UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 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 (I.R.S. Employer Identification No.)
of incorporation or organization)
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 June 30, 1999
- ----------------------------- -----------------------------------
Common Stock, $.001 par value 13,404,356
This document contains 15 pages.
The Exhibit listing appears on Page 14.
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 June 30, 1999 and December 31, 1998 3
Consolidated Statements of Earnings and Comprehensive Earnings for the Three
and Six Months Ended June 30, 1999 and 1998 4
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1999
and 1998 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities and Use of Proceeds 14
Item 3. Defaults upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
A. Exhibits
B. Reports on Form 8-K
SIGNATURES 15
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
QRS CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
ASSETS
JUNE 30, DECEMBER 31,
1999 1998
------------ ------------
Current assets:
Cash and cash equivalents .................................................................. $ 47,062 $ 36,642
Marketable securities available for sale 4,334 6,976
Accounts receivable-net of allowance for doubtful accounts of $1,307 at June 30,1999
and $1,036 at December 31,1998 ........................................................... 18,967 19,059
Deferred income tax assets ................................................................. 816 816
Prepaid expenses and other ................................................................. 1,216 1,179
------------ ------------
Total current assets ................................................................... 72,395 64,672
------------ ------------
Property and equipment:
Furniture and fixtures ..................................................................... 2,736 2,476
Equipment .................................................................................. 11,235 9,133
Leasehold improvements ..................................................................... 2,305 2,249
------------ ------------
16,276 13,858
Less accumulated depreciation .............................................................. 7,280 5,708
------------ ------------
Total .................................................................................. 8,996 8,150
Marketable securities available for sale ........................................................ 7,399 1,518
Deferred income tax assets ...................................................................... 5,941 1,578
Capitalized product development costs - net of accumulated amortization of $4,431 at
June 30, 1999 and $3,482 at December 31, 1998 ................................................ 4,152 4,136
Intangible assets - net of accumulated amortization of $507 at June 30, 1999 and
$225 at December 31, 1998 .................................................................... 2,829 2,805
Other assets .................................................................................... 314 146
------------ ------------
Total assets ............................................................................... $ 102,026 $ 83,005
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................................................... $ 8,574 $ 7,914
Accrued incentive .......................................................................... 1,083 1,710
Income taxes payable ....................................................................... 136 1,823
Accrued vacation ........................................................................... 1,036 818
Other accrued liabilities .................................................................. 2,267 1,498
------------ ------------
Total current liabilities .............................................................. 13,096 13,763
Deferred rent and other ......................................................................... 1,259 1,288
------------ ------------
Total liabilities .......................................................................... 14,355 15,051
------------ ------------
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; 13,442,681 shares
issued and 13,404,356 shares outstanding at June 30, 1999; and 12,919,187 shares
issued and 12,880,862 shares outstanding at December 31, 1998 ............................ 78,291 66,002
Treasury stock; 38,325 shares at June 30, 1999 and December 31, 1998 ....................... (740) (740)
Accumulated other comprehensive earnings - unrealized gain (loss) on investments ........... (51)
63
Retained earnings .......................................................................... 10,171 2,629
------------ ------------
Total Stockholders' equity ............................................................. 87,671 67,954
------------ ------------
Total liabilities and Stockholders' equity ...................................................... $ 102,026 $ 83,005
------------ ------------
------------ ------------
See notes to Consolidated financial statements.
3
QRS CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE EARNINGS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- ------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
Revenues .................................................... $ 29,540 $ 20,830 $ 58,884 $ 40,864
Cost of revenue ............................................. 14,993 11,684 30,174 22,939
------------ ------------ ------------ ------------
Gross profit ................................................ 14,547 9,146 28,710 17,925
Operating expenses:
Sales and marketing .................................... 3,844 2,573 8,253 5,366
Product development .................................... 2,089 950 4,084 1,890
General and administrative ............................. 2,785 1,746 5,267 3,231
------------ ------------ ------------ ------------
Total operating expenses ........................... 8,718 5,269 17,604 10,487
------------ ------------ ------------ ------------
Operating earnings .......................................... 5,829 3,877 11,106 7,438
Interest income ............................................. 493 556 1,057 1,099
------------ ------------ ------------ ------------
Earnings from continuing operations before income taxes ..... 6,322 4,433 12,163 8,537
Income taxes ................................................ 2,402 1,774 4,621 3,415
------------ ------------ ------------ ------------
Earnings from continuing operations after income taxes ...... 3,920 2,659 7,542 5,122
Discontinued operations:
Gain from sale of software and services business ....... - - - - - - 896
------------ ------------ ------------ ------------
Net earnings ................................................ 3,920 2,659 7,542 6,018
------------ ------------ ------------ ------------
Other comprehensive earnings:
Unrealized gain (loss) from marketable securities
available for sale ................................... (127) 32 (114) 98
------------ ------------ ------------ ------------
Total comprehensive earnings ................................ $ 3,793 $ 2,691 $ 7,428 $ 6,116
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Basic earnings per share:
Continuing operations .................................. $ 0.30 $ 0.21 $ 0.57 $ 0.40
Discontinued operations ................................ - - - - - - $ 0.07
------------ ------------ ------------ ------------
Net earnings per share ................................. $ 0.30 $ 0.21 $ 0.57 $ 0.47
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Shares used to compute basic earnings per share ............. 13,250,813 12,825,854 13,127,742 12,818,063
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Diluted earnings per share:
Continuing operations .................................. $ 0.28 $ 0.20 $ 0.54 $ 0.38
Discontinued operations ................................ - - - - - - $ 0.07
------------ ------------ ------------ ------------
Net earnings per share ................................. $ 0.28 $ 0.20 $ 0.54 $ 0.45
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Shares used to compute diluted earnings per share ........... 14,050,777 13,339,266 13,902,699 13,356,677
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
See notes to consolidated financial statements.
4
QRS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(DOLLARS IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
---------------------------
1999 1998
-------- --------
Operating activities:
Net earnings ........................................................................... $ 7,542 $ 6,018
Adjustment to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization ...................................................... 2,834 1,575
Gain from sale of software and services business ................................... - (1,494)
Loss on disposal of assets ......................................................... 92 -
Changes in:
Accounts receivable ................................................................ 92 664
Prepaid expenses and other ......................................................... (37) 109
Deferred income tax assets ......................................................... 350 2,708
Intangible and other assets ........................................................ (474) (66)
Accounts payable ................................................................... 660 3,412
Deferred rent and other ............................................................ (29) (106)
Income taxes payable ............................................................... (1,687) -
Other accrued liabilities .......................................................... 338 (683)
-------- --------
Net cash provided by operating activities .......................................... 9,681 12,137
-------- --------
Investing activities:
Sales (purchases) of marketable securities - available for sale (net) .................. (3,353) 12,310
Purchase of property and equipment ..................................................... (2,519) (1,747)
Capitalization of product development costs ............................................ (965) (1,284)
-------- --------
Net cash provided by (used in) investing activities ................................ (6,837) 9,279
-------- --------
Financing activities:
Exercise of stock options .............................................................. 7,551 247
Exercise of stock warrants ............................................................. 25 -
Purchase of treasury stock ............................................................. - (843)
-------- --------
Net cash provided by (used in) financing activities ................................ 7,576 (596)
-------- --------
Net increase in cash and cash equivalents ................................................... 10,420 20,820
Cash and cash equivalents at beginning of period ............................................ 36,642 16,091
-------- --------
Cash and cash equivalents at end of period .................................................. $ 47,062 $ 36,911
-------- --------
-------- --------
Other cash flow information:
Taxes paid during the period ........................................................... $ 5,958 $ 2,141
-------- --------
-------- --------
Noncash financing activities:
Tax benefit from stock options exercised ............................................... $ 4,713 $ 205
Unrealized gain (loss) on investments .................................................. (114) 98
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 products and services are organized and managed as a
single product family, which includes 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 June 30, 1999, the consolidated
statements of earnings and comprehensive earnings and the consolidated
statements of cash flows for the three and six months ended June 30,
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 June 30, 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 June 30, 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 during the six
months ended June 30, 1998. 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 is being amortized over the remaining
lease term through June 30, 2010.
6
3. STOCK OPTIONS AND WARRANTS
During the first six months of 1999, the Company granted options to
purchase 304,125 shares of common stock. Options to purchase 508,494
shares of common stock were exercised with proceeds to the Company of
$7,550,466. At June 30, 1999, 2,167,449 shares were subject to
outstanding options, of which 732,728 shares 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 225,000 to 450,000. On May
11, 1999, the stockholders approved additional allocations of 600,000
shares of common stock to the stock option pool under the 1993 Stock
Option/Stock Issuance Plan. As of June 30, 1999, stock options to
purchase approximately 656,396 shares of common stock were available for
future grant under the Company's 1993 Stock Option/Stock Issuance Plan
and the 1997 Special Non-Officer Stock Option Plan.
Warrants issued in connection with a line of credit to purchase 10,134
shares of common stock at $12.33 per share were outstanding at June 30,
1999. These warrants expire upon 30-day notification of the warrant
holder. During the quarter ended June 30, 1999, warrants issued in
connection with the public offering to purchase 15,000 shares of common
stock were exercised.
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- -------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
Shares used to compute basic EPS................ 13,250,813 12,825,854 13,127,742 12,818,063
Add: effect of dilutive securities............. 799,964 513,412 774,957 538,614
---------- ---------- ---------- ----------
Shares used to compute diluted EPS.............. 14,050,777 13,339,266 13,902,699 13,356,677
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
On June 10, 1999, the Company's Board of Directors authorized a
three-for-two split of the Company's common stock for the Company's
stockholders of record as of June 21, 1999. All share and per share
amounts have been restated to retroactively reflect the stock split.
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. The Board of
Directors authorized a $5 million increase in this repurchase amount on
October 16, 1998. 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 six months of
1999, the Company did not repurchase any shares of common stock. The
Company has repurchased 90,825 shares since the inception of the buyback
program, of which 88,875 shares were repurchased during 1998 for
$1,837,000. During the third quarter of 1998, the Company reissued
52,500 shares of treasury stock at $802,000 in connection with the
acquisition of businesses.
7
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. SUBSEQUENT EVENTS
On July 13, 1999, the Company created a wholly owned United States
subsidiary, E-Match, a Delaware corporation.
On July 23, 1999, the Company acquired the outstanding common shares of
Retail Data Services, Inc., a provider of competitive pricing
information primarily to grocery retailers. The total acquisition cost
was $17,762,610; comprised of $15,000,000 paid in cash and 53,250 shares
of common stock valued at $2,762,610. The acquisition will be accounted
for as a purchase transaction. Under the terms of the purchase, the
Company is required to pay the seller $3,000,000 if revenues from the
acquired company meet or exceed certain performance measurements.
8
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
QRS Corporation's (the Company's) products and services are organized
and managed as a single product family, which includes 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 42% to $29.5 million for the second
quarter of 1999, from $20.8 million for the second quarter of 1998. The
Company's revenues increased by 44% to $58.9 million during the first
six months of 1999, from $40.9 million for the first six months of 1998.
This increase was primarily attributable to an increased number of
customers, higher usage of Network and Catalog Services, higher yield
improvements due to pricing adjustments, additional primetime usage and
product improvements. The number of customers increased from 6,331 (226
retailers and 6,105 vendors and carriers) as of June 30, 1998 to 8,034
(270 retailers and 7,764 vendors and carriers) as of June 30, 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 28%, to $15.0
million for the second quarter of 1999, from $11.7 million for the
second quarter of 1998. Cost of sales increased by 32% to $30.2 million
for the first six months of 1999, from $22.9 million for the first six
months 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 49% for
the second quarter of 1999 compared to 44% for the second 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 by 49% to $3.8 million for the second quarter of 1999, from
$2.6 million for the second quarter of 1998. Sales and marketing
expenses increased by 54% to $8.3 million for the first six months of
1999, from $5.4 million for the first six months 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 $2.1 million for the second quarter of 1999 and $950,000
for the second quarter of 1998. Product development expenses were $4.1
million for the first six months of 1999 and $1.9 million for the first
six months of 1998. The Company capitalized product development costs of
9
$497,000 and $625,000 for the second quarters of 1999 and 1998,
respectively. The Company capitalized product development costs of
$965,000 and $1,284,000 for the first six months of 1999 and 1998,
respectively. The marginal change in capitalized product development
costs in 1999 reflects ongoing research and development activities for
new products or products that had reached technological feasibility.
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 by 60%, to $2.8 million for the second
quarter of 1999, from $1.7 million for the second quarter of 1998.
General and administrative expenses increased by 63% to $5.3 million for
the first six months of 1999, from $3.2 million for the first six months
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 was $493,000 and
$556,000 for the second quarters of 1999 and 1998, respectively, and
$1.1 million for each of the first six months of 1999 and 1998. Changes
in interest income reflect the level of average investment balances in
each period and a shift from taxable to non-taxable marketable
securities.
As a result of the foregoing, earnings from continuing operations before
income taxes increased by 43% to $6.3 million for the second quarter of
1999, from $4.4 million for the second quarter of 1998. Earnings from
continuing operations before income taxes increased by 42% to $12.2
million for the first six months of 1999, from $8.5 million for the
first six months of 1998.
Income taxes were $2.4 million and $1.8 million for the second quarter
of 1999 and 1998, respectively. Income taxes were $4.6 million and $3.4
million for the first six months of 1999 and 1998, respectively. The
1998 income tax rate for the first six months 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.
During the first quarter of 1998, outstanding matters with regard to the
bankruptcy proceedings of the purchaser of the Company's software and
services business were substantially resolved; accordingly, the Company
recognized a $1.5 million gain on sale of software and services
business, net of applicable income taxes of $600,000 for the first six
months of 1998.
As a result of the foregoing, net earnings increased by 47% to $3.9
million for the second quarter of 1999, from $2.7 million for the second
quarter of 1998. Net earnings increased by 25% to $7.5 million for the
first six months of 1999, from $6.0 million for the first six months of
1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital increased from $50.9 million at December
31, 1998 to $59.3 million at June 30, 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 $58.8
million at June 30, 1999. Total assets increased from $83.0 million at
December 31, 1998 to $102.0 million at June 30, 1999 and total
liabilities decreased from $15.1 million at December 31, 1998 to $14.4
million at June 30, 1999.
The increase of $13.7 million in cash, cash equivalents and marketable
securities from December 31, 1998 to June 30, 1999 resulted primarily
from positive cash flow from operations as well as exercise of stock
options.
On July 23, 1999, the Company acquired the outstanding common shares of
Retail Data Services, Inc., a provider of competitive pricing
information primarily to grocery retailers. The total acquisition cost
was $17,762,610; comprised of $15,000,000 paid in cash and 53,250 shares
of common stock valued at $2,762,610. The acquisition will be accounted
for as a purchase transaction
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.
10
The Board of Directors authorized a $5 million increase in this
repurchase amount on October 16, 1998. 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. The Company did not repurchase any common stock of the
Company during the six months ended June 30, 1999.
Management believes that the cash resources available at June 30, 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.
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 upgrading its PC and midrange based systems will
require the most of its 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 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 that the
11
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 Company's ability
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.
COSTS - The Company expended approximately $425,000 in 1998 and
$1,066,000 during the six months ended June 30, 1999 on activities to
prepare for Year 2000 readiness. Approximately $155,000 and $181,000,
respectively, was for assessments and customer notification, and
$270,000 and $885,000 respectively, was for testing and product and
infrastructure modifications. The Company currently estimates that it
will expend an additional $1,159,000; 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, 18% will be for assessment and customer
notification and 82% will be for testing and modifications. Total Year
2000 readiness costs has 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 no assurance that current 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 - The Company is developing contingency plans 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.
12
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 June 30, 1999, the weighted average maturity of the marketable
securities portfolio was 122 days.
Maturity
-------------------------- Fair Value at
(Amounts in thousands) 1999 2000 Total June 30, 1999
- ---------------------- ---------- ---------- --------- -------------
Corporate Bonds $ 1,015 $ 1,015 $ 1,000
Average interest rate 5.32% 5.32%
Government Agencies $ 1,804 $ 8,960 $10,764 10,733
Average interest rate 3.90% 3.86% 3.87%
---------- ---------- --------- -------------
Total Investment Portfolio $ 2,819 $ 8,960 $11,779 $11,733
---------- ---------- --------- -------------
-------------
Average interest rate 4.26% 3.86% 3.97%
---------- ---------- ---------
---------- ---------- ---------
FOREIGN CURRENCY RISK
The Company has no significant investments outside the United States and does
not have material foreign currency risk.
13
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 Not
Votes Votes Withheld Voted
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 Stock
Option/Stock Issuance Plan 6,096,577 1,636,966 7,295 997,129
---------------------------------------------------------------
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
14
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
----------------------------------------
August 13, 1999 John S. Simon
Chief Executive Officer
/s/ Shawn M. O'Connor
----------------------------------------
August 13, 1999 Shawn M. O'Connor
President and Chief Operating Officer
/s/ Peter Papano
----------------------------------------
August 13, 1999 Peter Papano
Chief Financial Officer and Secretary
15