<PAGE>
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 October 31, 1997
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition from ____________________ to _________________________
Commission File Number __________________________________
QAD INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0462381
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
6450 VIA REAL, CARPINTERIA, CALIFORNIA 93013
(805) 681-6614
(address, including zip code and telephone number
including area code, of registrant's principal executive offices)
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 filing requirements
for the past 90 days. Yes X . No .
----- -----
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15 (d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes X . No .
----- -----
The number of shares outstanding of the issuer's common stock as of the close of
business on December 12, 1997 is 29,099,248
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QAD Inc.
Index
Part I
Financial Information Page
Item 1 Financial Statements
Condensed Consolidated Statements of Income
Three Month and Nine Month Periods Ended
October 31, 1997 and October 31, 1996 1
Condensed Consolidated Balance Sheets at
October 31, 1997 and January 31, 1997 2
Condensed Consolidated Statements of Cash Flows
Nine Month Periods Ended
October 31, 1997 and October 31, 1996 3
Notes to Condensed Consolidated Financial
Statements 4
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 5
Part II
Other Information
Item 1 Legal Proceedings 13
Item 2 Changes in Securities 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
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Part I - Financial Information
QAD Inc.
Condensed Consolidated Statements of Income
(Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended October 31, Ended October 31,
1996 1997 1996 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenue:
License fees $ 13,915 $ 29,616 $ 48,136 $ 73,723
Maintenance and other 9,891 14,406 29,341 44,032
------------- ------------- ------------- -------------
Total revenues 23,806 44,022 77,477 117,755
Cost and expenses:
Cost of revenues 6,341 11,842 20,381 30,561
Sales and marketing 11,197 17,154 37,308 49,360
Research and development 6,096 7,927 17,455 20,733
General and administrative 3,726 4,597 10,500 12,660
------------- ------------- ------------- -------------
Total cost and expenses 27,360 41,520 85,644 113,314
Operating income (loss) (3,554) 2,502 (8,167) 4,441
Other (income) expense: 400 (678) 1,079 (778)
------------- ------------- ------------- -------------
Income (loss) before income taxes (3,954) 3,180 (9,246) 5,219
Income tax expense (benefit) (1,164) 1,795 (2,652) 2,532
------------- ------------- ------------- -------------
Net income (loss) $ (2,790) $ 1,385 $ (6,594) $ 2,687
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Net income (loss) per share $ (0.12) $ 0.05 $ (0.28) $ 0.10
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Shares used in computation 23,479 29,739 23,439 26,256
</TABLE>
See accompanying notes to the condensed consolidated financial statements
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QAD Inc.
Condensed Consolidated Balance Sheets
(In thousands, except for number of shares)
Assets
<TABLE>
<CAPTION>
January 31, October 31,
1997 1997
-------------- --------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 301 $ 65,078
Trade accounts receivable, net of allowances
of $3,694 for January 31, 1997 and $5,081
for October 31, 1997 46,745 60,496
Income taxes receivable -- 968
Other current assets 6,928 6,050
-------------- --------------
Total current assets 53,974 132,592
Property and equipment, net 18,071 23,055
Capitalized software, net 1,065 1,235
Other assets, net 4,140 7,793
-------------- --------------
$ 77,250 $ 164,675
-------------- --------------
-------------- --------------
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable and current installments of long-term debt $ 8,465 $ 157
Accounts payable and accrued liabilities 22,142 24,402
Income taxes payable 741 --
Deferred revenue and deposits 28,602 33,097
-------------- --------------
Total current liabilities 59,950 57,656
Long-term debt, less current installments 5,036 73
Other deferred liabilities 1,460 1,695
Stockholders' equity:
Preferred stock, no par value. Authorized 5,000,000 shares;
none issued and outstanding
Common stock, no par value. Authorized 150,000,000 shares;
issued and outstanding 22,218,572 at January 31, 1997 and
29,099,248 at October 31, 1997 5,942 98,133
Retained earnings 7,539 10,226
Stockholders' receivable (197) (397)
Unearned compensation - restricted stock (2,129) (2,185)
Cumulative foreign currency translation adjustment (351) (526)
-------------- --------------
Total stockholders' equity 10,804 105,251
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$ 77,250 $ 164,675
-------------- --------------
-------------- --------------
</TABLE>
See accompanying notes to condensed consolidated financial statements
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QAD Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
October 31, October 31,
1996 1997
-------------- --------------
<S> <C> <C>
Net cash provided by operating activities $ 4,663 $ 442
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Investing activities:
Purchases of property and equipment (2,695) (9,289)
Purchase of investments -- (3,000)
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Net cash used in investing activities (2,695) (12,289)
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Financing activities:
Borrowings (repayments) of line of credit and debt, net (2,607) (13,266)
Proceeds from issuance of common stock 550 93,260
Repurchase of common stock (532) (2,958)
Loans to stockholders (36) (200)
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Net cash provided by (used in) financing activities (2,625) 76,836
-------------- --------------
Effect of exchange rate changes on cash and cash equivalents (20) (212)
-------------- --------------
Increase (decrease) in cash and cash equivalents (678) 64,777
-------------- --------------
Cash and cash equivalents at beginning of period 1,463 301
Cash and cash equivalents at end of period $ 785 $ 65,078
-------------- --------------
-------------- --------------
</TABLE>
See accompanying notes to condensed consolidated financial statements
<PAGE>
QAD Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
The Condensed Consolidated Balance Sheets as of October 31, 1997 and January 31,
1997, the Condensed Consolidated Statements of Income for the three month and
nine month periods ended October 31, 1997 and 1996 and the Condensed
Consolidated Statements of Cash Flows for the nine month periods ended October
31, 1997 and 1996 have been prepared by the Company. In the opinion of
management, all adjustments (which include reclassifications and normal
recurring adjustments) necessary to present fairly the financial position,
results of operations and cash flows at October 31, 1997 and for all periods
presented, have been made.
Certain information and footnote disclosures normally included in the financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these condensed
consolidated financial statements be read in conjunction with the financial
statements and notes thereto included in the Company's S-1 Registration
Statement filed on August 6, 1997 with the Securities and Exchange Commission.
The results of operations for the three and nine-month periods ended October 31,
1997 are not necessarily indicative of the operating results for the full year.
2. Recent Accounting Pronouncements
In October 1997, the American Institute of Certified Public Accountants issued
Statement of Position 97-2: SOFTWARE REVENUE RECOGNITION (SOP 97-2) which is
effective for software transactions entered into in fiscal years beginning after
December 15, 1997. The Company is currently evaluating the effect of this new
statement.
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards (SFAS) No. 130 REPORTING COMPREHENSIVE INCOME and SFAS
No.131 DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION,
these statements will affect the disclosure requirements for the fiscal 1999
annual financial statements. The Company is currently evaluating the effect of
these new statements.
3. Initial Public Offering
On August 6, 1997, the Company completed its initial public offering of
5,750,000 shares of common stock. On August 11, 1997, the Company received
approximately $80.2 million in proceeds from the offering (net of offering costs
of $6.1 million). $19.9 million of the proceeds was immediately used to repay
and retire debt. Additionally, on August 12, 1997, the underwriters exercised
their option to purchase 862,500 shares of the Company's common stock, for which
the Company received additional proceeds of approximately $12.0 million (net of
offering costs of $900,000).
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QAD Inc.
Management's Discussion & Analysis of Financial
Condition and Results of Operations
This report contains forward-looking statements, which reflect the current views
of the Company with respect to future events that will have an effect on its
future financial performance. These statements include the words, "expects,"
"believes" and similar expressions. These forward-looking statements are
subject to various risks and uncertainties, including those referred to under
"Factors That May Affect Future Results" and elsewhere herein and contained in
the Company's S-1 Registration Statement filed with the Securities and Exchange
Commission. These factors, among other things, could cause actual results to
differ materially from historical results or those currently anticipated.
RESULTS FOR THE QUARTERS ENDED OCTOBER 31, 1997 AND 1996:
TOTAL REVENUES. Total revenues for the three months ended October 31, 1997
increased 85% to $44.0 million from $23.8 million in the same period in fiscal
1997. The increase in total revenues was primarily due to continued growth in
revenues generated from the Company's targeted vertical markets. License fees
continue to be the Company's major revenue source, accounting for $29.6 million
in revenues, ahead of $13.9 million in the prior year. For the three months
ended October 31, 1997, maintenance and other revenue as a percentage of total
revenues decreased to 33% as compared to 42% in the same period in 1996 due to
relatively faster license revenue growth.
COST OF REVENUES. Cost of revenues consists primarily of charges incurred from
reselling third-party databases (and their associated maintenance contracts)
which are required to run MFG/PRO software, support costs associated with
MFG/PRO software maintenance contracts, costs associated with the reproduction
and delivery of the Company's software and with the performance of service
contracts. During the three months ended October 31, 1997, cost of revenues
increased 87% to $11.8 million (26.9% of total revenues) from $6.3 million
(26.6% of total revenues) in the same period in fiscal 1997. The increase in
absolute dollars and as a percentage of total revenues was due to significantly
higher costs associated with reselling third-party databases.
SALES AND MARKETING. Sales and marketing expense consists primarily of salaries,
commissions and associated fringe benefits, travel and entertainment expenses
and promotional and advertising costs. During the three months ended October 31,
1997, sales and marketing expense increased 53% to $17.2 million (39.0% of
total revenues) from $11.2 million (47.0% of total revenues). Increased
expenses were primarily due to the expansion of the Company's global sales force
and higher commissions expense (including $1.3 million in commissions payable to
U.S. distributors, a new channel for the Company), as well as a salary
restructure that affected all employees in the third quarter of fiscal 1997.
RESEARCH AND DEVELOPMENT. Research and development expense consists primarily of
salaries and associated fringe benefits, related overhead expenses and amounts
paid to consultants and third party developers to supplement the product
development efforts of the Company's in-house staff. During the three months
ended October 31, 1997, research and development expense increased 30% to $7.9
million (18.0% of total revenues) from $6.1 million (25.6% of total revenues) in
the same period during fiscal 1997. Increased expenses were due primarily to
higher staffing for the development of On/Q software. Increased expenses were
partially offset by funds that the Company received from third parties as a
result of joint venture research and development projects.
In accordance with Statement of Financial Accounting Standards No. 86, the
Company expenses software development costs as they are incurred until
technological feasibility has been established, at which time such costs are
capitalized until the product is available for general release to customers. To
date, the establishment of technological feasibility of the Company's products
and general release of such software has substantially coincided. Accordingly,
the only costs capitalized relates to the translation of the Company's products
into foreign languages once technological feasibility has been achieved.
GENERAL AND ADMINISTRATIVE. During the three months ended October 31, 1997,
general and administrative expense increased 23% to $4.6 million (10.4% of total
revenues) from $3.7 million (15.7% of total revenues) in the same period in
fiscal 1997. The increase in spending resulted primarily from salary increases,
accruals for a new 401k matching program (implemented August 1, 1997) and also
hiring of additional personnel.
<PAGE>
OTHER (INCOME) EXPENSE. Total other (income) expense is composed primarily of
interest income and interest expense as well as other miscellaneous income and
expense. During the three months ended October 31, 1997, other (income) expense
increased to $(0.7) million from an expense of $0.4 million. The improvement
was due to significantly reduced interest expense as the IPO proceeds were
applied to the repayment and retirement of debt, and to interest income accruing
from investment of the remaining proceeds in short -term investment-grade
securities and money market instruments.
RESULTS FOR THE NINE MONTHS ENDED OCTOBER 31, 1997 AND 1996
TOTAL REVENUES. Total revenues for the nine months ended October, 1997 increased
52% to $117.8 million from $77.5 million for the same period in fiscal 1997. The
increase in total revenue was due to the Company's strengthened global presence
and continued growth of, and market penetration into the Company's targeted
vertical markets. For the nine months ended October 31, 1997, license fee
revenue continued to be the Company's major source of revenue, accounting for
63% of the total revenue. Maintenance and other revenue as a percentage of
total revenues for the nine months ended October 31, 1997 decreased to 57% as
compared to 63% in the same period in 1996 due to relatively faster license
revenue growth.
COST OF REVENUES. During the nine months ended October 31, 1997, cost of
revenues increased 50% to $30.6 million (26.0% of total revenues) from $20.4
million (26.3% of total revenues) for the same period in fiscal 1997. The
increase in absolute dollars was related to both the higher volume of
third-party databases resold and to increase personnel needed to provide support
for the larger base of maintenance contracts generated.
SALES AND MARKETING. During the nine months ended October 31, 1997, sales and
marketing expense increased 32% to $49.4 million (41.9% of total revenues) from
$37.3 million (48.2% of total revenues) for the same period in fiscal 1997. The
increase in absolute dollars was attributable to the expansion of the Company's
global sales force.
RESEARCH AND DEVELOPMENT. During the nine months ended October 31, 1997,
research and development expense increased 19% to $20.7 million (17.6% of total
revenues) from $17.5 million (22.5% of total revenues) in the same period during
fiscal 1997. This increase in expenses was due primarily to higher staffing for
the development of On/Q software. Increased expenses were partially offset by
funds that the Company received from third parties as a result of joint research
and development projects.
GENERAL AND ADMINISTRATIVE. During the nine months ended October 31, 1997,
general and administrative expense increased 21% to $12.7 million (10.8% of
total revenues) from $10.5 million (13.6% of total revenues) in the same period
in fiscal 1997. Increased expenses were due mainly to added personnel necessary
to support the infrastructure created by global expansion and to salary
increases. Additionally, the Company accrued charges for final payments to its
now discontinued profit sharing plan and for its matching contributions to the
new 401k plan implemented on August 1, 1997.
TOTAL OTHER (INCOME) EXPENSE. During the nine months ended October 31, 1997,
other (income) expense increased to $ (0.8) million from an expense of $1.1
million. The increase was primarily due to reduced interest expense due to the
repayment and retirement of debt using IPO proceeds and to interest income
arising from the investment of the remaining proceeds of short-term securities
and money market instruments.
LIQUIDITY AND CAPITAL RESOURCES
On August 6, 1997, the Company completed its initial public offering of common
stock, selling 5,750,000 shares at $15.00 per share. Net proceeds to the
Company were approximately $80.2 million. Additionally, on August 12, 1997, the
Company sold, through exercise of the underwriters' options, an additional
862,500 shares of the Company's common stock, for which the Company received
additional net proceeds of approximately $12.0 million. Prior to the initial
public offering the Company has financed its operations and met its capital
expenditure requirements through cash flows from operations as well as short and
long term borrowings.
At October 31, 1997, the Company had approximately $65.1 million in cash and
cash equivalents. Cash flows provided by operating activities were $0.4 million
and $4.7 million for the nine months ended October 31, 1997 and 1996,
respectively. Cash used in investing activities aggregated $12.3 million and
$2.7 million in the nine months ended October 31, 1997 and 1996, respectively
and was primarily related to
<PAGE>
the purchase of computer equipment and office furniture in both periods. Cash
flows from financing activities totaled $76.8 million and $(2.6) million for the
nine months ended October 31, 1997 and 1996, respectively and were comprised of
proceeds from the offering and the repayment of borrowings. At October 31,
1997, the Company had no material commitments for capital expenditures.
At October 31, 1997, the Company had working capital of $74.9 million. Accounts
receivable, net of allowance for doubtful accounts, increased to $60.5 million
from $46.7 million at January 31, 1997. The Company's accounts receivable days'
sales outstanding ("DSO"), calculated on a quarterly basis has demonstrated
seasonal fluctuations. For the three months ended October 31, 1997, DSO was 124
which represents an increase from 86 days for the three months ended January 31,
1997. The Company believes that the days' sales outstanding are higher than
desired and the Company is focusing on its credit and collection processes to
improve cash flows and working capital. Total deferred revenue increased to
$33.1 million at October 31, 1997 from $28.6 million at January 31, 1997
primarily as a result of increased billings of maintenance agreements.
During the quarter, the Company used $19.9 million from the proceeds of its
initial public offering to retire all of its debt, including a revolving credit
agreement (with available borrowings of approximately $20 million) and its fixed
asset and real estate loan agreements. At October 31, 1997, the Company had
obligations of approximately $230,000 outstanding under capital leases with
various credit institutions. The capitalized leases are secured by property and
equipment.
On August 4, 1997, the Company signed a new revolving credit agreement with Bank
of America, which expires on August 4, 1999. The maximum available amount of
borrowings under the revolving credit agreement is $20 million. The Company may
take out a Base Rate Loan or an Offshore Rate Loan. Both loans are unsecured.
The total amount of available borrowings under the revolving credit agreement as
of December 12, 1997 was approximately $20 million. Borrowings under the
Offshore Rate Loan bear interest on a floating rate based upon the IBOR rate
(interbank borrowing rate which is offered by Bank of America's Grand Cayman
Branch to other offshore banks) divided by a calculation of 1.00 less the
maximum reserve requirements issued by the FRB with respect to Eurocurrency
funding, which would result in an interest rate of 6.875% at October 31, 1997.
Borrowings under the Base Rate Loan bear interest at the higher of (a) 0.50%
per annum above the latest Federal Funds Rate; and (b) the rate of interest in
effect for such day as publicly announced from time to time by the Bank in San
Francisco, California, as its "reference rate", which would result in an
interest rate of 8.5% at October 31, 1997.
The Company believes that the net proceeds from the offering, the available
borrowings under its new revolving credit agreement and cash generated by
operations, will satisfy the Company's working capital requirements for at least
the next 12 months.
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
QAD wishes to caution the reader that the factors below, along with the factors
set forth in the Company's S-1 could affect QAD's actual results causing results
to differ materially from those in any forward-looking statement. These factors
include the following:
1) HISTORICAL FLUCTUATIONS IN QUARTERLY RESULTS AND POTENTIAL FUTURE
SIGNIFICANT FLUCTUATIONS
The Company's quarterly revenue, expenses and operating results have varied
significantly in the past, and the Company anticipates that such
fluctuations will continue in the future as a result of a number of
factors, many of which are outside the Company's control. The factors
affecting these fluctuations include demand for the Company's products and
services, the size, timing and structure of significant licenses by
customers, market acceptance of new or enhanced versions of the Company's
software products and products that operate with the Company's products,
the publication of opinions about the Company, its products and technology
by industry analysts, the entry of new competitors and technological
advances by competitors, delays in localizing the Company's products for
new markets, delays in sales as a result of lengthy sales cycles, changes
in operating expenses, foreign currency exchange rate fluctuations, changes
in pricing policies by the Company or its competitors, customer order
deferrals in anticipation of product enhancements or new product offerings
by the Company or its competitors, the timing of the release of new or
enhanced versions of the Company's software products and products that
operate with the Company's products, changes in the method of product
distribution (including the mix of direct and indirect channels), product
life cycles, changes in the mix of products and services licensed or sold
by the Company, customer cancellation of major planned software development
programs and general economic factors.
<PAGE>
A significant portion of the Company's revenue in any quarter may be
derived from a limited number of large, non-recurring license sales. The
Company expects to continue to experience from time to time large,
individual license sales, which may cause significant variations in
quarterly license fees.
Like many software companies, the Company typically realizes a significant
portion of its software license revenue in the last month of the quarter
and in the last quarter of the year. However, unlike a number of the
Company's competitors, the Company does not derive material revenue from
the provision of services in connection with its license sales. As a
result, a greater proportion of the Company's revenue tends to be less
predictable and to occur later in the quarter and in the year than the
revenue of competitors who provide such services.
Based upon the factors described above, the Company believes that its
quarterly revenue, expenses and operating results are likely to vary
significantly in the future, that period-to-period comparisons of its
results of operations are not necessarily meaningful and that, as a result,
such comparisons should not be relied upon as indications of future
performance. Moreover, although the Company's revenue has generally
increased in recent periods, there can be no assurance that the Company's
revenue will grow in future periods, at past rates or at all, or that the
Company will be profitable on a quarterly or annual basis. The Company has
in the past experienced and may in the future experience quarterly losses.
2) SALES CYCLE ASSOCIATED WITH A CUSTOMER'S PURCHASE OF THE COMPANY'S SOFTWARE
Because the license of the Company's products generally involves a
significant commitment of capital (which ranges from approximately $50,000
to several million dollars), the sales cycle associated with a customer's
purchase of the Company's products is generally lengthy (with a typical
duration of four to 15 months), varies from customer to customer and is
subject to a number of significant risks over which the Company has little
or no control. These risks include customers' budgetary constraints, timing
of budget cycle, concerns about the introduction of new products by the
Company or its competitors and general economic downturns which can result
in delays or cancellations of information systems investments. Due in part
to the strategic nature of the Company's products, potential customers are
typically cautious in making product acquisition decisions. The decision to
license the Company's products generally requires the Company to provide a
significant level of education to prospective customers regarding the uses
and benefits of the Company's products, and the Company must frequently
commit substantial presales support resources. The Company is almost
completely reliant on third parties for implementation and systems
integration services, which may cause sales cycles to be lengthened or
result in the loss of sales. The uncertain outcome of the Company's sales
efforts and the length of its sales cycles could result in substantial
fluctuations in operating results. If sales forecasted from a specific
customer for a particular quarter are not realized in that quarter, then
the Company is unlikely to be able to generate revenue from alternative
sources in time to compensate for the shortfall. As a result, and due to
the relatively large size of some orders, a lost or delayed sale could have
a material adverse effect on the Company's quarterly operating results.
3) THE COMPANY'S SEASONALITY OF OPERATING RESULTS
The Company has generally realized lower revenue (i) in July and August,
due primarily to reduced economic activity in Europe during the summer
months and (ii) to a lesser extent, in the first two months of the calendar
year, due to the concentration by some customers of purchases in the fourth
quarter of the calendar year and their consequently lower purchasing
activity during the immediately following months. Notwithstanding the
change in the Company's fiscal year end from December 31 to January 31 and
the recent changes in the Company's planning and compensation systems, the
Company anticipates that such seasonality will continue to cause
significant quarterly fluctuations in the Company's operating results.
<PAGE>
4) PRODUCT CONCENTRATION
The Company has historically derived substantially all of its revenue from
the licensing and maintenance of the Company's MFG/PRO software. . The
Company expects that such revenue will continue to represent substantially
all of the Company's revenue for the foreseeable future. The Company's
success depends on continued market acceptance of the Company's MFG/PRO
software, as well as the Company's ability to introduce new versions of
MFG/PRO software and other products to meet the evolving needs of its
customers. Although demand for MFG/PRO software has grown in recent years,
management believes that the market for ERP software is still developing
and there can be no assurance that it will continue to grow or that, even
if the market does grow, businesses will continue to adopt MFG/PRO
software. The failure of the market for ERP software to continue to grow,
any reduction in demand for MFG/PRO software as a result of increased
competition in the market for ERP software, technological change, failure
by the Company to introduce new versions of products acceptable to the
marketplace or other similar factors would have a material adverse effect
on the Company's business, operating results and financial condition.
5) DEPENDENCE ON PROGRESS PRODUCTS
The Company's MFG/PRO software is written in a programming language that is
proprietary to Progress Software Corporation ("Progress"). The Company has
entered into a license agreement with Progress (the "Progress Agreement")
that provides the Company and each of its subsidiaries, among other things,
with the perpetual, worldwide, royalty-free right to use the Progress
programming language to develop, market, distribute and license the
Company's software products. The Progress Agreement also provides for
continued software support from Progress through June 2002 without charge
to the Company. Progress may only terminate the Progress Agreement upon the
Company's adjudication as bankrupt, its liquidation or other similar event,
or if the Company has ceased business operations in full. The Company's
success is dependent upon Progress continuing to develop, support and
enhance this programming language, its tool set and database, as well as
the continued market acceptance of Progress as a standard database program.
The Company has in the past and may in the future experience product
release delays because of delays in the release of Progress products or
product enhancements. Any such delays could have a material adverse effect
on the Company's business, operating results and financial condition.
MFG/PRO software employs Progress programming interfaces, which allow
MFG/PRO software to operate with Oracle Corporation ("Oracle") database
software. However, the Company's software programs do not run within
programming environments other than Progress and the Company's customers
must acquire rights to Progress Software in order to use MFG/PRO software.
The Company's On/Q software products, the initial application of which are
currently under development and is expected to be commercially available in
the second half of 1998, are not dependent upon Progress technology. The
failure of Progress to continue its relationship with the Company or to
develop, support or enhance its programming language in a manner
competitive with enhancements of other present or future programming
languages, the increased market acceptance of programming languages other
than Progress in the Company's market or the Company's inability to adapt
its software to such other languages could have a material adverse effect
on the Company's business, operating results and financial condition.
6) RAPID TECHNOLOGICAL CHANGE
The market for the Company's software products is characterized by rapid
technological advances, evolving industry standards in computer hardware
and software technology, changes in customer requirements and frequent new
product introductions and enhancements. Customer requirements for products
can change rapidly as a result of innovations or changes within the
computer hardware and software industries, the introduction of new products
and technologies (including new hardware platforms and programming
languages) and the emergence, evolution or widespread adoption of industry
standards. For example, increasing commercial use of the Internet may give
rise to new customer requirements and new industry standards. The Company's
future success will depend upon its ability to continue to enhance its
current product line and to develop and introduce new products that keep
pace with technological developments, satisfy increasingly sophisticated
customer requirements and achieve market acceptance. In particular, the
Company believes its future success will depend on its ability to convert
its products to object-oriented technology as well as its ability to
develop products that will operate across the Internet. There can be no
assurance that the Company will be successful in developing and marketing,
on a timely and cost-effective basis, product enhancements or new products
that respond to technological advances by others, or that its products will
achieve market acceptance. The Company's failure to successfully develop
and market product enhancements or new products
<PAGE>
could have a material adverse effect on the Company's business, operating
results and financial condition.
7) SUPPLY CHAIN SOLUTIONS UNDER DEVELOPMENT AND UNDERLYING TECHNOLOGY
A significant element of the Company's strategy is its development of On/Q
software, a series of new products targeted to the supply chain management
needs of manufacturing companies. Over the past year, the Company has
devoted substantial resources to developing its On/Q software. The
Company's first On/Q software product, Logistics, is currently under
development and is anticipated to be commercially available in the second
half of 1998. Although the Company has performed preliminary tests on its
Logistics software, it has not completed its development or commenced beta
testing, nor has the product been implemented in a commercial setting.
There can be no assurance that Logistics or any other of the Company's
planned On/Q software products will achieve the performance standards
required for commercialization or that such products will achieve market
acceptance or be profitable. If Logistics or the Company's other planned
supply chain management software products do not achieve such performance
standards or do not achieve market acceptance, the Company's business,
operating results and financial condition would be materially and adversely
affected.
On/Q software is being designed based upon object-oriented technology.
Object-oriented applications are characterized by technology, development
style and programming languages that differ from those used in traditional
software applications, including the current version of MFG/PRO software.
The Company believes that new object-based functionality will play a key
role in the competitive manufacturing, distribution, financial, planning
and service/support management information technology strategies of
customers in the Company's targeted industry segments. The Company is also
currently in the process of converting its MFG/PRO software modules to
object-oriented technology where the Company believes such conversion will
add value. There can be no assurance that the Company will be successful in
developing its new supply chain management software or converting its
MFG/PRO software to object-oriented technology on a timely basis, if at
all, or that if developed or converted such software will achieve market
acceptance. The failure to successfully incorporate object-oriented
technology in new products or convert MFG/PRO software to object-oriented
technology could have a material adverse effect on the Company's business,
operating results and financial condition.
8) DEPENDENCE UPON DEVELOPMENT AND MAINTENANCE OF SALES AND MARKETING CHANNELS
The Company sells and supports its products through direct and indirect
sales organizations throughout the world. The Company has made significant
expenditures in recent years in the expansion of its sales and marketing
force, primarily outside the United States, and plans to continue to expand
its sales and marketing force. The Company's future success will depend in
part upon the productivity of its sales and marketing force and the ability
of the Company to continue to attract, integrate, train, motivate and
retain new sales and marketing personnel. Competition for sales and
marketing personnel in the software industry is intense. There can be no
assurance that the Company's sales and marketing organization will be able
to compete successfully against the significantly more extensive and better
funded sales and marketing operations of many of the Company's current and
potential competitors. If the Company were unable to develop and manage its
sales and marketing force expansion effectively, the Company's business,
operating results and financial condition would be materially adversely
affected.
The Company's indirect sales channel consists of over 40 distributors
worldwide. The Company does not grant exclusive rights to any of its
distributors. The Company's distributors primarily sell independently to
companies within their geographic territory but may also work in
conjunction with the Company's direct sales organization. The Company will
need to maintain and expand its relationships with its existing
distributors and enter into relationships with additional distributors in
order to expand the distribution of its products. The failure by the
Company to maintain successfully its existing distributor relationships or
to establish new relationships in the future would have a material adverse
effect on the Company's business, results of operations and financial
condition.
9) COMPETITION
The ERP software market is highly competitive, rapidly changing and
affected by new product introductions and other market activities of
industry participants. The Company currently competes primarily with (i)
other vendors of software focused on the specific needs of manufacturing
plants and distribution sites of multinational manufacturing companies,
which include Baan Company N.V. ("Baan"), J.D. Edwards & Company ("J.D.
Edwards") and Systems Software Associates, Inc. ("SSA"), (ii) smaller
independent companies that have developed or are attempting to develop
advanced
<PAGE>
planning and scheduling software which complement or compete with ERP or
manufacturing resource planning solutions, (iii) internal development
efforts by corporate information technology departments and (iv) companies
offering standardized or customized products on mainframe and/or mid-range
computer systems. The Company expects that competition for its MFG/PRO
software will increase as other large companies such as Oracle and SAP AG
("SAP"), as well as other business application software vendors, enter the
market for plant-level ERP solutions. With the Company's strategic entry
into the supply chain management software market, the Company can expect to
meet substantial additional competition from companies presently serving
that market, such as i2 Technologies, Inc. ("i2"), Industri-Matematik
International, Inc. ("IMI") and Manugistics, Inc. ("Manugistics"), as well
as from broad based solution providers such as Baan, Oracle, PeopleSoft,
Inc. ("PeopleSoft") and SAP that the Company believes are increasingly
focusing on this segment. In addition, certain competitors, such as Baan,
Oracle, PeopleSoft and SAP, have well-established relationships with
present or potential customers of the Company. The Company may also face
market resistance from potential customers with large installed legacy
systems because of their reluctance to commit the time, effort and
resources necessary to convert to an open, client/server-based software
solution. Further, as the client/server market continues to develop,
companies with significantly greater resources than the Company may attempt
to increase their presence in these markets by acquiring or forming
strategic alliances with competitors of the Company. Increased competition
is likely to result in price reductions, reduced operating margins and loss
of market share, any one of which could materially adversely affect the
Company's business, operating results and financial condition. Many of the
Company's present or future competitors have longer operating histories,
significantly greater financial, technical, marketing and other resources,
greater name recognition and a larger installed base of customers than the
Company. As a result, they may be able to respond more quickly to new or
emerging technologies and to changes in customer requirements, or to devote
greater resources to the development, promotion and sale of their products,
than can the Company. The Company believes that the principal factors on
which it competes in the ERP software market are functionality, ease of use
and implementation, technology, time to benefit, supplier viability,
service and cost. The Company intends to continue to acquire, develop and
allocate its resources to focus on these targeted competitive areas, as
well as to identify additional or different areas where the Company
perceives competitive advantage. There can be no assurance that the Company
will be able to compete successfully with existing or new competitors or
that competition will not have a material adverse effect on the Company's
business, operating results and financial condition.
10) RELIANCE ON AND NEED TO DEVELOP ADDITIONAL RELATIONSHIPS WITH THIRD PARTIES
The Company has established strategic relationships with a number of
consulting and systems integration organizations that it believes are
important to its worldwide sales, marketing, service and support activities
and the implementation of its products. The Company is particularly reliant
on third parties for installation and implementation of its products
because the Company, unlike a number of its competitors, does not provide
these services. If the Company is unable to train adequately a sufficient
number of system integrators or, if for any reason, any such integrators
terminate their relationship with the Company or do not have or devote the
resources satisfactory to provide necessary consulting and implementation
of the Company's products, the Company's business, operating results and
financial condition could be materially and adversely affected. The Company
expects to continue to rely upon such third parties, particularly
installation and implementation service providers, for marketing and sales,
lead generation, product installation and implementation, customer support
services, product localization, end-user training assistance in the sales
process and after-sale training and support. These relationships also
assist the Company in keeping pace with the technological and marketing
developments of major software vendors, and, in certain instances, provide
it with technical assistance for its product development efforts.
Organizations providing such consulting and systems integration and
implementation services in connection with the Company's products include
Arthur Andersen LLP, Deloitte & Touche LLP, Ernst & Young LLP, Integrated
Systems & Services, LLC and Strategic Information Group International, Inc.
in the United States, BDM Largotim US, Inc., CSBI S.A., Origin Technology
in Business Nederland B.V. and Sligos S.A. in Europe and Iris Ifec Co., Ltd
and STCS Systems Pte Ltd in Asia. In most cases distributors will also
deliver consulting and systems integration services. The Company will need
to expand its relationships with these parties and enter into relationships
with additional third parties in order to expand the distribution of its
products. . The failure by the Company to maintain its existing
relationships or to establish new relationships in the future, or the
failure of such third parties to meet the needs of the Company's customers,
would have a material adverse effect on the Company's business, results of
operations and financial condition. In addition, if such third parties
exclusively adopt a product or technology other than the Company's products
or technology, or if such third parties materially reduce their support of
the Company's
<PAGE>
products and technology or materially increase such support for competitive
products or technology, the Company's business, operating results and
financial condition will be materially and adversely affected.
The Company typically enters into separate agreements with each of its
installation and implementation partners that provide such partners with
the non-exclusive right to promote and market the Company's products, and
to provide training, installation, implementation and other services for
the Company's products, within a defined territory for a specified period
of time (generally two years). Although the Company's installation and
implementation partners do not receive fees for the sale of the Company's
software products, they generally are permitted to set their own rates for
such services and the Company typically does not collect a royalty or
percentage fee from such partners on services performed. The Company also
enters into similar agreements with its distribution partners that grant
such partners the non-exclusive right, within a specified territory, to
market, license, deliver and support the Company's products. In exchange
for such distributors' services, the Company grants a discount to the
distributor for the license of its software products. The Company also
relies on third parties for the development or inter-operation of key
components of its software so that users of the Company's software will
obtain the functionality demanded. Such research and product alliances
include software developed to be sold in conjunction with the Company's
software products, technology developed to be included in or encapsulated
within the Company's software products and numerous third-party software
programs that generally are not sold with the Company's software but
inter-operate directly with the Company's software through application
program interfaces. The Company generally enters into joint development
agreements with its third-party software development partners that govern
ownership of the technology collectively developed. Each of the Company's
partner agreements and third-party development agreements contain strict
confidentiality and non-disclosure provisions for the service provider, end
user and third-party developer and the Company's third-party development
agreements contain restrictions on the use of the Company's technology
outside of the development process. The failure of the Company to establish
or maintain successful relationships with such third-party software
providers or such third-party installation, implementation and development
partners or the failure of such third-party software providers to develop
and support their software could have a material adverse effect on the
Company's business, operating results and financial condition.
<PAGE>
Part II - Other Information
QAD Inc.
Item 1 - Legal Proceedings
None
Item 2 - Changes in Securities
See discussion in Management's Discussion and Analysis
Item 3 - Defaults upon Senior Securities
None
Item 4 - Submission of Matters to a Vote of Security Holders
None
Item 5 - Other Information
None
Item 6 - Exhibits and Reports on Form 8-K
a) Exhibits
27 Financial Data Schedule (filed only electronically with the SEC)
b) Reports on Form 8-K
No reports on Form 8-K were filed during the third quarter of 1997
<PAGE>
Signature
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.
QAD INC.
(Registrant)
Date: December 12, 1997 By: /s/ KARL F. LOPKER
--------------------------
Karl F. Lopker
Chief Executive Officer and
Chief Financial Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED
CONSOLIDATED BALANCE SHEET AS OF OCTOBER 31, 1997 AND THE CONDENSED CONSOLIDATED
STATEMENT OF INCOME FOR THE QUARTER ENDED OCTOBER 31, 1997 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-END> OCT-31-1997
<CASH> 65,078
<SECURITIES> 0
<RECEIVABLES> 65,577
<ALLOWANCES> (5,081)
<INVENTORY> 0
<CURRENT-ASSETS> 132,592
<PP&E> 39,047
<DEPRECIATION> (15,992)
<TOTAL-ASSETS> 164,675
<CURRENT-LIABILITIES> 57,656
<BONDS> 73
0
0
<COMMON> 98,133
<OTHER-SE> 7,118
<TOTAL-LIABILITY-AND-EQUITY> 105,251
<SALES> 49
<TOTAL-REVENUES> 44,022
<CGS> 9
<TOTAL-COSTS> 28,996
<OTHER-EXPENSES> 12,524
<LOSS-PROVISION> 184
<INTEREST-EXPENSE> 655
<INCOME-PRETAX> 3,180
<INCOME-TAX> 1,795
<INCOME-CONTINUING> 1,385
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,385
<EPS-PRIMARY> 0.05
<EPS-DILUTED> 0
</TABLE>
