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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, 1997
( ) 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
QCS CORPORATION
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(Exact name of small business issuer as specified in its charter)
DELAWARE 98-0132465
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(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)
(650) 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 X YES 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 ( X )
The aggregate market value of the common stock held by non-affiliates of the
Issuer as of October 10, 1997 was $6,916,572. The number of shares of Common
Stock, par value $.001 per share, outstanding as of October 10, 1997 was
17,136,531.
Documents incorporated by reference: NONE.
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Transitional Small Business Disclosure Format: YES NO X .
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TABLE OF CONTENTS
PAGE
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Part I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . 13
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . 13
Item 4. Submission of Matters to a Vote of Security Holders. . . . . 14
Part II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Item 5. Market For Common Equity and Related Stockholders Matters. . 14
Item 6. Management's Discussion and Analysis of Financial Condition
and Result of Operations . . . . . . . . . . . . . . . . . . 15
Item 7. Financial Statements . . . . . . . . . . . . . . . . . . . . 17
Item 8. Changes In And Disagreements With Accountants
On Accounting And Financial Disclosure . . . . . . . . . . . 17
Part III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act of the
Registrant . . . . . . . . . . . . . . . . . . . . . . . . . 17
Item 10. Executive Compensation . . . . . . . . . . . . . . . . . . . 18
Item 11. Security Ownership of Certain Beneficial Owners
and Management . . . . . . . . . . . . . . . . . . . . . . . 19
Item 12. Certain Relationships and Related Transactions . . . . . . . 21
Part IV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Item 13. Exhibits, Financial Statement Schedules and Reports on
Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . 22
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PART I
ITEM 1. 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 network access to enable retailers suppliers to conduct
negotiations and to electronically facilitate purchase and sale of
merchandise on a global basis. Using Lotus Notes/ Domino and industry
standard networking protocols to transmit data over leased "backbone" trunk
lines and the Internet, the Company maintains a secure yet open electronic
network that 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 product 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 (650) 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 private backbone trunk line
telecommunications services are provided by IBM Global Network ("IGN").
Access to the QCS Network is provided for a usage volume related fee. 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, product 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 QCS' retail industry clients 24 hours per 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. Consequently, the QCS Network 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.
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OVERVIEW OF THE MARKET BEING ADDRESSED BY THE COMPANY
As the worldwide retailing industry grapples with competitive pressures and
shifts in consumer demand, traditional sourcing methods are coming under
heightened scrutiny, especially in light of proven emerging technologies
which can now offer dramatic improvements in efficiency, costs and business
process management. Most purchasing automation efforts address the Post-Order
end of the Merchandise Flow. The Pre-Order and Order processes - the crucial
"upstream" lengths of the spectrum, may soon be automated.
All retailers experience the need for more efficient and effective buying
systems, but the major global and national retailers feel the need most
strongly and are actively exploring purchasing automation solutions.
THE MARKET NEED IN FOCUS
- The Retail Supply-Chain needs: efficient electronic flow of goods/services,
enabling Just-In-Time receiving, lower overall costs, fewer data errors,
closer relationships between retailers and suppliers for better service and
planning.
- Major Retailers need: buying efficiency and integration, supplier
partnering, lower costs, fewer data errors, and mapped input into existing
systems
- Qualified Suppliers need: customer partnering/closer relationship via
system tie-in to retailers, sales and bidding efficiency, Internet
presence, qualified presence in a network system with visibility and
mapped output to an array of customers and prospects
GLOBAL RETAIL MARKET
The retail industry is characterized by intense competition, consolidation
and tightening profit margins. Consumers are ever more discerning and
consequently demand that retailers offer more value in return for their
purchasing dollar. Pressure on retailers affects all players in the sourcing
environment.
To attract and keep consumers, retailers must offer more desirable products
and prices, while optimizing factors such as product variety, inventory
carrying costs, retail prices and costs of goods. Successful buyers must now
sort, view, decipher and effectively act upon immense volumes of product and
purchasing data. The average large department store carries more than one
million SKUs (stock keeping units) at any one time, each unique in terms of
product style, size, color, features, packaging, and so forth. Retailers
need to source these SKUs from hundreds, or in some cases thousands, of
vendors worldwide.
Sourcing-related communications between retailers and their vendors is a
continuing dialogue about products, pricing, delivery, special promotions,
packaging and a host of other issues. To date, these communications have
largely been carried out through paper-flow, phone calls, faxes, courier
services, or through travel and personal visits. It is time-consuming,
challenging and expensive to maintain retail supply communications in this
manner. Moreover, to compare different merchandise buying programs on a
consistent and meaningful basis requires a major undertaking for which buyers
often lack adequate resources.
Current sourcing methods often result in less than optimal merchandise
buying, characterized by frequent misalignment between what the consumers
want and what is actually on the store shelf, not to mention lost sales,
costly retail price discounts, or even unsold merchandise returned to the
supplier.
BUSINESS-TO-BUSINESS ELECTRONIC COMMERCE IN RETAIL
The expanding number and variety of products sold by each retailer along with
pricing pressure and geographic diversity, drives the globalization of
retailer-supplier partnerships. Growing volume and complexity in merchandise
sourcing relationships requires an information systems solution. Long
considered an art, merchandise buying must now be approached as a science,
with the help of technology.
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To better manage their relationships and merchandise flow, retailers and
suppliers alike are turning to information technology, and specifically to
electronic commerce solutions. QCS believes that the electronic commerce
market is at the start of a long-term expansion driven by adoption of the
Internet as a marketing venue and data highway. Electronic commerce in the
retail sphere represents a significant opportunity for systems application
and service providers who understand the unique requirements of the retail
industry and can provide the reliability and security necessary to consummate
and manage sourcing transactions.
The retail industry and its major participants have been early adopters of
electronic commerce technologies, initially in the form of Electronic Data
Interchange (EDI) managed over private Value-Added Networks (VAN). EDI
addresses the post-ordering flow of basic transactional data. In addition to
addressing a limited range of the merchandise flow, EDI systems can be
expensive to develop and are based on closed and proprietary system
technologies. The range of workflow capability is limited and costs tend to
exclude smaller participants, such as suppliers, from enthusiastic
involvement.
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 trend towards electronic
commerce solutions 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.
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/ Domino, 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 for a one time licensing 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/ or a digital camera. The multi-user service requires an image
acquisition PC, a QCS server, and multiple local area network ("LAN")
workstations. Through the Lotus Notes/ Domino 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. Lotus/ Domino server connected users access the
QCS Network via QCS' Web site (qcsnet.com) on the Internet.
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" or "on-line".
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 worldwide 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 or via local Internet
Service Providers ("ISP's").
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PRODUCT DEVELOPMENT AND/OR ACQUISITIONS
The Company's research and development efforts are exclusively driven by
market needs and directed towards technologies that enable and facilitate the
mapping and translation of information between trading parties in retailing.
QCS uses a product strategy that combines internal development, alliances,
and licensing of applications from third parties. New product development and
enhancements of existing products are typically performed within QCS.
Responsibilities include design, development, documentation and quality
assurance. Contractors are involved in non-critical projects.
QCS follows an open-environment strategy and supports, to the extent
possible, standard operating systems, LAN environments, communication
protocols and industry-specific message formats. There will continue to be
rapid changes in technology standards, and QCS intends to incorporate new
technologies and methods into its product and service offerings in order to
continue to provide leadership products.
International networking uses a combination of private (IBM Global Network
- -IGN) and public networks (Internet). QCS maintains its hub servers both
under a facility management agreement with IBM, and internally in a
self-hosted fashion in its own facilities.
Security concerns play a major role in technological choices. Lotus
Notes-TM-and Domino-TM- technology guarantee user authentication and
controlled access to the Company's servers. Critical documents exchanged
between QCS Network users are encrypted using Lotus Notes-TM- secure protocol
over the private network and standard SSL (Secure Socket Layer) protocol over
the Internet. Both provide the highest level of security permitted by U.S.
export laws.
CURRENT OFFERING
The QCS product line currently allows a supplier a variety of functions
revolving around its product catalog. Various functions allow a supplier to
maintain its product catalog, send portions of it to global listings, and to
send confidential detailed offers from its catalog to buyers on the QCS
Network in a point-to-point mode.
Documents sent by suppliers are processed by an intermediary QCS server,
incorporating various filtering and mapping functions, before being delivered
in the buyer organization in its own tailor-made format. This
centrally-managed form-based messaging system guarantees flexibility by
shielding the seller from buyer specificity and ensuring the interoperability
with a large number of messaging standards. Additional modules geared towards
communication of documents with forwarders and inspection companies enable
the buyer to follow-up the merchandise flow up to the delivery. In order to
smoothly integrate in a variety of site configurations, QCS offers its
customers various connectivity options to the QCS Network.
Launched in December 1996, QCS v2.4 is deployed at the customer site over
Lotus Notes-TM-, in either single station or LAN configuration. It is
typically chosen by large organizations and is available for suppliers,
retailers, forwarders and inspection companies. Hardware platforms running
Windows 3.1, Windows 95 or Windows NT on the client and Windows NT, OS/2 or
Netware on the server are supported. Access to the QCS hub server is achieved
through local X.28 dial-up calls to IGN X.25 private network.
The Supplier Sales Station v3.0 was introduced in May 1997. QCS v3.0 is a
web-based product that capitalizes on the low-cost and interactivity offered
by the Internet. It is available to any supplier with a standard Internet
connection and a web browser. Access to the QCS hub server is achieved
through local ISP calls using TCP/IP protocol over the Internet.
QCS-enablement of independent software vendors or proprietary solutions is
done through the support of standard EDI messages. This service is currently
available to forwarders but will be further generalized to other types of
messages.
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The back-end architecture of the QCS Network is built over Lotus Notes-TM-
and Domino technology, which allows shared database replication, user
authentication and controlled access, messaging and workflow management, and
offers support of industry standards such as HTTP, SSL or SMTP.
The QCS Solution addresses the workflow management of merchandise sourcing
for major retailers worldwide, with special emphasis on the "upstream"
processes of Pre-Ordering and Ordering. In alliance with IBM, the QCS Network
provides this well-defined market with a private, secure and web-enabled
network integrating retailers with their qualified vendors worldwide.
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 per day in
over 180 countries and territories throughout the world.
QCS operates an "Electronic Merchandise Flow" service using Lotus Domino
technology as the common presentation manager between its own collaboration
applications and existing in-house solutions of all members of the retail
trading community.
The QCS Network blends an industry standard groupware development platform,
Lotus Notes-TM- with the web enablement tool Domino, together with industry
standard networking and electronic mail systems. Retailers and their trading
partners are linked through electronic mail, data and full page image
exchange. The system offers the interactive exchange of product description
documents with text and color images, and administrative documents and forms
customized to each retailer's unique requirements.
The recent Internet-enablement of the QCS product line effectively joins
together the private and public networking application worlds, making their
differences transparent to the end-user. Supplier and retailer alike can
access the system from either software platform, and carry out their trading
dialogue with all supplier-originated communications automatically "mapped"
to the retailer's in-house systems.
By making many of its current network functions available through the
Internet via a standard Web browser (Netscape, MS Internet Explorer), QCS
removes much of the necessity for suppliers to maintain sophisticated local
hardware and software on site. QCS believes that suppliers will more readily
accept and use QCS via the Internet, thereby increasing adoption of the
technology.
SOLUTIONS FOR RETAILERS
QCS' retailer solution includes collaboration server software, an Electronic
Commerce implementation plan with the Retailer's MIS department, and a
detailed implementation project with the Retailer's Merchandising department.
The Collaboration Server is based on the Lotus Domino technology and consists
of a retail sourcing-specific electronic commerce server. The server can be
either housed by the Retailer or by QCS in Facilities Management. The QCS
Collaboration Server can be completely "firewalled" from the Retailer's
existing in-house systems. Data from the Collaboration server is transmitted
and interfaced ("mapped") through the firewall to match the Retailer's
in-house standards for Electronic Mail and Graphical User Interface, as well
as Management Systems handling data such as Purchase Orders, Point-of-Sale,
Quality Control and Shipping information.
Once on the QCS Network, the retail buyer can select and retrieve up-to-date
information from a worldwide pool of vendors and request information
concerning their product offerings. All data from all vendors appears on the
retailer's screen "mapped" automatically by QCS into the retailer's
pre-specified and familiar format. This makes it simple to compare products
across multiple suppliers for the same merchandise program. Supplier input
flows seamlessly through QCS into the retailer's existing systems.
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Global retailers can now review, select, negotiate and purchase consumer
goods over an image-based network using IBM's Global Network. Information is
exchanged in a confidential secure environment. The overall objective is to
enable the retailer client to obtain lower cost, increased sales volume,
faster inventory turnover, fewer involuntary price discounts, fewer inventory
buying errors, and improved margins and profitability. Enhanced merchandising
productivity yields substantial savings, directly impacting the client's
bottom line and bolstering price competitiveness.
When utilized to its full capability on a wide-scale basis, the QCS Network
can substantially shorten the sourcing process and more effectively manage
the vendor performance quality. 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.
SOLUTIONS FOR SUPPLIERS
To take advantage of the advent of the Internet, the Company has introduced a
new web-enabled product. The Supplier Sales Station offers vendors a
cost-effective way to get in front of all QCS private network retailer
members. A server facility located in Mountain View, California links the Web
with the QCS private network. The home page (http://www.qcsnet.com) tells
the viewer about the QCS services and benefits and allows him to register
online and to become a member at a basic service level. This provides the
supplier with free email directly between himself and individual buyers.
Many suppliers will get onto the Internet using a free 30-day trial of IBM
Internet Connection Services offered via direct mail.
The new member enjoys a limited version of the full spectrum of QCS Network
services. The vendor will be able to submit information about himself and his
product offerings to the catalog viewed by all QCS members. The data is input
by the vendor himself on the QCS Internet home page. The QCS server then
"maps" it into the QCS standard format and posts it on the QCS private
network catalog. Supplier input is thus in one standard format that is
"mapped" by the QCS system to each retailer's internal specifications.
The QCS product line currently allows suppliers a variety of functions
revolving around his product catalog. Various functions allow him to update
his catalog, send portions of his product catalog to global listings, and to
send confidential customized and detailed offers from his catalog to buyers
on the QCS Network in a point-to-point mode. This base functionality shall
remain in all future product offerings, however the underlying technology
will be enhanced to incorporate the most current market standards.
Supplier equipment requirements depend on whether they are a large-usage
vendor tied into the QCS private network and interacting extensively with
retailers, or a new supplier subscribing to free e-mail services through the
Web and considering additional options. The large user requires an industry
standard desktop PC with a high quality color display, a color scanner and/or
a digital camera, a QCS server and a local area network ("LAN") workstation.
The entry-level service requires only a PC running Windows and an Internet
connection with web browser.
SALES AND MARKETING
MARKETING ALLIANCE WITH IBM
In December 1996, QCS and IBM formally announced a broad alliance to enable
international electronic trading between retailers and their suppliers on
IBM's Global Network. IBM and QCS cooperatively market the QCS service. IBM
provides a global infrastructure that includes help desk support and a
worldwide sales and marketing force, some of which is expressly dedicated to
QCS. QCS operates its service on the IBM Global Network Interconnect Service
for Lotus Notes-TM-.
In addition to providing customer care centers and a worldwide sales force to
recruit suppliers, IBM also has responsibility for supplying, installing and
packaging the QCS Supplier Installation Kit and to provide telephone support
for Lotus Notes-TM- and the related QCS Software to suppliers. QCS pays IBM
for access to the IBM Global Network and makes revenue based payments for
IBM's sales and marketing services.
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IBM Electronic Commerce, Global Trade Services, the IBM entity which
sponsored the strategic alliance, was formed within the Internet Division in
1996 with the mission to develop business with companies engaged in
International Trade. Global Trade Services' objective is to leverage IBM's
worldwide sales and services capabilities, current and emerging technologies
and global network in cooperative business relationships that will capitalize
on the opportunities existing in the electronic commerce marketplace. Global
Trade Services introduced QCS to IBM's Distribution Industries Solutions
Unit. Their operational presence in the field and commitment to the QCS
vision brings market acceptance, local infrastructure to leverage, and deep
knowledge of retailers and emerging supply-chain solutions.
COMPETITION
BUSINESS-TO-BUSINESS ELECTRONIC COMMERCE
The general market sector for what QCS does can be broadly defined as firms
offering business to business electronic commerce applications, such as
General Electric Information Services (GEIS), Sterling Commerce, Harbinger
and IBM Corporation. They are large companies serving diverse markets, and
are not focused on the upstream part of the retail merchandise flow,
especially the Pre-Order area. QRS Inc. is an established firm that serves
the retail industry, the same vertical market as the Company, but it does not
focus on the Pre-Order area of the upstream flow, and offers EDI products
entirely.
Of the many electronic commerce providers, large and small, some offer a
proprietary network product and others apply an Internet based solution. The
trend is clearly moving toward Internet functionality, as big e-commerce
providers create products in this domain or at least web-enable existing and
largely EDI-based offerings to serve more areas of the Merchandise Flow chain.
UPSTREAM VERSUS DOWNSTREAM RETAIL SOLUTIONS
Within the upstream area, QCS addresses the Pre-Order and Order sourcing flow
needs of major retailers, with connectivity to applications, workflow
functions and service providers. QCS serves this well-defined market with a
private, secure and web-enabled network integrating the retailer with his
qualified vendors and service providers worldwide. It offers retailers and
suppliers a comprehensive, independent, industry standard solution supporting
upstream processes. Other upstream electronic commerce providers serving the
retail industry focus on rapid replenishment systems (just-in-time inventory
management). Downstream electronic commerce firms provide point of sales,
data warehousing and micro-marketing (analysis of consumer purchasing
behavior). Downstream systems do not overlap with the QCS Network in any
material fashion.
EXTRANETS VERSUS IN-HOUSE DEVELOPMENT
In-house systems development, a traditional internal competitor to new
technology applications, is not a strong competitor today because of the
direction in which Internet based technology is evolving. In 1996, intranets
were embraced by corporate users of information services and made substantial
inroads in strategic vision documents and procurement practices of many IT
departments within major companies.
The new Extranet, or extended Internet, is a private business network of
several cooperating organizations located outside the corporate firewall and
utilizing existing Internet interactive infrastructure such as standard
servers, email clients and Web browsers. This makes it far more economical
than the creation and maintenance of a proprietary network. It enables
trading partners, suppliers and customers with common interests to form a
tight business relationship and a strong communication bond. It is the first
non-proprietary technical tool that can support rapid evolution of electronic
commerce. QCS Network is an extranet system for which development experience
and costs have already been borne.
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EMPLOYEES
The Company currently has 19 full time employees, of which 5 are in sales and
marketing, 4 in engineering and development, 5 in network management and
field operations, and 5 in management 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, 1997, the Company has generated an
accumulated deficit of $10,160,862. 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 in 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 legal, economic and political 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 IBM
The Company has a strong and growing revenue sharing alliance with IBM for
marketing, major account sales and customer support, together with Network
service carriage through the IBM Global Network (IGN). IBM has substantial
discretion and control over such marketing and support including financial
resources devoted to marketing and the compensation of its sales and support
personnel. Therefore, IBM's decisions and performance
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with respect to these matters have a material impact on the Company's ability
to market its products and services. IBM is under no contractual obligation
to continue to market the Company's products and services. A decision by IBM
to cease or reduce substantially its marketing efforts would have an
immediate and material adverse effect on the Company's financial condition
and results of operations. There can be no assurance that, in such an event,
the Company would succeed in alternative sales methods.
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 begin to use the QCS Network, 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 succeed in connecting key suppliers.
CONTINUING NEED FOR PRODUCT ENHANCEMENTS: The Company's current product line
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.
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.
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, global networking and
technology, 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 products and services.
ABSENCE OF PUBLIC MARKET LIQUIDITY AND POSSIBLE VOLATILITY OF STOCK PRICE: The
public float of the Company's common stock is small in comparison to total
shares outstanding 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 July 1, 1996 to June 30, 1997, the
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bids for the shares of the Company's stock on the OTC Bulletin Board ranged
from $.625 to $5.00. Until additional shares of Common Stock of the Company
become freely tradable, this situation of limited liquidity and volatile
stock price will most likely persist.
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. 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 5,749,468
shares of Common Stock (assuming conversion of all issued and outstanding
shares of Series A Convertible Preferred Stock). 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 field 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. 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 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
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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 IGN for access to and usage of the QCS Network. Any disruption
in the service provided by IGN or any failure of IGN 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.
ITEM 2. PROPERTIES
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 Nice, France office is housed in a leased space of
approximately 2,000 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, 1997.
The Company is subject to a number of claims arising out of the conduct of
business. The Company believes that the results of the claims will not have
a materially adverse effect on the Company's financial condition.
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 1997.
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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, 1997 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
---- ---
1997
- ----
First Quarter ended 9/30/96 5.00 2.50
Second Quarter ended 12/31/96 4.50 3.00
Third Quarter ended 3/31/97 4.125 1.50
Fourth Quarter ended 6/30/97 1.375 0.625
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 June 30, 1997, there were approximately 188 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.
RECENT SALES OF UNREGISTERED SECURITIES
In July 1996 the Company issued 344,000 shares of Common Stock at $3.00 per
share in a private placement to accredited investors (as such term is defined
in Regulation D promulgated under the Securities Act of 1933, as amended).
The net proceeds of this sale totaled approximately $1,032,000. This private
placement commenced in June 1996 and in the fiscal year ended June 30, 1996
the Company issued a total of 1,036,531 shares of Common Stock at $3.00 per
shares of which the net proceeds totaled approximately $2,842,000.
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<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 Network access to enable retailers and suppliers to
conduct negotiations, purchase and sale of merchandise on a global basis.
Using Lotus Notes/ DominoTM and industry standard networking protocols and
transmitting data over leased "backbone" trunk lines and the Internet, 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 application software for a one time licensing fee and network
access for which the Company charges a fixed monthly fee and/or volume-based
recurring usage fees.
From inception in 1993 through June 30, 1997, the Company has generated an
accumulated deficit of $10,160,862. 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 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.
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RESULTS OF OPERATIONS FOR FISCAL YEARS ENDED JUNE 30, 1997 AND 1996
REVENUES
Revenues were $1,274,611 in fiscal 1997 versus $1,031,858 in fiscal 1996,
which represents a 24% increase. The increase in revenues was due primarily
to adding retailers and suppliers to the QCS Network in the first quarter of
FY 97 with the resultant installation charges and monthly access and volume
usage fees. These revenues were generated by private Network connections
using the full QCS Notes Client/ Server based applications. In fiscal 1997
access and volume usage fees represented 76% of total revenue and
installations fees represented 22% of total revenue.
Starting in the second quarter of fiscal 1997, the Company experienced a
decline in the number of new connections to the Private Network as a result
of price pressure from Internet based solutions. The Company started its
development and porting activities in the third quarter of fiscal 1997 in
order to introduce its Internet based solution. As a result the Company was
able to launch its first Internet based application, the WEB-Supplier Sales
Station, in May of 1997. The Company has however not yet been able to show
significant revenues from these new Internet enabled products and services in
fiscal 1997. There can be no assurance that these products will produce
significant revenue growth in the short-term future of the Company.
GROSS PROFIT
Gross profit represents revenues less cost of sales. Cost of sales consists
mainly of the following: (1) labor costs of installing software and providing
training 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. The cost of sales
increased from $554,034 in fiscal 1996 to $837,131 in fiscal 1997, or 51%,
mainly due to the cost of migrating the QCS Network to IBM's Global Network
(IGN) Backbone Services during the third quarter. The transition to IGN as
the new backbone service provider is part of the overall QCS - IBM
partnership agreement. For security reasons the Company also chose to
continue to use its previous backbone provider SITA during the transition
period which resulted in the temporary increase of cost of sales in the third
and fourth quarters of fiscal 1997. As a result the Company experienced a
decline in gross profit from $477,824 in fiscal 1996 to $437,480 in fiscal
1997 or 8%.
OPERATING EXPENSES
Selling, general and administrative expenses of $2,912,498 in fiscal 1997
experienced a decrease of 4% from fiscal 1996. Starting from the third
quarter of fiscal 1997, it has been the Company's policy to shift the
technical operation expenses from world wide field support to centralized
development efforts as a result of the transition from Notes Client/ Server
based applications on the Private Network to Domino Web enabled based
applications on the Internet. The new technology environment requires much
less technical field support which enabled the Company to decrease the
related costs. Research and development expenses increased 11% from $190,207
representing 18% of fiscal 1996 revenues, to $364,539 representing 29% of
fiscal 1997 revenues. These R&D expenditures increased in order to develop
new products and services, and to port existing applications to a new web
enabled server engine. To maintain competitiveness in the very fast-moving
software industry, additional engineering expenses also were spent on the
analysis and design of future products. The Company continued to invest
strongly in 1997 in several key areas to get into position to create,
accommodate, and sustain potential, substantial growth in the coming
quarters. The retail industry is truly global in nature. To properly address
the appropriate worldwide markets, sales and marketing staff and management
were maintained in 1997 at all three major sales locations; Hong Kong, France
and the U.S. with an enhanced focus on a limited number of Retail Hub
accounts.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1997 cash and cash equivalents were $1,274,157, representing a
decrease of $1,332,961 from the $2,607,118 at June 30, 1996. This decrease in
working capital resulted from $2,524,761 cash used in operating activities,
offset by $1,031,919 in additional funds received from the July equity
investment and proceeds from
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<PAGE>
exercise in stock options. In fiscal 1996 the Company used $1,884,262 in
operating activities. The Company's business plan for fiscal 1998 calls for
continued increases in spending for product development, selling expenses and
key management additions. The Company does not currently have a bank credit
line, but does intend to apply for one in 1998. The Company is seeking to
raise $5,000,000 through a private placement of common stock at $1.50 per
share. The Company believes this new equity investment combined with the
cash currently on hand and at least some growth in revenue will be sufficient
to fund operations for the next year. There can be no assurance that this
attempt will be successful. 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. If these fund
raising efforts were not 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.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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
September 29, 1997 are as follows:
NAME AGE POSITION WITH COMPANY
---- --- ---------------------
Marcel van Heesewijk 37 President, Chief Executive Officer, Acting Chief
Financial and Accounting Officer, Chairman of the
Board of Directors
Mattheus Wegbrans 47 Executive Vice President of Field Operations and
Sales, Director
Johan Vunderink 49 Director
MARCEL VAN HEESEWIJK, Chairman of the Board, and has served intermittently
since January 1993 as President, Chief Executive Officer and Acting Chief
Financial and Accounting Officer. 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 bachelor's 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.
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<PAGE>
MATTHEUS WEGBRANS, is a Director and Executive Vice President of Field
Operations and Sales. He had previously served as Vice President of Sales
and Marketing of the Company in 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.
JOHAN VUNDERINK, has been a director of the Company since July 1997. From
1977 to 1996 Mr. Vunderink held various executive and board positions with
BSO in the Netherlands and from 1989 to 1992 was President and CEO of Origin
Technology. Origin subsequently was merged into BSO and Mr. Vunderink became
Executive Vice President of Marketing and Sales. Origin is a global systems
integrator with offices in 31 countries, employing 13,500 people, and a 1996
revenue of $1.35 billion. Mr. Vunderink is also acting as interim President
and CEO of Matrix, a sales force automation provider, and a subsidiary of
Baan Investment BV. Additionally, Mr. Vunderink holds board member positions
for ITPS/Hyperion, a services company to Airline Reservation System, Health
Care Systems Benelux BV, a chipcard company and ALLSHARE BV, a development
company for banking and human resource software.
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
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
executive officers, directors and persons who beneficially own more than 10%
of the Company's Common Stock to file initial reports of ownership and
reports of changes in ownership with the Securities Exchange Commission
(SEC). Such persons are required by SEC regulations to furnish the Company
with copies of all Section 16(a) forms filed by such persons.
Based solely on the Company's review of such forms furnished to the Company
and written representations from certain reporting persons, the Company
believes that all filing requirements applicable to the Company's executive
officers, directors and more than 10% stockholders were satisfied.
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 three fiscal years ended June
30, 1997:
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION
--------------------------
AWARDS PAYOUTS
ANNUAL COMPENSATION ------------------- -------
------------------------------------- RESTRICTED
NAME AND PRINCIPAL OTHER ANNUAL STOCK OPTIONS/ LTIP ALL OTHER
POSITION DURING 1997 YEAR SALARY COMPENSATION AWARDS SARS PAYOUTS COMPENSATION
- -------------------- ---- ------ ------------ ------ ---- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Marcel van Heesewijk** 1997 $101,000 $53,000* -- -- -- --
President, CEO, Acting 1996 $102,996 $44,307* -- -- -- --
CFO and Chairman of 1995 $90,625 $12,983* -- -- -- --
the Board of Directors
Mattheus Wegbrans*** 1997 $132,000 $ 12,000* -- -- -- --
Vice President 1996 -- -- -- -- -- --
And Director 1995 $22,857 $7,886* -- -- -- --
</TABLE>
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<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Todd Myhre**** 1997 $59,496 $11,494* -- -- -- --
President, CEO
And Director
</TABLE>
* Represents car and housing allowances paid to Mr. van Heesewijk and Mr.
Wegbrans, car allowance and consulting services for Mr. Myhre.
** Mr. van Heesewijk assumed the position of Executive Vice President of
Business Strategies and Alliances in October 1996. In February 1997 he
resumed the positions of President and CEO.
*** Mr. Wegbrans rejoined the Company in August 1996 and did not receive any
compensation during fiscal 1996.
**** On October 21, 1996, Todd Myhre became the Company's President and Chief
Executive Officer. Mr. Myhre resigned this position on February 26, 1997,
after which he served as a consultant to the Company.
STOCK OPTION GRANTS, EXERCISES AND HOLDINGS
On October 21, 1996, the Company appointed Todd Myhre as its President and
Chief Executive Officer and elected him 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.
Options to purchase 1,372,077 shares immediately vested with the remaining
options to purchase 1,486,416 shares vesting in equal blocks of 495,472 on
April 11, 1997, October 11, 1997 and April 11, 1998. On February 25, 1997
all of the aforementioned options were rescinded by mutual agreement. On
February 26, 1997, he resigned his position with the Company and the Board of
Directors. Pursuant to the terms of a consulting agreement between the
Company and Mr. Myhre, he was granted new options to purchase 1,372,077
shares at $2.27 per share. These options were fully vested effective April
11, 1997 and may be exercised on or before April 11, 1999.
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.
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 Stock as of October 10, 1997 assuming the
conversion into Common Stock of 4,368,937 shares of the Company's Series A
Convertible Preferred Stock 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:
19
<PAGE>
NAME AND ADDRESS OF BENEFICIAL OWNER OR NUMBER OF SHARES PERCENT
GROUP AND NATURE OF BENEFICIAL OWNERSHIP (1) BENEFICIALLY OWNED OF CLASS
- --------------------------------------------------------------------------------
Marcel van Heesewijk 4,892,963 22.20%
650 Castro Street
Mountain View, CA 94041
Mattheus Wegbrans 2,183,100 9.91%
Chemin de la Cairee - Villa Ariari
Les Hauts de Saint-Paul
06140 St Paul de Vence
France
Todd S. Myhre (2) 1,372,077 5.86%
650 Castro Street
Mountain View, CA 94041
Carlyle-QCS Partners, LP (3) 3,058,253 13.88%
1001 Pennsylvania Avenue, NW
Washington, D.C. 20004
French American Banking Corporation 2,114,100 9.59%
World Financial Center, Tower A
200 Liberty Street
New York, NY 10281
STF Management Limited (4) 1,747,574 7.93%
as General Partner of Sharp Technology
Fund I & II, LP
1 Cornwall Street, 4th Floor
Birmingham, UK
Lagunitas Partners, L.P./Proactive Partners (5) 1,686,732 7.65%
C/O Gruber & McBaine Cap. Mgt.
50 Osgood Place, Penthouse
San Francisco, CA 94133
All Directors and Officers as a group (2 persons) 7,076,063 32.11%
(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) Assumes exercise of options to purchase 1,372,077 shares of Common Stock
that are exercisable within 60 days.
(3) Includes warrants to purchase 145,631 shares of Common Stock which are
exercisable within 60 days of September 30, 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.
20
<PAGE>
(4) Assumes conversion of 873,787 shares of Series A Convertible Preferred
Stock held by STF Management Limited into 873,787 shares of Common Stock.
(5) Assumes conversion of 776,700 shares of Series A Convertible Preferred
Stock held by Lagunitas Partners, L.P./Proactive Partners into 776,700 shares
of Common Stock.
Percentage ownership is based on (i) 17,136,531 shares of Common Stock of the
Company outstanding as of October 10, 1997, (ii) 4,368,937 shares of Series
A Convertible Preferred Stock outstanding as of October 10, 1997, 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.
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.
21
<PAGE>
PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
(a) The following documents are filed as a part of this form:
1. Financial Statements:
Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
Consolidated Balance Sheets - As of June 30, 1997 and 1996. . . . . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Statements of Operations - For the years ended June 30, 1997 and 1996. . . . . . . . . . . . . F-3
Consolidated Statements of Stockholders' Equity - For the years ended June 30, 1997 and 1996 . . . . . . . F-4
Consolidated Statements of Cash Flows - For the years ended June 30, 1997 and 1996. . . . . . . . . . . . . F-5
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6
2. Financial Statement Schedules - For years ended June 30, 1997 and 1996:
Schedule II - Valuation and other Qualification Accounts. . . . . . . . . . . . . . . . . . . . . . . . . . F-17
All other schedules are omitted because they are not applicable or the required information is
shown in the consolidated financial statements or notes thereto.
3. Exhibits:
3.1 Amended Certificate of Incorporation is incorporated by reference to Exhibit 28(ii)
to Form 8K filed November 22, 1994. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . *
3.2 By-laws are incorporated by reference to Exhibit 28(viii) to Form 8K filed November 22, 1994. . . . . . *
4 Instruments defining rights of holders of the Company's Series A Convertible Preferred Stock are
incorporated by reference to Exhibits (i), (ii), (iii) & (iv) to Form 8K filed November 22, 1994. . . . *
11 Statement re: Computation of earnings (loss) per share . . . . . . . . . . . . . . . . . . . . . See page F-3 of
the Financial
Statements filed
under Item 7
hereof
21.1 Subsidiaries of the Registrant. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-18
23.1 Report of Independent Accountants on Financial Statement Schedule . . . . . . . . . . . . . . . . . . F-19
27 Financial Data Schedule. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-20
* Previously filed
</TABLE>
(b) Reports on Form 8-K
The Company reported new product developments using the Internet's World Wide
Web in a letter to the shareholders and filed on Form 8-K with the Securities
Exchange Commission on April 3, 1997.
22
<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: October 14, 1997
QCS CORPORATION
(Registrant)
By: /s/ Marcel van Heesewijk
------------------------------------------
Marcel van Heesewijk, President,
Chief Executive Officer, Acting Principal
Accounting and Financial Officer
and Chairman of the Board of Directors
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 OCTOBER 14, 1997.
SIGNATURE TITLE
- --------- -----
/s/ MATTHEUS WEGBANS
- ---------------------
Mattheus Wegbrans Executive Vice President of Field Operations
& Sales, Director
/s/ JOHAN VUNDERINK
- ---------------------
Johan Vunderink Director
23
<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, 1997 and 1996,
and the related consolidated statements of operations, cash flows and
stockholders' equity for the years ended June 30, 1997 and 1996. 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.
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, 1997 and 1996, and the consolidated results of
its operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 2 to the financial
statements, the Company has suffered recurring losses from operations that
raises substantial doubt about its ability to continue as a going concern.
Management's plans in regards to these matters are also described in Note 2.
The financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
San Jose, California COOPERS & LYBRAND L.L.P.
September 22, 1997
F-1
<PAGE>
QCS CORPORATION
CONSOLIDATED BALANCE SHEETS
JUNE 30, JUNE 30,
1997 1996
ASSETS -------------- ---------------
Current assets:
Cash and cash equivalents $ 1,274,157 $ 2,607,118
Accounts receivable (net of allowance
for doubtful accounts of
$55,036 in 1997 and $119,960 in 1996) 152,789 238,202
Other current assets 14,896 23,462
------------ ------------
Total current assets 1,441,842 2,868,782
Fixed assets, net of accumulated
depreciation and amortization 242,243 229,296
Security deposits 32,059 37,802
------------ ------------
Total assets $ 1,716,144 $ 3,135,880
------------ ------------
------------ ------------
LIABILITIES
Current liabilities:
Accounts payable $ 240,007 $ 562,705
Accrued liabilities 520,305 393,989
Capital lease obligations, short-term portion 9,097 2,628
Preference dividend payable 605,462 362,344
------------ ------------
Total current liabilities 1,374,871 1,321,666
Capital lease obligations, long-term portion 14,892 3,806
------------ ------------
Total liabilities 1,389,763 1,325,472
------------ ------------
Commitments (Note 8)
STOCKHOLDERS' EQUITY
Series A convertible preferred stock, 4,369 4,369
par value $.001 per share:
Authorized: 5,000,000 shares; Issued and
outstanding 4,368,937 shares in
1997 and 1996 (aggregate liquidation
preference: $4,500,005)
Common stock, par value $.001 per share: 17,137 16,693
Authorized: 40,000,000 shares; Issued and
outstanding 17,136,531 in 1997 and
16,692,531 in 1996
Additional paid in capital 10,653,231 9,688,531
Deferred stock compensation (107,250) (301,638)
Subscriptions receivable from stockholders (200,100) (462,584)
Accumulated deficit (10,160,862) (7,139,967)
Cumulative foreign currency translation
adjustment 119,856 5,004
------------ ------------
Total stockholders' equity 326,381 1,810,408
------------ ------------
Total liabilities and stockholders'
equity $ 1,716,144 $ 3,135,880
------------ ------------
------------ ------------
The accompanying notes are an integral part of these
consolidated financial statements.
F-2
<PAGE>
QCS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED JUNE 30,
---------------------------------
1997 1996
-------------- ----------------
Revenue $ 1,274,611 $ 1,031,858
Cost of sales 837,131 554,034
------------ ------------
Gross profit 437,480 477,824
Operating expenses:
Selling, general and administrative 2,912,498 3,035,947
Research and development 364,539 190,207
------------ ------------
Total operating expenses 3,277,037 3,226,154
Operating loss (2,839,557) (2,748,330)
Other expense, net (36,458) (11,184)
Interest income 98,238 47,850
------------ ------------
Net loss (2,777,777) (2,711,664)
Preferred dividend payable not included in
net loss (243,118) (362,344)
------------ ------------
Net loss attributed to common stockholders $ (3,020,895) $ (3,074,008)
------------ ------------
------------ ------------
Net loss per share $ (0.18) $ (0.20)
------------ ------------
------------ ------------
Weighted average number of shares
used in per share calculation 17,074,660 15,658,840
------------ ------------
------------ ------------
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
<PAGE>
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK ADDITIONAL DEFERRED
-------------------- ------------------- PAID-IN STOCK OPTION
SHARES AMOUNTS SHARES AMOUNTS CAPITAL COMPENSATION
------ ------- ------ ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT JUNE 30, 1995 15,536,000 $ 15,536 4,368,937 $ 4,369 $ 6,145,468
Issuance of common stock in connection
of private placement 1,036,531 1,037 3,041,795
Exercise of stock options 120,000 120
Deferred stock option compensation 301,638 (301,638)
Compensation related to stock options 199,630
Preference dividend payable
Translation adjustment
Net loss for the year
---------- --------- --------- -------- ------------ ----------
BALANCE AT JUNE 30, 1996 16,692,531 16,693 4,368,937 4,369 9,688,531 (301,638)
Issuance of common stock in connection
of private placement 344,000 344 1,031,475
Common stock subscriptions received
Write-off of common stock warrants (66,775)
Exercise of stock options 100,000 100
Compensation related to stock options 194,388
Preference dividend payable
Translation adjustment
Net loss for the year
---------- --------- --------- -------- ------------ ----------
BALANCE AT JUNE 30, 1997 17,136,531 $ 17,137 4,368,937 $ 4,369 $ 10,653,231 $ (107,250)
---------- --------- --------- -------- ------------ ----------
---------- --------- --------- -------- ------------ ----------
</TABLE>
<TABLE>
<CAPTION>
CUMULATIVE
COMMON FOREIGN TOTAL
STOCK CURRENCY STOCK-
SUBSCRIPTIONS ACCUMULATED TRANSLATION HOLDERS'
RECEIVABLE DEFICIT ADJUSTMENTS EQUITY
---------- ------- ----------- ------
<S> <C> <C> <C> <C>
BALANCE AT JUNE 30, 1995 $(4,065,959) $ (26,149) $ 2,073,265
Issuance of common stock in connection
of private placement (462,584) 2,580,248
Exercise of stock options 120
Deferred stock option compensation 0
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)
---------- ------------ ----------- ------------
BALANCE AT JUNE 30, 1996 (462,584) (7,139,967) 5,004 1,810,408
Issuance of common stock in connection
of private placement 1,031,819
Common stock subscriptions received 262,484 262,484
Write-off of common stock warrants (66,775)
Exercise of stock options 100
Compensation related to stock options 194,388
Preference dividend payable (243,118) (243,118)
Translation adjustment 114,852 114,852
Net loss for the year (2,777,777) (2,777,777)
---------- ------------ ----------- ------------
BALANCE AT JUNE 30, 1997 $ (200,100) $(10,160,862) $ 119,856 $ 326,381
---------- ------------ ----------- ------------
---------- ------------ ----------- ------------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
<PAGE>
QCS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED JUNE 30,
-------------------------------
1997 1996
--------------- ---------------
Cash flows from operating activities:
Net loss $ (2,777,777) $ (2,711,664)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization expense 79,914 21,789
Unrealized exchange loss 128,992
Write-off of fixed assets 13,158
Compensation related to stock options 194,388 199,630
Changes in operating assets and liabilities:
Accounts receivable 18,638 (4,078)
Other current assets and security deposits 14,309 175,331
Accounts payable (322,698) 241,251
Accrued and other liabilities 126,315 193,479
------------- -----------
Net cash used in operating activities (2,524,761) (1,884,262)
Cash flows from investing activities:
Purchases of fixed assets (100,433) (101,713)
------------- -----------
Net cash used in investing activities (100,433) (101,713)
Cash flows from financing activities:
Proceeds from issuance of common stock 1,031,919 3,042,952
Common stock subscriptions received 262,484 (462,584)
Repayment of stockholder advances (116,261)
Repayments on capital leases (4,038) -
------------- -----------
Net cash provided by financing activities 1,290,365 2,464,107
Effect of exchange rate changes on cash 1,868 31,153
------------- -----------
Net increase (decrease) in cash and cash
equivalents (1,332,961) 509,285
Cash and cash equivalents, beginning of the
period 2,607,118 2,097,833
------------- -----------
Cash and cash equivalents, end of the period $ 1,274,157 $ 2,607,118
------------- -----------
------------- -----------
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 2,331 $ 10,444
Cash paid during the period for taxes 800 -
Capital lease additions 21,593 8,227
Write-off of subscription receivable 66,775 -
The accompanying notes are an integral part of these
consolidated 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 NotesTM 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 application software for a one time licensing fee and network
access for which the Company charges a fixed monthly fee and/or volume-based
recurring usage fees.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION:
The financial statements have been prepared assuming that the Company will
continue as a going concern. The Company has incurred losses from operations
since its inception. This factor raises substantial doubt about the
Company's ability to continue as a going concern. The Company is currently
finalizing a Private Placement offering in which it intends to raise
approximately $5,000,000 through the sale of common stock. The Company has
no assurance that this private placement offering will be successful. The
Company believes this new equity investment combined with the cash currently
on hand and at least some growth in revenue will be sufficient to fund
operations for the next year. These financial statements have been prepared
assuming that the Company will continue as a going concern and do not include
any adjustments that might result from the outcome of this uncertainty.
The consolidated financial statements include the accounts of QCS Corporation
and its wholly owned subsidiaries. All intercompany balances and
transactions have been eliminated.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to makes extensive use of 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.
CASH AND CASH EQUIVALENTS:
F-6
<PAGE>
Cash and cash equivalents consist of highly liquid instruments with an
original or remaining maturity of 90 days or less as of the date of purchase.
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.
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.
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, cost that could have been capitalized have been
insignificant and therefore, 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.
REVENUE RECOGNITION:
Revenues from network installations are recognized at the time the
installation is complete and accepted by the customer and all other
significant obligations are fulfilled. Revenues from network usage and
monthly service charges are recognized at the end of each month. Revenues
from sales of consulting and other services are recognized at the time the
service is performed and accepted by the customer.
EMPLOYEE STOCK PLANS:
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 (SFAS 123), "Accounting for
Stock-Based Compensation", which is effective for the Company's financial
statements for fiscal year 1997. SFAS 123 allows companies to either account
for stock-based compensation under the new provisions of SFAS 123 or under
the provisions of Accounting Principles Board Opinion No. 25 (APB 25),
"Accounting for Stock Issued to Employees", but requires pro forma disclosure
in the footnotes to the financial statements as if the measurement provisions
of SFAS 123 had been adopted. The Company has elected to continue to account
for its stock based compensation in accordance with the provisions of APB 25
and present pro forma disclosures required by SFAS 123 (see Note 5).
INCOME TAXES:
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 "Accounting for Income Taxes", 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
F-7
<PAGE>
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.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
Carrying amounts of certain of the Company's financial instruments including
cash and cash equivalents, accounts receivable, accounts payable, accrued
expenses and other liabilities approximate fair value due to their short
maturities. Based upon borrowing rates currently available to the Company
for loans with similar terms, the carrying value of capital lease obligations
approximate fair value.
CONCENTRATION OF CREDIT RISK:
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. There was one customer representing 17% of accounts receivable in
fiscal 1997 and no customers over 10% of accounts receivable in fiscal 1996.
The Company places its cash with two financial institutions.
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 1997 and
1996 net loss per share reflects preferred dividends of $243,118 and
$362,344, which have increased the respective years' net loss used in the
calculation.
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 other income (expense) in the
determination of net loss.
RECENT PRONOUNCEMENTS:
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 (SFAS 128), "Earnings Per Share",
which specifies the computation, presentation and disclosure requirement for
earnings per share. SFAS 128 will become effective for the Company's first
quarter of 1998. The impact of adopting SFAS 128 on the Company's financial
statements is unlikely to be significant.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 (SFAS 130) "Reporting Comprehensive
Income." SFAS 130 establishes standards for reporting and display of
financial statements. The impact of adopting SFAS 130, which is effective in
fiscal 1999 has not been determined.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 (SFAS 131) "Disclosures about
Segments of an Enterprise and Related Information." SFAS 131 requires
publicly held companies to report financial and other information about key
revenue-producing segments of the entity for which such information is
available and is utilized by the chief operation decision maker. Specific
information to be reported for individual segments includes profit or loss,
certain revenue and expense items and total assets. A reconciliation of
segment information to amounts reported in the financial statements would be
provided. SFAS 131 is effective in fiscal 1999 and the impact has not been
determined.
F-8
<PAGE>
3. PROPERTY AND EQUIPMENT:
JUNE 30,
----------------------------
1997 1996
------------- --------------
Furniture and equipment $ 271,000 $ 212,353
Computer software 65,766 56,386
Leasehold improvements 13,855 14,264
---------- ----------
350,621 283,003
Less accumulated depreciation and amortization (108,378) (53,707)
---------- ----------
$ 242,243 $ 229,296
---------- ----------
---------- ----------
Depreciation expense for fiscal 1997 and 1996 was $79,914 and $21,789,
respectively.
Assets under acquired capital leases arrangements included in property and
equipment above are as follows:
JUNE 30,
---------------------------
1997 1996
------------ ------------
Furniture and equipment $ 29,820 $ 8,227
Less accumulated amortization (5,912) (1,371)
--------- --------
$ 23,908 $ 6,856
--------- --------
--------- --------
4. STOCKHOLDERS' EQUITY:
PRIVATE PLACEMENT:
In 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 $2,842,000. An additional 344,000 shares
were issued at $3.00 in July 1996 through this private placement, the
proceeds of which totaled approximately $1,032,000.
PREFERRED STOCK:
The Company issued 4,368,937 shares of Series A convertible preferred stock,
"Series A preferred stock" 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 therefore, dividends at 5% per annum on the
original issue price of $1.03 per share. Such dividends are cumulative from
November 22, 1994 and began compounding annually on January 1, 1996.
Dividends accrue whether or not earned or declared. Such dividends shall be
payable upon the first to occur of the liquidation of the Company or, with
respect to any shares of Series A preferred stock that are converted into
common stock, such dividends shall be payable six months following such
conversion. At June 30, 1997 dividends payable in arrears amounted to
$605,462.
Upon any liquidation, dissolution, or winding up of the company, whether
voluntary or involuntary, the holders of Series A preferred stock shall be
paid $1.03 per share plus an amount equal to dividends accrued but unpaid
thereon, before any payment shall be made to holders of any other class or
series of stock. If upon liquidation, dissolution or winding up the Company,
the assets to be distributed to the holders of the Series A preferred stock
shall be insufficient to permit payment to such stockholders of full
preferential amounts aforesaid, then the assets of the Company shall be
distributed to such holders of the Series A preferred stock pro rata, so that
each holder receives that portion of assets available for distribution as the
liquidation
F-9
<PAGE>
preference payment amounts of the shares of Series A preferred stock held by
such holders bear to the aggregate liquidation preference payment amounts for
all shares of Series A preferred stock then outstanding.
Each holder of Series A preferred stock has the right to convert the Series A
preferred stock at any time into common shares of the Company. Unless
earlier converted, the Series A preferred stock will automatically convert
into common stock upon the earlier of (i) the effective date of a
registration pertaining to, and subject to the consummation of an
underwritten public offering of the Company's common stock at a price of at
least $5.00 per share and, (ii) the first business day following the
occurrence of the last of the three following events (a) the completion of a
36 month period commencing on the closing date, (b) the completion of six
consecutive quarters of sustained profitability of the Company and; (c) the
completion of a 30 consecutive day period during which the low bid for the
Company's common stock shall have been in excess of $5.00.
WARRANTS:
At June 30, 1997, there were warrants outstanding to purchase an aggregate of
635,471 shares of common stock. This includes warrants to purchase 511,894
shares of common stock at $0.01 per share, which are exercisable at any time
until November 1997 or the automatic conversion of preferred stock to common
stock, whichever is earlier. Additional warrants for 123,577 shares of
common stock have been issued during fiscal 1997 at prices ranging from
$0.8125 to $1.00 per share. The 123,577 warrants are exercisable at any time
and expire at various dates prior to June 1998.
5. STOCK OPTION PLANS:
In April 1997 the Board of Directors adopted the 1997 Stock Option Plan for
employees, directors and others. Under this Plan, the Board of Directors has
authorized 3,000,000 shares of common stock for eligible employees and
consultants. 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 four-year period
and generally expire ten years from the date of grant. Unvested options are
canceled 90 days after termination of employment and become available under
the Plan.
Prior to fiscal 1997, upon approval of the Board of Directors, the Company
was issuing stock options under individual stock option agreements. 1,450,000
shares were authorized for grant under these agreements. These options
generally, become exercisable over a three year period and expire ten years
from the date of grant. Unvested options are canceled upon termination of
employment and become available under the Plan.
Activity under the 1997 Plan and under individual agreements are as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
--------------------------------------------------
SHARES PRICE AGGREGATE
AVAILABLE SHARES PER SHARE EXERCISE 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
Shares authorized 3,000,000
Options granted (2,068,077) 2,068,077 $0.001-$3.13 4,103,965
Options exercised (100,000) $0.001 (100)
Options canceled 130,000 (130,000) $1.00 (130,000)
---------- --------- ------------ ------------
Balance at June 30, 1997 1,581,923 2,648,077 $0.15-$3.13 $ 4,528,865
---------- --------- ------------ ------------
---------- --------- ------------ ------------
</TABLE>
F-10
<PAGE>
The following table summarizes information with respect to stock options
outstanding at June 30, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------- ------------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE OUTSTANDING AT CONTRACTUAL EXERCISE AT EXERCISE
PRICE JUNE 30,1997 LIFE (YEARS) PRICE JUNE 30, 1997 PRICE
----- ------------ ------------ ----- ------------- -----
<S> <C> <C> <C> <C>
$0.15 300,000 6.51 $0.15 - -
$0.50 - $1.00 737,000 7.50 $0.90 479,666 $0.90
$1.88 - $2.27 1,382,077 1.84 $2.27 1,372,077 $2.27
$3.00 - $3.13 229,000 9.48 $3.01 - -
------------- -------- --------- --------------- ---------
2,648,077 4.60 $1.65 1,851,743 $1.91
------------- -------- --------- --------------- ---------
------------- -------- --------- --------------- ---------
</TABLE>
At June 30, 1996, options to purchase 133,000 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.
Options to purchase 1,372,077 shares immediately vested with the remaining
options to purchase 1,486,416 shares vesting in equal blocks of 495,472 on
April 11, 1997, October 11, 1997 and April 11, 1998. On February 25, 1997
all of the aforementioned options were rescinded by mutual agreement. On
February 26, 1997, he resigned his position with the Company and the Board of
Directors. Following his resignation, pursuant to the terms of a consulting
agreement entered into with the Company, he was granted new options to
purchase 1,372,077 shares at $2.27 per share. These options were fully
vested effective April 11, 1997 and will be exercisable for 24 months from
that date.
For certain options granted, the Company recognized $194,388 in 1997 and
$199,630 in 1996 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.
The Company has adopted the disclosure only provisions of Statement of
Financial Accounting Standards 123 (SFAS 123), "Accounting for Stock Based
Compensation". Had compensation cost for the 1997 Plan been determined based
on the fair market value at the grant date for the options granted in fiscal
1997 and 1996 consistent with the provisions of SFAS 123, the Company's net
loss for fiscal 1997 and 1996 would have been increased to the pro forma
amounts indicated below:
1997 1996
---- ----
Net loss - as reported $ 2,777,777 $ 2,711,664
------------ ------------
------------ ------------
Net loss - pro forma $ 2,822,427 $ 2,723,294
------------ ------------
------------ ------------
Loss per share - as reported $ (0.18) $ (0.20)
------------ ------------
------------ ------------
Loss per share - pro forma $ (0.18) $ (0.20)
------------ ------------
------------ ------------
F-11
<PAGE>
The above pro forma disclosures are not necessarily representative of the
effects on reported net income or loss for future years.
The aggregate fair value and weighted average fair value of each option
granted in fiscal years 1997 and 1996 were $225,000 and $58,000, and $0.58
and $0.27, respectively. The fair value of each option grant for the 1997
Plan is estimated on the date of grant using the Black-Scholes option-pricing
model with the following weighted average assumptions:
Risk-free interest rate 6.25%
Expected life 5 years
Expected volatility 10%
Expected dividend yield 0.0%
6. INCOME TAXES:
The tax provision for the years ended June 30, 1997 and 1996 is as follows:
1997 1996
---- ----
Current - -
Deferred $ (913,884) $ (877,319)
Less: valuation allowance 913,884 877,319
----------- -----------
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, 1997 and 1996 consist of the following:
1997 1996
---- ----
Miscellaneous accruals $ 131,254 $ -
Provision for doubtful accounts receivable 4,000 38,436
Set up costs and research and development
expenditures 52,881 41,904
Compensation related to stock options
granted 147,606 69,871
Net operating loss carryforwards 2,541,491 1,813,637
---------- ----------
Total deferred tax asset 2,877,232 1,963,848
Valuation allowance (2,877,232) (1,963,848)
---------- ----------
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.
F-12
<PAGE>
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
1997 197,165 70,979 2002
------------
$ 1,316,390(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 2011
1997 554,154 94,206 2012
----------
$ 162,596(2)
----------
----------
(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.
F-13
<PAGE>
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 U.S. TAX OPERATING YEAR OF
LOSS AROSE 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
1997 1,520,725 517,045 2012
------------
$ 1,016,881(2)
------------
------------
(2) The deferred tax asset is before the application of the valuation
allowance.
Due to changes in the Company's ownership during fiscal 1996 and prior years,
the amount of loss and credit carryforwards available to offset future U.S.
federal taxable income or tax may be subject to annual limitations 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:
1997 % 1996 %
---- - ---- -
Net loss $(2,777,777) $(2,711,664)
Federal tax at statutory rate (972,222) 35.0% (949,082) 35.0%
Foreign taxes - rate differential 58,838 (2.1%) 71,770 (2.6%)
Increase in valuation
allowance 913,384 (32.9%) 877,312 (32.4%)
----------- --------- ------------ ---------
Total provision - - - -
----------- --------- ------------ ---------
----------- --------- ------------ ---------
7. ACCRUED LIABILITIES:
Accrued liabilities at June 30, 1997 and 1996 consisted of the following:
1997 1996
---- ----
Payroll and related taxes $ 145,199 $ 155,372
Accrued legal and audit expenses 86,177 196,841
Other accrued liabilities 288,929 41,776
---------- ----------
$ 520,305 $ 393,989
---------- ----------
---------- ----------
F-14
<PAGE>
8. LEASE COMMITMENTS:
CAPITAL LEASE OBLIGATIONS:
The Company leases certain office equipment under lease arrangements expiring
from October 1998 to March 2000 with interest rates from 7% to 17%. Under
these leasing arrangements, the Company pays all costs related to the
equipment.
Future minimum lease payments under these capital leases is as follows:
Fiscal year ending June 30,
1998 $ 12,250
1999 10,250
2000 6,938
---------
Total minimum lease payments 29,438
Less amounts representing interest (5,449)
---------
Present value of net minimum lease payments 23,989
Less current obligation (9,097)
---------
Long-term obligation under capital lease $ 14,892
---------
---------
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 $257,000 and $264,000 in fiscal
1997 and 1996, respectively.
The annual minimum rental commitments under all non-cancelable operating
lease arrangements are as follows:
Fiscal year ending June 30,
1998 $ 178,000
1999 93,000
2000 73,000
2001 18,000
---------
$ 362,000
---------
---------
F-15
<PAGE>
9. BUSINESS SEGMENT, FOREIGN SALES AND OPERATIONS AND MAJOR CUSTOMERS:
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.
The geographical distribution of the revenues, operating loss and total
identifiable assets is as follows:
REVENUES
-----------------------------
1997 1996
------------- --------------
North and South America $ 137,236 $ 434,116
Europe 517,324 186,769
Asia 620,051 410,973
------------ ------------
$ 1,274,611 $ 1,031,858
------------ ------------
------------ ------------
OPERATING LOSS
-----------------------------
1997 1996
------------- --------------
North and South America $ 2,119,350 $ 1,240,996
Europe 112,629 1,025,213
Asia 607,578 482,121
------------ ------------
$ 2,839,557 $ 2,748,330
------------ ------------
------------ ------------
TOTAL IDENTIFIABLE ASSETS
-----------------------------
1997 1996
------------- --------------
North and South America $ 137,654 $ 77,272
Europe 114,545 189,861
Asia 189,788 261,629
------------ ------------
$ 441,987 $ 528,762
------------ ------------
------------ ------------
There was one customer representing 21% of revenues in fiscal 1997 and no
customers over 10% of revenues in fiscal 1996.
10. CONTINGENCIES
The Company is subject to a number of claims arising out of the conduct of
business. The Company believes that the results of the claims will not have
a materially adverse effect on the Company's financial condition.
F-16
<PAGE>
FINANCIAL STATEMENT SCHEDULE
REQUIRED RULE BY 5-04 OF REGULATION S-X
QCS CORPORATION
SCHEDULE II
VALUATION AND QUALIFICATION ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
--------------------------
BALANCE AT CHARGED TO CHARGED BALANCE AT
BEGINNING COSTS AND TO OTHER END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
----------- --------- -------- -------- ---------- ------
<S> <C> <C> <C> <C> <C>
YEAR ENDED JUNE 30, 1997
Provision for doubtful
accounts receivable $ 119,960 $ 13,159 - $ (78,083) $ 55,036
Deferred tax valuation
allowance 1,894,818 - 913,384 - 2,808,202
YEAR ENDED JUNE 30, 1996
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-17
<PAGE>
EXHIBIT 21.1
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
06299 Nice Cedex 3, France
QCS Asia Pacific Ltd.
19/F, Tung Sun Commercial Centre
194-200 Lockhart Road
Wanchai, Hong Kong
F-18
<PAGE>
EXHIBIT 23.1
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-17 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 Jose, California COOPERS & LYBRAND L.L.P.
September 22, 1997
F-19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM STATEMENTS
FOR THE FISCAL YEAR ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000825517
<NAME> QCS CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 1,274
<SECURITIES> 0
<RECEIVABLES> 208
<ALLOWANCES> 55
<INVENTORY> 0
<CURRENT-ASSETS> 1,442
<PP&E> 351
<DEPRECIATION> 109
<TOTAL-ASSETS> 1,716
<CURRENT-LIABILITIES> 1,375
<BONDS> 0
0
4
<COMMON> 17
<OTHER-SE> 305
<TOTAL-LIABILITY-AND-EQUITY> 1,716
<SALES> 0
<TOTAL-REVENUES> 1,275
<CGS> 0
<TOTAL-COSTS> 837
<OTHER-EXPENSES> 3,216
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,778)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,778)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,778)
<EPS-PRIMARY> (0.18)
<EPS-DILUTED> 0
</TABLE>
