-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MbSotHwXjZY0b1OKsvzHZ7wohlDhR5WJViqWBe2BxjP8Zbi+W0XrDnMn8WmBptFp CI2jVprKgQ/nfHExfkz9Zg== 0001047469-99-006187.txt : 19990217 0001047469-99-006187.hdr.sgml : 19990217 ACCESSION NUMBER: 0001047469-99-006187 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990216 FILER: COMPANY DATA: COMPANY CONFORMED NAME: QCS CORP CENTRAL INDEX KEY: 0000825517 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 841057621 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 033-18600-D FILM NUMBER: 99542109 BUSINESS ADDRESS: STREET 1: 650 CASTRO STREET SUITE 210 STREET 2: C/O RICHARD S LANE ESQ CITY: MOUNTAIN VIEW STATE: CA ZIP: 94041 BUSINESS PHONE: 4159661214 MAIL ADDRESS: STREET 1: 650 CASTRO ST STREET 2: STE 210 CITY: MOUNTAIN VIEW STATE: CA ZIP: 94041 FORMER COMPANY: FORMER CONFORMED NAME: PARKWAY CAPITAL CORP DATE OF NAME CHANGE: 19920703 10QSB 1 10QSB U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-QSB (X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 1998. ( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT For the transition period from ___________ to ___________. Commission File Number: 33-18600-D QCS.NET CORPORATION - -------------------------------------------------------------------------------- (Exact name of small business issuer as specified in its charter) DELAWARE 98-0132465 --------------------------------- ------------------- (State or other jurisdiction (IRS Employer of incorporation or organization) Identification No.) 650 CASTRO STREET, SUITE 210, MOUNTAIN VIEW, CA 94041 - -------------------------------------------------------------------------------- (Address of principal executive offices) (650) 966-1214 - -------------------------------------------------------------------------------- (Issuer's telephone number) QCS.NET CORPORATION - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. X YES NO --- --- Shares of Common Stock outstanding as of February 15, 1999: 21,815,437 shares Transitional Small Business Disclosure Format YES X NO --- --- QCS.NET CORPORATION
CONTENTS -------- PAGE PART I FINANCIAL INFORMATION ITEM 1 Financial Statements Consolidated Balance Sheets as of December 31, 1998 (unaudited) and June 30, 1998 3 Consolidated Statements of Operations for the three and six month periods ended December 31, 1998 and 1997 (unaudited) 4 Consolidated Statements of Cash Flows for the six months ended December 31, 1998 and 1997 (unaudited) 5 Notes to Consolidated Financial Statements (unaudited) 6 ITEM 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 7 PART II OTHER INFORMATION ITEM 2 Changes in Securities and Use of Proceeds 11 ITEM 4 Submission of Matters to a Vote of Security Holders 11 ITEM 5 Other Information 12 ITEM 6 Exhibits and Reports on Form 8-K 12 SIGNATURES 12
2 PART I FINANCIAL INFORMATION ITEM 1 FINANCIAL STATEMENTS QCS.NET CORPORATION CONSOLIDATED BALANCE SHEETS
DECEMBER 31, JUNE 30, ASSETS 1998 1998 ------------------- ------------------ Current assets: (Unaudited) Cash and cash equivalents $ 2,054,795 $ 473,170 Accounts receivable (net of allowance for doubtful accounts of $26,581 at December 31, 1998 and $29,657 at June 30, 1998) 202,547 203,921 Other current assets 1,854 5,345 ------------------- ------------------ Total current assets 2,259,196 682,436 Property and equipment, net 204,684 248,871 Security deposits 13,140 27,942 ------------------- ------------------ Total assets $ 2,477,020 $ 959,249 ------------------- ------------------ ------------------- ------------------ LIABILITIES Current liabilities: Accounts payable $ 366,311 $ 344,436 Accrued liabilities 600,483 590,526 Capital lease obligations, current portion 7,850 8,423 Preference dividends payable 9,247 65,051 ------------------- ------------------ Total current liabilities 983,891 1,008,436 Capital lease obligations, net of current portion 2,248 6,468 ------------------- ------------------ Total liabilities 986,139 1,014,904 STOCKHOLDERS' EQUITY (DEFICIT) Series A convertible preferred stock, par value $.001 per share: Authorized: 5,000,000 shares; issued and outstanding 4,592,723 and 4,593 4,680 4,680,102 shares at December 31, 1998 and June 30, 1998, respectively (aggregate liquidation preference: $4,730,505) Common stock, par value $.001 per share: Authorized: 40,000,000 shares; Issued and outstanding 21,815,437 and 18,831,552 at December 31, 1998 and 21,815 18,832 June 30, 1998, respectively Additional paid in capital 15,499,374 12,898,284 Subscriptions receivable from stockholders (275,100) (200,100) Common stock note receivable (40,000) Accumulated deficit (13,779,727) (12,928,630) Cumulative foreign currency translation adjustments 59,926 151,279 ------------------- ------------------ Total stockholders' equity (deficit) 1,490,881 (55,655) ------------------- ------------------ Total liabilities and stockholders' equity (deficit) $ 2,477,020 $ 959,249 ------------------- ------------------ ------------------- ------------------ The accompanying notes are an integral part of these consolidated financial statements.
3 QCS.NET CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
THREE MONTHS ENDED DECEMBER 31, SIX MONTHS ENDED DECEMBER 31, ------------------------------------- ------------------------------------- 1998 1997 1998 1997 ----------------- ----------------- ---------------- ---------------- Revenue: Network $ 155,086 $ 185,195 $ 304,232 $ 395,166 Consulting 98,022 196,166 ----------------- ----------------- ---------------- ---------------- 253,108 185,195 500,398 395,166 Cost of revenue: Network 67,394 133,732 128,566 282,733 Consulting 98,022 196,166 ----------------- ----------------- ---------------- ---------------- 165,416 133,732 324,732 282,733 Gross profit 87,692 51,463 175,666 112,433 Operating expenses: Selling, general and 416,092 624,394 816,584 1,115,309 administrative Research and development 152,233 85,580 296,852 163,563 ----------------- ----------------- ---------------- ---------------- Total operating expenses 568,325 709,974 1,113,436 1,278,872 Operating loss (480,633) (658,511) (937,770) (1,166,439) Other income (expense), net (2,053) (32,848) 80,625 (36,164) Interest income 2,939 4,792 6,048 16,250 ----------------- ----------------- ---------------- ---------------- Net loss (479,747) (686,567) (851,097) (1,186,353) Preferred dividend (61,704) (123,966) ----------------- ----------------- ---------------- ---------------- Net loss attributed to common $ (479,747) $ (748,271) $ (851,097) $(1,310,319) stockholders ----------------- ----------------- ---------------- ---------------- ----------------- ----------------- ---------------- ---------------- Net loss per share (basic and diluted) $ (0.02) $ (0.04) $ (0.04) $ (0.08) ----------------- ----------------- ---------------- ---------------- ----------------- ----------------- ---------------- ---------------- Weighted average number of shares used in per share calculation (basic 19,613,173 17,188,452 19,312,266 17,162,492 and diluted) The accompanying notes are an integral part of these consolidated financial statements.
4 QCS.NET CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
SIX MONTHS ENDED ----------------------------------------- DECEMBER 31, DECEMBER 31, 1998 1997 ----------------- ------------------ Cash flows from operating activities: Net loss $ (851,097) $ (1,186,353) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization expense 54,130 36,264 Unrealized exchange loss (82,894) 28,554 Write-off of fixed assets 15,181 Changes in operating assets and liabilities: Changes in accounts receivable 1,374 50,306 Changes in other current assets and security deposits 18,293 11,696 Changes in accounts payable 21,875 53,577 Changes in accrued and other liabilities 9,958 121,744 ----------------- ------------------ Net cash used in operating activities (828,361) (869,031) Cash flows from investing activities: Purchases of fixed assets (9,943) (10,991) ----------------- ------------------ Net cash used in investing activities (9,943) (10,991) Cash flows from financing activities: Net proceeds from issuance of common stock 2,433,183 Payments on capital leases (4,794) (4,391) ----------------- ------------------ Net cash provided by (used in) financing activities 2,428,388 (4,391) Effect of exchange rate changes on cash (8,459) 2,420 ----------------- ------------------ Net increase (decrease) in cash and cash equivalents 1,581,625 (881,993) Cash and cash equivalents, beginning of the period 473,170 1,274,157 ----------------- ------------------ Cash and cash equivalents, end of the period $ 2,054,795 $ 392,164 ----------------- ------------------ ----------------- ------------------ Supplemental disclosure of cash flow information: Cash paid during the period for interest $ 1,205 $ 2,163 Cash paid during the period for taxes 800 Conversion of preference dividend payable to common stock 55,804 Issuance of note receivable for exercise of employee stock option 40,000 Issuance of subscriptions receivable from stockholders 75,000
The accompanying notes are an integral part of these financial statements. 5 NOTES TO UNAUDITED FINANCIAL STATEMENTS The consolidated financial statements of QCS.net Corporation ("QCS" or the "Company") are unaudited and reflect all adjustments (consisting only of normal recurring adjustments), which are, in the opinion of management, necessary for a fair presentation, in all material respects, of the financial position and operating results of the Company for the interim periods. The results of operations for the three and six month periods ended December 31, 1998 are not necessarily indicative of the results to be expected for the entire fiscal year ending June 30, 1999. The year-end balance sheet data at June 30, 1998 was derived from the audited financial statements. This financial information should be read in conjunction with the audited financial statements and notes thereto included in the Company's Form 10-KSB for the fiscal year ended June 30, 1998 as filed with the Securities and Exchange Commission on September 28, 1998. COMPUTATION OF NET LOSS PER SHARE The Company adopted the provisions of Statement of Financial Accounting Standard ("SFAS") No. 128 "Earnings per Share" effective December 31, 1997. SFAS 128 requires the presentation of basic and diluted earnings per share. Basic earnings per share is computed by dividing the income available to holders of Common Stock by the weighted average number of shares of Common Stock outstanding for the period. Diluted earnings per share are computed by giving effect to all dilutive potential shares of Common Stock that were outstanding during the period. For the Company, dilutive potential shares of Common Stock consist of incremental shares of Common Stock issuable upon the exercise of stock options and warrants for all periods. In accordance with SFAS 128, all prior period earnings per share amounts have been restated to reflect this method of calculation. Basic and diluted earnings per share are calculated as follows during the three and six month periods ended December 31, 1998 and 1997 (unaudited):
THREE MONTHS ENDED SIX MONTHS ENDED ------------------------------------------- -------------------------------------------- BASIC: 12/31/98 12/31/97 12/31/98 12/31/97 -------------------- ------------------- --------------------- -------------------- Weighted average shares 19,613,173 17,188,452 19,312,266 17,162,492 outstanding for the period -------------------- ------------------- --------------------- -------------------- Shares used in per share 19,613,173 17,188,452 19,312,266 17,162,492 calculation Net loss available to $ (479,747) $ (748,271) $ (851,097) $ (1,310,319) common shareholders Net loss per share $ (0.02) $ (0.04) $ (0.04) $ (0.08) DILUTED: Weighted average shares 19,613,173 17,188,452 19,312,266 17,162,492 outstanding for the period Common stock equivalents from stock options and warrants Convertible preferred stock -- -- -- -- -------------------- ------------------- --------------------- -------------------- Shares used in per share 19,613,173 17,188,452 19,312,266 17,162,482 calculation Net loss available to $ (479,747) $ (748,271) $ (851,097) $ (1,310,319) common shareholders -------------------- ------------------- --------------------- -------------------- Net loss per share $ (0.02) $ (0.04) $ (0.04) $ (0.08) -------------------- ------------------- --------------------- -------------------- -------------------- ------------------- --------------------- --------------------
6 Options and warrants to purchase 6,665,163 and 3,288,048 shares of Common Stock were outstanding, respectively, at December 31, 1998 and 1997 (unaudited), but were not included in the computation of diluted earnings per share because inclusion of the options and warrants was anti-dilutive. RECLASSIFICATION Certain prior period balances have been reclassified to conform to the current period's presentation. RECENT PRONOUNCEMENTS: The Company adopted SFAS 130, "Reporting Comprehensive Income" in the first quarter of fiscal year 1999. SFAS 130 establishes new rules for the reporting and displaying of comprehensive income and its components. Comprehensive loss for the three months ended December 31, 1998 and 1997 were $480,770 and $661,767, respectively. For the six months ended December 31, 1998 and 1997, the comprehensive loss was 942,450 and 1,155,388, respectively. The principal difference between comprehensive loss and net loss is the treatment of cumulative translation adjustments. In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS 131 requires publicly held companies to report financial and other information about key revenue-producing segments of the entity for which such information is available and is utilized by the chief operation decision maker. Specific information to be reported for individual segments includes profit or loss, certain revenue and expense items and total assets. A reconciliation of segment information to amounts reported in the financial statements is required. SFAS 131 is effective in fiscal year 1999 and does not need to be applied to interim financial statements in the year of application. In June 1998, the FASB issued SFAS 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 requires all derivatives to be recorded on the balance sheet at fair value and establishes "special accounting" for the following three different types of hedges: hedges of changes in the fair value of assets, liabilities or firm commitments (referred to as fair value hedges); hedges of variable cash flows of forecasted transactions (cash flow hedges); and hedges of foreign currency exposures of net investments in foreign operations. All three types of hedges result in offsetting changes in fair values or cash flows of both the hedge and the hedged item being recognized in operations in the same period. Changes in fair value of derivatives that do not meet the criteria of one of these three categories of hedges are included in income. SFAS 133 is effective for years beginning after June 15, 1999, but earlier adoption is allowed. The Company has not determined the impact of adopting SFAS 133 on its financial position or results of operations. ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certain statements contained in this report and other reports of the Company, including, without limitation, statements containing the words "believes," "anticipates," "expects" and other words of similar import, constitute "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 forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These factors include, but are not limited to, the effect of (i) risks related to the Company's recent marketing and technology alliance with IBM, (ii) future capital needs and uncertainty of additional financing, (iii) possible competitive entries, and (iv) other risks detailed in this report. These factors are discussed in more detail in the Risk Factors section of the Company's Annual Report on Form 10-KSB for the fiscal year ended June 30, 1998. Given these uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. The Company disclaims any obligation to update any such factors or to announce publicly the results of any revisions of the forward-looking statements contained or incorporated by reference herein to reflect future events or developments. 7 OVERVIEW QCS.net Corporation ("QCS" or the "Company") is a provider of a business-to-business electronic collaboration solutions for the retail industry and its global trading partners. QCS.net provides an Internet, browser-based workflow tool which integrates electronic catalogs, requests for proposals, product offers, negotiations, ordering, order status/fulfillment tracking and full Internet EDI functionality. The Company's revenues are derived from consulting fees, deployment services and user training, network registration fees, and network usage fees for which the Company charges a fixed monthly fee and/or volume-based recurring usage fees or pay-as-you-go transaction fees for electronic forms. Based on a marketing agreement signed in December 1996, IBM has assumed responsibility for much of the sales and marketing efforts for the Company. Additionally, IBM provides end-user support via three international "solution centers" and houses the network servers in an IBM facilities management environment. The Company believes this alliance with IBM to be an essential component of its business plan, but the involvement with IBM is still in its early stages and the Company can give no assurance of when or if the alliance will ultimately be successful. As of December 31, 1998, sales generated from this alliance were still very limited. From inception in 1993 through December 31, 1998, the Company has generated an accumulated deficit of $13,779,727. Since inception, the Company has incurred substantial costs to develop and enhance its technology, to create, introduce and enhance its product offerings, to establish marketing and distribution relationships, to recruit and train a sales and marketing group and to build an administrative organization. The Company's prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in their early stage of development, particularly companies in new, unproved and rapidly evolving markets. The limited operating history of the Company makes the prediction of future results of operations difficult or impossible; and, therefore, there can be no assurance that the Company will sustain growth or achieve profitability. The Company's success depends to a significant degree upon the continued contributions of key management, engineering, sales and marketing, and finance personnel, certain of whom would be difficult to replace. The loss of the services of any of the key personnel, the inability to attract or retain qualified personnel in the future or delays in hiring required personnel could have a material adverse effect on the Company's business, operating results or financial condition. Also, as indicated above, the Company's success is highly dependent on its and IBM's ability to execute in a timely manner the joint sales and marketing plan, of which no assurance can be made. If this fails to occur, the Company would be materially and adversely affected. RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 1998 The total network and consulting revenues of $253,108 for Q2 99 represent a 37% increase from total revenues of $185,195 for Q2 98. The Company's network revenues decreased by 16% to $155,086 for the second quarter of fiscal year 1999 ("Q2 99") as compared to $185,195 for the second quarter of fiscal year 1998 ("Q2 98"). This decrease is primarily attributed to the Company's lower sales of its full Lotus Notes-based supplier stations and the related installation and monthly subscription fees. The loss of these revenues has not been offset by revenues of Internet-based products. The Company's Internet revenues has been slow in developing due to the lengthy sales and implementation cycles required for our retail clients to encourage their key vendors to connect to the QCS Network and to provide the significant level of training to buyers and suppliers on the use and benefits of the QCS.net Internet products. The consulting revenue associated with the Company's service agreement with IBM Corporation in Q2 99 was $98,022. In this agreement with IBM, the Company provides sales, marketing and end-user support services to assist in marketing of QCS products. Cost of network revenues decreased by 50% to $67,394 for Q2 99 from $133,732 in Q2 98. Cost of network revenues in Q2 99 is calculated primarily as a percentage of network revenues in accordance with the IBM revenue sharing arrangement. In Q2 98 cost of network revenues included cost of purchasing network services, the cost of internal and external labor to install and support customer sites, and third party software and hardware for the existing Lotus Notes based product. Cost of consulting revenue in Q2 99 was $98,022, which represents the value of services sold to IBM at cost. 8 Selling, general and administrative expenses ("SG&A") consist primarily of personnel-related costs in the Company's sales, marketing and general management organizations and other administrative support costs such as external legal and financial services. SG&A expenses decreased 33% to $416,092 in Q2 99 from $624,394 in Q1 98. The decrease was due in part to the aforementioned cost of sales, marketing and end-user support services, which are now invoiced to IBM or covered by IBM directly. In Q2 98, the Company recorded an expense for the closure of the Hong Kong and French offices for $110,256. Also relating to the closure of the overseas offices in Q2 99, the Company realized savings of approximately $33,000 in rents and facility expenses compared to Q2 98. Research and development expenses increased by $66,653 to $152,233 in Q2 99 compared to $85,580 in Q2 98. The increased expenditures were for internal labor for enhancements to the Company's Internet product. As a result of the foregoing, the net loss decreased 30% to $479,747 for Q2 99 from $686,567 in Q2 98. RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED DECEMBER 31, 1998 The total network and consulting revenues of $500,398 for the first six months of fiscal year 1999 represent a 27% increase from total revenues of $395,166 for the first six months of fiscal year 1998. The Company's network revenues decreased by 23% to $304,232 for the first six months of fiscal year 1999 as compared to $395,166 for the first six months of fiscal year 1998. This decrease is primarily attributed to the Company's lower sales of its full Lotus Notes-based supplier stations and the related installation and monthly subscription fees. The loss of these revenues has not been offset by revenues of Internet-based services. The revenue associated with the Company's service agreement with IBM Corporation in first half of fiscal year 1999 was $196,166. Cost of network revenues decreased by 55% to $128,566 for the first half of fiscal year 1999 from $282,733 in the first half of fiscal year 1998. In fiscal year 1999, cost of network revenues is calculated primarily as a percentage of network revenues in accordance to the IBM revenue sharing arrangement. In the first half of fiscal year 1998, cost of revenues included cost of purchasing network services, the cost of internal and external labor to install and support customer sites, and third party software and hardware for the existing Lotus Notes based product. Cost of consulting revenue in fiscal year 1999 was $196,166, which represents the value of services sold to IBM at cost. SG&A expenses decreased by 27% to $816,584 in the first six months of fiscal year 1999 from $1,115,309 in the same period in fiscal year 1998. The decrease was due in part to the aforementioned cost of sales, marketing and end-user support services, which are now invoiced to IBM, and the savings from the closure of the France and Hong Kong offices in December 1997. Research and development expenses increased by 82% from $163,563 to $296,852 in the first half of fiscal year 1999 compared to the same period in fiscal year 1998. The increased expenditures were for internal labor and consulting services for continued enhancements to the Company's Internet product. The first half of fiscal year 1999 benefited from a $81,169 unrealized foreign exchange gain in other income from the strengthening of the French Franc relative to the U.S. Dollar. As a result of the foregoing, the net loss decreased by 28% to $851,097 for the first six months of fiscal year 1999 from $1,186,353 in the first six months of fiscal year 1998. LIQUIDITY AND CAPITAL RESOURCES The Company's cash and cash equivalents at December 31, 1998 was $2,054,795, representing a $1,581,625 increase from June 30, 1998. Cash used in operating activities for the six months ended December 31, 1998 was $828,361, compared to $869,031 for the six months ended December 31, 1997. The cash usage is primarily attributed to the net losses that occurred in each of the periods. During the second quarter of fiscal year 1999, the Company raised $2,053,678 in net proceeds and has subscriptions receivable for an additional $75,000 in a private placement. This private placement consisted of 19 investors purchasing 2,237,680 equity "Units" at prices ranging from $0.75 to $1.15 per unit, each such unit consisting of one share of Common Stock and one warrant to purchase an additional share of Common Stock at an exercise price ranging from $1.00 to $1.75. 9 The Company believes the capital currently on hand will be sufficient to meet the working capital requirements for the next twelve months, until which time the Company expects revenue growth to be able to sustain operations. There can be no assurances when or if this revenue growth will occur. Furthermore, if the Company continues to sustain significant losses, it will be required to obtain additional debt or equity funds in subsequent periods. If such capital raising efforts should prove unsuccessful, the Company will need to reduce operating spending significantly, which would materially and adversely affect the Company's business. The Company currently does not have a bank credit line. The Company does not intend to pay cash dividends with respect to Common Stock in the foreseeable future. YEAR 2000 COMPLIANCE The "Year 2000" issue is the result of computer programs being written using two digits rather than four digits to define the applicable year. Accordingly, computer programs that have date sensitive software might recognize a date using "00" as the year 1900 rather than the year 2000. This circumstance could result in program failure or miscalculation causing disruptions of operations including, among other things, a temporary inability to process transactions, send invoices, operate equipment or engage in similar normal business activities. The Company has reviewed its internal computer systems, as well as its products and services, that could be affected by the Year 2000 issue and has identified certain systems, products and services that could be affected. The Company presently believes that, with modification to existing software and conversion to new software, the Year 2000 issues relating to such systems, products and services will not cause significant operational or customer problems. The Company is addressing these issues and intends to complete these efforts, including testing phases, throughout calendar year 1999. The Company does not anticipate that the cost of implementing these solutions will be material to its business, financial condition and results of operations. However, if such modifications and conversions are not made or not completed in a timely manner, then resulting Year 2000 issues could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, the Company has initiated communications with its significant suppliers and customers in order to (i) determine the extent to which the Company is vulnerable to such third parties' failure to remedy their own Year 2000 issues and (ii) assess whether the Company has adequate resources for required supplies, components and complementary offerings. As part of its contingency planning efforts, the Company is preparing to identify alternate sources or strategies where necessary if significant Year 2000 exposure is identified. The Company is addressing these issues and intends to complete these efforts throughout calendar year 1999. In addition, the Year 2000 issues present a number of other risks and uncertainties that could affect adversely the Company, including, without limitation, utilities failures, competition for personnel skilled in the resolution of Year 2000 issues and the nature of government responses to these issues. Although the Company believes that the Year 2000 matters discussed above will not have a material adverse effect on its business, financial condition or results of operations, the Company remains uncertain whether or to what extent that it may be affected. Accordingly, the Company's expenses to identify and address such risks and uncertainties, as well as the expenses and liabilities to which the Company may become subject as a result of such risks and uncertainties, could have a material adverse effect on the Company's business, financial condition and results of operations. 10 PART II OTHER INFORMATION ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS Effective November 13, 1998, the Company accepted subscriptions from 17 investors agreeing to purchase 933,333 equity "Units" at $0.75 per unit, each such unit consist of one share of Common Stock and one warrant to purchase an additional share of common stock at an exercise price of $1.00. The Company received proceeds of $607,500 net of stock selling expenses and has subscriptions receivable of $75,000 from two stockholders. Effective December 1, 1998, the Company accepted subscriptions from 2 investors agreeing to purchase 1,304,347 equity "Units" at $1.15 per unit, each such unit consist of one share of Common Stock and one warrant to purchase an additional share of common stock at an exercise price of $1.75. The Company received proceeds of $1,447,500 net of stock selling expenses. On December 16, 1998, the Company issued 288,463 shares of Common Stock to an investor in a cashless exercise of warrants. ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the Company's Annual Meeting of Stockholders held on October 29, 1998, the following proposals were adopted by the margins indicated. 1. To elect a Board of Directors to hold office until the next Annual Meeting of Stockholders or until their respective successors have been elected or appointed:
For Withheld Marcel van Heesewijk 17,026,505 3,000 Mattheus Wegbrans 15,135,305 1,894,200 Johan Vunderink 17,026,505 3,000 Louis A. Delmonico 17,026,505 3,000
2. Approve an amendment to the Company's Certificate of Incorporation to change the name of the company to QCS.net Corporation:
Voted for Voted against Not voting 17,026,405 3,100 2,156,973
3. Approve an amendment to the Company's Certificate of Incorporation to eliminate the cumulative dividend on the series a convertible preferred stock:
Voted for Voted against Not voting 13,476,604 1,813,500 3,896,374
4. Ratify and approve the QCS Corporation 1997 Stock Option Plan and amendment thereto:
Voted for Voted against Not voting 15,079,729 210,375 3,896,374
5. Ratify selection of PricewaterhouseCoopers LLP as the Company's independent accountants:
Voted for Voted against Not voting 16,872,971 2,200 2,311,307
11 ITEM 5 OTHER INFORMATION On December 30, 1998, the Company announced the adoption of a new pricing program, effective January 1, 1999, which incorporates subscription-based pricing along with a significant reduction in the on-going transaction charges associated with larger volume usage. The new pricing program offers monthly certified memberships for $95 per month, which includes the cost of the first 50 chargeable transactions and $1.50 for each additional transaction. On February 3, 1999, the Company announced the appointment of Sean Maloy as its new President and Chief Executive Officer. Mr. Maloy has held several senior management positions, most recently at Maxwell Technologies, Inc., a technology-based company, where Mr. Maloy has served as Chief Operating Officer, Chief Financial Officer and, prior to joining QCS.net, as Vice President of Mergers and Acquisitions. ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K A. EXHIBITS Exhibit 27 - Financial Data Schedule B. REPORTS ON FORM 8-K No reports on Form 8-K were filed with the Securities and Exchange Commission during the quarter for which this report is filed. SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: February 16, 1999 QCS.NET CORPORATION By: /s/ Marcel van Heesewijk ------------------------------ Marcel van Heesewijk, Chairman of the Board of Directors By: /s/ Sean Maloy ------------------------------ Sean Maloy President, Chief Executive Officer, Acting Chief Financial Officer 12 EX-27 2 EX-27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM STATEMENTS FOR THE THREE MONTHS ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000825517 QCS.NET CORPORATION 1,000 3-MOS JUN-30-1999 JUL-01-1998 DEC-31-1998 2,055 0 229 27 0 2,259 332 (127) 2,477 984 0 0 5 22 1,464 2,477 0 253 0 165 567 0 1 0 0 (480) 0 0 0 (480) (.02) (.02)
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