<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
March 10, 2000
- -------------------------------------------------------------------------------
Date of Report (Date of earliest event reported)
QRS CORPORATION
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 0-21958 68-0102251
- -------------------------------------------------------------------------------
(State or other jurisdiction of (Commission File Number) (I.R.S. Employer
of incorporation) Identification No.)
1400 Marina Way South, Richmond, California 94804
- ------------------------------------------------------------------------------
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (510) 215-5000
NOT APPLICABLE
------------------------------------------------------------------------------
(Former name or former address, if changed since last report)
The Registrant hereby amends and restates its Report on Form 8-K filed with the
Securities and Exchange Commission on March 24, 2000, reporting the acquisition
by Registrant of substantially all the assets of RockPort Trade Systems, Inc., a
Massachusetts corporation, as set forth in the pages attached hereto:
1
<PAGE>
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On March 10, 2000, QRS Corporation ("QRS"), pursuant to an Agreement and Plan of
Merger (the "Reorganization Agreement"), dated February 29, 2000, between QRS
and RockPort Trade Systems, Inc., a Massachusetts corporation ("RockPort"),
acquired substantially all of the assets of RockPort. A copy of the
Reorganization Agreement has previously been filed with the Securities and
Exchange Commission and is hereby incorporated by reference.
Pursuant to the Reorganization Agreement, QRS acquired substantially all of the
assets of RockPort in return for QRS's payment to RockPort of 814,794 shares of
common stock of QRS and QRS's assumption of certain liabilities and obligations
of RockPort. The amount of such consideration was determined based upon
arm's-length negotiations between QRS and RockPort. This acquisition is being
accounted for as a purchase transaction.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
INDEX
<TABLE>
<S> <C> <C>
(a) Financial Statements of Business Acquired.....................................Exhibit 99.1
(b) Pro Forma Financial Information...............................................Exhibit 99.2
(c) Exhibits:
</TABLE>
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
<S> <C>
23.1 Consent of Ernst & Young LLP
23.2 Consent of PricewaterhouseCoopers LLP
99.1 Financial Statements of Business Acquired
99.2 Pro Forma Financial Information
</TABLE>
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
QRS CORPORATION
Date: May 23, 2000 /s/ Shawn O'Connor
----------------------
Shawn O'Connor
President, Chief Operating Officer, Interim Chief
Financial Officer and Secretary
2
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in QRS Corporation's
Registration Statements No. 33-66944, No. 33-67138, No. 33-74734, No.
33-94878, No. 333-66837, No. 333-78499, No. 333-81159 and No. 333-35220 on
Forms S-8; Post Effective Amendments No. 1 and No. 2 to Registration
Statements No. 33-66944, No. 33-67138, No. 33-74734 and No. 33-94878 on Forms
S-8; and Post Effective Amendment No. 1 to Registration Statement No.
333-81159 on Form S-8 and the use of our report dated March 17, 2000 with
respect to the financial statements of RockPort Trade Systems, Inc. included
in this Current Report on Form 8-K/A of QRS Corporation.
/s/ Ernst & Young LLP
Boston, Massachusetts
May 19, 2000
3
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements No. 33-66944, No. 33-67138, No. 33-74734, No. 33-94878, No.
333-66837, No. 333-78499, No. 333-81159 and No. 333-35220 on Forms S-8; Post
Effective Amendments No. 1 and No. 2 to Registration Statements No. 33-66944,
No. 33-67138, No. 33-74734 and No. 33-94878 on Forms S-8; and Post Effective
Amendment No. 1 to Registration Statement No. 333-81159 on Form S-8 of QRS
Corporation of our report dated April 26, 1999 relating to the financial
statements of RockPort Trade Systems, Inc., which appears in the Current
Report on Form 8-K/A of QRS Corporation dated May 23, 2000.
PricewaterhouseCoopers LLP
Boston, Massachusetts
May 23, 2000
4
<PAGE>
EXHIBIT 99.1 FINANCIAL STATEMENTS OF BUSINESS ACQUIRED
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Report of Independent Auditors ............................................................... 6
Historical Financial Statements of RockPort Trade Systems, Inc. as of and for the Year Ended
December 31, 1999:
Balance Sheet................................................................................. 7
Statement of Operations ...................................................................... 8
Statement of Changes in Shareholders' Equity................................................. 9
Statement of Cash Flows....................................................................... 10
Notes to Financial Statements................................................................. 11
Report of Independent Accountants ............................................................ 19
Historical Financial Statements of RockPort Trade Systems, Inc. as of and for the Year Ended
December 31, 1998:
Balance Sheet................................................................................. 20
Statement of Operations ...................................................................... 21
Statement of Changes in Stockholders' Equity................................................. 22
Statement of Cash Flows....................................................................... 23
Notes to Financial Statements................................................................. 24
</TABLE>
5
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
and Shareholders
RockPort Trade Systems, Inc.
We have audited the accompanying balance sheet of RockPort Trade Systems, Inc.
as of December 31, 1999, and the related statements of operations, changes in
shareholders' equity, and cash flows for the year ended December 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of RockPort Trade Systems, Inc. as
of December 31, 1999, and the results of its operations and its cash flows for
the year then ended in conformity with accounting principles generally accepted
in the United States.
/s/ Ernst & Young LLP
Boston, Massachusetts
March 17, 2000
6
<PAGE>
ROCKPORT TRADE SYSTEMS, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
1999
---------------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 830,441
Accounts receivable, less allowance for doubtful accounts
of $154,500 1,689,147
Unbilled receivables 555,969
Prepaid expenses and other current assets 73,947
---------------------
Total current assets 3,149,504
Property and equipment, net 184,451
Other assets 54,388
---------------------
Total assets $ 3,388,343
=====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 103,777
Accrued expenses 823,349
Deferred revenue 927,002
Current portion of capitalized lease obligation 4,784
--------------------
Total current liabilities 1,858,912
Capitalized lease obligation, excluding current portion 4,784
Shareholders' equity:
Series A convertible preferred stock, $0.01 par value; 536,790
shares authorized, 400,000 shares issued and outstanding
(liquidation preference of $5,000,000) 4,000
Common stock, $.001 par value; 13,210,000 shares authorized,
9,000,000 shares issued and 8,400,000 shares outstanding 3,000
Additional paid-in capital 4,971,000
Accumulated deficit (1,953,353)
Common stock in treasury, at cost, 600,000 shares (1,500,000)
---------------------
Total shareholders' equity 1,524,647
---------------------
Total liabilities and shareholders' equity $ 3,388,343
=====================
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
7
<PAGE>
ROCKPORT TRADE SYSTEMS, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1999
----------------------
<S> <C>
Revenue:
Licenses $ 3,148,917
Post-contract customer support 1,345,407
Services 2,222,169
----------------------
Total revenue 6,716,493
Costs of revenue:
Cost of licenses 188,453
Cost of post-contract customer support 932,929
Cost of services 1,417,292
----------------------
Total cost of revenue 2,538,674
----------------------
Gross profit 4,177,819
Operating expenses:
General and administrative 2,316,597
Sales and marketing 1,824,136
Research and development 1,414,951
----------------------
Total operating expenses 5,555,684
----------------------
Operating loss (1,377,865)
Interest income 101,154
Other income, net 132,857
----------------------
Net loss $ (1,143,854)
======================
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
ROCKPORT TRADE SYSTEMS, INC.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
SERIES A
CONVERTIBLE
PREFERRED STOCK COMMON STOCK TREASURY STOCK
-------------------- ---------------------- -----------------------
NUMBER NUMBER ADDITIONAL NUMBER TOTAL
OF PAR OF PAR PAID-IN ACCUMULATED OF SHAREHOLDERS'
SHARES VALUE SHARES VALUE CAPITAL DEFICIT SHARES AMOUNT EQUITY
--------- ---------- ---------- ----------- ------------ ------------- --------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at
January 1,
1999 400,000 $ 4,000 9,000,000 $ 3,000 $ 4,971,000 $ (809,449) 600,000 $(1,500,000) $ 2,668,501
Net loss -- -- -- -- -- (1,143,854) -- (1,143,854)
--------- ---------- ---------- ----------- ------------ ------------- --------- ------------ --------------
Balances at
December 31,
1999 400,000 $ 4,000 9,000,000 $ 3,000 $ 4,971,000 $(1,953,303) 600,000 $(1,500,000) $ 1,524,647
========= ========== ========== =========== ============ ============ ========= ============= ==============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
ROCKPORT TRADE SYSTEMS, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1999
---------------------
<S> <C>
OPERATING ACTIVITIES
Net loss $(1,143,854)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 136,010
Loss on disposal of property and equipment 1,409
Provision for allowance for doubtful accounts 116,500
Changes in operating assets and liabilities:
Accounts receivable 33,023
Unbilled revenue (513,169)
Income taxes refundable 413,036
Prepaid expenses and other current assets 69,457
Other long-term assets (1,216)
Accounts payable 34,497
Accrued expenses 131,450
Deferred revenue (228,544)
---------------------
Net cash used in operating activities (951,401)
INVESTING ACTIVITIES
Proceeds from sales of property and equipment 5,000
Purchases of property and equipment (58,021)
---------------------
Net cash used in investing activities (53,021)
FINANCING ACTIVITIES
Repayment of note payable (1,444)
---------------------
Net cash used in financing activities (1,444)
---------------------
Net decrease in cash and cash equivalents (1,005,866)
Cash and cash equivalents at beginning of year 1,836,307
---------------------
Cash and cash equivalents at end of year $ 830,441
=====================
Supplemental disclosures of noncash investing
and financing activities:
Equipment acquired under capital lease obligations $ 9,568
=====================
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
ROCKPORT TRADE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS
RockPort Trade Systems, Inc. a Massachusetts corporation (the Company or
RockPort) was incorporated in July 1993. The Company designs, develops, markets
and supports global supply chain management software to automate the sourcing,
purchasing, financial and logistics functions of organizations in a broad range
of industries. In addition, the Company provides consulting, training,
maintenance and post-contract customer support services to facilitate the
installation and use of its software.
On March 10, 2000, QRS Corporation (QRS), pursuant to an Agreement and Plan
of Merger (the Reorganization Agreement), dated February 29, 2000, between
QRS and RockPort acquired substantially all of the assets of RockPort in
return for QRS's payment to RockPort of 814,794 shares of common stock of QRS
and QRS's assumption of certain liabilities and obligations of RockPort. The
amount of such consideration was determined based upon arm's-length
negotiations between QRS and RockPort.
QRS has committed to provide sufficient support for a period of at least one
year to allow the Company to meet its financial obligations as they come due.
2. SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Revenue recognition from software license fees and from sales of software
products is recognized when persuasive evidence of an agreement exists, delivery
of the product has occurred, no significant Company obligations with regard to
implementation remain, the fee is fixed or determinable and collectibility is
probable.
Post-contract customer revenue is deferred and recognized on a straight-line
basis as service revenue over the life of the related agreement, which typically
is one year.
Services revenue is primarily comprised of revenue from consulting and education
services. Services revenue from consulting and education is billed on a time and
materials basis and is recognized as the services are performed.
Customer advances and billed amounts due from customers in excess of revenue
recognized are recorded as deferred revenue and recognized as the services are
delivered.
The Company adopted Statement of Position (SOP) No. 97-2, SOFTWARE REVENUE
RECOGNITION, and SOP 98-4, DEFERRAL OF THE EFFECTIVE DATE OF A PROVISION OF SOP
97-2, SOFTWARE REVENUE RECOGNITION, as of January 1, 1998. SOP 97-2 and SOP 98-4
provide guidance for recognizing revenue on software transactions and supersede
SOP 91-1.
In 1999, the Company adopted SOP 98-9, MODIFICATION OF SOP 97-2, SOFTWARE
REVENUE RECOGNITION, WITH RESPECT TO CERTAIN TRANSACTIONS. SOP 98-9 amends 98-4
to extend the period of deferral of the application of certain passages of 97-2
provided by SOP 98-4 through fiscal years beginning on or before March 15, 1999.
All other provisions of SOP 97-2 are effective for transactions entered into in
fiscal years beginning after March 15, 1999.
11
<PAGE>
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH EQUIVALENTS
The Company considers all highly liquid investment instruments purchased with an
original maturity of three months or less to be cash equivalents. Cash
equivalents principally consist of money market investments. The fair value of
these investments approximates cost.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and depreciated over their estimated
useful lives using the straight-line method. Repair and maintenance costs are
expensed as incurred.
LONG-LIVED ASSETS
Long-lived assets used in operations, primarily property and equipment, are
included in impairment evaluations when events or circumstances exist that
indicate the carrying amount of those assets may not be recoverable. If the
impairment evaluation indicates the affected asset is not recoverable, the
asset's carrying value would be reduced to fair value. No event has occurred
that would impair the value of long-lived assets recorded in the accompanying
financial statements.
CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
Financial instruments, which potentially expose the Company to concentrations of
credit risk, principally comprise cash and cash equivalents and accounts
receivable. The Company's cash and cash equivalents are deposited with various
domestic financial institutions. The Company's customers typically are large
corporations with strong credit ratings. The Company performs periodic credit
evaluations of its customers' financial condition and generally does not require
collateral. The Company maintains reserves for potential credit losses and such
losses, in the aggregate, have been within management's expectations.
For the year ended December 31, 1999, three customers accounted for
approximately 58% of accounts receivables and approximately 22.5%
of revenues.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Carrying amounts of financial instruments held by the Company, which include
cash equivalents, accounts receivable, unbilled receivables, accounts payable
and accrued expenses and deferred revenue, approximate fair value due to their
short duration.
12
<PAGE>
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CAPITALIZED SOFTWARE
Capitalization of software development costs pursuant to SFAS No. 86, ACCOUNTING
FOR THE COSTS OF COMPUTER SOFTWARE TO BE SOLD, LEASED OR OTHERWISE MARKETED,
begins upon the establishment of technological feasibility. Technological
feasibility is established upon the completion of a working model. The
establishment of technological feasibility and the ongoing assessment of
recoverability of capitalized software development costs require considerable
judgment by management with respect to certain external factors, including, but
not limited to, technological feasibility, anticipated future gross revenues,
estimated economic life, and changes in software and hardware technologies.
Costs incurred by the Company between completion of a working model and the
point at which the product is ready for general release have been insignificant.
Therefore, through December 31, 1999 all research and development costs have
been expensed as incurred.
STOCK-BASED COMPENSATION
The Company follows Accounting Principles Board Opinion 25, ACCOUNTING FOR STOCK
ISSUED TO EMPLOYEES (APB 25), and related interpretations in accounting for its
stock-based compensation plan. The Company has elected the disclosure-only
provisions of SFAS No. 123, ACCOUNTING AND DISCLOSURE OF STOCK-BASED
COMPENSATION. Under SFAS No. 123, the Company is required to disclose pro forma
net income (loss) as if compensation expense related to stock awards was
recognized based on fair value of the options.
INCOME TAXES
The Company provides for income taxes under SFAS No. 109, ACCOUNTING FOR INCOME
TAXES. Under SFAS No. 109, the liability method is used in accounting for income
taxes. Under this method, deferred tax assets and liabilities are determined
based on differences between financial reporting and tax bases of assets and
liabilities, and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.
USE OF ESTIMATES
The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
SEGMENT REPORTING
The Company applies SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE
AND RELATED INFORMATION. SFAS 131 establishes standards for the way that
public business enterprises report information about operating segments in
interim financial reports. The Company views its operations and manages its
business as one segment: the development and delivery of global supply chain
management solutions, which include software and related products and
services. Factors used to identify the Company's single operating segment
include the organizational structure of the Company and the financial
information available for evaluation by the chief operating decision maker in
making decisions about how to allocate resources and assess performance.
13
<PAGE>
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, as amended by SFAS 137, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES, which is required to be adopted in fiscal years beginning after June
15, 2000. Management does not anticipate that the adoption of SFAS No. 133 will
have a significant effect on the Company's results of operations or financial
position.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin (SAB) No. 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS. The SAB
formalizes positions the staff has expressed in speeches and comment letters.
SAB 101 is effective no later than the second fiscal quarter of the fiscal year
beginning after December 15, 1999. The Company is presently analyzing the
effect, if any, that the adherence to the SAB will have on its financial
condition or results of operations.
In March 2000, the FASB issued FASB Interpretation No. 44, ACCOUNTING FOR
CERTAIN TRANSACTIONS INVOLVING STOCK COMPENSATION (FASBI No. 44), which provides
further clarification and addresses practical issues related to APB No. 25.
Among other issues, FASBI No. 44 clarifies (a) the definition of employee for
purposes of applying Opinion 25, (b) the criteria for determining whether a plan
qualifies as a noncompensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination.
FASBI No. 44 is effective July 1, 2000, but covers certain events that occurred
after either December 15, 1998, or January 12, 2000. To the extent that FASBI
No. 44 covers events occurring during the period after December 15, 1998, or
January 12, 2000, but before the effective date of July 1, 2000, the effects of
applying FASBI No. 44 are recognizable on a prospective basis from July 1, 2000.
The Company is presently analyzing the effect, if any, that the adherence to
FASBI No. 44 will have on its financial condition and results of operations.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31, 1999:
<TABLE>
<CAPTION>
ESTIMATED USEFUL
LIFE
----------------
<S> <C> <C>
Computer equipment 3 years $ 342,024
Computer software 3 years 78,489
Furniture, fixtures and equipment 5 years 141,638
Leasehold improvements Lease term or
remaining useful
life, if shorter 23,388
-----------------
585,539
Less accumulated depreciation and amortization 401,088
-----------------
$ 184,451
=================
</TABLE>
Gross property under capital leases was $9,568 and is included in property and
equipment.
14
<PAGE>
4. ACCRUED EXPENSES
Accrued expenses include the following at December 31, 1999:
<TABLE>
<S> <C>
Consulting $ 234,360
Salary and fringe benefits 392,364
Commission 126,375
Professional fees 20,000
Bonus 10,000
Other 40,000
-----------------
$ 823,349
=================
</TABLE>
5. INCOME TAXES
The provision for income taxes differs from that computed based upon application
of the statutory federal rate to income before income taxes due primarily to the
effect of state income taxes and differences between the book and tax bases of
certain assets and reserves.
The Company has deferred tax assets and liabilities comprised of the following
as of December 31, 1999:
<TABLE>
<S> <C>
Accrued employee costs $ 86,000
Allowances currently deductible 79,000
Tax credit carryforwards 258,000
Net operating loss carryforwards 789,000
---------------------
Net deferred tax assets 1,212,000
Deferred tax asset valuation allowance (1,212,000)
=====================
$ -
=====================
</TABLE>
The provision (benefit) for income taxes for the year ended December 31, 1999
consists of the following:
<TABLE>
<S> <C>
Current:
Federal $ -
State -
---------------------
-
Deferred:
Federal (511,394)
State (202,989)
---------------------
(714,383)
Valuation allowance 714,383
=====================
$ -
=====================
</TABLE>
The valuation allowance for deferred allowance for deferred tax assets
increased by approximately $714,000 during the year ended December 31, 1999,
due primarily to the additional allowance for net operating losses incurred.
15
<PAGE>
5. INCOME TAXES (CONTINUED)
At December 31, 1999, the Company has federal and state net operating loss
carryforwards of approximately $1,700,000 and $3,100,000, respectively.
Additionally, the Company has federal research and development credit
carryforwards of $258,000 at December 31, 1999. If not utilized, these
carryforwards will expire at various dates through 2019. Under the provisions of
the Internal Revenue Code, certain substantial changes in the Company's
ownership (see Note 1) may have limited, or may limit in the future, the amount
of net operating loss and research and development tax credit carryforwards
which could be used annually to offset future taxable income and income tax
liability.
The Company has provided a full valuation allowance for the net deferred tax
assets as the realization of these future benefits is not sufficiently assured
as of December 31, 1999. If the Company achieves profitability, the deferred tax
assets will be available to offset future income tax liabilities.
6. PREFERRED STOCK
In connection with the Series A offering, the Company granted warrants to
purchase up to 136,790 shares of the Series A preferred stock at an exercise
price of $21.93. The warrants expire in February 2001.
Holders of Series A preferred stock are entitled to the number of votes equal to
the number of shares of common stock into which such holder's shares are
convertible.
The holders of Series A are entitled to receive dividends, upon the declaration
of a cash dividend to the holders of common stock, when and if declared. The
holders of the Series A preferred stock shall be entitled to receive cash
dividends on a pro rata basis to be determined as if the Series A convertible
preferred stock was converted to common stock. Such dividends shall not be
cumulative.
In the event of any liquidation, dissolution, or winding up of the affairs of
the Company, the holders of Series A are entitled to receive, prior and in
preference to the holders of common stock an amount equal to (a) $12.50 per
share for the Series A preferred stock purchased under the February 1998
agreement and (b) $21.93 per share for the Series A preferred stock purchased
under the warrant agreement, plus any accrued and unpaid dividends.
The Series A preferred stock was initially convertible, at the option of the
holder, into common stock of the Company based upon a formula, which resulted in
a 5-for-1 exchange. However, as the Company did not meet certain revenue targets
in 1998, the conversion ratio was divided by 75% resulting in a current
6.67-for-1 exchange. The Series A preferred stock will convert automatically
into common stock upon closing of an initial public offering in which the net
proceeds equal or exceed $25,000,000.
7. COMMON STOCK
On April 28, 1999, the Company's stockholders approved a 5-for-1 stock split of
the Company's common stock. The financial statements have been restated to
present the split as of the beginning of 1999.
The Company has reserved 4,580,380 shares of common stock for the conversion of
the Series A convertible preferred stock, the exercise (and subsequent
conversion into common stock) of the Series A preferred stock warrants and the
exercise of common stock options. Of the common stock issued, 600,000 shares
were held by the Company as treasury shares.
Holders of common stock are entitled to one vote per share. The outstanding
shares of common stock are restricted as to transferability by an agreement
among the stockholders. This agreement entitles the Company and its stockholders
the right of first refusal to purchase any shares of the Company's common stock
when offered for sale by any stockholder or in the event of a stockholder's
death or disability.
16
<PAGE>
8. STOCK OPTIONS
The Company maintains the RockPort Trade Systems, Inc. Stock Option Plan (the
"Plan"), which provides for the granting of non-qualified and incentive stock
options, as applicable, to employees, officers and consultants of the
Company. The total number of shares of common stock that may be issued under
the Plan is 1,375,000. Options are exercisable at various exercise prices as
determined by the Board of Directors and typically vest ratably over three
years. The exercise price of incentive stock options shall not be less than
the fair value per common share on the date of grant (not less than 110% of
the fair value in the case of holders of more than 10% of the value or voting
power of the Company's voting stock). Non-qualified stock options may be
granted to employees and non-employees at an exercise price determined by the
Board of Directors that may be less than fair market value but not less than
the par value of the underlying common stock. No options have been exercised
under the Plan as of December 31, 1999.
The following table summarizes the stock option activity under the Plan:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
SHARES EXERCISE PRICE
----------------- ----------------
<S> <C> <C>
Outstanding at December 31, 1998 956,750 $0.44
Granted 427,900 0.80
Canceled (385,650) 1.30
----------------- ----------------
Outstanding at December 31, 1999 999,000 $0.44
================= ================
Options Exercisable at December 31, 1999 496,883
=================
Options Available for Future Grant 376,000
=================
</TABLE>
The weighted-average exercise price of options exercisable at December 31, 1999
was $0.16. The weighted-average fair value of options granted during 1999 was
$0.80.
The following table summarizes information about stock options outstanding at
December 31, 1999:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
REMAINING
NUMBER CONTRACTUAL NUMBER
EXERCISE PRICE OUTSTANDING LIFE (YEARS) EXERCISABLE
------------------------ -------------------- ---------------- ----------------
<S> <C> <C> <C>
$ 0.01 400,000 6.47 400,000
0.20 38,250 6.92 -
0.80 560,750 9.17 96,883
-------------------- ----------------
999,000 496,883
==================== ================
</TABLE>
No compensation expense was recognized under the Plan for employee option grants
during 1999. Had compensation cost been determined based on the fair value of
the options at the grant date pursuant to the provisions of SFAS No. 123, the
Company's net loss would have been $1,215,621. Since options vest
over several years and additional option grants are expected to be made in
future years, pro forma net loss could be materially affected in future periods
by the application of SFAS No. 123.
The fair value of each option grant is estimated on the date of grant using the
minimum value method option-pricing model with the following assumptions for
grants in 1999: no dividend yield; risk free interest rate of 5.04%; and
expected life of 4.5 years.
17
<PAGE>
8. STOCK OPTIONS (CONTINUED)
During March 1997, the Company entered into an agreement with a significant
customer entitling such customer to a worldwide nonexclusive license for use of
the Company's software. In connection with the agreement, the Company granted
the customer an option to purchase 25% of the Company's common stock in the
event that the Company notifies the customer that the Company intends to proceed
with an initial public offering of its common stock. The purchase price will be
mutually determined by the parties when the option becomes exercisable. The
value ascribed to the option by management was not significant.
9. LEASES
The Company leases its office space under a cancelable operating lease. The
Company also leases certain computer and office equipment under operating and
capital leases that expire through 2000. Future minimum lease payments under
leases at December 31, 1999 were as follows:
<TABLE>
<CAPTION>
CAPITALIZED LEASE
YEAR ENDING DECEMBER 31 OBLIGATION OPERATING LEASES
-----------------------------------------
<S> <C> <C>
2000 $ 5,478 $ 197,828
2001 5,478 191,928
2002 - 95,964
-----------------------------------------
Total minimum lease payments 10,956 $485,620
=====================
Less amounts representing interest 1,388
--------------------
Present value of minimum lease payments 9,568
Less current lease portion 4,784
--------------------
Present value of minimum lease payments less current portion $ 4,784
====================
</TABLE>
Rent expense under these leases was approximately $288,800 for the year ended
December 31, 1999.
10. EMPLOYEE BENEFIT PLAN
The Company maintains a 401(k) profit sharing plan (the "401(k) Plan") under
Section 401(k) of the Internal Revenue Code. The 401(k) Plan is available to all
full-time employees and allows employees to make contributions up to a specified
percentage of their compensation. Under the 401(k) Plan, the Company makes
discretionary matching contributions equal to 50% of the employees'
contributions up to a maximum of 6% of employees' annual salaries. The Company
contributed and expensed approximately $79,700 to the 401(k) Plan during the
year ended December 31, 1999.
18
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
April 26, 1999
To the Board of Directors and Stockholders
of RockPort Trade Systems, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of RockPort Trade Systems, Inc. at
December 31, 1998, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management:
our responsibility is to express an opinion on these financial statements based
on our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
19
<PAGE>
ROCKPORT TRADE SYSTEMS, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
1998
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,836,307
Accounts receivable, less allowance for doubtful accounts
of $32,000 at December 31, 1998 1,881,470
Income taxes refundable 413,036
Prepaid expenses and other current assets 143,404
---------------------
Total current assets 4,274,217
Property and equipment, net 259,281
Other assets 53,172
---------------------
Total assets $ 4,586,670
=====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 69,280
Accrued expenses 693,343
Deferred revenue 1,155,546
---------------------
Total current liabilities 1,918,169
Commitments (Note 10) -
Stockholders' Equity:
Series A convertible preferred stock, $0.01 par value; 536,790
shares authorized, 400,000 shares issued and outstanding
(liquidation preference of $5,000,000) 4,000
Common stock, $.001 par value; 13,210,000 shares
authorized, 9,000,000 shares issued and 8,400,000 shares 3,000
outstanding
Additional paid-in capital 4,971,000
Accumulated deficit (809,499)
Common stock in treasury, at cost, 600,000 shares (1,500,000)
---------------------
Total stockholders' equity 2,668,501
---------------------
Total liabilities and stockholders' equity $ 4,586,670
=====================
</TABLE>
The accompanying notes are an integral part of these financial statements
20
<PAGE>
ROCKPORT TRADE SYSTEMS, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1998
----------------------
<S> <C>
Revenue:
Product revenue $ 1,971,757
Service revenue 1,583,127
----------------------
Total revenue 3,554,884
Cost of revenue:
Cost of product revenue 343,085
Cost of service revenue 1,247,333
Research and development 1,273,063
Selling, general and administrative 2,793,891
----------------------
Total operating costs and expenses 5,657,372
----------------------
Loss from operations (2,102,488)
Interest income, net 133,921
----------------------
Net loss before benefit from income taxes (1,968,567)
Benefit from income taxes 318,753
----------------------
Net loss $ (1,649,814)
======================
</TABLE>
The accompanying notes are an integral part of these financial statements.
21
<PAGE>
ROCKPORT TRADE SYSTEMS, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
SERIES A
CONVERTIBLE
PREFERRED STOCK COMMON STOCK TREASURY STOCK
-------------------- ---------------------- -----------------------
RETAINED
NUMBER NUMBER ADDITIONAL EARNINGS NUMBER TOTAL
OF PAR OF PAID-IN (ACCUMULATED OF STOCKHOLDERS'
SHARES VALUE SHARES AMOUNT CAPITAL DEFICIT) SHARES AMOUNT EQUITY
--------- ---------- ----------- ---------- ----------- -------------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at
December 31, 1997 - $ -- 9,000,000 $ 3,000 $ -- $ 840,315 -- $ -- $ 843,315
Issuance of Series A
convertible
preferred stock
and warrants, net
of issuance costs 280,000 2,800 -- -- 3,742,200 -- 3,475,000
of $25,000
Purchase of
common stock
held in treasury 120,000 1,200 -- -- 1,498,800 -- 600,000 (1,500,000) --
Net loss -- -- -- -- -- (1,649,814) -- -- (1,649,814)
--------- ---------- ----------- ---------- ----------- -------------- --------- ------------- -------------
Balances at
December 31, 1998 400,000 $ 4,000 9,000,000 $ 3,000 $4,971,000 $ (809,499) 600,000 $(1,500,000) $ 2,668,501
========= ========== =========== ========== =========== ============== ========= ============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
22
<PAGE>
ROCKPORT TRADE SYSTEMS, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1998
---------------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,649,814)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 130,057
Deferred income taxes 107,141
Changes in operating assets and liabilities:
Accounts receivable (261,571)
Income taxes refundable (413,036)
Prepaid expenses and other current assets (61,570)
Other assets (16,948)
Accounts payable 10,925
Accrued expenses (471,142)
Deferred revenue 204,327
---------------------
Net cash used in operating activities (2,421,631)
---------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (127,255)
---------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of note payable (45,833)
Proceeds from issuance of Series A convertible preferred stock and
warrants, net of issuance costs 3,475,000
---------------------
Net cash provided by financing activities 3,429,167
---------------------
Net increase in cash and cash equivalents 880,281
Cash and cash equivalents at beginning of year 956,026
---------------------
Cash and cash equivalents at end of year $ 1,836,307
=====================
Supplemental disclosures of cash flow information:
Cash paid for taxes $ 738,500
=====================
Repurchase of 600,000 shares of common stock in exchange for
issuance of 120,000 shares of Series A convertible preferred
stock $ 1,500,000
=====================
</TABLE>
The accompanying notes are an integral part of these financial statements.
23
<PAGE>
ROCKPORT TRADE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND ORGANIZATION
RockPort Trade Systems, Inc. (the Company) was incorporated in July 1993.
The Company designs, develops, markets and supports global supply chain
management software to automate the sourcing, purchasing, financial and
logistics functions of organizations in a broad range of industries. In
addition, the Company provides consulting, training, maintenance and support
services to facilitate the installation and use of its software.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Revenue from software license fees is recognized at the time of deliver of
the product to the customer, provided that the Company has no remaining
service obligations, collectibility is considered probable and fees are
fixed and determinable.
Revenue from contracts for significant production, modification, or
customization of the software is recognized based on the ratio that total
costs incurred to date bear to total estimated costs at completion. These
contracts are assessed for losses and such losses are provided for in total
in the period in which the losses become known. Although management believes
that its estimates of progress toward completion, contract revenue and
contract costs are appropriate, it is reasonably possible that changes could
occur in the near term which could materially affect management's estimates
of such amounts.
Service revenue from maintenance fees are deferred and recognized ratably
over the service period, which is typically twelve months. Other service
revenue from training, installation and consulting is recognized as the
related services are performed.
Payments received by the Company in advance of product delivery of
performance of services are deferred until earned.
CASH EQUIVALENTS
The Company considers all highly liquid investment instruments purchased
with an original maturity of three months or less to be cash equivalents.
The Company invests its excess cash primarily in money market funds of major
financial institutions. These investments are subject to minimal credit and
market risk.
Cash equivalents are classified as available-for-sale and are stated at cost
plus accrued interest, which approximates fair market value. Included in
cash equivalents at December 31, 1998 are investments of approximately
$1,736,000.
RESTRICTED CASH
Restricted cash represents time deposits held at a major financial
institution as collateral on the Company's note payable agreement. During
1998, the note payable was repaid in full.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and depreciated over their
estimated useful lives using the straight-line method. Repair and
maintenance costs are expensed as incurred.
LONG-LIVED ASSETS
Long-lived assets used in operations, primarily property and equipment, are
included in impairment evaluations when events or circumstances exist
that indicate the carrying amount of those assets may not be recoverable.
If the impairment evaluation indicates the affected asset is not
recoverable, the asset's carrying value would be reduced to fair value.
No event has occurred that would impair the value of long-lived assets
recorded in the accompanying financial statements.
24
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
Financial instruments, which potentially expose the Company to
concentrations of credit risk, include accounts receivable. This risk is
reduced by the fact that the Company's customers are typically large
corporations with strong credit ratings. In addition, the Company maintains
reserves for potential credit losses and such losses, in aggregate, have not
exceeded management expectations.
At December 31, 1998, accounts receivable from three customers accounted for
approximately 12%, 13% and 42%, respectively, of total accounts receivable.
For the year ended December 31, 1998, revenue from two customers represented
12% and 14%, respectively, of total revenue.
RESEARCH AND DEVELOPMENT AND CAPITALIZED SOFTWARE DEVELOPMENT COSTS
Research and development costs are expensed as incurred. Development costs,
which are directly related to performance under customer contracts are
included as a component of cost of revenue. Costs associated with the
development of computer software are expensed prior to establishing
technological feasibility, as defined by Statement of Financial Accounting
Standards ("SFAS") No. 86, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE TO
BE SOLD, LEASED OR OTHERWISE MARKETED, and capitalized thereafter until
commercial release of the software product. Software development costs
eligible for capitalization have not been significant to date.
ACCOUNTING FOR STOCK-BASED COMPENSATION
Stock options issued to employees under the Company's stock option plan are
accounted for in accordance with Accounting Principles Board Opinion ("APB")
No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related
interpretations. The Company adopted SFAS No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION in 1996 through disclosure only.
INCOME TAXES
The Company provides for income taxes under SFAS No. 109, ACCOUNTING FOR
INCOME TAXES. Under SFAS No. 109, the liability method is used in
accounting for income taxes. Under this method, deferred tax assets and
liabilities are determined based on differences between financial
reporting and tax bases of assets and liabilities, and are measured using
the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles 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 date of the financial
statements and the reported amounts of revenue and expense during the
reporting period. Actual results could differ from those estimates. Amounts
particularly subject to estimation include the allowance for doubtful
accounts and revenue.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIFE DECEMBER 31, 1998
<S> <C> <C>
Computer equipment 3 years $276,721
Computer software 3 years 72,419
Furniture, fixtures and equipment 5 years 152,948
Leasehold improvements Lease term 23,388
----------------------
525,476
Less accumulated depreciation 266,195
----------------------
$259,281
======================
</TABLE>
25
<PAGE>
4. ACCRUED EXPENSES
Accrued expenses consist of the following at December 31, 1998:
Consulting $170,034
Salary and fringe benefits 200,113
Commission 47,198
Professional fees 25,960
Bonus 135,186
Other 114,852
--------
$693,343
========
5. NOTE PAYABLE
In September 1997, the Company entered into a demand note payable agreement (the
"Agreement") for $50,000 with a bank. The Company was required to maintain
certificates of deposit with the bank, restricted as to use, equal to the amount
outstanding under the Agreement. The note was payable in 36 equal monthly
installments plus interest at 2% above the interest being paid on the underlying
collateral (6.25% at December 31, 1997) beginning October 1997. The note payable
balance was repaid in full during March 1998.
6. CONVERTIBLE PREFERRED STOCK
In February 1998, the Company authorized 536,790 shares of preferred stock and
designated 400,000 preferred shares as Series A convertible participating
preferred stock (the "Series A preferred stock"). The Company sold 280,000
shares of Series A preferred stock for net proceeds of $3,475,000. Additionally,
the investors purchased 600,000 shares of the Company's common stock for
$1,500,000 from the founders, which were exchanged with the Company into
treasury for 120,000 shares of the Series A preferred stock. In connection with
the Series A offering, the Company granted warrants to purchase up to 136,790
shares of the Series A preferred stock at an exercise price of $21.93. The
warrants expire in February 2001.
The Series A preferred stock has the following characteristics:
VOTING
Holders of Series A preferred stock are entitled to the number of votes equal to
the number of shares of common stock into which such holders' shares are
convertible.
DIVIDENDS
The holders of Series A are entitled to receive dividends, upon the declaration
of a cash dividend to the holders of common stock, when and if declared. The
holders of the Series A preferred stock shall be entitled to receive cash
dividends on a pro rata basis to be determined as if the Series A convertible
preferred stock was converted to common stock. Such dividends shall not be
cumulative.
LIQUIDATION PREFERENCE
In the event of any liquidation, dissolution, or winding up of the affairs of
the Company, the holders of series A are entitled to receive, prior and in
preference to the holders of common stock an amount equal to (a) $12.50 per
share for the Series A preferred stock purchased under the February 1998
agreement and (b) $21.93 per share for the Series A preferred stock purchased
under the warrant agreement, plus any accrued and unpaid dividends.
CONVERSION
The Series A preferred stock was initially convertible, at the option of the
holder, into common stock of the Company based upon a formula, which resulted in
a 5-for-1 exchange. However, as the Company did not meet certain revenue targets
in 1998, the conversion ratio was divided by 75% resulting in a current
6.67-for-1 exchange. The Series A preferred stock will convert automatically
into common stock upon closing of an initial public offering in which the net
proceeds equal or exceed $25,000,000.
26
<PAGE>
7. COMMON STOCK
On April 28, 1999, the Company's stockholders approved a 5-for-1 stock split of
the Company's common stock. The financial statements have been adjusted to give
retroactive effect to the stock splits for all periods presented.
In February 1998, the Company increased the number of authorized shares of
common stock from 10,000,000 to 12,083,950 and again in April 1999 to 13,210,000
shares. The Company has reserved 4,580,380 shares of common stock for the
conversion of the Series A convertible preferred stock, the exercise (and
subsequent conversion into common stock) of the Series A preferred stock
warrants and the exercise of common stock options. Of the common stock issued,
600,000 shares were held by the Company as treasury shares at December 31, 1998.
VOTING RIGHTS AND STOCKHOLDER AGREEMENT
Holders of common stock are entitled to one vote per share. The outstanding
shares of common stock are restricted as to transferability by an agreement
among the stockholders. This agreement entitles the Company and its stockholders
the right of first refusal to purchase any shares of the Company's common stock
when offered for sale by any stockholder or in the event of a stockholder's
death or disability.
STOCK PURCHASE OPTION
During March 1997, the Company entered into an arrangement with a significant
customer entitling such customer to a worldwide nonexclusive license for use of
the Company's software, and the right to remarket and distribute the Company's
software to certain customers. Additionally, the Company granted the customer an
option to purchase 25% of the Company's common stock in the event that the
Company notifies the customer that the Company intends to proceed with an
initial public offering of its common stock. The purchase price will be mutually
determined by the parties when the option becomes exercisable. The value of
ascribed to the option by management was not significant. Total product license
and software development fees of $295,053 related to the agreement was
recognized as product revenue by the Company during 1998.
8. STOCK OPTION PLAN
During July 1996, the Company adopted the RockPort Trade Systems, Inc. Stock
Option Plan (the "Plan"), which provides for the granting of both
non-qualified and incentive stock options to employees, officers and
consultants of the Company. The total number of shares of common stock that
may be issued under the Plan is 1,000,000. Both non-qualified and incentive
stock options are exercisable at various dates, as determined by the Board of
Directors, within ten years of the date of the grant (generally vested
in-full on the third anniversary of the grant date). The exercise price per
share is determined by the Board of Director, and in the case of incentive
stock options such price shall not be less than the fair value per common
share on the date of grant (not less than 110% of fair value in the case of
holders of more 10% of the Company's voting stock). Non-qualified stock
options may be granted to employees at an exercise determined by the Board of
Directors, which may be less than fair market value but not less than the par
value of the underlying common stock. At December 31, 1998, the Company has
reserved 1,000,000 shares of common stock for issuance under the Plan.
27
<PAGE>
8. STOCK OPTION PLAN (CONTINUED)
Activity for the year ended December 31, 1998 was as follows:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
SHARES EXERCISE PRICE
----------------------------------
<S> <C> <C>
Outstanding at beginning of year 595,500 $ 0.24
Granted 870,250 1.08
Exercised - -
Canceled 509,000 1.30
----------------------------------
Outstanding at end of year 956,750 $ 0.44
==================================
Options exercisable at end of year 34,200
=================
Weighted-average fair value of options
granted during the year $ 0.24
=================
Options available for future grant 43,250
=================
</TABLE>
During 1998, the Company's Board of Directors determined that, because certain
stock options held by employees of the Company had an exercise price
significantly higher than the fair value of the Company's common stock, such
stock options were not providing the incentive intended. Accordingly, 99,000
options to purchase shares of the Company's common stock at exercise prices
ranging from $1.20 to $2.50 were canceled and reissued at a price of $0.80 per
share. The exercise price of the repriced options equaled the fair market value
of the Company's common stock on the date of repricing.
The following table summarizes information about stock options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
REMAINING
NUMBER CONTRACTUAL NUMBER
EXERCISE PRICE OUTSTANDING LIFE (YEARS) EXERCISABLE
------------------------ -------------------- ---------------- ----------------
<S> <C> <C> <C>
$ 0.01 400,000 7.56 -
0.20 44,500 8.02 -
0.80 512,250 9.90 34,200
-------------------- ----------------
956,750 34,200
==================== ================
</TABLE>
The Company applies APB No. 25 and related interpretations in accounting for the
Plan. No compensation expense was recognized under the Plan for employee option
grants during 1998. Had compensation cost been determined based on the fair
value of the options at the grant date consistent with the provisions of SFAS
No. 123, the Company's net income would not have been materially different.
Since options vest over several years and additional option grants are expected
to be made in future years, pro forma net income could be materially effected in
future periods by the application of SFAS No. 123.
The fair value of each option grant is estimated on the date of grant using the
minimum value method option-pricing model with the following assumptions for
grants in 1998: no dividend yield: risk free interest rate of 5.0%: and expected
lives of 5 years.
28
<PAGE>
9. EMPLOYEE BENEFIT PLAN
During 1996, the Company formed a 401(k) profit sharing plan (the "401(k) Plan")
under Section 401(k) of the Internal Revenue Code. The 401(k) Plan is available
to all full-time employees and allows employees to make contributions up to a
specified percentage of their compensation. Under the 401(k) Plan, the Company
makes discretionary matching contributions equal to 50% of the employees'
contributions up to a maximum of 6% of employees' annual salaries. The Company
contributed approximately $62,500 to the 401(k) Plan during the year ended
December 31, 1998.
10. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1998
---------------------
<S> <C>
CURRENT:
Federal $(425,894)
State -
---------------------
(425,894)
Deferred
Federal (266,095)
State (124,381)
---------------------
(390,476)
Valuation allowance 497,617
---------------------
$(318,753)
=====================
</TABLE>
The provision for income taxes differs from that computed based upon
application of the statutory federal rate to income before income taxes due
primarily to the effect of state income taxes and differences between the
book and tax bases of certain assets and reserves.
The Company has deferred tax assets and liabilities comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1998
---------------------
<S> <C>
Accrued employee costs $ 106,398
Reserves not currently deductible 45,808
Tax credit carryforwards 142,306
Net operating loss carryforwards 190,131
Other, net 13,244
---------------------
Net deferred tax assets 497,617
Deferred tax asset valuation allowance (497,617)
---------------------
$ -
=====================
</TABLE>
At December 31, 1998, the Company has federal and state net operating loss
carryforwards of approximately $221,000 and $1,761,000, respectively.
Additionally, the Company has federal research and development credit
carryforwards of $109,000 at December 31, 1998. If not utilized, these
carryforwards will expire at various dates through 2018. Under the provisions of
the Internal Revenue Code, certain substantial changes in the Company's
ownership may have limited, or may limit in the future, the amount of net
operating loss and research and development tax credit carryforwards which could
be used annually to offset future taxable income and income tax liability.
29
<PAGE>
10. INCOME TAXES (CONTINUED)
The Company has provided a full valuation allowance for the net deferred tax
assets as the realization of these future benefits is not sufficiently assured
as of December 31, 1998. If the Company achieves profitability, the deferred tax
assets will be available to offset future income tax liabilities.
11. COMMITMENTS
The Company leases its office space under a cancelable lease. The Company also
leases certain computer and office equipment under operating leases, which
expire through 2000. Future minimum lease payments under leases at December 31,
1998 were as follows:
<TABLE>
<CAPTION>
OPERATING
LEASES
---------------------
<S> <C>
1999 $ 224,635
2000 190,466
---------------------
Total minimum lease payments $ 415,101
=====================
</TABLE>
Rent expense under these leases was approximately $184,000 for the year ended
December 31, 1998.
30
<PAGE>
EXHIBIT 99.2 PRO FORMA FINANCIAL INFORMATION
On March 10, 2000, the Company 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 the
Company's 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. The Company 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 the Company's common stock. As a result, the
Company 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
the Company's common stock underlying the stock options assumed as of
the acquisition date. The acquisition cost 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 acquisition was accounted for under the purchase method of
accounting, which requires the purchase price to be allocated to the
acquired assets and liabilities assumed of RockPort on the basis of
their estimated fair values as of the date of acquisition. The
following unaudited pro forma condensed consolidated balance sheet
gives effect to the acquisition of RockPort as if it had occurred on
December 31, 1999, and the unaudited pro forma condensed consolidated
statements of earnings (collectively, the "Unaudited Pro Forma
Financial Information") reflects the results of operations of the
Company for the fiscal year ended December 31, 1999, as if the
acquisition of RockPort had occurred on January 1, 1999 (the first day
of fiscal 1999) and includes 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.
The Unaudited Pro Forma Financial Information and related notes are
provided for informational purposes only and are not necessarily
indicative of what the Company's actual financial position or results
of operations would have been had the forgoing transaction been
consummated on such dates, nor does it give effect to the synergies,
cost savings and other charges expected to result from the acquisition.
Accordingly, the pro forma financial information does not purport to be
indicative of the Company's financial position or results of operations
as of the date hereof or for any period ended on the date hereof or as
of or for any other future date or period.
The following unaudited pro forma financial information is based in
part on the historical consolidated financial statements of the
Company, and the related notes thereto, which are included in the
Company's Annual Report on Form 10-K for the year ended December 31,
1999; and the historical financial statements of RockPort, and the
related notes thereto, for the year ended December 31, 1999, included
elsewhere in this Current Report on Form 8-K/A.
This Current Report on Form 8-K/A contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934 and other risks
detailed in the Company's Annual Report on Form 10-K for the year ended
December 31, 1999 and other reports filed with the Securities and
Exchange Commission from time to time. Actual results could differ
materially from those projected in these forward-looking statements as
a result of the risks described above as well as other risk factors set
forth in the Company's periodic reports both previously and hereafter
filed with the Securities and Exchange Commission.
31
<PAGE>
PRO FORMA FINANCIAL INFORMATION
- -------------------------------
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Unaudited Pro Forma Condensed Consolidated Balance Sheet as of December 31, 1999............................ 33
Unaudited Pro Forma Condensed Consolidated Statement of Earnings for the Year Ended December 31, 1999....... 34
Unaudited Notes to Pro Forma Condensed Consolidated Financial Statements.................................... 35-36
</TABLE>
32
<PAGE>
QRS CORPORATION AND ROCKPORT
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
December 31, 1999
(Dollars in thousands)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
QRS ROCKPORT ADJUSTMENTS COMBINED
--------- --------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents............................ $ 34,412 $ 831 $ 35,243
Marketable securities available for sale............. 12,895 12,895
Accounts receivable-net.............................. 25,964 2,245 28,209
Deferred income tax assets........................... 819 819
Prepaid expenses and other........................... 2,848 74 2,922
Prepaid income taxes................................. 4,726 4,726
--------- --------- -----------
Total current assets............................ 81,664 3,150 84,814
Property and equipment, net.......................... 13,823 184 14,007
Deferred income tax assets........................... 1,156 1,156
Capitalized product development costs -- net......... 8,088 8,088
Intangible assets -- net............................ 20,758 $ 93,894[A][B] 114,652
Other assets......................................... 1,466 54 1,520
--------- --------- ---------- -----------
Total ............................................ $ 126,955 $ 3,388 $ 93,894 $ 224,237
========= ========= ========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable................................ $ 10,508 $ 104 $ 10,612
Accrued and other liabilities................... 9,632 1,754 $ 1,450[C] 12,836
--------- --------- ---------- -----------
Total current liabilities................... 20,140 1,858 1,450 23,448
Deferred income taxes................................ -- 9,228[B][I] 9,228
Deferred rent and other.............................. 2,240 5 2,245
--------- --------- ---------- -----------
Total liabilities............................... 22,380 1,863 10,678 34,921
--------- --------- ---------- -----------
Minority interest.................................... 361 361
Stockholders' equity:
Preferred stock................................. -- 4 (4)[D] --
Common stock ................................... 86,971 3 99,501[E] 186,475
Additional Paid-in Capital...................... -- 4,971 (4,971)[D] --
Treasury stock.................................. (526) (1,500) 1,500[D] (526)
Accumulated other comprehensive loss............ (136) (136)
Retained earnings (deficit) .................... 17,905 (1,953) (12,810)[F] 3,142
--------- --------- ---------- -----------
Total stockholders' equity ................. 104,214 1,525 83,216 188,955
--------- --------- ---------- -----------
Total................................................ $ 126,955 $ 3,388 $ 93,894 $ 224,237
========= ========= ========== ===========
</TABLE>
See notes to unaudited pro forma condensed consolidated financial statements.
33
<PAGE>
QRS CORPORATION AND ROCKPORT
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For the Year Ended December 31, 1999
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
QRS ROCKPORT ADJUSTMENTS COMBINED
------------- ------------ ------------- -----------
<S> <C> <C> <C> <C>
Revenues ............................................ $ 124,705 $ 6,716 $ 131,421
Cost of revenue...................................... 62,946 2,538 65,484
------------- ------------ -----------
Gross profit......................................... 61,759 4,178 65,937
------------- ------------ -----------
Operating expenses:
Sales and marketing............................. 17,994 1,824 19,818
Product development............................. 8,645 1,415 10,060
General and administrative...................... 11,285 2,317 13,602
Amortization of intangible assets............... 1,996 $ 14,455[G] 16,451
In-process technology expense related to
acquisitions................................ 963 15,443[H] 16,406
------------- ------------ ------------- -----------
Total operating expenses.................... 40,883 5,556 29,898 76,337
------------- ------------ ------------- -----------
Operating earnings (loss)............................ 20,876 (1,378) (29,898) (10,400)
Interest and other income ........................... 2,011 234 2,245
------------- ------------ ------------- -----------
Earnings (loss) from continuing operations before
income taxes and minority interest............... 22,887 (1,144) (29,898) (8,155)
Income taxes......................................... 8,057 (2,137)[I] 5,920
Minority interest in subsidiary...................... (89) (89)
------------- ------------ ------------- -----------
Net earnings (loss).................................. $ 14,919 $ (1,144) $ (27,761) $ (13,986)
============= ============ ============= ===========
Basic earnings (loss) per share (Note 2)............. $ 1.12 $ (0.99)
============= ===========
Shares used to compute basic earnings (loss) per share 13,322 815[E] 14,137
============= ============= ===========
</TABLE>
See notes to unaudited pro forma condensed consolidated financial statements.
34
<PAGE>
QRS CORPORATION AND ROCKPORT
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
1. PRO FORMA ADJUSTMENTS
[A] Adjustment to record the allocation of the acquisition cost to the
estimated fair value of assets acquired based on an independent
appraisal and to reflect the write-off of $15,442,694 of
in-process research and development as technological feasibility
had not been established and no alternative future uses existed
for these research projects at the acquisition date as follows (in
thousands):
<TABLE>
<S> <C>
Current technology................................................................. $ 18,818
Customer list and trademark........................................................ 2,438
In-process research and development 15,443
Assembled workforce................................................................ 2,813
-------------
Subtotal....................................................................... 39,512
Write-off in-process research and development...................................... (15,443)
-------------
Total.......................................................................... $ 24,069
=============
</TABLE>
[B] Represents the adjustment to record the excess of purchase price
over the estimated fair value of the identifiable net assets
acquired (Goodwill) as computed below (in thousands):
<TABLE>
<S> <C>
Estimated fair value of common stock issued....................................... $ 90,137
Estimated fair value of stock options assumed..................................... 9,367
Accrued transaction costs.......................................................... 1,450
-------------
Total purchase price .......................................................... $ 100,954
=============
Preliminary allocation of purchase price:
Accounts receivable............................................................... $ 1,928
Cash.............................................................................. 730
Prepaid expenses and other........................................................ 227
Property and equipment............................................................. 217
Other assets....................................................................... 54
Intangible assets.................................................................. 39,512
Deferred income taxes.............................................................. (9,228)
Liabilities assumed................................................................ (2,311)
-------------
Sub-total preliminary allocation of purchase price............................. 31,129
-------------
Goodwill........................................................................... $ 69,825
=============
</TABLE>
[C] Represents adjustment to accrue for estimated direct fees and
expenses in connection with the acquisition of RockPort.
[D] To reflect the elimination of the historical preferred stock,
additional paid-in capital and treasury stock of RockPort.
[E] To reflect the issuance of 814,794 shares of common stock, the
fair value of the outstanding stock options of RockPort assumed
and the elimination of the historical common stock of RockPort, as
follows (in thousands):
<TABLE>
<S> <C>
Issuance of common stock ........................................................... $ 90,137
Fair value of stock options assumed ................................................ 9,367
Historical common stock of RockPort ................................................ (3)
----------
$ 99,501
==========
</TABLE>
35
<PAGE>
[F] To reflect the elimination of the historical deficit of RockPort
and the effect of the write-off of in-process research and
development discussed in note [A] above, as follows (in
thousands):
<TABLE>
<S> <C>
Historical deficit of RockPort..................................................... $ 2,633
Write-off in-process research and development...................................... (15,443)
-----------
Total.............................................................................. $ (12,810)
===========
</TABLE>
[G] To reflect the amortization of intangible assets.
[H] To reflect the write-off of in-process research and development
as discussed in note [A] above.
[I] To reflect the income tax effect of the loss of RockPort and the
pro forma adjustments at the Company's income tax rate of 38%,
except that no tax effect is given to the amounts written off as
in-process research and development and the amortization of
goodwill.
2. PRO FORMA EARNINGS PER SHARE
Basic pro forma loss per share was calculated based on the Company's
outstanding common stock at December 31, 1999, which reflects 814,794
shares of the Company's common stock issued in connection with the
acquisition. Diluted pro forma loss per share was not presented because
the potential common shares outstanding during the period are
antidilutive.
36
