<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 MARCH 31, 2000
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 (I.R.S. Employer Identification No.)
of incorporation or organization)
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 Shares Outstanding At May 3, 2000
- ----------------------------- ---------------------------------
Common Stock, $.001 par value 15,190,881
This document contains 15 pages.
The Exhibit listing appears on Page 14.
<PAGE>
QRS CORPORATION
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
NUMBER PAGE
- ------ ----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of March 31, 2000 and December 31, 1999 .......... 3
Condensed Consolidated Statements of Operations and Comprehensive Earnings (Loss) for
the Three Months Ended March 31, 2000 and 1999 ............................................ 4
Condensed Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 2000 and 1999 .................................................................. 5
Notes to Condensed Consolidated Financial Statements ...................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations ................................................................................ 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk ................................ 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ......................................................................... 14
Item 2. Changes in Securities and Use of Proceeds ................................................. 14
Item 3. Defaults upon Senior Securities ........................................................... 14
Item 4. Submission of Matters to a Vote of Security Holders ....................................... 14
Item 5. Other Information ......................................................................... 14
Item 6. Exhibits and Reports on Form 8-K .......................................................... 14
SIGNATURES ......................................................................................... 15
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
QRS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents ................................................................... $ 33,811 $ 34,412
Marketable securities available for sale .................................................... 10,858 12,895
Accounts receivable-net of allowance for doubtful accounts of $2,152 at
March 31, 2000 and $1,676 at December 31,1999 ............................................. 25,666 25,964
Deferred income tax assets .................................................................. 819 819
Prepaid expenses and other .................................................................. 3,223 2,848
Prepaid income taxes ........................................................................ 5,701 4,726
------------ ------------
Total current assets .................................................................... 80,078 81,664
------------ ------------
Property and equipment:
Furniture and fixtures ...................................................................... 4,030 3,651
Equipment ................................................................................... 18,258 15,737
Leasehold improvements ...................................................................... 3,936 3,729
------------ ------------
26,224 23,117
Less accumulated depreciation and amortization .............................................. 9,781 9,294
------------ ------------
Total ................................................................................... 16,443 13,823
------------ ------------
Deferred income tax assets ....................................................................... -- 1,156
Capitalized product development costs - net of accumulated amortization of $6,084 at
March 31, 2000 and $5,293 at December 31, 1999 ................................................ 9,263 8,088
Intangible assets - net of accumulated amortization of $5,795 at March 31, 2000 and
$2,221 at December 31, 1999 ................................................................... 164,005 20,758
Other assets ..................................................................................... 1,160 1,466
------------ ------------
Total ....................................................................................... $ 270,949 $ 126,955
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................................................ $ 4,803 $ 10,508
Accrued incentive ........................................................................... 1,273 1,796
Accrued vacation ............................................................................ 2,040 1,195
Deferred acquisition cost ................................................................... 2,500 2,000
Deferred revenue ............................................................................ 2,004 --
Payroll taxes ............................................................................... 2,758 --
Other accrued liabilities ................................................................... 7,326 4,641
------------ ------------
Total current liabilities ............................................................... 22,704 20,140
Deferred income taxes ............................................................................ 9,579 --
Deferred acquisition cost ........................................................................ 3,500 1,000
Deferred rent and other .......................................................................... 1,915 1,240
------------ ------------
Total liabilities ........................................................................... 37,698 22,380
------------ ------------
Minority interest ................................................................................ 319 361
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; 15,202,644 shares
issued and 15,175,319 shares outstanding at March 31, 2000; and 13,674,534
shares issued and 13,647,208 shares outstanding at December 31, 1999 ...................... 240,029 86,971
Treasury stock; 27,325 shares at March 31, 2000 and December 31, 1999 ....................... (526) (526)
Accumulated other comprehensive loss - unrealized loss on investments ....................... (155) (136)
Retained earnings (deficit) ................................................................. (6,416) 17,905
------------ ------------
Total Stockholders' equity .............................................................. 232,932 104,214
------------ ------------
Total .................................................................................... $ 270,949 $ 126,955
============ ============
See notes to condensed consolidated financial statements.
3
</TABLE>
<PAGE>
QRS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE EARNINGS
(LOSS) FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Revenues ................................................................ $ 35,110 $ 29,344
Cost of revenue ......................................................... 19,031 15,018
------------ ------------
Gross profit ............................................................ 16,079 14,326
Operating expenses:
Sales and marketing ................................................ 6,914 4,409
Product development ................................................ 1,959 1,995
General and administrative ......................................... 4,579 2,482
Amortization of intangible assets .................................. 3,574 163
In-process research and development ................................ 24,882 --
------------ ------------
Total operating expenses ....................................... 41,908 9,049
------------ ------------
Operating earnings (loss) ............................................... (25,829) 5,277
Interest income ......................................................... 397 564
------------ ------------
Earnings (loss) from continuing operations before income taxes
and minority interest ................................................ (25,432) 5,841
Income tax expense (benefit) ............................................ (916) 2,220
Minority interest in subsidiary ......................................... (195) --
------------ ------------
Net earnings (loss) ..................................................... (24,321) 3,621
Other comprehensive earnings (loss) -
Unrealized gain (loss) from marketable securities available for sale (19) 13
------------ ------------
Total comprehensive earnings (loss) ..................................... $ (24,340) $ 3,634
============ ============
Basic earnings (loss) per share ......................................... $ (1.70) $ 0.28
============ ============
Shares used to compute basic earnings (loss) per share .................. 14,325,691 13,009,253
============ ============
Diluted earnings (loss) per share (Note 3) .............................. $ (1.70) $ 0.26
============ ============
Shares used to compute diluted earnings (loss) per share (Note 3) ....... 14,325,691 13,737,711
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
QRS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Operating activities:
Net earnings (loss) ......................................................................... $ (24,321) $ 3,621
Adjustment to reconcile net earnings (loss) to net cash provided by operating activities:
Depreciation and amortization ........................................................... 5,643 1,456
Minority interest in subsidiary ......................................................... (195) --
In-process research and development ..................................................... 24,882 --
Loss from disposal of property and equipment ............................................ 39 --
Changes in assets and liabilities, net of effects of acquisitions:
Accounts receivable ..................................................................... 3,732 (259)
Prepaid expenses and other .............................................................. 266 (121)
Prepaid income taxes .................................................................... (925) --
Deferred income taxes ................................................................... -- 351
Accounts payable ........................................................................ (5,995) 1,220
Deferred revenue ........................................................................ 151 --
Deferred rent and other ................................................................. 378 5
Income taxes payable .................................................................... -- 398
Other accrued liabilities ............................................................... (675) (405)
------------ ------------
Net cash provided by operating activities ............................................... 2,980 6,266
------------ ------------
Investing activities:
Sales of marketable securities - available for sale (net) ................................... 2,018 335
Purchase of property and equipment .......................................................... (3,398) (1,080)
Capitalization of product development costs ................................................. (1,966) (468)
Other assets ................................................................................ 546 (391)
Payment of deferred acquisition costs ....................................................... (2,000) --
Acquisition of businesses, net of cash acquired and fair value of common stock issued ....... (4,270) --
------------ ------------
Net cash used in investing activities ................................................... (9,070) (1,604)
------------ ------------
Financing activities:
Exercise of stock options ................................................................... 5,206 2,676
Contributions from minority interest ........................................................ 283 --
------------ ------------
Net cash provided by financing activities ............................................... 5,489 2,676
------------ ------------
Net increase (decrease) in cash and cash equivalents ............................................. (601) 7,338
Cash and cash equivalents at beginning of period ................................................. 34,412 36,642
------------ ------------
Cash and cash equivalents at end of period ....................................................... $ 33,811 $ 43,980
============ ============
Other cash flow information:
Taxes paid during the period ............................................................ $ 9 $ 1,822
============ ============
Noncash financing activities:
Tax benefit from stock options exercised .................................................... $ 7,309 $ 1,751
Deferred acquisition cost ................................................................... 5,000 --
Fair value of common stock issued ........................................................... 131,177 --
Fair value of stock options assumed ......................................................... 9,367 --
Unrealized gain (loss) on investments ....................................................... (19) 13
On March 10, 2000, we acquired substantially all the assets of RockPort Trade
Systems, Inc. and on January 21, 2000, we acquired the outstanding capital stock
of Image Info Inc. The purchase price was allocated, as follows:
Working capital, other than cash............................................................. $ (4,508)
Property and equipment....................................................................... 539
Other assets................................................................................. 97
Goodwill..................................................................................... 100,489
Other intangible assets...................................................................... 46,476
In-process research and development ......................................................... 24,882
Other non-current liabilities................................................................ (5,296)
Fair value of stock options assumed.......................................................... (9,367)
Deferred income taxes........................................................................ (17,865)
Less: Common stock issued in connection with acquisitions.................................... (131,177)
------------
Acquisitions, net of cash acquired of $730 and fair value of common stock issued............. $ 4,270
============
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
QRS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
Our products and services are organized and marketed as a comprehensive
suite of services, including Electronic Commerce Services, such as
messaging, service bureau, outsourcing and connectivity; Content
Services, consisting primarily of the Keystone catalog service; and
Application Services, such as price auditing (RDS), inventory management
(IMS), and logistics management (LMS) services. We launched a new
marketplace services offering, Tradeweave, in January 2000.
We have prepared the condensed consolidated balance sheet as of March
31, 2000, the condensed consolidated statements of operations and
comprehensive earnings (loss) and the condensed consolidated statements
of cash flows for the three months ended March 31, 2000 and 1999,
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 March 31,
2000 and 1999 and for all periods presented have been made. The
condensed consolidated balance sheet as of December 31, 1999 is derived
from our audited consolidated 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 condensed or omitted as permitted by
regulations of the Securities and Exchange Commission. It is suggested
that these interim condensed consolidated financial statements be read
in conjunction with the annual audited consolidated financial statements
and notes thereto included in our Annual Report on Form 10-K for the
year ended December 31, 1999.
The preparation of our 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 March 31, 2000 and 1999
are not necessarily indicative of the operating results anticipated for
the full year.
Certain reclassifications have been made to the 1999 amounts to conform
to the 2000 presentation.
2. ACQUISITIONS
On March 10, 2000, we acquired substantially all of the assets of
RockPort Trade Systems, Inc., a Massachusetts corporation (RockPort),
pursuant to an Agreement and Plan of Reorganization (Reorganization
Agreement), dated February 29, 2000. The total acquisition cost was
$100,953,407, comprised of 814,794 shares of our common stock valued at
$90,136,703; transaction costs of approximately $1,450,000 and
$9,366,704 in stock compensation related to stock options assumed. We
assumed the liabilities of RockPort under its RockPort Stock Option Plan
(RockPort Plan) and the outstanding stock options of RockPort that
converted to options to purchase 89,645 shares of our common stock. As a
result, we recorded stock compensation of approximately $9,366,704,
which has been included in the acquisition cost. The stock compensation
represents the difference between the original grant price of the
outstanding stock options and the estimated fair value of the shares of
our common stock underlying the stock options assumed as of the
acquisition date.
6
<PAGE>
On January 21, 2000, Image Info Inc. (Image Info), a New York
corporation merged with and into WS Acquisition Corp. (WSC), a
wholly-owned subsidiary of ours that was formed in January 2000,
pursuant to an Agreement and Plan of Merger, dated January 16, 2000
among us, WSC and Image Info (Merger Agreement). The total acquisition
cost was $52,771,682, comprised of $5,000,000 paid in cash; $5,000,000
in deferred acquisition cost to the former shareholders of Image Info;
440,914 shares of our common stock valued at $41,040,182; $1,431,500 in
bonuses payable to the employees of Image Info and transaction costs of
approximately $300,000. Under the terms of the Merger Agreement, we
agreed to pay $2,500,000 each in 2001 and 2002 to the former
shareholders of Image Info if revenue from the acquired business meets
or exceeds certain levels in 2000 and 2001. Management has determined,
based on the results of its analysis that it is highly probable that
revenue from the acquired business will exceed the established levels,
and accordingly, the deferred acquisition cost to the former
shareholders of Image Info has been included in the acquisition cost.
The purchase price related to each acquisition has been allocated to the
acquired assets and assumed liabilities on the basis of their estimated
fair values as of the date of the acquisition, as determined by an
independent appraisal. The financial statements reflect the preliminary
allocation of the purchase price, as estimates of certain direct costs
and liabilities associated with the transaction have not yet been
finalized. The fair value of the assets acquired and liabilities
assumed, based on the preliminary allocation of the purchase price, is
summarized as follows (in thousands):
<TABLE>
<CAPTION>
ROCKPORT IMAGE INFO TOTAL
------------ ------------ ------------
<S> <C> <C> <C>
Cash ................................................. $ -- $ 5,000 $ 5,000
Estimated fair value of common stock issued .......... 90,137 41,040 131,177
Fair value of stock options assumed .................. 9,367 -- 9,367
Accrued transaction costs ............................ 1,450 300 1,750
Deferred acquisition cost ............................ -- 5,000 5,000
Accrued bonuses ...................................... -- 1,432 1,432
------------ ------------ ------------
Total purchase price ................................. $ 100,954 $ 52,772 $ 153,726
============ ============ ============
Preliminary allocation of purchase price:
Goodwill .......................................... $ 70,208 $ 30,281 $ 100,439
Current technology ................................ 18,818 17,486 36,304
Customer list and trademark ....................... 2,438 2,283 4,721
Fair value of other intangible assets ............. -- 1,700 1,700
Assembled workforce ............................... 2,813 938 3,751
In-process research and development ............... 15,443 9,439 24,882
Accounts receivable ............................... 2,155 1,279 3,434
Prepaid and other current assets .................. 634 6 640
Property and equipment ............................ 217 322 539
Other assets ...................................... 54 43 97
Cash .............................................. 730 -- 730
Deferred income taxes ............................. (9,228) (8,637) (17,865)
Liabilities assumed ............................... (3,328) (2,368) (5,696)
------------ ------------ ------------
Total allocation of purchase price ........... $ 100,954 $ 52,772 $ 153,726
============ ============ ============
</TABLE>
The amounts allocated to intangible assets will be amortized on a
straight-line basis over estimated useful lives of three to seven
years. The amounts allocated to in-process research and development of
$24,882,000 were charged to expense during the three months ended March
31, 2000 as technological feasibility had not been established and no
alternative future uses existed for the research projects at the
acquisition dates.
The following unaudited pro forma financial results of QRS, RockPort
and Image Info for the three months ended March 31, 2000 and 1999 give
effect to the acquisition of RockPort and Image Info as if the
acquisitions had occurred on the first day of the periods presented and
includes adjustments (increase in amortization of intangible assets,
in-process research and development charge, decrease in interest income
from the increase in the use of cash and the related income tax
adjustments) directly attributable to the acquisition and expected to
have a continuing impact on the combined company. The unaudited pro
forma financial information has been prepared based on preliminary
estimates of certain direct costs and liabilities associated with the
transaction, and amounts actually recorded may change upon final
determination of such amounts. Specifically, additional information is
expected to be obtained for accrued expenses related to the
acquisition.
7
<PAGE>
The unaudited pro forma financial results are provided for comparative
purposes only and are not necessarily indicative of what our actual
results would have been had the forgoing transactions been consummated
on such dates, nor does it give effect to the synergies, cost savings
and other charges expected to result from the acquisitions.
Accordingly, the pro forma financial results do not purport to be
indicative of our results of operations as of the date hereof or for
any period ended on the date hereof or for any other future date or
period.
Unaudited Pro Forma Financial Information (in thousands, except share
and per share amounts):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Revenues .................................... $ 36,603 $ 32,084
Net loss .................................... $ (27,524) $ (26,396)
============ ============
Basic and diluted loss per share (Note 3) ... $ (1.83) $ (1.85)
============ ============
Shares used to compute basic and diluted loss
per share (Note 3) ......................... 15,040,406 14,264,960
============ ============
</TABLE>
Basic and diluted pro forma loss per share was calculated based on our
outstanding common stock at March 31, 2000 and 1999, which reflects
814,794 and 440,914 shares of our common stock issued in connection
with the acquisition of RockPort and Image Info, respectively
3. EARNINGS (LOSS) PER SHARE
Basic EPS is calculated by dividing net earnings (loss) 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
March 31,
------------------------------
2000 1999
---------- ----------
<S> <C> <C>
Shares used to compute basic EPS 14,325,691 13,009,253
Add: effect of dilutive securities -- 728,458
---------- ----------
Shares used to compute diluted EPS 14,325,691 13,737,711
========== ==========
</TABLE>
Diluted loss per share for the three months ended March 31, 2000 and
diluted pro forma loss per share for the three months ended March 31,
2000 and 1999 (Note 2) were the same as basic loss per share because
the potential common shares outstanding during the period are
antidilutive.
4. TREASURY STOCK
Our Board of Directors has authorized the repurchase from time to
time of up to $10 million of our common stock in both open market
and block transactions. On May 4, 2000, our Board of Directors
increased the number of shares available for repurchase from time
to time by $5 million to a total of $15 million. Shares purchased
under this program will
8
<PAGE>
be held in the corporate treasury for future use including employee
stock option grants and the employee stock purchase plan. We may
discontinue purchases of our common stock at any time that management
determines additional purchases are not warranted. During the first
three months of 2000, we did not repurchase any shares of common stock.
5. COMMITMENTS AND CONTINGENCIES
We entered into a Business Partner Agreement with IBM for the purchase
of $250 million of network services over a three-year period commencing
January 1, 1998. The agreement includes specified annual minimum
purchases and a graduated adjustment charge if total purchases fall
below the total minimum amount. Effective July 1, 1999, this agreement
was modified and the termination date was extended by one year to
December 31, 2001. The minimum gross revenue commitment for the term of
the modified agreement was increased from $250 million to $335 million
in consideration of an increase in the application discounts.
In December 1999, we entered into two concurrent transactions with
CommPress, Inc. a.k.a. bTrade (bTrade), an unaffiliated company. In one
transaction, we licensed our Keystone catalog software to bTrade for
$3,000,000. The arrangement grants bTrade a non-exclusive,
non-transferable license to be used solely in certain industry
segments. The license has a term of one year and automatically renews
unless either party terminates the arrangement. In the other
transaction, bTrade licensed its bTrade messaging software to us for
$4,000,000 and a guaranteed minimum service fee of $5,000,000 over 3
years (the term of the arrangement). The arrangement grants a
non-transferable, non-exclusive license to the messaging software and
the ability to market and resell the related services to our customer
base. Due to the concurrent execution of the two contracts, they were
deemed to be non-monetary transactions. As the fair value of the
products and services exchanged and received could not be reasonably
determined, we recorded the transactions on a net basis and the
resulting net asset of $1,000,000 will be amortized to expense over
three years.
In March 2000, we agreed to modify our agreements with bTrade such that
the Keystone catalog license agreement was rescinded and the bTrade
messaging software license agreement was amended to reduce the license
fee from $4,000,000 to $1,000,000. The net effect of these
modifications was to reduce our accounts receivable from bTrade by
$3,000,000 and our accounts payable to bTrade by an equal amount. This
adjustment, which did not affect earnings, was recorded during the
three months ended March 31, 2000. In addition, the guaranteed minimum
service fee to bTrade discussed above was reduced to $1,000,000.
6. RELATED PARTY TRANSACTIONS
On November 30, 1999, we entered into a Common Stock Purchase Agreement
(the "Agreement") with our wholly owned subsidiary, Tradeweave, Peter
R. Johnson, Chairman of our Board of Directors, and Garth Saloner, a
member of our Board of Directors and Chairman of the Compensation
Committee of our Board of Directors. Under the terms of the Agreement,
during 1999, Tradeweave issued 380,000 shares of its common stock to
Peter R. Johnson for $380,000 in cash, 120,000 shares of its common
stock to Garth Saloner for $120,000 in cash, and an additional
4,499,950 shares of its common stock to us for $4,499,950 in cash.
During the three-month period ended March 31, 2000, Tradeweave issued
100,000 shares of its common stock to Peter R. Johnson for $100,000 in
cash and 182,750 shares of its common stock to various Tradeweave
employees for $182,750 in cash pursuant to exercises of Tradeweave
stock options. As of March 31, 2000, we owned 85.2% of the outstanding
common stock of Tradeweave.
7. SEGMENT INFORMATION
QRS services are marketed as a comprehensive suite of electronic
commerce offerings and are designed to function most powerfully in
unison. A new venture, Tradeweave, focusing on assisting retailers,
vendors and manufacturers in the disposition of surplus and markdown
apparel merchandise, commenced planning and developmental activities in
the latter half of 1999. Although the Tradeweave marketplace service
offering is integrated with other QRS products, Tradeweave was
established as a start-up and separate legal entity in order to
minimize the time to launch this service and management evaluates its
performance separately from the other QRS products. During 1999,
Tradeweave was in a development stage and its service offering was
launched in mid-January 2000.
9
<PAGE>
Accordingly, we classify our business interests into two reportable
segments: QRS Other Products and Tradeweave. We evaluate performance
and allocate resources based on revenues and operating earnings (loss),
which includes allocated corporate general and administrative costs and
income tax expense or benefit recorded to Tradeweave. Unallocated
assets include corporate cash and equivalents, the net book value of
corporate facilities and related information systems, deferred tax
amounts and other corporate long-lived assets.
As Tradeweave was established during the third quarter of 1999,
separate segment disclosure for QRS Other Products for the three months
ended March 31, 1999 is included on the face of the financial
statements and is not repeated here. Financial information for our
business segments for the three months ended March 31, 2000 is as
follows (in thousands):
<TABLE>
<CAPTION>
QRS
OTHER INTERCOMPANY
PRODUCTS TRADEWEAVE ELIMINATIONS TOTAL
-------- ---------- ------------- -----
<S> <C> <C> <C> <C>
Revenues $ 35,110 $ -- $ -- $ 35,110
Operating loss (22,581) (3,248) -- (25,829)
Total assets 268,962 6,257 (4,270)* 270,949
Depreciation and amortization 5,612 31 -- 5,643
Capital expenditures 2,766 632 -- 3,398
Capitalized product development
costs 672 1,294 -- 1,966
</TABLE>
- ----------
* The intercompany elimination is comprised of advances made to Tradeweave
and deferred tax liabilities.
10
<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. OUR 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, OUR DEPENDENCE
ON KEY RETAILERS, OUR ABILITY TO SUCCESSFULLY INTRODUCE NEW PRODUCTS AND
SERVICES, OUR DEPENDENCE ON THE AT&T/IBM GLOBAL NETWORK AND OTHER RISK
FACTORS SET FORTH IN OUR ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED
DECEMBER 31, 1999.
GENERAL
Our products and services are organized and managed as a single product
family, including eCommerce Services, such as messaging, service bureau,
outsourcing and connectivity; Content Services, consisting primarily of
the QRS Keystone catalog service; and Application Services, such as
price auditing (RDS), inventory management services (IMS), logistics
management services (LMS) and marketplace services (Tradeweave) that is
expected to generate revenue in 2000. We derive revenues from three
principal and related sources: fees for utilization of network services
including the transmission of standard business documents over a
network, monthly charges for accessing content services, and
subscription and usage fees for application services.
RESULTS OF OPERATIONS
Revenues increased by 20% to $35.1 million for the first quarter of
2000, from $29.3 million for the first quarter of 1999. This increase
was primarily attributable to revenues from our expanded product
offerings in content and applications services. There was an overall
increase in our customer base with higher usage of eCommerce and content
services. The number of retailers and vendors, including carriers,
increased from 8,119 as of March 31, 1999 to 9,024 as of March 31, 2000.
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. March is usually a seasonal peak month for eCommerce services but
we did not experience the anticipated seasonal peak in March 2000. There
was no revenue from the Tradeweave product line.
Cost of revenue consists primarily of the cost of purchasing network
services and the cost of our data center and technical customer support
services. Cost of revenue increased by 27% to $19.0 million for the
first quarter of 2000, from $15.0 million for the first quarter of 1999.
The increase was principally due to increases in our data center and
technical customer support services group reflecting growth in customers
and our expanded product offerings in content services and applications
services. Tradeweave customer and technical support services of $1.4
million were incurred as we prepared for the launch of the product in
April 2000. Purchased network services decreased, reflecting growth in
network services purchased under a long-term contract, discounted based
upon a multi-year volume commitment. The gross profit margin was 46% and
49% for the first quarter of 2000 and 1999, respectively.
Sales and marketing expenses consist primarily of personnel and related
costs of our sales and marketing organizations, as well as the costs of
various marketing programs. Sales and marketing expenses increased by
57% to $6.9 million for the first quarter of 2000, from $4.4 million for
the first quarter of 1999. This increase reflects our expansion of
retailer and vendor-specific coverage and growth in our Program Sales
and Enablement organization, the group responsible for rapidly enabling
trading partners for key hub customers as well as the sales
organizations to support our expanded product offerings in content and
application services. In addition, we incurred $901,000 of marketing
costs to launch the Tradeweave product.
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 $2.0 million each for the first quarters of 2000 and 1999.
We capitalized product development costs of $2.0 million (including $1.3
million for Tradeweave) and $500,000 in the first quarters of 2000 and
1999, respectively. The increase in capitalized product development
costs in 2000 reflects significantly higher research and development
activities for products that have reached technological feasibility.
11
<PAGE>
General and administrative expenses consist primarily of the personnel
and related costs of our finance and administrative organizations, as
well as professional fees and other costs. General and administrative
expenses increased by 84% to $4.6 million for the first quarter of 2000,
from $2.5 million for the first quarter of 1999. This increase was
primarily due to increased investments in infrastructure and increased
headcount to support a larger organization, and included $370,000 for
Tradeweave.
In connection with the acquisition of RockPort and the merger with Image
Info (discussed in Note 2 of Notes to Condensed Consolidated Financial
Statements), we expensed $24.9 million of in-process research and
development. These acquisitions also resulted in $147.0 million of
intangible assets, which are being amortized over estimated useful lives
of three to seven years.
Interest income consists primarily of interest earned on cash, cash
equivalents and investment securities. Interest income was $397,000 and
$564,000 for the first quarter of 2000 and 1999, respectively. Changes
in interest income reflect the level of average investment balances in
each period and a shift from taxable to non-taxable marketable
securities. On January 21, 2000, we utilized $5.0 million in cash to
acquire Image Info.
We recorded an income tax benefit of $916,000 for the first quarter of
2000, resulting from purchase accounting adjustments related to the
acquisitions of RockPort and Image Info, and recorded an income tax
expense of $2.2 million for the first quarter of 1999. Our income tax
rate for the first quarter of 1999 was 38%. Our income tax rate for the
first quarter of 2000 of 39% approximates the combined effective federal
and state income tax rates.
LIQUIDITY AND CAPITAL RESOURCES
Our working capital was $61.5 million at December 31, 1999 and $57.4
million at March 31, 2000. Cash, cash equivalents and marketable
securities decreased from $47.3 million at December 31, 1999 to $44.7
million at March 31, 2000. Total assets increased from $127.0 million at
December 31, 1999 to $270.9 million at March 31, 2000 and total
liabilities increased from $22.4 million at December 31, 1999 to $37.7
million at March 31, 2000.
The decrease of $2.6 million in cash, cash equivalents and marketable
securities from December 31, 1999 to March 31, 2000 resulted primarily
from the payment of $6.3 million for acquisitions and $5.4 million for
capital expenditures (including product development costs) offset by
cash flow from operations and proceeds from exercise of stock options
and sales of marketable securities.
Our Board of Directors has authorized the repurchase from time to time
of up to $10 million of our common stock in both open market and block
transactions. On May 4, 2000, our Board of Directors increased the
number of shares available for repurchase from time to time by $5
million to a total of $15 million. 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. We
may discontinue purchases of our common stock at any time that
management determines additional purchases are not warranted. We did not
repurchase any of our common stock during the first three months ended
March 31, 2000.
Management believes that the cash resources available at March 31, 2000
and cash anticipated to be generated from future operations will be
sufficient for us to meet our working capital needs, capital
expenditures and common stock repurchases for the next year. We have not
paid any cash dividends to date and do not intend to pay cash dividends
with respect to common stock in the foreseeable future.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
Our exposure to market risk associated with changes in interest rates
relates primarily to our investment portfolio of marketable securities.
We do not use derivative financial instruments in our investment
portfolio. The stated objectives of our investment guidelines are to
preserve principal, meet liquidity needs and deliver maximum yield
subject to the previous conditions. The guidelines limit maturity,
concentration, and eligible investments to high credit quality U.S.
issuers, such as the U.S. Treasuries and agencies of the U.S. Government,
and highly rated banks and corporations. Our marketable securities
profile includes only
12
<PAGE>
those securities with active secondary or resale markets to ensure
portfolio liquidity.
The table below presents principal amounts and related weighted average
interest rates due by date of maturity for our marketable securities. Our
guidelines do not permit investments with maturities in excess of 24
months. At March 31, 2000, the weighted average maturity and interest
rate of the marketable securities portfolio was 165 days.
<TABLE>
<CAPTION>
MATURITY FAIR VALUE AT
(Amounts in thousands) 2000 MARCH 31, 2000
---- --------------
<S> <C> <C>
U.S. Government Agencies $10,996 $10,858
Average interest rate 4.42% 4.42%
</TABLE>
FOREIGN CURRENCY RISK
We have no significant investments outside the United States and do not
have material foreign currency risk.
13
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On January 21, 2000 we issued 440,914 shares of our common
stock in connection with the acquisition of all the
outstanding capital stock of Image Info. On March 10, 2000, we
issued 814,794 shares of our common stock in connection with
the acquisition of substantially all of the assets of
RockPort. On April 26, 2000, we filed a registration statement
on Form S-3 with the Securities and Exchange Commission to
register for resale certain of the shares issued in connection
with the Image Info and RockPort transactions.
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
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<S> <C>
27.1 Financial Data Schedule
B. REPORTS ON FORM 8-K
We filed a Current Report on Form 8-K dated January 28, 2000
describing, pursuant to Item 2, an agreement to acquire all of
the issued and outstanding capital stock of Image Info. On
March 27, 2000, we filed an amendment to the Form 8-K dated
January 28, 2000, which included, pursuant to Item 7, the
financial statements of Image Info and pro forma information.
We filed a Current Report on Form 8-K dated March 24, 2000
describing, pursuant to Item 2, an agreement to acquire
substantially all of the assets of RockPort.
</TABLE>
14
<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
----------------------------------------------------
May 15, 2000 John S. Simon
Chief Executive Officer
\s\ Shawn M. O'Connor
----------------------------------------------------
May 15, 2000 Shawn M. O'Connor
President, Chief Operating Officer, Chief Financial
Officer and Secretary
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 33,811
<SECURITIES> 10,858
<RECEIVABLES> 27,818
<ALLOWANCES> 2,152
<INVENTORY> 0
<CURRENT-ASSETS> 80,078
<PP&E> 26,224
<DEPRECIATION> 9,781
<TOTAL-ASSETS> 270,949
<CURRENT-LIABILITIES> 22,704
<BONDS> 0
0
0
<COMMON> 240,029
<OTHER-SE> (7,097)
<TOTAL-LIABILITY-AND-EQUITY> 270,949
<SALES> 0
<TOTAL-REVENUES> 35,110
<CGS> 0
<TOTAL-COSTS> 19,031
<OTHER-EXPENSES> 41,908
<LOSS-PROVISION> 235
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (25,432)
<INCOME-TAX> (916)
<INCOME-CONTINUING> (24,321)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (24,321)
<EPS-BASIC> (1.70)
<EPS-DILUTED> (1.70)
</TABLE>
