10-Q 1 doc1.txt 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, 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) TELEPHONE: (415) 543-1515 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . Shares outstanding of the Registrant's common stock: Class Outstanding at April 30, 2001 Common Stock, no par value 15,053,380 FORECROSS CORPORATION FORM 10-Q TABLE OF CONTENTS PART I. FINANCIAL INFORMATION Item 1. Financial Statements Balance Sheets at March 31, 2001 (unaudited) and September 30, 2000 Statements of Operations (unaudited) for the three and six months ended March 31, 2001 and 2000 Statements of Cash Flows (unaudited) for the six months ended March 31, 2001 and 2000 Statements of Shareholders' Deficit (unaudited) for the six months ended March 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 NOTES TO FINANCIAL STATEMENTS (Unaudited) 1. UNAUDITED INTERIM FINANCIAL STATEMENTS: The unaudited interim financial statements of Forecross Corporation have been prepared in conformity with generally accepted accounting principles, consistent in all material respects with those applied in the Annual Report on Form 10-K for the year ended September 30, 2000. The interim financial information is unaudited, but in the opinion of management, includes all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the information set forth therein. The interim financial statements should be read in connection with the financial statements and notes in the Company's Annual Report on Form 10-K for the year ended September 30, 2000. The interim period results are not necessarily indicative of the results for the year ending September 30, 2001. 2. BASIS OF PRESENTATION AND GOING CONCERN: Through March 31, 2001, the Company had sustained recurring losses from operations and, at March 31, 2001, had a shareholders' deficit of $2,119,000 and a net working capital deficiency of $2,215,000. 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, 2000 also contained an explanatory paragraph regarding this doubt about our ability to continue as a going concern. During fiscal 2001, the Company expects to meet its working capital and other cash requirements with cash derived from operations, short-term receivables and other financing as required, and software license fees from organizations desiring access to the Company's various product offerings. The Company's continued existence is dependent upon its ability to achieve and maintain profitable operations by controlling expenses and obtaining additional business. Management believes that the return of migration contracts combined with increased automation of its services for migration projects and cost reduction actions previously implemented should improve the Company's profitability in fiscal 2001. However, there can be no assurance that the Company's efforts to achieve and maintain profitable operations will be successful. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: USE OF ESTIMATES: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures; contingent assets and liabilities at the date of the financial statements; and the reported amounts of revenue and expenses during the reporting period. Accordingly, actual results could differ from those estimates. The most significant estimates subject to future uncertainties are those relating to calculations of percentage of completion for projects in process and estimations of warranty liability. It is at least reasonably possible that the significant estimates used will change within a year. RECLASSIFICATIONS: Certain prior-year amounts have been reclassified to conform to current year presentation. 5 4. CONCENTRATIONS OF CREDIT RISK AND FOREIGN SALES: The Company performs ongoing credit evaluations of its customers and generally does not require collateral on accounts receivable as the majority of the Company's customers are large, well-established companies. In the following table, revenues from the Company's Distributors are treated as resulting from one customer.

5. GRANTING OF WARRANTS: In March 2001, the Company signed an agreement modifying its factoring terms to reduce the interest rate and fees charged. As part of the agreement, the Company granted to the financial organization 100,000 warrants to purchase shares of the Company's stock. These warrants have an exercise price of $1.12 per share, and an expiration date of September 1, 2005. The company recorded $32,000 during the current period related to these warranta. 6. SUBSEQUENT EVENT: During May 2001, an existing client signed a contract for an additional $3,000,000 of migration services, bringing the total value of the project to $3,500,000. 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, 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, 2000. 6 RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THREE MONTHS ENDED MARCH 31, 2000 Total revenue for the three months ended March 31, 2001 was $926,000 as compared to $513,000 for the same period of 2000, an increase of 81%. Migration services revenue for the period contributed $660,000 as compared to $273,000 a year ago. Revenue from consulting totaled $125,000 as compared to $77,000 in 2000, and revenue from the amortization of deferred year 2000 distributor licenses, fees and maintenance remained at $141,000 for both periods. The current period change over a year ago reflects substantial progress toward the completion of multiple migration projects. Revenue in the 2000 quarter was also affected negatively by the slow return of migration service contracts following the passing of the year 2000 deadline. Project revenue is recognized on the cost-of-completion method, using estimates of the costs remaining. Backlog was $1,129,000 at March 31, 2001, as compared to $993,000 at September 30, 2000 and $2,001,000 at March 31, 2000. Gross margin was $553,000 and $297,000 for the three months ended March 31, 2001 and 2000, respectively. Gross margin percentages were 60% and 58% for these periods. Sales and marketing expenses were $168,000 in the three months ended March 31, 2001 as compared to $42,000 in the same period of 2000. Expenses for the 2000 quarter were reduced by $68,000 due to a correction of an over accrual. Research and development expenses were $221,000 at March 31, 2001 compared to $236,000 in the corresponding period of 2000. General and administrative expenses were $313,000 and $931,000, in the three months ended March 31, 2001 and 2000, respectively. The 2000 period included a $652,000 non-cash compensation charge for beneficial pricing to employees, distributors and a director related to the March 2000 stock private placement and debt conversion. Net interest expense was $44,000 for the three months ended March 31, 2001 as compared to $117,000 in the 2000 quarter, reflecting the elimination of debt to the company's senior officers and to year 2000 distributors as part of the previously mentioned debt to equity conversion. The overall net loss for the three months ended March 31, 2001 was $194,000 or $0.01 per share compared with a loss of $1,029,000 or $0.08 per share for the three months ended March 31, 2000 (based on the weighted average number of shares outstanding during the respective periods). The current period change over a year ago reflects the $652,000 non-cash charge for warrant expense in 2000, and the effects of increased revenues in 2001. 7 SIX MONTHS ENDED MARCH 31, 2001 COMPARED TO SIX MONTHS ENDED MARCH 31, 2000 Total revenue for the six months ended March 31, 2001 was $1,398,000 as compared to $1,930,000 for the same period of 2000, a decrease of 28%. Migration services revenue was $908,000 as compared to $383,000 a year ago. There was no Year 2000 project revenue in the current six months, compared to $1,057,000 for the same period a year ago. Revenue from the amortization of deferred year 2000 distributor licenses, fees and maintenance remained at $282,000 for both periods. Revenue from development and consulting totaled $200,000 as compared to $185,000 in 2000. Gross margin was $620,000 and $1,161,000 for the six months ended March 31, 2001 and 2000, respectively. Gross margin percentages were 44% and 60% for these periods. The higher gross margin percentage in 2000 was due to the completion of higher margin Year 2000 renovation contracts in the first fiscal quarter. The lower gross margin in 2001 was primarily due to unanticipated challenges in processing non-standard and unique programming in a portion of one of our client's applications. These problems were substantially resolved during the second fiscal quarter. Sales and marketing expenses were $325,000 for the six months ended March 31, 2001 as compared to $318,000 for the same period of 2000. Year to date research and development expenses were $408,000 as compared to $434,000 in the prior year. General and administrative expenses were $589,000 and $1,214,000, for the year to date periods. The 2000 period included a non-recurring $652,000 non-cash compensation expense for beneficial pricing to employees, distributors and a director related to the issuance of common stock and warrants in the March 2000 stock private placement and debt conversion. Net interest expense was $90,000 for the six months ended March 31, 2001 as compared to $259,000 in 2000, reflecting the elimination of debt to the company's senior officers and to year 2000 distributors as part of the March 2000 debt conversion. The overall net loss for the six months ended March 31, 2001 was $793,000 or $0.05 per share compared with a loss of $1,064,000 or $0.08 per share for the six months ended March 31, 2000 (based on the weighted average number of shares outstanding during the respective periods). The change from a year ago reflects two items. First is the $652,000 non-cash charge for warrant expense in 2000. Second is that, in the 2001 period we had unanticipated challenges in processing non-standard and unique programming in a portion of one of our client's applications, resulting in a slowing in completion of billable and revenue generating milestones and lower gross margins. 8 LIQUIDITY AND CAPITAL RESOURCES Through March 31, 2001, we sustained recurring losses from operations and, at March 31, 2001, we had a shareholders' deficit of $2,119,000 and a net working capital deficiency of $2,215,000. In addition, at March 31, 2001, the Company's cash remains significantly low. These conditions raise substantial doubts about our ability to continue as a going concern. See Note 2 of Notes to Financial Statements. The opinion of our independent certified public accountants on the audited financial statements for the year ended September 30, 2000 also contained an explanatory paragraph regarding this doubt about our ability to continue as a going concern. For the six months ended March 31, 2001, operations were funded by a payment received for future consulting services, by collection of accounts receivable, by deferral of salaries of senior officers, and by increases in accounts payable. In December 2000 we received an advance payment of $300,000 from a client, for future XML-related consulting services. As of March 31, 2001, $126,000 or 46% of the advance has been earned and recognized in revenues. We expect the balance to be earned over the next two quarters. During May 2001, an existing client signed a contract for an additional $3,000,000 of migration services, bringing the total value of the project to $3,500,000. We believe this will improve our cash position. 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, 2001, $381,000 was outstanding under the agreement and at September 30, 2000, $501,000 was outstanding. The agreement, established in October 1995, may be terminated by either the factor or us at any time. We are aggressively pursuing new opportunities for migration services, including developing products and services specifically marketable to businesses currently using legacy systems but needing to migrate to more web-friendly platforms. We expect additional revenue in the second quarter of fiscal 2001 from some of the migration contracts currently under negotiation. We are closely monitoring our sales pipeline, work in progress, collections and cash requirements to determine whether the existing sources of financing are adequate to support our operations or whether additional means of financing, including debt or equity financing, may be required to satisfy our working capital and other cash requirements. If we can obtain the anticipated level of new business, and continue the use of short-term receivables financing, we believe we will have sufficient funds to meet our needs through the balance of fiscal 2001. Cash from operations and the other sources described above may not be achieved or may not be sufficient for our needs. While we have not experienced difficulty in attracting or retaining qualified personnel in the past, any future problems in this area may have a material negative effect on our results of operations. We anticipate that our capital expenditures for fiscal 2001 will be under $75,000. Cash and cash equivalents on hand at March 31, 2001 were $3,000 as compared to $19,000 at September 30, 2000. 9 PART II-OTHER INFORMATION Item 1. Legal Proceedings None. Item 2. Recent Sales of Unregistered Securities In March 2001, the Company signed an agreement modifying its factoring terms to reduce the interest rate and fees charged. As part of the agreement, the Company granted to the financial organization 100,000 warrants to purchase shares of the Company's stock. These warrants have an exercise price of $1.12 per share, and an expiration date of September 1, 2005. The Company recorded $32,000 during the current period for seven months of prorated warrant expense. The grant of warrants was exempt from the registration requirements of the Securities Act of 1933, as amended, pursuant to Section 4(2) of such 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

(b). Reports on Form 8-K None 11 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 21, 2001 BY: /S/ Bernadette C. Castello --------------------------------- Bernadette C. Castello Senior Vice President and Chief Financial Officer 12

FORECROSS CORP 10-Q