SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-29672
FORECROSS CORPORATION
CALIFORNIA 94-2823882
(State or other jurisdiction (I.R.S. Employer
incorporation or organization) Identification No.)
90 NEW MONTGOMERY STREET, SAN FRANCISCO, CALIFORNIA 94105
Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (415) 543-1515
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO .
SHARES OUTSTANDING OF THE REGISTRANT'S COMMON STOCK:
CLASS OUTSTANDING AT FEBRUARY 15, 2002
COMMON STOCK, NO PAR VALUE 16,853,380
FORECROSS CORPORATION
FORM 10-Q
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets at December 31, 2001 (unaudited) and September 30, 2001
Statements of Operations (unaudited) for the three months ended December
31, 2001 and 2000
Statements of Cash Flows (unaudited) for the three months ended December
31, 2001 and 2000
Statements of Shareholders' Deficit (unaudited) for the three months ended
December 31, 2001 and 2000
Notes to Unaudited Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Recent Sales of Unregistered Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signature Page
Exhibit Index
PART I. FINANCIAL INFORMATION
-----------------------------
FORECROSS CORPORATION
BALANCE SHEETS
DEC. 31, SEPT. 30,
----------------------------
ASSETS 2001 2001
------------- -------------
(Unaudited)
Current assets:
Cash $ 39,931 $ 30,123
Accounts receivable, including unbilled receivables of $660,000 and
$525,000, net of allowances of $20,000 and $20,000, respectively 1,248,660 696,842
Other current assets 35,168 22,213
------------- -------------
Total current assets 1,323,759 749,178
Equipment and furniture, net 148,632 177,934
Notes receivable 77,118 76,183
Other assets 31,274 43,196
------------- -------------
TOTAL ASSETS $ 1,580,783 $ 1,046,491
============= =============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 268,767 $ 275,482
Accrued compensation and related benefits 901,786 921,303
Accrued liabilities 27,204 26,989
Accrued commissions 161,942 104,026
Payable to factor 445,195 -
Notes payable to officers and related parties, current portion 100,000 100,000
Accrued warranty costs 87,511 67,835
Deferred revenue-projects 181,533 190,575
------------- -------------
Total Current Liabilities 2,173,938 1,686,210
Notes payable to officers and related parties, less current portion 141,817 135,448
------------- -------------
TOTAL LIABILITIES 2,315,755 1,821,658
------------- -------------
Commitments and contingencies
Shareholders' deficit
Common stock, no par value; authorized 20,000,000 shares; issued and
outstanding 16,853,380 11,646,788 11,654,174
Accumulated deficit (12,381,760) (12,429,341)
------------- -------------
TOTAL SHAREHOLDERS' DEFICIT (734,972) (775,167)
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 1,580,783 $ 1,046,491
============= =============
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FORECROSS CORPORATION
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED
DECEMBER 31,
--------------------------
2001 2000
--------------------------
(Unaudited) (Unaudited)
Net revenue:
Migration services $ 979,690 $ 254,987
Consulting 94,500 75,345
Year 2000 software licenses, maintenance agreements and
distributorship fees from related parties - 141,249
--------------------------
Total net revenues 1,074,190 471,581
Cost of services and maintenance 426,306 404,201
--------------------------
Gross margin 647,884 67,380
--------------------------
Operating expenses:
Sales and marketing 266,512 156,631
Research and development 106,964 186,719
General and administrative 204,207 275,461
--------------------------
Total operating expenses 577,683 618,811
--------------------------
Income (loss) from operations 70,201 (551,431)
Interest and other expense, net (22,620) (46,447)
--------------------------
Income (loss) before provision for income taxes 47,581 (597,878)
Provision for income taxes - (1,600)
--------------------------
Net Income (loss) $ 47,581 ($599,478)
==========================
Earnings (loss) per share - basic and diluted $ 0.00 ($0.04)
==========================
Weighted average shares used in computing per share data 16,853,380 15,053,380
==========================
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FORECROSS CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED
DECEMBER 31,
-----------------------
2001 2000
- -----------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
INCREASE (DECREASE) IN CASH RESULTING FROM:
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 47,581 ($599,478)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH USED IN OPERATING ACTIVITIES-
Non-cash compensation adjustment to consultants (3,693) 14,650
Depreciation and amortization 25,609 43,203
CHANGES IN OPERATING ASSETS AND LIABILITIES-
Accounts receivable (551,818) 305,842
Other assets and accrued interest on notes receivable from officers (1,968) (8,422)
Accounts payable and accrued liabilities 53,816 (8,921)
Accrued compensation 4,128 75,928
Deferred revenue from year 2000 distributors - (141,249)
Deferred revenue from projects (9,042) 262,780
-----------------------
Net cash used in operating activities (435,387) (55,667)
-----------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from factoring of accounts receivable 445,195 545,243
Repayment of borrowings under factoring arrangement - (501,244)
Repayment of borrowings under capitalized leases - (5,999)
-----------------------
Net cash provided by financing activities 445,195 38,000
-----------------------
NET INCREASE (DECREASE) IN CASH 9,808 (17,667)
CASH AT BEGINNING OF PERIOD 30,123 18,833
-----------------------
CASH AT END OF PERIOD $ 39,931 $ 1,166
=======================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 17,176 $ 45,775
=======================
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Accrued interest on notes payable to officers and related parties $ 6,379 $ 2,875
=======================
Options issued to purchase software ($3,693) $ 14,638
=======================
4
FORECROSS CORPORATION
STATEMENTS OF SHAREHOLDERS' DEFICIT
(UNAUDITED)
COMMON STOCK
------------------------ ACCUMULATED TOTAL
SHARES AMOUNT DEFICIT DEFICIT
----------------------------------------------------
BALANCES AT OCTOBER 1, 2001 16,853,380 $11,654,174 ($12,429,341) ($775,167)
Revaluation of options to consultants - (7,386) - ($7,386)
Net income - - 47,581 $ 47,581
----------------------------------------------------
BALANCES AT DECEMBER 31, 2001 16,853,380 $11,646,788 ($12,381,760) ($734,972)
====================================================
FORECROSS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. UNAUDITED INTERIM FINANCIAL STATEMENTS:
The unaudited interim financial statements of Forecross Corporation have
been prepared in conformity with generally accepted accounting principles,
consistent in all material respects with those applied in the Annual Report on
Form 10-K for the year ended September 30, 2001. The interim financial
information is unaudited, but in the opinion of management, includes all
adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the information set forth therein. The interim financial
statements should be read in connection with the financial statements and notes
in the Company's Annual Report on Form 10-K for the year ended September 30,
2001. The interim period results are not necessarily indicative of the results
for the year ending September 30, 2002.
2. BASIS OF PRESENTATION AND GOING CONCERN:
Through December 31, 2001, the Company had sustained recurring losses from
operations, and at December 31, 2001, had a shareholders' deficit of $735,000
and a net working capital deficiency of $850,000. These conditions raise
substantial doubt about the ability of the Company to continue as a going
concern. The opinion of the Company's independent certified public accountants
on the audited financial statements for the year ended September 30, 2001 also
contained an explanatory paragraph regarding this doubt about the Company's
ability to continue as a going concern. During fiscal 2002, 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, sales of
shares of common stock, and software license fees from organizations desiring
access to the Company's
5
various product offerings. The Company's continued existence is dependent upon
its ability to achieve and maintain profitable operations by controlling
expenses and obtaining additional business. Management believes that the return
of migration contracts combined with increased automation of its services for
migration projects and cost reduction actions previously implemented should
improve the Company's profitability in fiscal 2002. However, there can be no
assurance that the Company's efforts to achieve and maintain profitable
operations will be successful. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures; contingent assets and liabilities at the date of the financial
statements; and the reported amounts of revenue and expenses during the
reporting period. Accordingly, actual results could differ from those estimates.
The most significant estimates subject to future uncertainties are those
relating to calculations of percentage of completion for projects in process and
estimations of warranty liability. It is at least reasonably possible that the
significant estimates used will change within a year.
Reclassifications:
Certain prior-year amounts have been reclassified to conform to current
year presentation.
4. CONCENTRATIONS OF CREDIT RISK AND FOREIGN SALES:
The Company performs ongoing credit evaluations of its customers and
generally does not require collateral on accounts receivable as the majority of
the Company's customers are large, well-established companies. In the following
table, revenues from the Company's Distributors are treated as resulting from
one customer.
CONCENTRATIONS OF ACCOUNTS RECEIVABLE
DECEMBER 31,
2001 2000
------------------
Accounts Receivable
Number of Customers Represented 2 2
Percentage of Accounts Receivable 80%, 16% 83%, 10%
SEPTEMBER 30,
2001 2000
------------------
Accounts Receivable
Number of Customers Represented 2 2
Percentage of Accounts Receivable 69%, 24% 75%, 22%
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CONCENTRATIONS OF REVENUE GENERATION
FOR THE THREE MONTHS ENDED
DECEMBER 31,
2001 2000
---------------------------
Revenue
Number of Customers Represented 2 4
30%, 26%, 21%,
Percentage of Total Revenue 88%, 9% 15%
Revenue by Geographic Area
United States Percentage of
Total Revenue 100% 100%
5. DEFERRED REVENUE:
The Company has no remaining obligations or continuing obligations with
respect to its prior arrangements with Y2K distributors or customers. Remaining
deferred revenues relate to migration projects for which amounts have been
billed or funds received in advance of revenues earned under the percentage of
completion method.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following summary of our material activities for the three months ended
December 31, 2001 and 2000 is qualified by, and should be read in conjunction
with more detailed information along with the financial statements and related
notes and other information contained in this report. Each recipient of this
document is urged to read it in its entirety.
The financial results reported herein do not indicate the financial results that
we may achieve in any future period. Other than the historical facts contained
in this document, this Quarterly Report contains statements that are
forward-looking, such as statements relating to plans for future activities.
Such forward-looking information involves important risks and uncertainties that
could significantly affect results in the future and, accordingly, such results
may differ from those expressed in any forward-looking statements made by us or
on our behalf. These risks and uncertainties include concentration of credit,
outstanding indebtedness, dependence on expansion, activities of competitors,
changes in federal or state laws and the administration of such laws, protection
of trademarks and other proprietary rights and the general condition of the
economy and its effect on the securities markets. For a discussion of such
risks and uncertainties see our Annual Report on Form 10-K for the fiscal year
ended September 30, 2001.
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 2001 COMPARED TO THREE MONTH ENDED DECEMBER
31, 2000
Total revenue for the three months ended December 31, 2001 was $1,074,000
as compared to $472,000 for the same period of 2000, an increase of 128%.
Migration services revenue for the period contributed $980,000 as compared to
$255,000 a year ago. Revenue in the 2000 period was less than expected, in part,
due to delays in the signing of new business until late in the reporting period,
and unanticipated challenges in processing non-standard and unique programming
in client applications, resulting in a temporary slowing in completion of
billable and revenue generating milestones. Project revenue is recognized on the
percentage-of-completion method, using estimates of the costs remaining.
Revenue from consulting totaled $95,000 as compared to $75,000 in 2000, and
revenue from the amortization of deferred year 2000 distributor licenses, fees
and maintenance was $0 for the current period compared to $141,000 a year ago.
Backlog was $1,689,000 at December 31, 2001, as compared to $2,668,000 at
September 30, 2001 and $1,402,000 at December 31, 2000.
Gross margin was $648,000 and $67,000 for the three months ended December 31,
2001 and 2000, respectively. Gross margin percentages were 60% and 14% for these
periods. The lower gross
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margin and gross margin percentage for the prior year period was due to the
previously mentioned challenges, where costs were being incurred to analyze and
provide a solution for the non-standard programming, without being able to
recognize related revenue.
Sales and marketing expenses were $267,000 in the three months ended December
31, 2001 as compared to $157,000 in the same period of 2000. The increase
reflects the reassignment of certain employees from administrative to
sales-related positions, the cost of two sales representatives hired in the
fourth fiscal quarter of 2001, and higher sales commissions earned based on
higher revenue recognized.
Research and development expenses were $107,000 at December 31, 2001 compared to
$187,000 in the corresponding period of 2000. During the current period, a
larger portion of the department labor was project related and included in cost
of revenue. Additional allocated cost savings came from consolidating and
reducing office space in September 2001.
General and administrative expenses were $204,000 and $275,000, in the three
months ended December 31, 2001 and 2000, respectively. Expense reductions in
the 2001 quarter were due to the reassigning of certain employees to
sales-related positions, reducing rented office space, and changes in the value
of options granted to consultants.
Net interest expense was $23,000 for the three months ended December 31, 2001 as
compared to $46,000 in the 2000 quarter. The change in the current quarter was
due to a reduction in borrowing against the bank factoring line of credit.
The overall net income for the three months ended December 31, 2001 was $48,000
or $0.00 per share compared with a net loss of $599,000 or $0.04 per share for
the three months ended December 31, 2000 (based on the weighted average number
of shares outstanding during the respective periods).
The Company anticipates relocating its offices in San Francisco at the end of
March 2002 and is close to completing the negotiations and signing the lease
contract. The approximate cost of rent in the first year of the lease will be
$120,000.
LIQUIDITY AND CAPITAL RESOURCES
Through December 31, 2001, we sustained recurring losses from operations,
and at December 31, 2001, we had a shareholders' deficit of $735,000 and a net
working capital deficiency of $850,000. These conditions raise substantial
doubts about our ability to continue as a going concern. The opinion of our
independent certified public accountants on the audited financial statements for
the year ended September 30, 2001 also contained an explanatory paragraph
regarding this doubt about our ability to continue as a going concern.
9
For the three months ended December 31, 2001, operations were funded primarily
by borrowings against the factoring line of credit.
A factoring agreement with a financial institution allows us to obtain financing
by borrowing against our accounts receivable on a recourse basis. At December
31, 2001, $445,000 was outstanding under the agreement and at September 30,
2001, $0 was outstanding. The agreement, established in October 1995 and
modified in March 2001, may be terminated by either the factor or us at any
time.
We are aggressively pursuing new opportunities for migration services, including
developing products and services specifically marketable to businesses currently
using legacy systems but needing to migrate to more web-friendly platforms. We
expect additional revenue in the second quarter of fiscal 2002 from some of the
migration contracts currently under negotiation. We are closely monitoring our
sales pipeline, work in progress, collections and cash requirements to determine
whether the existing sources of financing are adequate to support our operations
or whether additional means of financing, including debt or equity financing,
may be required to satisfy our working capital and other cash requirements.
If we can obtain the anticipated level of new business, and continue the use of
short-term receivables financing, we believe we will have sufficient funds to
meet our needs through the balance of fiscal 2002. Cash from operations and the
other sources described above may not be achieved or may not be sufficient for
our needs. While we have not experienced difficulty in attracting or retaining
qualified personnel in the past, any future problems in this area may have a
material negative effect on our results of operations.
We anticipate that our capital expenditures for fiscal 2002 will be between
$50,000 and $75,000.
Cash and cash equivalents on hand at December 31, 2001 were $40,000 as compared
to $30,000 at September 30, 2001.
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PART II-OTHER INFORMATION
-------------------------
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. RECENT SALES OF UNREGISTERED SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORT ON FORM 8-K
(a). Index and Description of Exhibits
EXHIBIT NO. DESCRIPTION
- ------------------------
3.1+ Restated Articles of Incorporation
3.2+ By-Laws
10.1+ Lease Agreement, dated January 1, 1997 between the Company and The
Canada Life Assurance Company
10.2+ Form of Indemnification Agreement entered into between the Company
and each of its officers and directors
10.3+ 1993 Restricted Stock Purchase Plan
10.4+ 1994 Stock Option Plan and Form of Option Agreement
10.8+ Factoring Agreement, dated October 30, 1995, between the Company
and Silicon Valley Financial Services
10.10+ Factoring Modification Agreement, dated January 13, 1998, between
the Company and Silicon Valley Financial Services
+ Previously filed as part of the Company's Form 10/A, effective June
16, 1998.
(b). Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Registrant
FORECROSS CORPORATION
February 19, 2002 BY: /S/ Bernadette C. Castello
-----------------------------------------
Bernadette C. Castello
Senior Vice President and Chief Financial Officer
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