Distributorships costs are draining Forecross's Cash flow.....
Software Licenses and Distributorships: -----------------------------------------The Company has entered into agreements with several entities (the"Distributors") for licenses and distributorship arrangements for its year 2000software products, Assess/2000 and Complete/2000TM, and related services. TheDistributors are related to each other through some common ownership andmanagement; a shareholder of the Company is a founding investor and officer ofeach of the other entities.At least one other shareholder of the Company is also an investor in at leastone of the Distributors. As of September 30, 1996, this shareholder pledged150,000 shares of Company stock as collateral for $800,000 due under the termsof the first of the contracts; the entire amount was collected in January 1997.Under the distributorship agreements, the Distributors receiveterritorially exclusive rights to market year 2000 renovation projects to beperformed by the Company using the Complete/2000TM software, and year 2000assessment projects to be performed either by the Company or theDistributor using the Assess/2000 software. In exchange for sales andmarketing services and support, customer contact, project management servicesand staffing for a portion of the on-site work, the Distributor generallyreceives a fee equal to 25% of collected revenues. The Company allocates thosefees 25% to cost of services and maintenance, and 75% to sales and marketingexpense. The exclusivity rights under these contracts are generally for aninitial one-year period, but are renewable for up to four additional yearsbased on certain performance conditions. The Distributors generally haveseparate agreements for license rights for unlimited usage of the Assess/2000product. In the case of one contract, fees payable are 50% of collected revenuesuntil $1,500,000 has been received by the Distributor, and 25% of revenuecollected thereafter. During fiscal 1998, the $1,500,000 amount had been earned,with all subsequent fees to be earned at the 25% rate.The licensing and distributorship fees received from the Distributors, totaling$3,125,000 and $200,000 in 1997 and 1996, respectively, have generally beendeferred and recognized over a five year period commencing with the signing ofthe respective agreements. Of these amounts, approximately $1,955,000 and F-10<PAGE>$2,500,000 is deferred at September 30, 1998 and September 30, 1997,respectively. Additional fees of approximately $672,000 for trainingprograms, annual software maintenance, and customer support were received in1997; of this amount, approximately $155,000 and $332,000 is deferred atSeptember 30, 1998 and September 30, 1997, respectively. The year 2000 projectfee expense related to the distributor contracts, included in cost of revenuesin the accompanying statements of operations, was approximately $346,000,$213,000 and $0 for the years ended September 30, 1998, 1997 and 1996,respectively. The year 2000 expenses related to the distributor contracts,included in sales and marketing expenses, were approximately $1,037,000,$640,000 and $0 for the years ended September 30, 1998, 1997 and 1996,respectively.Purchased Software: -------------------During the year ended September 30, 1997, the Company commissioned and purchaseda $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 presidentof the Company, another employee of the Company, and another shareholder.
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