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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-21958
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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, CALIFORNIA 94804
(Address of principal executive offices, including zip code)
(510) 215-5000
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, par value $0.001 per share
(Title of Class)
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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. YES /X/ NO / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. /X/
The aggregate market value of voting stock held by non-affiliates of the
Registrant as of March 15, 2001 was approximately $148,017,048 based upon the
closing price of $9.6875 for shares of the Registrant's common stock as reported
by the Nasdaq National Market). Shares of common stock held by each officer,
director and holder of five percent or more of the outstanding common stock have
been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
Number of shares of common stock outstanding as of March 15, 2001:
15,279,179
DOCUMENTS INCORPORATED BY REFERENCE
Designated portions of the following documents are incorporated by reference
into this Report on Form 10-K where indicated:
1. QRS Corporation Proxy Statement for the Annual Meeting of Stockholders
to be held on or about May 10, 2001, Part III.
The exhibit index appears on Pages 60 to 63.
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QRS CORPORATION
2000 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
ITEM 1 Business.................................................... 3
ITEM 2 Facilities.................................................. 17
ITEM 3 Legal Proceedings........................................... 17
ITEM 4 Submission of Matters to a Vote of Security Holders......... 17
PART II
ITEM 5 Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 18
ITEM 6 Selected Financial Data..................................... 19
ITEM 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 19
ITEM 7A Quantitative and Qualitative Disclosures About Market
Risk........................................................ 25
ITEM 8 Financial Statements........................................ 26
ITEM 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 59
PART III
ITEM 10 Directors and Executive Officers of the Registrant.......... 59
ITEM 11 Executive Compensation...................................... 59
ITEM 12 Security Ownership of Certain Beneficial Owners and
Management.................................................. 59
ITEM 13 Certain Relationships and Related Transactions.............. 59
PART IV
ITEM 14 Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 60
SIGNATURES.................................................. 64
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PART I
ITEM 1. BUSINESS
EXCEPT FOR THE HISTORICAL FINANCIAL INFORMATION CONTAINED HEREIN, THE
MATTERS DISCUSSED IN THIS ANNUAL REPORT ON FORM 10-K MAY BE CONSIDERED
"FORWARD-LOOKING" STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934,
AS AMENDED. SUCH STATEMENTS INCLUDE DECLARATIONS REGARDING OUR INTENT, BELIEF OR
CURRENT EXPECTATIONS. THESE FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF
FUTURE PERFORMANCE AND INVOLVE A NUMBER OF RISKS AND UNCERTAINTIES, AND OUR
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE INDICATED BY SUCH
FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE INDICATED BY SUCH FORWARD-LOOKING STATEMENTS INCLUDE, BUT
ARE NOT LIMITED TO, THOSE LISTED UNDER "BUSINESS--RISK FACTORS" AND ELSEWHERE
HEREIN, AND OTHER RISKS IDENTIFIED FROM TIME TO TIME IN OUR REPORTS AND
REGISTRATION STATEMENTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.
We are a leading provider of retail supply chain products and services. Our
products and services help thousands of customers by providing tools that enable
retailers, manufacturers and their business partners to source, track and
deliver the right product to the right place at the right time for the right
price while reducing costs and cycle times. For 13 years, QRS has been an
innovator in the technological evolution of the retail industry and has helped
its customers build profitable relationships with their supply chain partners.
QRS markets its products and services as a comprehensive family known as the
"Tradeweave Retail Network-TM-" that provides customers with a single integrated
source for implementing collaborative B2B ecommerce practices. 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 services, which we deliver and can be accessed
over the Internet and private networks, are organized into four major
categories:
- Tradeweave Collaboration and Commerce Platform, which offers our customers
a unified system to source, merchandise, conduct commerce and track
product information.
- Tradeweave Business Intelligence, which enables our customers to leverage
important product and consumer information in their strategic and tactical
decision making process.
- Tradeweave Message Exchange, which provides the crucial infrastructure to
allow retailers and their trading partners exchange critical business
documents and information electronically.
- Tradeweave Services, which encompasses solutions consulting, digital
imaging and merchandise tagging solutions.
Our business is subject to various risks and uncertainties that are
described herein under "Risk Factors."
We were incorporated in California in 1985 and reincorporated into Delaware
in October 1997. Except as otherwise noted, all references to "we" and "us"
include the subsidiaries of the Company.
INDUSTRY BACKGROUND
The retail industry is one of the world's largest and most complex sector.
According to a 2000 study by PricewaterhouseCoopers LLP, global retail sales
exceeded $6 trillion in 1999. The U.S. Department of Commerce estimated U.S.
retail sales in excess of $3.2 trillion in 2000.
The retail industry is highly fragmented and includes organizations ranging
from large multi-national retailers to single store specialty retailers, as well
as thousands of suppliers, manufacturers and distributors. In addition, the
retail industry is characterized by multiple product sourcing options, a
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wide array of products and product options, and multi-channel shopping venues
including retail stores, outlet malls, mail order catalogs, etailers and various
Internet sites. Due to this fragmentation, uncertainty and the industry's low
growth rate, competition for retail customers and wholesale orders is intense.
Participants have responded by focusing on meeting consumer demand quickly and
operating as efficiently as possible to capture market share and preserve
margins.
B2B ECOMMERCE AND THE RETAIL INDUSTRY
Historically, retailers and suppliers depended upon paper communication as
the medium for conducting business. While computers enabled companies to process
data electronically, the exchange of this data between companies still relied
heavily on paper-based communications for the exchange of information. Inherent
in this process were delays in sending information and an increased potential
for errors as information was transcribed and product descriptions interpreted
and selling summarized within and between companies in the supply chain.
A cooperative effort between industry groups led to standardized data
formats, and in the mid 1980's that work created industry wide electronic data
interchange (EDI) and uniform product code (U.P.C.) standards. EDI was developed
to allow retailers, suppliers and their trading partners to create and transmit
critical business documents in standard data format that was system and hardware
independent. These standards were also scalable and designed for open
architecture. The U.P.C. was developed to allow the same partners to
consistently identify and machine scan merchandise throughout the logistics
process up to and including the point of sale. Both of these technologies
provided retailers, distributors, and suppliers the opportunity to significantly
reduce the cost and improve the efficiency of their supply chain if they could
be implemented between trading partners.
It was the establishment and adoption of these standards and the requirement
for supply chain implementation that led to the foundation for QRS. Since
inception, QRS has enabled the retail supply chain to conduct business and
exchange information through electronic means. The retail industry has adopted
in varying degrees various components of electronic commerce (ecommerce), and
QRS has provided an increasing number of products and services over the last
thirteen years to faciliate the adoption and implementation of the various and
continually evolving standards, technologies, and processes that collectively
comprise ecommerce.
As Internet bandwidth, reliability, and security improve, more retailers and
manufacturers are beginning to use the Internet to expand their ecommerce
programs to extend transactions, online trading communities, and exchange more
types of information with additional suppliers, distributors, and customers.
This heightened awareness of B2B ecommerce has also led to an industry push to
create supply chain management (SCM) solutions focused on the efficient sharing
of sourcing, demand, forecasting, order, and inventory information that span the
entire merchandise product lifecycle. QRS has made a number of investments,
through both internal development and acquisition, to extend its products and
services to take advantage of the opportunities presented by the web as well as
an increasingly sophisticated need to integrate supply chain applications across
companies.
Most recently, the benefits of SCM have come to the forefront of B2B
ecommerce with the advent of Internet based trading exchanges. SCM covers the
entire product lifecycle continuum. By replacing paper-based processes with
ecommerce solutions, SCM software solutions enable real-time data sharing and
collaboration across supply chain activities, including product design,
sourcing, demand forecasting, collaborative assortment planning, purchasing,
logistics, distribution, pricing, sales, analysis, replenishment, sales
analysis, and surplus disposition. The results are lower operation costs,
overall reduction of product development and delivery cycle time, reduced rates
of product stock-outs, increased sales, improved gross margins, and reduced
operating expenses, which improve not only the financial performance of
retailers, distributors, and suppliers, but all ultimately benefit the consumer
through lower prices and improved service levels.
Despite the emergence of the Internet as a technology and SCM as a
management principal, we believe it will be many years before the majority of
commerce is done in this manner. Significant
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investments in internal application and process reengineering are required to
implement SCM successfully, and the maturity of the infrastructure in place,
well defined standards, existing investments and cost of conversion tend to
focus new efforts on areas and partners not yet automated through ecommerce. In
addition, international efforts are much less mature than those in North
America. Significant variation in the form and sophistication of ecommerce
implementation exist across the retail industry, and existing ecommerce
technologies critical to current operations must be integrated with new SCM
initiatives, and a continuing trading partner community management requirement
will remain regardless of any new technologies developed. We believe that the
role of a trusted third party, able to install and integrate internal SCM
solutions and extend the implementation and benefits of ecommerce across trading
partners of various sizes, will continue to exist as long as the retail industry
desires to improve supply chain efficiency and merchandise performance through
ecommerce over the internet rather than private and/or value added networks,
primarily due to the maturity of the infrastructure in place, well defined
standards, existing investments and cost of conversion.
IMPLEMENTATION OF B2B ECOMMERCE SERVICES
We believe retailers, suppliers and their trading partners are implementing
B2B ecommerce services in several ways, as described below.
Retailers, suppliers and their trading partners are taking advantage of
advances in data communications technologies and the availability of public and
private networks to transmit electronically transaction documents, such as
purchase orders, invoices and shipping instructions. The electronic exchange of
documents facilitates rapid and uniform communications among retailers,
suppliers, transportation services and financial institutions. It also reduces
the opportunity for clerical error. The transformation of paper records to an
electronic format facilitates data storage and analysis. Electronic document
exchange typically relies on common message formats and standards ranging from
EDI to extensible markup language (XML).
Retail companies are also automating their merchandise management practices
by installing networked point of sale terminals to verify product prices and
track merchandise and inventory levels automatically. These capabilities, along
with the rapid adoption of bar coding technologies, have led to the adoption of
a standardized product identification, numbering and communication format, known
as the universal product code or U.P.C., in North America and the European
article number, or E.A.N. in Europe and other international markets. The use of
U.P.C. and E.A.N. data greatly increases the efficiency with which retailers and
vendors can mark, track and exchange detailed product information. Today, for
example, the average department store carries more than one million unique
products and product options at a time, and the largest can carry as many as
five million. Each retailer's products are produced by hundreds, or in some
cases thousands, of independent vendors. Importantly, when U.P.C. and E.A.N.
data is used in conjunction with electronic document exchange, retailers benefit
through more accurate, secure and timely information exchange.
In addition, participants in the retail industry are using software
applications that leverage the data collected through ecommerce. These
applications analyze the data to assist in managing and optimizing the flow of
products between trading partners by managing inventory levels and replenishment
as well as product distribution and procurement. By collaborating with their
trading partners, we believe retail industry participants can achieve greater
operating efficiencies and improve their time to market.
Finally, retail participants are beginning to participate in public and
private trading exchanges to enhance their business processes through online
supply chain management and collaboration. B2B online marketplaces allow
retailers and vendors to conduct paperless transactions and exchange information
in real-time when these exchanges are connected to networks, identify items
consistently and process electronic business documents. Lastly, the global
availability of the Internet allows companies to reach outside of their local
markets and create electronic relationships with either new manufacturers and
retailers or those whom they were previously unable to establish electronic
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commerce relationships with using private networks for reasons of geography,
infrastructure, cost, or complexity.
QRS SERVICES
Our services are designed to enable retailers, vendors, manufacturers, and
carriers to implement B2B ecommerce practices. Our services provide a network
between all 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 services are integrated with our customers' back-end and supply
chain management systems in order to deliver greater benefits and efficiencies.
We also offer products and services that provide benefits to the
front-end/merchandising side of our customers' businesses. We market our
services, the Tradeweave Retail Network, as a comprehensive family that provides
customers with a single integrated source for implementing collaborative B2B
ecommerce solutions. However, selected services may be implemented on a
stand-alone basis and expanded incrementally, thereby allowing customers to
integrate functions as needed within their organizations.
QRS' Tradeweave Retail Network has grown out of our eCommerce, Content,
Applications and Marketplace offerings. During 2000, we acquired two companies
with products that significantly expanded our traditional offerings. With the
merger of our subsidiary, Tradeweave, Inc., into QRS in early 2001, we are now
able to complete the integration of our application, content, network and data
products into a single comprehensive solution under the brand "Tradeweave." We
also altered our product names to describe better what services they perform.
The Tradeweave Retail Network from QRS brings together a total end-to-end supply
chain solution for manufacturers, vendors, suppliers and retailers to build
secure and profitable relationships between businesses across the global supply
chain. The chart below shows our old product names as set forth in last year's
Report on Form 10-K and the new product names for 2001 and beyond.
NEW QRS TRADEWEAVE RETAIL PRODUCT NEW QRS TRADEWEAVE RETAIL NETWORK
OLD QRS PRODUCT NAMES NAMES GROUP NAMES
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Marketplace Services Tradeweave Collaborative Planning Tradeweave Collaboration and Commerce
Platform
Content Services
QRS Keystone Tradeweave Product Catalog Tradeweave Business Intelligence
Services
RDS Tradeweave Retail Intelligence Tradeweave Business Intelligence
Services
Digital Photography Services Tradeweave Digital Photography Tradeweave Services
ECommerce Services
QRS Alliance Tradeweave Data Exchange Messaging Tradeweave Message Exchange
QRS Concourse Tradeweave Remote Access Tradeweave Message Exchange
QRS Quickstep Tradeweave Vendor Messaging Tradeweave Message Exchange
QRS EC Service Bureau Tradeweave Service Bureau Tradeweave Message Exchange
Application Services
Rockblocks Tradeweave Sourcing Tradeweave Collaboration and Commerce
Platform
Image Info Tradeweave Merchandise Planning Tradeweave Collaboration and Commerce
Platform
QRS LMS Tradeweave Logistics Tradeweave Collaboration and Commerce
Platform
QRS IMS Tradeweave Sales/Inventory Analysis Tradeweave Business Intelligence
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The components of our integrated QRS Tradeweave Retail Network are organized
and described as follows:
TRADEWEAVE COLLABORATION AND COMMERCE PLATFORM
The Tradeweave Collaboration and Commerce Platform offers our customers a
unified system to source, merchandise, conduct commerce and track product
information. This service enables our customers to ensure the delivery of the
right product to the right place at the right time for the right price with the
collaboration of a number of parties throughout the supply chain over many weeks
or months and across the entire globe. Our customers are able to access, over
the Internet or via a proprietary network, software and web applications used to
support this complex collaborative process. Specific products within the
Tradeweave Collaboration and Commerce Platform are Tradeweave Sourcing
(Sourcing, Capacity Planning, Forwarding, Party Profiling, Inventory
Management), Tradeweave Merchandising (Merchandise Planning, Collaborative
Planning, Showroom) and Tradeweave Logistics.
TRADEWEAVE BUSINESS INTELLIGENCE
We believe that a company's ability to translate product and customer data
into actionable business intelligence is at the heart of maintaining a
competitive advantage in today's retail marketplace. The Tradeweave Business
Intelligence Solutions enables our customers to leverage important product and
consumer information in their strategic and tactical decision making process.
This product, pricing, sales and inventory information is accessed in real-time
by our customers to enable them to make decisions that affect business
performance. Specific products within Tradeweave Business Intelligence are
Tradeweave Product Catalog (Product Catalog, Grocery and Food Service Product
Catalog), Tradeweave Sales and Inventory Analysis (Reporting, Decision Support)
and Tradeweave Retail Intelligence Services (Competitive Price Audits, Causal
Data Collection, Price Scan Verification, Mystery Shopping).
TRADEWEAVE MESSAGE EXCHANGE
Over 80% of retail information is still exchanged via paper. The adoption
and use of industry specific ecommerce communications standards can eliminate up
to 50% of the cost of this process, 40% of cycle time, and 40% of data
inaccuracy. Tradeweave Message Exchange provides the crucial infrastructure to
allow all trading partners to exchange critical business documents and
information electronically; thereby reducing administrative costs and improving
the timeliness of information by automating the transmission of critical
business documents such as purchase orders, advanced ship notices, and invoices.
This reduces the costs of moving from paper to electronic communication, as well
as significantly lowering ongoing costs and staffing requirements. Specific
products within the Tradeweave Message Exchange are Tradeweave Data Exchange
(Data Exchange Messaging, Transaction Testing, Service Bureau, Internet
Transaction Exchange, Vendor Messaging, Outsourcing and Integration Manager) and
Tradeweave Managed Connectivity (Remote Access, Leased Lines and Connectivity
Software.)
TRADEWEAVE SERVICES
The ultimate success of any collaborative process lies in the ability for
customers and trading partners to gain access to the enablement, integration and
training required to take full advantage of the applications being used.
Tradeweave Services brings together the skill sets from a wide variety of retail
technology solutions under one, consultative arm. Our customers receive
customized, professional guidance from industry veterans via Tradeweave
Professional Services (Solutions Consulting, Training, Enabling).
Lastly, the retail process requires a tremendous amount of actual physical
labor. Two areas that we focus on as part of the Tradeweave Services offering
are the outsourcing of digital imaging and
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merchandise tagging. Specific services include Tradeweave Digital Photography,
and Tradeweave Tags and Label Services (Hang Tags and Bar Code Labels.)
CUSTOMERS
We provide services and generate revenues by enabling our customers and
their trading partners to conduct collaborative B2B electronic commerce.
Originally, QRS focused on providing products and services to the general
merchandise and apparel segment of the retail industry, and this remains QRS'
largest and most important segment, but we have considerably broadened our
customer base across various segments of the retail industry. The acquisition of
Retail Data Services in 1999 (now branded Tradeweave Retail Intelligence
Services) accelerated our penetration of the grocery and mass merchant segments,
and the acquisition of Rockport Trade Systems in 2000 (now branded Tradeweave
Global Sourcing) assisted in expansion into a number of specialty retailing
segments. Today QRS provides at least one product or service to 38 out of the
top 50 retailers in the United States. By segment our customers include:
- All 10 of the top department stores (including Sears, Federated, May,
Dillards and Saks)
- All 10 of the top grocery stores (including Kroger, Albertsons, Safeway,
Ahold and Winn Dixie)
- All 5 of the top mass merchants (Walmart, Kmart, Target, Costco, and
Meijer)
- All 5 of the top apparel specialty stores (Gap, Limited, Venator, TJX and
Spiegel)
- All 3 of the top office specialty stores (Office Depot, Staples, and
OfficeMax)
We summarize our customers by sector of retailing, but our customers also
include many of the thousands of manufacturers, distributors, and suppliers who
provide these retailers with merchandise. Top branded manufacturers like Liz
Claiborne, Jones, Nike, VF, Escada, Tommy Hilfiger, Estee Lauder, Timberland,
and Levi Strauss all use one or more services from QRS, as well as numerous
smaller branded and private label manufacturers and distributors of the general
merchandise, apparel, accessories, and consumer package goods. Many of these
customers are international, and we were very pleased to add Karstadt Quell and
The Lane Group as our first international retailers in 2000.
SALES AND MARKETING
We have a comprehensive marketing program that includes print advertising,
public relations campaigns, direct mailings, industry events including industry
conventions, trade shows, user groups, analyst programs, and speaking
engagements. In 2000 and early 2001, we initiated a renewed marketing effort for
the Tradeweave Retail Network and engaged full-service agencies of record in
advertising, public relations and investor relations to help us promote our
message. We also use our website to enhance our market presence and generate
additional leads.
We sell our products and services to the global marketplace through our
field sales force and our telesales group. Our field sales force targets and
works with large customers, primarily large retailers, to facilitate and
standardize their B2B ecommerce processes internally and with their trading
partners.
When large retailers or vendors use our services they typically require
their trading partners also to use our products and services to transact with
them. Large retailers or vendors can have thousands of trading partners. Once a
large retailer or vendor becomes a customer, our telesales group then contacts
their trading partners to explain our services and enable them to transact with
the retailer or vendor. We typically seek a commitment from the retailer to
sponsor a collaborative program aimed at creating a minimum number of trading
partnerships through QRS.
Sales prospects are drawn from a wide range of industry contacts, including
retail industry conventions, trade shows, technology user groups and referrals.
Our direct sales force employs a consultative approach, focusing upon
establishing the benefits of our products and services to senior management,
including chief executive officers, senior merchandising and MIS executives.
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CUSTOMER SUPPORT
We provide comprehensive integration, training, and support services for our
customers. We also provide presale, consulting services to potential customers.
We employ experienced software development and customer service personnel to
assist customers in implementing and using our B2B ecommerce products and
services. Our goal is to ensure successful and rapid deployment and high levels
of customer satisfaction by facilitating open communications to quickly
identify, analyze and solve problems. We operate a 24-hour hotline for customers
and have a program to regularly contact our customers to ensure customer
satisfaction, currency of catalog data, and maximization of trading partner
opportunities. Other forms of customer support services include e-mail and
web-based support, documentation and updates.
IBM RELATIONSHIP
We do not operate our own value-added network and have formed a strategic
alliance with IBM to outsource our network operation. We recently amended our
agreement with IBM to eliminate existing volume commitments and penalties for
failure to meet usage requirements. We have instead 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 charge. This agreement also allows for the purchasing of
additional/other services at a discounted rate, with no volume commitments or
penalties.
In April 1999, AT&T purchased IBM's Global Network and corporate networking
business. The services we purchase from IBM under our agreement include both
network connectivity and ecommerce related value added services. We have
continued to acquire our network service requirements pursuant to the terms of
our agreement with IBM with the delivery of a portion of these services provided
by AT&T.
DATA CENTER
We operate our primary data center at our Richmond, California offices. The
data center operates 24 hours a day, seven days a week, and is connected to our
network provider through three leased data circuits in two routings to ensure
availability. The data center consists primarily of leased mainframe,
client/server, disk storage, tape drive, and other peripheral technology to
provide online, batch, and back-up operations. Customer and content data is
backed up and shipped off-site daily. Our facility and data center are both
secured with controlled access doors, and the data center is equipped with a
Halon fire protection system, an uninterrupted power supply, and a diesel
generator permitting 24 hours of continuous electrical power. The data center
has an isolated power source separate from the remainder of the facility. We
have also contracted for an alternative operations facility in the event of
physical disaster.
SERVICE AND PRODUCT DEVELOPMENT
In order to compete actively in the B2B ecommerce services market, we will
invest in the development of new and existing services and supporting
technology. We have designed our service infrastructure to yield significant
benefits to our customers in performance, scalability, availability and
reliability. We are focused on the development and upgrading of our services
technology and architecture. We are not involved with the development,
maintenance and operation of the IBM value-added network. Service and product
development expenses were $4.3 million in 1998, $8.6 million in 1999 and
$9.2 million in 2000. In 1998, 1999 and 2000, we capitalized $2.6 million,
$5.8 million and $5.5 million of service and product development costs,
respectively.
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PROPRIETARY RIGHTS
We regard certain features of our software and documentation as proprietary
information and rely on a combination of contract, copyright, trademark, trade
secret laws, patent and other measures for its protection. Although data
provided to us by our vendor customers is not proprietary to us, we seek to
protect our product information database through copyright laws. However,
existing copyright laws afford only limited protection. We have filed one patent
application in connection with our Tradeweave Merchandising solution.
EMPLOYEES
At December 31, 2000, we had 670 full-time employees (of which 59 were
employed by Tradeweave, Inc. which was merged into QRS in early 2001) including:
- 108 in service and product development
- 112 in sales and marketing
- 369 in customer support, operations and services
- 81 in management, administration and finance
In addition, at December 31, 2000, we employed 620 part-time employees,
primarily in connection with Tradeweave Retail Intelligence Services. We also
use contractors from time to time as our business requires.
Our employees are not covered by a collective bargaining agreement. We have
never experienced an employment-related work stoppage and we consider our
employee relations to be good.
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RISK FACTORS
OUR OPERATING RESULTS MAY FLUCTUATE FROM QUARTER TO QUARTER.
Our future quarterly operating results may vary and we could experience
reduced levels of earnings or losses in one or more quarters. Fluctuations in
our quarterly operating results could result from a variety of factors,
including:
- changes in the demand for our services and the usage of our existing
services
- changes in customer buying patterns
- changes in our pricing policies or those of our competitors
- market acceptance of new and enhanced versions of our services
- changes in operating expenses
- changes in our strategy
- introduction of alternative technologies by our competitors
- effect of potential acquisitions and the integration and management of
acquired products
- industry and general economic factors
We cannot control all of these factors. Due to all of these factors and
other risks discussed in this report, period-to-period comparisons of our
results of operations may not reflect our future performance.
THE NEWLY ACQUIRED COMPANIES AND THEIR PRODUCTS MAY NOT BE INTEGRATED AND
MANAGED EFFECTIVELY.
In 2000 and early 2001, we acquired several companies and their products
including software applications. We have limited experience in integrating and
managing acquired companies and selling products such as software applications
and related services that produce revenue on a one-time license fee basis rather
than a recurring revenue model. We cannot assure you that we will be successful
in integrating these companies and their products into our business and
financial model.
OUR OPERATING RESULTS WILL SUFFER IF WE CANNOT ACCURATELY FORECAST OUR REVENUE.
We greatly expanded our product offerings in the past twelve months to
include many products that do not fit in our traditional network-based recurring
revenue business model. As a result of our limited operating history in software
licensing and transaction-based marketplace and exchange pricing, it is
difficult to forecast our revenue accurately. If our revenue falls short of our
expectations in any quarter, our operating results would be harmed. In addition,
the revenue and income potential of some of our products and services are
unproven, and some of the markets we are addressing are in the early stages of
development.
SOME OF OUR NEWER PRODUCTS ARE SOLD ON A LICENSE FEE BASIS.
Our products such as Tradeweave Sourcing solutions are sold through
licenses. We would expect to derive a significant portion of revenues for
Tradeweave Sourcing in each quarter from a small number of relatively large
license sales. Moreover, due to customer purchasing patterns, we would typically
realize a significant portion of our software license revenues in the last few
weeks of a quarter. As a result, we are subject to significant variations in
license revenues and results of operations if we incur
11
any delays in customer purchases. If in any future period we fail to close one
or more substantial license sales, our operating results for that period could
be seriously harmed.
OUR SERVICES ARE EVOLVING AND WE CANNOT BE SURE THEY WILL BE SUCCESSFUL.
We are continuing to expand the breadth of our B2B ecommerce services. In
particular, we have introduced new services such as Tradeweave Collaborative
Planning that address the front-end merchandising side of our customers'
businesses. Tradeweave Collaborative Planning is based on our customer using
collaborative methods of working with their trading partners. Our new services
are unproven, and we cannot assure you that they will be accepted by our
customers and become successful.
THE SUCCESS OF OUR BUSINESS DEPENDS ON OUR CUSTOMERS' CONTINUING USAGE AND
ACCEPTANCE OF OUR B2B ECOMMERCE SERVICES.
Currently, our revenues are primarily derived from the use of our B2B
ecommerce services by retailers and their trading partners. As a result, the
success of our business depends upon:
- our current customers' continued usage of our services at anticipated
levels
- our current customers' adoption and acceptance of additional services that
we currently offer and will offer in the future
- our ability to attract new customers and their acceptance of our current
and future service offerings
If our retail customers experience a slowdown in their businesses, they will
not need to use our services at the levels we anticipate and this will
negatively affect our revenues. Additionally, the retail industry is often
characterized as being conservative in its approach to adopting new
technologies. Many of our customers are new to the use of B2B ecommerce
practices and may not have sufficient resources or properly trained personnel to
utilize our services. If we are unable to increase customer acceptance of our
current service offerings and achieve market acceptance of our future service
offerings, our business, financial condition, and results of operations will be
materially adversely affected.
BECAUSE OUR PRODUCTS AND SERVICES ARE COMPLEX AND PERFORM MISSION-CRITICAL
FUNCTIONS, WE ARE VULNERABLE TO PRODUCT DEFECT AND PRODUCT LIABILITY CLAIMS.
Our software products are complex and perform critical functions for our
customers. Consequently, our product and service offerings have inherent risks.
For example, our software products may contain undetected errors or failures
when first introduced or as new versions are released. To the extent that we may
have to develop new products that operate in new environments, for example the
Internet, the possibility for program errors and failures may increase due to
factors including the use of new technologies or the need for more rapid product
development that is characteristic of the Internet market. Despite pre-release
product testing, and our current and potential customers', there still may be
errors in our products, even after commencement of commercial shipments.
Although our license agreements with our customers typically contain provisions
designed to limit our exposure to potential product liability claims, it is
possible that limitation of liability provisions may not be effective as a
result of existing or future laws or judicial decisions. Our products and
services are used in business-critical applications, and consequently any errors
or failures by these products and services may give rise to substantial product
liability claims.
12
THE MARKET FOR B2B ECOMMERCE SERVICES IS INTENSELY COMPETITIVE.
We compete with a number of companies providing B2B ecommerce services as
well as companies providing software and services to the retail industry. We
believe the principal factors on which we compete include:
- breadth and quality of services
- price
- customer base
- customer service and support
- retail industry focus, presence and knowledge
- product, merchandise and other related content
- enabling inter-enterprise relationships
Many of our existing and potential competitors have financial, marketing or
technological resources that exceed our own resources, and we cannot assure you
that we will be able to compete successfully. Competition may affect our ability
to gain new customers and retain and expand business with our existing
customers. It may also affect the range of services we can offer to our
customers.
We expect competition to increase as more companies enter the market and
existing competitors continue to change and expand their service offerings. In
addition, in-house systems and third-party software providers are also
significant competitors to our services. Some of our potential competitors have
longer operating histories, larger customer bases, and greater brand recognition
in B2B ecommerce markets than we do. In addition, other companies may be
acquired by, receive investments from, or enter into other commercial
relationships with larger, well-established and well-financed companies. As a
result, some of our competitors with other revenue or investment sources may be
able to devote more resources to marketing and promotional campaigns, adopt more
aggressive pricing policies and devote substantially more resources to website
and systems development than we can, which may adversely affect our business.
NEW TECHNOLOGY COULD MAKE OUR EXISTING SERVICES OBSOLETE.
The market for B2B ecommerce services is characterized by rapidly changing
technology and continuously evolving standards. To be successful, we must adapt
by continually improving the performance, features, and reliability of our
services or else our services may become obsolete. We cannot assure you that we
will be able to respond in a timely manner to technological changes. The ability
of competitors to successfully incorporate evolving standards and technologies
into new services may make our services noncompetitive. Technological changes
could force us to lower the price of our services. If we fail to adapt to or
incorporate new standards or technology, it may have a material adverse effect
on our business and results of operations.
WE DEPEND ON IBM FOR MOST OF OUR ECOMMERCE SERVICES AND FOR A SUBSTANTIAL
PORTION OF OUR REVENUES.
Since 1988, we have used the IBM value-added network, or VAN, as the network
platform over which we provide customers with most of our ecommerce services. We
depend on the IBM VAN for a substantial part of our revenues and such dependence
is expected to continue and last through the term of our contract, which expires
December 31, 2002. Because we have no right to control the maintenance and
operation of the IBM VAN, we do not control decisions that could have a material
adverse impact on the operation of the VAN and consequently, on our business and
results of operations. In addition, if IBM becomes unable or unwilling to
provide VAN services, we would either
13
have to provide these services directly or arrange for another third party to
provide such services. We cannot assure you that we would be able to do so on a
timely basis, if at all, or that the costs of any such arrangements would not
materially adversely affect our business and results of operations. Disruption
or unavailability of the IBM VAN may have a material adverse effect on our
business and results of operations.
IBM currently charges us for our use of its network and messaging services
by our customers. In the event that IBM decides to increase the prices that it
charges us or reduces the amount of discounts or allowances after our current
contract expires, we may not be able to pass along these charges to our
customers. If we are unable to do so, our business and results of operations
could be materially adversely affected. We recently amended our agreement with
IBM to eliminate existing volume commitments and penalties for failure to meet
usage requirements. We have instead 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
charge.
IBM AND AT&T COULD DECIDE TO COMPETE AGAINST US.
In April 1999, AT&T purchased IBM's Global Network and corporate networking
business. We have continued to receive our network services pursuant to the
terms of our IBM agreements. If AT&T markets IBM network services to the retail
industry or directly to our customers or permits one or more of our competitors
to use and remarket IBM's network services to the retail industry, our business
and results of operations could be materially adversely affected. IBM and AT&T
are free to compete against us, and we cannot assure you that IBM and AT&T will
not choose to compete with us in the future. If AT&T or IBM were to become a
competitor, our business and results of operations may be materially adversely
affected.
WE MAY NOT BE ABLE TO EFFECTIVELY MANAGE OUR GROWTH.
We have experienced significant revenue growth as we have added new
retailers and vendors, increased the number of trading partnerships and
increased the size of the Tradeweave Product Catalog, our product information
database. Maintaining profitability during a period of expansion will depend,
among other things, on our ability to effectively manage our operations. More
recently, we have significantly increased our service offerings and customers
both through internal growth and acquisitions. If we are unable to manage our
growth effectively, it may have a material adverse effect on our business and
results of operations.
OUR SUCCESS DEPENDS UPON OUR ABILITY TO ATTRACT, TRAIN AND RETAIN KEY PERSONNEL.
Our success depends significantly upon the performance of our executive
officers and other key employees. We also need to attract, train, retain, and
motivate technical, managerial, and marketing personnel. Competition for
qualified personnel is intense, particularly with respect to Internet product
and service personnel. We cannot assure you that we will be able to continue to
attract and retain the qualified personnel necessary for the development of our
business. If we lose key personnel or fail to recruit necessary additional
personnel, our business and results of operations may be materially adversely
affected.
OUR SUCCESS DEPENDS IN PART ON OUR ABILITY TO INTRODUCE NEW SERVICES IN A TIMELY
MANNER.
Our future growth depends on our successful and timely introduction of new
services in existing and emerging markets. We cannot assure you that we will
successfully complete development or that if
14
such development is completed, our planned introduction of these services will
gain market acceptance or will meet the technical or other requirements of
potential customers. To provide our services, we rely on complex software, which
may contain undetected errors or failures. Software errors or delays could
result in loss of, or delay in, market acceptance of our services, which may
have a material adverse effect on our business, results of operations, and
financial condition.
WE DEPEND ON SEVERAL KEY CUSTOMERS FOR OUR BUSINESS.
We provide services and generate revenues by enabling certain of our key
retail customers and their trading partners to conduct business over our
network. Estimated revenues attributable to all of the billings of any one of
these customers and its trading partners may exceed 10% of our total revenues in
future quarters. Also, the retail industry has recently experienced significant
consolidation. If any of our retail customers consolidate, it could adversely
affect our revenues. Also, our customers could elect either to develop their own
B2B ecommerce services or to transfer all or a significant portion of their
activities to one of our competitors, which could have a material adverse effect
on our business and results of operations.
DAMAGE TO OUR DATA CENTER FACILITY COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR
BUSINESS AND RESULTS OF OPERATIONS.
Our content and application services, such as the Tradeweave Product
Catalog, run on a computer system contained in our data center facility in
Richmond, California. The data center is located in a single facility and we
have no present intention of establishing an additional data center in a
separate location. However, we have arranged for use of off-site computer
facilities, if necessary, and have taken other precautions to protect ourselves
and our customers from events that could interrupt delivery of our services.
These precautions include off-site storage of back-up data, fire protection, and
physical security systems, an early warning detection, and a Halon fire
extinguishing system. Notwithstanding these precautions, we cannot assure you
that a fire, earthquake, or other natural disaster affecting the data center
would not disable our computer system. Our data center routes through
independent AT&T hubs in San Francisco and Los Angeles. In the event that
service through these locations is interrupted, we have back-up access through
AT&T's Seattle hub. Any significant damage to our data center or disruption of
its connectivity to the IBM VAN network and/or AT&T network could have a
material adverse effect on our business and results of operations.
WE MAY NOT BE ABLE TO PROTECT OUR PROPRIETARY TECHNOLOGY AND INFORMATION.
We rely on a combination of contracts, patent, copyright, trade secret, and
trademark laws and nondisclosure agreements to protect our proprietary rights.
Existing copyright laws afford only limited protection and we may not be able to
police unauthorized use of our services, and proprietary technology, and
information. Unauthorized third parties may be able to copy our services or
otherwise obtain and use our proprietary technology and information. For
example, if a competitor were able to duplicate the information contained in our
product information database, our business could be adversely affected. Further,
the laws of certain countries in which our services may be distributed may not
protect our services and intellectual rights to the same extent as the laws of
the United States. If unauthorized third parties obtain and use our proprietary
technology and information, our business and results of operations may be
materially adversely affected.
15
ACQUISITIONS OR INVESTMENTS COULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS.
We have made acquisitions in the past and we expect to acquire complementary
businesses or technologies in the future. The success of any acquisition will
depend upon, among other things, our ability to:
- identify and evaluate the proposed acquisition of complementary businesses
or technologies
- complete the acquisition on reasonable terms
- obtain any necessary financing
- integrate effectively the acquired personnel, operations or technologies
- retain customers and motivate key personnel
An acquisition could cause a distraction of our management and employees, an
increase in our expenses, an assumption of additional debt, and/or an issuance
of equity, which could be dilutive to existing stockholders, and expose us to
the risk that we will fail to successfully implement the acquisition. This may
materially and adversely affect our results of operations and financial
condition.
OUR STOCK PRICE MAY FLUCTUATE SUBSTANTIALLY.
The market price of our common stock has fluctuated significantly since the
initial public offering of our common stock in August 1993 and could be subject
to significant fluctuations in the future based on factors including:
- announcements of new services by us or by our competitors
- fluctuations in our quarterly financial results
- fluctuations in our competitors' quarterly financial results
- changes in analysts' estimates of our financial performance or our failure
to meet these estimates
- conditions in the Internet commerce, information services, and high
technology industries
- conditions in the financial markets
The stock market in general has experienced extreme price and volume
fluctuations which have particularly affected the market prices for many high
technology companies and which have often been unrelated to the operating
performance of the specific companies. Many technology companies, including QRS,
have recently experienced significant fluctuations in the market price of their
equity securities. We cannot assure you that the market price of our common
stock will not continue to experience significant fluctuations in the future.
OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY MAKE A TAKEOVER MORE DIFFICULT.
We are a Delaware corporation. The Delaware General Corporation Law contains
certain provisions that may make a change in control of our company more
difficult or prevent the removal of incumbent directors. In addition, our
certificate of incorporation and bylaws contain provisions that have the same
effect. Any of these provisions may have a negative impact on the price of our
common stock, may discourage third-party bidders from making a bid for QRS or
may reduce any premiums paid to our stockholders for their common stock.
16
ITEM 2. FACILITIES
We lease approximately 158,000 square feet of office space in Richmond,
California for our corporate headquarters. Of this total, leases with respect to
111,000 square feet expire on June 30, 2010 and a lease for the remaining 47,000
square feet expires on June 30, 2011. We lease approximately 20,000 square feet
of office space in San Francisco, California. This lease expires in
October 2004. We also lease approximately 28,500 square feet of office space in
New York City, New York. A lease with respect to 10,000 square feet expires on
April 1, 2007 and a lease for the remaining 18,500 square feet expires on
March 1, 2010. Finally, we lease additional office space in Torrance,
California; New York City, New York; and Richmond, Virginia. We believe that our
current and future facilities and extension agreements are adequate for our
level of business and growth requirements.
ITEM 3. LEGAL PROCEEDINGS
On September 22, 2000, Gladson and Associates, Inc. (Gladson) filed a
complaint for damages, injunctive relief and declaratory relief against QRS in
Contra Costa County Superior Court. On October 6, 2000, QRS 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 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, QRS filed a
motion to dismiss the FAC on strictly legal grounds; the hearing on this motion
is set for May 4, 2001.
Based upon the investigation to date, QRS intends 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
Our common stock has been traded in the over-the-counter market on the
Nasdaq National Market under the symbol QRSI since our initial public offering
in August 1993. According to records of our transfer agent, we had approximately
243 stockholders of record as of March 16, 2001. Because many of such shares are
held by brokers and other institutions on behalf of stockholders, we are unable
to estimate the total number of beneficial holders of the common stock. The
following table sets forth the low and high closing sales prices of our common
stock for the two-year period ended December 31, 2000:
PERIOD ENDED LOW HIGH
- ------------ -------- --------
For the Year ended December 31, 1999:
First Quarter............................................. $27.92 $ 42.83
Second Quarter............................................ 31.25 56.58
Third Quarter............................................. 44.00 64.13
Fourth Quarter............................................ 47.75 105.00
For the Year ended December 31, 2000:
First Quarter............................................. 64.38 114.94
Second Quarter............................................ 22.88 60.00
Third Quarter............................................. 13.81 35.44
Fourth Quarter............................................ 5.59 15.13
DIVIDEND POLICY
Our policy has been to reinvest earnings to fund future growth. Accordingly,
we have paid no cash dividends on our common stock and do not anticipate
declaring dividends on our common stock in the foreseeable future.
18
ITEM 6. SELECTED FINANCIAL DATA
YEARS ENDED DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA)
----------------------------------------------------
STATEMENTS OF OPERATIONS DATA 2000(1) 1999(1) 1998(1) 1997 1996
- ----------------------------- -------- -------- -------- -------- --------
Revenues..................................... $143,491 $124,705 $91,926 $71,632 $56,746
Operating earnings (loss).................... (53,486) 20,876 16,116 12,639 9,442
Earnings (loss) from continuing operations
before income taxes and minority
interest................................... (51,981) 22,887 18,267 14,625 11,019
Income tax expense (benefit)................. (8,182) 8,057 7,113 5,850 4,408
Minority interest............................ (1,422) (89) -- -- --
Discontinued operations--Gain from sale of
software and services business (2)......... -- -- 896 -- --
-------- -------- ------- ------- -------
Net earnings (loss).......................... $(42,377) $ 14,919 $12,050 $ 8,775 $ 6,611
======== ======== ======= ======= =======
Basic earnings (loss) per share (3):
Continuing operations...................... $ (2.92) $ 1.12 $ 0.87 $ 0.69 $ 0.53
Discontinued operations.................... -- -- 0.07 -- --
-------- -------- ------- ------- -------
Net earnings (loss) per share.............. $ (2.92) $ 1.12 $ 0.04 $ 0.69 $ 0.53
======== ======== ======= ======= =======
Diluted earnings (loss) per share (3):
Continuing operations...................... $ (2.92) $ 1.05 $ 0.84 $ 0.67 $ 0.51
Discontinued operations.................... -- -- 0.07 -- --
-------- -------- ------- ------- -------
Net earnings (loss) per share.............. $ (2.92) $ 1.05 $ 0.91 $ 0.67 $ 0.51
======== ======== ======= ======= =======
- ------------------------
(1) 2000, 1999 and 1998 results include the write-off of purchased in-process
research and development of $17.9 million, $963,000 and $967,000,
respectively. See Note 5 to Consolidated Financial Statements.
(2) See Note 6 to Consolidated Financial Statements.
(3) Earnings per share for 1998, 1997 and 1996 have been restated to
retroactively reflect the three-for-two stock split. See Note 2 to
Consolidated Financial Statements.
DECEMBER 31,
(IN THOUSANDS)
----------------------------------------------------
BALANCE SHEET DATA 2000 1999 1998 1997 1996
- ------------------ -------- -------- -------- -------- --------
Working capital................................ $35,896 $61,524 $50,909 $42,544 $29,416
Total assets................................... 248,120 126,955 83,005 64,002 55,946
Stockholders' equity........................... 211,090 104,214 67,954 54,729 43,570
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
EXCEPT FOR THE HISTORICAL FINANCIAL INFORMATION CONTAINED HEREIN, THE
MATTERS DISCUSSED IN THIS ANNUAL REPORT ON FORM 10-K MAY BE CONSIDERED
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934,
AS AMENDED. SUCH STATEMENTS INCLUDE DECLARATIONS REGARDING OUR INTENT, BELIEF,
OR CURRENT EXPECTATIONS. THESE FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF
FUTURE PERFORMANCE AND INVOLVE A NUMBER OF RISKS AND UNCERTAINTIES, AND OUR
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE INDICATED BY SUCH
FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE INDICATED BY SUCH FORWARD-LOOKING STATEMENTS INCLUDE, BUT
ARE NOT LIMITED TO, THOSE LISTED UNDER "BUSINESS--RISK FACTORS" AND
19
ELSEWHERE HEREIN, AND OTHER RISKS IDENTIFIED FROM TIME TO TIME IN OUR REPORTS
AND REGISTRATION STATEMENTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.
GENERAL
We market our products and services as a comprehensive family known as the
"Tradeweave Retail Network" that provides customers with a single integrated
source for implementing collaborative B2B ecommerce solutions practices. The
Tradeweave Retail Network has grown out of our eCommerce, Content, Applications
and Marketplace offerings. For purposes of discussing our results in 2000, we
will refer to the old product names that were in effect during that period. We
derive revenues from three principal and related sources: fees for utilization
of eCommerce services including the transmission of standard business documents
over a network, monthly charges for accessing Content services, and license,
subscription and usage fees for Application and Marketplace Services.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentage of
revenues represented by certain line items in the Company's consolidated
statements of operations:
YEARS ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
Revenues.................................................... 100% 100% 100%
Cost of revenue............................................. 62 50 55
--- --- ---
Gross profit................................................ 38 50 45
Operating expenses:
Sales and marketing....................................... 22 14 13
Product development....................................... 6 7 5
General and administrative................................ 17 9 8
Amortization of intangible assets......................... 17 2 --
In-process research and development....................... 13 1 1
--- --- ---
Total operating expenses................................ 75 33 27
--- --- ---
Operating earnings (loss)................................... (37) 17 18
Interest income............................................. 1 1 2
--- --- ---
Earnings (loss) before income taxes and minority interest... (36%) 18% 20%
=== === ===
REVENUES
Revenues increased from $91.9 million in 1998 to $124.7 million in 1999 and
to $143.5 million in 2000, representing increases of 36% from 1998 to 1999 and
15% from 1999 to 2000. The number of retailers and vendors, including carriers,
increased from 7,719 at December 31, 1998 to 8,834 at December 31, 1999 and to
9,842 at December 31, 2000. The number of catalog trading partnerships increased
as a result of the increase in the number of customers and their trading links
with each other. The revenue growth from 1998 to 1999 was primarily attributable
to an overall increase in customer base, higher usage of eCommerce and Content
Services, pricing adjustments, additional primetime usage, enhancements to our
services, and our expanded product offerings in eCommerce and Content Services,
including acquired service bureaus and the Retail Data Services business. The
increase from 1999 to 2000 was primarily the result of our product offerings in
Application Services. Application Services includes acquired products such as
Rockblocks software and Image Info software as well as products that existed
prior to 2000 such as QRS IMS and QRS LMS. There were minimal revenues from
Marketplace services in 2000. While there was growth in customer base from 1999
to 2000, we
20
experienced slower revenue growth in our eCommerce and Content Services during
2000 than in recent prior years as a result of continued slowness in trading
partner program rollouts and increased pricing pressure. We anticipate continued
pricing pressure and a competitive environment, which may affect our revenue
growth. In the fourth quarter of 2000, we experienced lower than anticipated
license revenue from Application Services.
COST OF REVENUE
Cost of revenue consists primarily of the cost of purchasing network
services, the cost of our data center and technical customer support services.
Cost of revenue increased from $50.9 million in 1998 to $62.9 million in 1999
and to $89.0 million in 2000. These increases were principally due to increases
in our data center and technical customer support services group reflecting
growth in customers along with incremental costs associated with our expanded
product offerings across our business, including Marketplace Services (which
were operated by Tradeweave, Inc. in 2000). These increases were partially
offset by a decrease in purchased network services, reflecting minimal growth in
network services purchased under a long-term contract, discounted based on a
multi-year volume commitment. Cost of revenue as a percentage of revenues was
55% in 1998, 50% in 1999, and 62% in 2000. This increase in primarily
attributable to eCommerce and Content Service price competitiveness and lower
than planned Application license sales, as well as the build up of
infrastructure to support our Marketplace Services. In the fourth quarter of
2000, there were large one-time adjustments totaling $1.0 million related to
eCommerce and content services.
SALES AND MARKETING EXPENSES
Sales and marketing expenses consist primarily of personnel and related
costs in our sales and marketing organizations as well as the costs of various
marketing programs. Sales and marketing expenses increased from $12.1 million in
1998 to $18.0 million in 1999 and to $31.2 million in 2000, reflecting the
general increase in the number of customers and the size of our operations.
Sales and marketing expenses represented 13% of revenues in 1998, 14% in 1999
and 22% in 2000. These increases reflect our expansion of retailer and
vendor-specific coverage 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 our services. Sales and marketing expenses also increased
to build infrastructure for anticipated sales gains.
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 were $4.3 million in 1998, $8.6 million in 1999 and $9.2 million in
2000. Service and product development expenses, as a percentage of revenues was
5% in 1998, 7% in 1999 and 6% in 2000. In 1998, 1999 and 2000, we capitalized
$2.6 million, $5.8 million and $5.5 million of service and product development
costs, respectively. The change in capitalized product development costs and the
amount charged to expenses reflects significantly higher research and
development activities for new products or products that had reached
technological feasibility.
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 increased
from $7.3 million in 1998 to $11.3 million in 1999 and to $24.6 million in 2000,
and represented 8% of revenues in 1998, 9% in 1999 and 17% in 2000. The increase
was primarily due to increased investments in infrastructure and increased
headcount to
21
support a larger organization and to support anticipated sales gains. Fourth
quarter 2000 expenses include one-time strategic consulting fees and executive
severance expenses.
ACQUISITIONS
During the third quarter of 1998, we acquired the assets of Custom
Information Systems Corporation and the outstanding common shares of Mueller
Associates, Inc., dba the EDI Connection, both service bureaus. The total
acquisition cost was $4.0 million, comprised of $3.0 million paid in cash;
35,000 shares of our common stock valued at $802,000 issued from our treasury
stock account; and $206,000 in transaction costs related to the acquisitions.
The acquisitions were accounted for as purchase transactions.
In connection with the acquisitions, $967,000, representing approximately
23% of the purchase price of $4.0 million, was allocated to in-process research
and development. As technological feasibility had not been established and no
alternative future uses existed at the acquisition dates, this in-process
research and development was charged to expense. The five acquired projects
under development increase automation and reduce manual processes, replace
third-party software, and/or migrate existing products to a single platform. The
costs to complete these projects were approximately $600,000 in 1999. The
acquired companies had expended approximately $200,000 on these projects prior
to acquisition. The values for the technology under development were estimated
through the income approach by discounting to present value cash flows to be
derived from the future products. The revenue and expense projections were based
on historical trends and future expectations for the acquired companies and us.
We did not anticipate any operating expense reductions as a result of synergy. A
discount rate was 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 products have not
reached technological feasibility.
On July 23, 1999, we completed the acquisition of all the outstanding
capital stock of Retail Data Services, Inc. and RDS, Inc. (collectively, "RDS").
The total acquisition cost was $21.0 million; comprised of $15.0 million paid in
cash; $3.0 million in deferred acquisition cost to the seller; 53,250 shares of
our common stock valued at $2.8 million 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
$2.0 million and $1.0 million to the seller in March 2000 and 2001,
respectively, if revenue from the acquired business met or exceeded the
established levels for 1999 and 2000. Revenue from the acquired business for
1999 met the established levels and we paid $2.0 million to the seller in
March 2000. The revenue goal was also achieved for 2000, so we paid the seller
$1.0 million in March 2001. Both payments to the seller have been included in
the acquisition cost. The acquisition was accounted for as a purchase
transaction.
In connection with the acquisition, $963,000, representing approximately 5%
of the purchase price, was allocated to in-process research and development. As
technological feasibility had not been established and no alternative future
uses existed at the acquisition date, this in-process research and development
was charged to expense. The two acquired projects under development included a
proprietary management database and a web site product offering for selling
syndicated pricing data. The costs to complete these projects were approximately
$35,000 in 1999. The acquired companies had expended approximately $81,000 on
these projects prior to acquisition. The values for the technology under
development were estimated through the income approach by discounting to present
value cash flows to be derived from the future products. The revenue and expense
projections were based on historical trends and future expectations for the
acquired companies and us. We did not anticipate any operating expense
reductions as a result of synergy. A discount rate was 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 products have not reached technological
feasibility.
22
On January 21, 2000, we acquired all of the outstanding stock of Image
Info Inc. (Image Info), pursuant to an Agreement and Plan of Merger, dated
January 16, 2000 (Merger Agreement). The total acquisition cost was
$51.3 million comprised of $5 million paid in cash; $5 million in deferred
acquisition payment to the former shareholders of Image Info; 440,914 shares of
our common stock valued at $41.0 million calculated based on the average of the
share price three days prior to the announcement of the acquisition on
January 21, 2000 and three days after this date; and transaction costs of
approximately $300,000. Under the terms of the Merger Agreement, we agreed to
pay $2.5 million 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.
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 $101.0 million, comprised of
814,794 shares of our common stock valued at $90.1 million calculated based on
the average of the share price three days prior to the announcement of the
acquisition on March 10, 2000 and three days after this date, transaction costs
of approximately $1.5 million and $9.4 million in stock compensation related to
stock options assumed. We assumed the obligations of RockPort under its RockPort
Stock Option Plan (RockPort Plan) and the outstanding stock options of RockPort
converted to options to purchase 89,645 shares of our common stock. As a result,
we recorded stock compensation of approximately $9.4 million, which has 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.
In connection with the acquisitions of RockPort and Image Info, 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 applications 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. We expect no significant
changes in the assumptions underlying these valuations. The percent of
completion for each project was determined using appropriate costs incurred and
technical milestones achieved to date. The percent of completion varied by
individual project ranging from 80% to 100% at December 31, 2000. The nature of
the efforts to develop the IPR&D into commercially viable products relate to the
completion of planned functionality and achievement of pre-established
scalability thresholds. The estimated costs to develop the IPR&D into
commercially viable projects were $1.1 million of which $882,000 have been
expended during the year ended December 31, 2000. If the projects discussed
above are not successfully developed, the future sales and profitability of the
combined companies may be adversely affected. Additionally, the value of other
intangible assets acquired may become impaired. Management believes that the
IPR&D charge of $17.9 million is valued consistently 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 amount allocated to IPR&D.
23
The appraisal techniques used in our acquisitions included certain
assumptions, including, the extent, character and utility, the income generating
or cost-savings 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 expense as a percentage of revenues was 17% and 2% in 2000
and 1999, respectively.
INTEREST INCOME
Interest income consists primarily of interest earned on cash, cash
equivalents and investment securities. Interest income decreased from
$2.2 million in 1998 to $2.0 million in 1999 and to $1.5 million in 2000.
Changes in interest income reflect the level of average investment balances in
each year and a shift from taxable to non-taxable marketable securities. During
the third quarter of 1998, we utilized $3.0 million in cash to acquire The EDI
Connection and Custom Information Systems Corporation, both service bureaus, and
on July 23, 1999, we utilized $15.0 million in cash to acquire RDS. 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.
INCOME TAX EXPENSE (BENEFIT)
Our income tax expense was $7.1 million and $8.1 million for fiscal years
1998 and 1999, respectively. We recorded an income tax benefit of $8.2 million
for fiscal 2000. The income tax benefit for 2000 as a percentage of pre-tax loss
reflects the non-deductibility of purchase accounting amounts related to the
acquisitions of RockPort and Image Info. Our effective income tax rate was 39%
for 1998, 35% for 1999 and (16)% for 2000. Our income tax rate of 40% for future
years approximates the combined effective federal and state income tax rates.
(See Note 4 to Consolidated Financial Statements).
LIQUIDITY AND CAPITAL RESOURCES
Our working capital decreased from $61.5 million at December 31, 1999 to
$35.9 million at December 31, 2000. Cash, cash equivalents and short-term
marketable securities available-for-sale decreased from $47.3 million at
December 31, 1999 to $25.5 million at December 31, 2000. Total assets increased
from $127.0 million at December 31, 1999 to $248.1 million at December 31, 2000,
while total liabilities increased from $22.4 million at December 31, 1999 to
$48.7 million at December 31, 2000. The decrease of $21.7 million in cash, cash
equivalents and short-term marketable securities available-for-sale from
December 31, 1999 to December 31, 2000 resulted primarily from the payment of
$7.0 million for acquisitions, $1.8 million for transaction costs related to
acquisitions, $20.5 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. Net cash flows from operating activities were $8.0 million for the
year ended December 31, 2000, which was primarily attributable to the
$42.4 million net loss adjusted for the amortization and depreciation of
intangible and other assets of $36.3 million, and in-process research and
development of $17.9 million.
On April 22, 1997, we announced that our Board of Directors has authorized
the repurchase from time to time of up to $5 million of our common stock in both
open market and block transactions. Our Board of Directors authorized a
$5 million increase in this repurchase amount on October 16, 1998, and an
additional increase of $5 million on May 4, 2000 for a total of $15 million.
Shares purchased under this program will be held in the corporate treasury for
future use including employee stock option grants and the employee stock
purchase plan. We may discontinue purchases of our common stock at any time that
management determines additional purchases are not warranted. We repurchased
198,000 shares of our common stock during the year ended December 31, 2000.
24
Although cash, cash equivalents and marketable securities in total will
decline in the first quarter of 2001, management believes that the cash, cash
equivalents, and marketable securities available for sale at December 31, 2000
and cash anticipated to be generated from future operations, will be sufficient
to meet our working capital needs and capital expenditures through 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.
SUBSEQUENT EVENTS
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 "Tradeweave Merger Agreement"). Under the Tradeweave
Merger Agreement, we agreed to issue 334,774 shares of our common stock for
4,347,711 shares of Tradeweave common stock and preferred stock held by Peter R.
Johnson, Chairman of the Company's Board of Directors; Garth Saloner, a member
of the Board of the Company's Board of Directors; and certain Tradeweave
employees who held shares pursuant to the exercises of Tradeweave stock options.
Additionally, we assumed the outstanding stock options under the Tradeweave
Non-Qualified Stock Option Plan, which will be convertible to options to
purchase 138,369 shares of our common stock. We also issued warrants to purchase
140,000 shares of QRS common stock at a price of $11.0625 per share to
Mr. Johnson and Mr. Saloner. The right to purchase such shares vests over a
four-year period in equal annual installments. The warrants expire on
January 31, 2005. We intend to account for this merger as a purchase
transaction.
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 December 19, 2000, our Compensation Committee approved the implementation
of a restricted share award program pursuant to the stock issuance provisions of
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 such Plan with exercise prices of more than $15.00 per share in
return for 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 291,709 shares of 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 individual's
completion of each successive six months of continued employment with us. The
first vesting date will occur on April 30, 2001. The shares will be fully-vested
upon issuance.
25
ITEM 7A. 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 US issuers, such as the US Treasuries and agencies of the US
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 the marketable securities. Our
guidelines do not permit investments with maturities in excess of 24 months. At
December 31, 2000, the weighted average maturity of the marketable securities
portfolio was 127 days.
FAIR VALUE AT
MATURITY MATURITY DECEMBER 31,
(AMOUNTS IN THOUSANDS) 2001 2002 TOTAL 2000
- ---------------------- -------- -------- -------- -------------
Municipal Agencies.................................... $9,145 $2,167 $11,312 $11,436
Certificate of deposit................................ 825 -- 825 825
------ ------ ------- -------
Total................................................. $9,970 $2,167 $12,137 $12,261
====== ====== ======= =======
Average interest rate................................. 5.17% 6.21% 5.35% 5.35%
====== ====== ======= =======
FOREIGN CURRENCY RISK
We have no significant investments outside the US and do not have material
foreign currency risk.
ITEM 8. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
PAGE
--------
Report of Independent Accountants........................... 27
Independent Auditors' Report................................ 28
Consolidated Balance Sheets................................. 29
Consolidated Statements of Operations and Comprehensive
Earnings (loss)........................................... 31
Consolidated Statements of Stockholders' Equity............. 32
Consolidated Statements of Cash Flows....................... 33
Notes to Consolidated Financial Statements.................. 35-58
26
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of QRS Corporation:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations and comprehensive loss, of stockholders'
equity and of cash flows present fairly, in all material respects, the financial
position of QRS Corporation at December 31, 2000, and the results of its
operations and its cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management: our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit in accordance with auditing standards
generally accepted in the United States of America. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
/s/ PricewaterhouseCoopers LLP
San Francisco, California
February 5, 2001
27
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders QRS Corporation:
We have audited the accompanying consolidated balance sheet of QRS
Corporation and subsidiaries (the "Company") as of December 31, 1999, and the
related consolidated statements of operations and comprehensive earnings,
stockholders' equity and cash flows for each of the two years in the period
ended December 31, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of December 31,
1999, and the results of its operations and its cash flows for each of the two
years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
San Jose, California
February 4, 2000 (March 20, 2000 as to the fourth paragraph of Note 7)
28
QRS CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
DECEMBER 31, DECEMBER 31,
2000 1999
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 15,372 $ 34,412
Marketable securities available-for-sale.................. 10,090 12,895
Accounts receivable-net of allowance for doubtful accounts
of $2,072 at December 31, 2000 and $1,676 at December
31,1999................................................. 27,292 25,964
Deferred income tax assets................................ 1,666 819
Prepaid expenses and other................................ 2,959 2,848
Income taxes receivable................................... 3,228 4,726
-------- -----------
Total current assets.................................... 60,607 81,664
-------- -----------
Property and equipment:
Furniture and fixtures.................................... 3,836 3,651
Equipment................................................. 23,849 15,737
Leasehold improvements.................................... 5,648 3,729
-------- -----------
33,333 23,117
Less accumulated depreciation and amortization............ (10,960) (9,294)
-------- -----------
Total................................................... 22,373 13,823
-------- -----------
Marketable securities available-for-sale.................... 2,171 --
Deferred income tax assets.................................. -- 1,156
Capitalized product development costs--net of accumulated
amortization of $8,515 at December 31, 2000 and $5,293 at
December 31, 1999......................................... 9,021 8,088
Intangible assets--net of accumulated amortization of
$27,244 at December 31, 2000 and $2,221 at December 31,
1999...................................................... 150,452 20,758
Other assets................................................ 3,496 1,466
-------- -----------
Total..................................................... $248,120 $ 126,955
======== ===========
See notes to consolidated financial statements
29
QRS CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(CONTINUED)
DECEMBER 31, DECEMBER 31,
2000 1999
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 7,823 $ 10,508
Accrued incentive......................................... 1,481 1,796
Accrued transaction costs................................. 1,700 --
Accrued vacation.......................................... 2,259 1,195
Deferred acquisition payments............................. 3,600 2,000
Deferred revenue.......................................... 3,138 --
Other accrued liabilities................................. 4,710 4,641
-------- -----------
Total current liabilities................................... 24,711 20,140
Deferred income taxes....................................... 7,678 --
Deferred acquisition payments............................... 2,500 1,000
Deferred rent and other..................................... 2,141 1,240
-------- -----------
Total liabilities......................................... 37,030 22,380
-------- -----------
Commitments and contingencies (Note 7)...................... -- --
Minority interest........................................... -- 361
Stockholders' equity:
Preferred stock--$.001 par value; 10,000,000 shares
authorized; none issued and outstanding................. -- --
Common stock--$.001 par value; 60,000,000 shares
authorized; 15,281,111 shares issued and 14,663,015
shares outstanding at December 31, 2000; and 13,674,533
shares issued and 13,647,208 shares outstanding at
December 31, 1999....................................... 240,968 86,971
Treasury stock; 225,325 shares at December 31, 2000 and
27,325 shares, at December 31, 1999..................... (5,530) (526)
Accumulated other comprehensive earnings
(loss)--unrealized gain (loss) on investments........... 124 (136)
Retained earnings (accumulated deficit)................... (24,472) 17,905
-------- -----------
Total Stockholders' equity............................ 211,090 104,214
-------- -----------
Total..................................................... $248,120 $ 126,955
======== ===========
See notes to consolidated financial statements.
30
QRS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE EARNINGS (LOSS)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2000 1999 1998
-------- -------- --------
Revenues.................................................... $143,491 $124,705 $91,926
Cost of revenue............................................. 89,045 62,946 50,915
-------- -------- -------
Gross profit................................................ 54,446 61,759 41,011
-------- -------- -------
Operating expenses:
Sales and marketing....................................... 31,244 17,994 12,080
Product development....................................... 9,210 8,645 4,309
General and administrative................................ 24,575 11,285 7,314
Amortization of intangible assets......................... 25,023 1,996 225
In-process research and development....................... 17,880 963 967
-------- -------- -------
Total operating expenses................................ 107,932 40,883 24,895
-------- -------- -------
Operating earnings (loss)................................... (53,486) 20,876 16,116
Interest income............................................. 1,505 2,011 2,151
-------- -------- -------
Earnings (loss) from continuing operations before income
taxes and minority interest............................... (51,981) 22,887 18,267
Income tax expense (benefit)................................ (8,182) 8,057 7,113
Minority interest in subsidiary............................. (1,422) (89) --
-------- -------- -------
Earnings (loss) from continuing operations after income
taxes and minority interest............................... (42,377) 14,919 11,154
Discontinued operations:
Gain from sale of software and services business.......... -- -- 896
-------- -------- -------
Net earnings (loss)......................................... (42,377) 14,919 12,050
Other comprehensive earnings (loss):
Unrealized gain (loss) from marketable securities
available-for-sale, net of tax.......................... 260 (199) 72
-------- -------- -------
Total comprehensive earnings (loss)......................... $(42,117) $ 14,720 $12,122
======== ======== =======
Basic earnings (loss) per share:
Continuing operations..................................... $ (2.92) $ 1.12 $ 0.87
Discontinued operations................................... -- -- 0.07
-------- -------- -------
Net earnings (loss) per share............................. $ (2.92) $ 1.12 $ 0.94
-------- -------- -------
Shares used to compute basic earnings (loss) per share...... 14,524 13,322 12,812
======== ======== =======
Diluted earnings (loss) per share:
Continuing operations..................................... $ (2.92) $ 1.05 $ 0.84
Discontinued operations................................... -- -- 0.07
-------- -------- -------
Net earnings (loss) per share............................. $ (2.92) $ 1.05 $ 0.91
-------- -------- -------
Shares used to compute diluted earnings (loss) per share.... 14,524 14,167 13,287
======== ======== =======
See notes to consolidated financial statements.
31
QRS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(DOLLARS IN THOUSANDS)
ACCUMULATED
COMMON STOCK OTHER RETAINED
--------------------- COMPREHENSIVE EARNINGS STOCKHOLDERS'
SHARES AMOUNT EARNINGS (LOSS) (DEFICIT) EQUITY
---------- -------- --------------- --------- -------------
Balance, January 1, 1998........... 12,797,049 $ 63,829 $ (9) $ (9,091) $ 54,729
Purchase of treasury stock......... (88,875) (1,837) (1,837)
Reissuance of treasury stock....... 52,500 1,132 (330) 802
Exercise of stock options,
including tax benefit............ 98,325 1,686 1,686
Issuance of common stock under
Employee Stock Purchase Plan..... 21,863 452 452
Other comprehensive earnings--
unrealized gain on marketable
securities available-for-sale.... 72 72
Net earnings....................... 12,050 12,050
---------- -------- ------- -------- --------
Balance, December 31, 1998......... 12,880,862 65,262 63 2,629 67,954
Exercise of warrants............... 15,000 25 25
Reissuance of treasury stock....... 11,000 214 357 571
Issuance of common stock........... 42,250 2,192 2,192
Exercise of stock options,
including tax benefit............ 675,105 18,078 18,078
Issuance of common stock under
Employee Stock Purchase Plan..... 23,175 683 683
Purchase of fractional shares from
stock split...................... (184) (9) (9)
Other comprehensive earnings--
unrealized loss on marketable
securities available-for-sale.... (199) (199)
Net earnings....................... 14,919 14,919
---------- -------- ------- -------- --------
Balance, December 31, 1999......... 13,647,208 86,445 (136) 17,905 104,214
Purchase of treasury stock......... (198,000) (5,004) (5,004)
Fair value of stock options assumed
in acquisition................... 9,367 9,367
Issuance of common stock........... 1,255,707 131,177 131,177
Common stock held in escrow........ (392,771) -- --
Exercise of stock options,
including tax benefit............ 312,919 13,040 13,040
Issuance of common stock under
Employee Stock Purchase Plan..... 37,952 413 413
Other comprehensive earnings--
unrealized gain on marketable
securities available-for-sale.... 260 260
Net loss........................... (42,377) (42,377)
---------- -------- ------- -------- --------
Balance, December 31, 2000......... 14,663,015 $235,438 $ 124 $(24,472) $211,090
========== ======== ======= ======== ========
See notes to consolidated financial statements.
32
QRS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(DOLLARS IN THOUSANDS)
2000 1999 1998
--------- --------- --------
Cash flows from operating activities:
Net earnings (loss)....................................... $ (42,377) $ 14,919 $ 12,050
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Depreciation and amortization........................... 36,286 7,366 3,429
Loss from disposal of property and equipment............ 179 103 134
Stock compensation...................................... 213 -- --
In-process research and development..................... 17,880 963 967
Gain from sale of software and services business........ -- -- (896)
Minority interest in subsidiary......................... (1,422) (89) --
Provision for allowance for doubtful accounts........... 1,977 1,980 1,031
Changes in assets and liabilities, net of effects of
acquisitions:
Accounts receivable................................... 125 (7,793) (5,245)
Prepaid expenses and other............................ (11) (1,669) 131
Income taxes receivable............................... 1,498 (4,726) --
Deferred income tax................................... (3,217) 7,856 1,684
Accounts payable...................................... (2,906) 2,594 4,181
Deferred revenue...................................... 1,054 -- --
Other accrued liabilities............................. (1,711) 1,312 2,141
Deferred rent and other............................... 445 (48) (47)
--------- --------- --------
Net cash provided by operating activities........... 8,013 22,768 19,560
--------- --------- --------
Cash flows from investing activities:
Purchases of marketable securities available-for-sale..... (15,069) (20,913) (3,907)
Sales of marketable securities available-for-sale......... 15,963 16,313 14,179
Purchase of property and equipment........................ (15,014) (9,123) (3,192)
Proceeds from disposal of property and equipment.......... 131 -- --
Capitalization of product development costs............... (5,468) (5,763) (2,555)
Acquisition of businesses, net of cash acquired........... (4,270) (14,840) (2,927)
Other assets.............................................. (2,166) (2,183) (276)
Payment of deferred acquisition payments.................. (2,000) -- --
Payment of transaction costs related to acquisitions...... (1,796) -- --
--------- --------- --------
Net cash provided by (used in) investing
activities........................................ (29,689) (36,509) 1,322
--------- --------- --------
Cash flows from financing activities:
Proceeds from employee stock purchase plan issuances...... 413 683 452
Exercise of stock options................................. 5,544 10,312 1,054
Exercise of stock warrants................................ -- 25 --
Contributions from minority interest...................... 1,683 500 --
Purchase of fractional shares from stock split............ -- (9) --
Purchase of treasury stock................................ (5,004) -- (1,837)
--------- --------- --------
Net cash provided by (used in) financing
activities........................................ 2,636 11,511 (331)
--------- --------- --------
See notes to consolidated financial statements
33
QRS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(DOLLARS IN THOUSANDS) (CONTINUED)
2000 1999 1998
--------- --------- --------
Net increase (decrease) in cash and cash equivalents........ (19,040) (2,230) 20,551
Cash and cash equivalents at beginning of year.............. 34,412 36,642 16,091
--------- --------- --------
Cash and cash equivalents at end of year.................... $ 15,372 $ 34,412 $ 36,642
========= ========= ========
Other cash flow information:
Taxes paid during the year................................ $ 69 $ 6,421 $ 5,742
========= ========= ========
Noncash investing and financing activities:
Tax benefit from stock options exercised.................. $ 7,496 $ 7,766 $ 632
Deferred acquisition payments............................. 5,000 3,000 --
Fair value of common stock issued in acquisitions......... 131,177 2,763 802
Fair value of stock options assumed in acquisition........ 9,367 -- --
Tax benefit from acquisition of The EDI Connection........ -- 329 --
Unrealized gain (loss) on marketable securities
available-for-sale...................................... 260 (199) 72
On March 10, 2000, we acquired substantially all the assets of RockPort
Trade Systems, Inc. On January 21, 2000, we acquired the outstanding capital
stock of Image Info. On July 23, 1999, we acquired the outstanding common shares
of Retail Data Services and its affiliate, RDS, Inc. During the third quarter of
1998, we acquired the assets of Custom Information Systems Corporation and the
outstanding common shares of The EDI Connection. The purchase prices were
allocated, as follows:
2000 1999 1998
--------- -------- --------
Working capital (deficiency) other than cash................ $ (4,929) $(1,329) $ (71)
Property and equipment...................................... 539 212 110
Other assets................................................ 97 -- --
Goodwill.................................................... 107,911 7,588 736
Other intangible assets..................................... 46,476 11,169 1,987
In-process research and development......................... 17,880 963 967
Other non-current liability................................. (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) (802)
--------- ------- ------
Acquisitions, net of cash acquired of $730, $160 and $23,
and stock issued.......................................... $ 4,270 $14,840 $2,927
========= ======= ======
See notes to consolidated financial statements
34
QRS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: DESCRIPTION OF THE BUSINESS
We market our 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 practices. The QRS
Tradeweave Retail Network has grown out of our eCommerce, Content, Applications
and Marketplace offerings. For clarity of presentation in our 2000 results, we
will refer to the old product names that were in effect during 2000. Please
refer to the chart in Item 1"Business--QRS Services" for a comparison of old and
new product names.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The accompanying financial statements include the accounts of QRS
Corporation and our subsidiaries which include QRS Canada Inc., QRS Sales and
Services Corporation, Tradeweave, Inc. (see Notes 14 and 16), Image Info Inc.,
Retail Data Services, Inc., Rockport Trade Systems Ltd., QRS PACRIM Corporation,
QRS EMEA, Inc., Image Info LLC (a Delaware LLC) and Rockport Trade Systems LLC
(a Delaware LLC). All significant intercompany transactions have been
eliminated.
REVENUE RECOGNITION
We derive revenues from three principal and related sources: fees for
utilization of eCommerce services, including the transmission of standard
business documents over a network, monthly charges for accessing Content
services, and subscription and usage fees for certain Application and
Marketplace services. The revenues from our three principal sources are
recognized in the month in which the service is performed. We also derive
revenues from the sale of software applications and related services. We
recognize product revenues upon shipment if a signed contract exists, the fee is
fixed and determinable, and collection of resulting receivables is reasonably
assured. For contracts with multiple obligations, revenue is allocated to each
component of the contract based on objective evidence of its fair value, which
is specific to QRS. We recognize revenue allocated to maintenance fees,
including amounts allocated from product revenue, for ongoing customer support
and product updates ratably over the period of the maintenance contract.
Payments for maintenance fees are generally made in advance and are
non-refundable. For revenue allocated to consulting services, such as
installation and training, we recognize revenue as the related services are
performed. During the fourth quarter of 2000, we adopted the Staff Accounting
Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements" issued by
the Securities and Exchange Commission (SEC). This summarizes certain areas of
the SEC's views in applying generally accepted accounting principles to revenue
recognition in financial statements. Our adoption of SAB 101 had no material
effect on our financial statements.
CASH AND CASH EQUIVALENTS
We consider all highly liquid temporary investments with original maturities
of three months or less to be cash equivalents. Our cash is deposited primarily
in banks in the United States, United Kingdom and Canada. Deposits in these
banks may exceed the amount of insurance, if any, provided on such deposits. We
have not experienced any losses in such deposits and believe we are not exposed
to any significant credit risk on cash and cash equivalents.
MARKETABLE SECURITIES AVAILABLE-FOR-SALE
Short-term and long-term investments in debt securities on the balance sheet
are classified as available-for-sale and are carried at fair value, with the
unrealized gains or losses, net of tax, reported
35
QRS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
in accumulated other comprehensive income (loss). The amortized cost of debt
securities is adjusted for amortization of premiums and accretion of discounts
to maturity, both of which are included in interest income. Realized gains and
losses are recorded on the specific identification method. Realized gains or
losses were not significant in 2000, 1999 and 1998.
INTANGIBLE ASSETS
Intangible assets include certain contracts, proprietary databases,
trademarks, current technology, assembled workforce, non-compete agreements and
goodwill purchased in connection with the acquisitions of businesses, and are
amortized on a straight-line basis over their estimated useful lives, which
range from three to seven years. Amortization expense was $25,023,000,
$1,996,000 and $225,000 in 2000, 1999 and 1998, respectively.
PRODUCT DEVELOPMENT COSTS
We account for development costs related to products to be sold in
accordance with SFAS No. 86, "Accounting for the Costs of Computer Software to
Be Sold, Leased, or Otherwise Marketed." Development costs are capitalized
beginning when a product's technological feasibility has been established and
ending when the product is available for general release to customers.
Technological feasibility is reached when the product reaches the beta stage. To
date, products and enhancements have generally reached technological feasibility
and have been released for sale at substantially the same time.
We account for costs incurred to develop our computer software for internal
use in accordance with AICPA Statement of Position (SOP) 98-1 "Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use". As
required by SOP 98-1, we capitalize the costs incurred during the application
development stage, which include costs to design the software configuration and
interfaces, coding, installation and testing. Costs incurred during the
preliminary project along with post-implementation stages of our internal use
computer software are expensed as incurred. Capitalized development costs are
amortized over various periods up to three years. Costs incurred to maintain
existing product offerings are expensed as incurred. The capitalization and
ongoing assessment of recoverability of development costs requires considerable
judgment by management with respect to certain external factors, including, but
not limited to, technological and economic feasibility, and estimated economic
life. For the years ended December 31, 2000, 1999 and 1998, we capitalized
product development costs of $5,468,000, $5,763,000 and $2,555,000,
respectively.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated on a straight-line
basis over their estimated useful lives, which are generally five years for
furniture, fixtures and equipment. Leasehold improvements are amortized over the
remaining period of the lease or over the estimated useful life of the
improvement, whichever is shorter. Depreciation expense for the years ended
December 31, 2000, 1999 and 1998 was $6,693,000, $3,559,000 and $2,540,000,
respectively.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews long-lived assets, which include fixed assets,
intangible assets, goodwill and capitalized software costs for internal use, for
impairment whenever events or changes in circumstances
36
QRS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
indicate the carrying value of an asset may not be recoverable. No such events
have occurred to date. In performing the review for recoverability, the Company
would estimate the future cash flows expected to result from the use of the
asset and its eventual disposition. The amount of the impairment loss, if any,
would be calculated based on the excess of the carrying amount of the asset over
its fair value.
ADVERTISING AND PROMOTIONAL COSTS
We expense advertising and promotional costs as they are incurred.
Advertising expense for 2000, 1999, and 1998 was $1.7 million, $965,000 and
$893,000, respectively.
STOCK BASED COMPENSATION
SFAS No. 123 established accounting and disclosure requirements using a
fair-value based method of accounting for stock-based employee compensation
plans. As allowed under provisions of SFAS No. 123, we have chosen to continue
the intrinsic value based method and provide pro forma disclosures of net
earnings and earnings per share as if the accounting provisions of SFAS No. 123
had been adopted (See Note 10). During the third quarter of 2000, we adopted the
Financial Accounting Standards Board Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation". Our adoption of this
accounting standard had no material effect on our financial statements.
EARNINGS PER SHARE
We present our earnings per share on a dual basis, basic and diluted EPS as
required by SFAS No. 128, "Earnings per Share." Basic EPS excludes dilution and
is computed by dividing net earnings by the weighted average of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock.
STOCK SPLIT
On June 10, 1999, our Board of Directors authorized a three-for-two split of
our common stock for our stockholders of record as of June 21, 1999. All share
and per share amounts have been restated to retroactively reflect the stock
split.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The amounts reported for cash equivalents, accounts receivables, accounts
payable and certain other accrued liabilities are considered to approximate fair
values based upon comparable market information available at the respective
balance sheet dates. Financial instruments that potentially subject us to
concentrations of credit risks comprise principally cash, investments and
accounts receivable. We invest our excess cash in accordance with our investment
policy that has been approved by the Board of Directors and is reviewed
periodically to minimize credit risk. The policy authorizes the investment of
excess cash in government securities, municipal securities, bonds, time
deposits, certificates of deposit and commercial paper rated AA or better (See
Note 3).
37
QRS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of our 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
results could differ from these estimates.
COMPREHENSIVE EARNINGS
As required by SFAS No.130, "Reporting Comprehensive Income," we classify as
components of comprehensive earnings, all items recognized under accounting
standards, which include net earnings and unrealized gains and losses on
marketable securities that are classified as available-for-sale.
SEGMENT INFORMATION
We have determined that beginning in 2000 we have three reportable operating
segments as defined by SFAS No. 131 "Disclosures about Segments of an Enterprise
and Related Information". See Note 15.
RECLASSIFICATION
Certain prior year amounts have been reclassified to conform to the 2000
presentation.
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. The Company believes that the adoption of this statement will not
have a material effect on its financial position or results of operations.
38
QRS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3: MARKETABLE SECURITIES, AVAILABLE FOR SALE
Marketable securities available-for-sale are summarized as follows (in
thousands):
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------
DECEMBER 31, 2000
Debt issued by--
Municipal Agencies................................... $11,312 $124 $ -- $11,436
Certificate of deposit............................... 825 -- -- 825
------- ---- ----- -------
Total marketable securities.......................... 12,137 124 -- 12,261
Less long-term marketable Securities
available-for-sale................................. 2,167 4 -- 2,171
------- ---- ----- -------
Short-term marketable Securities
available-for-sale................................. $ 9,970 $120 $ -- $10,090
======= ==== ===== =======
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------
DECEMBER 31, 1999
Debt issued by:
Municipal Agencies................................... $13,031 $8 $(144) $12,895
------- -- ----- -------
Short-term marketable Securities
available-for-sale................................. $13,031 $8 $(144) $12,895
======= == ===== =======
The table below presents principal amounts and related weighted average
interest rates due by date of maturity for the marketable securities. Our
guidelines do not permit investments with maturities in excess of 24 months. At
December 31, 2000 and 1999, the weighted average maturity of the marketable
securities portfolio was 127 days and 225 days, respectively.
DECEMBER 31, 2000:
FAIR VALUE AT
MATURITY MATURITY DECEMBER 31,
(AMOUNTS IN THOUSANDS) 2001 2002 TOTAL 2000
- ---------------------- -------- -------- -------- -------------
Municipal Agencies.................................... $9,145 $2,167 $11,312 $11,436
Certificate of deposit................................ 825 -- 825 825
------ ------ ------- -------
Total................................................. $9,970 $2,167 $12,137 $12,261
====== ====== ======= =======
Average interest rate................................. 5.17% 6.21% 5.35% 5.35%
====== ====== ======= =======
DECEMBER 31, 1999:
FAIR VALUE AT
MATURITY DECEMBER 31,
(AMOUNTS IN THOUSANDS) 2000 1999
- ---------------------- -------- --------------
Municipal Agencies.......................................... $13,031 $12,895
======= =======
Average interest rates...................................... 4.61% 4.61%
======= =======
39
QRS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4: INCOME TAXES
We account for income taxes using the asset and liability method under SFAS
No. 109, "Accounting for Income Taxes." We provide a deferred tax expense or
benefit for differences between financial accounting and tax reporting. Deferred
income taxes represent future net tax effects of temporary differences between
the financial statement and tax bases of assets and liabilities, using enacted
tax rates in effect for the year in which the differences are expected to
reverse.
The income tax expense (benefit) for the years ended December 31, 2000, 1999
and 1998 consisted of (in thousands):
2000 1999 1998
-------- -------- --------
Current:
Federal.......................................... $(3,762) $6,500 $4,604
State............................................ (796) 1,510 1,456
------- ------ ------
(4,558) 8,010 6,060
------- ------ ------
Deferred:
Federal.......................................... (3,272) 687 1,154
State............................................ (352) (640) (101)
------- ------ ------
(3,624) 47 1,053)
------- ------ ------
Total............................................ $(8,182) $8,057 $7,113
======= ====== ======
Significant components of our deferred tax balances as of December 31, 2000
and 1999 are as follows (in thousands):
DECEMBER 31, DECEMBER 31,
2000 1999
------------ ------------
Deferred tax assets:
Purchased in-process research and development............. $ 2,259 $1,657
Allowance for doubtful accounts........................... 806 631
Other accruals not currently deductible................... 1,115 541
Deferred rent............................................. 614 508
Net operating loss carryforwards.......................... 7,641 786
California enterprise zone credits........................ 313 482
Research and development credit carryforwards............. 143 505
State taxes............................................... 400 --
------- ------
Total deferred income tax assets........................ 13,291 5,110
Deferred tax liabilities:
Capitalized research and development costs expensed for
tax..................................................... 3,664 2,502
Depreciation.............................................. -- 293
State taxes............................................... -- 340
Other intangibles......................................... 15,639 --
------- ------
Total deferred income tax liabilities................... 19,303 3,135
------- ------
Deferred income tax assets (liabilities), net............. $(6,012) $1,975
======= ======
40
QRS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4: INCOME TAXES (CONTINUED)
A reconciliation of the federal statutory tax rate to our effective tax rate
is as follows (dollars in thousands):
2000 1999 1998
------------------- ------------------- -------------------
Provision at statutory tax rate.............. $(17,678) (35)% $8,010 35% $6,394 35%
State income taxes, net of federal tax
benefit.................................... (1,030) (2) 1,021 4 881 5
Research and experimentation credits......... -- -- (428) (2) (215) (1)
California enterprise zone credits........... -- -- (313) (1) -- --
Tax exempt interest.......................... (327) -- (247) (1) -- --
Minority interest in subsidiary.............. -- -- (31) -- -- --
Goodwill amortization........................ 4,540 9 -- -- -- --
In process research and development.......... 6,258 12 -- -- -- --
Other........................................ 55 -- 45 -- 53 --
-------- --- ------ -- ------ --
Total........................................ $ (8,182) (16)% $8,057 35% $7,113 39%
======== === ====== == ====== ==
At December 31, 2000, we had net operating loss carryforwards available to
offset future federal and state taxable income of approximately $18.3 million,
which will expire in 2020. Research and development tax credit carryforwards of
approximately $143,000 available to offset future California state taxes
respectively, which will expire in 2020. We also have California state
enterprise zone credit carryforwards of approximately $313,000, which have no
expiration date, and are available to offset future California state taxes.
NOTE 5: 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 $101.0 million, comprised of
814,794 shares of our common stock valued at $90.1 million calculated based on
the average of the share price three days prior to the announcement of the
acquisition on March 10, 2000 and three days after this date; transaction costs
of approximately $1.5 million and $9.4 million in stock compensation related to
stock options assumed. We assumed the obligations of RockPort under its RockPort
Stock Option Plan (RockPort Plan) and the outstanding stock options of RockPort
converted to options to purchase 89,645 shares of our common stock. As a result,
we recorded stock compensation of approximately $9.4 million, which has 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, we acquired all of the outstanding stock of Image
Info Inc. (Image Info), pursuant to an Agreement and Plan of Merger, dated
January 16, 2000 (Merger Agreement). The total acquisition cost was
$51.3 million comprised of $5.0 million paid in cash; $5.0 million in deferred
acquisition payment to the former shareholders of Image Info; 440,914 shares of
our common stock valued at $41.0 million calculated based on the average of the
share price three days prior to the announcement of the acquisition on
January 21, 2000 and three days after this date; and transaction costs of
approximately $300,000. Under the terms of the Merger Agreement, we agreed to
pay $2.5 million each in 2001 and 2002 to the former shareholders of Image Info
if revenue from the
41
QRS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5: ACQUISITIONS (CONTINUED)
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 fair value of the assets acquired and liabilities assumed, is
summarized as follows (in thousands):
ROCKPORT IMAGE INFO TOTAL
-------- ---------- --------
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
Transaction costs........................................... 1,450 300 1,750
Deferred acquisition payment................................ -- 5,000 5,000
-------- ------- --------
Total purchase price...................................... $100,954 $51,340 $152,294
======== ======= ========
Preliminary allocation of purchase price:
Goodwill.................................................... $ 76,315 $31,596 $107,911
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 1,297 3,430
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......................................... (2,003) (5,133) (7,136)
-------- ------- --------
Total allocation of purchase price........................ $100,954 $51,340 $152,294
======== ======= ========
During the third quarter of 2000, we made an adjustment to the allocation of
the purchase price recorded for the acquisition of RockPort. The adjustment
results from a subsequent review of the facts underlying the in-process research
and development (IPR&D) projects that were under development at RockPort at the
acquisition date. As a result of that review, we concluded that one of those
IPR&D projects involved the development of internal use software, and did not
entail expenditures that are within the scope of Statement of Financial
Accounting Standards No. 2, ACCOUNTING FOR RESEARCH AND DEVELOPMENT COSTS.
Consequently, the estimated fair value of that project was excluded from the
purchase price allocation previously made to IPR&D. This resulted in the
previously reported write-off of IPR&D in the amount of $24.9 million (of which
$15.4 million related to the RockPort acquisition) being reduced by
approximately $7.0 million to $17.9 million, and goodwill being increased by the
same amount. 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. The amounts
42
QRS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5: ACQUISITIONS (CONTINUED)
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 IPR&D
of $17.9 million were charged to expense during the year ended December 31, 2000
as technological feasibility had not been established and no alternative future
uses existed for the research projects at the acquisition dates.
On July 23, 1999, we completed the acquisition of all the outstanding
capital stock of Retail Data Services, Inc. and RDS, Inc. (collectively, "RDS").
The total acquisition cost was $21.0 million; comprised of $15.0 million paid in
cash; $3.0 million in deferred acquisition payment to the seller; 53,250 shares
of common stock valued at $2.8 million 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
$2.0 million and $1.0 million to the seller in March 2000 and 2001,
respectively, if revenue from the acquired business met or exceeded the
established levels for 1999 and 2000. Revenue from the acquired business for
1999 met the established levels and we paid $2.0 million to the seller in
March 2000. The revenue goal was also achieved for 2000, so we paid the seller
$1.0 million in March 2001. Both payments of $1.0 million 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 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 fair value of the
assets acquired and liabilities assumed is summarized as follows (in thousands):
Cash........................................................ $15,000
Fair value of common stock issued........................... 2,763
Transaction costs........................................... 250
Deferred acquisition payment to seller...................... 3,000
-------
Total purchase price.................................... $21,013
=======
Allocation of purchase price:
Goodwill.................................................. $ 7,588
Current technology........................................ 4,190
Customers list and trademark.............................. 3,757
Fair value of other intangible assets..................... 1,687
Assembled workforce....................................... 1,535
In-process research and development....................... 963
Accounts receivable....................................... 1,092
Property and equipment.................................... 212
Cash...................................................... 160
Liabilities assumed....................................... (171)
-------
Total allocation of purchase price...................... $21,013
=======
The amount allocated to in-process research and development of $963,000 was
charged to expense during the year ended December 31, 1999 as technological
feasibility had not been established and no alternative future uses existed for
the research projects at the acquisition date.
43
QRS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5: ACQUISITIONS (CONTINUED)
The following unaudited pro forma financial results of QRS, RockPort, Image
Info and RDS for the years ended December 31, 2000 and 1999 give effect to the
acquisition of RockPort, Image Info and RDS as if the acquisitions had occurred
at the beginning of the periods presented and includes adjustments (increase in
amortization of intangible assets, 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 results are provided for comparative
purposes only and are not necessarily indicative of what our actual results
would have been had the forgoing transactions been consummated on such dates,
nor does it give effect to the synergies, cost savings and other charges
expected to result from the acquisitions. Accordingly, the pro forma financial
results do not purport to be indicative of our results of operations as of the
date hereof or for any period ended on the date hereof or for any other future
date or period.
Unaudited Pro Forma Financial Information (in thousands, except share and
per share amounts):
YEARS ENDED DECEMBER 31,
-------------------------
2000 1999
----------- -----------
Revenues........................................... $ 144,984 $ 145,853
=========== ===========
Net loss........................................... $ (27,859) $ (5,148)
=========== ===========
Basic and diluted loss per share (Note 13)......... $ (1.90) $ (0.36)
=========== ===========
Shares used to compute basic and diluted loss per
share (Note 13).................................. 14,649,832 14,184,503
=========== ===========
Basic and diluted pro forma loss per share was calculated based on our
outstanding common stock at December 31, 2000 and 1999, which reflects 814,794
shares, 440,914 shares and 53,250 shares of our common stock issued,
respectively in connection with the acquisition of RockPort, Image Info and RDS.
At December 31, 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. The 226,105 and 166,666 shares of
our common stock were released from escrow in March and January, 2001,
respectively.
The Rockport, Image Info and RDS projects included in in-process research
and development and the percent complete, the estimated cost to complete and the
value assigned to each project are as follows (in thousands):
ESTIMATE OF PERCENT ESTIMATED COST VALUE
COMPLETION TO COMPLETE ASSIGNED
------------------- -------------- ------------
Rockport.......................................... 80% $218,000 $8.4 million
Image Info........................................ 100% -- 9.0 million
RDS............................................... 100% -- 963,000
The amounts allocated to the in-process research and development were
determined based on appraisals completed by independent appraisers using
established valuation techniques and were
44
QRS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5: ACQUISITIONS (CONTINUED)
expensed upon acquisition, because technological feasibility had not been
established and no future alternative uses existed. The value of these projects
was determined by estimating the costs to develop the in-process research and
development into commercially viable products, estimating the resulting net cash
flows form the sale of the products resulting from the completion of the
projects reduced by the portion of the revenue attributable to core technology,
and discounting the net cash flows back to their present value. Amounts
allocated to intangible assets and goodwill resulting from the above
acquisitions are amortized over periods ranging from three to seven years from
the date of acquisition.
During the third quarter of 1998, we acquired the assets of Custom
Information Systems Corporation and the outstanding common shares of Mueller
Associates, Inc. (dba EDI Connection), both service bureaus. The total
acquisition cost was $4.0 million, comprised of $3.0 million paid in cash;
35,000 shares of common stock valued at $802,000 issued from our treasury stock
account; and $206,000 in transaction costs related to the acquisitions. The
acquisitions were accounted for as purchase transactions. In connection with the
acquisitions, $967,000 of the purchase price was allocated to in-process
research and development and, as technological feasibility had not been
established and no alternative future uses existed at the acquisition dates,
charged to expense. We allocated $3.2 million of the purchase price to current
assets, property and equipment and intangible assets. The amounts allocated to
current assets and property and equipment were based on the fair market value of
the related assets and the amounts allocated to intangible assets were
determined on the basis of the appraised value of the related intangible assets.
The appraisal techniques used for the acquisitions included certain
assumptions, including, the extent, character and utility, the income generating
or cost-savings attributes, the nature and timing of the functional or economic
obsolescence and the relative risk and uncertainty associated with an investment
in intangible assets.
NOTE 6: SUBLEASE LOSS ACCRUALS AND DISCONTINUED OPERATIONS
On May 20, 1993, we divested our software and services business to Uniquest,
a publicly held company. In connection with the sale, we entered into various
agreements with the buyer, including the sublease of approximately 40,000 square
feet of office space through June 30, 2000. Minimum monthly lease payments
ranged from $53,000 to $75,000 through the seven-year term of the lease. There
were no sublease income or data cost reimbursements during 1997.
In May 1995, Uniquest ceased operations and made an assignment of assets for
the benefit of its creditors. In connection with the cessation of Uniquest's
operations, the Company's sublease with Uniquest was terminated. During the
quarter ended March 31, 1998, outstanding matters with regard to the Uniquest
bankruptcy were substantially resolved; accordingly, we recognized a gain on
sale of software and services business of $1,494,000 less applicable income
taxes of $598,000 for these discontinued operations. A sublease loss accrual of
$480,000 at March 31, 1998, representing the provisions established for
nonpayment by Uniquest of future sublease obligations was reclassified to
deferred rent and other and is being amortized over the remaining lease term
through June 30, 2010.
NOTE 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. We agreed to purchase a certain amount of network services
45
QRS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7: COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 April 30, 1999, AT&T completed its acquisition of IBM Global Network
business (renamed AT&T Global Network Services). This acquisition reflected
IBM's intent to exit the telecommunications infrastructure side of its network
business while focusing on its e-business related services. The services
purchased from IBM under its agreement include both network connectivity and
e-business related value added services. After the close of the AT&T
acquisition, we continue to acquire our network service requirements from IBM
with the delivery of a portion of these services undertaken by AT&T.
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 exclusive ability to
market and resell the related services to the retail industry. 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, the bTrade messaging software
license agreement was amended to reduce the license fee from $4,000,000 to
$1,000,000 and the remarketer agreement was revised to eliminate the exclusivity
right to remarket to the retail industry. 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.
In October 1999, we established an irrevocable letter of credit on behalf of
Tradeweave, for the amount of $825,000 with Wells Fargo Bank, N.A. as security
for its real property lease and general corporate purposes. The letter of credit
is outstanding as of December 31, 2000 (See Note 16).
We lease office buildings and certain equipment under various non-cancelable
operating lease agreements expiring through the year 2011. The leases for office
buildings generally provide renewal options and additional rents based on
increases in operating expenses of the buildings.
Our corporate building lease agreement provided for significant periods of
"free rent" when no cash was required. The total cash payments over the life of
the lease were divided by the total number of months in the lease period and the
average rent is charged to expense each month during the lease period. During
the periods of "free rent," this expense creates a deferred liability, which is
amortized as a reduction to expense over the life of the lease.
46
QRS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7: COMMITMENTS AND CONTINGENCIES (CONTINUED)
Total rent expense related to these operating leases charged to continuing
operations for the years ended December 31, 2000, 1999 and 1998 was $5,055,000,
$3,236,000 and $1,781,000, respectively.
At December 31, 2000, future minimum payments under long-term operating
leases are as follows (in thousands):
YEAR ENDING DECEMBER 31:
- ------------------------
2001...................................................... $ 7,556
2002...................................................... 7,178
2003...................................................... 6,681
2004...................................................... 5,907
2005...................................................... 4,973
2006 & thereafter......................................... 18,325
-------
Total....................................................... $50,620
=======
NOTE 8: CONCENTRATION OF CREDIT RISK
We provide services and generate revenues by enabling certain hub customers
and their trading partners to conduct business over our network. Due to the
large number of trading partners that transact business with each other,
including one or more hub customers, the difficulty of allocating trading
partner network services to individual hub customers, and the differences in the
manner in which hub customers and trading partners allocate the cost of network
services among each other, we cannot precisely attribute revenues to particular
trading relationships. While we continue to refine our estimation techniques, we
believe that no individual customer or hub customer trading partnership exceeded
10% of total revenues for any of the three years in the period ended
December 31, 2000. Additionally, no individual customer accounted for 10% or
more of the accounts receivable balances as of December 31, 2000, 1999 and 1998.
All of our customers belong to a single segment of the economy, the retail
industry. A slowdown or consolidation within such industry can have a material
adverse effect on our business and results of operation. The write-off of
accounts receivable was $2.2 million, $1.4 million and $719,000 for the years
ended December 31, 2000, 1999 and 1998, respectively. In connection with the
acquisitions of Rockport and Image Info in 2000, we reserved $684,000 as an
allowance for doubtful accounts.
The Company relies on the IBM Global Network for provision of electronic
data exchange services to its customers. If IBM becomes unable or unwilling to
provide VAN services, we would either have to provide these services directly or
arrange for another third party to provide such services. We cannot assure you
that we would be able to do so on a timely manner, if at all, or that the costs
of any such arrangements would not materially adversely affect our business and
results of operations.
47
QRS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9: RETIREMENT SAVINGS PLANS
We implemented a 401(k) plan, which is a defined contribution plan for all
eligible employees. The plan allows discretionary, matching employer
contributions of up to 50% of the maximum allowable employee contribution
($10,500 in 2000, $10,000 in 1999 and 1998). The matching employer contributions
charged to continuing operations during 2000, 1999 and 1998 were approximately
$1.2 million, $651,000 and $522,000, respectively. We also implemented a
non-qualified deferred compensation plan for certain employees whose
contributions and the related employer matching contributions under the 401(k)
plan are restricted under the Internal Revenue Code. The supplemental employer
matching contributions under this plan charged to continuing operations during
2000, 1999 and 1998 were $71,000, $64,000 and $32,000, respectively.
NOTE 10: COMMON STOCK, STOCK OPTIONS AND WARRANTS
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 shares to a total of 60,000,000 shares.
In 1989, our Board of Directors approved a Non-Qualified Stock Option Plan
(the "Plan"). The Plan was amended in 1990. The Plan provides for the granting
of options to certain employees and directors to purchase shares of our common
stock at prices determined by our Board of Directors.
In June 1993, our Board of Directors adopted an Employee Stock Purchase Plan
(the "Purchase Plan"). The Purchase Plan provides for the purchase of common
stock by eligible employees. A total of 225,000 shares of common stock have been
reserved for purchase under the Purchase Plan. The purchase price per share is
85% of the lower of (i) the fair market value of the common stock on the
participant's entry date (first business day in January, April, July and October
each year) into a purchase period (first business day in January and through the
last business day in December each year) or (ii) the fair market value on the
annual purchase date (the last business day in December each year). For a
participant whose entry date is subsequent to the start date of the purchase
period (first business day in January each year), the clause (i) value will not
be less than the fair market value of the common stock on the start date of the
purchase period. In 2000, 1999 and 1998, employees acquired 37,952 shares,
23,175 shares and 21,863 shares of our common stock, respectively, under the
Purchase Plan. At December 31, 2000, 42,479 shares of our common stock were
available for future purchases under the Purchase Plan.
In June 1993, our Board of Directors also approved the 1993 Stock
Option/Stock Issuance Plan (the "1993 Plan"). A total of 4,700,000 shares of
common stock have been reserved for issuance under this plan, which includes
additional allocations approved by the stockholders of 750,000, 750,000,
525,000, 600,000 shares and 800,000 shares in May 1995, 1996, 1998, 1999 and
2000, respectively. The 1993 Plan is divided into three separate components:
(i) the Discretionary Option Grant Program under which key employees (including
officers), certain non-employee directors and consultants may, at the discretion
of the Plan Administrator, be granted options to purchase shares of Common Stock
at an exercise price not less than 85% of the fair market value of such shares
on the grant date, (ii) the Automatic Option Grant Program under which option
grants will automatically be made at periodic intervals to certain non-employee
members of the Board to purchase shares of Common Stock at an exercise price
equal to 100% of the fair market value of the option shares on the grant date,
and (iii) the Stock Issuance Program under which key employees (including
officers), certain non-employee and consultants may, in the Plan Administrator's
discretion, be issued shares of Common Stock directly, either through the
purchase of such shares at a price not less than 85% of their fair market value
at
48
QRS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10: COMMON STOCK, STOCK OPTIONS AND WARRANTS (CONTINUED)
the time of issuance or as a bonus tied to the performance of services or our
attainment of financial objectives, without any cash payment required of the
recipient.
All outstanding options under the 1993 Plan have been granted at fair market
value on the date of grant and generally vest as follows: 25% of the option
vests upon optionee's completion of one year of service measured from the grant
date. The balance of the options vest in a series of thirty-six successive equal
monthly installments upon optionee's completion of each month of service over
the thirty-six month period. All options have a life of 10 years. Outstanding
options granted under earlier plans were granted at fair market value or lesser
values, and vest primarily over periods up to four years.
In December 1997, our Board of Directors approved the 1997 Special
Non-Officer Stock Option Plan, which permits us to grant options to purchase up
to 225,000 shares of common stock. The persons eligible to receive options
through this Plan are those employees who are neither our executive officers nor
members of our Board of Directors. On February 15, 1999, our Board of Directors
authorized an increase in the number of shares of common stock available for
issuance under the 1997 Special Non-Officer Stock Option Plan from 225,000
shares to 450,000 shares, and on May 11, 2000, authorized an increase from
450,000 shares to 675,000 shares. At December 31, 2000, options to purchase
approximately 364,234 shares of our common stock were available for future
grants under the Plans.
At December 16, 1999, the Tradeweave Board of Directors approved a
Non-Qualified Stock Option Plan (the "Tradeweave Plan"). The Tradeweave Plan
provides for the granting of options to certain employees, non-employees and
non-employee directors to purchase shares of Tradeweave common stock at prices
determined by Tradeweave's Board of Directors.
A total of 4,000,000 shares of Tradeweave common stock have been reserved
for issuance under this Plan. The Tradeweave Plan is divided into two separate
components: (i) the Option Grant Program under which certain employees, certain
non-employee directors and non-employees may, at the discretion of the
Tradeweave Plan Administrator, be granted options to purchase shares of
Tradeweave common stock at an exercise price not less than 85% of the fair
market value of such shares on the grant date, if the person to whom the option
is granted is a 10% shareholder, then the exercise price per share shall not be
less than 110% of the fair market value per share of common stock on the option
grant date, and (ii) the Stock Issuance Program under which certain employees,
non-employee directors and non-employees may, at the Tradeweave Plan
Administrator's discretion, be issued shares of Tradeweave common stock directly
through the purchase of such shares at a price not less than 85% of their fair
market value at the time of issuance, if the person to whom the option is
granted is a 10% shareholder, then the exercise price per share shall not be
less than 110% of the fair market value per share of common stock on the option
grant date.
All outstanding options under the Tradeweave Plan have been granted at fair
market value on the date of grant and vest 25% upon optionee's completion of one
year of service measured from the vesting commencement date. The balance of the
options vest in a series of thirty-six successive equal monthly installments
upon optionee's completion of each month of service over the thirty-six month
period measured from the first anniversary of the vesting commencement date. At
December 31, 2000, options to purchase approximately 519,497 shares of
Tradeweave common stock were available for future grants under the Tradeweave
Plan. However, this plan was assumed by us in connection with our merger with
Tradeweave Inc. in February 2001. As part of the assumption, all outstanding
options to
49
QRS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10: COMMON STOCK, STOCK OPTIONS AND WARRANTS (CONTINUED)
purchase Tradeweave common stock were converted into options to purchase QRS
common stock based on an exchange ratio established in the merger agreement (See
Notes 14 and 16).
The following table shows the activity in our stock option plans excluding
Tradeweave:
WEIGHTED AVERAGE
NUMBER OF EXERCISE
OPTIONS PRICE
--------- ----------------
Balance, December 31, 1997 (480,870 exercisable at $12.24
weighted average price per share)......................... 1,962,722 $17.03
Granted................................................... 698,025 19.77
Exercised................................................. (98,325) 10.73
Canceled.................................................. (124,088) 22.15
---------
Balance, December 31, 1998 (861,011 exercisable at $15.67
weighted average price per share)......................... 2,438,334 17.80
Granted................................................... 734,865 53.45
Exercised................................................. (675,106) 15.26
Canceled.................................................. (123,850) 19.96
---------
Balance, December 31, 1999 (971,860 exercisable at $21.70
weighted average price per share)......................... 2,374,243 29.45
Granted................................................... 1,361,489 42.92
Exercised................................................. (312,919) 17.72
Canceled.................................................. (328,133) 38.57
---------
Balance, December 31, 2000 (1,456,618 exercisable at $28.30
weighted average price per share)......................... 3,094,680 $35.91
=========
The weighted average fair value of options granted during 2000, 1999 and
1998 was $32.25, $24.96 and $9.08, respectively.
50
QRS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10: COMMON STOCK, STOCK OPTIONS AND WARRANTS (CONTINUED)
The status of options outstanding as of December 31, 2000, excluding the
Tradeweave Plan is summarized as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------------------------ ----------------------------
WEIGHTED
AVERAGE
REMAINING WEIGHTED WEIGHTED
RANGE OF NUMBER CONTRACTUAL AVERAGE NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- --------------------- ----------- ----------- -------------- ----------- --------------
$ 0.15-0.15 9,554 9.2 $ 0.15 9,554 $ 0.15
3.07-3.50 13,595 3.3 3.43 13,092 3.44
6.00-8.28 36,063 6.9 7.14 17,063 6.89
9.42-13.44 256,152 6.2 11.47 205,340 11.07
14.58-21.25 1,099,612 6.4 18.81 720,058 19.64
23.71-32.50 665,149 8.5 28.93 141,705 27.27
36.67-54.88 422,155 8.6 47.55 193,956 43.81
63.56-85.48 373,600 8.3 68.85 97,414 64.35
96.00-104.75 218,800 9.0 101.37 58,436 103.00
--------- --- ------- --------- -------
$ 0.15-104.75 3,094,680 7.5 $ 35.91 1,456,618 $ 28.30
========= === ======= ========= =======
The following table shows the activity in the Tradeweave Plan:
NUMBER OF WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
---------- ----------------
Balance, December 31, 1998.................................. --
Granted................................................... 2,167,000 $0.25
Exercised................................................. --
Canceled.................................................. --
---------- -----
Balance, December 31, 1999 (1,602,000 exercisable at $0.25
weighted average price per share)......................... 2,167,000 0.25
Granted................................................... 1,854,003 1.00
Exercised................................................. (1,683,503) 0.33
Canceled.................................................. (540,500) 0.62
---------- -----
Balance, December 31, 2000 (1,008,139 exercisable at $0.97
weighted average price per share)......................... 1,797,000 $0.84
========== =====
The weighted average fair value of options granted during 2000 and 1999 was
$0.09 and $0.02, respectively.
51
QRS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10: COMMON STOCK, STOCK OPTIONS AND WARRANTS (CONTINUED)
The status of options outstanding as of December 31, 2000 for the Tradeweave
Plan is summarized as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------------------------ ----------------------------
WEIGHTED
AVERAGE
REMAINING WEIGHTED WEIGHTED
RANGE OF NUMBER CONTRACTUAL AVERAGE NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- --------------------- ----------- ----------- -------------- ----------- --------------
$ 0.25 588,000 9.0 $0.25 215,139 $0.25
0.63 90,000 9.5 0.63 -- 0.63
1.17 1,119,000 9.5 1.17 793,000 1.17
--------- ---- ----- --------- -----
$0.25-1.17 1,797,000 9.25 $0.84 1,008,139 $0.84
========= ==== ===== ========= =====
We apply APB Opinion 25 and related Interpretations in accounting for our
employee stock-based compensation plans. Accordingly, no compensation cost has
been recognized for its stock option plans. Had compensation cost for our
stock-based plans been determined based on the fair value at the grant dates for
awards under those plans consistent with the method of SFAS No. 123, our net
earnings (loss) and net earnings (loss) per share would have been decreased to
the pro forma amounts indicated in the following table. As 1996 was the initial
phase-in period for applying this Statement, the pro forma results indicated are
not necessarily representative of the effects on pro forma disclosures of net
earnings (loss) for future periods as they exclude options that were granted
prior to January 1, 1995, with vesting periods in 1995 and later.
YEARS ENDED DECEMBER 31,
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
------------------------------
2000 1999 1998
-------- -------- --------
NET EARNINGS (LOSS)
As reported................................................. $(42,377) $14,919 $12,050
======== ======= =======
Pro forma................................................... $(55,575) $ 9,268 $ 9,145
======== ======= =======
BASIC EARNINGS (LOSS) PER SHARE
As reported................................................. $ (2.92) $ 1.12 $ 0.94
======== ======= =======
Pro forma................................................... $ (3.83) $ 0.70 $ 0.71
======== ======= =======
DILUTED EARNINGS (LOSS) PER SHARE
As reported................................................. $ (2.92) $ 1.05 $ 0.91
======== ======= =======
Pro forma................................................... $ (3.83) $ 0.65 $ 0.69
======== ======= =======
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants made in 2000, 1999 and 1998 under the 1993 Plan and
for purchases made in 2000, 1999 and 1998 under the Employee Stock Purchase
Plan: risk-free interest rates are 6.30% in 2000, 5.49% in 1999 and 4.59% in
1998; expected volatility is 88.82% in 2000 (0% for the Tradeweave Plan), 58.72%
in 1999 (0% for the Tradeweave Plan), 56.3% in 1998; expected lives in all years
are 12 to 18 months beyond each
52
QRS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10: COMMON STOCK, STOCK OPTIONS AND WARRANTS (CONTINUED)
incremental vesting period (total life of 2 to 5.5 years, depending upon each
grant's individual vesting schedule). No dividends are assumed for any plan in
any year.
Warrants issued in connection with a line of credit to purchase 10,134
shares of common stock at $12.33 were outstanding at December 31, 2000. These
warrants, which are exercisable, expire upon 30-day notification of the warrant
holder. During 1999, warrants issued in connection with the public offering to
purchase 15,000 shares of common stock were exercised.
NOTE 11: TREASURY STOCK
On April 22, 1997, we announced that our Board of Directors has authorized
the repurchase from time to time of up to $5 million of its common stock in both
open market and block transactions. Our Board of Directors authorized a
$5 million increase in this repurchase amount on October 16, 1998, and an
additional increase of $5 million on May 4, 2000 for a total of $15 million.
Shares purchased under this program will be held in the corporate treasury for
future use including employee stock option grants and the employee stock
purchase plan. We may discontinue purchases of its Common Stock at any time that
management determines additional purchases are not warranted. We have
repurchased 288,825 shares of our common stock since the inception of the
buyback program; of which 198,000 shares were repurchased during 2000 for
$5,004,000; 88,875 shares were repurchased during 1998 for $1,837,000; and 1,950
shares were repurchased during 1997 for $35,000. During the third quarter of
1998, we reissued 52,500 shares of treasury stock valued at $802,000 in
connection with the acquisition of businesses. On July 23, 1999, we reissued
11,000 shares of treasury stock valued at $571,000 in connection with the
acquisition of RDS (See Note 5).
NOTE 12: QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
2000 QUARTERLY
--------------------------------------------------------
QUARTER QUARTER QUARTER QUARTER
ENDED ENDED ENDED ENDED YEAR ENDED
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, DEC. 31,
IN THOUSANDS, EXCEPT PER SHARE DATA 2000 2000 2000 2000 2000
- ----------------------------------- --------- -------- --------- -------- ----------
Revenues..................................... $ 35,110 $36,491 $37,919 $33,971 $143,491
Gross profit................................. 16,079 15,586 14,828 7,953 54,446
Net loss..................................... (17,779) (5,173) (1,734) (9,727) (42,377)
Basic loss per share......................... (1.26) (0.35) (0.12) (0.67) (2.92)
Diluted loss per share....................... (1.26) (0.35) (0.12) (0.67) (2.92)
1999 QUARTERLY
--------------------------------------------------------
QUARTER QUARTER QUARTER QUARTER
ENDED ENDED ENDED ENDED YEAR ENDED
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, DEC. 31,
IN THOUSANDS, EXCEPT PER SHARE DATA 1999 1999 1999 1999 1999
- ----------------------------------- --------- -------- --------- -------- ----------
Revenues..................................... $ 29,344 $29,540 $32,389 $33,432 $124,705
Gross profit................................. 14,326 14,688 16,171 16,574 61,759
Net earnings................................. 3,621 3,920 3,662 3,715 14,919
Basic earnings per share..................... 0.28 0.30 0.27 0.27 1.12
Diluted earnings per share................... 0.26 0.28 0.26 0.26 1.05
53
QRS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13: EARNINGS PER SHARE
We calculate basic EPS and diluted EPS in accordance with SFAS No. 128.
Basic EPS is calculated by dividing net earnings 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:
YEARS ENDED DECEMBER 31,
------------------------------------
2000 1999 1998
---------- ---------- ----------
Shares used to compute basic EPS......................... 14,523,864 13,321,567 12,812,049
Add: Effect of dilutive securities....................... -- 845,565 475,370
---------- ---------- ----------
Shares used to compute diluted EPS....................... 14,523,864 14,167,132 13,287,419
========== ========== ==========
Dilutive potential shares for the year ended December 31, 2000 were 544,611
shares and have been excluded from the shares used in calculating diluted loss
per share because their effect is antidilutive.
NOTE 14: 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 2000,
Tradeweave issued 400,000 shares of its common stock to Peter R. Johnson for
$100,000 in cash and 1,141,000 shares of its common stock to various Tradeweave
employees for $285,250 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
54
QRS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14: RELATED PARTY TRANSACTIONS (CONTINUED)
holders of the Series A preferred stock are entitled to receive noncumulative
dividends in preference to any dividend on Tradeweave's common stock at the rate
of 8% of the original purchase price per annum, when and as declared by
Tradeweave's Board of Directors. In addition, the holders of the Series A
preferred stock are entitled to participate pro rata in any dividends paid on
Tradeweave's common stock on an as-if-converted basis.
On June 30, 2000, the Tradeweave Board of Directors authorized a
four-for-one split of 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 December 31, 2000, we owned 84.1% of the outstanding stock of
Tradeweave. We subsequently acquired the remaining stock of Tradeweave not
previously held by us (See Note 16).
NOTE 15: 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 purchase or
access, over the internet or a proprietary network, software applications to
support their operations. Marketplace Services offered by our subsidiary
Tradeweave in 2000 provides customers set-price trading and auctions for the
disposition of surplus and markdown apparel merchandise, vendor showroom, and
collaborative assortment planning, and 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 evaluated its performance separately
from the other QRS products in 1999 and 2000. 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 Marketplace
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 corporate cash and
cash 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.
55
QRS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15: SEGMENT INFORMATION (CONTINUED)
Financial information for our business segments for the years ended
December 31, 2000 and 1999 is as follows (in thousands):
Year Ended December 31, 2000:
ECOMMERCE AND APPLICATION MARKETPLACE
CONTENT SERVICES SERVICES SERVICES TOTAL
---------------- ----------- ----------- --------
Revenues...................................... $131,131 $ 12,311 $ 49 $143,491
Operating earnings (loss)..................... 7,814 (46,831) (14,469) (53,486)
Total assets.................................. 37,401 116,399 5,673 159,473
Amortization of intangible assets............. 7,313 17,710 -- 25,023
In-process research and development........... -- 17,880 -- 17,880
Reconciliation to QRS as Reported:
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
========
56
QRS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15: SEGMENT INFORMATION (CONTINUED)
Year Ended December 31, 1999(1):
ECOMMERCE AND APPLICATION MARKETPLACE
CONTENT SERVICES SERVICES SERVICES TOTAL
---------------- ----------- ----------- --------
Revenues...................................... $121,412 $3,293 $ -- $124,705
Operating earnings (loss)..................... 31,328 (8,016) (2,436) 20,876
Total assets.................................. 23,455 1,547 3,844 28,846
Amortization of intangible assets............. 1,352 644 -- 1,996
In-process research and development........... 963 -- -- 963
Reconciliation to QRS as Reported:
Assets:
Total reportable segments................................... $ 28,846
Unallocated amounts:
Cash and cash equivalents................................. 34,412
Marketable securities available-for-sale.................. 12,895
Accounts receivable, net.................................. 25,964
Prepaid expenses and other................................ 2,848
Income taxes receivable................................... 4,726
Property and equipment, net............................... 13,823
Deferred income tax assets................................ 1,975
Other assets.............................................. 1,466
--------
Total assets as reported.................................... $126,955
========
- ------------------------
(1) In order to provide comparative annual segment information, the previously
reported segment information for the year ended December 31, 1999 has been
restated.
NOTE 16: SUBSEQUENT EVENTS (UNAUDITED)
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 "Tradeweave Merger Agreement"). Under the Merger
Agreement, we agreed to issue 334,774 shares of our common stock for 4,347,711
shares of Tradeweave common stock and preferred stock held by Peter R. Johnson,
Chairman of the Company's Board of Directors; Garth Saloner, a member of the
Board of the Company's Board of Directors; and certain Tradeweave employees who
held shares pursuant to the exercises of Tradeweave stock options. Additionally,
we assumed the outstanding stock options under the Tradeweave Non-Qualified
Stock Option Plan, which will be convertible to options to purchase 138,369
shares of our common stock. We also issued warrants to purchase 140,000 shares
of QRS common stock at a price of $11.0625 per share to Mr. Johnson and
Mr. Saloner. The right to purchase such shares vests over a four-year period in
equal annual installments. The warrants expire on January 31, 2005. We intend to
account for this merger as a purchase transaction.
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
57
QRS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16: SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)
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 December 19, 2000, our Compensation Committee approved the implementation
of a restricted share award program pursuant to the stock issuance provisions of
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 such Plan with exercise prices of more than $15.00 per share in
return for 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 the Company's common stock was $13.69
per share. The executive officers surrendered options covering a total of
875,126 shares of the Company's common stock with a weighted average exercise
price of $41.88 per share in return for an aggregate of 291,709 shares of 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 individual's completion of each successive six months of
continued employment with the Company. The first vesting date will occur on
April 30, 2001. The shares will be fully-vested upon issuance.
58
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to Paragraph G(3) of the General Instructions to Form 10-K, the
information called for in this Part III, Item 10 of Form 10-K is omitted since
the Company will file, not later than 120 days after the close of the fiscal
year ended December 31, 2000, with the Securities and Exchange Commission, its
Proxy Statement, which shall contain, under the caption "Election of Directors
and Management," the information required by this item.
ITEM 11. EXECUTIVE COMPENSATION
Pursuant to Paragraph G(3) of the General Instructions to Form 10-K, the
information called for in this Part III, Item 11 of Form 10-K is omitted since
the Company will file, not later than 120 days after the close of the fiscal
year ended December 31, 2000, with the Securities and Exchange Commission, its
Proxy Statement, which shall contain, under the caption "Executive Compensation
and Other Information," the information required by this item.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Pursuant to Paragraph G(3) of the General Instructions to Form 10-K, the
information called for in this Part III, Item 12 of Form 10-K is omitted since
the Company will file, not later than 120 days after the close of the fiscal
year ended December 31, 2000, with the Securities and Exchange Commission, its
Proxy Statement, which shall contain, under the caption "Security Ownership Of
Certain Beneficial Owners and Management," the information required by this
item.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to Paragraph G(3) of the General Instructions to Form 10-K, the
information called for in this Part III, Item 13 of Form 10-K is omitted since
the Company will file, not later than 120 days after the close of the fiscal
year ended December 31, 2000, with the Securities and Exchange Commission, its
Proxy Statement, which shall contain, under the caption "Certain Relationships
and Related Transactions" the information required by this item.
59
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The following documents are filed or incorporated by reference as part of
this Form 10-K:
(a) ITEMS FILED AS PART OF REPORT:
1. FINANCIAL STATEMENTS
Independent Accountants'/Auditors' Report
Consolidated Balance Sheets
Consolidated Statements of Operations and Comprehensive
Earnings (Loss)
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
2. FINANCIAL STATEMENT SCHEDULES
All schedules are omitted because they are not applicable or
not required or because the required information is included in
the financial statements or notes thereto.
(b) REPORTS ON FORM 8-K
None
(c) EXHIBITS
NO. DESCRIPTION
- --- ------------------------------------------------------------
2.1 Agreement and Plan of Merger of QuickResponse Delaware, Inc.
and QuickResponse Services, Inc.*****
3.1 Certification of Incorporation of the Company.*****
3.2 Certificate of Correction of Certificate of Incorporation of
the Company.*****
3.3 Bylaws of the Company.*****
3.4 Certificate of Amendment of Certificate of Incorporation of
the Company.*******
4.1 Specimen of Common Stock Certificate of the Registrant.*
10.1 1993 Stock Option/Stock Insurance Plan and forms of
agreement thereunder.*
10.2 Employee Stock Purchase Plan.*
10.3 Form of 1990 Nonqualified Stock Option Agreement.*
10.4 Reserved.
10.5 Reserved.
10.6 Form of Indemnification Agreement.*
10.7 Lease Agreement dated April 27, 1990 between the Registrant
and Schooner Drive Associates, a California Limited
Partnership.*
10.8 Reserved.
10.9 Preferred Stock Purchase and Debt Consolidation Agreement,
dated as of March 22, 1991 among the Registrant, Peter R.
Johnson and International Business Machines Corporation.*
10.10 First Amendment dated as of May 20, 1993 to the Preferred
Stock Purchase and Debt Consolidation Agreement among the
Registrant, Peter R. Johnson, and International Business
Machines Corporation.*
60
NO. DESCRIPTION
- --- ------------------------------------------------------------
10.11 Replacement Consolidated Convertible Notes dated March 22,
1991 issued to International Business Machines Corporation.*
10.12 Security Agreement dated as of March 22, 1991 between the
Registrant and International Business Machines Corporation.*
10.13 Warrant dated March 22, 1991 issued to International
Business Machines Corporation.*
10.14 License Agreement dated March 22, 1991 between the
Registrant and International Business Machines Corporation.*
10.15 First Amendment dated as of May 20, 1993 to the License
Agreement between the Registrant and International Business
Machines Corporation.*
10.16 Maintenance and Support Agreement dated March 22, 1991
between the Registrant and International Business Machines
Corporation.*
10.17 First Amendment dated as of May 20, 1993 to the Maintenance
and Support Agreement between the Registrant and
International Business Machines Corporation.*
10.18 Marketing Agreement dated March 22, 1991 between the
Registrant and International Business Machines Corporation.*
10.19 Common Stock Purchase Agreement dated April 3, 1989 by and
among Registrant and Retail Shopping International (Aust.)
Pty. Ltd., Barclays Investment Pty. Ltd., and Peter R.
Johnson.*
10.20 Reserved.
10.22 Reserved.
10.23 Reserved.
10.24 # Volume Discount Agreement dated December 16, 1991 between
the Registrant and International Business Machines
Corporation.*
10.25 Facilities and Cost Sharing Agreement dated May 1, 1993
between the Registrant and PRJ&, Inc.*
10.26 Data Center Services Agreement dated April 30, 1993 between
the Registrant and PRJ&, Inc.*
10.27 Agreement and Plan of Merger dated May 20, 1993 among the
Registrant, Uniquest Incorporated, PRJ Acquisition Corp. and
PRJ&, Inc.*
10.28 Consent and Release Agreement dated as of May 20, 1993 among
the Registrant, PRJ&, Inc., Peter R. Johnson, Uniquest
Incorporated and International Business Machines
Corporation.*
10.29 Separation Agreement dated May 1, 1993 between the
Registrant and PRJ&, Inc.*
10.30 Assignment, Bill of Sale and Assumption Agreement dated as
of May 20, 1993 between the Registrant and PRJ&, Inc.*
10.31 Escrow Agreement dated May 20, 1993 among the Registrant,
Uniquest Incorporated and Bank of America NT&SA.*
10.32 Pledge Agreement dated as of May 20, 1993 between the
Registrant and International Business Machines Corporation.*
10.33 Agreement dated as of July 13, 1993 between the Registrant
and International Business Machines Corporation.*
10.34 # Advantis Industry Remarketer Agreement dated as of
January 6, 1994 between Advantis and the Registrant.**
10.35 Uniquest Forbearance Agreement between Uniquest Incorporated
and the Registrant.**
61
NO. DESCRIPTION
- --- ------------------------------------------------------------
10.36 # International Remarketer Agreement dated as of November
11, 1996 between Advantis and the Registrant.***
10.37 Reserved.
10.38 Reserved.
10.39 Fourth Amendment, dated August 7, 1997, to Lease Agreement
between the Registrant and Marina Westshore Partners, LLC,
successor in interest to Schooner Drive Association, a
California Limited Partnership.****
10.40 Option Agreement dated August 7, 1997 between the Registrant
and Marina Westshore Partners, LLC.****
10.41 Reserved.
10.42 Reserved.
10.43 Reserved.
10.44 # Business Partner Agreement dated December 31, 1997
between Registrant and International Business Machines
Corporation.*****
10.45 1997 Non-Officer Stock Plan.*****
10.46 Non-qualified Deferred Compensation Plan.*****
10.47 Reserved.
10.48 Reserved.
10.49 Fifth Amendment, dated November 20, 1998, to Lease Agreement
between the Registrant and Marina Westshore Partners,
LLC.*******
10.50 Lease Agreement, dated, May 15, 1998, between the Registrant
and Marina Westshore Partners, LLC.*******
10.51 First Amendment, dated November 20, 1998, between the
Registrant and Marina Westshore Partners, LLC.*******
10.52 Lease Agreement, dated November 20, 1998, between the
Registrant and Marina Bay Partners.*******
10.53 # Letter Amendment to International Business Partner
Agreement and Change Authorization to Retail Management
Agreement dated August 31, 1999 between Registrant and
International Business Machines Corporation.******
10.54 ## Letter Amendment No. 2, dated February 16, 2001, between
Registrant and International Business Machines Corporation.
10.55 ## Employment Agreement as of April 2, 2001, between the
Registrant and John Simon.
10.56 Employment Agreement as of January 23, 2001, between the
Registrant and Candy Smith.
10.57 Employment Agreement as of January 30, 2001, between the
Registrant and Sean Salehi.
10.58 Employment Agreement as of January 30, 2001, between the
Registrant and Mark Self.
10.59 Restricted Share Award Program.
10.60 Tradeweave, Inc. 1999 Stock Option/Stock Issuance Plan.
10.61 Tradeweave, Inc. Form of Stock Issuance Agreement.
10.62 Tradeweave, Inc. Form of Notice of Grant of Stock Option and
Stock Option Agreement.
21.1 Subsidiaries of the Registrant
62
NO. DESCRIPTION
- --- ------------------------------------------------------------
23.1 Consent of PricewaterhouseCoopers LLP, Independent
Accountants
23.2 Consent of Deloitte & Touche LLP, Independent Auditors.
24.1 Power of Attorney (see page 44).
- ------------------------
* Incorporated by reference to Exhibit of same number of the
Registrant's Registration Statement on Form S-1
(Registration No. 33-63938).
** Incorporated by reference to Exhibit of same number filed
with the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1994.
*** Incorporated by reference to Exhibit of same number filed
with the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1996.
**** Incorporated by reference to Exhibit of same number filed
with the Registrant's Quarterly Report on Form 10-Q for the
period ended September 30, 1997.
***** Incorporated by reference to Exhibit of same number filed
with the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1997.
****** Incorporated by reference to Exhibit of same number filed
with the Registrant's Quarterly Report on Form 10-Q for the
year ended September 30, 1999.
******* Incorporated by reference to Exhibit of same number filed
with the Registrant's Annual Report of Form 10-K for the
year ended December 31, 1999.
# Confidential treatment has been granted with respect to
portions of this document.
## Confidential treatment has been requested with respect to
portions of this document.
63
SIGNATURES
In accordance with 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, on this day of March 2001.
QRS CORPORATION
/s/ Samuel M. Hedgpeth III
------------------------------------
Samuel M. Hedgpeth III
CHIEF FINANCIAL OFFICER
POWER OF ATTORNEY
Each person whose signature appears below hereby appoints SAMUEL M. HEDGPETH
III, acting alone, his true and lawful attorney-in-fact with authority to
execute in the name of each person, and to file with the Securities and Exchange
Commission, together with any exhibits thereto and other documents therewith,
any and all amendments to this Annual Report on Form 10-K for the fiscal year
ended December 31, 2000 necessary or advisable to enable QRS Corporation to
comply with the Securities Exchange Act of 1934, any rules, regulations and
requirements of the Securities and Exchange Commission in respect thereof, which
amendments may make such other changes in the report as the aforesaid
attorney-in-fact executing the same deems appropriate.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report on Form 10-K for the fiscal year ended December 31, 2000 has been
signed by the following persons in the capacities indicated and on the dates
indicated.
SIGNATURE DATE
--------- ----
/s/ JOHN S. SIMON
------------------------------------ Chief Executive Officer and Director March 31, 2001
John S. Simon
/s/ PETER R. JOHNSON
------------------------------------ Chairman of the Board of Directors March 31, 2001
Peter R. Johnson
/s/ TANIA AMOCHAEV
------------------------------------ Director March 31, 2001
Tania Amochaev
/s/ DAVID A. COLE
------------------------------------ Director March 31, 2001
David A. Cole
/s/ JOHN P. DOUGALL
------------------------------------ Director March 31, 2001
John P. Dougall
/s/ GARTH SALONER
------------------------------------ Director March 31, 2001
Garth Saloner
/s/ PHILIP SCHLEIN
------------------------------------ Director March 31, 2001
Philip Schlein
/s/ GAREN K. STAGLIN
------------------------------------ Director March 31, 2001
Garen K. Staglin
64