SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10/A-3
General Form for Registration of Securities
Pursuant to Section 12(b) or 12(g) of
The Securities Exchange Act of 1934
FORECROSS CORPORATION
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(Exact name of registrant as specified in its charter)
California 94-2823882
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(State or other jurisdiction (I.R.S. Employer
incorporation or organization Identification No.)
90 New Montgomery Street, San Francisco, California 94105
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (415) 543-1515
Securities 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
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10/A of Forecross Corporation ("Forecross" or the "Company")
contains forward-looking statements within the meaning of the Private Litigation
Reform Act of 1995 (the "Litigation Reform Act") that are subject to risks and
uncertainties. Statements indicating that the Company "expects," "estimates" or
"believes" are forward-looking, as are all other statements concerning future
financial results, product offerings or other events that have not yet occurred.
There are several important factors that could cause actual results or events to
differ materially from those anticipated by the forward-looking statements
contained in this Form 10/A. 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. The safe harbor provided by the
Litigation Reform Act does not apply to initial public offerings. Additional
information on these and other certain business concerns is included elsewhere
in this Form 10/A.
ITEM 1. BUSINESS
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GENERAL BUSINESS DESCRIPTION
Forecross is a software company that, together with its predecessor
corporations, has been in business since 1982. Forecross develops, markets and
sells sophisticated software and associated services to large organizations for
the automated conversion ("migration") of existing business software
applications to new computing environments. 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.
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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.
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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. For the Company's experience competing
against these other solutions, see "Competition---Competitive Position".
MARKET
At its broadest, the potential worldwide market for Forecross products is
comprised of approximately 30,000 large computer-using organizations. Generally
referred to as "enterprise computing" users, they include the so-called Fortune
2,000 companies with annual revenues in excess of $100 million, and
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 Adabas 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.
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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, 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 upgrades, 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.
COMMERCIALLY AVAILABLE PRODUCTS
Forecross has, to date, developed nine migration products. Migration
products are named by reference to the source language or database and the
target language or database:
- - Convert/IDMS-DC to CICS (user interface language conversion)
- - Convert/ADSO to COBOL (language conversion)
- - Convert/IDMS-DB to SQL (database conversion)
- - Convert/VSAM to SQL (database conversion)
- - Convert/CSP to COBOL (language conversion)
- - Redirect II COBOL/VS to COBOL II (language conversion)
- - IMSADF II to Cross System Product Migration Facility (language
conversion)
- - Convert/IMSADF II to APS/COBOL (language conversion)
- - Fastforward/VSAM to SUPRA (database conversion)
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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, 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, $358,133,
$899,357 and $404,342 in the years ended September 30, 1997, 1996 and 1995, and
the six months ended March 31, 1998 and 1997, respectively. Additional
expenses of $29,067, $352,633 and $29,067 in the years ended September 30, 1996
and 1995, and the six months ended March 31, 1997, respectively, were
incurred on products funded by customers and are included in cost of revenues.
There were no such costs in the year ended September 30, 1997 or the six
months ended March 31, 1998.
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 and to ensure that authorized persons with access refrain
from duplicating, reproducing or disclosing information with respect to the
licensed software.
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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/2000TM 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
EXISTING APPLICATION MIGRATIONS
The developments in computer technology described above (see "-Industry
Background: Significant Industry Developments") have converged to produce the
need and create the opportunity to convert existing applications. Because of
this, the Company has had to experiment with a number of different techniques to
create market awareness of its technology and products, and to provide an easy
way for potential customers to evaluate and license its products.
Between 1989 and 1992, Forecross experimented with two different approaches
using third parties to market and sell its products. 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
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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.
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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/2000TM within a geographic territory. Exclusivity is generally for an
initial term of one year and is automatically extended annually for a total of
four subsequent years 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/2000TM products
and services accounted for forty-two percent of total revenue.
8
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 software to support data migration. In both of these cases, as in
all others of which Forecross is aware, the software products do not provide the
near-complete and comprehensive automated conversion of business applications as
those performed by Forecross products.
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/2000TM 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 EXPERIENCE
The Company's experience in the competitive bidding process employed by
many of its prospective customers, leads it to believe that it has a price
advantage over a majority of the other bidders. Such bidders' costs are
typically higher due to their dependence on skilled people, as compared with the
Company's dependence on less costly automation. However, the Company has not
historically enjoyed the same degree of market recognition as many of its large
competitors, such as the national consulting or accounting firms against whom it
often competes.
Until the emergence of the year 2000 problem, some customers did not
embrace the idea that automation could help them solve their problem. Such
uncertainty would sometimes cause a customer to award a contract to the more
recognizable bidder, in spite of the higher price. This extra cost was often
viewed as an "insurance policy" against any problems in the future. The Company
has observed a shift in this trend over the past year. Automation of some or
all of the year 2000 solution has gained such widespread acceptance that many
customers now will not entertain bids which do not contain the use of automated
software tools. In addition, a number of the year 2000 solution vendors,
particularly those offering software tools, are small, heretofore unrecognized
companies. Potential customers of these tools and services are now more
accustomed to dealing with such vendors. The Company believes that it has the
capability to compete favorably because of these trends, and because it has
steadily built its reputation and name recognition over the same period of time.
COMPETITIVE POSITION
It is possible that other software or services companies may attempt to
develop new proprietary conversion software or service offerings or to enhance
existing proprietary conversion software, or service offerings, to compete
directly in the Company's chosen market. There are, in addition, certain other
elements of risk which bear upon the Company's competitive position (see
"-Certain Business Concerns: Additional Financing; Competition; Market Size; No
Assurance of Success of Marketing Strategy; Product Development; and Limited
Experience of Management in the Management of Growth"). Moreover, (as indicated
under "-Industry Background: Available Solutions") there are alternatives to
migration as a means of adapting to technological change, and there can be no
assurance that enterprise computing users will not prefer one of these
alternatives.
It is difficult for the Company to assess how many potential customers have
availed themselves of the other alternatives (i.e., the purchase of a new
software package that is year 2000 compliant and operates on new technology
platforms or rewriting the computer source codes), since Forecross does not
actively track prospects who fail to meet the Company's initial sales
qualification criteria. Among qualified prospects who ultimately do not purchase
from Forecross, the rewriting option generally prevails.
9
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/A to
Forecross Corporation, Forecross, or the Company should be taken to include a
reference to its predecessor companies.
EMPLOYEES
As of March 31, 1998, Forecross had 56 employees. Of these, fifteen
work primarily in the Factory or on customer Factory Compile projects, nine are
engaged primarily in research and development work, eight are in project
management, five are in technical support, four are in quality assurance, three
are in sales and marketing and twelve 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 $2,510,000 at March 31, 1998 as compared to $2,812,000 at
March 31, 1997.
CERTAIN BUSINESS CONCERNS
UNPROFITABLE OPERATING HISTORY AND LIMITED FINANCIAL RESOURCES
The Company has not historically been profitable, and as of March 31,
1998, had suffered cumulative operating losses aggregating $7,003,385, and at
March 31, 1998, 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.
10
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").
11
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"
and "Business: Competitive Position").
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 six months ended
March 31, 1998, Brown Brothers Harriman & Company (45%), Charles Schwab
& Co., Inc. (14%), and the Company's Distributors, treated as one customer (12%)
represented seventy-one percent (71%) of total revenues. During the six
months ended March 31, 1997, the Company's Distributors, treated as one customer
(22%), Aetna Life Insurance Company (21%) and United Stationers Supply Company
(14%) represented fifty-seven percent (57%) of total revenues. During the
fiscal year ended September 30, 1997, the Company's Distributors, treated as one
customer (17%), NCR Corporation (15%), Aetna Life Insurance Company (11%)and
Brown Brothers Harriman Company (10%) represented fifty-three percent (53%)
of total revenues. During 1996, Bear Stearns & Company, Inc. (20%),
Humana Incorporated (14%), New Brunswick Telephone (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 (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.
12
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 42% of the Company's total revenues
in fiscal 1997 and 49% of total revenues for the six months ended March 31,
1998. Should the demand for the Company's year 2000 solutions and products
decline significantly as a result of new technologies, competition or any other
factors, the Company's professional 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
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. The Company does not presently
maintain insurance coverage for its products and services and 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.
13
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
upon 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.
EFFECT OF YEAR 2000 PROBLEM UPON COMPANY OPERATIONS
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 be 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 completed its assessment
of the Company's potential year 2000 compliance costs and related potential
effect on the Company's operations, however, management does not believe that
the expense or effect of such compliance will be material to the Company.
14
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/A. The financial data for the years ended
September 30, 1994 and 1993 and the balance sheet data at September 30, 1995,
1994 and 1993 are derived from audited financial statements not included in this
Form 10/A. The financial data for the six month periods ended March 31,
1998 and 1997, and the balance sheet data at March 31, 1998, are derived from
unaudited financial statements included elsewhere in this Form 10/A. The balance
sheet data at March 31, 1997 is derived from unaudited financial statements
not included in this Form 10/A. 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/A and
Management's Discussion and Analysis of Financial Condition and Results of
Operations included elsewhere herein.
YEAR ENDED SIX MONTHS ENDED
SEPTEMBER 30, MARCH 31,
-------------------------------------------------------------------- --------------------------
1997 1996 1995 1994 1993 1998 1997
------------ ------------ ------------ ------------ ------------ ------------ ------------
STATEMENT OF OPERATIONS DATA: (Restated (Unaudited (Unaudited)
-Note 1) and Restated
-Note 1)
Net revenues:
Services and maintenance . . $ 4,930,456 $ 2,199,672 $ 1,445,009 $ 1,785,035 $ 670,700 $ 3,112,920 $ 1,668,559
Software licenses and
distributorship fees
- related parties. . . . . . 844,582 200,000 10,071 - 157,350 272,499 465,000
------------ ------------ ------------ ------------ ------------ ------------ ------------
Total net revenues . . . . . 5,775,038 2,399,672 1,455,080 1,785,035 828,050 3,385,419 2,133,559
Cost of services and
maintenance including fees
to related parties of
$853,000, $0, $0, $0, $0,
$561,000, and $59,000,
respectively . . . . . . . . 4,006,323 1,431,489 738,986 983,298 387,735 2,690,035 1,107,371
------------ ------------ ------------ ------------ ------------ ------------ ------------
Gross margin. . . . . . . . . . 1,768,715 968,183 716,094 801,737 440,315 695,384 1,026,188
------------ ------------ ------------ ------------ ------------ ------------ ------------
Operating expenses:
Research and development . . 1,006,768 253,743 358,133 628,023 747,640 899,357 404,342
Sales and marketing. . . . . 850,764 711,545 685,360 682,454 529,368 397,277 421,192
General and administrative . 887,039 332,500 446,031 704,302 532,298 639,131 346,625
------------ ------------ ------------ ------------ ------------ ------------ ------------
Total operating expenses. . . . 2,744,571 1,297,788 1,489,524 2,014,779 1,809,306 1,935,765 1,172,159
------------ ------------ ------------ ------------ ------------ ------------ ------------
Loss from operations. . . . . . (975,856) (329,605) (773,430) (1,213,042) (1,368,991) (1,240,381) (145,971)
Other income (expense), net . . (68,855) (129,141) (37,720) (51,825) 16,826 (99,577) (68,759)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Loss before provision
for income taxes . . . . . (1,044,711) (458,746) (811,150) (1,264,867) (1,352,165) (1,339,958) (214,730)
Provision for income taxes. . . (800) (2,300) (31,616) (800) (800) - -
------------ ------------ ------------ ------------ ------------ ------------ ------------
Net loss. . . . . . . . . . . . $(1,045,511) $ (461,046) $ (842,766) $(1,265,667) $(1,352,965) $(1,339,958) $ (214,730)
============ ============ ============ ============ ============ ============ ============
Net loss per share. . . . . . . $ (0.09) $ (0.04) $ (0.08) $ (0.15) $ (0.25) $ (0.11) $ (0.02)
============ ============ ============ ============ ============ ============ ============
Dividends . . . . . . . . . . . - - - - - - -
============ ============ ============ ============ ============ ============ ============
Shares used in computing
per share data. . . . . . . . . 11,681,035 11,370,804 10,344,934 8,366,350 5,407,515 11,760,469 11,621,398
============ ============ ============ ============ ============ ============ ============
BALANCE SHEET DATA:
Cash and cash equivalents . . . $ 275,243 $ 99,427 $ 14,474 $ 332,683 $ 48,640 $ 106,823 $ 1,001,514
Working capital (deficit) . . . 442,765 (1,077,531) (890,040) (437,183) (472,104) (631,683) 660,157
Total assets. . . . . . . . . . 3,301,051 726,896 410,801 1,010,628 547,680 3,705,853 2,630,162
Deferred revenue, long-term . . 2,110,417 - - - - 868,577 1,827,917
Long-term debt (net of current
portion). . . . . . . . . . . . - 223,923 262,593 280,393 284,864 563,458 -
Shareholders' deficit . . . . . (995,912) (1,120,649) (999,092) (551,434) (575,946) (2,287,870) (189,681)
15
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, and the six month periods ended
March 31, 1998 and 1997, 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/A. Each recipient of this Form 10 is urged to read this Form 10/A in its
entirety.
The Private Securities Litigation Reform Act of 1995 (the "Litigation
Reform Act") provides a "safe harbor" for forward-looking statements. Certain
information included in this Form 10/A 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. The safe harbor provided by the Litigation Reform Act does not apply to
initial public offerings. 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
utilizing internal sales and marketing resources instead of relying upon third
parties, and focused upon pursuing migration services contracts as compared to
the previous focus on development contracts. Major customers utilizing
migration services have included Bank of Montreal, Bear Stearns, Kimberly Clark,
New Brunswick Telephone and Union Gas.
In addition to the migration services contracts, and in response to its
customers' growing year 2000 migration demands and utilizing the technology it
had developed over the past fifteen years, during 1996 and 1997 the Company
introduced its Complete/2000(TM) 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 contractual term (including renewals - generally five years)
commencing with the date of signing of the agreements. Revenues for technical
and sales training, maintenance and support are recognized ratably over the term
of the support period.
16
RESULTS OF OPERATIONS
RESTATEMENT OF FINANCIAL RESULTS:
The financial information reported herein for the fiscal year ended
September 30, 1997 and the six months ended March 31, 1998 has been restated
from amounts previously reported in order to reflect a modification of the
Company's accounting policies for the recognition of revenues associated with
certain year 2000-related software licenses and distributor agreements. Under
the Company's previous accounting policy, the Company recognized revenue under
these agreements ratably from execution of the contracts until December 31,
1999, the period during which the Company anticipated that it would perform
substantially all services required under the agreements.
The Company will now recognize revenues ratably over the contractual term
(including renewals) instead of the date by which the work resulting from such
contracts would be substantially completed. The net effect of the restatement
was to reduce revenues and increase net loss for the fiscal year ended September
30, 1997, and the six months ended March 31, 1998, by $193,748 and $240,093,
and to increase net loss per share by $0.02 and $0.02, respectively.
RESULTS OF OPERATIONS
YEAR 2000 COMPLIANCE
Forecross, like any other company, owns or uses computer software that may
be impacted by the year 2000 problem, and also relies upon vendors of equipment
and services whose products and services may be impacted by the year 2000
problem. The Company's year 2000 compliance issues include (i) the computer
hardware and internally developed software which it uses in the performance of
services for its customers, (ii) the hardware and third-party software which it
uses for corporate administration, (iii) the services of third-party providers
which it purchases for certain professional services, and (iv) the external
services such as telecommunications and electrical power. The Company has
initiated a project that will attempt to identify all computer hardware and
software, other significant equipment, and services upon which it relies that
may be impacted. After identification of such items, the Company will verify
whether those products and services are year 2000-compliant. The verification
process will include both accessing the websites of vendors and service
providers to verify such compliance, and, if necessary, contacting those vendors
and service providers to determine their compliance or plans to become compliant
prior to December 31, 1999. It is the intent of the Company to complete this
verification process by December 31, 1998.
The Company's administrative and operating systems are primarily PC-based,
utilizing commercially available software. Based on initial inquiries, which
have not yet been completed, management of the Company believes that these
commercial software applications are either year 2000-compliant now or will
have upgrades available at nominal cost which will be year 2000-compliant. The
Company has already purchased an upgrade to its accounting systems that will
make it year 2000-compliant, for less than $200. The Company's System 390
mainframe software is not year 2000-compliant, and the Company intends to obtain
an upgrade to such software from its vendor by September 30, 1998 at a cost of
less than $10,000.
A preliminary review of the Company's PC-based servers and computers has
indicated that several systems are not currently year-2000 compliant, but that
there is a simple procedure to make them compliant in the year 2000 at no cost.
On January 1, 2000, the dates in these computers will revert automatically to
January 1, 1980. The Company will execute a procedure, which it has already
tested on all of the non-compliant computers, to reset the date to the correct,
year 2000 date. If, nonetheless, the Company is not able to modify those
systems to become year-2000 compliant, it anticipates that the cost of replacing
such systems would be approximately $10,000, that the time required to replace
such systems would not exceed two weeks, and that, during the replacement
period, the Company's other, compliant systems could be used to perform the
work normally performed by the systems being replaced.
The Company relies upon outside service providers for the processing and/or
administration of its payroll, 401(K) plan and benefits insurance programs.
Based on initial inquiries, which have not yet been completed, management of
the Company believes that those service providers will have systems that are
year 2000-compliant or that the Company will be able to select other
providers whose systems are year 2000-compliant with no significant increase in
the cost of those services.
The internal software which the Company utilizes for performing the
migration projects, and the year 2000 assessment and renovation
projects, is year 2000-compliant.
The Company is developing a list of "non-computer" systems upon which it
relies, such as telecommunications equipment, building elevators, etc., in order
to determine whether such systems are in compliance with the year 2000. It is
anticipated that this review will be completed by December 31, 1998.
Preliminary review of such vendors' websites indicates that the Company's
vendors all have projects in process to ensure compliance well in advance of
December 31, 1999.
The Company has not deferred any information technology projects to date
due to the need to assess or ensure year 2000-compliance of its systems, and,
based upon its initial efforts to date as described herein, does not anticipate
that any other information technology projects will be delayed in the future due
to this year 2000 project.
For the foregoing reasons, the Company does not anticipate that it will
have an incomplete or untimely resolution of the year 2000 issue. Although the
total costs of compliance have not as yet been definitely determined, management
believes that such costs will not be material. As previously indicated, with
respect to items (i) - (iii) outlined above, the Company believes that it has or
will have achieved year 2000 compliance in advance of December 31, 1999. With
respect to external services provided by third parties, the Company is less
certain of the impact of year 2000 non-compliance. In the worst case scenario,
a failure of the electrical system which supplies power to the Company's
computers would disrupt both the Company's ability to conduct business and to
communicate with its customers, vendors and other suppliers, since the Company's
telephone system also requires electrical power. In this event, the Company
would be required to purchase these services from alternative providers. The
Company intends, as part of its "non-computer" systems review, to determine any
extraordinary costs and the amount of implementation time associated with such
change of providers.
YEAR ENDED SEPTEMBER 30, 1997 COMPARED TO YEAR ENDED SEPTEMBER 30, 1996
Revenues for the year ended September 30, 1997 were $5,775,038 as compared
to $2,399,672 in 1996, an increase of 141%. 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 $1,788,450 in 1997 as compared
to $200,000 in 1996; and third, revenue recognized from exclusive
distributorship agreements of $660,416 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 $1,768,715 and $968,183 in 1997 and 1996, respectively.
The gross margin percentage was 31% 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 and cost of revenues, primarily against
revenues recorded under year 2000 projects. 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 $1,045,511
or $0.09 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).
17
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.
SIX MONTHS ENDED MARCH 31, 1998 COMPARED TO SIX MONTHS ENDED MARCH 31, 1997
Revenues for the six months ended March 31, 1998 were $3,385,419 as
compared to $2,133,559 in 1997, an increase of 59%. This increase in revenues
for the period reflected several factors: first, revenue from year 2000
assessment and renovation contracts and the amortization of Assess/2000 software
licenses of $1,615,810 in 1998 as compared to $249,000 in 1997; and, second,
revenue from the amortization of exclusive distributorship agreements of
$55,000 in 1998 compared to $465,000 in 1997. Backlog was $2,510,000 at
March 31, 1998 as compared to $2,812,000 in 1997.
Gross margin was $695,384 and $1,026,188 in 1998 and 1997, respectively.
The gross margin percentage was 21% in 1998 and 48% in 1997. The revenues from
the year 2000 products and services increased to $943,974 in the second
quarter of 1998 as compared to $671,836 in the first quarter of 1998, however
they have not reached the level anticipated by the Company and industry in
general. The Company has added substantial resources to address the year 2000
market, and the lower than anticipated level of revenue adversely impacted gross
margins. During the three months ended March 31, 1998, the Company provided
reserves of $50,000 against revenues and cost of services and maintenance,
primarily against revenues recorded under migration projects, which reserves
adversely impacted the gross margin for the six months ended March 31, 1998. In
addition, the Company has not realized the efficiencies and cost savings
originally anticipated for the off-site work performed primarily by
subcontractors on the migration services projects. During the second quarter of
fiscal 1998 (the three months ended March 31, 1998), the Company implemented
some modifications to its procedures for pricing, performing, and controlling
the migration services projects in order to improve the gross margin on those
projects.
Research and development expenses increased to $899,357 in 1998 from
$404,342 in 1997, or 122% due to an increase in the number of personnel to
support the development activity associated with the Complete/2000 product
and enhancements to existing software products.
Sales and marketing expenses were $397,277 in 1998 as compared to $421,192
in 1997. Increases in commission expenses in 1998 as compared to 1997 were
offset by reductions in bonuses and consultant expenses in 1998.
General and administrative expenses were $639,131 and $346,625 in 1998 and
1997, respectively, reflecting additional personnel, increased use of legal,
audit, and other professional services, and increased rent, insurance,
telephone, business and payroll taxes in 1998 to support the increased level of
business activity.
Net interest expense was $99,577 for the six months ended March 31, 1998
as compared to $68,759 in 1997, reflecting the increased use in 1998 of
short-term receivables financing and loans from senior officers of the Company
to meet its working capital needs.
The overall net loss for the six months ended March 31, 1998 was $1,339,958
or $0.11 per share compared with a loss of $214,730 or $0.02 per share for the
six months ended March 31, 1997 (based on the weighted average number of shares
outstanding during the respective periods).
LIQUIDITY AND CAPITAL RESOURCES
Through March 31, 1998, the Company had sustained recurring losses from
operations and, at March 31, 1998, 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 (see Note 1 of Notes to
Financial Statements).
For the six months ended March 31, 1998, operations were funded through
cash derived from short-term receivables financing, proceeds from the exercise
of warrants to purchase common stock, and loans from senior officers of the
Company.
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, and the exercise
of warrants, amounted to $1,162,275, $328,422, $362,010, $48,000 and $1,132,725
in the years ended September 30, 1997, 1996 and 1995, and the three months ended
December 31, 1997 and 1996, 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 December 31, 1997, $373,862 was
outstanding under the agreement. 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 prior shareholder loans were repaid in full as of March 31,
1997.
In December 1997, the Company received a loan in the amount of $350,000
from a senior officer of the Company. The loan is for a term of two years, is
unsecured and will earn interest at a rate of 24% per annum.
In February 1998, the Company received a loan in the amount of $225,000
from another senior officer of the Company. The loan is for a term of two
years, is unsecured and will earn interest at a rate of 24% per annum.
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(TM) 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.
18
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. As indicated above, during the six months ended March 31, 1998,
and subsequent to March 31, 1998, the Company has utilized short-term
receivables financing and loans from senior officers of the Company to fund
operations. During the balance of fiscal 1998, the Company expects to continue
to meet its working capital and other cash requirements 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. Management believes that the loans from the senior officers of the
Company, combined with continued use of short-term receivables financing will be
sufficient to meet the Company's needs through the balance of fiscal 1998. In
the meantime, management is continuing to closely monitor the Company's
prospective year 2000 project volume to evaluate whether the existing sources of
financing are adequate to support the operations of the Company, or whether
additional means of financing, including debt or equity financing, may be
required to satisfy its working capital and other cash requirements.
The Company anticipates that its capital expenditures for the next twelve
months (calendar 1998) will be approximately $150,000 to $200,000, including
furniture and equipment for the Company's additional space that it leased in
March 1998. The Company has obtained lease financing for $50,000 to $75,000 of
furniture and equipment in connection with occupying that additional space.
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 effective January 1, 1998. The Company
occupied the additional space in March, 1998. Annual base rent for the expansion
space is approximately $143,000 per year.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -------- --------------------------------------------------------------
The following table sets forth certain information regarding the beneficial
ownership of the Company's outstanding shares of Common Stock as of March 31,
1998 by (i) each person known to the Company beneficially to own 5% or more of
the outstanding shares of its Common Stock, (ii) each of the Company's
directors, (iii) each of the Company's executive officers named in the Summary
Compensation Table below, and (iv) all directors and officers as a group.
Except as indicated in the footnotes to this table, the persons named in the
table have sole voting and investment power with respect to all shares of Common
Stock shown as beneficially owned by them, subject to community property laws
where applicable.
Name of Owner Number of Shares Percent of Class
Beneficially Owned Beneficially Owned
- ------------------------------------- ------------------ ------------------
Kim O. Jones (1). . . . . . . . . . . 2,218,344 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). . . . . . 4,447,288 36.3%
<FN>
(1) Includes 250,000 shares subject to stock option which is exercisable as of
March 31, 1998.
(2) Includes 250,000 shares subject to stock option which is exercisable as of
March 31, 1998.
(3) Includes 5,000 shares subject to stock option which is exercisable as of
March 31, 1998.
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 March 31, 1998.
19
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. . . 44 Senior Vice President, Chief Financial Officer and Director
Richard A. Carpenter. . . . 55 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. . . . . . 51 Senior Database Specialist
Peggy A. Payne. . . . . . . 48 Director of Migration Services
<FN>
(1) Denotes member of audit committee.
KIM O. JONES (53) founded Forecross together with Bernadette Castello in
1982 and has been in his present position since that time. Mr. Jones is the
chief architect of the Company's products. He has been active as a software
industry entrepreneur and industry participant since 1971. Prior to the
establishment of Forecross, Mr. Jones served from 1980 to 1982 as a Director and
Vice President of Computer Systems Design, Inc., of San Francisco, California,
in charge of software product development and marketing. In 1970 Mr. Jones
co-founded Genasys Systems, Inc., a software and services firm based in San
Francisco, California, for which he worked initially as Chief Technology Officer
and, later, as President until 1980. From 1967 to 1970, he was a Vice President
of Liberty National Bank of San Francisco, California, responsible for data
processing. Mr. Jones was a member of the Board of Directors of the American
Software Association, a division of the Information Technology Association of
America.
BERNADETTE C. CASTELLO (44) co-founded Forecross with Kim Jones in 1982 and
has been in her present position since that time. Ms. Castello manages the day
to day operations of the Company. From 1973 to 1977, Ms. Castello worked for
KPMG Peat Marwick in New York, designing and managing the installation and use
of some of the earliest automated applications in that firm. Thereafter, until
1980, she worked as an analyst in Peat Marwick's computer resources department.
From 1980 to 1982, when she left to found Forecross with Mr. Jones, Ms. Castello
was a Senior Consultant at Computer Systems Design, Inc. in San Francisco,
developing applications for the financial and manufacturing industries.
RICHARD A. CARPENTER (55) is the President of Carpenter Associates, a
consulting firm which provides strategic planning and product marketing
assistance to early stage software companies. Mr. Carpenter also serves as
Chairman of the Board of two companies which he co-founded: Corex Technologies;
and, Healthcourt Technologies. Prior to co-founding these companies, Mr.
Carpenter had co-founded Index Systems (now CSC/Index) in 1969, and Index
Technology (now part of Intersolv) in 1983 where he served as Chairman/CEO until
its merger with Sage Software in 1991 to form Intersolv Software. Mr. Carpenter
became a director in March 1998. Mr. Carpenter does not provide consulting
services to any direct or indirect competitor of the Company.
RICHARD L. CURRIER, JR. (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.
20
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 (51) 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").
Long-Term
Annual Compensation 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
<FN>
(1) The stock options granted to the named officers are fully vested. The
options are exercisable at $1.43 per share and expire five years from the
date of grant.
(2) There are no other long-term incentive compensation plans which require
disclosure.
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:
21
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options at
Options at 1997 Year End 1997 Year End
-------------------------- ---------------------------
Shares Acquired
Name on Exercise Value Received Exercisable Unexercisable Exercisable Unexercisable
- ------------- --------------- -------------- ----------- ------------- ------------ -------------
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. Non-employee directors are
reimbursed for reasonable out-of-pocket expenses incurred in connection with the
attendance of Board meetings. Non-employee directors are entitled to participate
in the Company's 1994 Stock Option Plan. During the year ended September 30,
1996, Mr. Currier received a stock option grant for 5,000 shares at $4.75 per
share. During the year ended September 30, 1997 and during the six months
ended March 31, 1998, no options were granted to non-employee directors. In
connection with his election to the Board of Directors in March 1998, the
Company has indicated to Mr. Carpenter that it would apply to the Vancouver
Stock Exchange for authorization to grant him a stock option for 7,500 shares at
the fair market value at the time of the grant.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------- --------------------------------------------------
As of September 30, 1997 and March 31, 1998, the Company had the
following notes receivable from/payable to 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.
In December 1997, the Company borrowed $350,000 from Kim O. Jones, Chief
Executive Officer, under an unsecured promissory note due December 30, 1999.
The note bears interest at 24.0% per annum.
In February 1998, the Company borrowed $225,000 from Bernadette C.
Castello, Senior Vice President, under an unsecured promissory note due February
28, 2000. The note bears interest at 24.0% per annum.
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.
22
ITEM 8. LEGAL PROCEEDINGS
- -------- ------------------
None.
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
- -------- -------------------------------------------------------------------
RELATED STOCKHOLDER MATTERS
- ----------------------------
As of March 31, 1998, 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
- ------------------ ------ ------
03/31/98 . . . . . $12.70 $ 6.70
12/31/97 . . . . . 20.00 10.00
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 and during
the six months ended March 31, 1998.
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)
551,250 330,750 Cash(4)
282,000 1,128,000 Cash(5)
14,000 39,550 Cash(6)
12,000 48,000 Cash(7)
23
<FN>
1. In May 1995, these shares were sold in a private placement to
two individuals and three investment funds . The Company incurred $34,890 of
costs related to this sale, including the finder's fee of $29,400 discussed in
the following footnote 2.
2. These shares were issued to Eboracum Ltd., a placement agent, in lieu of
cash for services associated with the private placement in May 1995. The
$29,400 value of the services was a finder's fee equal to ten percent of the
gross proceeds of the private placement ($294,000), and the shares were valued
at a price equal to the average trading price in the ten days preceding the
announcement of the placement. The $29,400 value of these shares 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 purchasers of the shares are family members of the president of the
Company. 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, no par value, of which 11,763,612 were issued and outstanding as
of March 31, 1998. The holders of the Common Stock are entitled to one vote
per share at all meetings of shareholders, to receive dividends ratably, 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. There are no provisions in the Articles of Incorporation or
By-Laws of the Company, nor any provisions of the laws of the State of
California to which the Company is subject, that would discourage a business
combination or other takeover of the Company.
See "Indemnification of Officers and Directors" for a discussion of the
indemnification and the limitation of liability of the Company's officers and
directors related to performance of their duties.
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.
The Company has entered into certain indemnification agreements with its
directors and officers (the "Indemnitee") that provide that the Company's
directors and officers shall be indemnified by the Company to the fullest extent
authorized by California law, as it now exists or may in the future be amended,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement (if such settlement is approved in advance by the Company)
actually and reasonably incurred by the Indemnitee in connection with an action
or proceeding against the Indemnitee by reason of the fact that Indemnitee is or
was a director, officer, employee or agent of the Company, or any subsidiary of
the Company, or is or was serving at the request of the Company as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust, or other enterprise, if the Indemnitee acted in good faith and in a
manner Indemnitee reasonably believed to be in the best interests of the
Company, and with respect to any criminal action or proceeding, had no
reasonable cause to believe Indemnitee's conduct was unlawful. No
indemnification shall be made in respect of any claim, issue or matter as to
which Indemnitee shall have been adjudged to be liable to the Company in the
performance of Indemnitee's duty to the Company and its shareholders unless and
only to the extent that the court in which such action or proceeding is or was
pending shall determine upon application that, in view of all the circumstances
of the case, Indemnitee is fairly and reasonably entitled to indemnity for
expenses and then only to the extent that the court shall determine.
24
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 STATEMENTS 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.
In connection with the filing of this Registration Statement, the Company
has modified its accounting policy and will recognize revenues ratably over the
contractual term (including renewals) of the software license and distributor
agreements. As a result, the Company has restated the financial information
reported herein from amounts previously reported.
25
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-16 of this Registration Statement.
DESCRIPTION PAGE NO.
- -------------------------------------------------------------- ----------------
Report of BDO Seidman, LLP,
Independent Certified Public Accountants . . . . . . . . . . F-1
Balance Sheets as of September 30, 1997 (Restated) and 1996 and
March 31, 1998 (Unaudited and Restated) . . . . . . . . . . . . . . . . . F-2
Statements of Operations for each of the Three Years
in the Period Ended September 30, 1997 (Restated), and the Six
Month Periods Ended March 31, 1998 and 1997 (Unaudited and Restated) . . F-3
Statements of Shareholders' Equity (Deficit) for each of the
Three Years in the Period Ended September 30, 1997 (Restated) and
the Six Month Period Ended March 31, 1998 (Unaudited and Restated). . . . F-4
Statements of Cash Flows for each of the Three Years
in the Period Ended September 30, 1997 (Restated), and the Six Month
Periods Ended March 31, 1998 and 1997 (Unaudited and Restated). . . . . . F-5
Notes to Financial Statements. . . . . . . . . . . . . . . . . F-6 through F-16
1. Financial Statement Schedule. The following financial statement schedule
- -- ----------------------------
of Forecross Corporation for each of the three years in the period ended
September 30, 1997, and the six month periods ended March 31, 1998 and 1997
(unaudited) is filed as part of this Form 10/A and should be read in conjunction
with the Financial Statements of Forecross Corporation.
Valuation and Qualifying Accounts S-1
(b) Index and Description of Exhibits
Exhibit No. Description
- ----------- --------------------------------------------------------------------------------
3.1 Restated Articles of Incorporation
3.2 By-Laws
10.1 Lease Agreement, dated January 1, 1997
between the Company and The Canada Life Assurance Company
10.2 Form of Indemnification Agreement entered into
between the Company and each of its officers and
directors
10.3 1993 Restricted Stock Purchase Plan
10.4 1994 Stock Option Plan and Form of Option Agreement
10.5* Exclusive Distributor Agreement between the
Company and Gardner Solution 2000, L.L.C., and
Amendment
10.6* Exclusive Distributor Agreement between the
Company and Y2K Solutions, L.P.,
10.7* Software License Agreement between the Company
and Y2K Solutions, L.P.
10.8 Factoring Agreement, dated October 30, 1995, between
the Company and Silicon Valley Financial Services
10.9 Lease Expansion Proposal dated November 17, 1997, between
the Company and The Canada Life Assurance Company
10.10 Factoring Modification Agreement, dated January 13, 1998, between the Company
and Silicon Valley Financial Services
10.11* Exclusive Distributor Agreement between the Company and CY2K Solutions, L.L.C.
10.12* Software License Agreement between the Company and CY2K Solutions, L.L.C.
10.13* Exclusive Distributor Agreement between the Company and PY2K Solutions, L.L.C.
10.14* Software License Agreement between the Company and PY2K Solutions, L.L.C.
16.1 Notice of Change of Auditor dated September 23, 1997, issued to all holders of
common shares of Forecross Corporation
26
16.2 Letter dated September 23, 1997 from BDO Seidman, LLP to the British Columbia
Securities Commission and to the Vancouver Stock Exchange confirming the
accuracy of the information contained in the Notice of Change of Auditor of
Forecross Corporation dated September 23, 1997
16.3 Letter dated September 23, 1997 from Coopers & Lybrand, L.L.P. to the British
Columbia Securities Commission and to the Vancouver Stock Exchange confirming
the accuracy of the information contained in the Notice of Change of Auditor of
Forecross Corporation dated September 23, 1997
16.4 Letter dated September 23, 1997 from the Board of Directors of Forecross
Corporation to the shareholders of Forecross Corporation, the British Columbia
Securities Commission and the Vancouver Stock Exchange confirming the review of
the Board of Directors of the Notice of Change of Auditor and the related letter
dated September 23, 1997 from BDO Seidman, LLP and Coopers & Lybrand,
L.L.P.
27.1 Financial Data Schedule, September 30, 1997
27.2 Financial Data Schedule, March 31, 1998
<FN>
* The Company has requested that certain portions of the documents be given
confidential treatment. The entire documents, including the redacted portions,
have been filed with the SEC.
27
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
July 23, 1998 BY: /S/ Bernadette C. Castello
---------------------------------
Bernadette C. Castello
Senior Vice President and Chief Financial Officer
28
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.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has sustained recurring losses from operations
and has net capital deficiencies and negative working capital at September 30,
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.
As discussed in Note 1, the financial statements have been restated to reflect
the retroactive change in accounting for software licenses and distributor fees.
/s/ BDO SEIDMAN, LLP
BDO SEIDMAN, LLP
San Francisco, California
December 12, 1997, except for Note 1,
which is as of July 17, 1998
F-1
FORECROSS CORPORATION
BALANCE SHEETS
September 30, March 31,
1997 1996 1998
------------ ------------ ------------
(Restated- (Unaudited
ASSETS Note 1) and Restated
-Note 1)
Current assets:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 275,243 $ 99,427 $ 106,823
Accounts receivable, including unbilled receivables of $1,754,691,
$122,370, and $2,642,259, net of allowance of $300,340, $340 and
$350,340, respectively (Note 3). . . . . . . . . . . . . . . . . . . . 2,112,982 392,805 2,739,182
Current portion of notes receivable from officers (Note 4) . . . . . . 112,504 - -
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . 128,582 53,859 87,596
------------ ------------ ------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . 2,629,311 546,091 2,933,601
Equipment and furniture, net (Notes 2, 4 and 5) . . . . . . . . . . . 540,804 79,601 660,345
Notes receivable from officers, net, less current portion (Note 4) . . 37,013 95,241 -
Notes receivable from others . . . . . . . . . . . . . . . . . . . . . 63,150 - 64,519
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,773 5,963 47,388
------------ ------------ ------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,301,051 $ 726,896 $ 3,705,853
============ ============ ============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 452,651 $ 475,633 $ 747,252
Accrued compensation and related benefits (Note 11). . . . . . . . . . 152,421 338,722 226,964
Accrued liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . 89,518 46,081 39,378
Accrued commissions and distributors' fees (Note 4). . . . . . . . . . 639,138 32,252 1,095,717
Deferred compensation. . . . . . . . . . . . . . . . . . . . . . . . . - 156,834 -
Payable to factor (Note 6) . . . . . . . . . . . . . . . . . . . . . . - 120,000 564,000
Accrued warranty costs . . . . . . . . . . . . . . . . . . . . . . . . 96,589 66,547 120,630
Current portion of notes payable to related parties (Note 4) . . . . . - 224,100 -
Notes payable-other. . . . . . . . . . . . . . . . . . . . . . . . . . - 10,000 -
Capital lease obligations due within one year. . . . . . . . . . . . . - - 12,361
Deferred revenue (Notes 2 and 4) . . . . . . . . . . . . . . . . . . . 756,229 153,453 758,982
------------ ------------ ------------
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . 2,186,546 1,623,622 3,565,284
Deferred revenue, less current portion (Notes 2 and 4) . . . . . . . . 2,110,417 - 1,827,917
Notes payable to related parties, less current portion (Note 4). . . . - 223,923 563,458
Capital lease obligations, less current portion. . . . . . . . . . . . - - 37,064
------------ ------------ ------------
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . 4,296,963 1,847,545 5,993,723
------------ ------------ ------------
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, 11,455,612 and 11,763,612, respectively . . . 4,667,515 3,505,240 4,715,515
Notes receivable from shareholders (Note 9). . . . . . . . . . . . . . - (7,973) -
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . . . . (5,663,427) (4,617,916) (7,003,385)
------------ ------------ ------------
Total shareholders' deficit. . . . . . . . . . . . . . . . . . . . . . (995,912) (1,120,649) (2,287,870)
------------ ------------ ------------
Total liabilities and shareholders' deficit. . . . . . . . . . . . . $ 3,301,051 $ 726,896 $ 3,705,853
============ ============ ============
The accompanying notes are an integral part of these financial statements.
F-2
FORECROSS CORPORATION
STATEMENTS OF OPERATIONS
For the Years Ended For the Six Months Ended
September 30, March 31,
---------------------------------------- --------------------------
1997 1996 1995 1998 1997
------------ ------------ ------------ ------------ ------------
(Restated- (Unaudited (Unaudited)
Note 1) and Restated
-Note 1)
Net revenues (Notes 2, 3 and 4):
Services and maintenance . . . . . . . . $ 4,930,456 $ 2,199,672 $ 1,445,009 $ 3,112,920 $ 1,668,559
Software licenses and distributorship
fees-related parties. . . . . . . . . . 844,582 200,000 10,071 272,499 465,000
------------ ------------ ------------ ------------ ------------
Total net revenues . . . . . . . . . . 5,775,038 2,399,672 1,455,080 3,385,419 2,133,559
Cost of services and maintenance
including fees to related parties of
$853,000, $0, $0, $561,000 and $59,000,
respectively (Notes 2 and 4). . . . . . 4,006,323 1,431,489 738,986 2,690,035 1,107,371
------------ ------------ ------------ ------------ ------------
Gross margin . . . . . . . . . . . . . . 1,768,715 968,183 716,094 695,384 1,026,188
------------ ------------ ------------ ------------ ------------
Operating expenses:
Research and development . . . . . . . . 1,006,768 253,743 358,133 899,357 404,342
Sales and marketing. . . . . . . . . . . 850,764 711,545 685,360 397,277 421,192
General and administrative . . . . . . . 887,039 332,500 446,031 639,131 346,625
------------ ------------ ------------ ------------ ------------
Total operating expenses . . . . . . . . 2,744,571 1,297,788 1,489,524 1,935,765 1,172,159
------------ ------------ ------------ ------------ ------------
Loss from operations . . . . . . . . . . (975,856) (329,605) (773,430) (1,240,381) (145,971)
Interest expense, net. . . . . . . . . . (68,855) (129,141) (37,720) (99,577) (68,759)
------------ ------------ ------------ ------------ ------------
Loss before provision for income taxes . (1,044,711) (458,746) (811,150) (1,339,958) (214,730)
Provision for income taxes (Note 7). . . (800) (2,300) (31,616) - -
------------ ------------ ------------ ------------ ------------
Net loss . . . . . . . . . . . . . . . $(1,045,511) $ (461,046) $ (842,766) $(1,339,958) $ (214,730)
============ ============ ============ ============ ============
Net loss per share . . . . . . . . . . . $ (0.09) $ (0.04) $ (0.08) $ (0.11) $ (0.02)
============ ============ ============ ============ ============
Shares used in computing per share data. 11,681,035 11,370,804 10,344,934 11,760,469 11,621,398
============ ============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
F-3
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 . . . . . . . . - - 11,067 - 11,067
shareholders (Note 9)
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. . . . . 14,000 39,550 - - 39,550
exercise of options (Note 10)
Payments received from
shareholders (Note 9) . . . . . . . . - - 7,973 - 7,973
Net loss (Restated-Note 1). . . . .. . - - - (1,045,511) (1,045,511)
----------- ----------- -------------- ------------ ------------
Balances at September 30, 1997 . . . . 11,751,612 4,667,515 - (5,663,427) (995,912)
(Restated-Note 1)
Issuance of common stock upon
exercise of warrants (Note 8)
(Unaudited) . . . . . . . . . . . . . 12,000 48,000 - - 48,000
Net loss (Unaudited and Restated-Note 1) - - - (1,339,958) (1,339,958)
----------- ----------- -------------- ------------ ------------
Balances at March 31, 1998
(Unaudited and Restated-Note 1). . . . 11,763,612 $4,715,515 $ - $(7,003,385) $(2,287,870)
=========== =========== ============== ============ ============
The accompanying notes are an integral part of these financial statements.
F-4
FORECROSS CORPORATION
STATEMENTS OF CASH FLOWS
For the Years For the Six Months
Ended September 30, Ended March 31,
1997 1996 1995 1998 1997
------------ ---------- ---------- ------------ ------------
(Restated- (Unaudited (Unaudited)
-Note 1) and Restated
-Note 1)
Increase (decrease) in cash resulting from:
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . . . $(1,045,511) $(461,046) $(842,766) $(1,339,958) $ (214,730)
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 35,453 126,457 33,860
Changes in operating assets and liabilities-
Accounts receivable. . . . . . . . . . . . . . (2,020,177) (199,067) 274,886 (626,200) (719,329)
Other assets and accrued interest on notes
receivable from officers. . . . . . . . . . . (148,552) (9,021) (16,740) 51,497 (55,702)
Accounts payable and accrued liabilities . . . 471,082 233,974 (113,410) 825,095 (516,875)
Deferred compensation. . . . . . . . . . . . . (156,834) - (9,997) - -
Deferred revenue . . . . . . . . . . . . . . . 2,713,193 128,678 (43,897) (279,747) 2,067,197
------------ ---------- ---------- ------------ ------------
Net cash provided by (used in) operating
activities. . . . . . . . . . . . . . . . . . 229,074 (255,724) (719,471) (1,242,856) 594,421
------------ ---------- ---------- ------------ ------------
Cash used in investing activities:
Purchase of equipment and furniture. . . . . . (577,076) (73,812) (15,482) (194,922) (256,324)
Loans to officers. . . . . . . . . . . . . . . (35,000) - - - -
Payments received on loans to officers . . . . 35,000 - - 81,858 (3,685)
Loans to key employees . . . . . . . . . . . . (62,057) - - - -
Payments received on loans to key employees. . 450 - - 500 -
------------ ---------- ---------- ------------ ------------
Net cash used in investing activities. . . . (638,683) (73,812) (15,482) (112,564) (260,009)
------------ ---------- ---------- ------------ ------------
Cash flows from financing activities:
Proceeds from factoring of accounts receivable 785,200 830,400 - 2,029,545 785,200
Repayment of borrowings under factoring
arrangement . . . . . . . . . . . . . . . . . (905,200) (710,400) - (1,465,545) (905,200)
Borrowings under note payable to officers . . . - - - 575,000 -
Borrowings under notes payable . . . . . . . . - - 185,000 - 70,000
Repayment of borrowings under notes payable . (458,023) (45,000) (163,364) - (528,023)
Repayment of borrowings under notes payable
- -officers. . . . . . . . . . . . . . . . . . . (6,800) - - - -
Net proceeds from issuance of common shares . 1,162,275 328,422 362,010 48,000 1,137,725
Payments received from shareholders. . . . . . 7,973 11,067 33,098 - 7,973
------------ ---------- ---------- ------------ ------------
Net cash provided by financing activities. . 585,425 414,489 416,744 1,187,000 567,675
------------ ---------- ---------- ------------ ------------
Net increase (decrease) in cash. . . . . . . 175,816 84,953 (318,209) (168,420) 902,087
Cash at beginning of period. . . . . . . . . . 99,427 14,474 332,683 275,243 99,427
------------ ---------- ---------- ------------ ------------
Cash at end of period. . . . . . . . . . . . . $ 275,243 $ 99,427 $ 14,474 $ 106,823 $ 1,001,514
============ ========== ========== ============ ============
The accompanying notes are an integral part of these financial statements.
F-5
FORECROSS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(INFORMATION FOR MARCH 31, 1998 AND 1997 IS UNAUDITED)
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.
RESTATEMENT OF FINANCIAL RESULTS:
The financial information reported herein for the fiscal year ended September
30, 1997 and the six months ended March 31, 1998 has been restated from amounts
previously reported in order to reflect a modification of the Company's
accounting policies for the recognition of revenues associated with certain year
2000-related software licenses and distributor agreements. Under the Company's
previous accounting policy, the Company recognized revenue under these
agreements ratably from execution of the contracts until December 31, 1999, the
period during which the Company anticipated that it would perform substantially
all services required under the agreements.
The Company will now recognize revenues ratably over the entire contractual term
(including renewals) of the contracts in question instead of the date by which
the work resulting from such contracts would be substantially completed. The net
effect of the restatement was to reduce revenues and increase net loss for the
fiscal year ended September 30, 1997, and the six months ended March 31, 1998,
by $193,748 and $240,093, and to increase net loss per share by $0.02 and $0.02,
respectively.
BASIS OF PRESENTATION AND GOING CONCERN:
Through March 31, 1998, the Company had sustained recurring losses from
operations and, at March 31, 1998, 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.
The accompanying balance sheet as of March 31, 1998, the statements of
operations and cash flows for each of the six months ended March 31, 1998
and 1997, and the statement of shareholders' deficit for the six months ended
March 31, 1998 have not been audited. However, in the opinion of management,
they include all adjustments necessary for a fair presentation of the financial
position and the results of operations for the periods presented. The results
of operations for the six months ended March 31, 1998 are not necessarily
indicative of results to be expected for any future period.
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 the year ended September
30,1996 to 42% of the Company's total revenues in the year ended September
30, 1997, and 33% and 49% of total revenues for the six months ended March
31, 1997 and 1998, respectively. 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.
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.
F-6
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:
Costs incurred internally in creating computer software products to be sold,
leased, or otherwise marketed are charged to expense when incurred as research
and development until technological feasibility has been established for the
product. Thereafter, such costs are capitalized until the product is available
for general release to customers and amortized based on either estimated current
and future revenue for each product or straight-line amortization over the
remaining estimated life of the product, whichever produces the higher expense
for the period. Purchased computer software to be sold, leased, or otherwise
marketed is treated the same if it has no alternative future use, or, if it has
an alternative future use, it is capitalized when acquired and amortized over
its estimated useful life. No costs have been capitalized for internally
developed software products because the amount of development costs eligible for
capitalization was not significant. Non-capitalizeable development and
marketing costs related to the software licenses are included in research and
development expense or sales and marketing expense, as discussed in "Net
Revenues and Cost of Services and Maintenance" below.
The Company has capitalized certain purchased software technology rights (see
Note 4) which can be used both in connection with its internally developed
software products and in alternative standalone applications. Accordingly,
these rights are included with other purchased software in fixed assets, and are
being amortized over their estimated useful life of three years. Amortization
of these purchased software technology rights was $12,500 and $25,000 in the
year ended September 30, 1997 and the six months ended March 31, 1998,
respectively.
LONG-LIVED ASSETS:
Long-lived assets are assessed for possible impairment whenever events or
changes in circumstances indicate that the carrying amounts may not be
recoverable, or whenever management has committed to a plan to dispose of the
assets. Such assets are carried at the lower of book value or fair value as
estimated by management based on appraisals, current market value, and
comparable sales value, as appropriate. Assets to be held and used affected by
such impairment loss are depreciated or amortized at their new carrying amount
over the remaining estimated life; assets to be sold or otherwise disposed of
are not subject to further depreciation or amortization. In determining whether
an impairment exists, the Company uses undiscounted future cash flows compared
to the carrying value of the asset.
NET REVENUES AND COST OF SERVICES AND MAINTENANCE:
The Company's migration projects have ranged from six to eighteen months in
duration. The Company's year 2000 projects have ranged from two to eighteen
months in duration. Revenues for migration services and year 2000 assessment or
renovation projects are recognized using the percentage of completion method in
the ratio that actual costs incurred to date bear to total estimated costs at
completion. Provisions for estimated losses on uncompleted contracts are
recognized in the period in which the likelihood of such losses is determined.
Reserves provided for estimated adjustments of contract revenues are included as
reductions of gross revenues. Cost of revenues is primarily comprised of
subcontractors' fees and salaries and benefits of employees assigned to the
contracts, and distributors' fees. Subcontractors' fees, salaries and benefits
are allocated based on the amount of time devoted to each contract by the
subcontractors and employees; distributors' fees are accrued based on revenues
earned for specific projects for which the distributors provide services.
Billings are issued based upon specific contractual terms which may or may not
relate to the percentage of completion for the respective contracts. Unbilled
receivables represent revenue recognized in excess of amounts billed. Amounts
for billings in excess of revenue recognized are included in deferred revenue.
The Company has authorized several exclusive distributor agreements for
specified areas for its Complete/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
March 31, 1998, had been sold primarily to the exclusive distributors above.
Once collectibility of the distributor and license fees is reasonably assured,
and if there are no significant post-delivery obligations, the Company
recognizes the fees associated with the exclusivity and the software license
ratably over the contractual term (including renewals), generally five years,
commencing with the date of the respective signing of the agreements. Costs
associated with the licenses for Assess/2000 have been included in research and
development expense as such costs did not qualify for capitalization. Costs
associated with the marketing and negotiation of distributor customer proposals
and/or sales contracts have been included in sales and marketing expense.
Revenues for technical and sales training, maintenance and support are
recognized ratably over the term of the support period.
RESEARCH AND DEVELOPMENT EXPENSE:
Research and development costs are expensed as incurred. 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:
F-7
Years Ended Six Months Ended
September 30, March 31,
------------------------ ------------
1997 1996 1995 1998 1997
----- ------- -------- ----- -----
- - Revenues . . . . . . . . . . . $ - $ - $272,754 $ - $ -
- - Research and development costs $ - $29,067 $352,633 $ - $ -
WARRANTY EXPENSE:
The Company provides a reserve for warranty costs based upon its estimate of
such related costs and expenses. The reserve is accrued ratably as revenues are
earned. The accrued warranty reserve is amortized over the related warranty
period for the respective contract, typically a period of three to six months.
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 periods ending after December 15, 1997, and 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. Under SFAS
No. 128, basic earnings per share is computed by dividing income or loss
available to common shareholders by the weighted average number of shares
outstanding for the period. Diluted earnings per share reflect the potential
dilution of securities that could share in the earnings of an entity. Due to
the losses, there were no includable equivalents in any period presented.
Calculations under the new standard, which was adopted in the quarter ended
December 31, 1997, were the same as current calculations for all periods, since
all common stock equivalents were dilutive due to the losses.
Securities outstanding at March 31, 1998, the future potential dilutive
effect of which would be dependent upon the exercise price of the securities and
the market price of the Company's common stock at that time, include warrants to
purchase 270,000 shares of common stock and options to purchase 700,300 shares
of common stock. See Note 8 "Common Stock" and Note 10 "Stock Option Plan" for
details on these securities.
STOCK-BASED COMPENSATION:
Effective October 1, 1996, the Company adopted the disclosure provisions of 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 and March 31, 1998, the Company's financial instruments
consist of cash, and accounts and notes receivable. The carrying value of cash
and accounts receivable approximate fair value based upon the liquidity and
short-term nature of the assets. The carrying value of notes receivable
substantially approximate fair value based upon current market interest rates,
the short-term maturity of certain of the notes and relative amounts owed.
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
F-8
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 deciding 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.
F-9
3. CONCENTRATIONS OF CREDIT RISK AND FOREIGN SALES:
The Company performs ongoing credit evaluations of its customers and generally
does not require collateral on accounts receivable as the majority of the
Company's customers are large, well-established companies. Two customers
accounted for approximately 53% and 12% of the accounts receivable balance
at March 31, 1998. 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, four customers, including revenues from the Company's
Distributors treated as resulting from one customer (see Note 4), accounted for
approximately 17%, 15%, 11% and 10% 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. Three
customers, including revenues from the Company's Distributors treated as
resulting from one customer, accounted for approximately 45%, 14% and 12% of
total revenues for the six months ended March 31, 1998. Three customers,
including revenues from the Company's Distributors treated as resulting from
one customer, accounted for approximately 22%, 21% and 14% of total revenues for
the six months ended March 31, 1997. Net revenues from Canadian and European
customers were as follows:
Years Ended Six Months Ended
September 30, March 31,
------------------- ------------
1997 1996 1995 1998 1997
----- ----- ----- ----- -----
Canada 9% 15% 29% -- 8%
Europe 1% -- 10% 2% --
4. RELATED PARTY TRANSACTIONS:
The Company has certain transactions with related parties in the ordinary course
of business as set forth below.
Notes receivable and payable:
- -------------------------------
Notes receivable and payable from officers consist of the following:
September 30, March 31,
-------- --------- ----------
1997 1996 1998
-------- --------- ----------
10% Uncollateralized notes receivable from president, due
December 31, 1997 . . . . . . . . . . . . . . . . . . . . . . $ 65,429 $ 65,429 $ -
5.7 to 10% Uncollateralized notes receivable from Senior Vice
President, due in varying amounts through September 30, 1999 53,442 16,429 37,012
Accrued interest receivable. . . . . . . . . . . . . . . . . . 30,646 22,511 1,067
-------- --------- ----------
Total receivable from officers . . . . . . . . . . . . . . . 149,517 104,369 38,079
-------- --------- ----------
24% Uncollateralized notes payable to president, due
December 30, 1999 . . . . . . . . . . . . . . . . . . . . . . - - (350,000)
24% Uncollateralized notes payable to senior vice president,
due February 28, 2000 . . . . . . . . . . . . . . . . . . . . - - (225,000)
Uncollateralized notes payable to president. . . . . . . . . . - (6,800) -
Accrued interest payable . . . . . . . . . . . . . . . . . . . - (2,328) ( 26,537)
-------- --------- ----------
Total payable to officers. . . . . . . . . . . . . . . . . . - (9,128) (601,537)
-------- --------- ----------
Notes receivable from (payable to) officers, net . . . . . . . 149,517 95,241 (563,458)
Less current portion under original terms. . . . . . . . . . . 112,504 - -
-------- --------- ----------
$ 37,013 $ 95,241 (563,458)
======== ========= ==========
F-10
The Company had notes payable to other related parties as follows:
September 30, March 31,
----------------- -----
1997 1996 1998
----- ---------- -----
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 under original terms. . . . . . . . . . . - (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 generally for an initial one-year
period, but are renewable for up to four additional years based on certain
performance conditions. The Distributors generally have separate agreements
for license rights for unlimited usage of the Assess/2000 product. In the
case of one contract, 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 and recognized over a five year period commencing with the signing of
the respective agreements. Of these amounts, approximately $2,500,000 and
$2,228,000 is deferred at September 30, 1997 and March 31, 1998,
respectively. Additional fees of approximately $672,000 for training
programs, annual software maintenance, and customer support were received in
1997; of this amount, approximately $332,000 and $186,000 is deferred at
September 30, 1997 and March 31, 1998, respectively. The year 2000 project fee
expense related to the distributor contracts, included in cost of revenues
in the accompanying statements of operations, was approximately $853,000
for the year ended September 30, 1997 and $561,000 and $59,000 for the six
months ended March 31, 1998 and 1997, respectively.
Purchased Software:
- -------------------
During the year ended September 30, 1997, the Company commissioned and purchased
a $150,000 data analysis module for use with its year 2000 software products.
The software developer is an entity owned in part by the senior vice president
of the Company, another employee of the Company, and another shareholder.
F-11
5. EQUIPMENT AND FURNITURE:
Equipment and furniture is comprised of the following:
September 30, March 31,
---------------------- -----------
1997 1996 1998
---------- ---------- -----------
Computer equipment and software . . . . . $ 700,554 $ 229,787 $ 817,012
Furniture and equipment . . . . . . . . . 244,570 145,772 363,761
---------- ---------- -----------
945,124 375,559 1,180,773
Accumulated depreciation and amortization (404,320) (295,958) (520,428)
---------- ---------- -----------
$ 540,804 $ 79,601 $ 660,345
========== ========== ===========
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. At March 31,
1998, the Company's outstanding indebtedness under the agreement was $564,000.
The agreement may be terminated by either the factor or the Company at any time.
7. INCOME TAXES:
The components of the provision for income taxes are summarized as follows:
Years Ended Six Months Ended
September 30, March 31,
---------------------- ------------
1997 1996 1995 1998 1997
----- ------ ------- ----- -----
Current:
State. . . . . . . . . . . $ 800 $ 800 $ 800 $ - $ -
Foreign. . . . . . . . . . - 1,500 30,816 -. -.
----- ------ ------- ----- -----
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 allowance against the Company's deferred tax
assets arising from its net operating losses.
Significant components of the Company's net deferred tax balances are as
follows:
September 30, March 31,
-------------------------- ------------
1997 1996 1998
------------ ------------ ------------
Deferred tax assets (liabilities):
Accrual to cash adjustment . . . . . . . . . . $ 511,000 $ 446,000 $ 148,000
Net operating loss carryforwards . . . . . . . 1,507,000 1,191,000 1,973,000
State taxes, net of federal benefit, and other (107,000) (85,000) (85,000)
------------ ------------ ------------
Total deferred tax assets. . . . . . . . . . 1,911,000 1,552,000 2,036,000
Valuation allowance. . . . . . . . . . . . . . (1,911,000) (1,552,000) (2,036,000)
------------ ------------ ------------
Net deferred tax assets. . . . . . . . . . . $ - $ - $ -
============ ============ ============
F-12
Since the Company could not determine if it was more likely than not that the
deferred tax assets would be realized, a 100% valuation allowance has been
provided to eliminate the deferred tax assets at September 30, 1997 and 1996 and
March 31, 1998. The increase in the valuation allowance was $359,000,
$715,000, $126,000, and $125,000 in the years ended September 30, 1997, 1996 and
1995 and the six months ended March 31, 1998, respectively. Of the 1996
increase, $448,000 represented a change in the expected federal rate at date of
realization from 20% to 34%.
At March 31, 1998, the Company has net operating loss carryforwards for
federal and California state income tax purposes of approximately $5,240,000 and
$2,050,000, 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 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 May 1995 private placement, the Company issued 735,000
warrants to purchase additional shares of common stock at $.40 and $.60 per
share if exercised prior to August 31, 1995 and November 30, 1995, respectively.
In August 1995, warrants were exercised to purchase 183,750 shares at $.40 per
share. Warrants to purchase the remaining 551,250 shares of common stock at
$.60 per share were exercised in November 1995.
In December 1996, the Company sold 282,000 shares of its common stock in a
private placement resulting in proceeds of $1,128,000. The Company incurred
$5,275 of costs related to this sale. In connection with the sale, the Company
issued to the investors nontransferable warrants to purchase an additional
282,000 shares of common stock. The warrants are exercisable for a period of
two years, at a price of $4.00 per share during the first year and at $4.60 per
share during the second year. During the six months ended March 31, 1998,
warrants to purchase 12,000 shares of common stock were exercised resulting in
proceeds of $48,000.
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, or during the six months ended March 31, 1998.
Shares purchased under the Plan are subject to a right of repurchase by the
Company at the original purchase price upon the termination of the purchaser's
employment or consulting relationship with the Company. Except for the initial
stock purchases in 1993, for which the vesting commenced on June 25, 1992, the
right to repurchase generally lapses at the rate of one-third (1/3) after one
year from the date of purchase, and one-thirty-sixth (1/36) of the original
number of shares purchased per month thereafter. At March 31, 1998, September
30, 1997 and September 30, 1996, no shares are subject to the Company's
repurchase option under this provision. No shares were repurchased during the
years ended September 30, 1997 or 1996, or during the six months ended
March 31, 1998. 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.
F-13
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 optionee already owning common
stock representing 10% or more of the voting power).
Stock option activity under the Plan is as follows:
OPTIONS OUTSTANDING
SHARES --------------------------------------------------------------
AVAILABLE AGGREGATE WEIGHTED AVG.
FOR GRANT NO. OF SHARES PRICE PER SHARE PRICE EXERCISE 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
Granted during the six months
ended March 31, 1998. . . . . . - - - - -
Exercised during the six months
ended March 31, 1998 . . . . . - - - - -
Canceled during the six months
ended March 31, 1998. . . . . . 3,000 (3,000) 9.70 (29,100) 9.70
---------- -------------- ---------------- ----------- ---------------
Balance, March 31, 1998 . . . . . 236,200 700,300 $ 1.43-19.00 $2,778,985 $ 3.97
========== ============== ================ =========== ===============
The following table summarizes information with respect to stock options
outstanding at March 31, 1998.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- -------------------------------------------------------------------------------- -------------------------------------
RANGE OF NUMBER OUTSTANDING WEIGHTED AVG. REMAINING WEIGHTED AVG. NUMBER EXERCISABLE WEIGHTED AVG.
EXERCISE PRICE AT DECEMBER 31, 1997 CONTRACTUAL LIFE (YEARS) EXERCISE PRICE AT DECEMBER 31, 1997 EXERCISE PRICE
=============== ==================== ======================== =============== ==================== ===============
1.43-$2.00 . . 517,500 2.90 $ 1.45 517,500 $ 1.45
4.75. . . . . . 55,500 3.67 4.75 55,500 4.75
9.70-12.70. . . 61,300 4.21 11.02 48,800 10.81
15.35-19.00 . . 66,000 4.70 16.51 49,913 16.42
- --------------- -------------------- ------------------------ --------------- -------------------- ---------------
1.43-19.00 . . 700,300 3.25 $ 3.97 671,713 $ 3.52
=============== ==================== ======================== =============== ==================== ===============
F-14
In April 1998, at the request of the Board of Directors, the Vancouver Stock
Exchange approved a repricing of the options listed above at $15.35 and $19.00
per share to $11.15 per share. Other terms of those options remain the same.
In June 1998, at the request of the Board of Directors, the Vancouver Stock
Exchange approved a repricing of the options listed above at $9.70 and $12.70
per share to $8.02 per share. Other terms of those options remain the same.
The Company applies APB Opinion No. 25, Accounting for Stock Issued to
Employees, in accounting for its plan. Accordingly, no compensation cost has
been recognized for its stock option plan. Had compensation cost for the
Company's stock option plan been determined consistent with SFAS No. 123,
Accounting for Stock-Based Compensation, the Company's net loss and net loss per
share would have been the pro forma amounts indicated below:
Years Ended Six Months Ended
September 30, March 31,
-------------------------- ----------------------
1997 1996 1998 1997
------------ ------------ ---------- ----------
Net loss . . . . . . . . . . . . . . As reported $(1,045,511) $ (461,046) $(1,339,958) $(214,730)
Pro forma $(2,043,097) $(1,038,641) $(1,439,980) $(713,523)
Net loss per share-basic and diluted As reported $ (0.09) $ (0.04) $ (0.11) $ (0.02)
Pro forma $ (0.18) $ (0.09) $ (0.12) $ (0.06)
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. No stock
options were granted during the six months ended March 31, 1998 or 1997.
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, and $23,991 and $16,430 in the six months
ended March 31, 1998 and 1997, respectively.
The Company also has a Money Purchase Pension Plan (Pension Plan). The Company
was required to contribute 10% of total participant compensation through
December 1992 and 6% of total participant compensation from January 1, 1993
through December 31, 1994. Effective January 1, 1995, contributions to the
Pension Plan were 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, $127,268, $181,067 and
$61,678 in the fiscal years ended September 30, 1997, 1996 and 1995, and the
six months ended March 31, 1998 and 1997, respectively. As of September 30,
1997, future minimum lease payments under operating leases are as follow:
F-15
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. The rent expense for this additional space is excluded from the
preceding summary.
13. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Years Ended Six Months Ended
September 30, March 31,
------------------------- -----------------
1997 1996 1995 1998 1997
-------- ------- ------ ------- --------
Interest paid $290,648 $59,647 $8,144 $78,930 $264,617
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Years Ended Six Months Ended
September 30, March 31,
------- ----- ------- ----- -----
1997 1996 1995 1998 1997
------- ----- ------- ----- -----
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 $ - $ - $ - $ -
F-16
FORECROSS CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
ALLOWANCES AGAINST RECEIVABLES:
- --------------------------------
Additions -
---------------------
Balance, Charges to Revenues Deductions- Balance,
Beginning of or Costs and Write-offs End of
------------- ---------
Period Expenses (1) Charged to Reserve Period
------------- --------------------- ------------------- ---------
Year Ended September 30,
1997. . . . . . . . . . . . . . $ 340 $ 300,000 $ - $ 300,340
1996. . . . . . . . . . . . . . 3,500 - 3,160 340
1995. . . . . . . . . . . . . . - 3,500 - 3,500
Six Months Ended March 31,
1998. . . . . . . . . . . . . . 300,340 50,000 - 350,340
1997. . . . . . . . . . . . . . 340 - - 340
<FN>
(1) Certain allowances related to contract estimations for amounts of revenue
recognized on percentage-of-completion basis are charged directly to revenues
S-1