fiscal years ended September 30, 1996 and 1995.
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS
________ _________________________________
(a) Financial Statements
1. Financial Statements. The following Financial Statements of Forecross
Corporation, and the Report of Independent Public Accountants are included at
pages F-1 through F-15 of this Registration Statement.
DESCRIPRIPTION PAGE NO.
___________ ________
Report of BDO Seidman, LLP, F-1
Independent Accountants
Balance Sheets as of September 30, 1997 and 1996 F-2
Statements of Operations for each of the Three Years
in the Period Ended September 30, 1997 F-3
Statements of Shareholders' Equity (Deficit) for each of the
Three Years in the Period Ended September 30, 1997 F-4
Statements of Cash Flows for each of the Three Years
in the Period Ended September 30, 1997 F-5
Notes to Financial Statements F-6 through F-16
2. Financial Statement Schedule. The following financial statement schedule
of Forecross Corporation for each of the three years ended September 30, 1997
is filed as part of this Form 10 and should be read in conjunction with the
Financial Statements of Forecross Corporation.
II. Valuation and Qualifying Accounts S-1
(b) Index and Description of Exhibits
Exhibit No. Description
3.1 Articles of Incorporation
3.2 By-Laws
10.1 Lease Agreement, dated January 20, 1997
between the Company and Northwest Asset Mgmt.
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 Form of Exclusive Distributor Agreement between the
Company and Gardner Solution 2000, L.L.C., and Form
of amendment
10.6 Form of Exclusive Distributor Agreement, between the
Company and Y2K Solutions, L.P., CY2K Solutions,
L.L.C. and PY2K Solutions, L.L.C.
10.7 Form of Software License Agreement between the Company
and Licensees of Assess/2000
10.8 Form of Factoring Agreement 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
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 Selected 1997 Financial Data Schedule
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the registrant has duly caused this Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized.
Registrant
FORECROSS
CORPORATION
January 28, 1998 BY: s/Kim O. Jones
____________________________
Kim O. Jones
President and Chief Executive Officer
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, 1997 and 1996, and the related statements of operations,
shareholders' deficit and cash flows for each of the three years in the
period ended September 30, 1997. 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. 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. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to the above present fairly,
in all material respects, the financial position of Forecross Corporation at
September 30, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended September 30, 1997 in
conformity with generally accepted accounting principles.
he 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, 1997. 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
San Francisco, California
December 12, 1997
FORECROSS CORPORATION
BALANCE SHEETS
SEPTEMBER 30,
__________________________________
1997 1996
________________ _______________
ASSETS
Current assets:
Cash $ 275,243 $ 99,427
Accounts receivable, including unbilled
receivables of $1,754,691 and $122,370,
net of allowance for
of $300,340 and$340, respectively (Note 3) 2,112,982 392,805
Current portion of notes receivable from
officers (Note 4) 112,504 -
Other current assets 128,582 53,859
________________ ______________
Total current assets 2,629,311 546,091
Equipment and furniture, net (Notes 2, 4 and 5) 540,804 79,601
Notes receivable from officers, net, less current
portion (Note 4) 37,013 95,241
Notes receivable from others 63,150 -
Other assets 30,773 5,963
________________ ______________
Total assets $3,301,051 $726,896
================ ==============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 452,651 $ 475,633
Accrued compensation and related benefits
(Notes 11 and 14) 152,421 338,722
Accrued liabilities 89,518 46,081
Accrued commissions and distributors' fees (Note 4) 639,138 32,252
Deferred compensation - 156,834
Payable to factor (Note 6) - 120,000
Accrued warranty costs 96,589 66,547
Current portion of notes payable to related parties
(Note 4) - 224,100
Notes payable-Other - 10,000
Deferred revenue (Notes 2 and 4) 1,240,581 153,453
________________ ____________
Total current liabilities 2,670,898 1,623,622
Deferred revenue, less current portion
(Notes 2 and 4) 1,432,317 -
Notes payable to related parties, less current
portion (Note 4) - 223,923
________________ ____________
Total liabilities 4,103,215 1,847,545
________________ ____________
Commitments and contingencies (Notes 2 and 12) - -
Shareholders' deficit (Notes 8, 9 and 10):
Common stock, no par value; authorized 20,000,000
shares; issued and outstanding 11,751,612 and
11,455,612, respectively 4,667,515 3,505,240
Notes receivable from shareholders (Note 9) - (7,973)
Accumulated deficit (5,469,679) (4,617,916)
________________ ____________
Total shareholders' deficit (802,164) (1,120,649)
________________ ____________
Total liabilities and shareholders' deficit$ 3,301,051 $ 726,896
================ ============
FORECROSS CORPORATION
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30,
___________________________________________
1997 1996 1995
___________ ___________ ____________
Net revenues (Notes 2, 3 and 4):
Services and maintenance $ 4,930,456 $ 2,199,672 $ 1,445,009
Software licenses and
distributorship fees 1,038,330 200,000 10,071
___________ ___________ ____________
Total net revenues 5,968,786 2,399,672 1,455,080
Cost of revenues (Notes 2 and 4) 4,006,323 1,431,489 738,986
___________ ___________ ____________
Gross margin 1,962,463 968,183 716,094
___________ ___________ ____________
Operating expenses:
Research and development 1,006,768 253,743 358,133
Sales and marketing 850,764 711,545 685,360
General and administrative 887,039 332,500 446,031
___________ ___________ ____________
Total operating expenses 2,744,571 1,297,788 1,489,524
___________ ___________ ____________
Loss from operations (782,108) (329,605) (773,430)
Interest expense, net (68,855) (129,141) (37,720)
___________ ___________ ____________
Loss before provision for income taxes (850,963) (458,746) (811,150)
Provision for income taxes (Note 7) (800) (2,300) (31,616)
___________ ___________ ____________
Net loss $ (851,763) $ (461,046) $ (842,766)
=========== =========== ============
Net loss per share $ (0.07) $ (0.04) $ (0.08)
=========== =========== ============
Shares used in computing per share
data 11,681,035 11,370,804 10,344,934
============ =========== ============
FORECROSS CORPORATION
STATEMENTS OF SHAREHOLDERS' DEFICIT
Notes Receivable
Common Stock from Accumulated Total
Shares Amount Shareholders Deficit
Deficit
_______________________ _________ ___________ _________
Balances at
October 1, 1994 10,035,143 $2,879,600 $(116,930) $(3,314,104) $(551,434)
Issuance of common
stock for cash, net
of stock issuance
costs of $34,890
(Note 8) 735,000 259,110 - - 259,110
Issuance of common
stock for services
(Note 8) 62,553 29,400 - - 29,400
Issuance of common
stock upon exercise
of warrants (Note 8) 183,750 73,500 - - 73,500
Repurchase of shares
(Note 9) (112,084) (64,792) 64,792 - -
Payments received from
shareholders (Note 9) - - 33,098 - 33,098
Net loss - - - (842,766) (842,766)
__________ __________ _______ __________ _________
Balances at
September 30, 1995 10,904,362 3,176,818 (19,040) (4,156,870) (999,092)
Issuance of common
stock upon exercise
of warrants, net of
stock issuance costs
of $2,328 (Note 8) 551,250 328,422 - - 328,422
Payments received from
shareholders (Note 9) - - 11,067 - 11,067
Net loss - - - (461,046) (461,046)
__________ _________ _______ _________ ___________
Balances at
September 30, 1996 11,455,612 3,505,240 (7,973) (4,617,916)(1,120,649)
Issuance of common
stock for cash, net
of stock issuance
costs of $5,275
(Note 8) 282,000 1,122,725 - - 1,122,725
Issuance of common
stock upon exercise
of options (Note 10) 14,000 39,550 - - 39,550
Payments received from
shareholders (Note 9) - - 7,973 - 7,973
Net loss - - - (851,763) (851,763)
__________ __________ _________ __________ ________
Balances at
September 30, 1997 11,751,612 $4,667,515 $ - $(5,469,679) $(802,164)
========== ========== ======== ========= ========
FORECROSS CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30,
__________________________________________
1997 1996 1995
__________ _________ _________
Increase (decrease) in cash resulting from:
Cash flows from operating activities:
Net loss $ (851,763) $(461,046) $(842,766)
Adjustments to reconcile net loss
to net cash provided by (used in)
operating activities-
Provision for uncollectible amounts 300,000 (3,160) 3,500
Gain from forgiveness of notes payable - - (6,500)
Depreciation and amortization 115,873 53,918 35,453
Changes in operating assets and
liabilities-
Accounts receivable (2,020,177) (199,067) 274,886
Other assets and accrued interest on
notes receivable from officers (148,552) (9,021) (16,740)
Accounts payable and accrued
liabilities 471,082 233,974 (113,410)
Deferred compensation (156,834) - (9,997)
Deferred revenue 2,519,445 128,678 (43,897)
_________ ________ _________
Net cash provided by (used in) operating
activities 229,074 (255,724) (719,471)
_________ ________ _________
Cash used in investing activities:
Purchase of equipment and furniture (577,076) (73,812) (15,482)
Loans to officers (35,000) - -
Payments received on loans to
officers 35,000 - -
Loans to key employees (62,057) - -
Payments received on loans to key
employees 450 - -
_________ ________ _________
Net cash used in investing
activities (638,683) (73,812) (15,482)
_________ ________ _________
Cash flows from financing activities:
Proceeds from factoring of accounts
receivable 785,200 830,400 -
Repayment of borrowings under factoring
arrangement (905,200) (710,400) -
Borrowings under notes payable - - 185,000
Repayment of borrowings under notes
payable (458,023) (45,000) (163,364)
Repayment of borrowings under notes
payable-officers (6,800) - -
Net proceeds from issuance of common
shares 1,162,275 328,422 362,010
Payments received from shareholders 7,973 11,067 33,098
__________ _______ _______
Net cash provided by financing
activities 585,425 414,489 416,744
__________ _______ _______
Net increase (decrease) in cash 175,816 84,953 (318,209)
Cash at beginning of year 99,427 14,474 332,683
__________ _______ _______
Cash at end of year $ 275,243 $ 99,427 $ 14,474
========== ======== =======
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 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 and
methodologies, which address the year 2000 problem. The year 2000 problem
exists because many existing computer programs use only two digits to
identify a year in the date field. These programs were designed and
developed before the impact of the upcoming change in the century was fully
appreciated by their developers. If not corrected, many computer
applications could fail or create erroneous results. Forecross year 2000
software products assist in identifying, analyzing and correcting these
problems in a highly automated manner. The Company's migration services and
software products have been designed to meet the specialized requirements of
management information systems departments of medium-sized to large
commercial and governmental organizations. Forecross also licenses its
Assess/2000 software product for use by customers and distributors (see Note
4). The Company's customers include banks and other industrial and
commercial corporations in Canada, the United States and Europe.
BASIS OF PRESENTATION:
Through September 30, 1997, the Company had sustained recurring losses from
operations and, at September 30, 1997, 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 1998, 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 licenses and other fees from
distributors desiring early access to the Company's Complete/2000TM 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 as the number of
concurrent conversion (migration and year 2000) contracts increases, the
Company will be able to utilize experienced outside contractors and
distributors (see Note 4) to perform many of the non-management project
functions to mitigate contract costs and improve its gross margin. However,
there can be no assurance that the Company's efforts to achieve and maintain
profitable operations will be successful. Additionally, the Company is
highly dependent on revenues from year 2000 contracts (see Note 2). 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. It is
at least reasonably possible that the significant estimates used will change
within a year.
CASH:
The Company maintains its cash balances with one financial institution. At
times, such balances may be in excess of the FDIC insurance limit.
EQUIPMENT AND FURNITURE:
Equipment and furniture is recorded at cost. Depreciation and amortization
is calculated using the straight-line method over the assets' estimated
useful lives, which range from three to five years.
CAPITALIZED SOFTWARE COSTS:
Financial accounting standards provide for the capitalization of certain
software development costs after technological feasibility is attained and
before the product is available for general release. No costs have been
capitalized for internally developed software products because the amount of
development costs eligible for capitalization was not significant.
The Company has capitalized certain purchased software technology rights (see
Note 4) which are included with other purchased software in fixed assets.
NET REVENUES AND COST OF REVENUES:
Revenues for migration services and year 2000 assessment or renovation
projects are recognized based on the percentage of completion method.
Provisions for estimated losses on uncompleted contracts are recognized
in the period in which the likelihood of such losses is determined. 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. Unbilled receivables represent
revenue recognized in excess of amounts billed. Amounts for billings in
excess of revenue recognized are included in deferred revenue.
The Company has authorized several exclusive distributor agreements for
specified areas for its Complete/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 licenses the rights to use its Assess/2000 software,
which as of September 30, 1997, 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 period commencing with the date of
the respective signing of the agreements and ending on December 31, 1999.
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. Research and
development expense includes both internally funded development and projects
funded in part by customers. In both 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. Revenues and research and development costs relating
to products funded by customers, included in revenues and cost of revenues on
the accompanying statements of operations, were as follows:
YEARS ENDED SEPTEMBER 30,
1997 1996 1995
Revenues $ - $ - $272,754
Research and development costs $ - $ 29,067 $352,633
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:
Net loss per share data have been computed using only the weighted average
number of outstanding shares of common stock during each period, as all
common stock equivalents are anti-dilutive due to the losses.
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, Earnings Per Share, which supersedes Accounting Principles Board (APB)
Opinion No. 15, the existing authoritative guidance. SFAS No. 128 is
effective for financial statements for fiscal years ending after December 15,
1997, and, when adopted, requires restatement of all prior-period earnings
per share data presented. The new statement modifies the calculations of
primary and fully diluted earnings per share and replaces them with basic and
diluted earnings per share. Calculations under the new standard, which will
be adopted in the year ending September 30, 1998, are expected to be
substantially the same as current calculations.
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 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, 1997, 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.
RECLASSIFICATIONS:
Certain prior-year amounts have been reclassified to conform to current year
presentation.
OTHER RECENTLY ISSUED ACCOUNTING STATEMENTS:
During 1997, the Financial Accounting Standards Board also released SFAS No.
130, Reporting Comprehensive Income. SFAS No. 130, which is effective for
fiscal years beginning December 15, 1997, establishes standards for reporting
and display of comprehensive income and its components in an entity's
financial statements. The objective of SFAS No. 130 is to report a measure
of all changes in the equity of an enterprise that result from transactions
and other economic events of the period. Comprehensive income is the total
of net income and all other non-owner changes in equity. SFAS No. 130 does
not address issues of recognition or measurement for comprehensive income and
its components, and therefore, it will not have an impact on the financial
condition or results of operation of the Company upon adoption.
In 1997, the American Institute of Certified Public Accountants released
Statement of Position (SOP) 97-2, which provides revised guidance for
recognizing revenue on certain software transactions. The Company has not
yet evaluated the effect, if any, that the new guidance will have on future
operating results and financial position. This SOP is required to be adopted
in fiscal years beginning after December 15, 1997, and, thus, will be adopted
by the Company by the year ending September 30, 1999. The Company has not
yet decided whether to elect early application for the fiscal year ending
September 30, 1998.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information, (SFAS
131) which supersedes SFAS No. 14, Financial reporting for Segments of a
Business Enterprises. SFAS 131 establishes standards for the way that public
companies report information about operating segments in annual financial
statements and requires reporting of selected information about operating
segments in interim financial statements issued to the public. It also
establishes standards for disclosures regarding products and services,
geographic areas and major customers. SFAS 131 defines operating segments as
components of a company about which separate financial information is
available that is evaluated regularly by the chief operating decision maker
in how to allocate resources and in assessing performance.
SFAS 131 is effective for financial statements for periods beginning after
December 15, 1997, and requires comparative information for earlier years to
be restated. The Company believes it operates under one business segment and
has already substantially complied with the required financial statement
disclosures. Results of operations and financial position, however, will be
unaffected by implementation of this standard.
DEPENDENCE ON YEAR 2000 REVENUES:
The growth in the Company's revenues in fiscal 1997 resulted in large part
from increased demand for Assess/2000 and Complete/2000 services and
licenses as awareness of the year 2000 century date conversion problem has
grown. Year 2000 services and related revenue increased from 8% in 1996 to
44% of the Company's total revenues in 1997. Should the demand for the
Company's year 2000 solutions and products decline significantly as a result
of new technologies, competition or any other factors, the Company's
professional services fees and license revenues would be materially and
adversely affected. The Company anticipates that demand in the year 2000
market will decline, perhaps rapidly, following the year 1999.
The Company has also experienced significant growth in its core migration
services. It is the Company's strategy to leverage customer relationships
and knowledge of customer application systems derived from its year 2000
services solutions to continue to grow its migration and other products and
services beyond the year 2000 market. However, there can be no assurance
that this strategy will be successful, and should the Company be unable to
market other products and services as demand in the year 2000 market
declines, whether as a result of competition, technological change or other
factors, the Company's business, results of operations and financial
condition will be materially and adversely affected.
The Company markets its products and services to customers for managing the
maintenance and redevelopment of mission-critical computer software systems.
As noted above, a large and increasing portion of the Company's business is
devoted to addressing the year 2000 problem, which affects the performance
and reliability of many mission-critical systems. The Company's agreements
with its customers typically contain provisions designed to limit the
Company's exposure to potential product and service liability claims. It is
possible, however, that the limitation of liability provisions contained in
the Company's customer agreements may not be effective as a result of
existing or future federal, state, local or foreign laws or ordinances or
unfavorable judicial decisions. Although the Company has not experienced any
material product or service liability claims to date, the sale and support of
its products and services may entail the risk of such claims, particularly in
the year 2000 market, which could be substantial in light of the use of its
products and services in mission-critical applications. A successful product
or service liability claim brought against the Company could have a material
adverse effect upon the Company's business, operating results and financial
condition.
3. CONCENTRATIONS OF CREDIT RISK AND FOREIGN SALES:
The Company performs ongoing credit evaluations of its customers and
generally does not require collateral on accounts receivable as the majority
of the Company's customers are large, well-established companies. Four
customers accounted for approximately 23%, 17%, 13% and 12% of the accounts
receivable balance at September 30, 1997, and four customers accounted for
approximately 25%, 22%, 15% and 12% at September 30, 1996. Additionally,
three customers, including revenues from the Company's Distributors treated
as resulting from one customer (see Note 4), accounted for approximately 19%,
15% and 11% of total revenues for the fiscal year ended September 30, 1997,
four customers accounted for 20%, 14%, 13% and 10% for the fiscal year ended
September 30, 1996, and three customers accounted for 26%, 21% and 10% of
total revenues for the fiscal year ended September 30, 1995. Net revenues
from Canadian and European customers were as follows:
YEARS ENDED SEPTEMBER 30,
1997 1996 195
____ ____ ____
Canada 9% 15% 29%
Europe 1% - 10%
4. RELATED PARTY TRANSACTIONS:
The Company has certain transactions with related parties in the ordinary
course of business. These transactions are valued at the exchange value,
which is the amount of consideration established and agreed to by the parties
involved.
Notes receivable and payable:
____________________________
Notes receivable and payable from officers consist of the following:
SEPTEMBER 30,
_______________________
1997 1996
________ _______
10% Uncollateralized notes receivable from
president, due December 31, 1997 $ 65,429 $65,429
5.7-10% Uncollateralized notes receivable from
senior vice president, due in varying amounts
through September 30, 1999 53,442 16,429
Accrued interest receivable 30,646 22,511
________ _______
Total receivable from officers 149,517 104,369
________ _______
Uncollateralized notes payable to president - (6,800)
Accrued interest payable - (2,328)
________ _______
Total payable to officers - (9,128)
________ _______
Notes receivable from officers, net 149,517 95,241
Less current portion 112,504 -
________ _______
$ 37,013 $95,241
======== =======
The Company had notes payable to other related parties as follows:
SEPTEMBER 30,
______________________
1997 1996
________ _______
14% Uncollateralized note payable to a
shareholder, paid in full during 1997 $ - $240,000
24% Uncollateralized note payable to a
shareholder, paid in full during 1997 - 20,000
Accrued interest payable, paid in full
during 1997 - 188,023
________ _______
- 448,023
Less current portion - (224,100)
________ ________
$ - $223,923
======== ========
Software Licenses and Distributorships:
______________________________________
The Company has entered into agreements with several entities (the
"Distributors") for licenses and distributorship arrangements for its year
2000 software products, Assess/2000 and Complete/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. As of September 30, 1996, this shareholder pledged
150,000 shares of Company stock as collateral for $800,000 due under the
terms of the first of the contracts; the entire amount was collected in
January 1997.
Under the distributorship agreements, the Distributors receive territorially
exclusive rights to market year 2000 renovation projects to be performed by
the Company using the Complete/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 marketing, project management services
and staffing for substantially all on-site work, the Distributor generally
receives a fee equal to 25% of collected revenues. The exclusivity rights
under these contracts are for a one-year period, but are renewable based on
certain performance conditions. The Distributors generally have separate
agreements for license rights for unlimited usage of the Assess/2000 product.
In the case of one contract, under which a substantial portion of the current
year 2000 projects operate, the Company performs both assessment and
renovation for all projects with the distributor providing project
management, customer contact and on-site work. Fees payable under this
contract are 50% of collected revenues until $1,500,000 has been received by
the Distributor, and 25% of revenue collected thereafter.
The licensing and distributorship fees received from the Distributors,
totaling $3,125,000 and $200,000 in 1997 and 1996, respectively, have
generally been deferred over the period from inception of the respective
agreements to December 31, 1999. Of these amounts, approximately $1,038,000
and $200,000 have been recognized in revenue during the years ended September
30, 1997 and 1996, respectively, and approximately $2,287,000 is deferred at
September 30, 1997. Additional fees of approximately $672,000 for training
programs, annual software maintenance, and customer support were received in
1997; of this amount, approximately $336,000 is deferred at September 30,
1997. The year 2000 project fee expense related to the distributor
contracts, included in cost of revenues in the accompanying statements of
operations, was approximately $853,000 for the year ended September 30, 1997.
Purchased Software:
__________________
During the year ended September 30, 1997, the Company commissioned and
purchased a $150,000 data analysis module for use with its year 2000 software
products. The software developer is an entity owned in part by the senior
vice president of the Company, another employee of the Company, and another
shareholder.
5. EQUIPMENT AND FURNITURE:
Equipment and furniture is comprised of the following:
SEPTEMBER 30,
________________________
1997 1996
_________ _________
Computer equipment and software $ 700,554 $ 229,787
Furniture and equipment 244,570 145,772
_________ _________
945,124 375,559
Accumulated depreciation and amortization (404,320) (295,958)
_________ _________
$ 540,804 $ 79,601
========= =========
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. In addition to an
administrative fee of 1% of each invoice financed, the Company will incur
interest at the rate of 2% per month on the outstanding gross amount of the
receivables financed. The Company's obligations under this agreement have
been personally guaranteed by the president and senior vice president of the
Company who are significant shareholders of the Company. At September 30,
1996, the Company's outstanding indebtedness under the agreement was
$120,000. There was no outstanding indebtedness under the agreement as of
September 30, 1997. The agreement may be terminated by either the factor or
the Company at any time.
7. INCOME TAXES:
The components of the provision for income taxes are summarized as follows:
YEARS ENDED SEPTEMBER 30,
___________________________
1997 1996 1995
____ ____ ____
Current:
State $800 $ 800 $ 800
Foreign - 1,500 30,816
Deferred - - -
_____ ______ _______
Total provision for income taxes $800 $2,300 $31,616
===== ====== =======
The effective income tax rate differs from the statutory federal income tax
rate primarily due to the full valuation against the Company's deferred tax
assets arising from its net operating losses.
Significant components of the Company's net deferred tax balances are as
follows:
September 30,
___________________
1997 1996
_______ _______
Deferred tax assets (liabilities):
Accrual to cash adjustment $ 595,000 $ 446,000
Net operating loss carryforwards 1,431,000 1,191,000
State taxes and other (109,000) (85,000)
____________ _________
Total deferred tax assets 1,917,000 1,552,000
Valuation allowance (1,917,000)(1,552,000)
____________ _________
Net deferred tax assets $ - $ -
============ =========
Due to the uncertainty of realization, a valuation allowance has been
provided to eliminate the deferred tax assets at September 30, 1997, 1996
and 1995. The increase in the valuation allowance was $365,000, $715,000,
and $126,000 in the years ended September 30, 1997, 1996 and 1995,
respectively. Of the 1996 increase, $448,000 represented a change in the
expected federal rate at date of realization from 20% to 34%.
At September 30, 1997, the Company has net operating loss carryforwards for
federal and California state income tax purposes of approximately $3,755,000
and $1,876,000, respectively. These carryforwards expire in varying amounts
between 1998 and 2012. 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 a greater than 50% change in the ownership of the
Company within a three-year period.
8. COMMON STOCK:
In connection with the Company's initial public offering in British Columbia,
Canada, a total of 285,115 of the previously issued and outstanding shares of
common stock were placed in escrow pursuant to escrow agreements dated April
8, 1994 between the Company, the trustee and certain shareholders of the
Company. All such shares were released from escrow by the Vancouver Stock
Exchange during the year ended September 30, 1997.
In May 1995, the Company sold 735,000 of its shares of common stock in a
private placement. The Company incurred $34,890 of costs related to this
sale, including services totaling $29,400 for which the Company issued
62,553 shares of common stock in lieu of payment.
In connection with the Company's initial public offering in British Columbia,
Canada, a total of 285,115 of the previously issued and outstanding shares of
common stock were placed in escrow pursuant to escrow agreements dated April
8, 1994 between the Company, the trustee and certain shareholders of the
Company. All such shares were released from escrow by the Vancouver Stock
Exchange during the year ended September 30, 1997.
In December 1996, the Company sold 282,000 shares of its common stock in a
private placement resulting in proceeds of $1,128,000. The Company incurred
$5,275 of costs related to this sale. In connection with the sale, the
Company issued to the investors nontransferable warrants to purchase an
additional 282,000 shares of common stock. The warrants are exercisable for a
period of two years, at a price of $4.00 per share during the first year and
at $4.60 per share during the second year.
9. RESTRICTED STOCK PURCHASE PLAN:
In June 1993, the Board of Directors approved the 1993 Restricted Stock
Purchase Plan (the "Plan"). The Plan allows employees and consultants to
purchase shares of the Company's common stock at a price not less than the
fair value. The maximum aggregate number of shares which may be sold under
the Plan is 1,000,000 shares of common stock. During the year ended
September 30, 1994, 50,000 shares were sold under the Plan. No shares were
sold under the Plan in 1997, 1996 or 1995.
Shares purchased under the Plan are subject to a right of repurchase by the
Company at the original purchase price upon the termination of the
purchaser's employment or consulting relationship with the Company. Except
for the initial stock purchases in 1993, for which the vesting commenced on
June 25, 1992, the right to repurchase generally lapses at the rate of
one-third (1/3) after one year from the date of purchase, and
one-thirty-sixth (1/36) of the original number of shares purchased per month
thereafter. At September 30, 1997 and 1996, no shares are subject to the
Company's repurchase option under this provision. No shares were repurchased
in 1997 or 1996. During 1995, the Company repurchased 112,084 shares under
this provision.
In partial consideration for stock purchased under the Plan,
the Company received promissory notes with an aggregate balance of $7,973 as
of September 30, 1996. These notes were paid in full during 1997.
10. STOCK OPTION PLAN:
In April 1994, the Board of Directors approved the 1994 Stock Option Plan,
whereby employees and consultants may be granted incentive and non-statutory
stock options. Depending on the employee's stock ownership percentage,
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 o
ptionee already owning common stock representing 10% or more of the voting
power).
Stock option activity under the Plan is as follows:
Shares Available Options Outstanding Aggregate Weighted Avg.
for Grant No. of Price Per Price Exercise
Shares Share Price
______________ ______ ___________ ________ ____________
Balance
October 1, 1994 950,500 - - - -
Granted during 1995 (42,500) 42,500 $ 2.00 $85,000 $ 2.00
______________ ______ __________ ________ ____________
Balance
September 30, 1995 908,000 42,500 2.00 85,000 2.00
Granted during 1996(561,500) 561,500 1.43-4.75 1,007,125 1.79
Canceled during 1996 10,000 (10,000) 2.00 (20,000) 2.00
_______ _______ _________ _________ _____
Balance
September 30, 1996 356,500 594,000 1.43-4.75 1,072,125 1.80
Granted during 1997(131,800) 131,800 9.70-19.00 1,809,010 13.73
Exercised
during 1997 - (14,000) 2.00-9.70 (39,550) 2.83
Canceled during 1997 8,500 (8,500) 2.00-4.75 (33,500) 3.94
Balance
September 30, 1997 233,200 703,300 $1.43-19.00 $2,808,085 $ 3.99
======== ======= =========== ========== ======
The following table summarizes information with respect to stock options
outstanding at September 30, 1997.
Options Outstanding Options Exercisable
____________________________________ ____________________________________
Range of Number Weighted Avg. Weighted Number Weighted
Exercise Outstanding Remaining Avg. Exercisable Avg.
Price at Contractual Exercise at September Exercise
September Life (years) Price 30, 1997 Price
30, 1997
________ ___________ _____________ _______ _____________ ________
$ 1.43-$2.00 517,500 3.09 $ 1.45 517,500 $ 1.45
4.75-$9.70 55,500 3.92 4.75 55,500 4.75
9.70-12.70 64,300 4.38 10.96 48,800 10.81
15.35-19.00 66,000 4.95 16.51 46,150 16.42
____________ ________ ____ ______ _______ _____
$1.43-19.00 703,300 3.45 $ 3.99 667,950 $ 3.44
========== ======== ==== ======= ======= ======
The Company applies APB Opinion No. 25, Accounting for Stock Issued to
Employees, in accounting for its plan. Accordingly, no compensation
cost has been recognized for its stock option plan. Had compensation
cost for the Company's stock option plan been determined consistent with
SFAS No. 123, Accounting for Stock-Based Compensation, the Company's net
loss and net loss per share would have been the pro forma amounts
indicated below:
YEARS ENDED SEPTEBER 30,
_________________________
1997 1996
___________ ___________
Net loss As reported $ (851,763) $ (461,046)
Pro forma $(1,849,349) $(1,038,641)
Net loss per share As reported $(0.07) $(0.04)
Pro forma $(0.16) $(0.09)
The fair value of the Company's stock option grants is amortized over the
vesting period. The average fair value of options granted during the years
ended September 30, 1997 and 1996 were $10.09 and $1.03, respectively. 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:
YEARS ENDED SEPTEMBER 30,
_________________________
1997 1996
______ ______
Expected life (years) 2.5 2.5
Expected volatility 125% 102%
Risk free interest rate 6.22% 5.70%
11. PROFIT SHARING AND RETIREMENT PLANS:
The Company has a 401(k) profit sharing plan covering substantially all
employees and matches employee salary deferrals up to a maximum of 4% of the
participant's eligible compensation. The Company's cost of the 401(k) profit
sharing plan was $66,670, $25,556 and $30,700 in the fiscal years ended
September 30, 1997, 1996 and 1995, respectively.
The Company also has a Money Purchase Pension Plan (Pension Plan). The
Company was required to contribute 10% of total participant compensation
through December 1992 and 6% of total participant compensation from January
1, 1993 through December 31, 1994. Effective January 1, 1995, contributions
to the Pension Plan were no longer required. There were no contributions to
this Plan during 1997 or 1996. The Company's cost of the Pension Plan was
$12,736 in the fiscal year ended September 30, 1995.
The Company was previously delinquent in the payment of its employer
contributions to the 401(k) plan and the Pension Plan. Under the terms of an
Employee Plans Voluntary Compliance Resolution Program, the Company paid the
past due contributions to the 401(k) plan ($59,778), the Pension Plan
($83,686) and penalties ($60,406) on December 28, 1996, with final interest
and penalties ($43,315) paid on September 11, 1997.
12. LEASE COMMITMENTS:
The Company leases office space and equipment under operating leases. Rent
expense under operating leases was $184,344, $125,820, and $127,268 in the
fiscal years ended September 30, 1997, 1996 and 1995, respectively. As of
September 30, 1997, future minimum lease payments under operating leases are
as follow:
Years Ending September 30,
- - --------------------------
1998 $188,564
1999 148,344
2000 152,207
2001 154,525
2002 57,947
________
$701,587
========
In November 1997, the Company signed a letter of intent for additional space
for a four-year period beginning in January 1998, for approximately $143,000
annually.
13. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
YEARS ENDED SEPTEMBER 30,
-------------------------
1997 1996 1995
____ ____ ____
Interest paid $290,648 $59,647 $8,144
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
YEARS ENDED SEPTEMBER 30,
-------------------------
1997 1996 1995
____ ____ ____
Common stock issued for professional services $ - $ - $29,400
Common stock repurchased through cancellation
of notes receivable from shareholders $ - $ - $64,792
Outstanding travel advances converted to a
note receivable from the senior vice
president $37,013 $ - $ -
FORECROSS CORPORATION VALUATION AND QUALIFYING ACCOUNTS
ALLOWANCES AGAINST RECEIVABLES:
Additions-
Balance Charges to Deductions- Balance
Beginning Revenues or Write-offs End of
of Year Costs and Charges to Year
Expenses(1) Reserve
Year Ended September 30,
1997 $ 340 $300,000 $ - $300,340
1996 3,500 - 3,160 340
1996 - 3,500 - 3,500
(1) Certain allowances related to contract estimations for amounts of revenue
recognized on percentage-of-completion basis are charged directly to revenues.
The accompanying notes are an integral part of these financial statements.
37
The accompanying notes are an integral part of these financial
statements.
F-5
F-17