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 MARCH 31, 2002
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 MAY 15, 2002
COMMON STOCK, NO PAR VALUE 16,859,180
FORECROSS CORPORATION
FORM 10-Q
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets at March 31, 2002 (unaudited) and September 30, 2001
Statements of Operations (unaudited) for the three and six months ended
March 31, 2002 and 2001
Statements of Cash Flows (unaudited) for the six months ended March 31,
2002 and 2001
Statements of Shareholders' Deficit (unaudited) for the six months ended
March 31, 2002
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
MARCH 31, SEPT. 30,
------------- -------------
ASSETS 2002 2001
------------- -------------
(Unaudited)
Current assets:
Cash $ 4,523 $ 30,123
Accounts receivable, including unbilled receivables of $939,000 and
525,000, net of allowances of $220,000 and $20,000, respectively 733,897 696,842
Other current assets 17,422 22,213
------------- -------------
Total current assets 755,842 749,178
Equipment and furniture, net 105,578 177,934
Notes receivable 78,053 76,183
Other assets 32,274 43,196
------------- -------------
TOTAL ASSETS $ 971,747 $ 1,046,491
============= =============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 369,402 $ 275,482
Accrued compensation and related benefits 1,033,945 780,803
Accrued liabilities 164,764 167,489
Accrued commissions 171,902 104,026
Payable to factor 341,280 -
Notes payable to officers and related parties, current portion 100,000 100,000
Accrued warranty costs 74,072 67,835
Deferred revenue 179,125 190,575
------------- -------------
Total Current Liabilities 2,434,490 1,686,210
Notes payable to officers and related parties, less current portion 148,187 135,448
------------- -------------
TOTAL LIABILITIES 2,582,677 1,821,658
------------- -------------
Commitments and contingencies
Shareholders' deficit
Common stock, no par value; authorized 20,000,000 shares; issued and
outstanding 16,859,180 and 16,853,380, respectively 11,628,119 11,654,174
Accumulated deficit (13,239,049) (12,429,341)
------------- -------------
TOTAL SHAREHOLDERS' DEFICIT (1,610,930) (775,167)
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 971,747 $ 1,046,491
============= =============
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FORECROSS CORPORATION
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
MARCH 31, MARCH 31,
-------------------------- --------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
------------ ------------ ------------ ------------
Net revenue:
Migration services $ 13,242 $ 660,166 $ 992,932 $ 915,153
Consulting 89,500 124,775 184,000 200,120
Year 2000 software licenses, maintenance
agreements and distributorship fees from
related parties - 141,249 - 282,498
------------ ------------ ------------ ------------
Total net revenues 102,742 926,190 1,176,932 1,397,771
Cost of services and maintenance 402,066 373,590 828,372 777,791
------------ ------------ ------------ ------------
Gross margin (299,324) 552,600 348,560 619,980
------------ ------------ ------------ ------------
Operating expenses:
Sales and marketing 185,379 168,403 451,891 325,034
Research and development 127,776 221,126 234,740 407,845
General and administrative 215,625 313,239 419,832 588,700
------------ ------------ ------------ ------------
Total operating expenses 528,780 702,768 1,106,463 1,321,579
------------ ------------ ------------ ------------
Loss from operations (828,104) (150,168) (757,903) (701,599)
Interest and other expense, net (29,185) (43,590) (51,805) (90,037)
------------ ------------ ------------ ------------
Loss before provision for income taxes (857,289) (193,758) (809,708) (791,636)
Provision for income taxes - - - (1,600)
------------ ------------ ------------ ------------
Net Loss $ (857,289) $ (193,758) $ (809,708) $ (793,236)
============ ============ ============ ============
Loss per share - basic and diluted ($0.05) ($0.01) ($0.05) ($0.05)
============ ============ ============ ============
Weighted average shares used in computing
per share data 16,857,730 15,053,380 16,855,866 15,053,380
============ ============ ============ ============
3
FORECROSS CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED
MARCH 31,
--------------------------
2002 2001
------------ ------------
(Unaudited) (Unaudited)
INCREASE (DECREASE) IN CASH RESULTING FROM:
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (809,708) $ (793,236)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH USED IN OPERATING ACTIVITIES-
Non-cash compensation adjustment to consultants (14,709) (7,818)
Non-cash compensation to financial organization - 31,594
Depreciation and amortization 57,646 81,305
CHANGES IN OPERATING ASSETS AND LIABILITIES-
Accounts receivable (37,055) 198,278
Other assets and accrued interest on notes receivable from officers 13,844 (6,302)
Accounts payable and accrued liabilities 144,351 385,205
Accrued compensation 286,836 93,686
Deferred revenue from year 2000 distributors - (282,498)
Deferred revenue from projects (11,449) 418,766
------------ ------------
Net cash used in operating activities (370,244) 118,980
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from factoring of accounts receivable 786,475 944,910
Repayment of borrowings under factoring arrangement (445,195) (1,064,954)
Repayment of borrowings under capitalized leases - (14,979)
Exercise of stock options 3,364 -
------------ ------------
Net cash provided by financing activities 344,644 (135,023)
------------ ------------
NET DECREASE IN CASH (25,600) (16,043)
CASH AT BEGINNING OF PERIOD 30,123 18,833
------------ ------------
CASH AT END OF PERIOD $ 4,523 $ 2,790
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 34,380 $ 95,640
============ ============
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Accrued interest on notes payable to officers and related parties $ 12,737 $ 5,750
============ ============
Revaluation of options issued to purchase software $ (14,710) $ (9,892)
============ ============
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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)
---------- ------------ ------------- ------------
Exercise of stock options 5,800 3,364 - 3,364
Revaluation of options to consultants - (29,419) - (29,419)
Net loss - - (809,708) (809,708)
---------- ------------ ------------- ------------
BALANCES AT MARCH 31, 2002 16,859,180 $11,628,119 $(13,239,049) $(1,610,930)
========== ============ ============= ============
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 March 31, 2002, the Company had sustained recurring losses from
operations, and at March 31, 2002, had a shareholders' deficit of $1,611,000 and
a net working capital deficiency of $1,679,000. 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 various product offerings. The Company's continued
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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
CUSTOMERS OVER 10% OF TOTAL
MARCH 31,
2002 2001
----------------------------
Accounts Receivable
Number of Customers Represented 1 3
Percentage of Accounts Receivable 98% 64%, 18%, 12%
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
CUSTOMERS OVER 10% OF TOTAL
FOR THE THREE MONTHS ENDED
MARCH 31,
2002 2001
----------------------------------
Revenue
Number of Customers Represented 2 4
Percentage of Total Revenue 87%, 13% 49%, 16%, 15%, 13%
Revenue by Geographic Area
Europe Percentage of Total Revenue - 16%
United States Percentage of Total
Revenue 100% 84%
FOR THE SIX MONTHS ENDED
MARCH 31,
2002 2001
----------------------------------
Revenue
Number of Customers Represented 2 4
Percentage of Total Revenue 81%, 16% 42%, 20%, 14%, 14%
Revenue by Geographic Area
Europe Percentage of Total Revenue - 14%
United States Percentage of Total
Revenue 100% 86%
5. SUBSEQUENT EVENT:
In May 2002 the Company announced the signing of two new contracts. The
first contract, valued at $947,000, involves the migration of legacy
applications to DB2 and XML. The second contract, initially valued at $200,000,
is a pilot migration project, which is expected to grow by phases into a much
larger project.
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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 and six
months ended March 31, 2002 and 2001 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 MARCH 31, 2002 COMPARED TO THREE MONTH ENDED MARCH 31,
2001
Total revenue for the three months ended March 31, 2002 was $103,000 as
compared to $926,000 for the same period of 2001, a decrease of 89%. Migration
services for the period contributed a net revenue of $13,000 as compared to
revenue of $660,000 a year ago. Revenue in the 2002 period was less than
expected, due to increased reserves for project uncertainties, and increased
project costs due to unforeseen challenges in processing non-standard and
unique programming in our client applications, resulting in a 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 $90,000 as compared to $125,000 in
2001, 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 $1,175,000 at March 31, 2002, as compared to
$2,668,000 at September 30, 2001 and $1,129,000 at March 31, 2001.
Gross margin was ($299,000) and $553,000 for the three months ended March
31,2002 and 2001,respectively. Gross margin percentages were (291%) and 60% for
these periods. The negative gross margin and gross margin percentage for the
8
current 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 $185,000 in the three months ended March
31, 2002 as compared to $168,000 in the same period of 2001.
Research and development expenses were $128,000 at March 31, 2002 compared
to $221,000 in the corresponding period of 2001. During the current period, a
larger portion of our labor was project related and therefore included in
cost of revenue. Additional allocated cost savings came from consolidating
and reducing office space in September 2001.
General and administrative expenses were $216,000 and $313,000 in the three
months ended March 31, 2002 and 2001, respectively. Expense reductions in the
2002 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 $29,000 for the three months ended March 31, 2002
as compared to $44,000 in the 2001 quarter. The change in the current quarter
was due to a reduction in borrowing against the bank factoring line of credit.
The overall net loss for the three months ended March 31, 2002 was $857,000
or $0.05 per share compared with a net loss of $194,000 or $0.01 per share for
the three months ended March 31, 2001 (based on the weighted average number of
shares outstanding during the respective periods).
SIX MONTHS ENDED MARCH 31, 2002 COMPARED TO SIX MONTHS ENDED MARCH 31, 2001
Total revenue for the six months ended March 31, 2002 was $1,177,000 as
compared to $1,398,000 for the same period of 2001, a decrease of 16%. Migration
services revenue for the period contributed $993,000 as compared to $915,000 a
year ago. Revenue from consulting totaled $184,000 as compared to $200,000 in
2001, and revenue from the amortization of deferred year 2000 distributor
licenses, fees and maintenance was $0 for the current period compared to
$282,000 a year ago.
Gross margin was $349,000 and $620,000 for the six months ended March 31,
2002 and 2001, respectively. The gross margin in the 2001 period was higher due
to the deferred year 2001 distributor revenue Gross margin percentages were 30%
and 44% for these periods.
9
Sales and marketing expenses were $452,000 in the six months ended March
31, 2002 as compared to $325,000 in the same period of 2001. The increase in
expenses is primarily due to the cost of two sales representatives hired in the
fourth fiscal quarter of 2001.
Research and development expenses were $235,000 at March 31, 2002 compared
to $408,000 in the corresponding period of 2001. During the current period, a
significantly larger portion of our labor was project related and therefore
included in cost of revenue. Additional allocated cost savings came from
consolidating and reducing office space in September 2001.
General and administrative expenses were $420,000 and $589,000, in the six
months ended March 31, 2002 and 2001, respectively. Expense reductions in the
2002 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 $52,000 for the six months ended March 31, 2002
as compared to $90,000 in the 2001 quarter. The change in the current period was
due to a reduction in borrowing against the bank factoring line of credit.
The overall net loss for the six months ended March 31, 2002 was $810,000
or $0.05 per share compared with a net loss of $793,000 or $0.05 per share for
the six months ended March 31, 2001 (based on the weighted average number of
shares outstanding during the respective periods).
LIQUIDITY AND CAPITAL RESOURCES
Through March 31, 2002, we sustained recurring losses from operations, and
at March 31, 2002, we had a shareholders' deficit of $1,611,000 and a net
working capital deficiency of $1,679,000. 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.
10
For the six months ended March 31, 2002, operations were funded primarily by
borrowings against the factoring line of credit and increases in accounts
payable and accrued compensation.
A factoring agreement with a financial institution allows us to obtain financing
by borrowing against our accounts receivable on a recourse basis. At March 31,
2002, $341,000 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 third quarter of fiscal 2002 from some of the
migration contracts recently signed or 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
$10,000 and $25,000.
The Company signed an extension to its expired lease for office space
rather than relocating as previously considered. This extension expires April
30,2003. The approximate cost of the space over the new lease term is $161,000.
Cash and cash equivalents on hand at March 31, 2002 were $5,000 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
In January 2002, an employee exercised options to purchase 5,800
shares of stock at $0.58 per share. This transaction was exempt from the
registration requirements of the Securities Act, pursuant to Rule 701 of the
Securities Act.
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
May 20, 2002 BY: /S/ Bernadette C. Castello
-------------------------------------------------
Bernadette C. Castello
Senior Vice President and Chief Financial Officer
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