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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended June 30, 1998
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ________ to ________
Commission File Number: 33-18600-D
QCS CORPORATION
(Name of small business issuer in its charter)
DELAWARE
(State or other jurisdiction of
incorporation or organization)
98-0132465
(IRS Employer 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
Securities registered pursuant to Section 12 (g) of the Act: Common Stock,
$0.001 Par Value per share
Indicate by check mark whether the Issuer (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 Issuer was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days (X) YES ( ) NO
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 the Issuer'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 (__)
The Issuer's revenues for the fiscal year ended June 30, 1998 were $892,192.
The aggregate market value of the common stock held by non-affiliates of the
Issuer as of September 15, 1998 was $12,337,695.
The number of shares of Common Stock, par value $.001 per share, outstanding as
of September 11, 1998 was 19,186,478.
DOCUMENTS INCORPORATED BY REFERENCE
The Issuer's definitive Proxy Statement will be filed with the Securities and
Exchange Commission on or before September 30, 1998 in connection with the
Issuer's Annual Meeting of Stockholders to be held on October 30, 1998 and is
incorporated by reference into Part III of this Report.
Transitional Small Business Disclosure Format: ( ) YES (X) NO
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TABLE OF CONTENTS
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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 . . . . . . . . . . . . . . . . . . . . 13
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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. . . . 18
Part III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with
Section 16(A) of the Exchange Act of the Registrant . . . . . . . . . . . . . . . . . . . . 19
Item 10. Executive Compensation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Item 11. Security Ownership of Certain Beneficial Owners and Management. . . . . . . . . . . . . . . 19
Item 12. Certain Relationships and Related Transactions. . . . . . . . . . . . . . . . . . . . . . . 19
Part IV. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Item 13. Exhibits, Consolidated Financial Statement Schedules and Reports on Form 8-K. . . . . . . . 20
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PART I
ITEM 1. BUSINESS
THIS REPORT CONTAINS CERTAIN STATEMENTS OF A FORWARD-LOOKING NATURE RELATING TO
FUTURE EVENTS OR THE FUTURE PERFORMANCE OF THE COMPANY. PROSPECTIVE INVESTORS
ARE CAUTIONED THAT SUCH STATEMENTS ARE ONLY PREDICTIONS AND THAT ACTUAL EVENTS
OR RESULTS MAY DIFFER MATERIALLY. IN EVALUATING SUCH STATEMENTS, PROSPECTIVE
INVESTORS SHOULD SPECIFICALLY CONSIDER VARIOUS FACTORS IDENTIFIED IN THIS
REPORT, INCLUDING THE MATTERS SET FORTH BELOW UNDER THE CAPTION "RISK FACTORS,"
WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE INDICATED BY
SUCH FORWARD-LOOKING STATEMENTS.
QCS Corporation (the "Company" or "QCS") is an electronic commerce service
provider serving the worldwide retail industry. The Company provides its
customers with computer software and network access to enable retailers and
suppliers to conduct negotiations and to facilitate electronically the purchase
and sale of merchandise on a global basis. Using Lotus Notes-TM-/ Domino-TM-
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 enables retailers to conduct on-line communication and
transactions with their vendors and suppliers (the "QCS Network"). This
communication and trading process is generally referred to in the retail
industry as "sourcing." High volumes of product and transaction data are
exchanged between 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
distributor. The QCS Network and the Company's related software products and
services are designed to make this sourcing function substantially more
effective and efficient and to facilitate the workflow management of retail
industry buyers and sellers.
QCS was incorporated in Delaware on March 26, 1993 and owns all of the issued
and outstanding shares of its operating subsidiaries, QCS Development Company
S.A. and QCS Global Retail Information Network Asia Pacific Ltd. The Company's
only office is located in Mountain View, California. 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 been
traded on the Over-The-Counter Bulletin Board (the "OTC Bulletin Board") under
the symbol PRKW. After the merger, QCS was the surviving corporation and its
shares of Common Stock began trading on the OTC Bulletin Board under the symbol
QCSC.
The Company's principal office is located at 650 Castro Street, Suite 210,
Mountain View, CA 94041 and its telephone number is (650) 966-1214. The
Company's home page on the Internet can be located at www.QCS.net.
OVERVIEW OF QCS GLOBAL SOURCING SYSTEM
The QCS Network uses industry standard Internet accessory browser and worldwide
telecommunication protocols. Currently, the private backbone trunk line
telecommunications services are provided by IBM Global Network ("IGN"). The
Company charges users of the QCS Network a usage volume fee and transaction
related fees. Through the QCS Network, retailers, manufacturers and distributors
can exchange 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.
The QCS Network and the Company's software products and services are designed to
address sourcing and workflow management needs in the worldwide consumer retail
industry. When utilized to its full capability and employed on a wide-scale
basis, the Company believes that the QCS Network is capable of reducing a
client's cost of sourcing communication and, 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 at
dates closer to the selling season, helping such parties make better informed
and more timely business decisions. The objective is to enable clients that
source product through the QCS Network to obtain lower costs, increased sales
volume, faster inventory turnover, fewer involuntary price discounts and
improved margins and profitability.
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MARKET OVERVIEW
As the worldwide retail industry faces 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. Retailers, in
particular those serving global or national markets, are increasingly
exploring automated purchasing 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 and 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 relationships
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 increasingly are 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 stock
keeping units ("SKUs") 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, together
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, both retailers and
suppliers are turning to information technology, and specifically to electronic
commerce solutions. QCS believes that the electronic commerce market is at the
beginning 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 only 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 significant 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 of both retailers and vendors.
Based on an industry standard groupware software platform (Lotus
Notes-TM-/Domino-TM-), and industry standard networking and electronic mail
systems, the QCS Network and QCS's software products and services link retailers
and their trading partners through electronic mail, data and full page image
exchange. This is accomplished through the interactive exchange of (i) product
description documents with text and color images and (ii) administrative
documents and forms customized to each retailer's unique requirements.
The Company charges users a one time registration fee and transaction-based fees
(adjusted by volume-based discounts) for the use of its software products and
services. Hardware requirements include an industry standard desktop PC with a
high quality color display, and an optional color scanner and/or digital camera
can be added for capturing catalog images. Through the Lotus
Notes-TM-/Domino-TM- replication feature, the QCS Network constantly updates and
synchronizes data residing in centrally located system servers and in multiple
distributed local desktop stations at client sites. Users connected to a
Lotus/Domino-TM- server access the QCS Network via QCS's Web site (www.QCS.net)
on the Internet.
Once on the QCS Network, a retail buyer can select and retrieve electronic forms
from a worldwide pool of vendors. Similarly, a manufacturer or vendor can access
volume retail buyers representing large department stores, mass merchandisers
and specialty chain stores. Retail buyers and their potential suppliers are
thereby able to electronically exchange product catalogs, requests for
proposals, offer sheets, negotiation sheets, order forms, order confirmations,
order changes, advance shipping notices and other documents. Data is entered
on-line or by uploading electronic forms in textual or color image formats.
Once retrieved by retail buyers, data from participating vendors is computer
accessible in industry standard formats, thereby permitting a meaningful and
efficient comparison of products offered by multiple suppliers, while at the
same time permitting the buyer to interface with the supplier'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".
Color images of products can be edited to customize the image to reflect the
retailer's private label or for other design, packaging and marketing purposes.
The flexibility of the QCS Network allows 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
either executed through a local telephone
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number dial-up or via an Internet service provider ("ISP"). When traveling on
the road, users can access the QCS Network from any PC connected to the Internet
with a user ID and password.
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 the retail industry.
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 internally.
Responsibilities include design, development, documentation and quality control.
Contractors and third party companies are involved in non-critical projects.
QCS follows an open-environment strategy and supports, to the extent possible,
standard operating systems, local area network ("LAN") environments,
communication protocols and industry-specific message formats. The Company
intends to incorporate new technologies and methods into its product and service
offerings in order to continue to provide leadership products in the face of
rapidly changing technological standards.
The Company's international networking utilizes a combination of private
networks (IGN) and public networks (the Internet). QCS maintains its hub servers
externally under a facility management agreement with IBM and internally in a
self-hosted fashion using 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 the QCS Network
users are encrypted using Lotus Notes-TM- secure protocol over the private
network and the standard Secure Socket Layer ("SSL") protocol over the Internet.
Both provide the highest level of security permitted by U.S. export laws.
CURRENT OFFERING
The QCS product line currently provides a supplier with a variety of functions
revolving around merchandise workflow. 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 to
the buyer organization in an industry standard format. This centrally-managed
form-based clearing house approach guarantees flexibility by shielding the
seller from buyer specificity and ensuring interoperability with a large number
of proprietary systems. Additional modules geared towards communication of
documents with forwarders and inspection companies enable the buyer to track the
merchandise flow through delivery. The QCS service can smoothly integrate its
system with a variety of site configurations after only a single mapping of
outgoing and incoming data.
The original QCS service is provided to the customer through 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,
Windows 98 or Windows NT on the client's computer 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's X.25 private network.
Since May 1997, QCS's development has been geared towards web-based network
services access which capitalizes on the low-cost and interactivity offered by
the Internet. It is available to any supplier or retail origination 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 and
standard web browsers (Netscape or Microsoft Internet Explorer).
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The back-end architecture of the QCS Network is built over Lotus Notes-TM- and
Domino-TM- 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 qualified vendors worldwide.
Through the QCS Network, retailers, manufacturers and distributors can exchange
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-TM-
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 Internet enablement tool Domino-TM-, 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 trading dialogue while
all supplier-originated communications are 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
the QCS Network via the Internet, thereby increasing adoption of the technology.
SOLUTIONS FOR RETAILERS
QCS's 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-TM- 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, and 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
such vendors' product offerings. Data from participating vendors appears on the
retailer's screen "mapped" automatically by QCS into the retailer's
pre-specified and familiar format, permitting for efficient comparison of
products across multiple suppliers of the same merchandise program. Supplier
input flows through the QCS Network 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 ("IGN"). Information is
exchanged in a confidential secure environment. The overall objective is to
enable the retailer client to obtain lower costs, increased sales volume, faster
inventory turnover, fewer involuntary price discounts, fewer inventory buying
errors, and improved margins and profitability.
When utilized to its full capability on a wide-scale basis, the Company believes
that the QCS Network can substantially shorten the sourcing process and can more
effectively manage the vendor's performance quality. The QCS Network enables
merchandising, manufacturing and shipping decisions to be made by all parties on
a date closer to the selling season, thus helping to the parties make better
informed and more timely 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 Station offers suppliers a cost-effective
way to provide information to QCS Network retailer members. A server facility
located in Mountain View, California links the Web with the QCS Network. The
QCS home page (http://www.QCS.net) tells the supplier about QCS's services and
benefits and allows the supplier to register online and to become a member at a
basic service level, which provides the supplier with free email directly
between the supplier and individual buyers.
The new member enjoys a limited version of the full spectrum of QCS Network
services. The supplier will be able to submit information about itself and its
product offerings to the catalog viewed by all QCS Network members. The data is
entered by the supplier on the QCS home page. The QCS server then "maps" it into
the QCS Network's standard format and posts it in the QCS Network catalog. The
supplier's data is thus entered in a 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 their product catalogs. Various functions allow suppliers to update
their catalogs, send portions of their product catalogs to global listings, and
to send confidential customized and detailed offers from their catalogs 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 the supplier is tied into the
QCS Network and interacting extensively with retailers, or is a new supplier
subscribing to free e-mail services through the Web and considering additional
options. The former requires an industry standard desktop PC with a high quality
color display and an optional color scanner and/or digital camera for catalog
image input, a QCS server and a LAN workstation, while the latter 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 Network. 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 houses its
servers in a professional IBM facilities management (FM) environment.
In addition to providing customer care centers and a worldwide direct and
indirect sales force, IBM also has responsibility for world wide end-user
hot-line support. QCS pays IBM through a revenue share payment schedule for
IBM's sales and marketing services, IBM's Facility Management services and the
use of IBM Global Network ("IGN").
IBM Electronic Commerce, Global Trade Services ("Global"), the IBM entity which
sponsored the strategic alliance, was formed within IBM's Internet Division in
1996 with the mission to develop business with companies engaged in
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international trade. Global's 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's operational presence
in the field brings market acceptance, local infrastructure to leverage, and
deep knowledge of retailers and emerging supply-chain solutions to the marketing
alliance. The QCS Network is part of IBM's global supply chain solutions product
and services portfolio and is marketed under IBM's e-business marketing
initiatives for the retail industry.
COMPETITION
Defined broadly, the Company's competition includes each company, which provides
pre-order and order sourcing flow in the retail industry. Much of this sourcing
flow is currently conducted by the retailers or suppliers themselves through (i)
facsimile or telephonic communications or (ii) EDI based internal computer
systems. These internal systems may involve extensive hardware and software
requirements that are prohibitively expensive for many retailers and suppliers.
The Company believes that most retailers and suppliers will move to electronic
based sourcing flow as the costs of such systems decrease over time. The QCS
Network is intended to provide retailers and suppliers with the efficiencies
offered by electronic based sourcing without incurring the costs of an EDI based
system.
BUSINESS-TO-BUSINESS ELECTRONIC COMMERCE
QCS's competitors within the market for business to business electronic
commerce applications include such companies as General Electric Information
Services (GEIS), Sterling Commerce and Harbinger Corporation. These large
companies serve diverse markets, and are not focused on the upstream part of
the retail merchandise flow (particularly the pre-order area). QRS Inc., an
established firm that serves the retail industry, serves the same vertical
market as the Company, but does not focus on the pre-order area of the
upstream flow.
Of the many electronic commerce providers, large and small, some offer a
proprietary network product and others apply an Internet based solution. The
Company believes the trend is moving toward Internet functionality, as large
e-commerce providers create products in this domain or 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
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electronic commerce. The QCS Network is an extranet system for which development
experience and costs have already been borne.
EMPLOYEES
The Company currently has 21 full time employees, of which four are in sales and
marketing, ten in engineering and development, two in field operations, and five
in management and administrative support functions. These employees are located
in the United States, Hong Kong and France. The Company's employees are not
represented by a labor union, and the Company's management believes that its
relations with its employees are satisfactory.
RISK FACTORS
AN INVESTMENT IN THE COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. IN ADDITION TO
THE OTHER INFORMATION IN THIS REPORT, THE FOLLOWING RISK FACTORS SHOULD BE
CONSIDERED CAREFULLY IN EVALUATING THE COMPANY AND ITS BUSINESS. THIS REPORT
CONTAINS FORWARD-LOOKING STATEMENTS THE ACCURACY OF WHICH IS SUBJECT TO MANY
RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY
FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT
CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THE FOLLOWING RISK
FACTORS.
HISTORY OF LOSSES AND ACCUMULATED DEFICIT; LIMITED OPERATING HISTORY: From
inception in 1993 through June 30, 1998, the Company has generated an
accumulated deficit of $12,928,630. 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.
DEPENDENCE ON IBM: The Company has a revenue sharing alliance with IBM for
marketing, major account sales and customer support, together with network
service carriage through 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 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.
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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 and
services. In addition, the implementation of the Company's products and
services 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 results of operations and can be
expected to cause the Company's results of operations to vary significantly
from quarter to quarter.
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 to the Company's stockholders.
POSSIBLE COMPETITIVE ENTRIES: Although the Company believes that few
companies currently provide 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.
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.
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 applications, 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, resulting in 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, while some days have 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, 1997 to June 30, 1998, the closing
price for the shares of
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the Company's stock on the OTC Bulletin Board ranged from $0.4375 to $3.875.
Until additional shares of Common Stock of the Company become freely
tradable, this situation of limited liquidity and volatile stock price will
most likely continue.
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS: Future sales of shares
of Common Stock by existing stockholders could also adversely affect the
prevailing market price for the Company's Common Stock. The vast majority of
the shares of Common Stock outstanding are "restricted securities," as that
term is defined in Rule 144 promulgated under the Securities Act of 1933, as
amended (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.
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 stockholder, Marcel van Heesewijk (the Company's President, Chief
Executive Officer and Acting Chief Financial Officer). The Company is the
beneficiary of a key man life insurance policy for Mr. 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, financial condition and results of operations.
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 of its products and services.
The Company believes that its products and services are capable of sustaining
higher volumes of customer usage and plans to continue to enhance the current
capacities. However, an increase in the volume of traffic conducted through
the QCS Network could strain the capacity of the software or hardware
deployed by the Company, which could lead to system failures. In addition,
as the number of customers using the QCS Network increases, there can be no
assurance that the infrastructure of the QCS Network will be able to scale
accordingly. The Company is dependent upon the telecommunications backbone
provided by 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, financial condition and results of operations.
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 by rapid technological advances. Although the Company is in a position to
pick and choose from the best and most reliable technologies that are available
in the marketplace, the Company will need to stay current with the latest
technologies and applications. There can be no assurance that the Company will
be able to stay current with such technologies and applications, or that its
efforts to do so will not have a material adverse effect on the Company's
business, financial position or results of operations.
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
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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 results of operations.
YEAR 2000 COMPLIANCE: The "Year 2000" issue is the result of computer programs
being written using two digits rather than four to define the applicable year.
As such, computer programs that have date sensitive software might recognize a
date using "00" as the year 1900 rather than the year 2000. This could result in
program failure or miscalculation causing disruptions of operations including,
among other things, a temporary inability to process transactions, send
invoices, operate equipment or engage in similar normal business activities.
The Company has reviewed both its internal computer systems and its products
that could be affected by the "Year 2000" issue and has identified some systems
and a few products that will be affected. The Company presently believes, with
modification to existing software and converting to new software, that the "Year
2000" issues relating to internal computer systems and products will not cause
significant operational problems or customer problems. Furthermore, the cost of
implementing these solutions is not anticipated to be material to the Company's
business, financial condition and results of operations. However, if such
modifications and conversions are not made, or not completed in a timely manner,
the "Year 2000" issue could have a material adverse effect on the Company's
business, financial condition and results of operations. Furthermore, the costs
of such conversions and updates are based on management's best estimates, which
are derived utilizing numerous assumptions of future events including such
things as, but not limited to, the availability and cost of personnel trained in
this area, the ability to locate and correct all relevant computer codes and
similar uncertainties. The Company has already begun initiating formal
communications with its significant suppliers and large customers in the fiscal
year ended June 30, 1998 ("Fiscal 1998") to determine the extent to which the
Company is vulnerable to such third parties' failure to remediate their own
"Year 2000" Issues. However, there can be no assurance that the Company will
identify all "Year 2000" issues affecting its systems, its customers' systems,
or third parties' systems in advance of their occurrence, or that the Company
will be able to successfully remedy any problems that are discovered. The
expenses of the Company's efforts to identify and address such problems, or the
expenses or liabilities to which the Company may become subject as a result of
such problems, could have a material adverse effect on the Company's business,
financial condition and results of operations.
ITEM 2. PROPERTIES
The Company maintains one office in the Mountain View, California occupying
approximately 2,148 square feet of space. The Company's operating lease on this
facility expires in September 2000. The Company closed its offices in Hong Kong
and Nice, France in January 1998. At present, the Company does not foresee any
need beyond these existing leased spaces in the near future.
ITEM 3. LEGAL PROCEEDINGS
No legal proceedings were commenced by or against the Company during Fiscal
1998.
The Company is subject to other legal actions arising in the ordinary course
of business. The Company believes that the results of any such actions will
not have a material adverse effect on the Company's business, financial
condition and results of operations.
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 1998.
The following matters will be submitted to a vote of security holders during the
first quarter of the fiscal year ended June 30, 1999 ("Fiscal 1999"):
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1. To elect four (4) directors of the Company to hold office until the
1999 Annual Meeting of Stockholders or until their respective
successors are duly elected and qualified;
2. To approve an amendment to the Company's Certificate of Incorporation
to change the name of the Company to QCS.net Corporation;
3. To approve an amendment to the Company's Certificate of Incorporation
to eliminate the cumulative dividend to which the holders of the
Company's Series A Convertible Preferred Stock previously have been
entitled;
4. To ratify and approve the adoption of the Company's 1997 Stock Option
Plan and to approve the amendment of such Option Plan to increase the
number of shares of the Company's Common Stock reserved for issuance
thereunder from 3,000,000 shares of Common Stock to 4,000,000 shares
of Common Stock; and
5. To ratify the selection of PricewaterhouseCoopers LLP as the
independent accountants of the Company for Fiscal 1999.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
The Company's Common Stock is traded on the OTC Bulletin Board under the symbol
"QCSC". The following table indicates the high and low bid prices for the
Company's Common Stock as quoted on the OTC Bulletin Board for the periods
indicated. The prices shown are representative inter-dealer prices, do not
include retail markups, markdowns, or commissions and may not necessarily
reflect actual transactions.
<TABLE>
<CAPTION>
BID PRICES ($)
-----------------
HIGH LOW
---- ---
<S> <C> <C>
1998
First Quarter ended 9/30/97 1.1875 0.50
Second Quarter ended 12/31/97 1.5625 0.4375
Third Quarter ended 3/31/98 1.625 0.50
Fourth Quarter ended 6/30/98 3.875 1.50
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
</TABLE>
As of June 30, 1998, there were approximately 203 holders of record and 427
beneficial holders of the Company's Common Stock and nine holders of the
Company's Series A Convertible Preferred Stock for which no market is
maintained. The Company has never declared nor 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 on November 22, 1994 and
began compounding annually on January 1, 1996 (the "Series A Dividend").
Effective June 30, 1998, the Company completed an agreement with the current
holders of shares of Series A Preferred Stock (the "Series A Investors") to
restructure the Series A Dividend, whereby the Series A Investors agreed to
eliminate the Series A Dividend. In place of the Series A Dividend, the Series
A Investors were issued, on a pro rata basis, shares of Series A Preferred
Stock. The number of shares issued to the Series A Investors was determined by
dividing the accrued dividend as of June 30, 1998 by $1.2069, which was 66 2/3%
of the average bid and ask prices of the
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Company's Common Stock for the prior 20 trading days as reported on the OTC
Bulletin Board reporting system. These shares of Series A Preferred Stock have
the same voting and other rights as the Series A Preferred Stock. Pending the
approval of the holders of the Company's Common Stock (the "Common
Stockholders"), this agreement will also eliminate the accrual of future
preferred dividends.
On the date of conversion, the accrued Series A Dividend for the Series A
Investors was $797,377. The Company issued 660,681 shares of Series A Preferred
Stock in payment of the Series A Dividend accrued through June 30, 1998. After
issuance of these shares the remaining Series A Dividend payable in arrears was
$65,051, which amount represents those dividends accrued with respect to shares
of Series A Preferred Stock which were converted to Common Stock prior to June
30, 1998.
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). 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 share of which the net proceeds
totaled approximately $2,842,000.
In June 1998, the Company was in the process of completing a private placement
of its Common Stock. As of June 30, 1998 a total of 1,270,505 shares of Common
Stock had been issued, raising net proceeds (after fees and other costs
associated with the offering) of $1,078,239 at prices ranging from $0.75 to
$1.375 per share. An additional 276,091 shares were issued at $1.375 during
August 1998 through this private placement, the proceeds of which totaled
$379,625. The net proceeds raised in the private placement from February to
August 1998 were $1,457,864 for 1,546,596 shares.
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 Company's Consolidated
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
The Company is an electronic commerce service provider serving the worldwide
retail industry. The Company provides its customers with computer software and
network access to enable retailers and suppliers to conduct negotiations and to
electronically facilitate the purchase and sale of merchandise on a global
basis. Using Lotus Notes-TM-/ Domino-TM- and industry standard networking
protocols to transmit data over leased "backbone" trunk lines and the Internet,
the Company maintains the QCS Network, a secure yet open electronic network that
enables retailers to conduct on-line communication and transactions with their
vendors and suppliers. This communication and trading process is generally
referred to in the retail industry as "sourcing." High volumes of product and
transaction data must be exchanged between 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 make this sourcing function
substantially more effective and efficient and to facilitate the workflow
management of retail industry buyers and sellers.
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The Company's revenues are derived from consulting fees, installation
services and user training, network registration fees, and network usage fees
for which the Company charges a fixed monthly fee and/or volume-based
recurring usage fees or pay-as-you-go transaction fees for electronic forms.
From inception in 1993 through June 30, 1998, the Company has generated an
accumulated deficit of $12,928,630. 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 are 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, financial condition 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 rtain qualified
personnel in the future or delays in hiring required personnel could have a
material adverse effect on the Company's business, financial condition or
results of operations.
RESULTS OF OPERATIONS FOR FISCAL YEARS ENDED JUNE 30, 1998 AND 1997
REVENUES
Revenues were $892,192 in Fiscal 1998 versus $1,274,611 in the fiscal year
ended June 30, 1997 ("Fiscal 1997"), which represents a 30% decrease. This
decrease is attributed to a 46% reduction in the Company's network revenues,
primarily from lower sales of its full Notes-TM- based supplier stations and
the related installation and monthly subscription fees providing private
network services. The loss of these revenues has not been compensated by
revenues of the new Internet based supplier sales stations. Internet
revenues for Fiscal 1998 were $60,620 versus $5,000 for Fiscal 1997. The
Company entered into a service agreement with IBM Corporation to provide
sales, marketing and end-user support services at cost to ensure the
transition of the Company's marketing and sales activities to IBM. The
revenue associated with this agreement in Fiscal 1998 was $210,000 versus
none in 1997.
COST OF REVENUES
Cost of network revenues were $414,815 in Fiscal 1998 versus $837,131 for
Fiscal 1997, which represents a 50% decrease. This decrease was due
primarily to the decrease in sales of the full Lotus Notes-TM- based product
and to cost of network revenues recorded as a percentage of notes revenues in
accordance with the IBM revenue sharing agreement effective January 1998.
Effective in January 1998, cost of network revenues were primarily calculated
as a percentage of network revenues in accordance with the IBM revenue
sharing arrangement. In Fiscal 1997, cost of revenues included cost of
purchasing network services, the cost of internal and external labor to
install and support customer sites, and third party software and hardware for
the existing Lotus Notes-TM- based product. Cost of consulting revenue in
Fiscal 1998 was $210,000, which represents the value of services provided to
IBM at cost. As a result, the Company experienced a decline in gross profit
from $437,480 in Fiscal 1997 to $267,377 in Fiscal 1998, a 39% decrease.
OPERATING EXPENSES
Selling, general and administrative expenses ("SG&A") consist primarily of
personnel-related costs in the Company's sales, marketing and general management
organizations and other administrative support costs such as external legal and
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financial services. SG&A expenses were $2,344,971 in Fiscal 1998 versus
$2,912,498 in Fiscal 1997, a 19% decrease. This decrease was due to reduced
payroll expenses resulting in part from the classification of $210,000 of
labor costs associated with the IBM service contract to cost of consulting
services, and a reduction in travel and consulting expenses. Research and
development expenses increased to $407,479 in Fiscal 1998 from $364,539 in
Fiscal 1997, a 12% increase, due to increased investment in internally
developed enhancements and consulting services purchased for the development
of back-end administrative features of the Company's Internet product.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1998, cash and cash equivalents were $473,170, versus $1,274,157
as of June 30, 1997, a decrease of $800,987, or 63%. This decrease in working
capital resulted from $1,706,181 in cash used in operating activities, offset by
$1,078,239 in additional funds received from the sale of Common Stock in the
private placement during the second half of 1998. Cash used in operating
activities was $1,706,181 in Fiscal 1998 versus $2,524,761 in Fiscal 1997. This
reduction in cash used in operating activities was due primarily to reductions
in expenses and a $104,429 increase in accounts payable in Fiscal 1998 offset by
a $322,698 decrease in accounts payable in Fiscal 1997. Subsequent to June 30,
1998, the Company raised an additional $379,625 through the sale of 276,091
shares of Common Stock to complete its private placement, raising total net
proceeds of $1,457,865 on the sale of 1,546,596 shares of Common Stock.
As of September 23, 1998, the Company's cash on hand was approximately
$450,000. With the capital currently on hand, the Company has resources to
fund its operations through approximately the end of calendar 1998. The
Company believes that with the capital currently on hand and with a projected
growth in revenue, there will be sufficient capital to fund operations
throughout Fiscal 1999. There can be no assurance, however, that this
revenue growth will occur. If the Company continues to sustain significant
losses beyond the current business plan, the Company may be required to
attempt to raise further debt or equity funds. If such fund raising efforts
should prove unsuccessful, the Company might need to reduce operating
spending significantly, which would materially and adversely effect the
Company's business and raise substantial doubts about its ability to continue
as a going concern.
Effective June 30, 1998, the Company completed an agreement with the Series A
Investors, whereby the Series A Investors agreed to eliminate the Series A
Dividend. In place of the Series A Dividend, the Series A Investors were
issued, on a pro rata basis, shares of Series A Preferred Stock. The number
of shares issued to the Series A Investors was determined by dividing the
accrued dividend as of June 30, 1998 by $1.2069, which was 66 2/3% of the
average bid and ask prices of the Company's Common Stock for the prior 20
trading days as reported on the OTC Bulletin Board reporting system. Pending
the approval of the holders of the Company's Common Stock (the "Common
Stockholders"), this agreement will also eliminate the accrual of future
preferred dividends. This agreement eliminated $797,377 in current
liabilities, which would have been payable in cash within six months after
conversion of the shares of Series A Preferred Stock to shares of Common
Stock at the election of either the Series A Investors or the Company.
The Company does not currently have a bank credit line. The Company does not
intend to pay cash dividends with respect to Common Stock in the foreseeable
future.
RECENT PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and display of
financial statements. The impact of adopting SFAS No. 130, which is effective
in Fiscal 1999 has not been determined.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 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.
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<PAGE>
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 No. 131 is effective in Fiscal 1999 and the impact has not been
determined.
In March 1998, the American Institute of Certified Public Accountants (AICPA)
issued Statement of Position ("SOP") No. 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." The Company is
reviewing the impact of SOP No. 98-1, which will be effective in Fiscal 1999.
YEAR 2000 COMPLIANCE
The "Year 2000" issue is the result of computer programs being written using two
digits rather than four to define the applicable year. As such, computer
programs that have date sensitive software might recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in program failure or
miscalculation causing disruptions of operations including, among other things,
a temporary inability to process transactions, send invoices, operate equipment
or engage in similar normal business activities.
The Company has reviewed both its internal computer systems and its products
that could be affected by the "Year 2000" issue and has identified some systems
and a few products that will be affected. The Company presently believes, with
modification to existing software and converting to new software, that the "Year
2000" issues relating to internal computer systems and products will not cause
significant operational problems or customer problems. Furthermore, the cost of
implementing these solutions is not anticipated to be material to the Company's
business, financial condition and results of operations. However, if such
modifications and conversions are not made, or not completed in a timely manner,
the "Year 2000" issue could have a material adverse effect on the business,
financial condition and results of operations of the Company. Furthermore, the
costs of such conversions and updates are based on management's best estimates,
which are derived utilizing numerous assumptions of future events including such
things as, but not limited to, the availability and cost of personnel trained in
this area, the ability to locate and correct all relevant computer codes and
similar uncertainties. The Company has already begun initiating formal
communications with its significant suppliers and large customers in Fiscal 1998
to determine the extent to which the Company is vulnerable to such third
parties' failure to remediate their own "Year 2000" Issues. However, there can
be no assurance that the Company will identify all "Year 2000" issues affecting
its systems, its customers' systems, or third parties' systems in advance of
their occurrence, or that the Company will be able to successfully remedy any
problems that are discovered. The expenses of the Company's efforts to identify
and address such problems, or the expenses or liabilities to which the Company
may become subject as a result of such problems, could have a material adverse
effect on the Company's business, financial condition and results of operations.
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.
18
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT OF THE REGISTRANT
The information required by this item is included under the captions entitled
"Election of Directors" and "Information Concerning Directors and Executive
Officers" in the Company's Proxy Statement and is incorporated herein by
reference.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this item is included under the caption entitled
"Executive Compensation" in the Company's Proxy Statement and is incorporated
herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is included under the caption entitled
"Security Ownership of Certain Beneficial Owners and Management" in the
Company's Proxy Statement and is incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is included under the caption entitled
"Certain Relationships and Related Transactions" in the Company's Proxy
Statement and is incorporated herein by reference.
19
<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, 1998 and 1997 . . . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Statements of Operations - For the years ended June 30, 1998 and 1997 . . . . . . . . . . . F-3
Consolidated Statements of Stockholders' Equity / (Deficit) - For the years ended June 30, 1998
and 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Cash Flows - For the years ended June 30, 1998 and 1997 . . . . . . . . . . . F-5
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6
2. Financial Statement Schedules - For years ended June 30, 1998 and 1997:
Schedule II - Valuation and other Qualification Accounts . . . . . . . . . . . . . . . . . . . . . . . . F-18
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(1) Amended Certificate of Incorporation of the Registrant. . . . . . . . . . . . . . . . . . . . . *
3.2(2) By-laws of the Registrant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . *
4(3) Instruments defining rights of holders of the Company's Series A Convertible Preferred Stock. . *
21.1 Subsidiaries of the Registrant. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
23.1 Consent of PricewaterhouseCoopers, Independent Accountants. . . . . . . . . . . . . . . . . . .
27 Financial Data Schedule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -
</TABLE>
* Previously filed
(1) Incorporated by reference to Exhibit 28(ii) filed in
connection with the Registrant's Form 8-K filed with the
Securities and Exchange Commission on November 22, 1994
(2) Incorporated by reference to Exhibit 28(viii) filed in
connection with the Registrant's Form 8-K filed with the
Securities and Exchange Commission on November 22, 1994
(3) Incorporated by reference to Exhibits (i),(ii), (iii) & (iv)
filed in connection with the Registrant's Form 8-K filed
with the Securities and Exchange Commission on November 22,
1994
(b) Reports on Form 8-K
20
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934, AS AMENDED, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO
BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
Date: September 28, 1998
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 SEPTEMBER 28, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- --------- ------
<S> <C>
/s/ Marcel van Heesewijk President, Chief Executive Officer,
- -------------------------------- Acting Principal Accounting and Financial Officer
Marcel van Heesewijk and Chairman of the Board of Directors
/s/ Mattheus Wegbrans Director
- --------------------------------
Mattheus Wegbrans
/s/ Johan Vunderink Director
- --------------------------------
Johan Vunderink
/s/ Louis Delmonico Director
- --------------------------------
Louis Delmonico
</TABLE>
21
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of QCS Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations and of stockholders' equity/(deficit) and
of cash flows present fairly, in all material respects, the financial position
of QCS Corporation and its subsidiaries at June 30, 1998 and 1997, and the
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles. 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 of these consolidated
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the 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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to
the consolidated financial statements, the Company has incurred losses from
operations since inception which raises substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
described in Note 2. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
San Jose, California PricewaterhouseCoopers LLP
August 21, 1998
F-1
<PAGE>
QCS CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
ASSETS 1998 1997
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 473,170 $ 1,274,157
Accounts receivable (net of
allowance for doubtful accounts of
$29,657 at June 30, 1998 and $55,036
at June 30, 1997) 203,921 152,789
Other current assets 5,345 14,896
---------- ------------
Total current assets 682,436 1,441,842
Property and equipment, net 248,871 242,243
Security deposits 27,942 32,059
---------- ------------
Total assets $ 959,249 $ 1,716,144
---------- ------------
---------- ------------
LIABILITIES
Current liabilities:
Accounts payable $ 344,436 $ 240,007
Accrued liabilities 590,526 520,305
Capital lease obligations, current portion 8,423 9,097
Preference dividends payable 65,051 605,462
---------- ------------
Total current liabilities 1,008,436 1,374,871
Capital lease obligations, net of current
portion 6,468 14,892
---------- ------------
Total liabilities 1,014,904 1,389,763
Commitments (Note 7)
STOCKHOLDERS' EQUITY (DEFICIT)
Series A convertible preferred stock, par
value $.001 per share:
Authorized: 5,000,000 shares;
issued and outstanding 4,680,102 and
4,368,937 shares at June 30, 1998
and June 30, 1997, respectively
(aggregate liquidation preference:
$4,820,505) 4,680 4,369
Common stock, par value $.001 per share:
Authorized: 40,000,000 shares; issued
and outstanding 18,831,552 and
17,136,531 at June 30, 1998 and
June 30, 1997, respectively 18,832 17,137
Additional paid in capital 12,898,284 10,653,231
Deferred stock option compensation (107,250)
Subscriptions receivable from stockholders (200,100) (200,100)
Accumulated deficit (12,928,630) (10,160,862)
Cumulative foreign currency translation
adjustments 151,279 119,856
---------- ------------
Total stockholders' equity (deficit) (55,655) 326,381
---------- ------------
Total liabilities and
stockholders' equity (deficit) $ 959,249 $ 1,716,144
---------- ------------
---------- ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE>
QCS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------
1998 1997
----------- -----------
<S> <C> <C>
Revenue:
Network $ 682,192 $ 1,274,611
Consulting 210,000
----------- -----------
892,192 1,274,611
Cost of revenue:
Network 414,815 837,131
Consulting 210,000
----------- -----------
624,815 837,131
----------- -----------
Gross profit 267,377 437,480
Operating expenses:
Selling, general and administrative 2,344,971 2,912,498
Research and development 407,479 364,539
----------- -----------
Total operating expenses 2,752,450 3,277,037
----------- -----------
Operating loss (2,485,073) (2,839,557)
Other expense, net (44,433) (36,458)
Interest income 18,704 98,238
----------- -----------
Net loss $(2,510,802) $(2,777,777)
Preferred dividend (256,966) (243,118)
----------- -----------
Net loss attributed to common stockholders $(2,767,768) $(3,020,895)
----------- -----------
----------- -----------
---------- ------------
Net loss per share (basic and diluted) $ (0.16) $ (0.18)
----------- -----------
----------- -----------
Weighted average number of shares used
in per share calculation (basic and diluted) 17,539,820 17,074,660
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
QCS CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY / (DEFICIT)
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
---------------------------- --------------------------- PAID-IN
SHARES AMOUNTS SHARES AMOUNTS CAPITAL
----------- ----------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C>
BALANCES AT JULY 1, 1996 4,368,937 $ 4,369 16,692,531 $ 16,693 $ 9,688,531
Issuance of common stock in connection
with a 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
Preferred dividend payable
Translation adjustment
Net loss for the year
--------------------------- ---------------------------- -------------
BALANCES AT JUNE 30, 1997 4,368,937 4,369 17,136,531 17,137 10,653,231
Issuance of common stock in connection
with a private placement 1,270,505 1,270 1,076,969
Conversion of preferred stock to
common stock (349,516) (350) 349,516 350
Exercise of warrants 75,000 75 675
Conversion of dividend payable to
preferred stock 660,681 661 796,716
Compensation related to stock options
and warrants 370,693
Preferred dividend payable
Translation adjustment
Net loss for the year
--------------------------- ---------------------------- -------------
BALANCES AT JUNE 30, 1998 4,680,102 $ 4,680 18,831,552 $ 18,832 $ 12,898,284
--------------------------- ---------------------------- -------------
--------------------------- ---------------------------- -------------
<CAPTION>
CUMULATIVE TOTAL
SUBSCRIPTIONS FOREIGN STOCK-
DEFERRED RECEIVABLE CURRENCY HOLDERS'
STOCK OPTION FROM ACCUMULATED TRANSLATION EQUITY /
COMPENSATION STOCKHOLDERS DEFICIT ADJUSTMENTS (DEFICIT)
-------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCES AT JULY 1, 1996 $ (301,638) $ (462,584) $ (7,139,967) $ 5,004 $ 1,810,408
Issuance of common stock in connection
with a 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 194,388 194,388
Preferred dividend payable (243,118) (243,118)
Translation adjustment 114,852 114,852
Net loss for the year (2,777,777) (2,777,777)
------------------------------------------------------------ -------------
BALANCES AT JUNE 30, 1997 (107,250) (200,100) (10,160,862) 119,856 326,381
Issuance of common stock in connection
with a private placement 1,078,239
Conversion of preferred stock to
common stock 0
Exercise of warrants 750
Conversion of dividend payable to
preferred stock 797,377
Compensation related to stock options
and warrants 107,250 477,943
Preferred dividend payable (256,966) (256,966)
Translation adjustment 31,423 31,423
Net loss for the year (2,510,802) (2,510,802)
------------------------------------------------------------ -------------
BALANCES AT JUNE 30, 1998 $ (200,100) $(12,928,630) $ 151,279 $ (55,655)
------------------------------------------------------------ -------------
------------------------------------------------------------ -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
QCS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(2,510,802) $(2,777,777)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 63,536 79,914
Unrealized exchange loss 39,532 128,992
Loss on disposal of fixed assets 86,424 13,158
Expense related to stock options and warrants 477,943 194,388
Changes in operating assets and liabilities:
Accounts receivable (51,132) 18,638
Other current assets and security deposits 13,668 14,309
Accounts payable 104,429 (322,698)
Accrued and other liabilities 70,221 126,315
----------- -----------
Net cash used in operating activities (1,706,181) (2,524,761)
Cash flows from investing activities:
Purchases of fixed assets (180,406) (100,433)
Proceeds from disposal of fixed assets 23,818
----------- -----------
Net cash used in investing activities (156,588) (100,433)
Cash flows from financing activities:
Proceeds from issuance of common stock 1,078,239 1,031,919
Common stock subscriptions received 262,484
Proceeds from exercise of warrants 750
Payments on capital leases (9,098) (4,038)
----------- -----------
Net cash provided by financing activities 1,069,891 1,290,365
Effect of exchange rate changes on cash (8,109) 1,868
----------- -----------
Net decrease in cash and cash equivalents (800,987) (1,332,961)
Cash and cash equivalents, beginning of
the period 1,274,157 2,607,118
----------- -----------
Cash and cash equivalents, end of the period $ 473,170 $ 1,274,157
----------- -----------
----------- -----------
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 4,153 $ 2,331
Cash paid during the period for taxes 800 800
Conversion of preference dividend
payable to Series A convertible
preferred stock 797,377
Capital lease additions 21,593
Write-off of subscription receivable 66,775
</TABLE>
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 Corporation ("the Company") was incorporated in 1994 as a Delaware
corporation. The Company 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 its offices in Mountain View,
California. The Company has commenced the liquidation of QCS Global Retail
Information Network Asia Pacific Ltd., and has ceased operations of QCS
Development Company S.A.
The Company provides its users with computer software and network access to
enable retailers and 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 enables retailers to conduct on-line
communication and transactions with their vendors and suppliers.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION:
These consolidated 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. Management plans
for increases in revenue to provide for adequate capital for operations in
Fiscal 1999. In the event the anticipated growth in revenue does not occur,
management will attempt to raise further equity funding. If these fund raising
efforts are not successful, the Company would have to reduce operating
spending significantly, which would materially and adversely effect the
Company's business, and raise substantial doubts about its ability to
continue as a going concern. These consolidated financial statements 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:
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.
F-6
<PAGE>
PROPERTY AND EQUIPMENT:
Property and equipment 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.
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 Internet fees, network usage and monthly service
charges are recognized as the services are provided. Revenues from sales of
consulting and other services are recognized at the time the service is
performed and accepted by the customer.
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 (SFAS) No. 86, "Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed." Under this
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. In Fiscal 1998, the Company capitalized $141,132 of costs associated
with the development of software features to its Internet product. These
capitalized costs are being 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 amortization expense is
greater.
EMPLOYEE STOCK PLANS:
In October 1995, the Financial Accounting Standards Board (FASB) issued SFAS No.
123, "Accounting for Stock-Based Compensation", which is effective for the
Company's financial statements since Fiscal 1997. SFAS No. 123 allows companies
to either account for stock-based compensation under the new provisions of SFAS
No. 123 or under the provisions of Accounting Principles Board Opinion (APB) No.
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 No. 123 had been adopted. The Company has elected to
continue to account for its stock based compensation in accordance with the
provisions of APB No. 25 and present pro forma disclosures required by SFAS No.
123 (see Note 5).
INCOME TAXES:
The Company accounts for income taxes in accordance with SFAS 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 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.
F-7
<PAGE>
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 were two customers representing 43% and 29% of accounts
receivable in Fiscal 1998 and one customer representing 17% of accounts
receivable in Fiscal 1997.
The Company places its cash with two financial institutions.
NET LOSS PER SHARE:
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 128 ("SFAS No. 128") "Earnings per Share" ("EPS") effective
December 31, 1997. SFAS No. 128 requires the presentation of basic and diluted
EPS. Basic EPS is computed by dividing the income available to common
stockholders by weighted average number of common shares outstanding for the
period. Diluted EPS is computed by giving effect to all dilutive potential
common shares that were outstanding during the period. For the Company,
dilutive potential common shares consist of incremental common shares issuable
upon the exercise of stock options and warrants for all periods. In accordance
with SFAS No. 128, all prior period earnings per share amounts have been
restated to reflect this method of 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 June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting and display of financial statements. The impact of adopting SFAS No.
130, which is effective in Fiscal 1999 has not been determined.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 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 No. 131 is effective in
Fiscal 1999 and the impact has not been determined.
In March 1998, the American Institute of Certified Public Accountants (AICPA)
issued Statement of Position ("SOP") No. 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." The Company is
reviewing the impact of SOP No. 98-1, which will be effective in Fiscal 2000.
F-8
<PAGE>
3. BALANCE SHEET DETAIL
PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
JUNE 30,
------------------------
1998 1997
---------- ----------
<S> <C> <C>
Furniture and equipment $ 151,609 $ 271,000
Computer software 159,727 65,766
Leasehold improvements 10,559 13,855
---------- ----------
321,895 350,621
Less accumulated depreciation and amortization (73,024) (108,378)
---------- ----------
$ 248,871 $ 242,243
---------- ----------
---------- ----------
</TABLE>
Depreciation and amortization expense for Fiscal 1998 and 1997 was $63,536 and
$79,914, respectively.
Assets under acquired capital leases arrangements included in property and
equipment above are as follows:
<TABLE>
<CAPTION>
JUNE 30,
------------------------
1998 1997
---------- ----------
<S> <C> <C>
Furniture and equipment $ 29,820 $ 29,820
Less accumulated amortization (15,853) (5,912)
---------- ----------
$ 13,967 $ 23,908
---------- ----------
---------- ----------
</TABLE>
ACCRUED LIABILITIES:
Accrued liabilities at June 30, 1998 and 1997 consisted of the following:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Payroll and related taxes $ 130,167 $ 145,199
Accrued legal and audit expenses 114,502 86,177
Other accrued expenses 345,857 288,929
---------- ----------
$ 590,526 $ 520,305
---------- ----------
---------- ----------
</TABLE>
4. STOCKHOLDERS' EQUITY
PRIVATE PLACEMENT:
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 Fiscal 1996 the Company issued a total of
1,036,531 shares of Common Stock at $3.00 per share of which the net proceeds
totaled approximately $2,842,000.
In June 1998, the Company was in the process of completing a private placement
of its common stock. As of June 30, 1998, a total of 1,270,505 shares of common
stock had been issued, raising net proceeds (after fees and other costs
associated with the offering) of $1,078,239 at prices ranging from $0.75 to
$1.375 per share.
F-9
<PAGE>
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 were 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 were 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.
Effective June 30, 1998, the Company completed an agreement with the current
Series A preferred stockholders to restructure the Series A dividend. The
Company and Series A preferred stockholders agreed to eliminate the dividend on
the Series A preferred stock. In place of the dividend, the Series A preferred
stockholder were issued, on a pro rata basis, shares of preferred stock. The
number of shares the Series A preferred stockholders were issued was determined
by dividing the accrued dividend as of June 30, 1998 by $1.2069, which was 66
2/3% of the average bid and ask prices of the Company's common stock for the
prior 20 trading days as reported on the Over-The-Counter Bulletin Board
reporting system. These shares have the same voting and other rights as the
Series A preferred stock. Pending the approval of the Company's Common
Stockholders, this agreement will also eliminate the accrual of future
preferred dividends.
At the date of conversion, the accrued dividend for the Series A preferred
stockholders on that date was $797,377. The Company issued 660,681 shares of
preferred stock in payment of the Series A preferred dividend accrued through
June 30, 1998. After issuance of these shares, the remaining dividend payable
in arrears was $65,051. This represents dividends accrued on shares of Series A
preferred stock which were converted to common stock prior to June 30, 1998.
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 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.
During Fiscal 1998, 349,516 shares of preferred stock were converted to common
stock.
WARRANTS:
At June 30, 1997, there were warrants outstanding to purchase an aggregate of
436,894 shares of common stock at $0.01 per share, which are exercisable at any
time until November 1999 or the automatic conversion of preferred stock to
common stock, whichever is earlier.
F-10
<PAGE>
During March 1998, the Company issued warrants for 810,000 shares of common
stock, at a price of $1.00 per share. The 810,000 warrants are exercisable at
any time between March 6, 1999 and March 6, 2002.
During March 1998, the Company issued warrants for 21,000 shares of common
stock, at a price of $0.75 per share. The 21,000 warrants are exercisable at
any time between March 31, 1998 and February 23, 2001.
Additional warrants for 3,567 shares of common stock were issued during Fiscal
1998 at prices ranging from $1.75 to $1.94 which are exercisable in perpetuity.
All warrants were valued using the Noreen-Woolfson model and an amount of
$370,693 was recognized as expense during Fiscal 1998. The grant date weighted
average fair market value of these warrants was $0.46.
5. STOCK OPTION PLANS
In April 1997 the Board of Directors adopted the 1997 Stock Option Plan ("the
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.
Activity under the Plan and under individual agreements is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-------------------------------------------
SHARES PRICE AGGREGATE
AVAILABLE SHARES PER SHARE EXERCISE PRICE
---------- ------------ ------------ ----------------
<S> <C> <C> <C> <C>
Balance at July 1, 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
Options granted (366,000) 366,000 $0.70 256,200
Options canceled 28,000 (28,000) $0.75-$3.00 (77,250)
----------- ---------- ------------- -----------
Balance at June 30, 1998 1,243,923 2,986,077 $0.15-$3.13 $4,707,815
----------- ---------- ------------- -----------
----------- ---------- ------------- -----------
</TABLE>
F-11
<PAGE>
The following table summarizes information with respect to stock options
outstanding at June 30, 1998:
<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, 1998 LIFE (YEARS) PRICE JUNE 30, 1998 PRICE
------- -------------- ------------- ------- ------------ -----
<S> <C> <C> <C> <C> <C>
$0.15 300,000 5.51 $0.15 300,000 $0.15
$0.50 - $1.00 1,100,000 7.47 $0.83 606,084 $0.91
$1.88 - $2.27 1,382,077 0.84 $2.27 1,378,744 $2.27
$3.00 - $3.13 204,000 8.48 $3.01 68,000 $3.01
----------------------------------------------------------------
2,986,077 4.27 $1.58 2,352,828 $1.67
----------------------------------------------------------------
----------------------------------------------------------------
</TABLE>
At June 30, 1997, options to purchase 1,851,743 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 $107,250 in 1998 and
$194,388 in 1997 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 SFAS No. 123,
"Accounting for Stock Based Compensation". Had compensation cost for the Plan
been determined based on the fair market value at the grant date for the options
granted in Fiscal 1998 and 1997, consistent with the provisions of SFAS No. 123,
the Company's net loss for Fiscal 1998 and 1997 would have been increased to the
pro forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Net loss as attributed to common
stockholders - as reported $ 2,767,768 $ 3,020,895
------------ ------------
------------ ------------
Net loss as attributed to common
stockholders - pro forma $ 2,868,733 $ 3,065,545
------------ ------------
------------ ------------
Loss per share - as reported $ (0.16) $ (0.18)
------------ ------------
------------ ------------
Loss per share - pro forma $ (0.16) $ (0.18)
------------ ------------
------------ ------------
</TABLE>
F-12
<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 values of each option granted in Fiscal years 1998 and 1997
were $0.56 and $0.58, respectively. The fair value of each option grant for the
Plan is estimated on the date of grant using the Black-Scholes option-pricing
model with the following weighted average assumptions:
<TABLE>
Caption>
1998 1997
----- ----
<S> <C> <C>
Risk-free interest rate 6.06% 6.25%
Expected life 5 years 5 years
Expected volatility 84% 10%
Expected dividend yield 0.0% 0.0%
</TABLE>
The Black-Scholes option valuation model was developed for use in estimating the
fair market value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in these subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not provide a single measure of the fair value
of its employee stock options.
6. INCOME TAXES
The tax provision for the years ended June 30, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Current - -
Deferred $ (1,093,330) $ (913,884)
Less: valuation allowance 1,093,330 913,884
------------ ----------
Total provision - -
------------ ----------
------------ ----------
</TABLE>
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, 1998 and 1997 consist of the following:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Miscellaneous accruals $ 138,559 $ 131,254
Provision for doubtful accounts receivable 2,018 4,000
Set up costs and research and development
expenditures 106,589 52,881
Compensation related to stock options
granted 190,508 147,606
Net operating loss carryforwards 3,532,888 2,541,491
----------- -----------
Total deferred tax asset 3,970,562 2,877,232
Valuation allowance (3,970,562) (2,877,232)
----------- -----------
Net deferred tax asset - -
----------- -----------
----------- -----------
</TABLE>
F-13
<PAGE>
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.
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:
<TABLE>
<CAPTION>
FUTURE
TAX
BENEFITS ON
YEAR IN WHICH FRENCH TAX OPERATING YEAR OF
LOSS AROSE LOSSES LOSSES EXPIRATION
- ------------- ---------- ----------- ----------
<S> <C> <C> <C>
1994 $ 509,138 $ 186,650 1999
1995 2,020,161 740,598 2000
1996 1,140,162 417,983 2001
1997 416,040 152,520 2002
1998 183,018 67,094 2003
-----------
$ 1,564,845 (1)
-----------
-----------
</TABLE>
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:
<TABLE>
<CAPTION>
FUTURE
TAX
BENEFITS ON
YEAR IN WHICH HONG KONG OPERATING YEAR OF
LOSS AROSE TAX LOSSES LOSSES EXPIRATION
----------- ---------- ------ ----------
<S> <C> <C> <C>
1996 $ 414,485 $ 68,930 2011
1997 554,154 94,206 2012
1998 116,795 19,855 2013
-----------
$ 182,991 (1)
-----------
-----------
</TABLE>
(1) The deferred tax asset is before the application of the valuation
allowance.
F-14
<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:
<TABLE>
<CAPTION>
FUTURE
TAX
BENEFITS ON
YEAR IN WHICH U.S. TAX OPERATING YEAR OF
LOSS AROSE LOSSES LOSSES EXPIRATION
---------- ------ ------ ----------
<S> <C> <C> <C>
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
1998 2,111,388 717,872 2013
-----------
$ 1,734,753 (1)
-----------
-----------
</TABLE>
(1) The deferred tax asset is before the application of the valuation
allowance.
Due to changes in the Company's ownership during Fiscal 1997 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 (34%) on
income (loss) before income taxes and the company's effective tax rate is
summarized as follows:
<TABLE>
<CAPTION>
1998 % 1997 %
---- --- ---- ---
<S> <C> <C> <C> <C>
Net loss $ (2,510,802) $ (2,777,777)
Federal tax at statutory rate (853,673) 34.0% (972,222) 35.0%
Foreign taxes - rate differential 21,840 (0.9%) 58,838 (2.1%)
R&D credit (40,245) 1.6%
State tax benefit (221,252) 8.8%
Increase in valuation
allowance 1,093,330 (43.5%) 913,384 (32.9%)
------------- ----- ------------- -----
Total provision - - - -
------------- ----- ------------- -----
------------- ----- ------------- -----
</TABLE>
F-15
<PAGE>
7. 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:
<TABLE>
<S> <C>
For Year Ending June 30,
1999 $ 10,250
2000 6,938
---------
Total minimum lease payments 17,188
Less amounts representing interest (2,297)
---------
Present value of net minimum lease payments 14,891
Less current obligation (8,423)
---------
Long-term obligation under capital lease $ 6,468
---------
---------
</TABLE>
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 $174,000 and $257,000 in Fiscal 1998
and 1997, respectively.
The annual minimum rental commitments under all non-cancelable operating lease
arrangements are as follows:
<TABLE>
<S> <C>
Fiscal year ending June 30,
1999 $ 95,187
2000 73,328
2001 18,424
----------
$ 186,939
----------
----------
</TABLE>
8. EARNINGS PER SHARE
Reconciliation of the numerator and denominator of both basic and diluted EPS is
provided as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Basic and diluted;
Weighted average shares outstanding 17,539,820 17,074,660
------------ ------------
Shares used in calculating per share amounts 17,539,820 17,074,660
------------ ------------
Net loss attributed to common stockholders $2,767,768 $3,020,895
------------ ------------
Net loss per share attributed to common stockholders $0.16 $0.18
------------ ------------
</TABLE>
Options to purchase 2,986,077 shares of common stock at June 30, 1998 and
2,648,077 at June 30, 1997, have been excluded from the computation of diluted
net loss per share as to include such options would be anti-dilutive.
F-16
<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:
<TABLE>
<CAPTION>
REVENUES
--------------------------------
1998 1997
------------ ------------
<S> <C> <C>
North and South America $ 145,695 $ 137,236
Europe 428,257 517,324
Asia 318,240 620,051
------------ ------------
$ 892,192 $ 1,274,611
------------ ------------
------------ ------------
<CAPTION>
OPERATING LOSS
--------------------------------
1998 1997
------------ ------------
<S> <C> <C>
North and South America $ 2,028,824 $ 2,119,350
Europe 277,198 112,629
Asia 179,051 607,578
------------ ------------
$ 2,485,073 $ 2,839,557
------------ ------------
------------ ------------
<CAPTION>
TOTAL IDENTIFIABLE ASSETS
--------------------------------
1998 1997
------------ ------------
<S> <C> <C>
North and South America $ 440,165 $ 137,654
Europe 28,430 114,545
Asia 17,484 189,788
------------ ------------
$ 486,079 $ 441,987
------------ ------------
------------ ------------
</TABLE>
There were two customers representing 48% and 24% of revenues in Fiscal 1998 and
one customer representing 21% of revenues in Fiscal 1997.
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.
11. SUBSEQUENT EVENT
During August 1998, an additional 276,091 shares of common stock were issued at
$1.375, the net proceeds totaled $379,625. This concluded the Company's private
placement. The total net proceeds raised in the private placement from February
to August 1998 were $1,457,864 for 1,546,596 shares.
F-17
<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 TO BALANCE AT
BEGINNING COSTS AND OTHER END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
----------- --------- -------- -------- ---------- ------
<S> <C> <C> <C> <C> <C>
YEAR ENDED JUNE 30, 1998
Provision for doubtful
accounts receivable $ 55,036 $ 31,883 $ (57,262) $ 29,657
Deferred tax valuation
allowance 2,877,232 1,162,360 3,970,562
YEAR ENDED JUNE 30, 1997
Provision for doubtful
accounts receivable 119,960 13,159 - (78,083) 55,036
Deferred tax valuation
allowance $ 1,963,848 - $ 913,384 - $ 2,877,232
</TABLE>
F-18
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
The Company's wholly-owned subsidiary is as follows:
QCS Development Company S.A.
Immeuble Le Quadra
455 Promenade des Anglais
06299 Nice Cedex 3, France
F-19
<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-18 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 PricewaterhouseCoopers LLP
August 21, 1998
F-20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM STATEMENTS
FOR THE YEAR ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 473
<SECURITIES> 0
<RECEIVABLES> 234
<ALLOWANCES> (30)
<INVENTORY> 0
<CURRENT-ASSETS> 682
<PP&E> 322
<DEPRECIATION> (73)
<TOTAL-ASSETS> 959
<CURRENT-LIABILITIES> 1,008
<BONDS> 0
0
5
<COMMON> 19
<OTHER-SE> (80)
<TOTAL-LIABILITY-AND-EQUITY> 959
<SALES> 0
<TOTAL-REVENUES> 892
<CGS> 0
<TOTAL-COSTS> 625
<OTHER-EXPENSES> 2,797
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (19)
<INCOME-PRETAX> (2,511)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,511)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,511)
<EPS-PRIMARY> (.16)
<EPS-DILUTED> (.16)
</TABLE>
