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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
(X) ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT FOR
THE FISCAL YEAR ENDED JUNE 30, 1996
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO __________
Commission File Number: 33-18600-D
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QCS CORPORATION
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(Exact name of small business issuer as specified in its charter)
DELAWARE 98-0132465
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
650 CASTRO STREET, SUITE 210, MOUNTAIN VIEW, CA 94041
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(415) 966-1214
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ISSUER'S TELEPHONE NUMBER
Securities registered pursuant to
Section 12(b) of the Act: NONE
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Securities registered pursuant to
Section 12 (g) of the Act: COMMON SHARES, PAR VALUE $.001 PER SHARE
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(Title of Class)
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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB ( )
Revenues for the twelve-month period ended June 30, 1996 were: $1,031,858. The
aggregate market value of the common stock held by non-affiliates of the Issuer
as of November 20, 1996 was $25,119,198. The number of shares of Common Stock,
par value $.001 per share, outstanding as of November 20, 1996 was 17,266,531.
Documents incorporated by reference: NONE.
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Transitional Small Business Disclosure Format: YES NO X
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
QCS Corporation (the "Company") is an electronic commerce service provider
serving the worldwide retail industry. The Company provides its users with
computer software and related hardware to enable retailers and suppliers to
conduct the purchase and sale of merchandise on a global basis. Using Lotus
Notes-TM- and industry standard networking protocols and transmitting data over
leased "backbone" trunk lines, the Company maintains a secure yet open
electronic network which helps retailers conduct on-line communication and
transactions with their vendors and suppliers (the "QCS Network"). This
communication and trading process is usually referred to in the retail industry
as "sourcing." High volumes of products and transaction data need to be
exchanged between the retailers and their suppliers in order for buy-sell
transactions to be initiated, negotiated and closed. This critical sourcing
process typically requires a substantial amount of time and attention from both
the retail merchandise buyer and the salesperson of a manufacturer or a
distributor. The QCS Network and the Company's related software products and
services are designed to help make this sourcing function substantially more
effective and efficient, to facilitate the workflow management of retail
industry buyers and sellers, and ultimately to set the standard of sourcing for
selected retail industry product categories.
QCS was incorporated in 1994 as a Delaware corporation. QCS owns all of the
outstanding shares of its operating subsidiaries, QCS Development Company S.A.
and QCS Global Retail Information Network Asia Pacific Ltd. The Company
maintains offices in Mountain View, California, Hong Kong and Nice, France. In
October, 1994 the Company merged with QCS Corporation, a publicly-held Colorado
corporation formerly known as Parkway Capital Corporation ("QCS-Colo") whose
shares had traded on the Over-The-Counter Bulletin Board (the "OTC Bulletin
Board") under the symbol PRKW, following which QCS was the surviving
corporation. After the merger, shares of QCS began trading on the OTC Bulletin
Board under the symbol, QCSC.
The Company's principal offices are located at 650 Castro Street, Suite 210,
Mountain View, CA 94041 and its telephone number is (415) 966-1214.
For a detailed discussion of risk factors relating to the Company, see "Risk
Factors" at the end of this Item 1. Stockholders and prospective investors in
the Company should carefully consider these risk factors.
OVERVIEW OF QCS GLOBAL SOURCING SYSTEM
The QCS Network uses industry standard software and worldwide telecommunication
protocols. Currently the backbone trunk line telecommunications services
are provided by two major complimentary network providers.
Service is provided for a usage volume related fee.
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Through the QCS Network, retailers, manufacturers and distributors can exchange
their sourcing information electronically in a secure and confidential
environment. The QCS Network is designed to provide accuracy, speed, format
standardization, comparability and on-screen product images that can be
manipulated with relative ease by the end-user. Access to the QCS Network is
available to its retail industry clients 24 hours every day in over 180
countries and territories throughout the world.
The QCS Network and the Company's software products and services are designed to
address a sourcing and workflow management need in the broad, worldwide
consumer retail industry. When utilized to its full capability and employed on
a wide-scale basis, the QCS Network is capable of reducing a client's cost of
sourcing communication but, more importantly, it can substantially shorten the
sourcing process and more effectively manage the quality performance of vendors.
Because of that, it enables merchandising, manufacturing and shipping decisions
to be made by all parties closer to the selling season, thus helping to provide
better informed and timely critical business decisions. The objective is to
enable the clients who source product to obtain lower cost, increased sales
volume, faster inventory turnover, fewer involuntary price discounts and
improved margins and profitability.
OVERVIEW OF THE MARKET BEING ADDRESSED BY THE COMPANY
Due in part to the ever increasing financial awareness and sensitivity of
consumers, the retail industry is characterized by intense competition and
tightening product margins. In addition, as a result of the concentration and
consolidation occurring in the retail industry, consumers can demand more value
from retailers in return for their purchasing dollar. To attract and keep these
consumers, retailers must offer the products and prices consumers desire while
optimizing the tradeoffs among product variety, inventory carrying costs, retail
prices and costs of goods. The front end of this optimization process is called
"sourcing," an ongoing task that has become increasingly complex with the
globalization of retailer-supplier relationships. As a result, retailing is
rapidly becoming an information-based industry where success is often influenced
by a company's ability to access, sort, view, and decipher immense volumes of
product and purchasing data in a very short time frame.
For example, the average large department store carries more than one million
stock keeping units ("SKUs") at any one time, each unique in terms of product
style, size, color, features, packaging, etc. Each retailer needs to source
these SKUs from hundreds or, in some cases, thousands of vendors throughout the
world. There is a constant need for communication for sourcing purposes among
retailers , manufacturers and distributors regarding products, pricing,
delivery, special promotion, packaging, etc. To date, this communication has
largely been carried out on paper, on the phone, via fax, through courier
services, or through personal contacts. It is time consuming and challenging to
stay current, and usually it is very laborious to compare different merchandise
buying programs of many different vendors. The Company believes that the result
can be, and often is, less than optimal merchandise buying, a misalignment
between what the consumers want and what is actually on the store shelf which
may cause lost sales, costly retail price discounts, or even unsold merchandise
returned to the vendor or manufacturer.
In order to successfully face these challenges, retailers and suppliers are
increasingly turning to information technology, and specifically electronic
commerce applications, as a means of managing their retailer-supplier
relationships. The Company believes that this represents an opportunity for
application and service providers who understand the unique requirements of the
retail industry and can provide the necessary reliability and security to
consummate and manage sourcing transactions.
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OVERVIEW OF QCS SERVICES
The QCS Network is designed to address the retail industry's sourcing
communication and workflow management needs, for both the retailers and their
vendors. Based on an industry standard groupware software development platform,
Lotus Notes-TM-, and industry standard networking and electronic mail systems,
the QCS Network and QCS's software products and services link retailers and
their trading partners through electronic mail, data and full page image
exchange. This is done through the interactive exchange of product description
documents with text and color images, and administrative documents and forms
customized to each retailer's unique requirements. QCS's software products and
services include (1) application software and specific image capture hardware
for a one time licensing/installation fee, and (2) unlimited network access for
a fixed monthly fee or, for most retailers and certain high volume vendors,
network access for which the Company charges volume-based recurring usage fees.
Hardware requirements are simple -- the single user service requires an industry
standard desktop PC with a high quality color display, a color scanner, and a
digital camera. The multi-user service requires an image acquisition PC, a QCS
server, and multiple local area network ("LAN") work stations. Through the
Lotus Notes-TM- replication feature, the QCS Network constantly updates and
synchronizes all its data residing both in centrally located system servers and
multiple distributed local desktop stations at client sites.
Once on the QCS Network, the retail buyer can select and retrieve the up-to-date
information from a worldwide pool of vendors regarding their product offerings.
Similarly, a manufacturer or vendor can access the buyers at the large
department store retailers, mass merchandisers and specialty chain stores.
Product information is input by the vendor following a series of computer
prompts, both textual and in color image. When retrieved by retail buyers, the
data from all different vendors will appear on the retailer's desk top screen
in the retailer's own pre-specified and familiar format, thus making it
meaningful and relatively easy to compare products across multiple suppliers for
the same merchandise program offering, and at the same time allowing easy
interface to the retailer's in-house information systems. Communication between
each pair of trading partners on the QCS Network is totally private and on a
"store-and-forward basis." The product color images can be edited easily to
customize it to the retailer's own private label or for other design, packaging
and marketing purposes. Flexibility has been built into the QCS Network,
allowing users to establish exclusive links with a particular trading partner,
to conduct exclusive communications between groups of users, or to use the QCS
Network exclusively for internal purposes to connect a client's world-wide
business locations. Access to the QCS Network is executed automatically in the
background through a local telephone number dial-up. When traveling on the road,
QCS Network users have access to "Traveling Mailboxes" via local phone dial-up
numbers in most major cities in the world.
PRODUCT DEVELOPMENT AND/OR ACQUISITIONS
The Company's current technology is based on proven components in the three
areas that it addresses: international networking, hardware and software.
International networking for the current product line utilizes X.25 networks
purchased from leading backbone providers. Hardware platforms supported by
the current product line include all PC-based hardware components running MS
Windows, MS Windows NT, MS Windows 95, OS/2, and Novell Netware. Software
platforms utilized in the current product line include Lotus Notes GroupWare,
Standard JPG Image Compression/Decompression applications and some custom C++
code. In addition, QCS software can run on virtually any network protocol
within each organization on their LAN.
QCS maintains dedicated Lotus Notes network access servers through both a
facility management server site in London, the UK, as well as on its' own
premises in the Mountain View, California facilities.
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The Company's research and development efforts are directed towards technologies
that enable and facilitate the mapping and translation of information between
trading parties in the retail industry. All research and development follows
the same guidelines as the current technology which QCS has already introduced
into the marketplace -- open standards and common operating environments.
QCS uses a multiple products sourcing strategy that includes internal
development, acquisitions, alliances, and licensing of applications from third
parties. Development of new products and enhancements of existing products are
typically performed within QCS. Responsibilities include design, development,
documentation and quality assurance. Outside contractors are used for certain
aspects of the product development process.
The Company believes that these new products and applications will leverage
off existing software and hardware, better serve the Company's retail and
vendor clients, increase the appeal of the QCS solutions to the retail
industry, and help accelerate the growth of customer acceptance and use of
the QCS Network.
The current technology of the QCS Network utilizes industry standards to the
extent possible. There will continue to be rapid changes in technology
standards, and QCS intends to incorporate these new technologies and
methodologies into its service offerings in order to continue to provide
leadership products. Today, the QCS software platform is based on the Lotus
Notes groupware product.
The QCS product line currently allows suppliers a variety of functions
revolving around its product catalog. Various functions allow a supplier to
update its catalog, to send portions of its product catalog to potential
retail customer world-wide, and to send confidential detailed offers from its
catalog to buyers on the QCS Network in a point-to-point mode. The company
intends that this base functionality shall remain in all future product
offerings; however, the Company plans to enhance its underlying technology to
incorporate the most current market standards.
SALES AND MARKETING
The Company is emphasizing sales and marketing in an effort to establish the QCS
Network and the Company's software products and services as a retail industry
sourcing standard. Marketing offices are located in the United States, France
and Hong Kong, covering clients in the Americas, Europe and Asia/Pacific.
The retail industry sourcing process is driven by the retailer in a
"hub-and-spoke" fashion, with the retailer at the center of a communicating
and trading community. In view of this fact, QCS works with major retailer
clients first. QCS and the retailer work together to meet the retailer's
sourcing needs and to connect key suppliers. After-sales support includes
technical training and 800-number customer support phone lines.
QCS's strategy is predicated on the Company's ability initially to penetrate
specific product market segments to prove its concept, followed by a broader
expansion of similar services across geographic and/or retail product category
boundaries.
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This marketing strategy has evolved from over three years of actual experience.
Market acceptance of the Company's electronic sourcing concept depends on the
establishment of a trading community large enough for retailers and vendors to
have choices and comparisons, or, in other words, an installed base that has
reached a certain critical mass so that it resembles a "marketplace."
Currently, several major retailers in the U.S., Europe and Asia are Wal-Mart,
Kmart, Metro and Petsmart and several other major retailers have implemented the
QCS sourcing system for portions of their trading. Additionally, several other
major retailers are testing or evaluating the QCS system.
QCS believes that there is an important strategic opportunity in achieving
highly accelerated growth. The Company believes it can establish a retail
industry trading standard if it can briskly respond to the retailers' drive to
have their trading partners connected to the QCS system. As momentum builds in
the QCS connect rate, the retail industry needs to understand how the Company
can provide a sufficiently large and capable organization to meet the demand.
In view of the foregoing, QCS may decide to seek a partnership with a global
partner, who is highly regarded in the retail industry, has a global networking
and communications expertise and who can provide the necessary sales and
marketing as well as technical support infrastructure to accelerate the
Company's growth.
The Company's alternative is having to raise substantial funds and to engage
itself in the creation of a global marketing and support infrastructure.
There is no assurance that the needed funds could be raised or that the
infrastructure could be created.
COMPETITION
The Company believes it is still alone in providing its integrated package of
computer network sourcing services and workflow management toolset to the retail
industry. For retailers, sourcing is the "upstream" trading activity. There are
other companies providing similar network services to the retail industry to
facilitate its "downstream" activities. These activities include rapid
replenishment systems (just in time inventory management), point of sales, data
warehousing and micromarketing (analysis of consumer purchasing behavior).
Such "downstream" services do not overlap with the QCS Network in any material
fashion.
The rapid growth of the Internet has inspired a large number of companies to
provide electronic bulletin boards, advertising services and "yellow page"
indexing systems for consumer goods manufacturers and their products. These
companies, generally speaking, sell their indexes to aspiring consumer goods
vendors and rely on the spontaneous interest of the retailer to engage these
advertising vendors. The Company does not believe that the above described
generic Internet marketing meets the needs of high volume retail sourcing
processes, nor does it provide for any form of quality screening in the final
selection of the posted vendors.
While the Company is analyzing the need for adapting its software products and
services to provide for end-user access via the Internet, it believes that, at
the present moment, the lack of effective software solutions to provide
transaction security and selective and controlled access to information on the
Internet, make it premature as a practical forum on which to conduct business to
business electronic commerce.
The Company expects more professional competition to emerge, even though the
timing is not certain. QCS has been marketing its services for more than three
years, during which time it has designed and built an extensive suite of
application packages and integrated retail systems. In addition, the Company has
gained valuable market experience and recognition in its ability to meet
customer requirements and provide value added product features and
services. The Company believes it is unlikely that a new entrant would and could
duplicate all this and gain a credible critical mass and create a global support
infrastructure in a significantly shorter period of time.
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EMPLOYEES
The Company currently has 23 full time employees, of which six are in sales and
marketing, ten are in engineering and network management, and seven in finance
and administrative support functions. These employees are located in the United
States, Hong Kong and France. None of the employees are represented by a labor
union, and the Company considers its employee relations to be satisfactory.
RISK FACTORS
In this section, the Company summarizes certain risks that should be considered
by stockholders and prospective investors in the Company. These risks are
discussed in greater detail below, and are discussed in context in other
sections of this Report. This Report contains forward looking statements
regarding, among other matters, the Company's future strategy and prospects for
growth. The forward looking statements are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Forward
looking statements address matters which are subject to a number of risks and
uncertainties. The Company's actual results may differ materially from the
results discussed in the forward-looking statements. The factors that might
cause this difference include, but are not limited to, those discussed in the
Risk factors set forth below.
HISTORY OF LOSSES AND ACCUMULATED DEFICIT; LIMITED OPERATING HISTORY: From
inception in 1993 through June 30, 1996, the Company has generated an
accumulated loss of $7,139,967. Since inception, the Company has incurred
substantial costs to develop and enhance its technology, to create, introduce
and enhance its product offerings, to establish marketing and distribution
relationships, to recruit and train a sales and marketing group and to build an
administrative organization. The Company's prospects must be considered in
light of the risks, expenses and difficulties frequently encountered by
companies in their early stage of development, particularly companies in new,
unproved and rapidly evolving markets. To address these risks, the Company
must, among other things, continue to upgrade its technology, commercialize
products incorporating such technology, continue to attract, retain and motivate
qualified persons and respond to competitive developments. There can be no
assurance that the Company will be successful in addressing such risks. The
limited operating history of the Company makes the prediction of future results
of operations difficult or impossible, and, therefore, there can be no assurance
that the Company will sustain growth or achieve profitability. Furthermore, the
Company has a limited operating history focused primarily on integration
activities with major retailers. Although the purpose of this integration work
has been to establish a strong launch platform to connect large numbers of
consumer goods vendors, there can be no certainty that retailers will indeed be
successful in enforcing QCS as a retail industry trading standard to their the
near future, if ever. Further time may be required to introduce the new QCS
work processes into the vendor organizations. This delay would result in
continued losses.
ANTICIPATED FLUCTUATIONS IN OPERATING RESULTS: It is anticipated that, as the
Company matures, the Company's sales and operating results may fluctuate from
quarter to quarter and from year to year due to a combination of factors, many
of which are outside the control of the Company, including, among others,
(i) the size and timing of significant orders and their fulfillment, (ii) the
demand for the Company's products and services, (iii) the number, timing and
significance of product enhancements and new product introductions by the
Company and its competitors, (iv) changes in pricing policies by the Company or
its competitors, (v) changes in the level of operating expenses, (vi) personnel
changes, (vii) product defects and other product or service quality problems,
(viii) the results of international expansion and currency fluctuations,
(ix) seasonal trends and (x) general domestic and international economic and
political
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conditions. Any unfavorable changes in these or other factors could have a
material adverse effect on the Company's business, financial condition and
results of operation.
DEPENDENCE ON KEY RETAILERS: A key element of the Company's marketing
strategy is the Retail Partner Program whereby the Company works with
selected large retailers to encourage their key vendors to connect with the
QCS Network. These key "hub" retailers therefore play a vital role in the
Company's rate of market penetration and, after the retailers and their
vendors are installed with the QCS system, will continue to drive the usage
for trading and communication which will have a direct impact on the
Company's recurring revenue. Although these retailers have been successful in
the past in enforcing standards with their vendors ( e.g. EDI, bar codes),
there is no guarantee that these key retailers will (1) succeed in persuading
their key suppliers to connect with QCS in order to create a trading
community, and (2) succeed in driving the increasing usage volume on the QCS
Network in order to create the recurring revenue stream foreseen by the
Company.
CONTINUING NEED FOR PRODUCT ENHANCEMENTS: The Company's current version of
product offerings will continue to need enhancements and upgrading, driven by
client needs as well as rapid technological advances. Although the Company is
technologically independent in that it is in a position to pick and choose from
the best and most reliable technology that is available in the marketplace, the
risk will continue to exist that the Company's clients will always demand the
best functionality at the lowest cost and the Company will always have to be
current with the latest of technologies and applications. Maintaining
continuity, keep current with multiple evolving technologies, satisfy clients,
and contain product development costs will always be a challenge. There is no
assurance that the Company will always be successful in meeting that challenge.
LENGTHY SALES AND IMPLEMENTATION CYCLE: The adoption of the Company's products
and services is often an enterprise-wide decision by prospective customers and
can be expected to require the Company to engage in a lengthy sales cycle to
provide a significant level of education to prospective customers regarding the
use and benefits of the Company's products. In addition, the implementation of
the Company's products involves a significant commitment of resources by
customers over an extended period of time. As a result, the Company's sales and
customer implementation cycles are subject to significant delays over which the
Company has little or no control. Such delays due to lengthy sales cycles or
delays in customer deployment could have a material adverse effect on the
Company's business, financial condition, and operating results and can be
expected to cause the Company's operating results to vary significantly from
quarter to quarter.
REGULATORY BARRIERS IN CERTAIN FOREIGN MARKETS: The Company's backbone
providers, such as SITA, are at present not legally allowed to provide trunk
line service in certain key countries such as India and China. These countries
have a large concentrated number of manufacturing and exporting firms ideally
positioned as the Company's target customer. Until regulatory environments
change substantially in this regard, the Company at present can only gain
legitimate entry into those key foreign markets through a partnership with a
strategic partner having a firmly established global presence. This could mean
that the Company may have to change some of its commercial practices in these
countries.
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POSSIBLE COMPETITIVE ENTRIES: Although, to the best of the Company's knowledge,
it is alone in providing the electronic cataloging and networking services to
facilitate the global retailing industry's "sourcing" function, competitive
entry is and will continue to be a major potential threat. Competitive entrants
may be encouraged by the Company's success as well as by its setbacks. There
are electronic document interchange or EDI providers serving the retail industry
already, some of which have greater financial, human and technological resources
than the Company. It is possible that they may choose to present products or
services to the marketplace in the same areas that the Company is engaged. In
addition, the Internet has experienced explosive growth and attracted many
companies engaged in software development to enable electronic transactions on
the Internet. Significant technological advances with regards to Internet
commerce may invite direct competition in the Company's current marketplace.
Such competitive entries may materially impair the Company's ability to
penetrate the market and to achieve its financial goals.
LIMITED PROTECTION OF PROPRIETARY TECHNOLOGY AND KNOW-HOW: The Company creates
client-driven applications using technologies available to all in the
marketplace. However, some key software elements within the applications are
custom designed and developed by the Company. Although the Company is
positioned as an amalgamation of software application technology, global
networking and, importantly, an address book of industry leading buyers, vendors
and service providers, there can be no assurance that some of the Company's
customers will not invite other service or application providers to imitate or
improve upon the Company's services.
ABILITY TO MANAGE GLOBAL GROWTH: The Company has experienced revenue growth of
114% from fiscal year 1995 to fiscal year 1996. During this time it has added
new retailers and vendors and has only recently started to witness sustained and
significant usage volume between and among trading partners on the QCS Network.
Additional staff and technical support personnel may need to be added in the
event the Company begins to experience rapid growth. If these resources are
provided through a strategic partnership, synergistic coordination and
cooperation is needed among the Company's sales and engineering teams and their
counterparts at the strategic partner. Difficulties and ineffectiveness in
managing continued growth in liaison with a new strategic partnership could have
a material adverse effect on the Company's business and results of operations.
If the Company creates its own infrastructure, substantial additional funding
will be needed. There is no assurance that the needed funds could be raised or
that the global staffing can be successfully implemented.
CONCENTRATION OF OWNERSHIP: As of November 20 1996, Marcel van Heesewijk and
Mattheus Wegbrans together own approximately 43.96 % of the outstanding shares
of common stock on a fully diluted basis. These major shareholders, if acting in
concert regarding issues critical to the Company's business and operations,
could either outvote any other shareholder in combination or exert an
overwhelming influence upon other shareholders both to the Company's benefit as
well as detriment.
ABSENCE OF PUBLIC MARKET LIQUIDITY AND POSSIBLE VOLATILITY OF STOCK PRICE: The
public float of the Company's common stock is small, approximately 1.4 million
tradable shares versus total shares outstanding of approximately 26.0 million on
a fully diluted basis. This situation creates a very thin public market for the
trading of the Company's shares. Trading volume on any single day rarely
exceeds a few thousand shares, with some days of no trading at all. Limited
trading volume entails a high degree of volatility in the stock price. In the
52 week period from October 1, 1995 to September 30, 1996, the bids for the
shares of the Company's stock on the OTC Bulletin Board ranged from $.625 to
$4.875. Until the Company files a registration statement for additional shares
of Common Stock of the Company, this situation of limited liquidity and volatile
stock price will most likely persist.
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SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS: Future sales of shares by
existing shareholders could also adversely affect the prevailing market price
for the Company's common stock. On or before August 1, 1997, the Company's two
principal shareholders, Marcel van Heesewijk and/or Mattheus Wegbrans may elect
to sell a sizable number of their shares to satisfy certain obligations to the
Company's Series A Convertible Preferred Stockholders. Although they intend to
privately raise the necessary funds to satisfy their contractual obligations,
there is no assurance that, if a sizable transaction of equity were to be deemed
desirable, there will be sufficient interest and that, therefore, the market may
have to absorb a sizable transaction. If there is insufficient market liquidity,
there could be an adverse effect on the prevailing market price for the
Company's Common Stock. The vast majority of Common Stock outstanding are
"restricted securities," as that term is defined in Rule 144 promulgated under
the Securities Act, and in the future may be sold only pursuant to an effective
registration statement under the Securities Act, in compliance with the
exemption provisions of Rule 144 or pursuant to another exemption under the
Securities Act. The Company is obligated to provide certain registration
rights to the holders of an aggregate of 1,380,531 shares of Common Stock.
Certain holders of Series A Convertible Preferred Stock have requested that the
Company register their shares of Common Stock of the Company into which their
shares of Series A Convertible Preferred Stock may be converted. No prediction
can be made as to the effect, if any, that sales of such securities or the
availability of such securities for sale will have on the market prices
prevailing from time to time. However, even the possibility that a substantial
number of the Company's securities may be sold in the public market may
adversely affect prevailing market prices for the Common Stock and could impair
the Company's ability to raise capital through the sale of its equity
securities.
PRIVACY AND SECURITY CONCERNS OF ON-LINE COMMERCE: A significant barrier to
online commerce and communication is the secure exchange of confidential
information over public and private networks. The Company relies on the
encryption and authentication technology of its backbone providers and otherwise
incorporated in its application software to provide the security and
authentication necessary to effect the secure exchange of confidential
information. There can be no assurance that advances in computer capabilities,
new discoveries in the filed of cryptography or other events or developments
will not result in a compromise or breach of the systems used by the Company to
protect customer transaction data. If any such compromise of the Company's
security were to occur, it could have a material adverse effect on the Company's
business, financial condition, and operating results.
DEPENDENCE ON KEY PERSONNEL AND HIRING OF ADDITIONAL PERSONNEL: The Company's
success depends to a significant degree upon the continued contributions of key
management, engineering, sales and marketing, and finance personnel, certain of
whom would be difficult to replace. In particular, the Company believes that its
future success is highly dependent on the continued efforts of the Company's
principal shareholders, Marcel van Heesewijk and Mattheus Wegbrans and Todd
Myhre, the Company's President and Chief Executive Officer who joined the
Company on October 21, 1996. The Company is the beneficiary of a key man life
insurance policy for Marcel van Heesewijk for the amount of $1,000,000. The
Company does not intend to maintain key man life insurance covering additional
key personnel. The Company believes its future success will also depend in
large part upon its ability to attract and retain highly skilled management,
engineering, sales and marketing, and finance personnel. Competition for such
personnel is intense and there can be no assurance that the Company will be
successful in attracting and retaining such personnel. The loss of the services
of any of the key personnel, the inability to attract or retain qualified
personnel in the future or delays in hiring required personnel could have a
material adverse effect on the Company's business, operating results or
financial condition.
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FINANCING: The Company requires
substantial working capital to fund its business. The Company's future capital
requirements will depend on many factors, including the rate of revenue growth,
the timing and extent of spending to support product development efforts and
expansion of sales and marketing, the timing of introductions of new products
and
10
<PAGE>
enhancements to existing products, and market acceptance of the Company's
products. The Company expects that it may need to raise additional equity or
debt financing in the future. There can be no assurance that additional equity
or debt financing, if required, will be available on acceptable terms or at all.
The sale of additional equity or other securities will result in further
dilution of the Company's stockholders.
RISK OF CAPACITY CONSTRAINTS AND SYSTEMS FAILURES AND RELATED LIABILITY: A key
element of the Company's strategy is to generate a high volume of customer use
of the QCS Network. Accordingly, the reliability of the QCS Network is critical
to the Company's reputation and its ability to attract new customers and to
achieve market acceptance its products and services. The Company believes its
products and services are capable of sustaining higher volumes of customer usage
and plans to continue to enhance the current capacities. However, an increase
in the volume of traffic conducted through the QCS Network could strain the
capacity of the software or hardware deployed by the Company, which could lead
to system failures. In addition, as the number of customers using the QCS
Network increases, there can be no assurance that the infrastructure of the QCS
Network will be able to scale accordingly. The Company is dependent upon the
telecommunications backbone provided by SITA for access to and usage of the QCS
Network. Any disruption in the service provided by SITA or any failure of SITA
to handle the anticipated higher volumes of traffic could have a material
adverse effect on the Company's business, results of operations and financial
condition. Furthermore, the Company is dependent on hardware suppliers for
prompt delivery, installation and service of servers and other equipment used to
maintain the QCS Network and deliver the Company's products and services.
ITEM 2. DESCRIPTION OF PROPERTY
The Company maintains offices in the U.S., Hong Kong and France. In Mountain
View, California, the Company leases approximately 2,148 square feet of space.
The Mountain View lease expires in September, 2000. The Company's Hong Kong
operation is housed in a leased floor approximately 2,755 square feet. The Hong
Kong lease expires in April, 1998 at which time the Company has an option to
renew with rent adjustments for an additional two years. Similarly, the
Company's France operation is housed in a leased space of approximately 2,755
square feet, which lease expires in December, 1999 and may be renewed for an
additional three years. At present, the Company does not foresee any need
beyond these leased spaces in the near future.
ITEM 3. LEGAL PROCEEDINGS
No legal proceedings were commenced by or against the Company during the fiscal
year ended June 30, 1996.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 1996.
11
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERS
MATTERS
The following table indicates the high and low bid prices for shares of the
Company's Common Stock as quoted under the symbol, QCSC, on the OTC Bulletin
Board for each quarter within the fiscal years ended June 30, 1995 and 1996,
respectively. The prices shown are representative inter-dealer prices, do not
include retail markups, markdowns, or commissions and may not necessarily
reflect actual transactions.
BID PRICES ($)
--------------
HIGH LOW
---- ---
1995
----
First Quarter ended 9/30/94 1.00 0.375
Second Quarter ended 12/31/94 1.375 0.75
Third Quarter ended 3/31/95 1.75 0.625
Fourth Quarter ended 6/30/95 3.375 2.25
1996
----
First Quarter ended 9/30/95 1.375 0.75
Second Quarter ended 12/31/95 1.125 0.625
Third Quarter ended 3/31/96 3.75 0.9375
Fourth Quarter ended 6/30/96 3.375 2.25
As of November 20, 1996, there were approximately 128 shareholders of record and
208 beneficial shareholders of the Company's Common Stock and 11 holders of the
Company's Series A Convertible Preferred Stock for which no market is
maintained. The Company has never paid dividends on its common stock and does
not anticipate paying dividends on its common stock for the foreseeable future.
Quarterly dividends of $0.012875 per share began accruing on the Company's
Series A Convertible Preferred Stock beginning on November 22, 1994 and began
compounding annually as of January 1, 1996. The dividends become payable,
subject to legality, upon the liquidation of the Company or six months after the
date of conversion of any shares of Series A Convertible Preferred Stock into
common stock of the Company. Such dividends shall be paid in cash.
12
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULT OF OPERATIONS.
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Financial
Statements and Notes thereto included elsewhere in this Report. This section
may contain forward looking statements regarding, among other matters, the
Company's future strategy and prospects for growth. The forward looking
statements are made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Forward looking statements address
matters which are subject to a number of risks and uncertainties. The
Company's actual results may differ materially from the results discussed in
the forward-looking statements. The factors that might cause this difference
include, but are not limited to, those discussed throughout this report..
OVERVIEW
QCS Corporation (the "Company") is an electronic commerce service provider
serving the worldwide retail industry. The Company provides its users with
computer software and related hardware to enable retailers and suppliers to
conduct the purchase and sale of merchandise on a global basis. Using Lotus
Notes-TM- and industry standard networking protocols and transmitting data over
leased "backbone" trunk lines, the Company maintains a secure yet open
electronic network which helps retailers conduct on-line communication and
transactions with their vendors and suppliers (the "QCS Network"). This
communication and trading process is usually referred to in the retail industry
as "sourcing." High volumes of products and transaction data need to be
exchanged between the retailers and their suppliers in order for buy-sell
transactions to be initiated, negotiated and closed. This critical sourcing
process typically requires a substantial amount of time and attention from both
the retail merchandise buyer and the salesperson of a manufacturer or a
distributor. The QCS Network and the Company's related software products and
services are designed to help make this sourcing function substantially more
effective and efficient and to facilitate the workflow management of retail
industry buyers and sellers.
The company's revenues are derived from QCS's software products and
services which include 1) application software and specific image capture
hardware for a one time licensing/installation fee, and (2) network access for
which the Company charges a fixed monthly fee and/or volume-based recurring
usage fees. (3) At times, the Company will also derive revenue from consulting
and engineering projects.
From inception in 1993 through June 30, 1996, the Company has generated an
accumulated loss of $7,139,967. Since inception, the Company has incurred
substantial costs to develop and enhance its technology, to create, introduce
and enhance its product offerings, to establish marketing and distribution
relationships, to recruit and train a sales and marketing group and to build an
administrative organization. The Company's prospects must be considered in
light of the risks, expenses and difficulties frequently encountered by
companies in their early stage of development, particularly companies in new,
unproven and rapidly evolving markets.. The limited operating history of the
Company makes the prediction of future results of operations difficult or
impossible, and, therefore, there can be no assurance that the Company will
sustain growth or achieve profitability. The Company has only recently started
to witness sustained and significant usage volume between and among trading
partners on the QCS Network. Additional staff and technical support personnel
may need to be added in a rapid growth scenario.If these resources are provided
through a strategic partnership, synergistic coordination and cooperation is
13
<PAGE>
needed among the Company's sales and engineering teams and their counterparts at
the strategic partner. Difficulties and ineffectiveness in managing continued
growth in liaison with a new strategic partnership could have a material adverse
effect on the Company's business and results of operations. If the company
creates its own infrastructure, substantial additional funding would be needed.
There is no assurance that the needed funds could be raised or that the global
staffing could be successfully implemented. The Company's success depends to a
significant degree upon the continued contributions of key management,
engineering, sales and marketing, and finance personnel, certain of whom would
be difficult to replace.. The loss of the services of any of the key personnel,
the inability to attract or retain qualified personnel in the future or delays
in hiring required personnel could have a material adverse effect on the
Company's business, operating results or financial condition.
RESULTS OF OPERATIONS
Please note, when comparing fiscal years 1995 and 1996, the financial results
are not directly comparable due to the acceleration of the Company's growth and
related expenses throughout the two periods.
REVENUES
Net revenues increased 114% from $482.1 thousand in fiscal 1995 (FY95) to $1.032
million in fiscal 1996 (FY96). This increase in revenues was due primarily to
adding retailers and suppliers to the network with the resultant installation
charges and increased monthly access fees. Also, retail and service providers
increased the amount of activity on the network resulting in added usage fee
revenues. In addition, there was a material year-end adjustment to the 4th
quarter ended June30, 1996 for revenue recognition of $325.6 thousand.
GROSS MARGIN
Gross margin represents revenues less cost of revenues. Cost of revenues
consists mainly of the following: (1) labor costs of installing the hardware and
software at the customers site; this includes QCS employee costs and
subcontracted costs; (2) the costs of the network backbone and hub providers;
(3) 3rd party software costs; and (4) engineering costs for specific revenue
generating consulting or product enhancement efforts. Gross margin increased by
589% from $69.4 thousand in FY95 to $477.8 thousand in FY96. Gross margin as a
percent of revenues increased from 14% in FY95 to 46% in FY96. This improvement
in gross margin was caused partially by economies of scale provided by the large
increase in revenues and the fact that network management was performed by QCS's
operations staff in FY96 after incurring start-up assistance charges from an
external contractor in FY95.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses (S,G & A) increased 80% from $1.777
million in FY95 to $3.204 million in FY96. The Company's operating expenses
have increased substantially since inception as the investments to assist in
growing the business have been made in advance of the resulting revenue
increases. The Company believes that continued expansion of its operations is
essential to achieving its objectives and, therefore, intends to continue to
increase expenditures in these areas in the future.
The Company invested strongly in FY96 in several key areas to get into position
to create, accommodate, and sustain potential, substantial growth in the coming
quarters. First, the retail industry is truly global in nature. To properly
address the appropriate worldwide markets, increased sales and marketing staff
and management were added in FY96. These expenses were increased at all three
major sales locations; Hong Kong, France and the U. S. The initial steps of a
worldwide marketing plan, and improved attention to customer account management,
were also funded in FY96. Second, General and administrative expenses
14
<PAGE>
also grew in relation to the growth in revenue and broadening, global scope of
the operating plans. Third, engineering headcount and expenses were increased to
continue to refine and enhance the current product and service offerings. To
maintain competitiveness in the very fast-moving software industry, additional
engineering expenses also were spent on the analysis and design of future
products. Also, there was a material year-end adjustment to the 4th quarter
ended June30, 1996 for compensation related to stock options granted of $199.6
thousand. This adjustment was a non-cash item.
The FY96 Net Loss was ($2.712) million, or ($0.20) per share versus a FY95 Net
Loss of ($1.735) million or ($0.11) per share.
LIQUIDITY AND CAPITAL RESOURCES
FY96 year-ending Cash and short-term investments of $2.607 million was an
increase of $509 thousand over the FY95 year-ending balance of $2.098 million.
This increase was generated by $2.5 million raised in equity financing which was
partially offset by $2.0 million in cash used for operations and capital
expenditures.
The Company's business plan for FY97 calls for continued increases in funding
for product development, selling expenses and key management additions. This
plan also depends on a continuing growth in the revenue base which will thereby
generate increased cash receipts to partially offset the spending growth. The
Company does not currently have a bank credit line, but does intend to apply for
one in FY97. There can be no assurance that this attempt will be successful.
Additional funds will be realized in early FY97 from the receipt of the
remaining investment dollars from the equity financing which took place at
approximately FY96 year-end. The Company believes that the cash resources
available at 6/30/96, the anticipated receipt of the previously mentioned
additional equity funds, coupled with at least some growth in collectable
revenues, will be sufficient to fund operations for the next year.
However, if the company were to continue to sustain significant losses, beyond
the current business plan, the company may be required to attempt to raise
further debt or equity funds. Whether of not these fund raising efforts would
be successful, the Company might have to reduce operating spending resulting in
possible additional negative impacts on the achievement of the Company's
objectives.
ITEM 7. FINANCIAL STATEMENTS
Financial statements and supplementary data are set forth on pages F-1 through
F-20 of this Report and are incorporated herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
15
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT OF THE REGISTRANT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company and their ages as of October
31, 1996 are as follows:
NAME AGE POSITION WITH COMPANY
- ---- --- ---------------------
Todd Myhre 51 President, Chief Executive Officer, Acting Chief
Financial and Accounting Officer and Director
Marcel van Heesewijk 37 Executive Vice President of Business Strategies
and Alliances, Chairman of the Board of Directors
Mattheus Wegbrans 46 Executive Vice President of Worldwide Sales and
Marketing, Director
Lindsay Bury 57 Director
TODD MYHRE, joined QCS in October, 1996 and serves as its President, Chief
Executive Officer, Acting Chief Financial Officer and Acting Principal
Accounting Officer. Prior joining QCS, Mr. Myhre was a business consultant from
September, 1995 to September 1996. In this capacity Mr. Myhre assisted small
businesses in strategic planning and implementation of operational plans and
objectives. From January, 1993 to September, 1995 Mr. Myhre was the President
and Chief Operating Officer of Genus, Inc. a publicly-held semiconductor
equipment manufacturer based in Sunnyvale, CA. From January, 1989 to December,
1992,, Mr. Myhre was President and Chief Financial Officer of Optimal Associates
where he was responsible for all business operations for this private real
estate development and consulting firm. In addition, Mr. Myhre has held
management positions with noted industry leaders such as Hewlett-Packard and
Intel.
MARCEL VAN HEESEWIJK, Chairman of the Board, and prior to October 18, 1996, was
President and Chief Executive Officer since January 1993. Presently, Mr. Van
Heesewijk is Executive Vice President of Business Strategies and Alliances.
From January, 1990 to June , 1992 Mr. van Heesewijk was the General Manager of
European operations for Pande Inc., a software engineering services firm. In
addition, Mr. Van Heesewijk has held management positions with Siemens AG in
both Germany and Portugal. Mr. van Heesewijk holds a bachelors degree in
Economics from the University of Groningen in the Netherlands and a degree of
the EAP, European School of Management Studies in Paris, Oxford and Berlin.
16
<PAGE>
MATTHEUS WEGBRANS, has been a Director and has served intermittently as Vice
President of Sales & Marketing of the Company since 1993. His prior experience
includes Vice President at Digital Equipment Corporation from December, 1994 to
August, 1996 where he was responsible for the overall management of its computer
systems business in Europe, the Middle East and Africa. Prior to joining QCS in
1993, Mr. Wegbrans was a Director of Software Publishing Corporation from June,
1992 to June, 1993 and a founder and President of NeXT Computer Europe from
July, 1990 to May, 1992.
LINDSAY BURY, has been a director of the Company since July, 1996. Mr. Bury is
a London-based private investor and business consultant. Mr. Bury serves on the
board of directors of several companies listed on the London Stock Exchange
including, South Staffordshire Water plc, Unicorn plc, Roxboro plc, The Sage
Group and The Electric General Investment Co. He is the Chairman of the Sharp
Technology Funds, a holder of the Company's Series A Convertible Preferred
Stock.
There are no family relationships among the officers or directors of the
Company. The executive officers are elected by and serve at the discretion of
the Company's Board of Directors.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
The Company has determined that the filing requirements applicable to the
Company's executive officers, directors and more than 10% stockholders of the
Company in the fiscal year ended June 30, 1996 (a "Reporting Person") were not
met with respect to any Reporting Person required by Section 16(a) of the
Securities Exchange Act of 1934 during the fiscal year ended June 30, 1996 and
in all prior years.
In particular, the filings required under Section 16(a) by Marcel van Heesewijk
and Matthews Wegbrans in connection with their shares of Common Stock of QCS
acquired in connection with the merger of QCS and QCS-Colo. in October, 1994
were not made on a timely basis.
17
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
SUMMARY OF COMPENSATION
The following table sets forth all remuneration paid by the Company and its
subsidiaries to executive officers during the years ended June 30, 1996:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
----------------------
AWARDS PAYOUTS
------ -------
ANNUAL COMPENSATION
-------------------
Name and Principal Restr. All other
Position During Other Annual Stock Options LTIP Compen-
Fiscal 1996 Year Salary Bonus Compensation Awards /SARs Payouts sation
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Marcel 1996 $102,996 $44,307** -- -- -- --
van Heesewijk 1995 $ 90,625 $12,983** -- -- -- --
President, CEO 1994 $ 11,500 -- -- -- -- --
and Director*
Mattheus 1996 -- -- -- -- -- --
Wegbrans*** 1995 $22,857 $7,886** -- -- -- --
V. President 1994 $11,500 -- -- -- -- --
and Director
</TABLE>
*On October 21, 1996, Todd Myhre became the Company's President and Chief
Executive Officer and Mr. van Heesewijk assumed the position of Executive Vice
President of Business Strategies and Alliances.
** Represents car and housing allowances paid to Mr. van Heesewijk and Mr.
Wegbrans.
*** Mr. Wegbrans rejoined the Company in August 1996 and did not receive any
compensation during fiscal 1996.
STOCK OPTION GRANTS, EXERCISES AND HOLDINGS
There were no stock options granted to the above directors and officers of
the Company during the period from July 1, 1995 to June 30, 1996 and none of
these directors or officers of the Company exercised options during this
period or held stock options as of June 30, 1996.
COMPENSATION OF DIRECTORS
Directors do not receive any cash remuneration for their services as such,
although they are reimbursed in accordance with the Company's policy for their
expenses in connection with attending meetings of the Board. Directors serving
on committees of the Board receive no special compensation for such activities.
18
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of the Company's common and Series A convertible preferred stock as of
November 20, 1996 by (i) each person who is known to the Company to own
beneficially more than 5% of the outstanding Common Stock of the Company, (ii)
each of the Company's executive officers and directors named in the Summary
Compensation Table, and (iv) all current directors and executive officers as a
group.
<TABLE>
<CAPTION>
Name and Address of Beneficial Owner or Number of Shares
Group and Nature of Beneficial Ownership(1) Beneficially Owned Percent of Class*
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Marcel van Heesewijk 7,914,000 35.70%
650 Castro Street
Mountain View, CA 94041
Todd S. Myhre(2) 1,372,077 5.83%
650 Castro Street
Mountain View, CA 94041
Mattheus Wegbrans 3,531,000 15.93%
Chemin de la Cairee - Villa Ariari
Les Hauts de Saint-Paul
06140 St Paul de Vence
France
Lindsay Bury(3) 953,787 4.30%
Millichope Park
Munslow, Craven Arms
Shropshire, England SY79HA
Reinhardt Stille 2,124,100 9.58%
7 Av. Princesse Grace
Emily Palace
98000 Monte-Carlo
Monaco
Carlyle-QCS Partners, LP(4) 1,601,942 7.23%
1001 Pennsylvania Avenue, N.W.
Washington, D.C. 20004
United States
All Directors and Officers as a group (4 persons)(5) 13,770,864 58.50%
</TABLE>
- -------------------------------
1 The persons named in the table above 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. The table is based on
information supplied by the directors, officers and principal shareholders.
2 Includes option to purchase 1,372,077 shares of Common Stock which are
exercisable within 60 days of November 20, 1996.
3 Includes 567,962 shares of Series A Convertible Preferred Stock owned by
Sharp Technology Fund I Limited Partnership ("Sharp I") and 305,825 shares of
Series A Convertible Preferred Stock owned by Sharp Technology Fund II Limited
Partnership ("Sharp II"). In his capacity as Chairman of Sharp I and Sharp II,
Mr. Bury has shared voting and investment power with respect to the 873,787
shares and may be deemed to beneficially own such shares. Mr. Bury disclaims
beneficial ownership of such shares.
4 Includes warrants to purchase 145,631 shares of Common Stock which are
exercisable within 60 days of November 20, 1996 and assumes conversion of
1,456,311 shares of Series A Convertible Preferred Stock held by Carlyle-QCS
partners, LP into 1,456,311 shares of Common Stock.
5 See Footnote 3.
19
<PAGE>
* Percentage ownership is based on (i) 17,266,531 shares of Common Stock of
the Company outstanding as of November 20, 1996, (ii) 4,368,937 shares of
Series A Convertible Preferred Stock outstanding as of November 20, 1996, the
terms of which shares are substantially equivalent to shares of Common Stock
and may be converted into shares of Common Stock at any time at the option of
the holder, (iii) 534,152 currently exercisable outstanding warrants to
purchase shares of Common Stock at a purchase price of $.01 per share, and
(iv) for Todd Myhre and for All Directors and Officers as a Group only,
1,372,077 outstanding stock options exercisable within 60 days of November
20, 1996.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the two years prior to the date of this Report, there were no
transactions or proposed transactions, to which the Company was or is to be a
party, in which any of the Company's directors, executive officers or principal
shareholders identified above under "Item 11 - Security Ownership of Certain
Beneficial Owners and Management" or any member of the immediate family of any
such person had or is to have a direct or indirect material interest, except as
noted in Note 11, page F-17 under Notes to Consolidated Financial Statements.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
A list of exhibits required to be filed as part of this Report is incorporated
by reference on page 22 of this Report.
REPORTS ON FORM 8-K
No reports on Form 8-K were filed with the Securities and Exchange Commission
during the fourth quarter of fiscal 1996.
20
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934, AS AMENDED, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO
BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
Date:
--------------- QCS CORPORATION
(Registrant)
By: /s/ Todd Myhre
-----------------------
Todd Myhre, President, Chief
Executive Officer, Acting
Principal Accounting and
Financial Officer, Director
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT
HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND
IN THE CAPACITIES AS INDICATED ON NOVEMBER __, 1996.
SIGNATURE TITLE
- --------- -----
/s/ TODD MYHRE
- ------------------------------------ President, Chief Executive Officer,
Todd Myhre Acting Principal Accounting and
Financial Officer, and Director
/s/ MARCEL VAN HEESEWIJK
- ------------------------------------ Executive Vice President of Business
Marcel van Heesewijk Strategies and Alliances, Chairman of
the Board of Directors
/s/ MATTHEWS WEGBANS
- ------------------------------------ Vice President of Sales & Marketing,
Matthews Wegbans Director
/s/ LINDSAY BURY
- ------------------------------------ Director
Lindsay Bury
21
<PAGE>
<TABLE>
<CAPTION>
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION SEQUENTIALLY
NUMBERED
PAGE
<S> <C> <C>
3.1 Amended Certificate of Incorporation is incorporated by
reference to Exhibit 28(ii) to Form 8-K filed November
22, 1994
3.2 By-Laws are incorporated by reference to Exhibit 28(viii)
to Form 8-K filed November 22, 1994
4 Instruments defining rights of holders the Company's
Series A Convertible Preferred Stock are incorporated by
reference to Exhibits 28 (i), (ii), (iii) & (iv) to Form 8-K
filed November 22, 1994
11 Statement re: Computation of per share earnings (loss) See page F-3 of the
Financial Statements
filed under Item 7
hereof
21 Subsidiaries of the Registrant
27 Financial Data Schedule
</TABLE>
22
<PAGE>
QCS CORPORATION
-------------
REPORT ON AUDITS OF FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1996 AND 1995
<PAGE>
QCS CORPORATION
-------------
CONTENTS
PAGE
Report of Independent Accountants F-1
Consolidated Balance Sheets as of June 30, 1996 and 1995 F-2
Consolidated Statements of Operations for the years ended
June 30, 1996 and 1995 F-3
Consolidated Statements of Cash Flows for the years ended
June 30, 1996 and 1995 F-4
Consolidated Statements of Stockholders' Equity for the years
ended June 30, 1996 and 1995 F-5
Notes to Consolidated Financial Statements F6-F18
Report of Independent Accountants on Financial Statement
Schedule F-19
Financial Statement Schedule Required by Rule 5-04 of Reg. S-X F-20
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
QCS Corporation:
We have audited the accompanying consolidated balance sheets of QCS
Corporation and subsidiaries ("the Company") as of June 30, 1996 and 1995,
and the related consolidated statements of operations, cash flows and
stockholders' equity for the years ended June 30, 1996 and 1995. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements 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 financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
As described in Note 13 to the consolidated financial statements, the Company
reversed a foreign currency transaction gain on the conversion of
intercompany debt to equity in a transaction involving its French subsidiary
in fiscal 1995. The financial statements for the year ended June 30, 1995
have been restated for the effects of this adjustment.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of the Company as of June 30, 1996 and 1995, and the consolidated results of
its operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
San Francisco, California
November 26, 1996
F-1
<PAGE>
QCS CORPORATION
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1996 AND 1995
-------------
<TABLE>
<CAPTION>
ASSETS 1996 1995
(AS RESTATED)
<S> <C> <C>
Current assets:
Cash $ 2,607,118 $ 2,097,833
Trade accounts receivable (net of allowance for doubtful
accounts of $119,960 in 1996 and $56,665 in 1995) 238,202 234,124
Other current assets 23,462 236,595
------------ ------------
Total current assets 2,868,782 2,568,552
Equipment and leasehold improvements (net of accumulated
depreciation of $33,684 and $20,172, respectively) 192,933 89,108
Computer software (net of accumulated amortization of
$20,023 and $5,926, respectively) 36,363 53,829
Security deposits 37,802 -
------------ ------------
Total assets $ 3,135,880 $ 2,711
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 562,705 $ 321,454
Accrued liabilities 396,617 200,510
Stockholder advances - 116,261
Preference dividend payable 362,344 -
------------ ------------
Total current liabilities 1,321,666 638,225
------------ ------------
Capital lease obligations, long-term portion 3,806 -
------------ ------------
Total liabilities 1,325,472 638,225
------------ ------------
Commitments (Note 9)
Stockholders' equity:
Common stock, par value $0.001 per share: authorized
40,000,000 shares; outstanding 16,692,531 (1995:
15,536,000) shares 16,693 15,536
Series A convertible preferred stock, par value $0.001 per
share; authorized 5,000,000 shares; outstanding
4,368,937 (1995: 4,368,937) shares (aggregate
liquidation preference: $4,500,005) 4,369 4,369
Paid-in capital 9,386,893 6,145,468
Common stock subscriptions receivable (462,584) -
Accumulated deficit (7,139,967) (4,065,959)
Cumulative foreign currency translation adjustments 5,004 (26,149)
------------ ------------
Total stockholders' equity 1,810,408 2,073,265
------------ ------------
Total liabilities and stockholders' equity $ 3,135,880 $ 2,711,490
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
QCS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1996 AND 1995
--------------
<TABLE>
<CAPTION>
1996 1995
(AS RESTATED)
<S> <C> <C>
Service revenue $ 1,031,858 $ 482,140
Cost of services rendered (554,034) (412,760)
------------- -------------
Gross margin 477,824 69,380
Depreciation and amortization (includes amortization of computer
software costs in 1996 and 1995 of $14,097 and $5,926,
respectively) (21,789) (21,874)
Selling, general and administrative expenses (includes research
and development expenditure in 1996 and 1995 of approxi-
mately $78,000 and $9,000, respectively) (3,204,365) (1,777,223)
------------- -------------
Operating loss (2,748,330) (1,729,717)
Other (expense) income (11,184) (37,310)
Interest income (expense) 47,850 31,786
------------- -------------
Net loss $ (2,711,664) $ (1,735,241)
------------- -------------
------------- -------------
Net loss per share of common stock and common stock equivalents
(Note 3) $ (0.20) $ (0.11)
------------- -------------
------------- -------------
Weighted average number of shares outstanding
(common stock and common stock equivalents) 15,658,840 15,536,000
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
QCS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1996 AND 1995
-------------
<TABLE>
<CAPTION>
1996 1995
(AS RESTATED)
<S> <C> <C>
Cash flows from operating activities:
Net loss $(2,711,664) $ (1,735,241)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 21,789 21,890
Compensation related to stock options 199,630 -
Changes in accounts and notes receivable (4,078) (195,635)
Changes in other current assets and security deposit 175,331 (75,225)
Changes in accounts payable 241,251 (59,938)
Changes in accrued and other liabilities, net of
capital lease obligation 193,479 137,738
------------ --------------
Net cash used in operations (1,884,262) (1,906,411)
------------ --------------
Cash flows from investing activities:
Purchases of equipment and leasehold improvements, net (101,713) (90,233)
------------ --------------
Net cash used in investment activities (101,713) (90,233)
------------ --------------
Cash flows from financing activities:
Proceeds from issuance of capital stock 3,042,952 4,580,812
Common stock subscriptions receivable (462,584) -
Repayment of stockholders' advances (116,261) (346,832)
Repayment of bank borrowings - (152,148)
------------ --------------
Net cash provided by financing activities 2,464,107 4,081,832
------------ --------------
Net increase in cash and cash equivalents 478,132 2,085,188
Cash and cash equivalents at the beginning of the year 2,097,833 110
Effect of exchange rate changes on cash 31,153 12,535
------------ --------------
Cash and cash equivalents at the end of the year $ 2,607,118 $ 2,097,833
------------ --------------
------------ --------------
Supplementary cash flow information:
Cash paid during the year for interest $ 10,444 $ 17,346
------------ --------------
------------ --------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
QCS CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1996 AND 1995
-----------------
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK
------------------------- ----------------------- ADDITIONAL
PAID-IN
SHARES AMOUNTS SHARES AMOUNTS CAPITAL
----------- ----------- ------------ -------- ------------
<S> <C> <C> <C> <C> <C>
Balances at June 30, 1994 15,536,000 $ 1,584,561 - - -
Issuance of Series A convertible preferred stock - - 4,368,937 $ 4,369 $ 4,576,443
Exchange of 15,536,000 shares of common stock of
QCS Corporation (formerly Parkway Capital
Corporation ) of no par value for 15,536,000 shares
of common stock of QCS Corporation of $0.001 per
share par value - (1,569,025) - - 1,569,025
Translation adjustment - - - - -
Net loss for the year - - - - -
----------- ----------- ------------ -------- ------------
Balances at June 30, 1995 15,536,000 15,536 4,368,937 4,369 6,145,468
Issuance of common stock in connection with private
placement, net of issuance costs of approximately
$67,000 1,036,531 1,037 - - 3,041,795
Exercise of stock options 120,000 120 - - -
Compensation related to stock options - - - - 199,630
Preference dividend payable - - - - -
Translation adjustment - - - - -
Net loss for the year - - - - -
----------- ----------- ------------ -------- ------------
Balances at June 30, 1996 16,692,531 $ 16,693 4,368,937 $ 4,369 $ 9,386,893
----------- ----------- ------------ -------- ------------
----------- ----------- ------------ -------- ------------
<CAPTION>
CUMULATIVE
FOREIGN COMMON
ACCUMULATED CURRENCY STOCK
DEFICIT TRANSLATION SUBSCRIPTIONS
(AS RESTATED) ADJUSTMENTS RECEIVABLE TOTAL
------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balances at June 30, 1994 $ (2,330,718) $ (50,834) - $ (796,991)
Issuance of Series A convertible preferred stock - - - 4,580,812
Exchange of 15,536,000 shares of common stock of
QCS Corporation (formerly Parkway Capital
Corporation ) of no par value for 15,536,000 shares
of common stock of QCS Corporation of $0.001 per
share par value - - - -
Translation adjustment - 24,685 - 24,685
Net loss for the year (1,735,241) - - (1,735,241)
------------- ----------- ----------- -----------
Balances at June 30, 1995 (4,065,959) (26,144) - 2,073,265
Issuance of common stock in connection with private
placement, net of issuance costs of approximately
$67,000 - - $ (462,584) 2,580,248
Exercise of stock options - - - 120
Compensation related to stock options - - - 199,630
Preference dividend payable (362,344) - - (362,344)
Translation adjustment - 31,153 - 31,153
Net loss for the year (2,711,664) - - (2,711,664)
------------- ----------- ----------- -----------
Balances at June 30, 1996 $ (7,139,967) $ 5,004 $ (462,584) $ 1,810,408
------------- ----------- ----------- -----------
------------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
QCS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------
1. NATURE OF BUSINESS:
QCS was incorporated in 1994 as a Delaware corporation. QCS owns all of
the outstanding shares of its operating subsidiaries, QCS Development
Company S.A. and QCS Global Retail Information Network Asia Pacific Ltd.
The Company maintains offices in Mountain View, California, Hong Kong and
Nice, France. In October 1994 the Company merged with QCS Corporation, a
publicly-held Colorado corporation formerly known as Parkway Capital
Corporation, following which QCS was the surviving corporation.
QCS is an electronic commerce service provider serving the worldwide retail
industry. The Company provides its users with computer software and
related hardware to enable retailers and suppliers to conduct the purchase
and sale of merchandise on a global basis. Using Lotus Notes-TM- and
industry standard networking protocols and transmitting data over leased
"backbone" trunk lines, the Company maintains a secure yet open electronic
network which helps retailers conduct on-line communication and
transactions with their vendors and suppliers (the "QCS Network").
The Company's revenues are derived from QCS's software products and
services which include (1) application software and specific image capture
hardware for a one time licensing/installation fee, and (2) network access
for which the Company charges a fixed monthly fee and/or volume-based
recurring usage fees. (3) At times, the Company will also derive revenue
from consulting and engineering projects.
2. GOING CONCERN:
As at June 30, 1996, an accumulated deficit of $7,139,967 has been
accumulated by the consolidated operations of the Company. This has mainly
arisen from the expenditure of research and development costs and marketing
of the Company's product and service.
Management believes the cash resources of the Company are sufficient to
enable it to continue as a going-concern for at least the coming year
until revenues from principal planned operations have increased to a
maintainable level, assuming a constant rate of fixed expenditure.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION:
The consolidated financial statements include the accounts of QCS
Corporation and its wholly owned subsidiaries. All intercompany
balances and transactions have been eliminated.
Continued
F-6
<PAGE>
QCS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued:
CONCENTRATION OF CREDIT RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS:
The Company performs ongoing credit evaluations within the context of
the industry in which it operates, does not require collateral, and
maintains reserves for potential credit losses on customer accounts
when deemed necessary.
Financial instruments included in the Company's financial
statements at June 30, 1996 consist of cash and cash
equivalents, investments, trade accounts receivable, deposits, accounts
payable, and accrued liabilities. The financial statement carrying
amounts approximate fair value.
The Company places its cash with two financial institutions.
EQUIPMENT, LEASEHOLD IMPROVEMENTS, AND COMPUTER SOFTWARE:
Equipment, leasehold improvements, and computer software are stated at
cost. Depreciation is computed using the straight-line method over
the estimated useful lives of the assets, ranging from one to five
years, or over the term of the lease, if shorter.
The cost of property retired or otherwise disposed of and the related
accumulated depreciation and amortization are removed from the
accounts, and the resulting gains or losses are included in the
results of operations.
FOREIGN CURRENCY TRANSLATION:
Assets and liabilities of the foreign subsidiaries were translated
into U.S. dollars at year-end exchange rates. Revenue and expenses
have been translated at average exchange rates during the year. Local
currencies are considered to be the functional currencies for the
Company's foreign subsidiaries. Accordingly, currency translation
adjustments are accumulated as a separate component of stockholders'
equity. Foreign currency transaction gains and losses are included
in the determination of net loss.
INCOME TAXES:
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, 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
amounts expected to be realized. Income tax expense is the tax
payable for the period and the change during the period in deferred
tax assets and liabilities.
Continued
F-7
<PAGE>
QCS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued:
NET LOSS PER SHARE:
Net loss per share is computed using the weighted average number of
common shares outstanding during each period. Common equivalent
shares, consisting of stock options and convertible preferred stock
are excluded from the computation because they would have an
anti-dilutive effect. The 1996 net loss per share is stated after
preferred dividends of $362,344 have been deducted from the June 30,
1996 net loss.
RECENT PRONOUNCEMENTS:
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123 (SFAS 123),
ACCOUNTING FOR STOCK-BASED COMPENSATION which established a fair value
based method of accounting for stock-based compensation plans. The
Company will be required to adopt SFAS 123 in fiscal 1997. The
Company's intention is to continue to account for employee stock
awards in accordance with APB Opinion No. 25 and to adopt the pro
forma disclosure alternative required by SFAS 123.
In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121 (SFAS 121),
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED
ASSETS TO BE DISPOSED OF, which requires the Company to review for
impairment of long-lived assets, certain identifiable intangibles, and
goodwill related to those assets whenever events or changes in
circumstances indicate that the carrying amount of an asset might not
be recoverable. In certain situations, an impairment loss would be
recognized. The Company will be required to adopt SFAS 121 in fiscal
1997. The Company has studied the implications of SFAS 121 and, based
on its initial evaluation, does not expect its adoption to have a
material impact on the Company's financial condition or results of
operations.
Continued
F-8
<PAGE>
QCS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued:
RESEARCH AND DEVELOPMENT:
All research and development expenditures are expensed as incurred,
including costs relating to patents or rights which may result from
such expenditures.
REVENUE RECOGNITION:
Revenues from network installations are recognized at the time the
installation is complete and accepted by the customer and fulfillment
of all significant obligations. Revenues from network usage and
monthly service charges are recognized at month-end. Revenues from
sales of consulting and other services are recognized at the time the
service is performed and accepted by the customer.
SOFTWARE DEVELOPMENT COSTS:
Software development costs have been accounted for in accordance with
Statement of Financial Accounting Standards No. 86 "Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed."
Under the standard, capitalization of software development costs
begins upon the establishment of technological feasibility, subject to
net realizable value considerations. The Company begins
capitalization upon completion of a working model. To date, no
capitalized costs have been incurred. Accordingly, the Company has
charged all such costs to research and development expenses. Future
capitalized costs, if any, will be amortized on the straight-line
basis over the estimated life of the products or the ratio of current
revenue to the total of current and anticipated future revenue,
whichever expense is greater.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS:
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, the disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
4. STOCKHOLDERS' EQUITY:
PRIVATE PLACEMENT:
At the end of June 1996, the Company issued a total of 1,036,531
shares of common stock at $3.00 per share through a private placement.
The net proceeds (after underwriters' commissions and fees and other
costs associated with the offering) totaled approximately $3,043,000.
Continued
F-9
<PAGE>
QCS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------
4. STOCKHOLDERS' EQUITY, continued:
An additional 344,000 shares were issued at $3.00 per share in July 1996
through this private placement, the proceeds of which totaled
approximately $1,032,000.
PREFERRED STOCK:
The Company issued 4,368,937 of Series A convertible preferred shares
on November 11, 1994 for a consideration of $4,580,812.
The holders of Series A preferred stock are entitled to receive, out
of funds legally available, cumulative dividends at an annual rate of
5% on the original issue price calculated from the date of
original issuance compounded annually beginning January 1, 1996. At
June 30, 1996, dividends payable and in arrears amounted to $362,344.
Upon any liquidation, dissolution, or winding up of the company, the
holders of Series A convertible preferred shares shall be paid $1.03
per share plus accrued dividends.
Each holder of Series A preferred stock has the right to convert all
or any shares into common stock, on a one-for-one basis, at any time
for no additional consideration.
WARRANTS:
At June 30, 1995, there were warrants outstanding to purchase an
aggregate of 436,894 shares of common stock at $0.01 per share,
75,000 shares at $0.01 per share and 22,258 shares at $3 per share
(see Note 11). The $.01 per share warrants are exercisable at
any time until November 1997 or the automatic conversion of
preferred stock to common stock, whichever is earlier. The $3 per
share warrants are exercisable at any time until July 1999.
5. STOCK OPTION PLAN:
The Company is currently preparing a stock option plan for employees,
directors and others. Under this proposed plan, the Board of Directors may
grant options for the purchase of up to 1,450,000 shares of common stock by
directors, employees, and others. Options may be granted at an exercise
price of not less than 85% of the estimated fair value of the common stock,
at the date of grant, as determined by the Board of Directors. Options are
exercisable at such times and under such conditions as determined by the
Board of Directors. Options granted under the plan generally become
exercisable over a three-year period and generally expire five years from
the date of grant. Unvested options are canceled upon termination of
employment and become available under the plan.
Certain options have been granted to key employees in anticipation of this
plan, as described below:
Activity under the proposed plan is as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
-----------------------------------------------
SHARES NUMBER PRICE AGGREGATE
AVAILABLE OF PER EXERCISE
FOR GRANT SHARES SHARE PRICE
---------- ---------- --------------- ------------
<S> <C> <C> <C> <C>
Shares authorized 1,450,000 - - -
Options granted (1,450,000) 1,450,000 $0.001 - $1.00 $1,075,120
Options exercised - (120,000) $0.001 (120)
Options canceled 520,000 (520,000) $1.00 (520,000)
---------- ---------- --------------- -----------
Balance at June 30, 1996 520,000 810,000 $0.15 - $1.00 $555,000
---------- ---------- --------------- -----------
---------- ---------- --------------- -----------
</TABLE>
Continued
F-10
<PAGE>
QCS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------
5. STOCK OPTION PLAN, continued:
At June 30, 1996, options to purchase 113,000 shares of common stock were
exercisable.
On October 21, 1996, the company appointed a new President and Chief
Executive Officer who was also elected to serve as a member of the Board of
Directors. Under the terms of his employment agreement, he was granted
options to purchase 2,858,493 shares of common stock at $2.27 per share,
subject to certain adjustments in the event of the future issuance of
shares of common stock of the Company. Options to purchase 1,372,077
shares immediately vested with the remaining options to purchase 1,486,416
shares vesting in the equal blocks of 495,472 on April 11, 1997, October
11, 1997, and April 11, 1998, respectively.
For certain options granted, the Company recognized $199,630 as
compensation for the excess of the fair value of the stock at the date of
grant of the common stock issuable upon exercise of such options over the
aggregate exercise price of such options. The compensation expense is
charged to operations as the options vest.
6. INCOME TAXES:
The tax provision for the years ended June 30, 1996 and 1995 is as follows:
1996 1995
Current - -
Deferred $ (877,319) $ (592,767)
Less: valuation allowance 877,319 592,767
------------- -------------
Total provision - -
------------- -------------
------------- -------------
The Company has paid no income tax to date other than the $800
California minimum franchise tax. Deferred tax assets arise from both
carried forward losses and differences between the expenses for tax
purposes and that for financial accounting purposes. The components of
deferred tax assets as of June 30, 1996 and 1995 consist of the
following:
1996 1995
Provision for doubtful accounts receivable $ 38,436 -
Set up costs and research and development
expenditures 41,904 $ 21,513
Compensation related to stock options
granted 69,871 -
Net operating loss carryforwards 1,813,637 1,065,016(1)
----------- -----------
Total deferred tax asset 1,963,848 1,086,529
Continued
F-11
<PAGE>
QCS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------
Valuation allowance (1,963,848) (1,086,529)
----------- -----------
Net deferred tax asset - -
----------- -----------
----------- -----------
A valuation allowance is provided due to the uncertainty surrounding the
realization of the deferred tax assets in view of the Company's not having
achieved profitable operations.
(1) The French subsidiary did not have a fiscal year-end in 1994 and for
tax purposes these losses relate to the 18-month period ended June 30,
1995.
Continued
F-12
<PAGE>
QCS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------
6. INCOME TAXES, continued
Net operating losses of the French subsidiary are available for offset
against future taxable income in the French operating subsidiary and will
expire five years after the year-end in which they arose, as follows:
FUTURE
TAX
BENEFITS ON
YEAR IN WHICH FRENCH TAX OPERATING YEAR OF
LOSS AROSE LOSSES LOSSES EXPIRATION
-------------- ----------- ------------ -----------
1993 $ 537,047 $ 155,131 1998
1994 510,078 188,869 2000(1)
1995 1,657,995 570,276 2000
1996 902,276 331,135 2001
------------
$1,245,411(2)
------------
------------
Net operating losses of the Hong Kong subsidiary are available for offset
against future taxable income in the Hong Kong operating subsidiary and
will expire fifteen years after the year-end in which they arose, as
follows:
FUTURE TAX
BENEFITS ON
YEAR IN WHICH HONG KONG OPERATING YEAR OF
LOSS AROSE TAX LOSSES LOSSES EXPIRATION
------------- ---------- ----------- ----------
1996 $414,485 $68,390(2) 2011
----------
----------
(1) The French subsidiary did not have a fiscal year-end in 1994 and for
tax purposes these losses relate to the 18-month period ended June 30,
1995.
(2) The deferred tax asset is before the application of the valuation
allowance.
Continued
F-13
<PAGE>
QCS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------
6. INCOME TAXES, continued
Net operating losses of the U.S. subsidiary are available for offset
against future taxable income in the U.S. operating subsidiary and will
expire fifteen years after the year-end in which they arose, as follows:
FUTURE TAX
BENEFITS ON
YEAR IN WHICH OPERATING YEAR OF
LOSS AROSE U.S. TAX LOSSES LOSSES EXPIRATION
------------- --------------- ----------- ----------
1987 $ 201 $ 70 2002
1988 35,896 12,564 2003
1989 61,333 21,467 2004
1990 60,480 21,168 2005
1993 53,731 18,806 2008
1994 141,598 49,559 2009
1995 77,446 27,106 2010
1996 997,417 349,096 2011
---------
$499,836(2)
---------
---------
(2) The deferred tax asset is before the application of the valuation
allowance.
Due to changes in the Company's ownership during 1996 and prior years, the
amount of loss and credit carryforwards available to offset future federal
taxable income or tax may be limited by IRS Code Section 382. The amount
of such limitation, if any, has not been determined.
The difference between the statutory U.S. federal income tax rate (35%) on
income (loss) before income taxes and the company's effective tax rate is
summarized as follows:
<TABLE>
<CAPTION>
1996 % 1995 %
<S> <C> <C> <C> <C>
Net loss $(2,711,682) $(1,735,241)
$(1,735,241)
Federal tax at statutory rate (949,089) 35.00 (607,334) 35.00
Foreign taxes - rate differential 71,770 (2.60) 14,567 (0.80)
Increase in valuation
allowance 877,319 (32.40) 592,767 (34.20)
------------- -------- ------------- ---------
Total provision - - - -
------------- -------- ------------- ---------
------------- -------- ------------- ---------
</TABLE>
Continued
F-14
<PAGE>
QCS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------
7. OTHER CURRENT ASSETS:
Other current assets at June 30, 1996 and 1995 consisted of the following:
1996 1995
Prepaid expenses $ 22,622 $ 52,848
Supplies 840 3,193
Sales taxes recoverable - 117,184
Other - 63,734
---------- ----------
$ 23,462 $ 236,959
---------- ----------
---------- ----------
8. ACCRUED LIABILITIES:
Accrued liabilities at June 30, 1996 and 1995 consisted of the following:
1996 1995
Payroll and related taxes $ 155,372 $ 76,129
Other accrued liabilities 241,245 124,381
----------- ----------
$ 396,617 $ 200,510
----------- ----------
----------- ----------
9. LEASE COMMITMENTS:
CAPITAL LEASE OBLIGATIONS:
The Company leases certain office equipment under a lease term of three
years with a purchase option at the end of the lease period. Under this
leasing arrangement, the Company pays all costs related to the
equipment.
Future minimum lease payments under this capital lease is as follows:
FOR THE YEAR ENDING JUNE 30,
1997 $ 3,000
1998 3,000
1999 1,000
--------
Total minimum lease payments 7,000
Less amount representing interest 566
---------
Present value of net minimum lease payments 6,434
Less current obligation 2,628
---------
Long-term obligation under capital lease $ 3,806
---------
---------
The current obligation under the capital lease is included in accrued
liabilities.
Continued
F-15
<PAGE>
QCS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------
9. LEASE COMMITMENTS, continued
OPERATING LEASE OBLIGATIONS:
The Company leases its offices, housing for certain employees, and
certain motor vehicles under operating lease agreements expiring in
future years. These agreements require the Company to pay taxes,
insurance, and maintenance expenses. Rental expense was approximately
$264,000 and $244,000 in fiscal 1996 and 1995, respectively.
The annual minimum rental commitments under all noncancelable operating
lease arrangements are as follows at June 1996:
1997 $ 297,000
1998 252,000
1999 121,000
2000 110,000
2001 84,000
Future years 126,000
-----------
$ 990,000
-----------
-----------
10. SEGMENT INFORMATION:
The geographical distribution of revenue is as follows:
1996 1995
North and South America $ 434,116 $ 121,787
Europe 186,769 168,346
Asia 410,973 192,007
------------- -----------
$ 1,031,858 $ 482,140
------------- -----------
------------- -----------
The Company operates in a single industry segment and sells its
products and services primarily to the retail industry. The Company
markets its products and services in the U.S. and foreign countries
(mainly Europe and Asia) through its sales organizations and
distributors. There are no significant volumes of business greater
than 10% of revenues transacted with any particular customer.
Continued
F-16
<PAGE>
QCS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------
10. SEGMENT INFORMATION, continued
The geographical distribution of the net operating loss and total
assets for the year ended June 30, 1996 is as follows:
NET OPERATING LOSS TOTAL ASSETS
------------------ ------------
North and South America $1,204,330 $2,677,890
Europe 1,025,213 147,702
Asia 482,121 310,288
----------- -----------
$2,711,664 $3,135,880
----------- -----------
----------- -----------
11. RELATED PARTY TRANSACTIONS:
One of the Company's shareholders acted as a broker during the June
1996 private placement of common stock. He received a commission of
five percent of the equity dollars he placed, equal to $133,550. Half
of that commission was paid in cash and half was issued in the form of
common stock warrants with an exercise price of $3 per share.
During the year ended June 30, 1995, this shareholder also acted as a
broker in a private placement of preferred stock. He received a
commission in the form of 75,000 common stock warrants at $0.01 per
share.
12. FOURTH QUARTER DATA:
The following adjustments were recorded in the fourth quarter ended
June 30, 1996 which pertained to previous quarters during fiscal
year 1996:
Revenue recognition adjustment $ 325,603
Compensation related to stock options granted 199,630
----------
Aggregate effect on net loss for the year $ 525,233
----------
----------
Effect on net loss per share of common stock
and common stock equivalents $ (0.03)
----------
----------
In addition, preferred dividends in arrears amounting to $362,344 have
been accrued in the quarter ended June 30, 1996.
F-17
<PAGE>
QCS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------
13. PRIOR PERIOD RESTATEMENT:
The June 30, 1995 consolidated financial statements have been
restated to reverse a previously reported $200,695 foreign currency
exchange gain on the conversion to equity of intercompany debt
between the Company and its French subsidiary.
The effect of the restatement on the 1995 financial statements is as
follows:
Previously Reported Restated
------------------- -----------
Other (expense) income $ 163,385 $ (37,310)
Net loss $(1,534,546) $(1,735,241)
Accumulated deficit $(3,865,264) $(4,065,959)
Cumulative currency
translation adjustments $ (226,844) $ (26,149)
Net loss per share $ (0.10) $ (0.11)
F-18
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To The Board of Directors and Stockholders of
QCS Corporation:
Our report on the consolidated financial statements of QCS Corporation is
included on page F-1 of this Form 10-KSB. In connection with our audits of
such financial statements, we have also audited the related financial
statement schedule on page F-20 of this Form 10-KSB.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
San Francisco, California
November 26, 1996
F-19
<PAGE>
FINANCIAL STATEMENT SCHEDULE
REQUIRED RULE BY 5-04 OF REGULATION S-X
<PAGE>
QCS CORPORATION
SCHEDULE II
VALUATION AND QUALIFICATION ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
---------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
- ------------------------ ------------ ------------ ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Provision for doubtful
accounts receivable $56,655 $153,922 - $90,617 $119,960
Deferred tax valuation
allowance $1,017,499 - $877,319 - $1,894,818
</TABLE>
F-20
<PAGE>
SUBSIDIARIES OF THE REGISTRANT
The Company's wholly-owned subsidiaries are as follows:
QCS Development Company S.A.
Immeuble Le Quadra
455 Promenade des Anglais
06200 Nice,
FRANCE
QCS Global Retail Information Network Asia Pacific Ltd.
19/F, Tung Sun Commercial Centre
194-200 Lockhart Road, Wanchai,
Hong Kong
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ANNUAL
FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 2607
<SECURITIES> 0
<RECEIVABLES> 358
<ALLOWANCES> 120
<INVENTORY> 1
<CURRENT-ASSETS> 2869
<PP&E> 283
<DEPRECIATION> 54
<TOTAL-ASSETS> 3136
<CURRENT-LIABILITIES> 1322
<BONDS> 0
0
4
<COMMON> 17
<OTHER-SE> 1789
<TOTAL-LIABILITY-AND-EQUITY> 3136
<SALES> 0
<TOTAL-REVENUES> 1032
<CGS> 0
<TOTAL-COSTS> 554
<OTHER-EXPENSES> 3189
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2712)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2712)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2712)
<EPS-PRIMARY> (0.20)
<EPS-DILUTED> 0
</TABLE>
