<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 JUNE 30, 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 of (I.R.S. Employer Identification No.)
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 August 9, 2000
----------------------------- ------------------------------------
Common Stock, $.001 par value 15,216,964
This document contains 17 pages.
The Exhibit listing appears on Page 16.
<PAGE>
QRS CORPORATION
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
NUMBER
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of June 30, 2000 and December 31, 1999...................... 3
Condensed Consolidated Statements of Operations and Comprehensive Earnings (Loss) for
the Three and Six Months Ended June 30, 2000 and 1999................................................ 4
Condensed Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 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........................................................................................... 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk........................................... 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................................................... 15
Item 2. Changes in Securities and Use of Proceeds............................................................ 15
Item 3. Defaults upon Senior Securities...................................................................... 15
Item 4. Submission of Matters to a Vote of Security Holders.................................................. 15
Item 5. Other Information.................................................................................... 15
Item 6. Exhibits and Reports on Form 8-K..................................................................... 16
SIGNATURES.................................................................................................... 17
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
QRS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
JUNE 30, DECEMBER 31,
2000 1999
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents ............................................................ $ 23,595 $ 34,412
Marketable securities available for sale ............................................. 6,994 12,895
Accounts receivable-net of allowance for doubtful accounts of $1,964 at
June 30, 2000 and $1,676 at December 31,1999 ....................................... 27,737 25,964
Deferred income tax assets ........................................................... 819 819
Prepaid expenses and other ........................................................... 3,900 2,848
Prepaid income taxes ................................................................. 5,668 4,726
------------ ------------
Total current assets ............................................................. 68,713 81,664
------------ ------------
Property and equipment:
Furniture and fixtures ............................................................... 4,579 3,651
Equipment ............................................................................ 20,415 15,737
Leasehold improvements ............................................................... 4,267 3,729
------------ ------------
29,261 23,117
Less accumulated depreciation and amortization ....................................... (10,415) (9,294)
------------ ------------
Total ............................................................................ 18,846 13,823
------------ ------------
Deferred income tax assets ................................................................ -- 1,156
Capitalized product development costs - net of accumulated amortization of $7,126 at
June 30, 2000 and $5,293 at December 31, 1999 .......................................... 9,898 8,088
Intangible assets - net of accumulated amortization of $12,691 at June 30, 2000 and
$2,221 at December 31, 1999 ............................................................ 158,436 20,758
Other assets .............................................................................. 1,444 1,466
------------ ------------
Total ................................................................................ $ 257,337 $ 126,955
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ..................................................................... $ 3,544 $ 10,508
Accrued incentive .................................................................... 1,462 1,796
Accrued vacation ..................................................................... 2,142 1,195
Deferred acquisition cost ............................................................ 2,600 2,000
Deferred revenue ..................................................................... 4,034 --
Other accrued liabilities ............................................................ 4,178 4,641
------------ ------------
Total current liabilities ........................................................ 17,960 20,140
Deferred income taxes ..................................................................... 9,585 --
Deferred acquisition cost ................................................................. 3,500 1,000
Deferred rent and other ................................................................... 1,850 1,240
------------ ------------
Total liabilities .................................................................... 32,895 22,380
------------ ------------
Minority interest ......................................................................... 1,168 361
Stockholders' equity:
Preferred stock - $.001 par value; 10,000,000 shares authorized; none issued and
outstanding ........................................................................ -- --
Common stock - $.001 par value; 60,000,000 shares authorized; 15,225,986 shares
issued and 15,000,661 shares outstanding at June 30, 2000; and 13,674,533
shares issued and 13,647,208 shares outstanding at December 31, 1999 ............... 240,321 86,971
Treasury stock; 225,325 shares at June 30, 2000 and 27,325 shares at December 31, 1999 (5,530) (526)
Accumulated other comprehensive loss - unrealized loss on investments ................ (20) (136)
Retained (deficit) earnings .......................................................... (11,497) 17,905
------------ ------------
Total Stockholders' equity ....................................................... 223,274 104,214
------------ ------------
Total ............................................................................. $ 257,337 $ 126,955
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
QRS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE EARNINGS (LOSS)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- ----------------------------
2000 1999 2000 1999
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Revenues ........................................................... $ 36,491 $ 29,540 $ 71,601 $ 58,884
Cost of revenue .................................................... 20,905 14,852 39,936 29,870
------------- ------------ ------------- ------------
Gross profit ....................................................... 15,586 14,688 31,665 29,014
Operating expenses:
Sales and marketing ........................................... 7,120 3,844 14,034 8,253
Product development ........................................... 1,652 2,089 3,611 4,084
General and administrative .................................... 5,769 2,785 10,348 5,267
Amortization of intangible assets ............................. 6,896 141 10,470 304
In-process research and development ........................... -- -- 24,882 --
------------- ------------ ------------- ------------
Total operating expenses .................................. 21,437 8,859 63,345 17,908
------------- ------------ ------------- ------------
Operating earnings (loss) .......................................... (5,851) 5,829 (31,680) 11,106
Interest income .................................................... 431 493 828 1,057
------------- ------------ ------------- ------------
Earnings (loss) from continuing operations before income taxes
and minority interest ........................................... (5,420) 6,322 (30,852) 12,163
Income tax expense (benefit) ....................................... (9) 2,402 (925) 4,621
Minority interest in subsidiary .................................... (330) -- (525) --
------------- ------------ ------------- ------------
Net earnings (loss) ................................................ (5,081) 3,920 (29,402) 7,542
------------- ------------ ------------- ------------
Other comprehensive (losses):
Unrealized gain (loss) from marketable securities
available for sale............................................ 135 (127) 116 (114)
------------- ------------ ------------- ------------
Total comprehensive earnings (loss) ................................ $ (4,946) $ 3,793 $ (29,286) $ 7,428
============= ============ ============= ============
Basic earnings (loss) per share .................................... $ (0.34) $ 0.30 $ (1.99) $ 0.57
============= ============ ============= ============
Shares used to compute basic earnings (loss) per share ............. 15,164,975 13,250,813 14,745,126 13,127,742
============= ============ ============= ============
Diluted earnings (loss) per share (Note 3) ......................... $ (0.34) $ 0.28 $ (1.99) $ 0.54
============= ============ ============= ============
Shares used to compute diluted earnings (loss) per share (Note 3) .. 15,164,975 14,050,777 14,745,126 13,902,699
============= ============ ============= ============
See notes to condensed consolidated financial statements.
</TABLE>
4
<PAGE>
QRS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------------
2000 1999
---------- ----------
<S> <C> <C>
Operating activities:
Net earnings (loss) ............................................................................... $ (29,402) $ 7,542
Adjustment to reconcile net earnings (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization ................................................................. 15,107 2,834
Minority interest in subsidiary ............................................................... (525) --
In-process research and development ........................................................... 24,882 --
Loss from disposal of property and equipment .................................................. 96 92
Changes in assets and liabilities, net of effects of acquisitions:
Accounts receivable ........................................................................... 1,203 92
Prepaid expenses and other .................................................................... (720) (37)
Prepaid income taxes .......................................................................... (942) --
Deferred income taxes ......................................................................... 52 350
Accounts payable .............................................................................. (7,254) 660
Deferred revenue .............................................................................. 1,482 --
Deferred rent and other ....................................................................... 313 (29)
Income taxes payable .......................................................................... -- (1,687)
Other accrued liabilities ..................................................................... (4,224) 338
--------- ---------
Net cash provided by operating activities ..................................................... 68 10,155
--------- ---------
Investing activities:
Sales (purchases) of marketable securities - available for sale (net) ............................. 6,017 (3,353)
Purchase of property and equipment ................................................................ (7,515) (2,519)
Proceeds from disposal of property and equipment .................................................. 131 --
Capitalized product development costs ............................................................. (3,643) (965)
Other assets ...................................................................................... 118 (474)
Payment of deferred acquisition costs ............................................................. (2,000) --
Payment of transaction costs ...................................................................... (1,683) --
Acquisition of businesses, net of cash acquired and fair value of common stock issued ............. (4,270) --
--------- ---------
Net cash used in investing activities ......................................................... (12,845) (7,311)
--------- ---------
Financing activities:
Proceeds from exercise of stock options and stock warrants ........................................ 5,283 7,576
Contributions from minority interest .............................................................. 1,681 --
Purchase of treasury stock ........................................................................ (5,004) --
--------- ---------
Net cash provided by financing activities ..................................................... 1,960 7,576
--------- ---------
Net increase (decrease) in cash and cash equivalents ................................................... (10,817) 10,420
Cash and cash equivalents at beginning of period ....................................................... 34,412 36,642
--------- ---------
Cash and cash equivalents at end of period ............................................................. $ 23,595 $ 47,062
========= =========
Other cash flow information:
Taxes paid during the period ........................................................................... $ 69 $ 5,958
========= =========
Noncash financing activities:
Tax benefit from stock options exercised .......................................................... $ 7,523 $ 4,713
Deferred acquisition cost ......................................................................... 5,000 --
Fair value of common stock issued in acquisitions ................................................. 131,177 --
Fair value of stock options assumed in acquisitions ............................................ 9,367 --
Unrealized gain (loss) on investments .......................................................... 116 (114)
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 .................................................................. $ (5,691)
Property and equipment ............................................................................ 539
Other assets ...................................................................................... 97
Goodwill .......................................................................................... 101,672
Other intangible assets ........................................................................... 46,476
In-process research and development ............................................................... 24,882
Other non-current liabilities ..................................................................... (5,296)
Fair value of stock options assumed in acquisitions ............................................... (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, digital
photography and price auditing services; Application Services, such as
global sourcing services, inventory management, logistics management
services, and Marketplace Services, consisting of set-price trading and
auctions, and vendor showroom.
We have prepared the condensed consolidated balance sheet as of June 30,
2000, the condensed consolidated statements of operations and
comprehensive earnings (loss) and the condensed consolidated statements
of cash flows for the three and six months ended June 30, 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 June 30,
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 June 30, 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 $51,340,182, 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; 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. During the second quarter of 2000, the Company adjusted the
opening balance sheet of Image Info to properly reflect deferred revenue
from maintenance and other service obligations. 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
--------- --------- ---------
Total purchase price ...................... $ 100,954 $ 51,340 $ 152,294
========= ========= =========
Preliminary allocation of purchase price:
Goodwill ..................................... $ 69,825 $ 31,847 $ 101,672
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 .......................... 1,928 1,047 2,975
Prepaid and other current assets ............. 226 6 232
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 .......................... (2,310) (5,134) (7,444)
--------- --------- ---------
Total allocation of purchase price ......... $ 100,954 $ 51,340 $ 152,294
========= ========= =========
</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 six months ended June
30, 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 six months ended June 30, 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. During the second quarter of 2000, the 1999 Image Info revenues
and net loss were adjusted to properly reflect deferred revenue from
maintenance and other service obligations.
Unaudited Pro Forma Financial Information (in thousands, except share
and per share amounts):
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-------------------------------
2000 1999
------------- ------------
<S> <C> <C>
Revenues................................................. $ 73,094 $ 65,061
Net loss................................................. $ (32,469) $ (27,788)
============= ============
Basic and diluted loss per share (Note 3)................ $ (2.16) $ (1.93)
============= ============
Shares used to compute basic and diluted loss
per share (Note 3) .................................... 15,102,483 14,383,449
============ ============
</TABLE>
Basic and diluted pro forma loss per share was calculated based on our
outstanding common stock at June 30, 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- ---------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Shares used to compute basic EPS................ 15,072,835 13,250,813 14,745,126 13,127,742
Add: effect of dilutive securities............. - 799,964 - 774,957
------------ ------------ ------------ ------------
Shares used to compute diluted EPS.............. 15,072,835 14,050,777 14,745,126 13,902,699
============ ============ ============ ============
</TABLE>
Diluted loss per share for the three and six months ended June 30, 2000
and diluted pro forma loss per share for the six months ended June 30,
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. COMMON STOCK AND STOCK OPTIONS
On May 11, 2000, our shareholders approved an amendment to our
Certificate of Incorporation to increase the number of shares of common
stock available for issuance by an additional 40,000,000 to a total of
60,000,000 shares, and approved a series of amendments to our 1993
Stock Option/Stock Issuance Plan including an increase in the number of
shares of common stock authorized
8
<PAGE>
for issuance over the term of the 1993 plan by an additional 800,000
shares. On May 11, 2000, our Board of Directors authorized an increase
in the number of shares of common stock available for issuance under
our 1997 Special Non-Officer Stock Option Plan from 450,000 shares to
675,000 shares.
5. TREASURY STOCK
On May 4, 2000, our Board of Directors increased the funds available to
repurchase common stock from time to time by $5 million to a total of
$15 million. We are authorized to repurchase common stock in both open
market and block transactions. Shares purchased under this program will
be held in the corporate treasury for future use including employee
stock option grants and the employee stock purchase plan. We may
discontinue purchases of our common stock at any time that management
determines additional purchases are not warranted. During May 2000, we
repurchased 198,000 shares of our common stock for $5 million.
6. 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.
7. RELATED PARTY TRANSACTIONS
On November 30, 1999, we entered into a Common Stock Purchase
Agreement (the "Common Stock Agreement") with Tradeweave, our
wholly owned subsidiary, 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 Common Stock Agreement, during
1999, Tradeweave issued 1,520,000 shares of its common stock to
Peter R. Johnson for $380,000 in cash, 480,000 shares of its common
stock to Garth Saloner for $120,000 in cash, and an additional
17,999,800 shares of its common stock to QRS for $4,499,950 in cash
(for a total of 18,000,000 shares of Common Stock owned by QRS).
During the six-month period ended June 30, 2000, Tradeweave issued
400,000 shares of its common stock to Peter R. Johnson for $100,000
in cash and 1,131,000 shares of its common stock to various
Tradeweave employees for $282,750 in cash pursuant to exercises of
Tradeweave stock options.
On June 30, 2000, we entered into a Preferred Stock Purchase Agreement
(the "Preferred Stock Agreement") with Tradeweave, Peter R. Johnson and
Garth Saloner. Under the terms of the Preferred
9
<PAGE>
Stock Agreement, during the month of June 2000, Tradeweave issued
529,115 shares of its Series A preferred stock to Peter R. Johnson
for $1,034,000 in cash, 135,093 shares of its Series A preferred
stock to Garth Saloner for $264,000 in cash, and 4,964,678 shares of
its Series A preferred stock to QRS for $9,702,000 in cash.
Each share of Series A preferred stock is convertible into one share of
Tradeweave common stock at the option of the holder, subject to certain
antidilution provisions. The holders of the preferred stock receive a
preference in liquidation. A merger, acquisition, sale of voting
control or sale of substantially all of the assets of the Company in
which the shareholders of the Company do not own a majority of the
outstanding shares of the surviving corporation shall be deemed to be a
liquidation. The holders of the Series A preferred stock are entitled
to receive noncumulative dividends in preference to any dividend on
Tradeweave's common stock at the rate of 8% of the original purchase
price per annum, when and as declared by Tradeweave's Board of
Directors. In addition, the holders of the Series A preferred stock are
entitled to participate pro rata in any dividends paid on Tradeweave's
common stock on an as-if-converted basis.
On June 30, 2000, the Tradeweave Board of Directors authorized a
four-for-one split of their common and Series A preferred stock for
their stockholders of record as of June 30, 2000. All Tradeweave share
amounts have been restated to retroactively reflect the stock split.
As of June 30, 2000, we owned 84.6% of the outstanding stock of
Tradeweave.
8. SEGMENT INFORMATION
QRS services are marketed as a comprehensive suite of electronic
commerce offerings and are designed to function most powerfully in
unison. Tradeweave, offering set-price trading and auctions for the
disposition of surplus and markdown apparel merchandise, vendor
showroom, and collaborative assortment planning, 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. 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.
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 six months
ended June 30, 1999 is included on the face of the financial statements
and is not repeated here. Financial information for our business
segments for the six months ended June 30, 2000 is as follows (in
thousands):
<TABLE>
<CAPTION>
QRS INTERCOMPANY TOTAL
OTHER ELIMINATIONS -----
PRODUCTS TRADEWEAVE ------------
----------- ----------
<S> <C> <C> <C> <C>
Revenues $ 71,601 $ - $ - $ 71,601
Operating loss (24,451) (7,229) - (31,680)
Total assets 248,884 8,235 218* 257,337
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
QRS INTERCOMPANY TOTAL
OTHER ELIMINATIONS -----
PRODUCTS TRADEWEAVE ------------
----------- ----------
<S> <C> <C> <C> <C>
Depreciation and amortization 14,262 845 - 15,107
Capital expenditures 6,496 1,019 - 7,515
Capitalized product development
costs 1,273 2,370 - 3,643
</TABLE>
----------
* The intercompany elimination is comprised of advances made to Tradeweave
and deferred tax liabilities.
11
<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 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, digital
photography and price auditing services; Application Services, such as
global sourcing services, inventory management, logistics management
services, and Marketplace Services, consisting of set-price trading and
auctions, and vendor showroom, 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 24% to $36.5 million for the second quarter of
2000, from $29.5 million for the second quarter of 1999. The Company's
revenues increased by 22% to $71.6 million during the first six months
of 2000, from $58.9 million for the first six months of 1999. These
increases were primarily attributable to revenues from our expanded
product offerings (including acquired businesses) in content and
applications services. There was an overall increase in our customer
base with higher usage of content services. The number of retailers and
vendors, including carriers, increased from 8,034 as of June 30, 1999 to
9,116 as of June 30, 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. The number of eCommerce trading
partnerships remained constant for the second quarter of 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 41% to $20.9 million for the
second quarter of 2000, from $14.9 million for the second quarter of
1999. Cost of revenue increased by 34% to $39.9 million for the first
six months of 2000, from $29.9 million for the first six months of 1999.
These increases were 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 $2.0
million and $3.4 were incurred during the three and six months ended
June 30, 2000, respectively. Purchased network services decreased,
reflecting minimal growth in network services purchased under a
long-term contract, discounted based upon a multi-year volume
commitment. The gross profit margin was 43% and 50% for the second
quarters 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
85% to $7.1 million for the second quarter of 2000, from $3.8 million
for the second quarter of 1999. Sales and marketing expenses increased
by 70% to $14.0 million for the first six months of 2000, from $8.3
million for the first six months 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. We incurred $1.4 and $2.8 million of marketing
costs to launch the Tradeweave product during the three and six months
ended June 30, 2000, respectively.
Product development expenses consist primarily of personnel and
equipment costs related to research, development and implementation of
new services and enhancement of existing services. Product development
expenses were $1.7 million for the second quarter of 2000 and
$2.1 million for the second quarter of 1999. Product development
expenses were $3.6 million for the first six months of 2000 and
12
<PAGE>
$4.1 million for the first six months of 1999. We capitalized product
development costs of $1.7 million (including $1.1 million for
Tradeweave) and $497,000 in the second quarters of 2000 and 1999,
respectively. We capitalized product development cost of $3.6 million
(including $2.4 million for Tradeweave) and $965,000 for the six months
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. 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 were $5.8 million
for the second quarter of 2000 compared to $2.8 million for the
second quarter of 1999. General and administrative expenses were
$10.3 million for the first six months of 2000 compared to
$5.3 million for the first six months of 1999. This increase was
primarily due to increased investments in infrastructure and
increased headcount to support a larger organization, and included
Tradeweave expenses of $480,000 and $850,000 for the three and six
months ended June 30, 2000.
In connection with the acquisition of RockPort and 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 $148.1 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 $431,000 and
$493,000 for the second quarters of 2000 and 1999, respectively.
Interest income was $828,000 and $1.1 million for the first six months
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 and during May 2000,
we utilized $5.0 million in cash to repurchase 198,000 shares of our
common stock.
We recorded an income tax benefit of $9,000 and $925,000 for the three
and six months ended June 30, 2000, respectively. The tax benefit as a
percentage of pre-tax loss reflects the non-deductibility of purchase
accounting amounts related to the acquisitions of RockPort and Image
Info. We recorded an income tax expense of $2.4 million and $4.6 million
for the three and six months ended June 30, 1999, respectively. Our
income tax rate for the three and six months ended June 30, 1999 was
38%.
LIQUIDITY AND CAPITAL RESOURCES
Our working capital was $61.5 million at December 31, 1999 and $50.8
million at June 30, 2000. Cash, cash equivalents and marketable
securities decreased from $47.3 million at December 31, 1999 to $30.6
million at June 30, 2000. Total assets increased from $127.0 million at
December 31, 1999 to $257.3 million at June 30, 2000 and total
liabilities increased from $22.4 million at December 31, 1999 to $32.9
million at June 30, 2000.
The decrease of $16.7 million in cash, cash equivalents and marketable
securities from December 31, 1999 to June 30, 2000 resulted primarily
from the payment of $8.0 million for acquisitions, $11.2 million for
capital expenditures (including product development costs) and $5
million to repurchase our common stock, partially offset by proceeds
from exercise of stock options and sales of marketable securities.
On May 4, 2000, our Board of Directors increased the funds available to
repurchase common stock from time to time by $5 million to a total of
$15 million. We are authorized to repurchase common stock in both open
market and block transactions. Shares purchased under this program will
be held in the corporate treasury for future use including employee
stock option grants and the employee stock purchase plan. We may
discontinue purchases of our common stock at any time that management
determines additional purchases are not warranted. During May 2000, we
repurchased 198,000 shares of our common stock for $5 million.
Management believes that the cash resources available at June 30, 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.
13
<PAGE>
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 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 June 30, 2000, the weighted average maturity and interest rate
of the marketable securities portfolio was 126 days.
MATURITY FAIR VALUE AT
(Amounts in thousands) 2000 JUNE 30, 2000
---- -------------
U.S. Government Agencies $7,061 $6,994
Average interest rate 4.72% 4.72%
FOREIGN CURRENCY RISK
We have no significant investments outside the United States and do not
have material foreign currency risk.
14
<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.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The annual meeting of stockholders was held on May 11, 2000.
(b) The following directors were elected at the meeting to a term of three
years:
David A. Cole, Garth Saloner and Garen Staglin.
The following directors are continuing to serve their terms:
Peter R. Johnson, Tania Amochaev, Steven D. Brooks, John P. Dougall,
Philip Schlein and John S. Simon.
(c) The matters voted upon at the meeting and results of the voting with
respect to those matters are as follows:
<TABLE>
<CAPTION>
FOR AGAINST WITHHELD NOT
VOTED
<S> <C> <C> <C>
a. Election of Directors:
David A. Cole 11,798,087 51,383
Garth Saloner 11,811,774 37,696
Garen Staglin 11,811,608 37,862
b. Approve an amendment to QRS'
Certificate of Incorporation
to increase the number of 10,787,359 1,070,066 2,045 10,000
authorized shares
c. Approve a series of
amendments to QRS' 1993 Stock 5,973,297 4,835,083 23,195 1,017,895
Option/Stock Issuance Plan
d. Ratify the appointment of
Deloitte & Touche 11,767,434 1,563 704 79,769
as QRS' independent auditors
for the fiscal year ending
December 31, 2000
</TABLE>
The foregoing matters are described in further detail in our definitive proxy
statement dated April 10, 2000 for the Annual Meeting of Stockholders held on
May 11, 2000.
ITEM 5. OTHER INFORMATION
None
15
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
27.1 Financial Data Schedule
B. REPORTS ON FORM 8-K
On May 23, 2000, we filed an amendment to the Form 8-K
dated March 24, 2000, which included, pursuant to Item 7,
the financial statements of RockPort Trade Systems, Inc.,
and proforma information.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized and in the capacity
indicated.
QRS CORPORATION
---------------------------------------------------
(Registrant)
/s/ John S. Simon
---------------------------------------------------
August 14, 2000 John S. Simon
Chief Executive Officer
/s/ Shawn M. O'Connor
---------------------------------------------------
August 14, 2000 Shawn M. O'Connor
President, Chief Operating Officer, Interim Chief
Financial Officer and Secretary
17
