QRS (QRSI) 10-Q 2001 Q2 Quarterly report

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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, 2001

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 (State or other jurisdiction of incorporation or organization)	68-0102251 (I.R.S. Employer Identification No.)
1400 Marina Way South, Richmond, CA (Address of principal executive offices)	94804 (Zip code)

(510) 215-5000
(Registrant's phone number, including area code)

    Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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.

Yes /x/  No / /

APPLICABLE ONLY TO CORPORATE ISSUERS

    The number of outstanding shares of the issuer's common stock, par value $.01 per share, as of August 1, 2001, was 15,498,225.

    Transitional Small Business Disclosure Format (check one):

Yes / /  No /x/

QRS CORPORATION
FORM 10-Q
INDEX

		Page Number
PART I—FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets as of June 30, 2001 and December 31, 2000	3
	Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three and Six Months Ended June 30, 2001 and 2000	4
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2001 and 2000	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	17
PART II—OTHER INFORMATION		18
Item 1.	Legal Proceedings	18
Item 2.	Changes in Securities and Use of Proceeds	18
Item 3.	Defaults upon Senior Securities	18
Item 4.	Submission of Matters to a Vote of Security Holders	18
Item 5.	Other Information	19
Item 6.	Exhibits and Reports on Form 8-K	19
SIGNATURES		20

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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

QRS Corporation
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)

			June 30, 2001			December 31, 2000
ASSETS
Current assets:
	Cash and cash equivalents		$	28,170		$	15,372
	Marketable securities available-for-sale			2,929			10,090
	Accounts receivable-net of allowance for doubtful accounts of $1,806 at June 30, 2001 and $2,072 at December 31, 2000			24,227			27,292
	Deferred income tax assets			1,666			1,666
	Prepaid expenses and other			3,206			2,959
	Income taxes receivable			104			3,228
		Total current assets		60,302			60,607
Property and equipment:
	Furniture and fixtures			4,043			3,836
	Equipment			23,337			23,849
	Leasehold improvements			6,337			5,648
				33,717			33,333
	Accumulated depreciation and amortization			(13,749	)		(10,960	)
		Total		19,968			22,373
Marketable securities available-for-sale				1,967			2,171
Capitalized service and product development costs—net of accumulated amortization of $10,641 at June 30, 2001 and $8,515 at December 31, 2000				8,420			9,021
Intangible assets (including goodwill)—net of accumulated amortization of $42,304 at June 30, 2001 and $27,244 at December 31, 2000				144,318			150,452
Other assets				2,457			3,496
	Total assets		$	237,432		$	248,120
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
	Accounts payable		$	10,326		$	8,675
	Accrued compensation			4,951			4,274
	Accrued vacation			2,356			2,259
	Deferred acquisition payments			2,500			3,600
	Accrued transaction costs related to acquisition			445			1,700
	Deferred revenue			3,747			3,138
	Other accrued liabilities			2,235			1,065
		Total current liabilities		26,560			24,711
Deferred income taxes				7,525			7,678
Deferred acquisition payments				—			2,500
Deferred rent and other				1,897			2,141
	Total liabilities			35,982			37,030
Commitments and Contingencies (Note 7)				—			—
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; 15,723,550 shares issued and 15,498,225 shares outstanding at June 30, 2001; and 15,281,111 shares issued and 14,663,015 shares outstanding at December 31, 2000			250,973			240,968
	Deferred compensation			(2,419	)		—
	Treasury stock; 225,325 shares at June 30, 2001 and December 31, 2000			(5,530	)		(5,530	)
	Accumulated other comprehensive gain (loss)			(122	)		124
	Accumulated deficit			(41,452	)		(24,472	)
		Total stockholders' equity		201,450			211,090
	Total liabilities and stockholders' equity		$	237,432		$	248,120

See notes to condensed consolidated financial statements.
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QRS Corporation
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
For the Three and Six Months Ended June 30, 2001 and 2000
(In thousands, except share and per share amounts)
(Unaudited)

			Three Months Ended June 30,						Six Months Ended June 30,
			2001			2000			2001			2000
Revenues			$	36,847		$	36,491		$	72,613		$	71,601
Cost of revenues				21,205			20,905			42,437			39,936
Gross profit				15,642			15,586			30,176			31,665
Operating expenses:
	Sales and marketing			7,504			7,120			15,851			14,034
	Service and product development			3,269			1,652			6,536			3,611
	General and administrative			5,571			5,769			11,587			10,348
	Amortization of intangible assets (including goodwill)			7,861			7,145			15,060			10,802
	In-process research and development			—			—			—			17,880
		Total operating expenses		24,205			21,686			49,034			56,675
Operating loss				(8,563	)		(6,100	)		(18,858	)		(25,010	)
Interest income				338			431			708			828
Loss before income taxes and minority interest				(8,225	)		(5,669	)		(18,150	)		(24,182	)
Income tax benefit				—			(166	)		(1,170	)		(705	)
Minority interest in subsidiary				—			(330	)		—			(525	)
Net loss				(8,225	)		(5,173	)		(16,980	)		(22,952	)
Other comprehensive (loss) earnings—
	Unrealized gain (loss) from marketable securities available-for-sale			(21	)		135			(127	)		116
	Unrealized loss from foreign currency exchange			(119	)		—			(119	)		—
Total comprehensive loss			$	(8,365	)	$	(5,038	)	$	(17,226	)	$	(22,836	)
Basic loss per share			$	(0.53	)	$	(0.35	)	$	(1.11	)	$	(1.59	)
Shares used to compute basic loss per share				15,470,336			14,772,204			15,238,417			14,448,476
Diluted loss per share			$	(0.53	)	$	(0.35	)	$	(1.11	)	$	(1.59	)
Shares used to compute diluted loss per share				15,470,336			14,772,204			15,238,417			14,448,476

See notes to condensed consolidated financial statements.

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QRS Corporation
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2001 and 2000
(Dollars in thousands)
(Unaudited)

				Six Months Ended June 30,
				2001			2000
Cash flows from operating activities:
	Net loss			$	(16,980	)	$	(22,952	)
	Adjustment to reconcile net loss to net cash provided by operating activities:
		Depreciation and amortization			21,289			15,439
		Loss from disposal of property and equipment			—			96
		Stock-based compensation			1,318			—
		In-process research and development			—			17,880
		Minority interest in subsidiary			—			(525	)
		Provision for allowance for doubtful accounts			979			568
		Deferred income taxes			(1,172	)		272
	Changes in assets and liabilities, net of effects of acquisitions:
		Accounts receivable			2,086			635
		Prepaid expenses and other			(247	)		(720	)
		Income taxes receivable (payable)			3,124			(942	)
		Accounts payable			1,651			(7,254	)
		Deferred revenue			449			1,482
		Other accrued liabilities			1,944			(4,224	)
		Deferred rent and other			(84	)		313
			Net cash provided by operating activities		14,357			68
Cash flows from investing activities:
	Sales of marketable securities available-for-sale				12,147			7,017
	Purchases of marketable securities available-for-sale				(4,909	)		(1,000	)
	Purchase of property and equipment				(1,609	)		(7,515	)
	Proceeds from disposal of property and equipment				—			131
	Capitalization of service and product development costs				(1,525	)		(3,643	)
	Acquisition of businesses, net of cash acquired and fair value of common stock issued				—			(4,270	)
	Other assets				(868	)		118
	Payment of deferred acquisition payments				(3,500	)		(2,000	)
	Payment of transaction costs related to acquisitions				(1,305	)		(1,683	)
		Net cash used in investing activities			(1,569	)		(12,845	)
Cash flows from financing activities:
	Exercise of stock options				10			5,283
	Contributions from minority interest				—			1,681
	Purchase of treasury stock				—			(5,004	)
		Net cash provided by financing activities			10			1,960
Net increase (decrease) in cash and cash equivalents					12,798			(10,817	)
Cash and cash equivalents at beginning of period					15,372			34,412
Cash and cash equivalents at end of period				$	28,170		$	23,595
Other cash flow information:
		Taxes paid during the period		$	—		$	69
Noncash financing activities:
	Tax benefit from stock options exercised			$	54		$	7,523
	Deferred acquisition payments				—			5,000
	Fair value of common stock issued				3,847			131,177
	Fair value of stock options assumed				1,044			9,367
	Fair value of warrants issued				1,372			—
	Fair value of restricted stock awarded				3,927			—
	Unrealized gain (loss) from investments				(127	)		116
	Unrealized loss from foreign currency exchange				(119	)		—
On February 9, 2001, we acquired the outstanding capital stock not previously held by us in our subsidiary, Tradeweave, Inc. 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 prices were allocated, as follows:
	Working capital, other than cash			$	(1,750	)	$	(5,487	)
	Property and equipment				—			539
	Other assets				—			97
	Goodwill				5,471			108,469
	Other intangible assets				3,556			46,476
	In-process research and development				—			17,880
	Other non-current liabilities				—			(5,295	)
	Fair value of stock options assumed				(1,044	)		(9,367	)
	Intrinsic value of unvested stock options assumed				59			—
	Fair value of warrants issued				(1,372	)		—
	Deferred income taxes				(1,073	)		(17,865	)
	Less: Common stock issued in connection with acquisitions				(3,847	)		(131,177	)
	Acquisitions, net of cash acquired of $0 and $730 and fair value of common stock issued			$	—		$	4,270

See notes to condensed consolidated financial statements.

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QRS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. GENERAL

    We market our products and services as a comprehensive family known as the "QRS Tradeweave Retail Network" that provides customers with a single integrated source for implementing collaborative B2B ecommerce solutions. The QRS Tradeweave Retail Network consists of the Tradeweave Message Exchange, which provides the infrastructure that allows retailers and their trading partners to exchange business documents and information electronically; Tradeweave Business Intelligence (comprised of Tradeweave Product Catalog, Tradeweave Sales and Inventory Analysis, and Tradeweave Retail Intelligence Services) which enables our customers to leverage product and consumer information in their strategic and tactical decision making process; Tradeweave Collaboration and Commerce Platform (comprised of Tradeweave Sourcing, Tradeweave Merchandising and Tradeweave Logistics), which offers our customers a unified system to source, merchandise, conduct commerce and track product information; and Tradeweave Services (comprised of Tradeweave Digital Photography, Tradeweave Professional Services, and Tradeweave Tags and Label Services), which encompasses solutions consulting, digital imaging and merchandise tagging solutions. (See Note 8).

    We have prepared the condensed consolidated balance sheet as of June 30, 2001, the condensed consolidated statements of operations and comprehensive loss for the three and six months ended June 30, 2001 and 2000 and the condensed consolidated statements of cash flows for the six months ended June 30, 2001 and 2000, 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, 2001 and 2000 and for all periods presented have been made. The condensed consolidated balance sheet as of December 31, 2000 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, 2000.

    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 six months ended June 30, 2001 are not necessarily indicative of the operating results anticipated for the full year.

    Certain reclassifications have been made to the 2000 amounts to conform to the 2001 presentation.

2. ACQUISITIONS

    On February 9, 2001, we acquired the outstanding capital stock not previously held by us in our subsidiary, Tradeweave, Inc. (Tradeweave), under a merger agreement. The total acquisition cost was $8.0 million, comprised of 334,774 shares of our common stock valued at $3.8 million (calculated based on the average of the share price three days prior to the announcement of the acquisition on February 9, 2001 and three days after this date) for 4,347,711 shares of Tradeweave common stock and preferred stock held by Peter R. Johnson, Chairman of our Board of Directors, Garth Saloner, a

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member of our Board of Directors and certain Tradeweave employees who held shares pursuant to the exercises of Tradeweave stock options; transaction costs of approximately $1.8 million; and the fair value of employee options assumed of $1.0 million and the fair value of warrants issued to investors of $1.4 million.

    We assumed the outstanding stock options under the Tradeweave Non-Qualified Stock Option Plan, which were converted to stock options to purchase 138,369 shares of our common stock. The fair value of the stock options assumed was $1.0 million determined using the Black-Scholes method with the following assumptions: expected life of 4 years, volatility of 88%, weighted average risk-free interest rate of 6%, and expected dividend rate of 0%. Additionally, we issued warrants to purchase 140,000 shares our common stock at a price of $11.0625 per share with a fair value of $1.4 million (determined using the Black-Scholes method) to Mr. Johnson and Mr. Saloner. The warrants become exercisable in equal amounts over a four year period and expire on January 31, 2005. The intrinsic value of unvested stock options assumed has been included in the financial statements as deferred compensation and is amortized over the remaining vesting period. The acquisition was accounted for as a purchase transaction.

    The purchase price has been allocated to the acquired assets on the basis of their estimated fair values as of the date of acquisition, as determined by an independent appraisal. The amount allocated to intangible assets is being amortized on a straight-line basis over estimated useful lives of three to seven years. The financial statements reflect the preliminary allocation of the purchase price, as estimates of certain direct costs and liabilities associated with the transaction have not yet been finalized. The fair value of the assets acquired, based on the preliminary allocation of the purchase price, is summarized as follows (in thousands):

Fair value of common stock issued		$	3,847
Fair value of stock options assumed			1,044
Fair value of warrants issued			1,372
Transaction costs			1,750
	Total purchase price	$	8,013
Preliminary allocation of purchase price:
Goodwill		$	5,471
Current technology			1,523
Trademark			821
Fair value of other intangible assets			877
Assembled workforce			335
Intrinsic value of unvested options assumed			59
Deferred income taxes			(1,073	)
	Total allocation of purchase price	$	8,013

    In conjunction with the Rockport Trade Systems, Inc. (Rockport) and Image Info, Inc. (Image Info) acquisitions in 2000, we recorded in-process research and development charges of $17.9 million reflecting ongoing projects at the time of acquisition. The Rockport and Image Info projects included in in-process research and development have been completed, and the actual costs were in line with estimates.

3. EARNINGS (LOSS) PER SHARE

    Basic earnings per share (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

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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:

	Three Months Ended June 30,		Six Months Ended June 30,
	2001	2000	2001	2000
Shares used to compute basic EPS	15,470,336	14,772,204	15,238,417	14,448,476
Add: effect of dilutive securities	—	—	—	—
Shares used to compute diluted EPS	15,470,336	14,772,204	15,238,417	14,448,476

    Potentially dilutive shares for the quarters ended June 30, 2001 and 2000 were 254,544 shares and 400,028 shares, respectively. Potentially dilutive shares for the six months ended June 30, 2001 and 2000 were 286,012 and 752,604, respectively, which have been excluded from the shares used in calculating diluted loss per share because their effect is antidilutive.

4. RECENT ACCOUNTING PRONOUNCEMENTS

    In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 established accounting and reporting standards for derivative instruments, including derivative instruments embedded in other contracts, and for hedging activities. SFAS No. 133, as amended by SFAS No. 137,Deferral of the Effective Date of FASB Statement No. 133, is effective for fiscal years beginning after June 15, 2000. We adopted SFAS No. 133, effective January 1, 2001 and the adoption of the Statement had no material effect on our financial position or results of operations.

    In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141 "Business Combinations" and SFAS No. 142 "Goodwill and Other Intangible Assets." SFAS No. 141 requires business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting, and broadens the criteria for recording intangible assets separate from goodwill. Recorded goodwill and intangibles will be evaluated against this new criteria and may result in certain intangibles being subsumed into goodwill, or alternatively, amounts initially recorded as goodwill may be separately identified and recognized apart from goodwill. SFAS No. 142 requires the use of a nonamortization approach to account for purchased goodwill. Under a nonamortization approach, goodwill will not be amortized into results of operations, but instead would be reviewed for impairment and written down and charged to results of operations only in the periods in which the recorded value of goodwill is more than its fair value. The provisions of each statement which apply to goodwill and intangible assets acquired prior to June 30, 2001 will be adopted by the Company on January 1, 2002. We expect the adoption of these accounting standards will result in certain of our intangibles being subsumed into goodwill and will have the impact of reducing our amortization of goodwill commencing January 1, 2002; however, impairment reviews may result in future periodic write-downs.

5. INCOME TAXES

    We recorded no income tax benefit for the three months ended June 30, 2001 and a $166,000 income tax benefit for the three months ended June 30, 2000. Income tax benefits for the six months ended June 30, 2001 and 2000 were $1.2 million and $705,000, respectively, which reflects the non-deductibility of purchase accounting amounts related to the acquisitions of RockPort, Image Info and the Tradeweave minority interest.

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6. COMMON STOCK AND STOCK OPTIONS

    On December 19, 2000, our Compensation Committee approved the implementation of a restricted share award program pursuant to the stock issuance provisions of the 1993 Stock Option/Stock Issuance Plan (the "1993 Plan"). Under the terms of the program, each officer (from Vice President level and up) was given the opportunity to surrender his or her outstanding options under the 1993 Plan with an exercise price of more than $15.00 per share in return for a restricted share award at an exchange ratio of three option shares surrendered for every one share of common stock awarded under the restricted share program. When the restricted share awards were made under the program on January 3, 2001, the fair market value of our common stock was $13.69 per share. The executive officers surrendered options covering a total of 875,126 shares of our common stock with a weighted average exercise price of $41.88 per share in return for an aggregate of 286,876 shares of our common stock subject to their restricted share awards. The shares subject to each such award will be issued in a series of six successive equal semi-annual installments upon the individuals' completion of each successful six months of continued employment with us. The shares are fully vested upon their issuance, and on April 30, 2001, we issued 95,691 shares of our common stock under the program.

    The fair value of the 286,876 shares awarded was $3.9 million at January 3, 2001, and has been included in the financial statements as deferred compensation, and is being amortized ratably over the remaining vesting period. In the second quarter of 2001, shares subject to accelerated vesting were 12,222. During the first six months of 2001, shares subject to accelerated vesting and cancellation were 56,366 and 18,229, respectively. Stock-based compensation recognized during the second quarter of 2001 was $611,000 of which $374,000 related to the accelerated vesting in the second quarter. Stock-based compensation recognized during the first six months of 2001 was $1.3 million of which $772,000 related to the accelerated vesting. As of June 30, 2001, shares outstanding under the restricted share award program were 172,955.

7. COMMITMENTS AND CONTINGENCIES

    Effective January 1, 2001, we amended our agreement with IBM to eliminate existing volume commitments and penalties for failure to meet usage requirements. IBM waived all penalty charges incurred by us under the prior agreement. Under the amendment, we agreed to purchase a certain amount of network services for a fixed fee over a two-year period ending December 31, 2002. If our usage of the network services exceeds the specified usage volume, we will pay an incremental fee for such excess usage based on a schedule of charges. The amended agreement also allows for the purchasing of additional/other services at a discounted rate, with no volume commitments or penalties. As part of the amendment, we also terminated the Retail Management Agreement between IBM and us.

    On September 22, 2000, Gladson and Associates, Inc. (Gladson) filed a complaint for damages, injunctive relief and declaratory relief against us in Contra Costa County Superior Court. On October 6, 2000, we removed the case to the United States District Court, Northern District of California. On February 6, 2001, the Court dismissed Gladson's complaint in its entirety with leave to amend.

    On March 8, 2001, Gladson filed its First Amended Complaint (FAC) for injunctive relief and damages in the sum of $3.5 million, including punitive damages in the sum of $5.0 million. The FAC asserts claims for breach of written contract, unfair competition, misappropriation of trade secrets, conversion, fraud, false designation of origin, intentional and negligent interference with prospective business advantage, and conspiracy. On March 21, 2001, we filed a motion to dismiss the FAC on strictly legal grounds. On May 4, 2001, the Court granted our motion to dismiss as to Gladson's claims for unfair competition, conspiracy, fraud and negligent interference with prospective business advantage; on the last two dismissed claims, the Court gave Gladson twenty days leave to amend such

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claims. After we raised procedural defects to Gladson's Second Amended Complaint, Gladson elected to file a Third Amended Complaint on or about July 22, 2001. Our answer or other response to the Third Amended Complaint must be filed by August 21, 2001.

    Based upon the investigation to date, we intend to vigorously deny all claims made by Gladson and, furthermore, believes that such claims are entirely without merit. Discovery has not yet commenced and no trial date has been set in this matter. No costs have been accrued related to this matter.

8. SEGMENT INFORMATION

    We market our products and services as a comprehensive family known as the "QRS Tradeweave Retail Network" that provides customers with a single integrated source for implementing collaborative B2B ecommerce solutions. Our products and services provide a network between retailers, suppliers and their trading partners as well as value-added functionality that enables them to transact business, share information, and collaborate on decisions regarding consumer demand, forecasting, inventory management, production, and logistics. Our products and services are integrated with our customers' merchandising, logistics, and supply chain management systems in order to deliver greater benefits and efficiencies.

    Our products and services, which we deliver and can be accessed over the Internet and private networks, are organized into four categories: Tradeweave Message Exchange, which provides the infrastructure that allows retailers and their trading partners to exchange business documents and information electronically; Tradeweave Business Intelligence (comprised of Tradeweave Product Catalog, Tradeweave Sales and Inventory Analysis, and Tradeweave Retail Intelligence Services) which enables our customers to leverage product and consumer information in their strategic and tactical decision making process; Tradeweave Collaboration and Commerce Platform (comprised of Tradeweave Sourcing, Tradeweave Merchandising and Tradeweave Logistics), which offers our customers a unified system to source, merchandise, conduct commerce and track product information; and Tradeweave Services (comprised of Tradeweave Digital Photography, Tradeweave Professional Services, and Tradeweave Tags and Label Services), which encompasses solutions consulting, digital imaging and merchandise tagging solutions.

    We classify our business segments into two reportable operating segments based on the way we are managing our business: Tradeweave Message Exchange, Catalog and Related Services (formerly Ecommerce and Content Services, comprised of Tradeweave Message Exchange, Tradeweave Product Catalog, Tradeweave Retail Intelligence Services, Tradeweave Digital Photography and Tradeweave Tags and Label Services) and Tradeweave Collaboration and Related Services (formerly Applications Services and Marketplace Services, comprised of Tradeweave Collaboration and Commerce Platform, Tradeweave Sales and Inventory Analysis, and Tradeweave Professional Services). 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 cash and cash equivalents, marketable securities available-for-sale, accounts receivable, income taxes receivable, prepaid expenses and other current assets, the net book value of property and equipment, deferred income tax assets and other non-current assets.

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    Financial information for our reportable business segments as of and for the six months ended June 30, 2001, and as of December 31, 2000 and for the six months ended June 30, 2000 is as follows (in thousands):

    As of and for the six months ended June 30, 2001:

	Tradeweave Message Exchange, Catalog and Related Services (formerly Ecommerce and Content Services)		Tradeweave Collaboration and Related Services (formerly Applications and Marketplace Services)			Total
Revenues	$	62,608	$	10,005		$	72,613
Operating earnings (loss)		3,112		(21,970	)		(18,858	)
Intangible assets (including goodwill), net		31,350		112,968			144,318
Capitalized service and product development costs, net		2,624		5,796			8,420
Amortization of intangible assets (including goodwill)		4,416		10,644			15,060
Amortization of capitalized service and product development costs		510		1,616			2,126

    Reconciliation to QRS as Reported as of June 30, 2001:

Assets:
Total reportable segments		$	152,738
Unallocated amounts:
	Cash and cash equivalents		28,170
	Marketable securities available-for-sale		4,896
	Accounts receivable, net		24,227
	Prepaid expenses and other		3,206
	Income taxes receivable		104
	Property and equipment, net		19,968
	Deferred income tax assets		1,666
	Other assets		2,457
Total assets as reported		$	237,432

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    As of December 31, 2000 and for the six months ended June 30, 2000(1):

	Tradeweave Message Exchange, Catalog and Related Services (formerly Ecommerce and Content Services)		Tradeweave Collaboration and Related Services (formerly Application and Marketplace Services)			Total
Revenues	$	65,582	$	6,019		$	71,601
Operating earnings (loss)		10,971		(35,981	)		(25,010	)
Intangible assets (including goodwill), net		35,264		115,188			150,452
Capitalized service and product development costs, net		2,137		6,884			9,021
Amortization of intangible assets (including goodwill)		3,376		7,426			10,802
Amortization of capitalized service and product development costs		571		1,262			1,833
In-process research and development		—		17,880			17,880

    Reconciliation to QRS as Reported as of December 31, 2000:

Assets:
Total reportable segments		$	159,473
Unallocated amounts:
	Cash and cash equivalents		15,372
	Marketable securities available-for-sale		12,261
	Accounts receivable, net		27,292
	Prepaid expenses and other		2,959
	Income taxes receivable		3,228
	Property and equipment, net		22,373
	Deferred income tax assets		1,666
	Other assets		3,496
Total assets as reported		$	248,120

(1)

In order to provide comparative segment information, the previously reported segment information as of December 31, 2000 and for the six months ended June 30, 2000 has been restated.

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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, 2000.

GENERAL

    We market our products and services as a comprehensive family known as the "QRS Tradeweave Retail Network" that provides customers with a single integrated source for implementing collaborative B2B ecommerce solutions. We derive revenues from four principal sources: Tradeweave Message Exchange, which provides the infrastructure that allows retailers and their trading partners to exchange business documents and information electronically; Tradeweave Business Intelligence (comprised of Tradeweave Product Catalog, Tradeweave Sales and Inventory Analysis, and Tradeweave Retail Intelligence Services), which enables our customers to leverage product and consumer information in their strategic and tactical decision making process; Tradeweave Collaboration and Commerce Platform (comprised of Tradeweave Sourcing, Tradeweave Merchandising, and Tradeweave Logistics), which offers our customers a unified system to source, merchandise, conduct commerce and track product information; and Tradeweave Services (comprised of Tradeweave Digital Photography, Tradeweave Professional Services, and Tradeweave Tags and Labels), which encompass solutions consulting, digital imaging and merchandise tagging solutions. We classify our business segments into two reportable operating segments based on the way we are managing our business: Tradeweave Message Exchange, Catalog and Related Services (formerly Ecommerce and Content Services) and Tradeweave Collaboration and Related Services (formerly Applications and Marketplace Services) (See Note 8 to Condensed Consolidated Financial Statements).

RESULTS OF OPERATIONS

Revenues

    Revenues were $36.8 million for the second quarter of 2001, compared to revenues of $36.5 million for the second quarter of 2000. Revenues were $72.6 million for the first six months of 2001, compared to revenues of $71.6 million for the first six months of 2000. Revenues from Tradeweave Message Exchange, Catalog and Related Services were $31.0 million for the second quarter of 2001, compared to revenues of $31.9 million for the second quarter of 2000. For the first six months of 2001 and 2000, revenues from Tradeweave Message Exchange, Catalog and Related Services were $62.6 million and $65.6 million, respectively. Revenues from Tradeweave Collaboration and Related Services were $5.8 million for the second quarter of 2001, compared to $4.6 million for the second quarter of 2000. For the first six months of 2001 and 2000, revenues from Tradeweave Collaboration and Related Services were $10.0 million and $6.0 million, respectively. The decrease in revenues from Tradeweave Message Exchange, Catalog and Related Services was primarily attributable to decreases in electronic data exchange partially offset by increases in other areas. Additionally, our digital photography business has been affected by reduced orders from internet businesses. We expect continued pricing pressure and a competitive environment, particularly in the electronic data exchange area. The increase in revenues from Tradeweave Collaboration and Related Services results primarily from application licensing fees along with the related professional services.

Cost of Revenues

    Cost of revenues consists primarily of the cost of purchasing network services, the costs of our data center and technical enablement, customer support and professional services personnel, and

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amortization of capitalized service and product development costs. Cost of revenues increased by 1% to $21.2 million for the second quarter of 2001 from $20.9 million for the second quarter of 2000. Cost of revenues increased by 6% to $42.4 million for the six months ended June 30, 2001 from $39.9 million for the six months ended June 30, 2000. The increase was principally due to an increase in costs for our professional services personnel associated with our expanded product offerings, and an increase in costs for our data center and technical customer support services group, partially offset by cost reductions achieved under a long-term contract with IBM for message exchange services, which became effective on January 1, 2001. The gross profit margin was 42% and 43% for the second quarters of 2001 and 2000, respectively.

Sales and Marketing Expenses

    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 6% to $7.5 million for the second quarter of 2001, from $7.1 million for the second quarter of 2000. Sales and marketing expenses increased by 14% to $15.9 million for the first six months of 2001, from $14.0 million for the first six months of 2000. This increase is due to growth in our international sales organization partially offset by reductions in marketing expenses due to brand consolidation. Sales and marketing expenses for the first six months of 2001 included charges of $1.2 million, comprised of $622,000 in severance and $571,000 in stock-based compensation related to the accelerated vesting of shares of our common stock under a restricted share award program.

Service and Product Development Expenses

    Service and product development expenses consist primarily of personnel and equipment costs related to research, development and implementation of new services and enhancement of existing services. Service and product development expenses increased by 94% to $3.3 million for the second quarter of 2001, from $1.7 million for the second quarter 2000. Service and product development expenses increased by 81% to $6.5 million for the first six months of 2001, from $3.6 million for the first six months of 2000. The increase in service and product development expenses is due to a reduction in capitalizable costs. Capitalized service and product development costs decreased by $900,000 in the second quarter of 2001 compared to the second quarter 2000. Capitalized service and product development costs decreased by $2.1 million for the first six months of 2001 compared to the first six months of 2000.

General and Administrative Expenses

    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 decreased by 3% to $5.6 million for the second quarter of 2001, from $5.8 million for the second quarter of 2000. General and administrative expenses increased by 12% to $11.6 million for the six months ended 2001, from $10.3 million for the six months ended 2000. The second quarter decrease resulted from cost cutting measures implemented earlier in the year, partially offset by one-time charges of $655,000, comprised of severance; stock-based compensation related to the accelerated vesting of shares of our common stock under a restricted share award program; and facilities costs related to the termination of a non-cancelable operating lease. Expenses for the six months ended June 30, 2001 increased primarily due to one time charges of $1.8 million, comprised of severance; stock-based compensation related to the accelerated vesting of shares of our common stock under a restricted share award program; and facilities costs related to the termination of a non-cancelable operating lease.

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Acquisitions and Amortization of Intangible Assets (including Goodwill)

    In connection with the acquisitions of Image Info, Inc. (Image Info) and Rockport Trade Systems, Inc. (RockPort) in 2000, we expensed $17.9 million ($9.4 million for Image Info and $8.5 million for RockPort, representing 18% and 8% of the purchase prices, respectively) of in-process research and development (IPR&D) related to eight software application research projects under development for which technological feasibility had not been established as of the acquisition dates. The value of each project was determined through the income approach, which involved discounting cash flows to be derived from the future products to present value using discount rates ranging from 22.5% to 28.5%. The discount rates were developed by computing the weighted average cost of capital of established companies similar in operations and then increased to reflect the additional risk for technology under development since these projects have not reached technological feasibility. The revenue and expense projections were based on historical trends and future expectations for the acquired companies and QRS. These projects have been completed and the actual costs were in line with estimates. However, failure to successfully introduce these products into the market place could adversely affect our future sales and profitability. Additionally, the value of other intangible assets, including goodwill may become impaired. Management believes that the IPR&D charge of $17.9 million is valued consistent with the SEC staff's current views regarding valuation methodologies. There can be no assurances, however, that the SEC staff will not take issue with any assumptions used in our valuation model and require a revision in the amounts allocated to IPR&D.

    On February 9, 2001, we acquired the outstanding capital stock not previously held by us in our subsidiary, Tradeweave, Inc. (Tradeweave), under a merger agreement. The total acquisition cost was $8.0 million, comprised of 334,774 shares of our common stock valued at $3.8 million for 4,347,711 shares of Tradeweave common stock and preferred stock held by Peter R. Johnson, Chairman of our Board of Directors, Garth Saloner, a member of our Board of Directors and certain Tradeweave employees who held shares pursuant to the exercises of Tradeweave stock options; transaction costs of approximately $1.8 million and the fair value of employee options assumed of $1.0 million and the fair value of warrants issued to investors of $1.4 million.

    We assumed the outstanding stock options under the Tradeweave 1999 Stock Option/Issuance Plan, which were converted to options to purchase 138,369 shares of our common stock. The fair value of the stock options assumed was $1.0 million determined using the Black-Scholes method. Additionally, we issued warrants to purchase 140,000 shares of our common stock at a price of $11.0625 per share with a fair value (determined using the Black-Scholes method) of $1.4 million to Mr. Johnson and Mr. Saloner. The warrants become exercisable in equal amounts over a four year period and expire on January 31, 2005. As a result, we recorded stock-based compensation of $2.4 million, which has been included in the acquisition cost. The acquisition was accounted for as a purchase transaction.

    The purchase prices have been allocated to the acquired assets on the basis of their estimated fair values as of the date of each acquisition, as determined by an independent appraisal. The appraisal techniques used in our acquisitions included certain assumptions, including, the extent, character and utility, the income generating or cost-saving attributes, the nature and timing of the functional or economic obsolescence and the relative risk and uncertainty associated with an investment in intangible assets. These intangible assets are amortized over three to seven years.

    Amortization of intangible assets consists primarily of amortization of goodwill and amortization of other intangible assets, including current technology, tradenames, customer lists, workforce and non-compete agreements. Amortization of intangible assets was $7.9 million and $7.1 million for the second quarter of 2001 and 2000, respectively. Amortization of intangible assets was $15.1 million and $10.6 million for the six months ended June 30, 2001 and 2000. This increase was primarily due to the timing of the acquisitions during the first quarters of 2000 and 2001. Amortization of goodwill was $4.3 million and $4.0 million for the second quarter of 2001 and 2000, respectively. Amortization of

15

goodwill was $8.6 million and $5.8 million for the six months ended June 30, 2001 and 2000, respectively. Amortization of other intangible assets was $3.5 million and $3.1 million for the second quarter of 2001 and 2000, respectively. Amortization of other intangible assets was $6.5 million and $4.8 million for the six months ended June 30, 2001 and 2000, respectively. After January 1, 2002, under FAS 142 the elimination of goodwill amortization is expected to reduce operating expenses by approximately $17.0 million and increase net income by approximately $17.0 million, for the year ended December 31, 2002, compared with 2001. The Company will also complete an initial goodwill impairment assessment to determine if a transition impairment charge will be recognized under FAS 142. See footnote 4. "Recent Accounting Pronouncements" in the Notes to Condensed Consolidated Financial Statements.

Interest Income

    Interest income consists primarily of interest earned on cash, cash equivalents and investment securities. Interest income was $338,000 and $431,000 for the second quarter of 2001 and 2000, respectively. Interest income was $708,000 and $828,000 for the six months ended June 30, 2001 and 2000, respectively. Changes in interest income reflect the level of average investment balances in each period.

Income Taxes

    We recorded no income tax benefit for the three months ended June 30, 2001 and an income tax benefit of $166,000 for the three months ended June 30, 2000. Income tax benefits for the six months ended June 30, 2001 and June 30, 2000 were $1.2 million and $705,000, respectively, which reflects the non-deductibility of purchase accounting amounts related to the acquisitions of RockPort and Image Info. The difference between our expected annualized effective income tax rate of negative 7% and the combined federal and state statutory rates of approximately negative 39% is primarily due to acquisition-related charges that were not deductible for tax purposes.

Liquidity and Capital Resources

    Our working capital decreased from $35.9 million at December 31, 2000 to $33.7 million at June 30, 2001. Cash, cash equivalents and short-term marketable securities available-for-sale increased from $25.5 million at December 31, 2000 to $31.1 million at June 30, 2001. Total assets decreased from $248.1 million at December 31, 2000 to $237.4 million at June 30, 2001 and total liabilities decreased from $37.0 million at December 31, 2000 to $36.0 million at June 30, 2001.

    The increase of $5.6 million in cash, cash equivalents and short-term marketable securities available-for-sale from December 31, 2000 to June 30, 2001 resulted primarily from an overall reduction in accounts receivable of $3.0 million, an income tax refund of $3.1 million, and $8.2 million in cash flows from other operating activities, partially offset by payments of $1.3 million in acquisition related transaction costs, $1.0 million related to a deferred acquisition payment and $3.1 million for capital expenditures (including service and product development costs). Net cash flows from operating activities were $14.4 million for the six months ended June 30, 2001, which were primarily attributable to the $17.0 million net loss adjusted for the amortization and depreciation of intangible and other assets of $21.3 million and stock based compensation of $1.3 million.

    Under a stock repurchase program authorized by our Board of Directors, we are authorized to repurchase our common stock from time to time up to $8.1 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

16

management determines additional purchases are not warranted. We did not repurchase any shares of our common stock during the quarter ended June 30, 2001.

    Management believes that the cash and cash equivalents at June 30, 2001, and cash anticipated to be generated from future operations, will be sufficient to meet our working capital needs and capital expenditures in the next twelve months. After that time, we cannot be certain that additional funding will be available on acceptable terms or at all. If we require additional capital resources to grow our business, execute our operating plans or acquire complementary technologies or businesses at any time in the future, we may seek to sell additional equity or debt securities, which may result in additional dilution to our stockholders. We have no plans to pay 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. Treasury 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, 2001, the weighted average maturity and interest rate of the marketable securities portfolio was 266 days and 4.3%, respectively.

	Maturity 2001			Maturity 2002			Maturity 2003			Fair Value at June 30, 2001
	(Amounts in thousands)
Corporations	$	2,000			—			—		$	1,977
U.S. Government Agencies	$	950		$	970		$	1,000		$	2,919
Average interest rate		4.09	%		4.47	%		4.80	%

Foreign Currency Risk

    We have no significant investments outside the United States and do not have material foreign currency risk.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

    As previously disclosed in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 2, 2001, on September 22, 2000, Gladson and Associates, Inc. (Gladson) filed a complaint for damages, injunctive relief and declaratory relief against us in Contra Costa County Superior Court. On October 6, 2000, we removed the case to the United States District Court, Northern District of California. On February 6, 2001, the Court dismissed Gladson's complaint in its entirety with leave to amend.

    On March 8, 2001, Gladson filed its First Amended Complaint (FAC) for injunctive relief and damages in the sum of $3.5 million, including punitive damages in the sum of $5.0 million. The FAC asserts claims for breach of written contract, unfair competition, misappropriation of trade secrets, conversion, fraud, false designation of origin, intentional and negligent interference with prospective business advantage, and conspiracy. On March 21, 2001, we filed a motion to dismiss the FAC on strictly legal grounds. On May 4, 2001, the Court granted our motion to dismiss as to Gladson's claims for unfair competition, conspiracy, fraud and intentional negligent interference with prospective business advantage; on the last two dismissed claims, the Court gave Gladson twenty days leave to amend such claims. After we raised procedural defects to Gladson's Second Amended Complaint, Gladson elected to file a Third Amended Complaint on or about July 22, 2001. Our answer or other response to the Third Amended Complaint must be filed by August 21, 2001.

    Based upon the investigation to date, we intend to vigorously deny all claims made by Gladson and, furthermore, believe that such claims are entirely without merit. Discovery has not yet commenced and no trial date has been set in this matter. No costs have been accrued related to this matter.

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

(a)

The annual meeting of stockholders was held on May 10, 2001.

(b)

The following directors were elected at the meeting to a term of three years:

John P. Dougall, Philip Schlein, John S. Simon.

The following directors are continuing to serve their terms:

David A. Cole, Garth Saloner, Garen K. Staglin, Peter R. Johnson, and Tania Amochaev

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(c)

The matters voted upon at the meeting and results of the voting with respect to those matters are as follows:

		For	Authorization Withheld
a.	Election of Directors:
	John P. Dougall	12,771,226	202,165
	Philip Schlein	12,771,226	202,165
	John S. Simon	12,771,226	202,165

		For	Against	Abstain
b.	Approve an amendment to QRS' 1993 Stock/Option Issuance Plan	6,375,879	3,598,361	63,704
c.	Approve a series of amendments and restatement of QRS' Employee Stock Purchase Plan	9,612,079	361,984	63,881
d.	Ratify the appointment of PricewaterhouseCoopers LLP as QRS' independent auditors for the fiscal year ending December 31, 2001	12,922,124	50,197	1,070

    The foregoing matters are described in further detail in our definitive proxy statement dated April 14, 2001 for the Annual Meeting of Stockholders held on May 10, 2001.

Item 5. Other information

    None

Item 6. Exhibits and Reports on Form 8-K

A. Exhibits

Exhibit Number	Description
10.64	Employment Agreement commencing on April 1, 2001 between the Registrant and Samuel M. Hedgpeth III.
10.65	1993 Stock Option/Stock Issuance Plan (as amended and restated through March 1, 2001) (incorporated by reference to Appendix B filed with Registrant's Definitive Proxy Statement on Schedule 14A for the Annual Meeting of Shareholders on May 10, 2001)
10.66	Employee Stock Purchase Plan (as amended and restated as of March 1, 2001) (incorporated by reference to Appendix C filed with Registrant's Definitive Proxy Statement on Schedule 14A for the Annual Meeting of Shareholders on May 10, 2001)

B. Reports on Form 8-K

    None

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SIGNATURES

    Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized and in the capacity indicated.

	QRS CORPORATION (Registrant)
August 14, 2001	/s/ SAMUEL M. HEDGPETH III   Samuel M. Hedgpeth III Chief Financial Officer
August 14, 2001	/s/ JOHN S. SIMON   John S. Simon Chief Executive Officer

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QuickLinks

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation
Item 3. Quantitative and Qualitative Disclosures about Market Risk

PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other information
Item 6. Exhibits and Reports on Form 8-K