<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1997
( ) 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
- ------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
DELAWARE 98-0132465
--------------------------------- ----------------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
650 CASTRO STREET, SUITE 210, MOUNTAIN VIEW, CA 94041
- ------------------------------------------------------------------------------
(Address of principal executive offices)
(650) 966-1214
- ------------------------------------------------------------------------------
(Issuer's telephone number)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days
YES X NO
----- -----
Common stock outstanding as of February 13, 1998: 17,269,784 shares
Transitional Small Business Disclosure Format YES X NO
----- -----
<PAGE>
QCS CORPORATION
CONTENTS
PAGE
PART I FINANCIAL INFORMATION
ITEM 1 Consolidated Financial Statements (unaudited):
Consolidated Balance Sheets as of
December 31, 1997 (unaudited) and June 30, 1997 3
Consolidated Statements of Operations
for the three and six month periods ended
December 31, 1997 and 1996 (unaudited) 4
Consolidated Statements of Cash Flows
for the six month period ended
December 31, 1997 and 1996 (unaudited) 5
Notes to Consolidated Financial Statements (unaudited) 6
ITEM 2 Management's Discussion and Analysis of 7
Financial Condition and Results of Operations
PART II OTHER INFORMATION
ITEM 6 Exhibits and Reports on Form 8K 10
SIGNATURE 10
2
<PAGE>
QCS CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
ASSETS 1997 1997
------------ ------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 392,164 $ 1,274,157
Accounts receivable (net of allowance for doubtful accounts of
$51,142 on December 31, 1997 and $55,036 on June 30, 1997) 102,483 152,789
Other current assets 14,055 14,896
---------- ------------
Total current assets 508,702 1,441,842
Fixed assets, net of accumulated depreciation and amortization 201,780 242,243
Security deposits 21,205 32,059
---------- ------------
Total assets $ 731,687 $ 1,716,144
---------- ------------
---------- ------------
LIABILITIES
Current liabilities:
Accounts payable $ 293,584 $ 240,007
Accrued liabilities 642,049 520,305
Capital lease obligations, short-term portion 9,253 9,097
Preference dividends payable 729,428 605,462
---------- ------------
Total current liabilities 1,674,314 1,374,871
Capital lease obligations, long-term portion 10,345 14,892
---------- ------------
Total liabilities 1,684,659 1,389,763
STOCKHOLDERS' EQUITY (DEFICIT)
Series A convertible preferred stock, par value $.001 per share:
Authorized: 5,000,000 shares; issued and outstanding 4,310,684 and 4,368,937
shares at December 31, 1997 and June 30, 1997, respectively (aggregate
liquidation preference: $4,440,005) 4,311 4,369
Common stock, par value $.001 per share: Authorized: 40,000,000 shares; issued
and outstanding 17,194,784 and 17,136,531 at December 31, 1997 and June 30,
1997, respectively 17,195 17,137
Additional paid in capital 10,653,231 10,653,231
Deferred stock compensation (107,250) (107,250)
Subscriptions receivable from stockholders (200,100) (200,100)
Accumulated deficit (11,471,181) (10,160,862)
Cumulative foreign currency translation adjustment 150,821 119,856
---------- ------------
Total stockholders' equity (deficit) (952,972) 326,381
---------- ------------
Total liabilities and stockholders' equity (deficit) $ 731,687 $ 1,716,144
---------- ------------
---------- ------------
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
3
<PAGE>
QCS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------- --------------------------
1997 1996 1997 1996
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue $ 185,195 $ 324,941 $ 395,166 $ 769,406
Cost of revenue 133,732 238,031 282,733 443,276
---------- ----------- ----------- -----------
Gross profit 51,463 86,910 112,433 326,130
Operating expenses:
Selling, general and administrative 624,394 975,863 1,115,309 1,729,455
Research and development 85,580 95,961 163,563 185,582
---------- ----------- ----------- -----------
Total operating expenses 709,974 1,071,824 1,278,872 1,915,037
Operating loss (658,511) (984,914) (1,166,439) (1,588,907)
Other income (expense), net (32,848) (1,130) (36,164) 4,507
Interest income 4,792 30,352 16,250 55,787
---------- ----------- ----------- -----------
Net loss $ (686,567) $ (955,692) $(1,186,353) $(1,528,613)
Preferred dividend payable not
included in net loss (61,704) (60,779) (123,966) (121,558)
---------- ----------- ----------- -----------
Net loss attributed to common stockholders $ (748,271) $(1,016,471) $(1,310,319) $(1,650,171)
---------- ----------- ----------- -----------
---------- ----------- ----------- -----------
Net loss per share basic and diluted $ (0.04) $ (0.06) $ (0.08) $ (0.10)
---------- ----------- ----------- -----------
---------- ----------- ----------- -----------
Weighted average number of shares
used in basic and diluted per
share calculation 17,188,452 17,162,292 17,162,492 16,982,711
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
4
<PAGE>
QCS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
---------------------------------
DECEMBER 31, DECEMBER 31,
1997 1996
-------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,186,353) $(1,528,613)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization expense 36,264 35,125
Unrealized exchange loss 28,554 -
Write-off of fixed assets 15,181 -
Change in allowance for doubtful accounts (3,894) 172,912
Stock option compensation - 168,650
Changes in operating assets and liabilities:
Changes in accounts receivable 54,200 (254,806)
Changes in other current assets and security deposits 11,696 (54,430)
Changes in accounts payable 53,577 (70,491)
Changes in accrued and other liabilities 121,744 92,324
----------- -----------
Net cash used in operating activities (869,031) (1,439,329)
Cash flows from investing activities:
Purchases of fixed assets (10,991) (52,738)
----------- -----------
Net cash used in investing activities (10,991) (52,738)
Cash flows from financing activities:
Proceeds from issuance of common stock - 1,031,969
Common stock subscriptions received - 262,484
Exercise of stock options - 130,000
Payments on capital leases (4,391) -
----------- -----------
Net cash provided by (used in) financing activities (4,391) 1,424,453
Effect of exchange rate changes on cash 2,420 5,737
----------- -----------
Net decrease in cash and cash equivalents (881,993) (61,877)
Cash and cash equivalents, beginning of the period 1,274,157 2,607,118
----------- -----------
Cash and cash equivalents, end of the period $ 392,164 $ 2,545,241
----------- -----------
----------- -----------
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 2,163 $ 1,846
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
5
<PAGE>
NOTES TO UNAUDITED FINANCIAL STATEMENTS
The consolidated financial statements are unaudited and reflect all
adjustments (consisting only of normal recurring adjustments) which are, in
the opinion of management, necessary for a fair presentation, in all material
respects, of the financial position and operating results for the interim
periods. The results of operations for the three and six month periods ended
December 31, 1997 are not necessarily indicative of the results to be
expected for the entire fiscal year ending June 30, 1998. The year-end
balance sheet data was derived from the audited financial statements.
This financial information should be read in conjunction with the audited
financial statements and notes thereto included in the Company's Form 10-KSB
for the fiscal year ended June 30, 1997 as filed with the Securities and
Exchange Commission.
COMPUTATION OF NET LOSS PER SHARE
The Company has adopted the provisions of Statement of Financial Accounting
Standard No. 128 (SFAS 128) "Earnings per Share" effective December 31, 1997.
SFAS requires the presentation of basic and diluted earning per share. Basic
EPS is computed by dividing the income available to common shareholders 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, dilative potential
common shares consist of incremental common shares issuable upon the exercise
of stock options and warrants for all periods. In accordance with SFAS 128,
all prior period earnings per share amounts have been restated to reflect
this method of calculation.
Basis and diluted earning per share are calculated as follows during the
three and six month period ended December 31, 1997 and 1996:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------------- --------------------------
BASIC: 12/31/97 12/31/96 12/31/97 12/31/96
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Weighted average shares outstanding for the period 17,188,452 17,162,292 17,162,492 16,982,711
----------- ----------- ----------- -----------
Shares used in per share calculation 17,188,452 17,162,292 17,162,492 16,982,711
Net loss attributed to common shareholders $ (748,271) $(1,016,471) $(1,310,319) $(1,650,171)
----------- ----------- ----------- -----------
Net loss per share $ (0.04) $ (0.06) $ (0.08) $ (0.10)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
DILUTED:
Weighted average shares outstanding for the period 17,188,452 17,162,292 17,162,492 16,982,711
Common stock equivalents from stock options and warrants - - - -
Convertible preferred stock - - - -
----------- ----------- ----------- -----------
Shares used in per share calculation 17,188,452 17,162,292 17,162,492 16,982,711
Net loss attributed to common shareholders $ (748,271) $(1,016,471) $(1,310,319) $(1,650,171)
----------- ----------- ----------- -----------
Net loss per share $ (0.04) $ (0.06) $ (0.08) $ (0.10)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
6
<PAGE>
Options and warrants to purchase 3,288,048 and 96,894 shares of common stock
were at December 31, 1997 and 1996, but were not included in the computation
of diluted earnings per share because inclusion of the options and warrants
was anti-dilutive.
RECLASSIFICATION
Certain prior period balances have been reclassified to conform to the
current period's presentation.
RECENT PRONOUNCEMENTS:
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 (SFAS 130) "Reporting Comprehensive
Income." SFAS 130 establishes standards for reporting and display of
financial statements. The impact of adopting SFAS 130, which is effective in
fiscal 1999, has not been determined.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 (SFAS 131) "Disclosures about
Segments of an Enterprise and Related Information." SFAS 131 requires
publicly held companies to report financial and other information about key
revenue-producing segments of the entity for which such information is
available and is utilized by the chief operation decision maker. Specific
information to be reported for individual segments includes profit or loss,
certain revenue and expense items and total assets. A reconciliation of
segment information to amounts reported in the financial statements would be
provided. SFAS 131 is effective in fiscal 1999 and the impact has not been
determined.
PART I FINANCIAL INFORMATION
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of operations
of the Company should be read in conjunction with the unaudited 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 that 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 and
the Risk Factor section of the Company's Report on Form 10-KSB for the Fiscal
Year Ended June 30,1997.
OVERVIEW
QCS Corporation (the "Company") is an electronic commerce service provider
serving the worldwide retail industry. The Company's revenues are derived
from its software products and services which include application software
for a one time licensing/installation fee and network access for which the
Company charges a fixed monthly fee and/or volume-based recurring usage fees.
The Company from time to time also derives revenues from consulting services.
The Company is continuing to implement its marketing alliance with IBM. The
Company believes this alliance to be an important and central component of
its business plan. Based on the marketing agreement signed in December of
1996, IBM will assume responsibility for much of the sales, marketing and end
user support efforts of the Company's electronic collaboration services. The
preparation activities for IBM to assume these tasks were started in the
reporting quarter. There can be no assurance that the IBM agreement will
continue to be executed.
7
<PAGE>
From inception in 1993 through December 31, 1997, the Company has generated
an accumulated deficit of $11,471,181. 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. 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's
success depends to a significant degree upon the continued contributions of
key management, engineering, sales and marketing, and finance personnel,
certain of whom would be difficult to replace. The loss of the services of
any of the key personnel, the inability to attract or retain qualified
personnel in the future or delays in hiring required personnel could have a
material adverse effect on the Company's business, operating results or
financial condition.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 1997
The Company's revenues decreased by 43% to $185,195 for the second quarter of
fiscal year 1998 (Q2 98) as compared to $324,941 for the second quarter of
fiscal year 1997 (Q2 97). This decrease is primarily attributed to the
Company's lower sales of its full Notes based supplier stations and the
related installation and monthly subscription fees. The loss of these
revenues has not been compensated by revenues of the new Internet based QCS
Supplier Stations. In November, the Company reduced its monthly Internet
subscription fee from $195 per month to $55 per month. Internet revenue for
Q2 98 was $20,175 or 11% of total revenues.
Cost of revenues decreased by 44% to $133,732 for Q2 98 from $238,031 in Q2
97 due primarily to the decrease in sales of the full Lotus Notes based
product. Cost of sales consists primarily of the 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 based product. In future periods, the Company anticipates that its
cost structure may continue to differ significantly from previous periods
because of the further transition from the Lotus Notes based product to the
Internet based product using Lotus Domino technology, which does not have
significant installation and backbone costs.
Selling, general and administrative expenses (SG&A) consist primarily of
personnel and personnel-related costs in the Company's sales, marketing and
general management organizations. Also included are other administrative
support costs such as external legal and financial services. SG&A expenses
decreased 36% to $624,394 in Q2 98 from $975,863 in Q2 97. The decrease was
due to lower payroll, travel, bad debt expense, and a reduction in the use of
external consulting services. During Q2 98 the Company recorded a provision
to SG&A expenses of $110,256 for the closure of its Nice and Hong Kong
offices. The employees and services provided by these offices will be
transferred to the local IBM teams in Q3 98.
As a result of the foregoing, the net loss decreased 28% to $686,567 for Q2
98 from $955,692 in Q2 97.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED DECEMBER 31, 1997
The Company's revenues decreased by 49% to $395,166 for the first six months
of fiscal year 1998 as compared to $769,406 for the first half of fiscal year
1997. This decrease is primarily attributed to the Company's lower sales of
its full Notes based supplier stations and the related installation and
monthly subscription fees. The loss of these revenues has not been
compensated by revenues of the new Internet based Supplier Sales Stations.
Internet revenue for the first half of fiscal 1998 was $50,625 or 13% of
total revenues.
Cost of revenues decreased by 36% to $282,733 from $443,276 for the first
half of 1998 from the same period in fiscal 1997. This was due primarily to
the decrease in sales of the full Lotus Notes based product. Cost of sales
consists primarily of the 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
8
<PAGE>
Notes based product. In future periods, the Company anticipates that its
cost structure may continue to differ significantly from previous periods
because of the further transition from the Lotus Notes based product to the
Internet based product using Lotus Domino technology, which does not have
significant installation and backbone costs.
SG&A consist primarily of personnel and personnel-related costs in the
Company's sales, marketing and general management organizations. Also
included are other administrative support costs such as external legal and
financial services. SG&A expenses decreased 36% to $1,115,309 from
$1,729,455 for the first half of fiscal 1998 from the same period in 1997.
The decrease was due to lower payroll and related expenses, communications, a
reduction of accounting and legal fees and a reduction in the use of external
consulting services.
As a result of the foregoing, the net loss decreased 22% to $1,186,353 from
$1,528,613 for the first half of fiscal 1998 from the same period in fiscal
1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents at December 31, 1997 was $392,164,
representing a $881,993 decrease from June 30, 1997. This decrease in
working capital was almost entirely from cash used in operating activities.
In the first half of fiscal 1997, the Company used $1,439,329 of cash in
operating activities. The Company's business plan for fiscal 1998 calls for
continued increases in spending for product development and key technical
personnel. The Company does not currently have a bank credit line. The
Company did not conclude the private placement of common stock during the
second quarter of fiscal 1998. The Company is in the process of implementing
its working relationship with IBM and believes, that if it is successful in
doing so, it will lower its marketing and selling expenses and be in a better
situation to successfully raise an equity financing which would be sufficient
to fund operations for the next year. While the Company believes it will be
successful in implementing its alliance with IBM, there can be no assurance
of this result or in successful fund raising efforts.
The Company's ability to operate is dependent upon raising additional equity
capital until revenues under the IBM relationship develop to a level that
will sustain operations. The Company is currently seeking to raise
additional capital through a private placement of common stock. As of the
filing date, the Company had received $394,715 for 526,500 shares at $0.75
per share and has received signed subscriptions agreements executed by
additional investors for another $175,500 for 234,000 shares. The Company
has accepted these subscriptions and expects to receive the proceeds in due
course.
With the capital currently on hand, the Company has resources to fund
operations through approximately June 1998. If the implementation of its
agreement with IBM and the conclusion of the fund raising efforts are not
successful, the Company would have to reduce operating expenses, this
reduction would materially and adversely effect the Company's business and
raise substantial doubt about its ability to continue as a going concern.
The Company does not intend to pay cash dividends with respect to common
stock in the foreseeable future.
9
<PAGE>
PART II OTHER INFORMATION
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
a. EXHIBITS
27 Financial Data Schedule
b. REPORTS ON FORM 8-K
No reports on Form 8-K were filed with the Securities and Exchange
Commission during the second quarter of fiscal 1998.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: February 23, 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
10
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM STATEMENTS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 392
<SECURITIES> 0
<RECEIVABLES> 154
<ALLOWANCES> 51
<INVENTORY> 0
<CURRENT-ASSETS> 509
<PP&E> 335
<DEPRECIATION> 133
<TOTAL-ASSETS> 732
<CURRENT-LIABILITIES> 1,674
<BONDS> 0
0
4
<COMMON> 17
<OTHER-SE> (974)
<TOTAL-LIABILITY-AND-EQUITY> (953)
<SALES> 0
<TOTAL-REVENUES> 185
<CGS> 0
<TOTAL-COSTS> 134
<OTHER-EXPENSES> 743
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (5)
<INCOME-PRETAX> (687)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (687)
<EPS-PRIMARY> (.04)
<EPS-DILUTED> 0
</TABLE>
