<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 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 November 9, 2000
--------------------------- --------------------------------------
Common Stock, $.001 par value 14,626,067
This document contains 17 pages.
The Exhibit listing appears on Page 16.
<PAGE>
QRS CORPORATION
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE
----
NUMBER
------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of September 30, 2000 and December 31, 1999................. 3
Condensed Consolidated Statements of Operations and Comprehensive Earnings (Loss) for
the Three and Nine Months Ended September 30, 2000 and 1999.......................................... 4
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
September 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........................................................................................... 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk........................................... 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................................................... 16
Item 2. Changes in Securities and Use of Proceeds............................................................ 16
Item 3. Defaults upon Senior Securities...................................................................... 16
Item 4. Submission of Matters to a Vote of Security Holders.................................................. 16
Item 5. Other Information.................................................................................... 16
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>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................................... $ 18,617 $ 34,412
Marketable securities available for sale..................................... 10,100 12,895
Accounts receivable - net of allowance for doubtful accounts of $2,051 at
September 30, 2000 and $1,676 at December 31,1999.......................... 29,129 25,964
Deferred income tax assets................................................... 819 819
Prepaid expenses and other................................................... 2,659 2,848
Income taxes receivable...................................................... 2,083 4,726
------------- -------------
Total current assets..................................................... 63,407 81,664
------------- -------------
Property and equipment:
Furniture and fixtures....................................................... 6,280 3,651
Equipment.................................................................... 22,845 15,737
Leasehold improvements....................................................... 4,034 3,729
------------- -------------
33,159 23,117
Less accumulated depreciation and amortization............................... (11,016) (9,294)
------------- -------------
Total.................................................................... 22,143 13,823
------------- -------------
Deferred income tax assets........................................................ 8,615 1,156
Capitalized product development costs - net of accumulated amortization of
$8,217 at September 30, 2000 and $5,293 at December 31, 1999................... 9,676 8,088
Intangible assets - net of accumulated amortization of $19,974 at
September 30, 2000 and $2,221 at December 31, 1999............................. 158,288 20,758
Other assets...................................................................... 1,749 1,466
------------- -------------
Total........................................................................ $ 263,878 $ 126,955
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................. $ 4,739 $ 10,508
Accrued incentive............................................................ 988 1,796
Accrued vacation............................................................. 2,335 1,195
Deferred acquisition cost.................................................... 3,600 2,000
Deferred revenue............................................................. 2,373 -
Other accrued liabilities.................................................... 5,368 4,641
----------- -----------
Total current liabilities................................................ 19,403 20,140
Deferred income taxes............................................................. 19,105 -
Deferred acquisition cost......................................................... 2,500 1,000
Deferred rent and other........................................................... 2,112 1,240
------------- -------------
Total liabilities............................................................ 43,120 22,380
------------- -------------
Minority interest................................................................. 419 361
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; 14,849,528
shares issued and 14,624,203 shares outstanding at September 30, 2000;
and 13,674,533 shares issued and 13,647,208 shares outstanding at
December 31, 1999.......................................................... 240,603 86,971
Treasury stock; 225,325 shares at September 30, 2000 and 27,325 shares
at December 31, 1999....................................................... (5,530) (526)
Accumulated other comprehensive gain (loss) - unrealized gain (loss) on
investments................................................................ 11 (136)
Retained (deficit) earnings.................................................. (14,745) 17,905
------------- -------------
Total Stockholders' equity............................................... 220,339 104,214
------------- -------------
Total........................................................................ $ 263,878 $ 126,955
============ =============
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
QRS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE EARNINGS (LOSS) FOR THE THREE AND
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- ---------------------------
2000 1999 2000 1999
--------- ---------- ------------ -----------
<S> <C> <C> <C> <C>
Revenues ......................................................... $ 37,919 $ 32,389 $ 109,520 $ 91,273
Cost of revenue................................................... 23,091 16,218 63,027 46,088
--------- ---------- ------------ -----------
Gross profit...................................................... 14,828 16,171 46,493 45,185
Operating expenses:
Sales and marketing.......................................... 8,971 3,617 23,005 11,870
Product development.......................................... 2,929 2,551 6,540 6,635
General and administrative................................... 6,939 2,957 17,287 8,224
Amortization of intangible assets............................ 6,951 684 17,753 988
In-process research and development.......................... - 963 17,880 963
--------- ---------- ------------ -----------
Total operating expenses................................. 25,790 10,772 82,465 28,680
--------- ---------- ------------ -----------
Operating earnings (loss)......................................... (10,962) 5,399 (35,972) 16,505
Interest income................................................... 257 468 1,085 1,525
--------- ---------- ------------ -----------
Earnings (loss) from operations before income taxes
and minority interest.......................................... (10,705) 5,867 (34,887) 18,030
Income taxes (benefit)............................................ (376) 2,205 (1,081) 6,826
Minority interest in subsidiary................................... (631) - (1,156) -
--------- ---------- ------------ -----------
Net earnings (loss)............................................... (9,698) 3,662 (32,650) 11,204
--------- ---------- ------------ -----------
Other comprehensive earnings (loss):
Unrealized gain (loss) from marketable securities
available for sale........................................... 31 (29) 147 (143)
--------- ---------- ------------ -----------
Total comprehensive earnings (loss)............................... $ (9,667) $ 3,633 $ (32,503) $ 11,061
========== =========== ============ ===========
Basic earnings (loss) per share................................... $ (0.66) $ 0.27 $ (2.25) $ 0.85
========== =========== ============ ==========
Shares used to compute basic earnings (loss) per share............ 14,613,804 13,471,029 14,484,294 13,243,357
========== =========== =========== ==========
Diluted earnings (loss) per share ................................ $ (0.66) $ 0.26 $ (2.25) $ 0.80
========== =========== =========== ==========
Shares used to compute diluted earnings (loss) per share ......... 14,613,804 14,291,826 14,484,294 14,041,491
========== =========== =========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
QRS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------
2000 1999
------------- -------------
<S> <C> <C>
Operating activities:
Net earnings (loss).............................................................. $ (32,650) $ 11,204
Adjustment to reconcile net earnings (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization................................................ 25,279 5,329
Minority interest in subsidiary.............................................. (1,156) -
Stock compensation........................................................... 213 -
In-process research and development.......................................... 17,880 963
Loss from disposal of property and equipment................................. 108 92
Changes in assets and liabilities, net of effects of acquisitions:
Accounts receivable.......................................................... 61 (815)
Prepaid expenses and other................................................... 421 (368)
Income taxes receivable...................................................... 2,643 -
Deferred income taxes........................................................ 635 2,544
Accounts payable............................................................. (5,990) (2,868)
Deferred revenue............................................................. (179) -
Deferred rent and other...................................................... 577 (41)
Income taxes payable ........................................................ - (1,823)
Other accrued liabilities.................................................... (3,123) 372
------------- -------------
Net cash provided by operating activities.................................... 4,719 14,589
------------- -------------
Investing activities:
Sales (purchases) of marketable securities - available for sale (net)............ 2,942 (8,603)
Purchases of property and equipment.............................................. (12,622) (6,689)
Proceeds from disposal of property and equipment................................. 131 -
Capitalized product development costs............................................ (4,512) (2,311)
Other assets..................................................................... (570) (606)
Payment of deferred acquisition costs............................................ (2,000) -
Payment of transaction costs related to acquisitions............................. (1,844) -
Acquisition of businesses, net of cash acquired and fair value of
common stock issued........................................................... (4,270) (14,840)
------------- -------------
Net cash used in investing activities........................................ (22,745) (33,049)
------------- -------------
Financing activities:
Proceeds from exercise of stock options and stock warrant........................ 5,554 8,452
Contributions from minority interest............................................. 1,681 -
Purchase of treasury stock....................................................... (5,004) -
Purchase of fractional shares from stock split................................... - (9)
------------- -------------
Net cash provided by financing activities.................................. 2,231 8,443
------------- -------------
Net decrease in cash and cash equivalents............................................. (15,795) (10,017)
Cash and cash equivalents at beginning of period...................................... 34,412 36,642
------------- -------------
Cash and cash equivalents at end of period............................................ $18,617 $26,625
============= =============
Other cash flow information:
Taxes paid during the period.......................................................... $69 $6,130
============= =============
Noncash financing activities:
Tax benefit from stock options exercised......................................... $7,534 $5,573
Deferred acquisition cost........................................................ 5,000 3,000
Fair value of common stock issued in acquisitions................................ 131,177 2,763
Fair value of stock options assumed in acquisitions.............................. 9,367 -
Unrealized gain (loss) on investments............................................ 147 (143)
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. On July 23, 1999, we acquired the outstanding common shares
of Retail Data Services and its affiliate, RDS, Inc. The purchase prices were
allocated, as follows:
Working capital, other than cash................................................. $ (5,487) $ (1,329)
Property and equipment........................................................... 539 212
Other assets..................................................................... 97 -
Goodwill......................................................................... 108,469 7,588
Other intangible assets.......................................................... 46,476 11,169
In-process research and development ............................................. 17,880 963
Other non-current liabilities.................................................... (5,295) (1,000)
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) (2,763)
------------- -------------
Acquisitions, net of cash acquired of $730 and fair value of common stock issued. $ 4,270 $ 14,840
============= =============
</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
September 30, 2000, the condensed consolidated statements of operations
and comprehensive earnings (loss) and the condensed consolidated
statements of cash flows for the nine months ended September 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
September 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.
During the third quarter of 2000, management determined that it would
adjust a portion of the purchase accounting entry recorded in the first
quarter of 2000 related to the acquisition of RockPort Trade Systems,
Inc. The previously reported write-off of in-process research and
development of $24.9 million (of which $15.4 million related to the
acquisition of RockPort Trade Systems, Inc.) was reduced by
approximately $7.0 million to $17.9 million, and goodwill was increased
by the same amount. As a result, we have revised our net loss for the
first and second quarters to $17.8 million ($1.26 per share, diluted)
and $5.2 million ($0.35 per share, diluted), from $24.3 million ($1.70
per share, diluted) and $5.1 million ($0.34 per share, diluted),
respectively (See Note 2). We will file amended Form 10-Q's to reflect
these adjustments.
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 September 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
6
<PAGE>
been included in the acquisition cost. The stock compensation represents
the estimated fair value of the outstanding stock options under the
RockPort Plan, which were converted into shares of our common stock as
of the acquisition date. The acquisition was accounted for as a purchase
transaction.
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. The deferred
acquisition payment to the former shareholders of Image Info has been
included in the acquisition cost. The acquisition was accounted for as a
purchase transaction.
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, management adjusted the
opening balance sheet of Image Info to properly reflect deferred revenue
from maintenance and other service obligations. During the third quarter
of 2000, management adjusted the amount allocated to in-process research
and development related to the acquisition of RockPort Trade Systems,
Inc. 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....................................... $ 76,622 $ 31,847 $ 108,469
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............ 8,441 9,439 17,880
Accounts receivable............................ 2,133 1,047 3,180
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 are being 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
$17,880,000 were charged to expense during the nine months ended
September 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 nine months ended September 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
7
<PAGE>
preliminary estimates of certain direct costs and liabilities
associated with the transaction, and amounts actually recorded may
change upon final determination of such amounts.
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. During the third quarter
of 2000, management determined that it would exclude in process
research and development related to the acquisitions of RockPort
Trade Systems, Inc. and Image Info from the unaudited pro forma
financial information. As a result, we have revised our previously
reported pro forma net loss for the three and six months ended
June 30, 2000 to $2,885,000 ($0.19 per share, basic and diluted) and
$8,073,000 ($0.55 per share, basic and diluted) from $27,524,000
($1.83 per share, basic and diluted) and $32,469,000 ($2.16 per
share, basic and diluted), respectively. Additionally, we have
revised our previously reported pro forma net loss for the three
and six months ended June 30, 1999 to $1,757,000 ($0.12 per share,
basic and diluted) and $3,392,000 ($0.24 per share, basic and diluted)
from $26,396,000 ($1.85 per share, basic and diluted) and $27,788,000
($1.93 per share, basic and diluted), respectively (See Note 1). We
will file amended 10Q's to reflect these adjustments.
Unaudited Pro Forma Financial Information (in thousands, except share
and per share amounts):
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Revenues................................................. $ 111,013 $ 99,256
============ ============
Net loss................................................. $ (18,179) $ (3,536)
============ ============
Basic and diluted loss per share (Note 3)................ $ (1.23) $ (0.25)
============ ============
Shares used to compute basic and diluted loss
per share (Note 3) .................................... 14,721,663 14,170,140
============ ============
</TABLE>
Basic and diluted pro forma loss per share was calculated based on our
outstanding common stock at September 30, 2000 and 1999, which reflects
814,794 shares and 440,914 shares of our common stock issued,
respectively in connection with the acquisition of RockPort and Image
Info. At September 30, 2000, 226,105 shares and 166,666 shares of our
common stock issued in connection with the acquisitions of RockPort and
Image Info, respectively were held in Escrow and have been excluded
from shares used to compute basic and diluted loss per share.
On July 23, 1999, we acquired of all the outstanding capital stock of
Retail Data Services, Inc. and its affiliate, RDS, Inc. The total
acquisition cost was $21,012,610; comprised of $15,000,000 paid in
cash; $3,000,000 in deferred acquisition cost to the seller; 53,250
shares of common stock valued at $2,762,610 of which 11,000 shares of
common stock were issued from our treasury account; and $250,000 in
transaction costs related to the acquisition. The terms of the purchase
agreement require that we pay $2,000,000 and $1,000,000 to the seller
in March 2000 and 2001, respectively, if revenue from the acquired
business meets or exceeds the established levels for 1999 and 2000.
Revenue from the acquired business for 1999 met the established levels
and we paid $2,000,000 to the seller in March 2000. Management has
determined, based on the results of its analysis that it is highly
probable that revenue from the acquired business for 2000 will exceed
the established levels, and accordingly, the deferred acquisition cost
of $1,000,000 along with the payment made in March 2000 to the seller
have been included in the acquisition cost. The acquisition was
accounted for as a
8
<PAGE>
purchase transaction. The purchase price 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 amount allocated to in-process research and
development of $963,000 was charged to expense during the nine months
ended September 30, 1999 as technological feasibility had not been
established and no alternative future uses existed for the research
projects at the acquisition date The intangible assets are being
amortized using the straight-line method for periods between three and
seven years.
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -----------------------------
2000 1999 2000 1999
-------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Shares used to compute basic EPS................ 14,613,804 13,471,029 14,484,294 13,243,357
Add: effect of dilutive securities............. - 820,797 - 798,134
-------------- ------------- -------------- -------------
Shares used to compute diluted EPS.............. 14,613,804 14,291,826 14,484,294 14,041,491
============== ============= ============== =============
</TABLE>
Common equivalent shares for the three and nine months ended September
30, 2000 were 185,880 shares and 665,728 shares, respectively (Note 2)
and have been excluded from the shares used in calculating diluted loss
per share because their effect is 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 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. We did
not repurchase any shares of our common stock during the three months
ended September 30, 2000.
9
<PAGE>
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 is being 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 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 nine-month period ended September 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 September 30, 2000, Tradeweave issued
142,503 shares of its common stock valued at $1.17 per share (as
determined by an independent appraisal) to Peter R. Johnson for
services provided to Tradeweave.
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 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
10
<PAGE>
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 its common stock for its stockholders of record
at June 30, 2000, and adjusted the conversion price of the Series A
preferred stock accordingly. All Tradeweave share amounts have been
restated to retroactively reflect the stock split on a common share
equivalent basis.
As of September 30, 2000, we owned 84.1% of the outstanding stock of
Tradeweave.
8. INCOME TAXES
We recorded an income tax benefit of $376,000 and $1.1 million for the
three and nine months ended September 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 $2.2 million and
$6.8 million for the three and nine months ended September 30, 1999,
respectively. Our income tax rate for the three and nine months ended
September 30, 1999 was 38%.
9. RECENT ACCOUNTING PRONOUNCEMENT
In December of 1999, the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101, or SAB 101. This summarizes
certain areas of the Staff's views in applying generally accepted
accounting principles to revenue recognition in financial statements.
SAB 101 becomes effective for the fourth quarter of the year ending
December 31, 2000. The Company believes that adoption of SAB 101 will
not have a material effect on its consolidated financial statements.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, ACCOUNTING FOR CERTAIN TRANSACTIONS INVOLVING
STOCK COMPENSATION (Interpretation 44). Interpretation 44 is effective
July 1, 2000. We believe that the adoption of Interpretation 44 did
not have a material effect on our financial statements.
10. SEGMENT INFORMATION
Our services are marketed as a comprehensive suite of electronic
commerce offerings and are designed to function most powerfully in
unison. ECommerce and Content Services provide a comprehensive solution
for retailers and their trading partners to collaborate and exchange
critical business documents and information electronically. Application
Services enable companies to access, over the internet or a proprietary
network, software applications to support their operations.
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 three reportable
segments: eCommerce and Content Services, Application Services and
Tradeweave. We evaluate performance and allocate resources based on
revenues and operating earnings (loss), which includes allocated
corporate general and administrative expenses, sales and marketing
expenses and customer support and information delivery expenses.
Unallocated assets include corporate cash and equivalents,
marketable securities available-for-sale, accounts receivable, income
taxes receivable, prepaid expenses and other assets, the net book
value of corporate facilities and related information systems,
deferred income tax assets and other corporate long-lived assets.
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<PAGE>
Prior to September 30, 1999, we had one reporting segment and the
segment disclosure for eCommerce and Content Services for the nine
months ended September 30, 1999 is included on the face of the
financial statements and is not repeated here. Financial information
for our business segments for the nine months ended September 30, 2000
is as follows (in thousands):
<TABLE>
<CAPTION>
QRS
EDI AND CONTENT APPLICATION INTERCOMPANY
SERVICES SERVICES TRADEWEAVE ELIMINATIONS TOTAL
--------------- ----------- ---------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Revenues $ 97,498 $ 12,022 $ - $ - $ 109,520
Operating earnings (loss) 10,710 (34,760) (11,922) - (35,972)
Total assets 40,193 122,215 8,472 (2,916)* 167,964
Amortization of 5,282 12,471 - 17,753
intangible assets
In-process 17,880 - 17,880
Research and development
</TABLE>
<TABLE>
<CAPTION>
Reconciliation to QRS as Reported:
<S> <C>
Assets:
Total reportable segments $167,964
Unallocated amounts:
Cash and cash equivalents 18,617
Marketable securities available-for-sale 10,100
Accounts receivable, net 29,129
Prepaid expenses and other 2,659
Income taxes receivable 2,083
Property and equipment, net 22,143
Deferred income tax assets 9,434
Other assets 1,749
--------
Total assets as reported $263,878
--------
</TABLE>
----------
* The intercompany elimination is comprised of advances made to Tradeweave and
deferred tax liabilities.
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<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. 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, subscription, usage and
licensing fees for application services.
RESULTS OF OPERATIONS
Revenues increased by 17% to $37.9 million for the third quarter of
2000, from $32.4 million for the third quarter of 1999. The Company's
revenues increased by 20% to $109.5 million during the first nine months
of 2000, from $91.3 million for the first nine 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 8,430 as of September 30,
1999 to 9,462 as of September 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. However, we
experienced slower revenue growth in the third quarter of 2000 than
recent prior quarters as a result of continued slowness and increased
pricing pressure in the eCommerce business. We anticipate continued
pricing pressure and a competitive environment, which may affect our
revenue growth. 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 42% to $23.1 million for the
third quarter of 2000, from $16.2 million for the third quarter of 1999.
Cost of revenue increased by 37% to $63.0 million for the first nine
months of 2000, from $46.1 million for the first nine 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, including
amortization of capitalized product development costs of $2.1 million
and $5.5 million, were incurred during the three and nine months ended
September 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 39% and 50% for the third
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 were $9.0
million for the third quarter of 2000 compared to $3.6 million for the
third quarter of 1999. Sales and marketing expenses were $23.0 million
for the first nine months of 2000 compared to $11.9 million for the
first nine 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 $2.8 million during the nine months
ended September 30, 2000 of marketing costs to launch the Tradeweave
product.
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<PAGE>
Product development expenses consist primarily of personnel and
equipment costs related to research, development and implementation of
new services and enhancement of existing services. Product development
expenses were $2.9 million for the third quarter of 2000 and $2.6
million for the third quarter of 1999. Product development expenses were
$6.5 million for the first nine months of 2000 and $6.6 million for the
first nine months of 1999. We capitalized product development costs of
$869,000 (including $643,000 for Tradeweave) and $1.3 million in the
third quarters of 2000 and 1999, respectively. We capitalized product
development costs of $4.5 million (including $3.0 million for
Tradeweave) and $2.3 million for the nine months of 2000 and 1999,
respectively. The increase in capitalized product development costs
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 $6.9 million for the third quarter of 2000 compared to
$3.0 million for the third quarter of 1999. General and administrative
expenses were $17.3 million for the first nine months of 2000 compared
to $8.2 million for the first nine 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 $600,000 and $1.4 million for the three and nine months
ended September 30, 2000, net of minority interest.
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 $17.9 million of in-process research and
development. These acquisitions also resulted in $154.9 million of
intangible assets, which are being amortized over estimated useful lives
of three to seven years (See Notes 1 and 2). During the nine months
ended September 30, 1999, we expensed $963,000 of in-process research
and development resulting from the acquisition of Retail Data Services
and its affiliate, RDS, Inc. (collectively "RDS"). The acquisition of
RDS resulted in $18.8 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 $257,000 and
$468,000 for the third quarters of 2000 and 1999, respectively. Interest
income was $1.1 million and $1.5 million for the first nine 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. On July 23, 1999, we utilized $15.0 million in cash to
acquire RDS.
We recorded an income tax benefit of $376,000 and $1.1 million for the
three and nine months ended September 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 $2.2 million and
$6.8 million for the three and nine months ended September 30, 1999,
respectively. Our income tax rate for the three and nine months ended
September 30, 1999 was 38%.
LIQUIDITY AND CAPITAL RESOURCES
Our working capital was $61.5 million at December 31, 1999 and $44.0
million at September 30, 2000. Cash, cash equivalents and marketable
securities decreased from $47.3 million at December 31, 1999 to $28.7
million at September 30, 2000. Total assets increased from $127.0
million at December 31, 1999 to $263.9 million at September 30, 2000 and
total liabilities increased from $22.4 million at December 31, 1999 to
$43.1 million at September 30, 2000.
The decrease of $17.5 million in cash, cash equivalents and marketable
securities from December 31, 1999 to September 30, 2000 resulted
primarily from the payment of $8.0 million for acquisitions; $1.8
million for transaction costs related to acquisitions; $17.1 million for
capital expenditures (including product development costs) and $5
million to repurchase our common stock, partially offset by proceeds
from exercises 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
14
<PAGE>
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.
We did not repurchase any shares of our common stock during the three
months ended September 30, 2000.
Management believes that the cash resources available at September 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.
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 September 30, 2000, the weighted average maturity and
interest rate of the marketable securities portfolio was 90 days.
<TABLE>
<CAPTION>
MATURITY MATURITY FAIR VALUE AT
(Amounts in thousands) 2000 2001 SEPTEMBER 30, 2000
-------- -------- ------------------
<S> <C> <C> <C>
U.S. Government Agencies $ 6,979 $ 3,121 $ 10,100
Average interest rate 5.63% 4.78% 5.37%
</TABLE>
FOREIGN CURRENCY RISK
We have no significant investments outside the United States and do not
have material foreign currency risk.
15
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
27.1 Financial Data Schedule
B. REPORTS ON FORM 8-K
On August 28, 2000, we filed a Form 8-K dated August 21, 2000,
which reported, pursuant to item 4, the resignation of
Deloitte Touche LLP as the Company's certifying accountant. On
September 26, 2000, we filed a Form 8-K dated September 22,
2000, which included, pursuant to Item 4, the retention of
PricewaterhouseCoopers LLP as the Company's certifying
accountant.
16
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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.
<TABLE>
<S> <C>
QRS CORPORATION
-------------------------------------------------
(Registrant)
\s\ John S. Simon
-------------------------------------------------
November 14, 2000 John S. Simon
Chief Executive Officer
\s\ Alan Geddes
-------------------------------------------------
November 14, 2000 Alan Geddes
Chief Financial Officer and Secretary
</TABLE>
17
