UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 0-21958
QRS CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 68-0102251
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1400 MARINA WAY SOUTH, RICHMOND, CA 94804
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(Address of principal executive offices) (Zip code)
(510) 215-5000
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(Registrant's phone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
_X_ YES ___ NO
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Classes of Common Stock Shares Outstanding at March 31, 1999
- ----------------------------- ------------------------------------
Common Stock, $.001 par value 8,731,517
This document contains 14 pages.
The Exhibit listing appears on Page 13.
QRS CORPORATION
FORM 10-Q
INDEX
NUMBER PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of March 31, 1999 and December 31, 1998 3
Consolidated Statements of Earnings And Comprehensive Earnings for the Three
Months Ended March 31, 1999 and 1998 4
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1999
and 1998 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities and Use of Proceeds 13
Item 3. Defaults upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
A. Exhibits
B. Reports on Form 8-K
SIGNATURES 14
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
QRS CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
ASSETS
MARCH 31,
1999 DECEMBER 31,
(UNAUDITED) 1998
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Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $43,980 $36,642
Marketable securities available for sale. . . . . . . . . . . . . . . . . . . . . . . 4,301 6,976
Accounts receivable-net of allowance for doubtful accounts of $1,416 at March 31,1999
and $1,036 at December 31,1998 . . . . . . . . . . . . . . . . . . . . . . . . . 19,318 19,059
Deferred income tax assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 816 816
Prepaid expenses and other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,300 1,179
------------ ------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69,715 64,672
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Property and equipment:
Furniture and fixtures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,663 2,476
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,015 9,133
Leasehold improvements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,260 2,249
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14,938 13,858
Less accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,453 5,708
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Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,485 8,150
Marketable securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . 3,871 1,518
Deferred income tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,227 1,578
Capitalized product development costs -- net of accumulated amortization of $4,029 at
March 31, 1999 and $3,482 at December 31, 1998. . . . . . . . . . . . . . . . . . . . 4,056 4,136
Intangible assets -- net of accumulated amortization of $366 at March 31, 1999 and
$225 at December 31, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,970 2,805
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 209 146
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Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $90,533 $83,005
------------ ------------
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,134 7,914
Accrued incentive . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 760 1,710
Income taxes payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 470 1,823
Accrued vacation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 922 818
Other accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,939 1,498
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Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,225 13,763
Deferred rent and other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,293 1,288
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Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,518 15,051
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Stockholders' equity:
Preferred stock - $.001 par value; 10,000,000 shares authorized; none issued and
outstanding. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - - -
Common stock - $.001 par value; 20,000,000 shares authorized; 8,757,067 shares
issued and 8,731,517 shares outstanding at March 31, 1999; and 8,612,791 shares
issued and 8,587,241 shares outstanding at December 31, 1998 . . . . . . . . . . 70,429 66,002
Treasury stock; 25,550 shares at March 31, 1999 and December 31, 1998 . . . . . . . . (740) (740)
Accumulated other comprehensive earnings -- unrealized gain on investments. . . . . . 76 63
Retained earnings (deficit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,250 2,629
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Total Stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . 76,015 67,954
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Total liabilities and Stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . $90,533 $83,005
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See notes to Consolidated financial statements.
3
QRS CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE EARNINGS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1999 MARCH 31, 1998
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Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $29,344 $20,034
Cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,181 11,255
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Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,163 8,779
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Operating expenses:
Sales and marketing . . . . . . . . . . . . . . . . . . . . . . . 4,036 2,793
Product development . . . . . . . . . . . . . . . . . . . . . . . 1,995 940
General and administrative. . . . . . . . . . . . . . . . . . . . 2,855 1,485
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Total operating expenses . . . . . . . . . . . . . . . . . . 8,886 5,218
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Operating earnings . . . . . . . . . . . . . . . . . . . . . . . . . . 5,277 3,561
Interest income. . . . . . . . . . . . . . . . . . . . . . . . . . . . 564 544
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Earnings from continuing operations before income taxes. . . . . . . . 5,841 4,105
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,220 1,642
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Earnings from continuing operations after income taxes . . . . . . . . 3,621 2,463
Discontinued operations:
Gain from sale of software and services business. . . . . . . . . -- 896
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Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,621 3,359
Other comprehensive earnings:
Unrealized gain from marketable securities available for sale . . 13 66
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Total comprehensive earnings . . . . . . . . . . . . . . . . . . . . . $3,634 $3,425
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Basic earnings per share:
Continuing operations . . . . . . . . . . . . . . . . . . . . . . $0.42 $0.29
Discontinued operations . . . . . . . . . . . . . . . . . . . . . -- 0.10
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Net earnings per share. . . . . . . . . . . . . . . . . . . . . . $0.42 $0.39
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Shares used to compute basic earnings per share. . . . . . . . . . . . 8,672,835 8,540,109
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Diluted earnings per share:
Continuing operations . . . . . . . . . . . . . . . . . . . . . . $0.40 $0.28
Discontinued operations . . . . . . . . . . . . . . . . . . . . . -- 0.10
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Net earnings per share. . . . . . . . . . . . . . . . . . . . . . $0.40 $0.38
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Shares used to compute basic earnings per share. . . . . . . . . . . . 9,158,474 8,915,325
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See notes to consolidated financial statements.
4
QRS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(DOLLARS IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
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1999 1998
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Operating activities:
Net earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,621 $3,359
Adjustment to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . . . . . . 1,456 714
Gain from sale of software and services business . . . . . . . . . . . . . . . . - - (896)
Changes in:
Accounts receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (259) 514
Prepaid expenses and other . . . . . . . . . . . . . . . . . . . . . . . . . . . (121) 303
Deferred income tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 351 2,236
Intangible and other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . (391) (18)
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,220 3,624
Deferred rent and other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 (637)
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 398 (834)
Other accrued liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . (405) (358)
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Net cash provided by operating activities. . . . . . . . . . . . . . . . . . . . 5,875 8,007
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Investing activities:
Sale of marketable securities -- available for sale (net) . . . . . . . . . . . . . . 335 14,765
Purchase of property and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . (1,080) (1,437)
Capitalization of product development costs . . . . . . . . . . . . . . . . . . . . . (468) (349)
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Net cash provided by (used in) investing activities. . . . . . . . . . . . . . . (1,213) 12,979
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Financing activities:
Exercise of stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,676 242
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Net cash provided by financing activities. . . . . . . . . . . . . . . . . . . . 2,676 242
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Net increase in cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . 7,338 21,228
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . . . . . . . 36,642 16,091
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Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . . . . . . . $43,980 $37,319
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Other cash flow information:
Taxes paid during the period. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,822 $834
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Noncash financing activities:
Tax benefit from stock options exercised. . . . . . . . . . . . . . . . . . . . . . . $1,751 $198
Unrealized gain on investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 66
See notes to consolidated financial statements.
5
QRS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
Effective May 11, 1998, QuickResponse Services, Inc. changed its corporate
name to QRS Corporation (QRS or the Company).
The Company's product families are Catalog Services, Network Services,
Inventory Management Services (IMS), Logistics Management Services (LMS),
and Professional Services. The Company derives revenues from five
principal and related sources: monthly charges for accessing Catalog
Services, fees for utilization of network services including the
transmission of standard business documents over a network, IMS-related
fees based on negotiated monthly service charges, LMS fees, and consulting
fees. Network Services pricing is based primarily on the volume of
characters transmitted and the type of network access utilized, and
incorporates discounts based on volume.
The consolidated balance sheet as of March 31, 1999, the consolidated
statements of earnings and comprehensive earnings and the consolidated
statements of cash flows for the three months ended March 31,1999 and 1998,
have been prepared by the Company without audit. In the opinion of
management, all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the financial position, results of
operations and cash flows at March 31, 1999 and for all periods presented
have been made. The consolidated balance sheet as of December 31, 1998 is
derived from the Company's audited consolidated financial statements as of
that date.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted as permitted by regulations of
the Securities and Exchange Commission. It is suggested that these interim
consolidated financial statements be read in conjunction with the annual
audited consolidated financial statements and notes thereto included in the
Company's Form 10-K for the year ended December 31, 1998.
The preparation of the Company's consolidated financial statements in
conformity with generally accepted accounting principles necessarily
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the balance sheet dates and the reported amounts
of revenues and expenses for the periods presented. Actual amounts may
differ from such estimates.
The results of operations for the periods ended March 31, 1999 and 1998 are
not necessarily indicative of the operating results anticipated for the
full year.
Certain reclassifications have been made to the 1998 amounts to conform to
the 1999 presentation.
2. SUBLEASE LOSS RESERVES
During the quarter ended March 31, 1998, outstanding matters with regard to
the Uniquest bankruptcy were substantially resolved. Accordingly, the
Company recognized a gain on sale of software and services business of
$1,494,000 less applicable income taxes of $598,000. The remaining sublease
loss reserve 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 will be amortized over the
remaining lease term through June 30, 2010.
6
3. STOCK OPTIONS
During the first three months of 1999, the Company granted options to
purchase 28,100 shares of common stock. Options to purchase 144,276 shares
of common stock were exercised. At March 31, 1999, 1,472,154 shares were
subject to outstanding options, of which 582,143 were exercisable. On
February 15, 1999, the 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 150,000 to 300,000. Options to
purchase approximately 205,097 shares of common stock are available for
future grant under the Company's 1993 Stock Option/Stock Issuance Plan and
the 1997 Special Non-Officer Stock Option Plan.
4. EARNINGS PER SHARE
The Company calculates basic earnings per share (EPS) and diluted EPS in
accordance with SFAS No. 128 "Earnings per Share". 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:
THREE MONTHS ENDED
MARCH 31,
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1999 1998
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Shares used to compute basic EPS . . . . . . . . . 8,672,835 8,540,109
Add: effect of dilutive securities. . . . . . . . 485,639 375,216
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Shares used to compute diluted EPS . . . . . . . . 9,158,474 8,915,325
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5. TREASURY STOCK
On April 22, 1997, the Company announced that its 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. 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. The Company may discontinue purchases of its common stock at any time
that management determines additional purchases are not warranted. During
the first quarter of 1999, the Company did not repurchase any shares of
common stock. The Company has repurchased 60,550 shares since the
inception of the buyback program, of which 59,250 shares were repurchased
during 1998 for $1,837,000. During the third quarter of 1998, the Company
reissued 35,000 shares of treasury stock at $802,000 in connection with the
acquisition of businesses.
6. COMMITTMENTS
As of December 31, 1998, the Company had contracted to lease an additional
48,000 square feet for its corporate headquarters starting in early 2000
and expiring in June 2010 (the Lease). On April 15, 1999, the Company
amended the Lease to include an additional 48,000 square feet starting in
early 2000 and expiring in June 2011. The monthly rental for the Lease,
as amended, will be $142,900 through June 2000, $150,519 through June 2010
and $75,395 through June 2011.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
THIS FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS, WHICH INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM
THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF
INTENSE COMPETITION IN THE ELECTRONIC COMMERCE BUSINESS, THE COMPANY'S
DEPENDENCE ON KEY RETAILERS, THE COMPANY'S ABILITY TO SUCCESSFULLY
INTRODUCE NEW PRODUCTS AND SERVICES, THE COMPANY'S DEPENDENCE ON THE IBM
GLOBAL NETWORK AND OTHER RISK FACTORS SET FORTH IN THE COMPANY'S ANNUAL
REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998.
GENERAL
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QRS Corporation's (the Company's) product families are Catalog Services,
Network Services, Inventory Management Services (IMS), Logistics Management
Services (LMS), and Professional Services. The Company derives revenues
from five principal and related sources: charges for accessing Catalog
Services, fees for utilization of network services including the
transmission of standard business documents over a network, IMS fees, LMS
fees, and consulting fees. Network Services pricing is based primarily on
the volume of characters transmitted and the type of network access
utilized. Network Services pricing also incorporates discounts based on
volume.
RESULTS OF OPERATIONS
---------------------
The Company's revenues increased by 46% to $29.3 million for the first
quarter of 1999, from $20.0 million for the first quarter of 1998. This
increase was primarily attributable to an increased number of customers,
higher usage of Network and Catalog Services, and higher yield
improvements due to pricing adjustments, additional primetime usage
and product improvements. The number of customers increased from 6,105
(228 retailers and 5,877 vendors and carriers) as of March 31, 1998 to
8,119 (282 retailers and 7,837 vendors and carriers) as of March 31, 1999.
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. Customers increased the number, type and size of transactions
transmitted over the network, as well as the utilization of Catalog
Services. The Company expanded its product offerings in the Network, IMS
and Professional Services product families.
Cost of sales consists primarily of the cost of purchasing network services
and the cost of the Company's data center and technical customer support
services. Cost of sales increased by $3.9 million, or 35%, to $15.2
million for the first quarter of 1999, from $11.3 million for the first
quarter of 1998. The increase was principally due to increases in purchased
network services, reflecting growth in Network Services purchased under a
long-term contract, discounted based upon a multi-year volume commitment,
and an expanded customer support group reflecting growth in customers and
products. The gross profit margin was 48% for the first quarter of 1999
compared to 44% for the first quarter of 1998. The margin improvement is
due to higher yield improvements and improved pricing on purchased network
services partially offset by technical infrastructure expenditures to
support newer products.
Sales and marketing expenses consist primarily of personnel and related
costs in the Company's sales and marketing organizations, as well as the
costs of various marketing programs. Sales and marketing expenses
increased $1.2 million, or 45%, to $4.0 million for the first quarter of
1999, from $2.8 million for the first quarter of 1998. This increase
reflects the Company's expansion of its retailer and vendor-specific
coverage and growth in its Program Sales and Enablement organization, the
group responsible for rapidly enabling trading partners for key hub
customers.
Product development expenses consist primarily of personnel and equipment
costs related to research, development and implementation of new services
and enhancement of existing services. Product development expenses were
$2.0 million for the first quarter of 1999 and $0.9 million for the first
quarter of 1998. The Company capitalized product development costs of
$0.5 million and $0.3 million for the first quarters of 1999 and 1998,
respectively. The increase in capitalized product development costs in
1999 is due to increased product development on products that had reached
technological feasibility.
8
General and administrative expenses consist primarily of the personnel and
related costs of the Company's finance and administrative organizations, as
well as professional fees and other costs. General and administrative
expenses increased $1.4 million, or 92%, to $2.9 million for the first
quarter of 1999, compared to $1.5 million for the first quarter of 1998.
This increase was primarily due to increased headcount to support a larger
organization and investments in infrastructure.
Interest income consists primarily of interest earned on cash, cash
equivalents and investment securities. Interest income increased to
$564,000 for the first quarter of 1999, compared to $544,000 for the first
quarter of 1998, as a result of higher investment balances.
As a result of the foregoing, earnings from continuing operations before
income taxes increased 42% to $5.9 million for the first quarter of 1999,
compared to $4.1 million for the first quarter of 1998.
Income taxes were $2.2 million and $1.6 million for the first three months
of 1999 and 1998, respectively. The 1998 income tax rate for the first
quarter of 40% approximates the combined effective federal and state income
tax rates. The income tax rate forward from the third quarter of 1998 of
38% approximates the combined effective federal and state income tax rates
and is expected to be effective for 1999.
In the first quarter of 1998, the Company reported a $1.5 million gain on
sale of software and services business, net of applicable income taxes of
$.6 million, related to the substantial resolution of the bankruptcy
proceedings of the purchaser.
As a result of the foregoing, net earnings increased 8% to $3.6 million for
the first quarter of 1999, compared to $3.4 million for the first quarter
of 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital increased from $50.9 million at December 31,
1998 to $56.5 million at March 31, 1999 primarily due to positive cash flow
from operations. Cash, cash equivalents and marketable securities
increased from $45.1 million at December 31, 1998 to $52.2 million at March
31, 1999. Total assets increased from $83.0 million at December 31, 1998 to
$90.5 million at March 31, 1999 and total liabilities decreased from $15.1
million at December 31, 1998 to $14.5 million at March 31, 1999.
The increase of $7.1 million in cash, cash equivalents and marketable
securities from December 31, 1998 to March 31, 1999 resulted primarily from
positive cash flow from operations, including the timing of certain
payments to vendors.
On April 22, 1997, the Company announced that its 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. 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. The Company may discontinue purchases of its common stock at any time
that management determines additional purchases are not warranted. During
the first quarter of 1999, the Company did not repurchase any common stock
of the Company.
Management believes that the cash resources available at March 31,
1999 and cash anticipated to be generated from future operations will
be sufficient for the Company to meet its working capital needs,
capital expenditures and common stock repurchases for the next year.
The Company has not paid any cash dividends to date and does not
intend to pay cash dividends with respect to common stock in the
foreseeable future.
9
YEAR 2000 COMPLIANCE
INTRODUCTION - The Year 2000 issue involves computer programs and embedded
microprocessors in computer systems and other equipment that utilize two
digits rather than four to define the applicable year. These systems may
be programmed to assume that all two digit dates are preceded by "19,"
causing "00" to be interpreted as 1900 rather than 2000. This could result
in the possible failure of those programs and devices to properly recognize
date sensitive information when the year changes to 2000. Systems that do
not properly recognize date sensitive information could generate erroneous
data or a system failure. The following discussion regarding Year 2000
matters constitutes a "Year 2000 Readiness Disclosure" within the meaning
of the Year 2000 Information and Readiness Disclosure Act.
The Company has conducted an evaluation of the actions necessary to confirm
that its business critical computer and other systems will be able to
function without disruption with respect to the application of dating
systems in the Year 2000. This evaluation was conducted with the
assistance of consulting services. The completed deliverable from that
review is a detailed Year 2000 readiness plan.
The Company's plan objective is to achieve an uninterrupted transition into
the Year 2000. The scope of the Year 2000 plan includes: (1) information
technology ("IT") such as software and hardware, (2) non-IT systems or
embedded technology such as micro-controllers contained in various safety
systems, facilities and utilities, and (3) readiness of key third parties,
including suppliers and customers. The Company's remedial actions are
scheduled for completion during the third quarter of 1999. However, there
can be no assurance that the remedial actions being implemented by the
Company will be completed by the time necessary to avoid Year 2000
compliance problems.
INFORMATION TECHNOLOGY SYSTEMS -- Based on this evaluation, the Company is
upgrading, replacing, and testing many of its IT systems to achieve Year
2000 readiness. Because the Company was founded 11 years ago, the Company
believes that its mainframe systems are largely Year 2000 capable, and that
its PC and midrange based systems will require the majority of attention.
NON INFORMATION TECHNOLOGY SYSTEMS - The Company believes that its
non-information technology Year 2000 exposure is relatively low, since the
Company's product delivery is primarily executed through very modern
computer equipment and related technology that does not have dated,
embedded chip deployment.
PRODUCT AND SERVICE OFFERINGS -- The Company has completed a Year 2000
assessment of its currently offered products and services. Based on this
assessment, the Company believes that its currently offered products and
electronic commerce services are Year 2000 ready, or will be ready by the
third quarter of 1999 through new product releases or modifications to
internal systems. The Company believes that a small percentage of its
customers who receive product support from the Company are operating
product versions that may not be Year 2000 ready or products or product
versions that the Company has replaced or intends to replace with
comparable Year 2000 ready products. The Company believes that the
majority of these customers are migrating and will continue to migrate to
Year 2000 ready versions and products through new releases, which the
Company is strongly encouraging. The Company does not believe that
customers who license or migrate to Year 2000 ready versions of its
products, or customers who purchase the Company's electronic commerce
services, will experience any Year 2000 failures caused by such products or
services. However, there can be no assurance caused that the Company's
expectations and beliefs as to these matters will prove to be accurate.
Moreover, the Company's products employ, and the provision of its services
requires the use of, systems comprised of third-party hardware and
software, some of which may not be Year 2000 ready.
THIRD PARTY READINESS - The Company has a process in place to assess the
Year 2000 readiness of its business critical vendors and customers, and is
working with these vendors and customers on Year 2000 readiness issues.
There can be no assurances that the systems of other parties upon which the
company relies will be made Year 2000 ready on a timely basis. The Company
utilizes third party vendor equipment, telecommunications products and
software products. Disruptions with respect to computer systems of vendors
or customers, whose systems are outside the control of the Company, could
impair the ability of the Company to provide services to its customers, and
could have a material adverse effect upon the Company's financial condition
and results of operations, or require the Company to incur unanticipated
expenses to remedy any problems.
10
COSTS -- The Company expended approximately $425,000 in 1998 and $639,000
during the first quarter ended March 31, 1999 on activities to prepare for
Year 2000 readiness. Approximately $155,000 and $96,000, respectively,
was for assessments and customer notification, and $270,000 and $543,000
respectively, was for testing and product and infrastructure modifications.
The Company currently estimates that it will cost an additional $1,561,000,
budgeted primarily under its Information Technology division, prior to
January 1, 2000, to modify its in-house information systems, other systems
and internally developed software products affected by the Year 2000 issue.
The Company estimates that of the remaining costs, 25% will be for
assessment and customer notification and 75% will be for testing and
modifications. Total Year 2000 readiness costs have increased due to
additional work scope. All costs associated with Year 2000 compliance
are being funded with cash flow generated from operations and existing
cash balances and are being expensed as incurred.
ADDITIONAL RISKS -- Additional aspects of the Year 2000 issue may pose
risks to be considered in evaluating the future growth of the Company.
Some commentators predict that normal purchasing patterns and trends in the
industry may be affected by customers replacing or upgrading applications
or systems to address the Year 2000 issue. The Company has not experienced
any discernable trend indicating a recent or impending material reduction
in demand for the Company's products and services. Furthermore, some
commentators have also predicted that a significant amount of litigation
may arise out of Year 2000 readiness issues. While the Company has not
been subject to any Year 2000 claims or lawsuits to date, there can be not
assurance that customers or former customers will not bring claims or
lawsuits against the Company seeking compensation for losses associated
with Year 2000 related failures. A material adverse outcome in a Year 2000
claim or lawsuit could have a material adverse effect on the Company's
business, financial condition and results of operations.
CONTINGENCY PLANING - Contingency plans are under development to address
those business critical systems that may not be Year 2000 ready, in the
event the Company is unable to complete its remedial actions in the planned
time frame.
The Company believes that the most reasonably likely worst case scenario is
that a small number of vendors and/or customers will have lingering Year
2000 compliance problems, resulting in additional support for these
customers, and the substitution of a higher number of software vendors than
currently anticipated. As a part of the assessment process, the Company
will develop contingency plans for those business critical vendors or large
customers who are either unable or unwilling to develop remedial plans to
become Year 2000 ready. The Company expects that these plans will involve
the acceleration of its Year 2000 readiness activity and the application of
additional resources. It is expected that these contingency plans will be
in place by the third quarter of 1999.
11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
The Company's exposure to market risk associated with changes in interest
rates relates primarily to the Company's investment portfolio of marketable
securities. The Company does not use derivative financial instruments in its
investment portfolio. The stated objectives of the Company's investment
guidelines are to preserve principal, meet liquidity needs and deliver
maximum yield subject to the previous conditions. The guidelines limit
maturity, limit concentration, and limit eligible investments to high credit
quality U.S. issuers, such as the U.S. Treasuries and agencies of the U.S.
Government, and highly rated banks and corporations. The Company's
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 Company's marketable
securities. The Company's guidelines do not permit investments with
maturities in excess of 24 months. At March 31, 1999, the weighted average
maturity of the marketable securities portfolio was less than 65 days.
Maturity
-------------------------- Fair Value at
(Amounts in thousands) 1999 2000 Total March 31, 1999
---- ---- ----- --------------
Corporate Bonds $3,998 $3,998 $4,001
Average interest rate 5.46% 5.46%
Government Agencies $ 300 $3,858 $4,158 4,170
Average interest rate 5.00% 4.50% 4.54%
------------ ----------- ---------- ----------------
Total Investment Portfolio $4,298 $3,858 $8,156 $8,171
------------ ----------- ---------- ----------------
Average interest rate 5.43% 4.50% 4.99% ----------------
------------ ----------- ----------
------------ ----------- ----------
FOREIGN CURRENCY RISK
The Company has no significant investments outside the United States and does
not have material foreign currency risk.
12
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's annual meeting of stockholders was held on May 11, 1999.
The following actions were taken at this meeting:
Affirmative Negative votes Votes Not Voted
votes votes withheld
a. Election of Directors:
Peter R. Johnson
Tania Amochaev
Steven D. Brooks 7,736,209 4,629 997,129
b. Approval of Amendments to the 1993 6,096,577 1,636,966 7,295 997,129
Stock Option/Stock Issuance Plan
c. Ratification of Independent Auditors 7,730,025 1,432 9,381 997,129
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
27.1 Financial Data Schedule
B. REPORTS ON FORM 8-K
None
13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized and in the capacity indicated.
QRS CORPORATION
---------------------------------------
(Registrant)
/s/ John S. Simon
May 17, 1999 ---------------------------------------
John S. Simon
Chief Executive Officer
/s/ Shawn M. O'Connor
May 17, 1999 ---------------------------------------
Shawn M. O'Connor
President and Chief Operating Officer
/s/ Peter Papano
May 17, 1999 ---------------------------------------
Peter Papano
Chief Financial Officer and Secretary
14