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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 July 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
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Commission File Number
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QAD INC.
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(Exact name of registrant as specified in its charter)
Delaware; 77-0462381
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
6450Via Real, Carpinteria, California 93013
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(805) 681-6614
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(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 September 11, 1997 is 29,100,760.
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QAD, Inc.
Index
Part I
Financial Information Page
Item 1 Financial Statements
Consolidated Statements of Income
Three-Month and Six-Month Periods ended
July 31, 1997 and July 31, 1996 1
Condensed Consolidated Balance Sheets at
July 31, 1997 and January 31, 1997 2
Condensed Consolidated Statements of Cash Flows
Six-Month Periods ended
July 31, 1997 and July 31, 1996 3
Notes to Condensed Consolidated Financial
Statements 4
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 6
Part II
Other Information
Item 1 Legal Proceedings 14
Item 2 Changes in Securities 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
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Part I - Financial Information
QAD, Inc.
Consolidated Statements of Income
(Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JULY 31 ENDED JULY 31,
1996 1997 1996 1997
<S> <C> <C> <C> <C>
Revenue:
License Fees 23,151 24,959 34,221 44,107
Maintenance and other 10,404 16,702 19,450 29,626
------ ------ ------ ------
Total Revenues 33,555 41,661 53,671 73,733
Cost and expenses:
Cost of revenues 7,177 10,273 14,040 18,719
Sales and marketing 12,395 18,818 26,111 32,206
Research and development 5,438 6,726 11,359 12,806
General and administrative 3,000 4,333 6,774 8,063
------ ------ ------ ------
Total cost and expenses 28,010 40,150 58,284 71,794
Operating income (loss) 5,545 1,511 (4,613) 1,939
Other (income) expense:
Total other (income) expense 396 307 679 (99)
--- --- --- ----
Income (loss) before income taxes 5,149 1,204 (5,292) 2,038
Income tax expense (benefit) 1,636 463 (1,488) 737
----- --- ------- ---
Net income $ 3,513 $ 741 $ (3,804) $ 1,301
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
Net income per share $ 0.15 $ 0.03 $ (0.16) $ 0.05
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
Shares used in computation 23,146 24,115 23,119 24,069
Net income per share (pro forma) $ 0.14 $ 0.04 $ (0.11) $ 0.08
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
Shares used in computation 28,135 29,104 28,108 29,058
</TABLE>
See accompanying notes to the Condensed Consolidated Financial Statements
1
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QAD, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Assets JANUARY 31, JULY 31,
1997 1997
----------- -----------
<S> <C> <C>
Current assets:
Cash $ 301 952
Trade accounts receivable, net of allowances of $3,694
for January 31,1997 and $4,646 for July 31, 1997 46,745 55,188
Deferred income taxes 4,816 3,560
Other current assets 2,112 2,975
----------- -----------
Total current assets 53,974 62,675
Property and equipment, net 18,071 21,651
Capitalized software, net 1,065 1,428
Other assets, net 1,986 2,575
Deferred income taxes 2,154 4,718
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$ 77,250 93,047
----------- -----------
----------- -----------
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable and current installments of long-term debt $ 8,465 17,191
Accounts Payable and Accrued liabilities 22,142 23,216
Income taxes payable 741 505
Deferred revenue and deposits 28,602 34,859
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Total current liabilities 59,950 75,771
Long-term debt, less current installments 5,036 3,631
Other deferred liabilities 1,460 1,673
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
22,490,660 at July 31, 1997 5,942 6,308
Retained earnings 7,539 8,840
Stockholder's Receivable (197) (397)
Unearned compensation - restricted stock (2,129) (2,245)
Cumulative foreign currency translation adjustments (351) (534)
----------- -----------
Total stockholders' equity 10,804 11,972
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$ 77,250 93,047
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to condensed consolidated financial statements
2
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QAD, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
For the Six Month Periods Ended
-------------------------------
July 31, July 31,
1996 1997
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<S> <C> <C>
Net cash provided by (used in) operating activities $ 6,858 $ (558)
Investing activities:
Additions to land & building (125) (198)
Purchases of Property and Equipment (2,040) (5,929)
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Net cash used in investing activities $ (2,165) $ (6,127)
Financing activities:
Borrowings Under Line of Credit - 9,374
Repayments of Line of Credit & debt (4,196) (2,053)
Proceeds from issuance of common stock - 215
Repurchases of common stock (85) -
Loans to stockholders (8) (200)
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Net cash provided by (used in) financing activities $ (4,289) $ 7,336
Increase in cash $ 404 $ 651
--------- --------------
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Cash at beginning of period $ 1,463 $ 301
Cash at end of period $ 1,867 $ 952
</TABLE>
See accompanying notes to consolidated financial statements
3
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QAD, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
The Condensed Consolidated Balance Sheet as of July 31, 1997, the Condensed
Consolidated Statements of Income for the three-month and six-month periods
ended July 31, 1997 and 1996 and the Condensed Consolidated Statements of
Cash Flows for the six-month periods ended July 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 July 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 six-month periods ended July 31,
1997 are not necessarily indicative of the operating results for the full year.
2. Recent Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128 Earnings Per Share.
The overall objective of the Statement No. 128 is to simplify the calculation of
earnings per share by excluding the dilutive effect of stock options and
warrants from the "basic" earnings per share calculation. The statement is
effective for interim and annual financial statements for the periods ending
after December 31, 1997 and earlier application is not permitted. The Company
will not be required to adopt such statement until after its first quarter of
fiscal 1999 and such adoption, when effective, is not expected to result in a
materially different disclosure of "dilutive" earnings per share than currently
disclosed.
Additionally, the FASB has issued two new 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.
Currently the Company is evaluating the effect of these new statements.
3. Subsequent Event
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, $19.9 million of
which 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. The unaudited pro forma information below presents
the consolidated performance and financial position as if the offering had
occurred at the beginning of the period.
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QAD, Inc.
Pro Forma Condensed Consolidated Balance Sheet
(Unaudited)
(In thousands)
July 31,
1997
----
Assets
Current Assets
Cash $ 73,333
Trade accounts receivable, net of
allowances of $4,646 55,188
Other current assets 5,515
--------
Total current assets 134,036
Property and equipment, net 21,651
Capitalized software, net 1,428
Other long term assets 7,293
-------
Total assets $ 164,408
-------
-------
Liabilities and Stockholders' Equity
Current liabilities
Notes payable and current
installments of long-term debt $ 183
Accounts payable and accrued liabilities 23,590
Income taxes payable 505
Deferred revenue and deposits 34,859
------
Total current liabilities 59,137
Long-term debt, less current installments 776
Other deferred liabilities 1,673
Stockholders' equity
Preferred Stock, no par value. Authorized
5,000,000; none issued and outstanding
Common stock, no par value. Authorized
150,000,000 shares; issued and outstanding
29,103,160 shares at July 31, 1997 97,158
Retained earnings 8,840
Receivable from stockholders (397)
Unearned compensation -
restricted stock (2,245)
Cumulative for. currency
translation adjustment (534)
------
Total stockholders' equity 102,822
-------
Total liabilities and
stockholders' equity $ 164,408
-------
-------
Additionally, interest expense would have been reduced by $.9 million and $.7
million had the offering occurred at the beginning of the six month periods
ended July 31, 1997 and 1996, respectively, and by $.5 million and $.4 million
had the offering occurred at the beginning of the three month periods ended July
31, 1997 and 1996, respectively. Refer to the Condensed Consolidated Statements
of Income on page 1 for the per share effect of this pro forma adjustment.
5
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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 SEC. These factors,
among other things, could cause actual results to differ materially from
historical results or those currently anticipated.
RESULTS FOR THE QUARTERS ENDED JULY 31, 1997 AND 1996:
TOTAL REVENUES. Total revenues for the three months ended July 31, 1997
increased 24% to $41.7 million from $33.6 million in the same period in fiscal
1997. For the three months ended July 31, 1997, maintenance and other revenue as
a percentage of total revenues increased to 40% as compared to 31% in the same
period in 1996. The increase in total revenues this period was primarily due to
continued growth in the Company's targeted vertical markets and revenues
received from EXPLORE '97, the Company's world-wide user conference. License
fees continue to be the Company's major revenue source, accounting for $25.0
million in revenues, ahead of $23.2 in the prior year.
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 and the costs
associated with the reproduction and delivery of the Company's software.
During the three months ended July 31, 1997, cost of revenues increased 43%
to $10.3 million (24.7% of total revenues) from $7.2 million (21.4% of total
revenues) in the same period in fiscal 1997. The increase in dollar amount
and as a percentage of total revenues was due to higher direct support costs
needed to support a larger customer base and to cost incurred creating
localization enhancements for international markets. Additionally, growth in
revenues of reselling third-party databases resulted in comparatively higher
related costs of revenue.
SALES AND MARKETING. Sales and marketing expense consists primarily of salaries
and associated fringe benefits, travel and entertainment expenses and
promotional and advertising costs. During the three months ended July 31, 1997,
sales and marketing expense increased 52% to $18.8 million (45.2% of total
revenues) from $12.4 million (36.9% of total revenues). The increase, both in
dollars and as a percentage of total revenues, is attributable primarily to the
expansion of the Company's global sales force as well as a salary restructure
that affected all employees in the second quarter of fiscal 1997. Additionally,
the second quarter of fiscal 1998 includes substantial expenses related to
EXPLORE '97, the corresponding event occurred in the first quarter of the prior
year.
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 July 31, 1997, research and development expense increased
24% to $6.7 million (16.1% of total revenues) from $5.4 million (16.2% of
total revenues) in the same period during fiscal 1997. Increased expenses
were due primarily to increased activity related to 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. The amount
of 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 July 31, 1997,
general and administrative expense increased 44% to $4.3 million (10.4% of total
revenues) from $3.0 million (8.9% of total revenues) in the same period in
fiscal 1997. Increased expenses were due to increased personnel necessary to
support
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the Company's global growth and expansion as well as a salary restructure that
affected all employees in the second quarter of fiscal 1997. Additionally, the
Company accrued charges for final payments to its prior profit sharing plan as
well as charges to reduce general exposure in its emerging markets.
TOTAL OTHER (INCOME) EXPENSE. Total other (income) expense is composed
primarily of interest expense, interest income and foreign exchange gains and
losses as well as other miscellaneous income and expense. During the three
months ended July 31, 1997, other expense decreased to $ 0.3 million from
$0.4 million in the prior year primarily due to miscellaneous rental income.
RESULTS FOR THE SIX MONTHS ENDED JULY 31, 1997 AND 1996
TOTAL REVENUES. Total revenues for the six months ended July 31, 1997 increased
37% to $73.7 million from $53.7 million for the same period in fiscal 1997. For
the six months ended July 31, 1997, license fee revenue continued to be the
Company's major source of revenue, accounting for 60% of the total revenue. The
increase in total revenue was due to the Company's strengthened global presence
and continued growth of, and market penetration into QAD's targeted vertical
markets.
COST OF REVENUES. During the six months ended July 31, 1997, cost of revenues
increased 33% to $18.7 million (25.4% of total revenues) from $14.0 million
(26.2% of total revenues) for the same period in fiscal 1997. The increase 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 six months ended July 31, 1997, sales and
marketing expense increased 23% to $32.2 million (43.7% of total revenues) from
$26.1 million (48.7% of total revenues) for the same period in fiscal 1997. The
increase in dollars was attributable to the expansion of the Company's global
sales force. The decrease as a percentage of total revenue was due to
nonrecurring marketing infrastructure expenses that were made in the first
quarter of fiscal 1997.
RESEARCH AND DEVELOPMENT. During the six months ended July 31, 1997, research
and development expense increased 13% to $12.8 million (17.4% of total revenues)
from $11.4 million (21.2% of total revenues) in the same period during fiscal
1997. This increase in expenses was due primarily to increased activity related
to the development of On/Q software. Increased expenses were offset by funds
that the Company received from third parties as a result of joint venture
research and development projects. The decrease in research and development
expense as a percentage of total revenues was primarily the result of a
reduction in the utilization of third-party software developers in the first
quarter of fiscal 1997.
GENERAL AND ADMINISTRATIVE. During the six months ended July 31, 1997, general
and administrative expense increased 19% to $8.1 million (10.9% of total
revenues) from $6.8 million (12.6% of total revenues) in the same period in
fiscal 1997. Increased expenses were due to added personnel necessary to support
the infrastructure created by global growth and expansion. Additionally, the
Company accrued charges for final payments to its prior profit sharing plan as
well as charges to reduce general exposure in its emerging markets.
TOTAL OTHER (INCOME) EXPENSE. During the six months ended July 31, 1997, other
(income) expense increased to $ (0.1) million from an expense of $0.7 million.
This increase was primarily the result of foreign currency translation gains and
miscellaneous rental income.
LIQUIDITY AND CAPITAL RESOURCES
The Company typically finances its operations and meets its capital expenditure
requirements through cash flows from operations as well as short and long term
borrowings. At July 31, 1997, the Company had about $1.0 million in cash. Cash
flows provided by (used in) operating activities were $ (.6) million and $6.9
million for the six months ended July 31, 1997 and 1996, respectively. Cash
used in investing activities was primarily related to the purchase of computer
equipment and office furniture and aggregated $6.1 million and $2.2 million in
the six months ended July 31, 1997 and 1996, respectively. Cash flows from
financing activities in the six months ended July 31, 1997 and 1996 were
primarily related to proceeds from (used in) borrowings and totaled $7.3 million
and $(4.3) million, respectively. At July 31, 1997, the Company had no material
commitments for capital expenditures.
At July 31, 1997, the Company had a working capital deficit of $13.1 million.
Accounts receivable, net of allowance for doubtful accounts, increased to $55.2
million from $46.7 million at January 31, 1997. The Company's accounts
receivable days' sales outstanding ("DSO"), calculated on a quarterly basis has
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demonstrated seasonal fluctuations. For the three months ended July 31, 1997,
DSO was 119 which represents an increase from 86 days for the quarter 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. If the Company is
unsuccessful in reducing the days' sales outstanding, it could impair the
Company's cash position. Total deferred revenue increased to $32.9 million at
July 31,1997 from $29.1 million at January 31, 1997 primarily as a result of
increased billings of maintenance agreements.
The Company had a revolving credit agreement which was retired on August 11,
1997. The total amount of available borrowings under the revolving credit
agreement at July 31, 1997 was approximately $20 million. Borrowings under the
revolving credit agreement bore interest, calculated monthly, at an annual rate
equal to the highest LIBOR rate in effect during the month plus 4.875% but in no
event less than 8%. Minimum monthly interest charges are $20,000 (resulting in
a rate of 10.595% at July 31, 1997). At July 31, 1997 the Company had
approximately $16.9 million of borrowings outstanding under the revolving credit
agreements. The Company's revolving credit agreement was collateralized by a
security interest in substantially all of the Company's assets. At July 31,
1997, the Company also had outstanding borrowings of $3.9 million under
additional term loan agreements and capital leases with other various credit
institutions, which included approximately $3.4 million with maturities of one
year or less, at interest rates of approximately 9.94% per annum. These term
loans and capitalized leases are secured primarily by property and equipment.
Amounts outstanding under these additional credit agreements are scheduled to be
paid in monthly installments over varying maturities through July 2002.
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, $19.9 million of which it used to repay and
retire most of its debt, including the revolving credit agreement and its fixed
asset and real estate loan agreements. 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 proceeds of approximately $12.0 million.
On August 4, 1997, the Company signed a new revolving credit agreement with
Bank of America, which expires by August 4, 1999. The maximum available
amount of borrowings under the revolving credit agreement is $20 million and
the loan is secured by the Company's assets. The total amount of available
borrowings under the revolving credit agreement as of September 12, 1997 was
approximately $20 million. Borrowings under the revolving credit agreement
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.
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
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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.
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.
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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 is
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
10
<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 is 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 planning and scheduling software which complement or compete with
ERP or manufacturing resource
11
<PAGE>
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 & Co. 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 products and technology or materially increase
such support for competitive products or technology,
12
<PAGE>
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.
13
<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
11 QAD Inc. primary and fully diluted earnings per common and common
equivalent shares for the three months ended July 31, 1997 and 1996
11.1 QAD Inc. primary and fully diluted earnings per common and common
equivalent shares for the six months ended July 31, 1997 and 1996
27 Financial Data Schedule (filed only electronically with the SEC)
a) Reports on Form 8-K
No reports on Form 8-K were filed during the second quarter of 1997
14
<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: September 15, 1997 By:
Dennis R. Raney
Senior Vice President, Finance and
Administration and Chief Financial
Officer (Principal Financial and
Accounting Officer and Duly Authorized
Officer of the Registrant)
<PAGE>
Exhibit 11
QAD Inc.
Primary and Pro Forma Earnings Per Common and Common Equivalent Share
Three Months Ended July 31, 1997 and 1996
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
July 31, 1997 July 31, 1996
<S> <C> <C>
Net Income $ 741 $ 3,513
Add:
Interest expense on purchased debt 488 383
-------- --------
Proforma Net Income $ 1,229 $ 3,897
EARNINGS PER COMMON AND COMMON EQUIVALENT
SHARE - PRIMARY
Weighted Average Common Shares
Outstanding 22,505 21,141
Weighted Average Shares of Common Stock
and equivalents issued during the 12
months preceding the initial public offering 761 761
Stock Options 849 1,244
-------- --------
Common and Common Equivalent Shares 24,115 23,146
Net earnings per share - Primary $ 0.03 $ 0.15
-------- --------
-------- --------
EARNINGS PER COMMON AND COMMON EQUIVALENT
SHARE - PROFORMA
Weighted Average Common Shares
Outstanding 28,255 26,891
Stock Options 849 1,244
-------- --------
Common and Common Equivalent Shares 29,104 28,135
Net earnings per share - Proforma $ 0.04 $ 0.14
-------- --------
-------- --------
</TABLE>
<PAGE>
Exhibit 11.1
QAD Inc.
Primary and Pro Forma Earnings Per Common and Common Equivalent Share
Six Months Ended July 31, 1997 and 1996
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Six Months Ended
July 31, 1997 July 31, 1996
<S> <C> <C>
Net Income $ 1,301 $ (3,804)
Add:
Interest expense on purchased debt 915 738
-------- ---------
Proforma Net Income $ 2,216 $ (3,066)
EARNINGS PER COMMON AND COMMON EQUIVALENT
SHARE - PRIMARY
Weighted Average Common Shares
Outstanding 22,459 21,114
Weighted Average Shares of Common Stock
and equivalents issued during the 12
months preceding the initial public offering 761 761
Stock Options 849 1,244
-------- ---------
Common and Common Equivalent Shares 24,069 23,119
Net earnings per share - Primary $ 0.05 $ (0.16)
-------- ---------
-------- ---------
EARNINGS PER COMMON AND COMMON EQUIVALENT
SHARE - PROFORMA
Weighted Average Common Shares
Outstanding 28,209 26,864
Stock Options 849 1,244
-------- ---------
Common and Common Equivalent Shares 29,058 28,108
Net earnings per share - Proforma $ 0.08 $ (0.11)
-------- ---------
-------- ---------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF JULY 31, 1997 AND THE STATEMENT OF CONSOLIDATED
EARNINGS FOR THE QUARTER ENDED JULY 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> MAY-01-1997
<PERIOD-END> JUL-31-1997
<CASH> 952
<SECURITIES> 0
<RECEIVABLES> 59,834
<ALLOWANCES> (4,646)
<INVENTORY> 0
<CURRENT-ASSETS> 62,675
<PP&E> 36,230
<DEPRECIATION> (14,579)
<TOTAL-ASSETS> 93,047
<CURRENT-LIABILITIES> 75,771
<BONDS> 3,631
0
0
<COMMON> 6,308
<OTHER-SE> 5,664
<TOTAL-LIABILITY-AND-EQUITY> 93,047
<SALES> 727
<TOTAL-REVENUES> 41,661
<CGS> 102
<TOTAL-COSTS> 29,091
<OTHER-EXPENSES> 11,059
<LOSS-PROVISION> 578
<INTEREST-EXPENSE> 449
<INCOME-PRETAX> 1,204
<INCOME-TAX> 463
<INCOME-CONTINUING> 741
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 741
<EPS-PRIMARY> 0.03
<EPS-DILUTED> 0
</TABLE>
