<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1998
OR
[ ] 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 0-21958
QRS CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 68-0102251
------------------------------- --------------------------
(State or other jurisdiction of (I.R.S.
incorporation or organization) Employer Identification No.)
1400 MARINA WAY SOUTH, RICHMOND, CA 94804
-----------------------------------------------------------
(Address of principal executive offices) (Zip code)
(510) 215-5000
-----------------------------------------------
(Registrant's phone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.__X__ YES NO _____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Classes of Common Stock Outstanding at September 30, 1998
- -------------------------------------------- ---------------------------------
Common Stock, $.001 par value 8,525,991
This document contains 11 pages.
The Exhibit listing appears on Page 10.
<PAGE>
QRS CORPORATION
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of September 30, 1998 and December 31, 1997 3
Consolidated Statements of Earnings for the Three and Nine Months
Ended September 30, 1998 and 1997 4
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1998
and 1997 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities and Use of Proceeds 13
Item 3. Defaults upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
A. Exhibits
B. Reports on Form 8-K
SIGNATURES 14
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
QRS CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .............................................. $ 30,621 $ 16,091
Marketable securities available-for-sale ............................... 6,692 17,694
Accounts receivable-net of allowance for doubtful accounts of $1,265 in
1998 and $873 in 1997 ................................................ 18,359 14,567
Deferred income tax assets ............................................. 870 870
Prepaid expenses and other ............................................. 1,288 1,260
------------ ------------
Total current assets ............................................. 57,830 50,482
Property and equipment:
Furniture and fixtures ................................................. 2,626 2,162
Equipment .............................................................. 9,369 7,622
Leasehold improvements ................................................. 2,088 1,800
------------ ------------
14,083 11,584
Less accumulated depreciation .......................................... 5,933 4,062
------------ ------------
Total .............................................................. 8,150 7,522
Marketable securities available-for-sale ................................. 1,523 1,000
Deferred income tax assets ............................................... 1,921 2,576
Capitalized product development costs - net of accumulated amortization of
$3,290 and $2,818 in 1998 and 1997 ...................................... 3,645 2,245
Other assets ............................................................. 3,099 177
------------ ------------
Total assets ............................................................ $ 76,168 $ 64,002
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ....................................................... 7,731 $ 3,733
Other accrued liabilities .............................................. 4,460 2,711
Sublease loss reserve .................................................. 1,494
------------ ------------
Total current liabilities .......................................... 12,191 7,938
------------ ------------
Deferred rent and other .................................................. 1,161 1,335
------------ ------------
Total liabilities .................................................. 13,352 9,273
------------ ------------
Stockholders' equity:
Preferred stock - $.001 par value; 10,000,000 shares authorized; none
issued and outstanding ............................................... -- --
Common stock - $.001 par value; 20,000,000 shares authorized;8,525,991
shares outstanding in 1998 and 8,531,366 shares in 1997 ............. 64,331 63,864
Treasury stock (25,550 shares in 1998 and 1,300 shares in 1997) ........ (740) (35)
Unrealized gain (loss)on investments ................................... 157 (9)
Accumulated deficit .................................................... (932) (9,091)
------------ ------------
Total Stockholders' equity ......................................... 62,816 54,729
------------ ------------
Total liabilities and Stockholders' equity ............................... $ 76,168 $ 64,002
------------ ------------
------------ ------------
</TABLE>
See notes to Consolidated financial statements.
3
<PAGE>
QRS CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues .................................................... $ 23,618 $ 18,253 $ 64,482 $ 51,610
Cost of revenues ............................................ 13,319 10,494 36,258 29,231
---------- ---------- ---------- ----------
Gross profit ................................................ 10,299 7,759 28,224 22,379
Operating expenses:
Sales and marketing ................................. 2,881 2,115 8,247 6,391
Product development ................................. 1,187 1,215 3,077 3,426
General and administrative .......................... 1,823 1,196 5,054 3,574
In-process technology expense related to acquisitions 967 967
---------- ---------- ---------- ----------
Total operating expenses ........................ 6,858 4,526 17,345 13,391
---------- ---------- ---------- ----------
Operating earnings .......................................... 3,441 3,233 10,879 8,988
Interest income ............................................. 545 523 1,644 1,468
---------- ---------- ---------- ----------
Earnings from continuing operations before income taxes ..... 3,986 3,756 12,523 10,456
Income taxes ................................................ 1,515 1,502 4,930 4,182
---------- ---------- ---------- ----------
Earnings from continuing operations after income taxes ...... 2,471 2,254 7,593 6,274
Discontinued operations:
Gain from sale of software and services business ............ -- -- 896
---------- ---------- ---------- ----------
Net earnings ................................................ $ 2,471 $ 2,254 $ 8,489 $ 6,274
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Basic earnings per share:
Continuing operations ....................................... $ 0.29 $ 0.27 $ 0.89 $ 0.74
Discontinued operations ..................................... -- -- 0.10 --
---------- ---------- ---------- ----------
Net earnings per share ...................................... $ 0.29 $ 0.27 $ 0.99 $ 0.74
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Shares used to compute basic earnings per share ............. 8,530,515 8,488,553 8,539,239 8,450,616
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Diluted earnings per share:
Continuing operations ....................................... $ 0.28 $ 0.26 $ 0.86 $ 0.72
Discontinued operations ..................................... -- -- 0.10 --
---------- ---------- ---------- ----------
Net earnings per share ...................................... $ 0.28 $ 0.26 $ 0.96 $ 0.72
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Shares used to compute diluted earnings per share ........... 8,734,698 8,762,389 8,850,481 8,733,214
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
4
<PAGE>
QRS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1998 1997
---------- --------
<S> <C> <C>
Operating activities:
Net earnings ......................................................... $ 8,489 $ 6,274
Adjustment to reconcile net earnings to net cash provided by operating
activities:
Depreciation and amortization ...................................... 2,427 1,157
Gain from sale of software and services business ................... (896)
In-process technology expense related to acquisitions .............. 967 --
Stock option compensation .......................................... -- 26
Changes in:
Accounts receivable ................................................ (3,514) (3,229)
Prepaid expenses and other ......................................... 22 (869)
Deferred income tax assets ......................................... 867 4,156
Other assets ....................................................... (283) (245)
Accounts payable ................................................... 3,998 (1,131)
Deferred rent and other ............................................ 578 (1,934)
---------- --------
Net cash provided by operating activities ...................... 12,655 4,205
---------- --------
Investing activities:
Sale (purchase) of marketable securities-available for sale (net) .. 10,645 (3,173)
Purchase of property and equipment ................................. (2,389) (4,995)
Acquisition of businesses, net of stock issued and cash acquired ... (2,927) --
Capitalization of product development costs ........................ (1,872) (605)
---------- --------
Net cash provided by (used in) investing activities ............ 3,457 (8,773)
---------- --------
Financing activities:
Exercise of stock options .......................................... 255 807
Exercise of stock warrant .......................................... -- 13
Purchase of treasury stock ......................................... (1,837) (35)
---------- --------
Net cash provided by (used in) financing activities ............ (1,582) 785
---------- --------
Net increase (decrease) in cash and cash equivalents .................. 14,530 (3,783)
Cash and cash equivalents at beginning of period ...................... 16,091 16,022
---------- --------
Cash and cash equivalents at end of period ............................ $ 30,621 $ 12,239
---------- --------
---------- --------
Other cash flow information:
Taxes paid during the period ...................................... $ 3,514 $ 116
---------- --------
---------- --------
Noncash investing and financing activities:
Tax benefit from stock options exercised .......................... $ 212 $ 704
Unrealized gain on marketable securities available-for-sale ....... 166 --
During the third quarter of 1998, the Company acquired the assets of
Custom Information Systems Corporation and the outstanding common
shares of the EDI Connection with the allocation of the purchase
price as follows:
Working capital other than cash $ (71)
Property & Equipment 110
Goodwill 736
Other Intangible Assets 1,987
In-Process Technology 967
Less: Common stock issued in connection with acquisitions (802)
--------
Acquisition of businesses, net of stock issued and cash acquired $ 2,927
--------
--------
</TABLE>
5
<PAGE>
QRS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
Effective May 11, 1998, QuickResponse Services, Inc. changed its corporate
name to QRS Corporation (QRS or the Company). The Company's product
families are Catalog Services, Network Services, Inventory Management
Services (IMS), Logistics Management Services (LMS), and Professional
Services. The Company derives revenues from five principal and related
sources: monthly charges for accessing Catalog Services, fees for
utilization of network services including the transmission of standard
business documents over a network, IMS-related fees based on negotiated
monthly service charges, LMS fees, and consulting fees. Network Services
pricing is based primarily on the volume of characters transmitted and the
type of network access utilized, and incorporates discounts based on
volume.
The consolidated balance sheet as of September 30, 1998, the consolidated
statements of earnings for the three and nine months ended September 30,
1998 and 1997, and the consolidated statements of cash flows for the nine
months ended September 30, 1998 and 1997 have been prepared by the Company
without audit. In the opinion of management, all adjustments (consisting
only of normal recurring adjustments) necessary to present fairly the
financial position, results of operations and cash flows at September 30,
1998 and for all periods presented have been made. The consolidated balance
sheet as of December 31, 1997 is derived from the Company's audited
financial statements as of that date.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been consolidated or omitted as permitted by regulations of
the Securities and Exchange Commission. It is suggested that these interim
consolidated financial statements be read in conjunction with the annual
audited financial statements and notes thereto included in the Company's
Form 10-K for the year ended December 31, 1997.
The preparation of the Company's consolidated financial statements in
conformity with generally accepted accounting principles necessarily
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the balance sheet dates and the reported amounts
of revenues and expenses for the periods presented. Actual amounts may
differ from such estimates.
The results of operations for the periods ended September 30, 1998 and 1997
are not necessarily indicative of the operating results anticipated for the
full year.
Certain reclassifications have been made to the 1997 amounts to conform to
the 1998 presentation.
2. SUBLEASE LOSS RESERVES
During the quarter ended March 31, 1998, outstanding matters with regard to
the Uniquest bankruptcy were substantially resolved; accordingly the
Company recognized a gain on sale of software and services business of
$1,494,000 less applicable income taxes of $598,000. The remaining sublease
loss reserve of $480,000 at March 31, 1998 and $536,000 at December 31,
1997 representing the provisions established for nonpayment by Uniquest of
future sublease obligations was reclassified to Deferred rent and other and
will be amortized over the remaining lease term through June 30, 2010.
6
<PAGE>
3. ACQUISITIONS
During the third quarter of 1998, the Company acquired the assets of Custom
Information Systems Corporation and the outstanding common shares of the
EDI Connection, both service bureaus. The total acquisition cost was
$4,152,000, comprised of $2,950,000 paid in cash, 35,000 of common shares
valued at $802,000 issued from the treasury stock account, liabilities
assumed of $194,000 and $206,000 in transaction costs related to the
acquisitions. The acquisitions were accounted for as purchase transactions.
In connection with the acquisitions and in conjunction with the Company's
capitalized software policies, $967,000 of the purchase price was allocated
to in-process research and development and, as technological feasibility
had not been established and no alternative future uses existed at the
acquisition dates, charged to operations. The Company allocated $3,185,000
of the purchase price to current assets, property and equipment and
intangible assets. The amounts allocated to current assets and property and
equipment were based on the fair market value of the related assets and the
amounts allocated to intangible assets were determined on the basis of the
appraised value of the related intangible assets. The appraisal techniques
included certain assumptions, including, the extent, character and utility,
the income generating or cost-savings attributes, the nature and timing of
the functional or economic obsolescence and the relative risk and
uncertainty associated with an investment in intangible assets.
The intangible assets will be amortized using the straight-line method for
periods between three and seven years.
4. STOCK OPTIONS
During the first nine months of 1998, the Company granted options to
purchase 161,500 shares of common stock. Options to purchase 18,875 shares
of common stock were exercised. Stockholders approved additional
allocations of 350,000 shares of common stock to the stock option pool
under the 1993 Stock Option/Issuance Plan in May 1998. At September 30,
1998, 1,438,081 shares were subject to outstanding options, of which
433,642 were exercisable. Options to purchase approximately 280,121 shares
of common stock are available for future grant under the Company's 1993
Stock Option/Stock Issuance Plan and the 1997 Special Non-Officer Stock
Option Plan.
5. EARNINGS PER SHARE
The Company calculates basic earnings per share (EPS) and diluted EPS in
accordance with SFAS No. 128. Basic EPS is calculated by dividing net
earnings for the period by the weighted average common shares outstanding
for that period. Diluted EPS takes into account the effect of dilutive
instruments, such as stock options, and uses the average share price for
the period in determining the number of incremental shares that are to be
added to the weighted average number of shares outstanding.
The following is a summary of the calculation of the number of shares used
in calculating basic and diluted EPS:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
1998 1997 1998 1997
--------- --------- --------- ----------
<S> <C> <C> <C> <C>
Shares used to compute basic EPS 8,530,515 8,488,553 8,539,239 8,450,616
Add: effect of dilutive securities 204,183 273,836 311,242 282,598
--------- --------- --------- ---------
Shares used to compute diluted EPS 8,734,698 8,762,389 8,850,481 8,733,214
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
7
<PAGE>
6. COMPREHENSIVE INCOME
Effective January 1, 1998, QRS adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income." This Statement
requires that all items recognized under accounting standards as components
of comprehensive earnings be reported in an annual financial statement that
is displayed with the same prominence as other annual financial statements.
This Statement also requires that an entity classify items of other
comprehensive earnings by their nature in an annual financial statement.
For example, other comprehensive earnings may include foreign currency
translation adjustments and unrealized gains and losses on marketable
securities classified as available-for-sale. Annual financial statements
for prior periods will be reclassified, as required. QRS' total
comprehensive earnings were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net earnings $2,471 $ 2,254 $8,489 $ 6,274
Other comprehensive gain (loss) 68 (26) 166 (33)
------ ------- ------ -------
Total comprehensive earnings $2,539 $ 2,228 $8,655 $ 6,241
------ ------- ------ -------
------ ------- ------ -------
</TABLE>
7. TREASURY STOCK
On April 22, 1997, the Company announced that its Board of Directors has
authorized the repurchase from time to time of up to $5 million of its
common stock in both open market and block transactions. Shares purchased
under this program will be held in the corporate treasury for future use
including employee stock option grants and the employee stock purchase
plan. The Company may discontinue purchases of its Common Stock at any time
that management determines additional purchases are not warranted. During
the third quarter of 1998, the Company repurchased a total of 33,750 shares
of common stock for $995,000. The Company has repurchased 60,550 shares
since the inception of the buyback program, of which 59,250 shares were
repurchased during 1998 for $1,837,000. During the third quarter of 1998,
the Company reissued 35,000 shares of treasury stock at $802,000 in
connection with the acquisition of businesses (Note 3).
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
THIS FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM
THE RESULTS DISCUSSED IN THE FORWARD- LOOKING STATEMENTS AS A RESULT OF
INTENSE COMPETITION IN THE ELECTRONIC COMMERCE BUSINESS, THE COMPANY'S
DEPENDENCE ON KEY RETAILERS, THE COMPANY'S ABILITY TO SUCCESSFULLY
INTRODUCE NEW PRODUCTS AND SERVICES, THE COMPANY'S DEPENDENCE ON THE IBM
GLOBAL NETWORK AND OTHER RISK FACTORS SET FORTH IN THE COMPANY'S ANNUAL
REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997.
GENERAL
QRS Corporation's (the Company's) product families are Catalog Services,
Network Services, Inventory Management Services (IMS), Logistics Management
Services (LMS), and Professional Services. The Company derives revenues
from five principal and related sources: charges for accessing Catalog
Services, fees for utilization of network services including the
transmission of standard business documents over a network, IMS fees, LMS
fees, and consulting fees. Network Services pricing is based primarily on
the volume of characters transmitted and the type of network access
utilized. Network Services pricing also incorporates discounts based on
volume.
RESULTS OF OPERATIONS
The Company's revenues increased by 29% to $23.6 million for the third
quarter of 1998, from $18.3 million for the third quarter of 1997. The
Company's revenues increased by 25% to $64.5 million during the first nine
months of 1998 from $51.6 million for the same period of 1997. These
increases were primarily attributable to the increased number of customers,
higher usage of Network and Catalog Services, pricing adjustments and
expanded product offerings. The number of customers increased from 5,410
(238 retailers and 5,172 vendors and carriers) as of September 30, 1997 to
7,427 (231 retailers and 7,196 vendors and carriers) as of September 30,
1998. The number of catalog trading partnerships increased as a result of
the increase in the number of customers and their trading links with each
other. Customers increased the number, type and size of transactions
transmitted over the network, as well as the utilization of Catalog
Services. The Company expanded its product offerings in the Network, IMS
and Professional Services product families.
Cost of sales consists primarily of the cost of purchasing network services
and the cost of the Company's data center and technical customer support
services. Cost of sales increased by 27% to $13.3 million for the third
quarter of 1998, from $10.5 million for the third quarter of 1997. Cost of
sales increased by 24% to $36.3 million for the first nine months of 1998,
from $29.2 million for the first nine months of 1997. The increase was
principally due to increases in purchased network services, reflecting
growth in Network Services, purchased under a long-term contract,
discounted based upon a multi-year volume commitment, and an expanded
customer support group reflecting growth in customers and products. The
gross profit margin was 44% for the third quarter of 1998 compared to 43%
for the third quarter of 1997. The slight margin improvement is due to
improved pricing on purchased network services largely offset by technical
infrastructure expenditures to support newer products.
Sales and marketing expenses consist primarily of personnel and related
costs in the Company's sales and marketing organizations, as well as the
costs of various marketing programs. Sales and marketing expenses increased
36% to $2.9 million for the third quarter of 1998, from $2.1 million for
the third quarter of 1997. Sales and marketing expenses increased 29% to
$8.2 million for the first nine months of 1998, from $6.4 million for the
first nine months of 1997. This increase reflects the Company's expansion
of its retailer and vendor- specific coverage and growth in its Program
Sales and Enablement organization, the group responsible for rapidly
enabling trading partners for key hub customers.
9
<PAGE>
Product development expenses consist primarily of personnel and equipment
costs related to research, development and implementation of new services
and enhancement of existing services. Product development expenses were
$1.2 million for the third quarter of 1998 and 1997. Product development
expenses decreased by 10% to $3.1 million for the first nine months of
1998, from $3.4 million for the first nine months of 1997. The Company
capitalized product development costs of $588,000 and $387,000 for the
third quarters of 1998 and 1997, respectively. The Company capitalized
product development costs of $1.9 million and $605,000 for the first nine
months of 1998 and 1997, respectively. The increase in capitalized product
development costs in 1998 is due to increased product development on
products that had reached technological feasibility.
General and administrative expenses consist primarily of the personnel and
related costs of the Company's finance and administrative organizations, as
well as professional fees and other costs. General and administrative
expenses increased 52% to $1.8 million for the third quarter of 1998,
compared to $1.2 million for the third quarter of 1998. General and
administrative expenses increased 41% to $5.1 million for the first nine
months of 1998, compared to $3.6 million for the first nine months of 1997.
This increase was primarily due to increased headcount to support a larger
organization and investments in infrastructure.
During the third quarter of 1998, the Company acquired the assets of Custom
Information Systems Corporation and the outstanding common shares of the
EDI Connection, both service bureaus. The total acquisition cost was
$4,152,000, comprised of $2,950,000 paid in cash, 35,000 of common shares
valued at $802,000 issued from the treasury stock account, liabilities
assumed of $194,000 and $206,000 in transaction costs related to the
acquisitions. The acquisitions were accounted for as purchase transactions.
In connection with the acquisitions and in conjunction with the Company's
capitalized software policies, $967,000 of the purchase price was allocated
to in-process research and development and, as technological feasibility
had not been established and no alternative future uses existed at the
acquisition dates, charged to operations. The Company allocated $3,185,000
of the purchase price to current assets, property and equipment and
intangible assets. The amounts allocated to current assets and property and
equipment were based on the fair market value of the related assets and the
amounts allocated to intangible assets were determined on the basis of the
appraised value of the related intangible assets. The appraisal techniques
included certain assumptions, including, the extent, character and utility,
the income generating or cost-savings attributes, the nature and timing of
the functional or economic obsolescence and the relative risk and
uncertainty associated with an investment in intangible assets.
Interest income consists primarily of interest earned on cash, cash
equivalents and investment securities. Interest income increased to
$545,000 for the third quarter of 1998, compared to $523,000 for the third
quarter of 1997, as a result of higher investment balances. Interest income
increased to $1.6 million for the first nine months of 1998, compared to
$1.5 million for the first nine months of 1997.
As a result of the foregoing, earnings from continuing operations before
income taxes increased 6% to $4 million for the third quarter of 1998,
compared to $3.8 million for the third quarter of 1997. Earnings from
continuing operations before income taxes increased 20% to $12.5 million
for the first nine months of 1998, compared to $10.5 million for the first
nine months of 1997.
Income taxes were $1.5 million each for the third quarters of 1998 and
1997. Income taxes were $4.9 million and $4.2 million for the first nine
months of 1998 and 1997, respectively. The 1998 income tax rates for the
first two quarters of 1998 and for the nine months of 1997 of 40%
approximate the combined effective federal and state income tax rates. The
income tax rate for the third quarter of 1998 of 38% approximates the
combined effective federal and state income tax rates.
In the first quarter of 1998, the Company reported a $1.5 million gain on
sale of software and services business, net of applicable income taxes of
$598,000, related to the substantial resolution of the bankruptcy
proceedings of the purchaser.
10
<PAGE>
As a result of the foregoing, net earnings increased 10% to $2.5 million
for the third quarter of 1998, compared to $2.3 million for the third
quarter of 1997. Net earnings increased 35% to $8.5 million for the first
nine months of 1998, compared to $6.3 million for the first nine months of
1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital increased from $42.5 million at December 31,
1997 to $45.6 million at September 30, 1998 primarily due to positive cash
flow from operations. Deferred income tax assets decreased as the Company
continued to use tax various tax credits to partially defer the Company's
cash requirements for tax payments. Cash, cash equivalents and marketable
securities increased from $34.8 million at December 31, 1997 to $38.8
million at September 30, 1998. Total assets increased from $64.0 million at
December 31, 1997 to $76 million at September 30, 1998 and total
liabilities increased from $9.3 million at December 31, 1997 to $13.4
million at September 30, 1998.
The increase of $4 million in cash, cash equivalents and marketable
securities from December 31, 1997 to September 30, 1998 resulted primarily
from positive cash flow from operations, including the timing of certain
large payments to vendors.
On April 22, 1997, the Company announced that its Board of Directors has
authorized the repurchase from time to time of up to $5 million of its
common stock in both open market and block transactions. Shares purchased
under this program will be held in the corporate treasury for future use
including employee stock option grants and the employee stock purchase
plan. The Company may discontinue purchases of its common stock at any time
that management determines additional purchases are not warranted. During
the third quarter of 1998, the Company repurchased a total of 33,750 shares
of common stock for $995,000.
During the third quarter of 1998, the Company utilized $2.9 million in cash
to acquire The EDI Connection and Custom Information Systems Corporation,
both service bureaus.
Management believes that the cash resources available at September 30, 1998
and cash anticipated to be generated from future operations will be
sufficient for the Company to meet its working capital needs, capital
expenditures and Common Stock repurchases for the next year. The Company
has not paid any cash dividends to date and does not intend to pay cash
dividends with respect to common stock in the foreseeable future.
YEAR 2000 COMPLIANCE
INTRODUCTION
The Year 2000 issue involves computer programs and embedded microprocessors
in computer systems and other equipment that utilize two digits rather than
four to define the applicable year. These systems may be programmed to
assume that all two digit date are preceded by "19," causing "00" to be
interpreted as 1900 rather than 2000. This could result in the possible
failure of those programs and devices to properly recognize date sensitive
information when the year changes to 2000. Systems that do not properly
recognize date sensitive information could generate erroneous data or a
system failure.
The Company has conducted an evaluation of the actions necessary to ensure
that its business critical computer and other systems will be able to
function without disruption with respect to the application of dating
systems in the Year 2000. This evaluation was conducted with the assistance
of expert consulting services. The completed deliverable from that review
is a detailed Year 2000 compliance plan. The Company's plan objective is to
ensure uninterrupted transition into the Year 2000. The scope of the Year
2000 plan includes: (1) information technology ("IT") such as software and
hardware, (2) non-IT systems or embedded technology such as
micro-controllers contained in various safety systems, facilities and
utilities, and (3) readiness of key third parties, including suppliers and
customers.
11
<PAGE>
COMPANY SYSTEMS
Based on this evaluation, the Company is engaged in upgrading, replacing,
and testing many of these computer systems to achieve Year 2000 compliance.
Because the Company was founded 10 years ago, the Company believes that its
COBOL mainframe systems are largely Year 2000 compliant, and that its PC
and midrange based systems will require the majority of attention. The
Company believes that its non-information technology Year 2000 exposure is
relatively low, since embedded chip deployment is not central to the
Company's product delivery.
THIRD PARTY READINESS
The Company has a process in place to assess the Year 2000 readiness of its
business critical vendors and customers, and is involved in working with
these vendors and customers on Year 2000 compliance issues. Disruptions
with respect to computer systems of vendors or customers, whose systems are
outside the control of the Company, could impair the ability of the Company
to provide services to its customers, and could have a material adverse
effect upon the Company's financial condition and results of operations.
COMPANY PLANS
The Company's remedial actions are scheduled to be completed during the
third quarter of 1999. Based on the information currently available, the
Company does not anticipate that the costs of its remedial actions will be
material to the Company's results of operations and financial position and
are expensed as incurred. However, there can be no assurance that the
remedial actions being implemented by the Company will be able to be
completed by the time necessary to avoid Year 2000 compliance problems, or
that the cost of doing so will not be material. If the Company is unable to
complete its remedial actions in the planned time frame, contingency plans
will be developed to address those business critical systems that may not
be Year 2000 compliant.
The Company believes that the most reasonably likely worst case scenario is
that a small number of vendors and/or customers will have lingering Year
2000 compliance problems, resulting in additional support for these
customers, and the substitution of a higher number of software vendors than
currently anticipated. As a part of the assessment process, the Company
will develop contingency plans for those business critical vendors or large
customers who are either unable or unwilling to develop remedial plans to
become Year 2000 compliant. The Company expects that these plans will
involve the acceleration of its Year 2000 compliance activity and the
application of additional resources. It is expected that these contingency
plans will be in place by the third quarter of 1999.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable
12
<PAGE>
II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
27.1 Financial Data Schedule
B. REPORTS ON FORM 8-K
None
13
<PAGE>
SIGNATURES
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 and in the capacity indicated.
QRS CORPORATION
------------------------------------
(Registrant)
\s\ John S. Simon
------------------------------------
November 16, 1998 John S. Simon
Chief Executive Officer
\s\ Shawn M. O'Connor
------------------------------------
November 16, 1998 Shawn M. O'Connor
President and Chief Operating Officer
\s\ Peter Papano
------------------------------------
November 16, 1998 Peter Papano
Chief Financial Officer and
Secretary
14
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