UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 31, 1998
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 0-22823
QAD INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0462381
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
6450 VIA REAL, CARPINTERIA, CALIFORNIA 93013
(Address of Principal Executive Offices)
805-684-6614
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock, $.001
par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] YES [ ] NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant, based on the closing price for the
registrant's Common Stock in the Nasdaq National Market on April 20, 1998, was
approximately $441,090,420. This calculation does not reflect a determination
that certain persons are affiliates of the registrant for any other purposes.
The number of outstanding shares of the registrant's Common Stock as of the
close of business on April 20, 1998 was 29,163,003.
DOCUMENTS INCORPORATED BY REFERENCE
Items 10,11,12 and 13 of Part III incorporate information by reference from the
definitive proxy statement for the registrant's Annual Meeting of Stockholders
to be held on June 30, 1998.
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QAD INC.
FISCAL YEAR 1998 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Page
PART I
ITEM 1. BUSINESS..........................................................1
ITEM 2. PROPERTIES.......................................................18
ITEM 3. LEGAL PROCEEDINGS................................................18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..............18
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS..........................................................19
ITEM 6. SELECTED FINANCIAL DATA (in thousands, except per share data)....20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS............................................20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA......................40
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.............................................40
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..............41
ITEM 11. EXECUTIVE COMPENSATION..........................................41
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..41
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................41
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.42
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Forward Looking Statement
In addition to historical information, this form 10-K contains
forward-looking statements. These forward-looking statements are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those reflected in these forward-looking statements. Factors
that might cause such a difference include, but are not limited to, those
discussed in the sections entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Factors That May Affect
Future Results and Market Price of Stock." Readers are cautioned not to place
undue reliance on these forward-looking statements, which reflect management's
opinions only as of the date hereof. The Company undertakes no obligation to
revise or publicly release the results of any revision to these forward-looking
statements. Readers should carefully review the risk factors described in other
documents the Company files from time to time with the Securities and Exchange
Commission, including the Quarterly Reports on Form 10-Q to be filed by the
Company in fiscal year ended January 31, 1999.
PART I
ITEM 1. BUSINESS
The Company is a provider of supply chain enabled Enterprise Resource
Planning ("ERP") software for multinational and other large manufacturing
companies. The Company's software solutions are designed to facilitate global
management of resources and information to allow manufacturers to reduce order
fulfillment cycle times and inventories, improve operating efficiencies and
measure critical company performance criteria against defined business plan
objectives. The flexibility of the Company's products also helps manufacturers
adapt to growth, organizational change, business process reengineering, supply
chain management and other challenges.
The Company's principal product, MFG/PRO software, is specifically designed
for deployment at the plant or division level of global manufacturers in five
targeted industry segments: electronics/industrial, food/beverage, consumer
packaged goods, medical and automotive. MFG/PRO software provides multinational
organizations with an integrated ERP solution that is based on an open,
client/server architecture and includes manufacturing, distribution, financial
and service/support management applications. Additionally, the Company is
currently focused on extending its presence in multi-site manufacturing by
developing a line of object-oriented, supply chain management solutions, named
On/Q software. The Company's initial On/Q software product, Outbound Logistics,
is designed to allow for consolidation of orders, contract management, shipping
and logistics management. Outbound Logistics is currently in development and its
initial release is expected to be commercially available in the second half of
calendar year 1998. As of January 31, 1998, the Company had licensed MFG/PRO
software at approximately 3,600 sites to approximately 1,900 customers in more
than 80 countries. The Company's customers include Cargill, Inc.,
Colgate-Palmolive Company, Johnson Controls, Inc., Johnson & Johnson, Lucent
Technologies, Inc., Philips Electronics N.V., St. Jude Medical, Inc., Unilever
N.V., United Technologies Automotive, Genzyme Corp. and AT&T.
The Company was founded in 1979 and was incorporated in California as qad.inc in
1986. In February 1997, the Company's name was changed to QAD Inc. The Company
was reincorporated in Delaware in July 1997. The Company's executive offices are
located at 6450 Via Real, Carpinteria, California 93013, and its telephone
number is (805) 684-6614. "QAD," "Qwizard" and "On/Q" are trademarks and
"MFG/PRO" is a registered trademark of the Company. This form 10-K also contains
trademarks and registered trademarks of persons and companies other than QAD.
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Industry Background
In recent years, businesses have been subject to increasing global
competition, resulting in pressure to lower production costs, improve product
performance and quality, increase responsiveness to customers and shorten
product development and delivery cycles. In addition, globalization has greatly
increased the scope and complexity of multinational manufacturing organizations.
Through business process reengineering, many organizations have begun to
reengineer their critical business processes and restructure their organizations
to accommodate and exploit rapid changes in the business environment. As part of
this process, businesses are seeking ERP software solutions which will enable
them to better manage resources across the enterprise and facilitate the
integration of sales management, component procurement, inventory management,
manufacturing control, project management, distribution, transportation, finance
and other functions on a global basis. While historically many companies have
developed their ERP software internally, companies are increasingly deploying
open, client/server-based ERP applications developed by third parties which
reduce internal software development costs and enable increased flexibility and
inter-operability across a broad range of hardware and software platforms. The
Gartner Group has estimated that the global ERP software market totaled more
than $6.2 billion in 1997 and will grow to an estimated $10.0 billion by the
year 2000.
While current ERP software enables the integration and management of
critical data within enterprises, organizations increasingly are recognizing the
need to deploy new software systems that manage the global supply chain by
enhancing the flow of information to and from customers, suppliers and other
business partners outside the enterprise. More recently, the availability and
use of the Internet has created a demand for software, which will operate across
the Internet to enhance business-to-business electronic commerce.
The Company believes that the increasing complexity and diversity of
customer requirements limits the ability of any single-vendor solution to fully
meet the enterprise-wide needs of its customers and has led to the emergence of
three distinct segments within the ERP software market: (i) corporate;
(ii) plant; and (iii) supply chain management.
Corporate ERP solutions are primarily focused on the consolidated data
management, financial and human resource needs of large Fortune 1000 companies.
Leading vendors of corporate level solutions include Oracle Corporation
("Oracle"), PeopleSoft, Inc. ("PeopleSoft") and SAP AG ("SAP"). While corporate
ERP systems offer robust functionality, the Company believes that the very broad
scope, significant cost and limited flexibility of many of these systems limit
their effectiveness in addressing the needs of individual plants or divisions.
In addition, this limited flexibility makes these systems difficult to deploy
throughout the enterprise.
Plant ERP solutions are primarily focused on the specific needs of
manufacturing plants and distribution sites of global companies, such as
manufacturing planning, production control and distribution. Leading vendors of
plant ERP solutions include the Company, Baan Company N.V. ("Baan"), J.D.
Edwards & Company ("J.D. Edwards") and Systems Software Associates, Inc.
("SSA"). Given the diverse and constantly changing needs of manufacturing and
distribution sites, ERP users demand highly flexible, industry-specific plant
ERP solutions that can be deployed rapidly and cost-effectively across multiple
sites on a global basis.
Supply chain management solutions are designed to link a company more
closely with customers, suppliers and other business partners in order to
optimize manufacturing and distribution processes, reduce costs and enhance
customer satisfaction. Supply chain
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management functions include logistics and order management, advanced planning
and scheduling, global purchasing, and sales and support management. Leading
vendors in the supply chain management market include i2 Technologies, Inc.
("i2"), Industri-Matematik International, Inc. ("IMI") and Manugistics Group,
Inc. ("Manugistics"), as well as certain corporate level ERP software vendors.
The Company believes that supply chain management represents one of the greatest
current opportunities for companies to reduce costs and enhance customer
relationships.
Market Opportunity
While ERP solutions have provided significant benefits to companies by
centralizing and integrating the management of enterprise-wide data, the Company
believes that customer requirements for industry-specific functionality,
flexibility and ease of implementation pose significant challenges for many ERP
vendors. As a result, the Company believes that there is a large and rapidly
growing market demand for industry-specific software solutions that meet
customers' needs for plant-level deployments and global supply chain management.
The Company believes that the adoption of open, client/server-based ERP
solutions at the plant level will accelerate as potential customers transition
from proprietary, legacy systems in coming years. In addition, the Company
believes that supply chain management represents a compelling market
opportunity. To be successful in meeting customer requirements in these market
segments, the Company believes ERP software vendors must:
Offer localized, multi-language, multi-currency functionality to
support global deployments;
Offer industry-specific product functionality and expertise in key
vertical markets;
Provide global service and support, either directly or through third
parties;
Offer ease of implementation and rapid time to benefit;
Provide flexibility to meet the diverse needs and business practices
of global, multi-site manufacturing implementations;
Inter-operate and co-exist with corporate-level ERP solutions and
industry-leading supply chain management solutions;
Address supply chain management challenges by offering technology
which integrates and optimizes interactions between companies and
their customers, suppliers and other business partners; and
Develop and utilize advanced technologies to deliver superior product
functionality.
The QAD Solution
The Company is a leading provider of ERP software for multinational and other
large manufacturing companies. The Company's principal product, MFG/PRO
software, is a modular software program designed specifically to address the
plant-level needs of multinational manufacturers for flexible, inter-operable
and rapidly deployable ERP software solutions. Additionally, the Company is
currently focused on extending its presence in multi-site manufacturing by
developing a line of supply chain management solutions designed to serve the
needs of multinational manufacturing companies. The Company meets customer
requirements in its vertical markets by delivering the following:
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Global Solutions for Multinational Manufacturers. The Company focuses on
the plant-level ERP and supply chain management requirements of global
manufacturers. The Company's MFG/PRO software incorporates multi-currency
capabilities, is available in 26 languages and is tailored to local financial
practices and requirements in many of its major markets. The Company's customers
have deployed MFG/PRO software in more than 80 countries.
Expertise and Functionality for Key Vertical Markets. The Company targets
and has achieved leadership positions in the electronics/industrial,
food/beverage, consumer packaged goods, medical and automotive industries. The
Company believes that its substantial expertise in these markets, together with
its strategy of developing software modules that address specific industry
needs, provides the Company with a competitive advantage. For example, the
Company's MFG/PRO software includes features which facilitate United States Food
and Drug Administration ("FDA") compliance and validation for the medical
industry, advanced pricing and promotion management for the consumer packaged
goods industry, and customer/supplier scheduling via electronic data interchange
for the automotive industry.
Global Service and Support. The Company believes that a high level of
global service and support is a critical component of its ERP solution for
multinational manufacturers. The Company offers product service and support
directly through its sales and support offices in 19 countries and indirectly
through its global network of systems integration partners and distributors
located in more than 40 countries. The Company's systems integrator and
distributor network also offers consultant services for the implementation of
its software solutions.
Ease of Implementation. The modular product design of MFG/PRO software,
together with the Company's focus and expertise in its key vertical markets,
enables rapid product implementation, often within six months at a particular
site. Product modules are designed to address the specific needs of customers in
the Company's targeted markets, limiting the need for extensive customization
upon implementation. In addition, customers are able to implement only those
modules with functionality appropriate for their needs, limiting time-consuming
implementation and training for unneeded features.
Open, Client/Server-Based Solutions. The Company's products are based on an
open, client/server computing architecture. The Company believes that this
architecture enables superior flexibility and inter-operability and addresses
the desire of customers to migrate critical business software to an open
platform. MFG/PRO software operates in Windows NT and major UNIX environments on
more than 20 hardware platforms and is compatible with Oracle and Progress
databases.
The QAD Strategy
The Company's objectives are to expand its leadership position in
plant-level solutions and become a leading provider of supply chain management
software solutions to multinational manufacturers. The key elements of the
Company's strategy for achieving these objectives include the following:
Maintain and Leverage Leadership in Plant-Level Manufacturing. The Company
believes its MFG/PRO software is the leading open systems ERP solution for
plant-level deployments worldwide. As of January 31, 1998, the Company had
licensed MFG/PRO software at approximately 3,600 sites to approximately 1,900
customers in more than 80 countries. The Company's strategy is to continue to
aggressively pursue plant-level opportunities in its targeted markets to enhance
its leadership position. The Company believes that the success of its MFG/PRO
software provides a strong existing customer base from which to license
additional modules and additional users. In addition, the Company intends to
leverage its installed base of MFG/PRO software customers in order to accelerate
the adoption of On/Q software, the Company's new supply chain management
solution.
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Focus on Global Supply Chain Management Solutions. The Company believes
that supply chain optimization represents one of the greatest current
opportunities for companies to reduce costs and enhance customer relationships.
The Company is developing a group of new applications, known as On/Q software,
for this market. The initial product, Outbound Logistics, is being developed
specifically to meet demand-side requirements of multinational manufacturing
companies, including complex high-volume order processing, import/export
management, multiple-route segmentation and logistics, distribution point
optimization, lead and sales order management, contract management and
liquidation. In addition, the Company intends to develop additional
applications, including inbound logistics and planning, and to provide seamless
inter-operability with other industry leading supply chain management solutions
for scheduling. The Company believes that these new products, coupled with its
strength in plant-level ERP solutions and the Company's products' demonstrated
ability to inter-operate with other corporate applications, positions the
Company to succeed in the emerging supply chain management marketplace.
Leverage Alliances. The Company leverages the expertise of distribution,
implementation and technology partners to meet the diverse needs of its
customers. The Company augments its direct sales organization with a global
network of more than 40 distributors and numerous implementation providers. The
Company plans to leverage its network of distributors and implementation
providers to further penetrate its vertical markets. For implementation of its
software, the Company relies almost exclusively on third-party providers,
allowing the Company to maintain its focus on developing, marketing and
distributing its software. In addition, the Company has entered into a number of
joint development agreements with third-party software developers who provide
functionality that has been embedded into or integrated with MFG/PRO software to
deliver a more complete solution for its targeted vertical markets.
Maintain Technology Leadership. The Company was one of the first providers
of open, client/server-based ERP software and is committed to maintaining its
technology leadership. The Company's technology strategy is focused on migrating
its products to a component object architecture in order to enable customers to
improve inter-operability with existing software applications and to deploy and
integrate new "best of breed" software applications across the enterprise. The
Company believes inter-operability will become an important requirement of
software applications as organizations seek fully integrated ERP solutions. In
addition, the Company believes this object architecture will enable it to
provide enhanced functionality in its new On/Q software, which is currently
under development.
Capitalize on Year 2000 Compliance. Many companies are facing significant
business problems due to the failure of their existing ERP systems to
appropriately recognize years after 1999. The Company believes that this problem
will accelerate the migration to open, client/server-based ERP solutions that
are configured to handle this transition. The Company's products are year 2000
capable. The Company believes that it is well positioned to leverage its MFG/PRO
software and its On/Q software to be a part of customers' year 2000 solutions.
Products
The Company targets its MFG/PRO software to manufacturing companies within
the electronics/industrial, food/beverage, consumer packaged goods, medical and
automotive industries. In addition, the Company is developing On/Q software, a
group of applications targeted to the supply chain management needs in these
industry segments. The first of these applications, Outbound Logistics, is
currently under development and its initial release is expected to be
commercially available in the second half of calendar year 1998.
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The Company's principal product, MFG/PRO software, provides multinational
organizations with an integrated ERP solution that includes manufacturing,
distribution, financial and service/support management applications within an
open systems environment. MFG/PRO software is composed of an extensive set of
modules designed to address the needs of customers in the Company's vertical
markets. The Company's software supports multiple currencies and global tax
management and is tailored to financial practices and requirements in many of
its major geographic markets. MFG/PRO software supports 26 languages, including
most European languages, Japanese, Chinese, Korean and Russian. MFG/PRO software
operates in both host and distributed, client/server computing environments and
supports single or multiple sites, as well as multiple production and
operational processes. These capabilities enable multinational manufacturers to
manage multiple hybrid production methods within a single organization or a
single production site, and also provide the flexibility to adapt to additional
sites and processes as an organization's business evolves. Licensing fees for
the Company's MFG/PRO software generally range from $50,000 to several million
dollars, depending on the configuration of the software, the number of sites and
the number of users. Annual maintenance fees for such software generally
approximate 15% of the list price of the software.
The modular design of MFG/PRO software enables the Company's customers to
select the modules necessary to meet their specific operational needs. Customers
generally may choose which of the base package of modules they wish to implement
and then choose additional modules to add to the base implementation. For
example, in the automotive industry, MFG/PRO software's Repetitive Manufacturing
module, coupled with the Customer Schedules and Supplier Schedules modules,
provides high-volume businesses with streamlined manufacturing capabilities. The
Product Change Control module allows electronics/industrial companies to meet
challenges presented by rapidly changing products and short product life-cycles
through sophisticated engineering change management. In the industrial and
consumer packaged goods industries, MFG/PRO software supports mixed-mode and
discrete manufacturing with powerful planning and execution management modules.
In the food/beverage industry, the Advanced Pricing Manager module tracks
product promotion life cycles from concept through analysis. In the medical
industry, MFG/PRO software has the tools to allow for accurate FDA compliance
reporting and validation.
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MFG/PRO software currently includes the following modules and distinct
functionality:
Accounts Payable
Accounts Receivable
Advanced Pricing Manager
Capacity Requirements Planning
Cash Management
Client/Server
Compliance (for FDA)
Configurator
Configurator Product Modeler
Configured Products
Cost Management
Customer Schedules
Decision Support
Distribution Requirements Planning
Electronic Data Interchange
Enterprise Operations Planning
Fixed Assets
Forecasting
Formula/Process
General Ledger
GL Report Writer
Intrastat
Inventory Control
Master Scheduling
Materials Requirements Planning
Multiple Currency
Payroll
Physical Inventory
Product Change Control
Product Line Planning
Product Structures
Purchasing
Quality Management
Repetitive Manufacturing
Resource Planning
Results Files
Routings/Work Centers
Sales Analysis
Sales Orders/Invoices
Sales Quotations
Service/Repair Orders
Service/Support Management
Shop Floor Control
Supplier Schedules
Validation (for FDA)
Work Orders
The Company has a number of business alliances to enhance the functionality of
MFG/PRO software. The Company has entered into a number of joint development
agreements with third-party software developers who provide functionality that
has been embedded into or integrated with MFG/PRO software to deliver more
complete solutions for its targeted vertical markets.
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To further enhance the rapid deployment and ease of use of MFG/PRO
software, the Company introduced Qwizard software in March 1997. Qwizard
software provides self-paced interactive training for users of MFG/PRO software.
In addition, Qwizard software includes tools to design and customize the visual
interface of MFG/PRO software to match the users' workflows and job
responsibilities.
Products Under Development
The Company's planned suite of supply chain management solutions,
On/Q software, is designed to inter-operate with MFG/PRO software and other ERP
and supply chain software solutions. The initial On/Q software product under
development, Outbound Logistics, is designed to allow for consolidation of
orders, contract management, shipping and logistics management. The Company
anticipates that the initial release of Outbound Logistics will be commercially
available in the second half of calendar year 1998. Outbound Logistics is
specifically designed to meet demand-side requirements of global multinationals,
including complex high-volume order processing, import/export management,
multiple-route segmentation and logistics, distribution point optimization, lead
and sales order management, contract management and liquidation. The Outbound
Logistics application is targeted to address supply chain issues associated with
global manufacturing operations, and is designed to allow orders to be taken
from any customer, placed with any number of plants as capacity and product mix
change, and filled from the most cost-efficient available distribution center,
while consolidating or distributing invoices to any combination of sold-to-,
ship-to- and bill-to-customers. Outbound Logistics is also designed to provide
cost-efficient consolidation and to provide multi-lingual and multi-currency
capabilities. The Company plans to follow Outbound Logistics with additional
On/Q software products. There can be no assurance, however, that any of the
Company's supply chain management solutions will be successfully developed in
accordance with planned schedules or at all, or that if successfully developed,
such software will achieve market acceptance. See "Factors That May Affect
Future Results and Market Price of Stock-Supply Chain Solutions Under
Development and Underlying Technology."
Technology
MFG/PRO software has been developed with a commercially available, fourth
generation language and tool set marketed by Progress that addresses relational
databases provided by Oracle and Progress. See "Factors That May Affect Future
Results and Market Price of Stock-Dependence on Progress Products." MFG/PRO
software is being migrated to component objects and to a Java user interface
which the Company believes will enable customers to improve inter-operability
with existing software applications and to deploy and integrate new "best of
breed" software applications across the enterprise. The Company also believes
object-orientation will enable the Company to provide enhanced functionality in
its new On/Q software under development. While the Company's MFG/PRO software is
dependent upon Progress technology, the Company's new On/Q software under
development is not dependent on Progress technology. However, both the Company's
MFG/PRO software and new On/Q software are reliant on third-party software for
specific functionality. See "Factors That May Affect Future Results and Market
Price of Stock-Reliance on and Need to Develop Additional Relationships with
Third Parties." The Company is currently in the process of converting its
MFG/PRO software modules to object-oriented technology where the Company
believes such conversion will add value. The software operates in Windows NT and
major UNIX environments on more than 20 hardware platforms. MFG/PRO software
supports distributed and mirrored databases, local and wide area networks,
character-based and graphical user interfaces.
The Company is also embracing object-oriented technology as a next
generation technology to address the complex supply chain management
requirements of companies and to improve business processes. The Company
believes that new object-based functionality will play a key role in the
competitive manufacturing, distribution, financial, planning and service/support
management strategies of customers in the Company's targeted industry
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segments. Object-oriented technology allows for the creation of systems which
are scalable and flexible and which are capable of accommodating changes in
business requirements and technology infrastructure.
The Company's deployment of object-oriented technology consists of three
main elements: component objects; Convergent Engineering methodology; and an
open interface server.
Component objects are simple building blocks of small, discrete pieces of
functionality that can be configured to create complete applications and enable
developers to rapidly create and modify systems to provide the desired set of
functionality for specific vertical markets or individual customers. The Company
has defined three types of component objects: business object frameworks, common
business objects and application objects.
Convergent Engineering methodology is a new software design methodology
employed by the Company to develop future products. Convergent Engineering
methodology allows business requirements to be captured as a series of simple
facts, actions and rules, enabling software to more flexibly accommodate current
business practices and processes.
Q/LinQ (formerly InterLinQ), the open interface server developed by the
Company, uses commercially available messaging tools along with the Company's
proprietary data mapping applications. This product is used to provide
inter-operability with other software applications, even among multiple revision
levels of the same or different products.
There can be no assurance that the Company will be successful in converting
its MFG/PRO software to component objects and to a Java user interface or
developing its new supply chain management software to incorporate component
objects and convergent engineering technology on a timely basis, if at all, or
that if converted or developed such software will achieve necessary market
acceptance. See "Factors That May Affect Future Results and Market Price of
Stock-Supply Chain Solutions Under Development and Underlying Technology."
Research and Development
The Company originally introduced its client/server-based MFG/PRO software
in 1986 and has subsequently released a number of product enhancements. The
Company's research and development staff, augmented by third-party development
resources, is focused on continuing updates and enhancements to its MFG/PRO
software, as well as the continual migration of MFG/PRO software to component
objects and to a Java user interface. The Company also maintains a separate
advanced technology development organization to research longer term software
solutions. This organization is specifically focused on developing the Company's
On/Q software supply chain management solutions, the first of which will be
Outbound Logistics. In April 1997, the Company also invested in a private
company focused on developing the Convergent Engineering methodology to
participate in research and development efforts of that company. The Company had
an option to acquire an additional interest in such company, and in September
1997 the Company exercised this option and, as a result, owns a 33% equity
interest. See Note 11 to Notes to Consolidated Financial Statements.
The Company believes that Internet capability for its products will be
important to the future success of its products. Accordingly, the Company is
developing Web-enabled versions of its products through in-house and third-party
development. The Company's Outbound Logistics product is also being designed to
include Web enablement. There can be no assurance that the Company will be
successful in developing any new products or enhancements, that the Company will
not experience difficulties that could delay or
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prevent successful development, introduction or sales of these products or that
its new products will adequately meet the requirements of the marketplace and
achieve market acceptance.
Research and development expense increased significantly in recent years as
the Company has continued to focus on development of new and enhanced products.
Research and development expense, which does not include costs of product
support and customization, increased to $29.3 million for the fiscal year ended
January 31, 1998, from $25.4 million and $17.0 million for the fiscal years
ended January 31, 1997 and December 31, 1995, respectively. At January 31, 1998
the Company had 289 personnel in its research and development department. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations,""Factors That May Affect Future Results and Market Price of
Stock-Rapid Technological Change," and "-Supply Chain Solutions Under
Development and Underlying Technology."
Sales and Marketing
The Company sells and supports its products through direct and indirect
sales organizations throughout the world. The Company's direct sales
organization consists of approximately 239 personnel located at its corporate
headquarters in Carpinteria, California, its regional headquarters in Mt.
Laurel, New Jersey, Hoofddorp, The Netherlands, Hong Kong, China and Sydney,
Australia, and more than 20 other direct sales offices worldwide. The Company's
sales team is organized around its five targeted vertical markets, enabling the
Company to address the specialized needs of its customers.
The Company's indirect sales channel consists of approximately 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. In addition, the Company leverages
its relationships with implementation providers, hardware vendors and other
third parties to identify sales opportunities on a global basis.
Following the conclusion of its initial public offering, the Company has
commenced discussions with certain of its distributors regarding possible
acquisitions of controlling interests in such distributors. The Company is
pursuing this acquisition strategy to enhance the effectiveness and allegiance
of existing distributors and provide capital to help such distributors meet the
Company's growth targets.
The Company's sales and marketing strategy is to develop demand for its
products by creating visibility for the Company and awareness of its principal
product, MFG/PRO software. The Company participates in major computer and
vertical market industry trade shows and sponsors regional and worldwide user
conferences and regional alliance conferences. The Company also advertises in
leading business and targeted industry publications.
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 Company's
industry is intense. There can be no assurance the Company will be successful in
hiring such personnel in accordance with its plans. In addition, the failure by
the Company to maintain successfully its 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. See
"Factors That May Affect Future Results and Market Price of Stock-Dependence
Upon Development and Maintenance of Sales and Marketing Channels."
10
<PAGE>
Third-Party Implementation Providers
The Company has historically followed a strategy of utilizing almost
exclusively third parties to provide implementation and customization services
to the Company's customers. The Company chose this strategy to allow the Company
to maintain its focus on developing, marketing and distributing its software and
to enhance the effectiveness, expertise and commitment of third parties who
provide services on behalf of the Company. The Company also uses these third
parties for sales lead generation. Implementation and system integration
services are provided by a network of consultants and system integrators,
including 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, the Company's
distributors also deliver consulting and integration services. All third-party
providers are required to be certified in the applications and methodologies of
the Company's products. To the extent the Company implements its distributor
acquisition strategy, the Company anticipates that it will, directly or
indirectly, be providing implementation and system integration services. In
addition, in connection with the introduction of its On/Q software, the Company
intends to provide implementation services for this new product. The Company
believes this service will be an important factor in ensuring the successful
implementation of the initial installations of On/Q software and in successfully
transferring knowledge to third-party implementation partners to enable them to
provide necessary implementation services for future On/Q software
installations.
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 distributor
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 receives a negotiated
royalty fee 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 to 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. See "Factors That May Affect Future Results and
Market Price of Stock-Reliance on and Need to Develop Additional Relationships
with Third Parties."
11
<PAGE>
Customers
The Company targets the industrial/electronics, food/beverage, consumer
packaged goods, medical and automotive sectors worldwide. As of January 31,
1998, the Company had licensed MFG/PRO software at approximately 3,600 sites to
approximately 1,900 customers in more than 80 countries. No one customer
accounted for more than 10% of total revenue during any of the Company's last
three fiscal years. The following are among companies and/or subsidiaries of
such companies in each of the Company's target vertical markets that have each
generated more than $400,000 in software license and maintenance revenue over
the last three fiscal years:
Electronics/Industrial
ABB Flakt Oy
Alcatel Services International B.V.
Allen-Bradley Co. Inc.
Aluminum Company of America
AT&T
Courtaulds plc
Ingersoll-Rand Company
Lucent Technologies Inc.
Matsushita Electric-Industrial Co., Ltd
NEC America, Inc.
Newbridge Networks Corporation
Philips International B.V.
RayChem Corporation
Schlumberger Technology Corp.
Silicon Graphics SA
Sun Microsystems, Inc.
Xerox Corporation
Food/Beverage
AEP Borden Nederland B.V.
Cargill, Incorporated
Kraft Jacobs Suchard AG
Pepsi-Cola Company
Presto Foods Products
The Quaker Oats Company
Rich Products Corporation
Consumer Packaged Goods
The Black & Decker Corporation
Colgate-Palmolive Company
Gillette Company
Johnson & Johnson
Unilever N.V.
Automotive
Aeroquip-Vickers, Inc.
Daewoo Information Systems Co. Ltd.
Ford Motor Corporation
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<PAGE>
Johnson Controls, Inc.
Lear Seating Corporation
R.J. Tower Corporation
Rockwell Automotive
United Technologies Automotive
Varity Kelsey-Hayes Company
Medical
Alza Corporation
BOC Ohmeda Inc.
Physio-Control Corporation
Rexall Sundown, Inc.
St.Jude Medical, Inc.
Sunrise Medical Inc.
Ventritex, Inc.
Genzyme Corporation
Customer Service and Support
The Company believes that providing a high level of customer service and
support is essential to customer satisfaction and the Company's long-term
success. The Company's service and support organization is based primarily in
centers located in Mt. Laurel, New Jersey, Hoofddorp, The Netherlands, Hong
Kong, China, Sydney, Australia and Sao Paulo, Brazil. Global support is also
provided through the Company's extensive network of alliance partners. This
global presence helps the Company support customers and partners in different
regions and time zones worldwide.
The Company also provides its customers with access to information and
customer support services via the World Wide Web. The Company's Internet-enabled
services facilitate the exchange of information seven days per week, 24 hours a
day and provide customers with access to QAD support databases. These databases
contain a wide variety of product information, customer support functionality,
answers to frequently asked questions, and a search-enabled online knowledge
base. In addition, ongoing training of support personnel, internal and external
consultants and the Company's alliance partners helps to ensure that customers
are up to date on the latest technologies and product enhancements offered by
the Company.
The Company offers, for a fee, a comprehensive education and training
program to its customers' information and technology staff and end-users, as
well as its implementation providers. Classes are offered through in-house
facilities at Company offices in various locations, as well as on-site training
services at customer locations. The Company has also assisted implementation
providers and customers in developing their own in-house support centers.
Competition
The ERP software market is highly competitive, rapidly changing and
affected by new product introductions and other market activities of industry
participants including consolidations among industry participants. The Company
competes in the ERP software market primarily on the basis of functionality,
ease of use and implementation, technology, time to benefit, supplier viability,
service and cost. 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,
J.D. Edwards and 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 planning solutions,
13
<PAGE>
(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, 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, IMI and Manugistics, as well as from broad based solution providers
such as Baan, Oracle, 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 the large installed base of legacy systems because of the
reluctance of these potential customers 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,
partners or potential partners 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, results of operations 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. 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.
Proprietary Rights and Licensing
The Company's success is dependent upon its proprietary technology and
other intellectual property. The Company relies primarily on a combination of
the protections provided by applicable copyright, trademark and trade secret
laws, as well as on confidentiality procedures and licensing arrangements, to
establish and protect its rights in its software. The Company enters into
license agreements with each of its customers. Each of the Company's license
agreements provides for the non-exclusive license of the Company's MFG/PRO
software. Such licenses generally are perpetual (unless terminated by either
party upon 30 days written notice) and contain strict confidentiality and
non-disclosure provisions, a limited warranty covering MFG/PRO software and
indemnification for the customer from any infringement action related to MFG/PRO
software. The pricing policy under each license is based on a standard price
list and may vary based on the number of end-users, number of sites, number of
modules, number of languages, the country in which the license is granted and
level of ongoing support, training and services to be provided by the Company.
Payment terms are generally 30 days from the date of shipment. The Company has
no patents or pending patent applications. In order to facilitate the
customization required by most of the Company's customers, the Company generally
licenses its MFG/PRO software to end users in both object code
(machine-readable) and source code (human-readable) format. While this practice
facilitates customization, making software available in source code also makes
it easier for third parties to copy or modify the Company's software for
non-permitted purposes. One of the Company's distributors has developed
modifications to the Company's software, which it owns jointly with the Company.
The Company has entered into a reciprocal license with this distributor who
markets the product enhancements in conjunction with MFG /PRO software. This or
other distributors or other persons may continue to independently develop a
modified version of the Company's software. The Company seeks to protect its
software,
14
<PAGE>
documentation and other written materials under the legal provisions relating to
trade secret, copyright and contract law. The Company's license agreements
generally allow the use of MFG/PRO software solely by the customer for internal
purposes without the right to sublicense or transfer the MFG/PRO software to
third parties. The Company believes that the foregoing measures afford only
limited protection. Despite the Company's efforts, it may be possible for third
parties to copy certain portions of the Company's products or reverse engineer
or obtain and use information that the Company regards as proprietary. In
addition, the laws of certain countries do not protect the Company's proprietary
rights to the same extent as do the laws of the United States. Accordingly,
there can be no assurance that the Company will be able to protect its
proprietary software against unauthorized third-party copying or use, which
could adversely affect the Company's competitive position. Policing unauthorized
use of the Company's products is difficult, and while the Company is unable to
determine the extent to which piracy of its software products exist, software
piracy can be expected to be a problem. Furthermore, there can be no assurance
that the Company's competitors will not independently develop technology similar
to that of the Company.
The Company has in the past been subject to claims of intellectual property
infringement and may increasingly be subject to such claims as the number of
products and competitors in the Company's targeted vertical markets grows and
the functionality of products in other industry segments overlaps. Although the
Company is not aware that any of its products infringes upon the proprietary
rights of third parties, there can be no assurance that third parties will not
claim infringement by the Company with respect to current or future products.
Any such claims, with or without merit, could be time-consuming, result in
costly litigation, cause product shipment delays or require the Company to enter
into royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to the Company, or at all,
which could have a material adverse effect upon the Company's business,
operating results and financial condition. The Company may also initiate claims
or litigation against third parties for infringement of the Company's
proprietary rights or to establish the validity of the Company's proprietary
rights. Litigation to determine the validity of any claims could result in
significant expense to the Company and divert the efforts of the Company's
technical and management personnel from productive tasks, whether or not such
litigation were determined in favor of the Company.
The Company has in the past and may in the future resell certain software,
which it licenses from third parties. In addition, the Company has in the past
and may in the future jointly develop software in which the Company will have
co-ownership or cross-licensing rights. There can be no assurance that these
third-party software arrangements and licenses will continue to be available to
the Company on terms that provide the Company with the third-party software it
requires to provide adequate functionality in its products, on terms that
adequately protect the Company's proprietary rights or on terms that are
commercially favorable to the Company. The loss of or inability to maintain or
obtain any of these software licenses, including a loss as a result of a
third-party infringement claim, could result in delays or reductions in product
shipments until equivalent software, if any, could be identified, licensed and
integrated, which could materially and adversely affect the Company's business,
operating results and financial condition. See "-Products" and "-Research and
Development."
Year 2000 Compliance
The Company's internal business information systems are primarily composed
of the same commercial application software products generally offered for
license by the Company to end-user customers. The Company is in the process of
implementing the current release of certain modules of its MFG/PRO software and
is not aware of any material operational issues or costs associated with
preparing such internal systems for the Year 2000. However, the Company utilizes
other third-party vendor network equipment,
15
<PAGE>
telecommunication products, and other third-party software products which may or
may not be Year 2000 compliant. The Company recognizes the need to ensure its
operations will not be adversely impacted by Year 2000 software failures and has
established a project team to assess Year 2000 risks. The project team will
coordinate the identification and implementation of changes to computer hardware
and software applications that will ensure availability and integrity of the
Company's financial systems and the reliability of its operational systems.
Although the Company has undertaken these steps to address the impact, if any,
of the Year 2000 issue surrounding such third-party products, failure of any
critical technology components to operate properly in the Year 2000 may have an
adverse impact on business operations or require the Company to incur
unanticipated expenses to remedy any problems.
The Company believes that all versions of its software products are "Year
2000 compliant;" that is, they are capable of adequately distinguishing 21st
century dates from 20th century dates. However, the Company's products are
generally integrated into enterprise systems involving software products
developed by other vendors and varying hardware platforms. The Company believes
that, due to the necessary interaction with such other software (including older
versions of other vendors' software) and platforms or other modifications to
older versions of the Company's software products, some of the Company's
customers are running earlier versions of the Company's software products that
in operation may not be Year 2000 compliant. The Company has produced
corrections for known non-compliant or potentially non-compliant situations and
is continuing its program of analysis for other potential non-compliant
situations involving its software. The Company has been encouraging customers to
implement corrections developed by the Company or to migrate to current product
versions.
The total cost of these Year 2000 compliance activities has not been, and
is not anticipated to be, material to the Company's financial condition or its
operating results. These costs and the timing in which the Company plans to
complete its Year 2000 modification and testing processes are based on
management's best estimates. However, there can be no assurance that the Company
will timely identify and remediate all significant Year 2000 problems, that
remedial efforts will not involve significant time and expense, or that such
problems will not have a material adverse effect on the Company's business,
operating results and financial condition. In addition, the Company may in the
future be subject to claims based on Year 2000 problems arising upon the use of
the Company's products with others' products, custom modifications made by third
parties to the Company's products, or issues arising from the integration of
multiple products within an overall system. Although the Company has not been a
party to any litigation or arbitration proceeding to date involving its products
or services and related to Year 2000 compliance issues, there can be no
assurance that the Company will not in the future be required to defend its
products or services in such proceedings, or to negotiate resolutions of claims
based on Year 2000 issues. The costs of defending and resolving Year
2000-related disputes, and any liability of the Company for Year 2000-related
damages, including consequential damages, could have a material adverse effect
on the Company's business, operating results and financial condition.
Employees
As of January 31, 1998, the Company had 917 full-time employees of which
289 were in research and development, 173 were in customer and product support,
280 were in sales and marketing, and 175 were in general and administration and
other. In addition, the Company contracted with approximately 213 temporary
employees. None of the Company's workers is represented by collective bargaining
agreements with the exception of certain of the employees of the Company's
Netherlands subsidiary who are represented by statutory Works Councils as
required under the laws of The Netherlands. The Company believes that its
employee relations are good. The Company's success depends to a significant
extent upon a
16
<PAGE>
limited number of key employees and other members of senior management of the
Company. There can be no assurance that the Company will be successful in
attracting and retaining such personnel, and the failure to attract and retain
such personnel could have a material adverse effect on the Company's business.
See "Factors That May Affect Future Results And Market Price Of Stock-Dependence
Upon Key Personnel; Need to Hire Additional Personnel in All Areas."
Executive Officers of the Registrant
Set forth below is certain information concerning the executive officers of
the Company as of January 31, 1998.
<TABLE>
<CAPTION>
Name Age Position(s)
<S> <C> <C>
Pamela M. Lopker .................... 43 Chairman of the Board and
President
Karl F. Lopker ...................... 46 Chief Executive Officer,
Chief Financial Officer and
Secretary
Rita V. Foley........................ 45 Executive Vice President, Global
Sales and Marketing
Barry R. Anderson.................... 46 Vice President, Administration
Vincent P. Niedzielski............... 44 Vice President, Development
</TABLE>
Pamela M. Lopker founded the Company in 1979 and has been its Chairman of
the Board and President since inception. Prior to founding the Company,
Ms. Lopker served as Senior Systems Analyst for Comtek Research from 1977 to
1979. Ms. Lopker is certified in Production and Inventory Management by the
American Production and Inventory Control Society. Ms. Lopker earned a Bachelor
of Arts degree in Mathematics from the University of California at Santa
Barbara.
Karl F. Lopker has served as Director, Chief Executive Officer and
Secretary since joining the Company in 1981. Mr. Lopker was founder and
President of Deckers Outdoor Corporation from 1973 to 1981, where he currently
serves as a Director. Mr. Lopker is certified in Production and Inventory
Management at the Fellow level by the American Production and Inventory Control
Society. Mr. Lopker studied Electrical Engineering and Computer Science at the
University of California at Santa Barbara. Mr. Lopker and Pamela Lopker are
married.
Rita V. Foley joined QAD in August 1997 as Executive Vice President, Global
Sales and Marketing. Prior to joining QAD. Mrs. Foley was with Digital
Corporation where she held progressively more responsible positions within
Sales, Marketing, Services, and Engineering. Most recently, she was Vice
President of the Partners Group. Before joining Digital, Mrs. Foley held
positions with Harris Lanier and Polaroid UK Ltd.
Barry R. Anderson has served as Vice President, Administration since April
1997. Prior to joining QAD, Mr. Anderson was Chief Administrative Officer at the
Bank South in Atlanta, Georgia. Previous experience includes ten years with
Lanier Worldwide as Vice President, Human Resources plus experience with ARAMCO
(Arabian American Oil Company), Lockheed and Pan Am. Mr. Anderson received a
Bachelor of Science degree in Business Management from Florida State University
and a Juris Doctorate degree from Atlanta Law School.
Vincent P. Niedzielski has served as Vice President, Development since
joining the Company in April 1996. Prior to joining the Company, Mr. Niedzielski
served as Vice President, Production and Development at Candle Corporation from
1984 to 1996.
17
<PAGE>
Mr. Niedzielski holds a Bachelor of Science degree in Mathema1tics from the
University of Scranton.
On March 31, 1998 A.J. Moyer joined the Company as its Chief Financial
Officer.
ITEM 2. PROPERTIES
The Company leases facilities to support its operations in several
locations throughout the world. The corporate headquarters are located in
Carpinteria, California in approximately 95,000 square feet of leased space in
two facilities subject to thirteen leases. The leases expire on dates ranging
from May 1998 to January 2003. An additional 14,000 square feet of office space
is leased in a neighboring location, with the lease expiring in February 2003.
The Company owns approximately 28 acres and 54,000 square feet of office space
in a neighboring location, which also supports portions of its operations. The
Company also owns a 34-acre parcel located in Carpinteria, California at which
it is considering developing additional facilities. Regional headquarters are
located in Mount Laurel, New Jersey, Hoofddorp, The Netherlands, Hong Kong, and
Sydney, Australia in space covering approximately 62,000, 16,000, 6,500 and
13,000 square feet and subject to leases expiring in 2001, 2000, 1998 and 2000,
respectively. Satellite offices are located in the Americas, Europe, Asia and
Australia in space covering approximately 52,000, 16,000, 10,000, and 10,000
square feet and subject to leases expiring in 2003, 2000, 1999 and 2002,
respectively. All of the Company's leases have been negotiated with independent
third parties on an arms length basis, and the Company believes they are on
commercially reasonable terms. Total rent expense for the year ended January 31,
1998 was $6.5 million. The global presence of the Company is supported by
offices located in the United States, Canada, Mexico, Brazil, The Netherlands,
United Kingdom, France, Germany, Sweden, Poland, Australia, Singapore, Japan,
Korea, India and China (Hong Kong and Shanghai). Although the Company has from
time to time sought and will in the future seek new or expanded facilities for
existing or additional regional offices, the Company expects that its current
domestic and international facilities will be sufficient to meet its needs for
at least the next 12 months. See Notes 2 and 8 of Notes to Consolidated
Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to various legal proceedings and claims, either
asserted or unasserted, which arise in the ordinary course of business. While
the outcome of these claims cannot be predicted with certainty, management does
not believe that the outcome of any of these legal matters will have a material
adverse effect on the Company's consolidated results of operations or
consolidated financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has been traded in the Nasdaq National Market
since the Company's initial public offering in August 1997. According to records
of the Company's transfer agent, the Company had approximately 461 stockholders
of record as of January 31, 1998. The following table sets forth the low and
high sale price as of the close of market of the Company's Common Stock in each
of the fiscal quarters since the Company's initial public offering.
<TABLE>
<CAPTION>
Low Sale Price High Sale Price
<S> <C> <C>
Fiscal 1998:
Fourth Quarter............. $11.75 $15.75
Third Quarter.............. $13.63 $22.50
</TABLE>
The Company's policy has been to reinvest earnings to fund future growth.
Accordingly, the Company has not paid dividends and does not anticipate
declaring dividends on its Common Stock in the foreseeable future.
On June 2, 1997 the Company announced a two-for-one stock split. The
effective date of the stock split was June 19, 1997. Per share data and numbers
of common shares contained in these consolidated financial statements and in
Management's Discussion and Analysis of Financial Condition and Results of
Operations have been adjusted to reflect the stock split for all periods
presented.
19
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA (in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, January 31,
-------- -------- -------- -------- --------
1993 1994 1995 1997(1) 1998(1)
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Statement of Income Data:
Revenue ................................................. $ 46,543 $ 66,360 $ 89,949 $126,444 $172,234
Operating income (loss) ................................. 6,442 4,084 (2,646) 2,720 14,695
Net income (loss) ....................................... 3,694 2,878 (686) 1,000 9,856
Basic net income (loss) per share (2) ................... 0.18 0.14 (0.03) 0.05 0.38
Diluted net income (loss) per share (2) ................. $ 0.18 $ 0.12 $ (0.03) $ 0.04 $ 0.38
</TABLE>
<TABLE>
<CAPTION>
December 31, January 31,
-------- -------- -------- -------- --------
1993 1994 1995 1997 1998
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents ....................... $ 1,413 $ 1,706 $ 1,519 $ 301 $ 70,082
Working capital (deficiency) .................... 5,015 2,271 (2,814) (5,976) 79,258
Total assets .................................... 26,489 44,361 68,466 77,250 190,506
Notes payable and current
installments of long-term debt ................ 2,630 4,767 9,610 8,465 143
Long-term debt, less current
installments .................................. 1,380 4,677 7,341 5,036 39
Total stockholders' equity ...................... $ 7,098 $ 11,993 $ 11,732 $ 10,804 $112,375
___________________
<FN>
(1) Effective February 1, 1996, the Company changed its financial reporting
year-end from December 31 to January 31. See Note 1 of Notes to
Consolidated Financial Statements.
(2) The basis for the determination of stock used in computing basic and
diluted net income (loss) per share is described in Note 1 of Notes to
Consolidated Financial Statements.
</FN>
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Introduction
The following discussion should be read in conjunction with the
Consolidated Financial Statements of the Company and the Notes thereto included
elsewhere in this form 10-K. Effective February 1, 1996, the Company changed its
financial reporting year end from December 31 to January 31. The Company's
fiscal years ending on or prior to December 31, 1995 ended December 31.
Overview
Founded in 1979, the Company is a provider of ERP software for
multinational and other large manufacturing companies. In 1986, the Company
commercially released its open, client/server based ERP application, MFG/PRO
software. Since that time, the Company has introduced several new generations of
its MFG/PRO software, and has significantly expanded its operations. As of
January 31, 1998, the Company had 917 full time employees, more than 20 direct
sales and support offices and approximately 40 distributors worldwide and
approximately 1,900 customers in more than 80 countries. Total revenues have
grown rapidly in recent years, increasing from $46.5 million to $172.2 million
in the year ended December 31, 1993 and year ended January 31, 1998,
respectively.
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<PAGE>
The Company derives its revenue from license fees, maintenance contracts
and other products and services. License fees are primarily derived from the
licensing of the Company's MFG/PRO software. License fees also include fees
received by the Company for licenses of third-party software sold in conjunction
with MFG/PRO software. Maintenance and other revenue consist primarily of
maintenance contracts and, to a lesser extent, revenue from consulting, training
and other services. Maintenance contract revenue typically represents 15% of the
software license list price (net of any distributor discounts) and is recognized
ratably over the life of the contract, which is typically 12 months. The Company
has historically followed a strategy of relying on its network of third-party
distribution and implementation alliances to provide hardware, consulting and
implementation services. As a result, the Company's revenue related to license
fees and maintenance contracts as a percentage of total revenues has increased
from 75% to 91% from the year ended December 31, 1993 to the year ended January
31, 1998, respectively. In the event the Company pursues certain acquisitions of
distributors, the Company anticipates that revenues from implementation services
may increase as a percentage of revenue. Further, if the Company is successful
in the launch of its On/Q software and the Company pursues its strategy of
directly providing implementation services for such product, the Company
anticipates that service revenue will be increased.
License fees for the Company's products generally range from $50,000 to
several million dollars, depending on the configuration of the products, the
number of sites and the number of users. No single customer has accounted for
greater than 10% of the Company's total revenues in any of the Company's last
three fiscal years. However, it is not uncommon for QAD to conclude a
multi-million dollar contract with a single customer, and the Company expects
revenue from large individual licenses to increase as a percentage of total
revenues.
The sales cycle for the Company's products is typically four to 15 months.
Like many enterprise software companies, the Company has experienced in the past
and expects to continue to experience seasonal fluctuations in its operating
results. Prior to the year ended January 31, 1998 the Company generally realized
lower total revenues (i) in July and August, due primarily to the timing of the
Company' fiscal quarter end and reduced economic activity in Europe during that
period and (ii) to a lesser extent, in the first two months of the fiscal year,
due to the Company's timing of the Company's fiscal year end and a concentration
of customers which purchase products in the fourth fiscal quarter, and their
resulting lower purchasing activity during the immediately following months. In
addition, like many enterprise software companies, the Company also typically
realizes a significant portion of its software license revenue in the last month
of each quarter. Unlike a number of the Company's competitors, the Company does
not derive material revenue from implementation in connection with its license
sales. As a result, the Company's revenue tends to be less predictable.
Furthermore, when QAD was a private company, QAD had historically focused its
efforts primarily on achieving annual financial results, with a significant
percentage of the Company's sales force compensation based on the achievement of
annual revenue goals. The Company believes that such practice had also
contributed to the weighting of total revenues to the fourth calendar quarter.
With the change in the Company's fiscal year end to January 31, the Company
experienced some shifting in revenues to the last month of each fiscal quarter.
In the year ended January 31, 1998 QAD implemented various changes designed
to mitigate the seasonal and quarterly fluctuations in its operating results.
Such changes included the hiring of additional financial personnel experienced
in quarterly budgeting, including a new Chief Financial Officer. The Chief
Financial Officer retained by the Company in the year ended January 31, 1998 was
replaced by a new Chief Financial Officer who started with the Company on March
31, 1998. Other changes included the changing of the Company's fiscal year end
from December 31 to January 31 and the changing of the Company's planning
systems to incorporate quarterly performance goals and quarterly forecasting
procedures. Additionally, the Company is including quarterly financial
incentives into its
21
<PAGE>
sales compensation system. There can be no assurance that such changes will
alleviate the seasonal, quarterly or other fluctuations in the Company's
financial results or that such changes will have a positive effect at all.
During the year ended December 31, 1995 through the year ended January 31,
1998, the Company significantly increased its sales and marketing, service and
support and research and development staffs. These increases resulted in
substantial growth in the number of its full-time employees (from 521 at
March 31, 1995, to 917 at January 31, 1998), the scope of its financial and
operating systems and the geographic distribution of its direct sales and
support operations (from 12 to 19 countries). These investments were incurred in
connection with the Company's strategy to establish and maintain a leadership
position as a global supplier of ERP solutions at the plant level as well as to
enter new markets such as supply chain management software. QAD believes that
such investments were essential in the development of the Company's products and
operations. Such commitment of resources has had, and may continue to have, a
significant impact on the Company's financial results, including annual and
quarterly profitability.
License fees revenue is recognized upon shipment of the software provided
there are no vendor obligations to be fulfilled and collectibility is probable
within a 12-month period from date of shipment. Typically, the Company's
software licenses do not include significant vendor obligations. Maintenance
revenue for ongoing customer support and product updates is recognized ratably
over the term of the maintenance period, which is typically 12 months. Other
revenue is derived mainly from training, consulting and manual sales. Training
and consulting revenue is recognized as the services are performed.
The Company records revenue primarily in United States dollars. However,
the Company has historically recorded local expenses in local currency. Foreign
currency transaction and translation gains and losses are recorded in accordance
with Statement of Financial Accounting Standards (SFAS) No. 52. In the years
ended January 31, 1997 and 1998, the Company realized $879,000 and $407,000,
respectively, in foreign currency transaction gains, compared to a loss of
$477,000 in the year ended December 31, 1995. The Company has not previously
undertaken hedging transactions to cover its currency exposure, but may
implement programs to mitigate foreign currency exposure risk in the future as
management deems appropriate. See "Factors That May Affect Future Results and
Market Price of Stock-Risks Associated With International Operations" and
"-Exposure To Currency Fluctuations."
Results of Operations
The following table sets forth for the periods indicated the percentage of
total revenues represented by certain items reflected on the Company's
Consolidated Statements of Income:
22
<PAGE>
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, January 31,
---- ---- -----------
1995 1997 1998
<S> <C> <C> <C>
---- ---- ----
Revenue:
License fees ................................................. 71% 68% 66%
Maintenance and other ........................................ 29 32 34
---- ---- ----
Total revenues ............................................. 100% 100% 100%
==== ==== ====
Cost and expenses:
Cost of revenues ............................................. 26 23 24
Sales and marketing .......................................... 43 42 39
Research and development ..................................... 19 20 17
General and administrative ................................... 15 13 11
---- ---- ----
Total cost and expenses .................................... 103 98 91
---- ---- ----
Operating income (loss) ........................................ (3) 2 9
Other (income) expense:
Interest income .............................................. (0) (0) (1)
Interest expense ............................................. 1 1 1
Other ........................................................ (0) (0) (1)
---- ---- ----
Total other (income) expense ............................... 1 1 (1)
---- ---- ----
Income (loss) before income taxes .............................. (4) 1 10
Income tax expense (benefit) ................................... (3) 0 4
---- ---- ----
Net income (loss) .............................................. (1)% 1% 6%
==== ==== ====
</TABLE>
For the year ended December 31, 1995 and years ended January 31, 1997 and 1998
Total Revenues. Total revenues increased 36% to $172.2 million in the year
ended January 31, 1998 from $126.4 million in the year ended January 31, 1997,
and increased 41% in the year ended January 31, 1997 from $89.9 million in the
year ended December 31, 1995. License fees as a percentage of total revenues
decreased to 66% in the year ended January 31, 1998 from 68% in the year ended
January 31, 1997 and 71% in the year ended December 31, 1995. The dollar
increases in total revenues were primarily due to growing acceptance of the
Company's MFG/PRO software, continued market penetration into its targeted
vertical markets and the Company's expansion into new geographical markets. The
decreases in license fees and increases in maintenance and other revenue as a
percentage of total revenues were primarily a result of a larger installed base
and increased maintenance renewals.
Cost of Revenues. Cost of revenues increased 43% to $41.6 million in the
year ended January 31, 1998 from $29.2 million in the year ended January 31,
1997, and increased 24% in the year ended January 31, 1997 from $23.6 million in
the year ended December 31, 1995. Cost of revenues as a percentage of total
revenues increased to 24% in the year ended January 31, 1998 from 23% in the
year ended January 31, 1997 and decreased from the 26% in the year ended
December 31, 1995. The increase in dollar amount was primarily the result of
costs associated with the year over year growth in revenues of reselling
third-party databases. The decrease in cost of revenues as a percentage of total
revenues in the year ended January 31, 1997 from the year ended December 31,
1995 was primarily due to increased sales of MFG/PRO software licenses where the
purchase of third-party tools and databases were deferred or where the licensee
obtained licenses of third-party tools and databases directly from the
third-party vendor. The increase in cost of revenue as a percentage of total
revenue in the year ended January 31, 1998 from the year ended January 31, 1997
was due to significantly higher costs associated with reselling third-party
databases.
23
<PAGE>
Sales and Marketing. Sales and marketing expense increased 26% to
$67.2 million in the year ended January 31, 1998 from $53.2 million in the year
ended January 31, 1997, and increased 39% in the year ended January 31, 1997
from $38.3 million in the year ended December 31, 1995. Sales and marketing
expense as a percentage of total revenues decreased to 39% in the year ended
January 31, 1998 from 42% in the year ended January 31, 1997 and 43% in the year
ended December 31, 1995. The increase in dollar amount was primarily due to the
expansion of the Company's global sales force, opening and supporting global
sales offices and increasing marketing expense to promote the Company's name and
products. The expansion was initiated in the year ended December 31, 1995 and
continued into the year ended January 31, 1998. The decrease in sales and
marketing expense as a percentage of total revenue was primarily due to the
fixed cost portion of the expense base not increasing commensurate with the
revenue increases.
Research and Development. Research and development expense increased 15% to
$29.3 million in the year ended January 31, 1998 from $25.4 million in the year
ended January 31, 1997, and increased 49% in the year ended January 31, 1997
from $17.0 million in the year ended December 31, 1995. Research and development
expense as a percentage of total revenues decreased to 17% in the year ended
January 31, 1998 from 20% in the year ended January 31, 1997 and 19% in the year
ended December 31, 1995. The increase in total research and development was
primarily due to ongoing enhancements to MFG/PRO software, including the ongoing
migration of MFG/PRO software to object-oriented technology. In addition, the
increases were due to increased staffing of, and associated support for, product
engineers in connection with efforts to develop On/Q software, the Company's new
supply chain management software which the Company expects to be commercially
available in the second half of calendar year 1998, and Qwizard, a
computer-based interactive training tool which became commercially available in
May 1997. The decrease in research and development expense as a percentage of
total revenue was primarily the result of the increase in revenue and the
reduction in the utilization of third-party software developers in the first
half of the year ended January 31, 1998.
General and Administrative. General and administrative expense increased
22% to $19.4 million in the year ended January 31, 1998 from $15.9 million in
the year ended January 31, 1997, and increased 17% in the year ended January 31,
1997 from $13.6 million in the year ended December 31, 1995. General and
administrative expense as a percentage of total revenues decreased to 11% in the
year ended January 31, 1998 from 13% in the year ended January 31, 1997 and 15%
in the year ended December 31, 1995. The dollar increases in general and
administrative expense were primarily the result of costs associated with the
expansion of the Company's administrative infrastructure to support increases in
the Company's total revenues. In addition, the Company recognized compensation
expense of $648,000 and $2.4 million in the year ended January 31, 1997 and the
year ended December 31, 1995, respectively, in connection with the repurchase of
stock held by employees upon their departure from the Company. The decrease in
general and administrative expense as a percentage of total revenues resulted
from total revenues growing faster than general and administrative expense. See
Note 10 of Notes to Consolidated Financial Statements.
Total Other (Income) Expense. Total other (income) expense increased 333%
to $(2,320,000) in the year ended January 31, 1998 from $997,000 in the year
ended January 31, 1997, and decreased 19% in the year ended January 31, 1997
from $835,000 in the year ended December 31, 1995. The increase in the year
ended January 31, 1998 was primarily the result of 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. The decrease in the year ended January 31, 1997 was primarily the
result of foreign currency transaction gains and miscellaneous rental income
offset by increased interest expense.
24
<PAGE>
Income Tax Expense (Benefit). The Company recorded income tax expense
(benefit) of $7.2 million, $723,000 and $(2.8) million in the years ended
January 31, 1998 and 1997 and the year ended December 31, 1995, respectively.
The Company's effective income tax rates were 42% in the years ended January 31,
1998 and 1997, respectively. The Company's effective income tax rate
historically has benefited from the United States research and development tax
credit and tax benefits generated from export sales made from the United States.
The tax benefit recorded in the year ended December 31, 1995 relates primarily
to loss carrybacks and carryforwards associated with the Company's entry into
new foreign taxing jurisdictions and anticipated future taxable income to be
earned in such jurisdictions. The Company has available tax benefits associated
with net operating loss carryforwards of foreign subsidiaries aggregating
$1.8 million at January 31, 1998. See Note 6 of the Notes to Consolidated
Financial Statements.
Fiscal Year Transition Period
Effective February 1, 1996, the Company changed its financial reporting
year-end from December 31 to January 31. As a result of the change, the Company
is disclosing interim financial results for the one-month period ended January
31, 1996. Total revenues, total cost and expenses, total other (income) expense
and net income (loss) were $3.5 million, $7.3 million, $65,000 and $(2.9)
million, respectively, for the one-month period. During that month, the Company
experienced normal monthly operational costs including planned increases in
headcount for the coming year. The net loss for this period reflects these
planned increases in conjunction with seasonally low revenue in the month of
January.
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 $78.5 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 financed its operations and met its capital
expenditure requirements through cash flows from operations as well as short and
long term borrowings.
At January 31, 1998, the Company had $70.1 million of cash and cash
equivalents. Net cash provided by operating activities were $9.5 million,
$7.4 million and $4.1 million in the years ended January 31, 1998 and 1997 and
the year ended December 31, 1995, respectively. Net cash used in investing
activities was primarily related to the purchase of computer equipment, office
furniture and real estate and aggregated $16.5 million, $3.4 million and
$9.5 million in the years ended January 31, 1998 and 1997 and the year ended
December 31, 1995, respectively. Net cash provided by (used in) financing
activities were primarily related to proceeds from the initial public offering,
proceeds from (used in) borrowings and proceeds from the sale of stock to
employees and totaled $76.8 million, $(4.5) million and $5.0 million in the
years ended January 31, 1998 and 1997 and the year ended December 31, 1995,
respectively. At January 31, 1998, the Company did not have any material
commitments for capital expenditures.
At January 31, 1998, the Company had a working capital of $79.3 million.
Accounts receivable, net of allowance for doubtful accounts, increased to $75.7
million at January 31, 1998 from $46.7 million at January 31, 1997. The
Company's accounts receivable days' sales outstanding ("DSO"), calculated on a
quarterly basis (for quarters ending on April 30, July 31, October 31, and
January 31), has ranged from 125 days to 66 days over the last three years and
has demonstrated seasonal fluctuations. During each of those years, DSO peaked
in the quarter ended April 30 and (except for the year ended January 31, 1998)
improved significantly during the middle two quarters. The quarters ended
January
25
<PAGE>
31 are impacted by the significant amount of seasonal maintenance renewals. The
Company believes that the days' sales outstanding are higher than desired and
the Company is focusing on its sales terms and collection processes to improve
cash flows and working capital. Total deferred revenue increased to $43.0
million at January 31, 1998 from $29.1 million at January 31, 1997 primarily as
a result of increased billings of maintenance agreements.
Subsequent to the initial public offering the Company entered into a
revolving credit agreement with Bank of America National Trust and Savings
Association, which expires on August 4, 1999. The maximum available amount of
borrowings under the revolving credit agreement is equal to $20 million, unless
there is a voluntary termination or reduction of commitment by the Company. The
total amount of available borrowings under the revolving credit agreement at
January 31, 1998 was approximately $20 million. Borrowings under the revolving
credit agreement bear interest at a rate per annum equal to the Offshore Rate
plus the Applicable Margin or the Base Rate plus the Applicable Margin. The
Applicable Margin means, with respect to Base Rate Loans, 0%, and with respect
to Offshore Rate Loans, 1.25% when 50% or less of the loan commitment is being
utilized, and 1.50% when more than 50% of the loan commitment is being utilized.
The Company pays a commitment fee on the average unused portion of the loan
commitment to the bank, equal to one-half of one percent (.50%) per annum.
The Company believes that its available working capital, the available
borrowings under its revolving credit agreement and cash generated by
operations, will satisfy the Company's working capital requirements for at least
the next 12 months.
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 SFAS No. 130 Reporting
Comprehensive Income and SFAS No.131 Disclosures about Segments of an Enterprise
and Related Information. SFAS No. 130 will affect the disclosure requirements
for the first quarter of the year ended January 31, 1999 financial statements.
SFAS No. 131 will affect the disclosure requirements for the year ended January
31, 1999 annual financial statements. The Company is currently evaluating the
effect of these new statements.
Year 2000 Compliance
In 1997, the Company developed a plan to deal with the Year 2000 problem
and began converting its computer systems to be Year 2000 compliant. The plan
provides for the conversion efforts to be completed by the end of 1999. The Year
2000 problem is the result of computer programs being written using two digits
rather than four to define the applicable year. The total cost of the project
has not been, and is not anticipated to be, material to the Company's financial
position, results of operations or liquidity. The costs of the project has been
and will continue to be funded through operating cash flows. The Company is
expensing all costs associated with these systems changes as the costs are
incurred. See "Business-Year 2000 Compliance."
International Operations
The Company has reassessed, and continues to closely monitor, its
international business risks due to the recent economic conditions in the Asian
markets. Although the Company does not anticipate that the Asian conditions will
materially impact its business,
26
<PAGE>
there can be no assurance that the current economic conditions in Asia will not
worsen or that the situation will not negatively impact the Company's financial
condition or results of operations.
FACTORS THAT MAY AFFECT FUTURE RESULTS AND MARKET PRICE OF STOCK
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.
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. The
Company also believes that the purchase of its products is relatively
discretionary and generally involves a significant commitment of a customer's
capital resources. Therefore, a downturn in any potential customer's business
could result in order cancellations, which could have a significant adverse
impact on the Company's revenue and quarterly results. Moreover, declines in
general economic conditions could precipitate significant reductions in
corporate spending for information technology, which could result in delays or
cancellations of orders for the Company's products.
The Company has also historically recognized a substantial portion of its
revenue from sales booked and shipped in the last month of a quarter. As a
result, the magnitude of quarterly fluctuations in license fees may not become
evident until late in, or at the end of, a particular quarter. If sales
forecasted from a specific customer for a particular quarter are not realized in
that quarter, the Company is unlikely to be able to generate revenue from
alternate sources in time to compensate for the shortfall. As a result, a lost
or delayed sale could have a material adverse effect on the Company's quarterly
operating results. To the extent that significant sales occur earlier than
expected, operating results for subsequent quarters may be adversely affected.
The Company has also historically operated with little backlog because its
products are generally shipped as orders are received. As a result, revenue from
license fees in any quarter is substantially dependent on orders booked and
shipped in that quarter and on sales by the Company's distributors and other
resellers. Sales derived through indirect channels are harder to predict and may
have lower profit margins than direct sales.
The Company has generally realized lower revenue (i) in July and August,
due primarily to the timing of the Company's fiscal quarter end and reduced
economic activity
27
<PAGE>
in Europe during that period and (ii) to a lesser extent, in the first two
months of the fiscal year, due to the timing of the Company's fiscal year end
and the concentration by some customers of purchases in the fourth quarter of
the fiscal year, and their consequently lower purchasing activity during the
immediately following months. In addition, 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. With the
change in the Company's fiscal year end to January 31, the Company experienced
some shifting in revenues to the last month of each new fiscal quarter. 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.
The Company's expense levels are relatively fixed and are based, in
significant part, on expectations of future revenue. Consequently, if revenue
levels are below expectations, expense levels could be disproportionately high
as a percentage of total revenue, and operating results would be immediately and
adversely affected and losses could occur.
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.
In the year ended January 31, 1998, QAD implemented various changes
designed to mitigate the seasonal and quarterly fluctuations in its operating
results. Such changes included the hiring of additional financial personnel,
including a new Chief Financial Officer, the changing of the Company's fiscal
year end from December 31 to January 31 and the changing of the Company's
planning systems to incorporate quarterly performance goals and quarterly
forecasting procedures. Additionally, the Company is including quarterly
financial incentives into its sales compensation system. There can be no
assurance that such changes will alleviate the seasonal, quarterly or other
fluctuations in the Company's financial results or that such changes will have a
positive effect at all.
In future periods, the Company's operating results may be below the
expectations of stock market analysts and investors. In such event, the price of
the Common Stock could be materially adversely affected. See "-Seasonality of
Operating Results" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Risks Associated with Sales Cycle
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
28
<PAGE>
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. See "Management's Discussion and Analysis of Consolidated Financial
Condition and Results of Operations."
Seasonality of Operating Results
The Company has generally realized lower revenue (i) in July and August,
due primarily to the timing of the Company's fiscal quarter end and reduced
economic activity in Europe during that period and (ii) to a lesser extent, in
the first two months of the fiscal year, due to the timing of the Company's
fiscal year end and the concentration by some customers of purchases in the
fourth quarter of the fiscal 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. See "-Historical Fluctuations
in Quarterly Results and Potential Future Significant Fluctuations" and
"Management's Discussion and Analysis of Consolidated Financial Condition and
Results of Operations."
Product Concentration
The Company has historically derived substantially all of its revenue from
the licensing and maintenance of the Company's MFG/PRO software and third-party
software. In the fiscal year ended January 31, 1997 and 1998, such revenue
equaled approximately 94% and 91%, respectively, of the Company's total revenue.
The Company expects that such revenue will continue to represent substantially
all of the Company's revenue for the foreseeable future. However, in the event
the Company pursues certain acquisitions of distributors, the Company
anticipates that revenues from implementation services will increase. In
addition, if the Company is successful in the launch of its On/Q software and
the Company pursues its strategy of directly providing implementation services
for such product, the Company anticipates that service revenue will be
increased. 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. The Company has spent, and intends to continue
to spend, considerable resources educating potential customers about ERP in
general and about the features and functions of MFG/PRO software in particular.
However, there can be no assurance that such expenditures will enable MFG/PRO
software to achieve any additional degree of market penetration or a higher
level of market acceptance, nor can there be any assurance that any new ERP
products being
29
<PAGE>
developed by the Company will achieve the market acceptance necessary to make
such products profitable. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business-Products."
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 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 calendar year 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.
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 could have a material adverse effect on the
Company's business, operating results and financial condition.
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While the Company generally takes steps to avoid interruptions of sales due
to the pending availability of new products, customers may delay their
purchasing decisions in anticipation of the general availability of new or
enhanced MFG/PRO software, which could have a material adverse effect on the
Company's business, operating results and financial condition. The actual or
anticipated introduction of new products, technologies and industry standards
can also render existing products obsolete or unmarketable or result in delays
in the purchase of such products. As a result, the life cycles of the Company's
products are difficult to estimate. The Company must respond to developments
rapidly and incur substantial product development expenses. Any failure by the
Company to anticipate or respond adequately to technology developments or
customer requirements, or any significant delays in introduction of new
products, could result in a loss of revenue. Moreover, significant delays in the
general availability of such new releases, significant problems in the
installation or implementation of such new releases, or customer dissatisfaction
with such new releases, could have a material adverse effect on the Company's
business, operating results and financial condition. The Company is also
dependent upon third parties for necessary services in connection with the
installation and implementation of the Company's products and associated
post-sales training. Any errors, delays or other deficiencies in such services
due to technology changes or other factors could have a material adverse effect
on the Company's business, operating results and financial condition. See
"Business-Products" and "-Third-Party Implementation Providers."
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 two years, the Company has devoted
substantial resources to developing its On/Q software and working with third
parties to develop software components which may be included as part of or
encapsulated within On/Q software. The Company's first On/Q software product,
Outbound Logistics, is currently under development and is anticipated to be
commercially available in the second half of calendar year 1998. Although the
Company has performed preliminary tests on its Outbound 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
Outbound Logistics or any other of the Company's planned On/Q software products
developed by the Company or third parties will achieve the performance standards
required for commercialization or that such products will achieve market
acceptance or be profitable. If Outbound 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 component objects and to a Java user
interface 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 component
objects or to a Java user interface on a timely basis, if at all, or that if
developed or converted such software will achieve market acceptance. The Company
is also reliant on the Java programming language in developing and supporting
its Java user interface for MFG/PRO and its On/Q software products. The failure
to successfully incorporate component objects in
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new products, to convert MFG/PRO software to component objects, to integrate
Java user interfaces or of Java to achieve market acceptance could have a
material adverse effect on the Company's business, operating results and
financial condition.
Convergent Engineering is a new software design methodology employed by the
Company to develop future products. Convergent Engineering methodology allows
business requirements to be captured as a series of simple facts, actions and
rules, enabling software to more flexibly accommodate business practices and
processes. Although Convergent Engineering does not require the user to adopt
new business practices or principles for their own work processes, Convergent
Engineering models business management processes differently than traditional
business models. As a result, use of Company products based upon Convergent
Engineering principles will require the Company's implementation partners to be
educated in the new methodology. There can be no assurance that the Company will
gain acceptance among its implementation providers for this methodology on which
the Company's new products are based. The failure to obtain such acceptance
would have a material adverse effect on the marketability of the Company's
products under development and the Company's business, operating results and
financial condition. See "Business-Products."
Risk of Software Defects
As a result of the complexities inherent in client/server computing
environments and the broad functionality and performance demanded by customers
for ERP products, major new products and product enhancements can require long
development and testing periods. In addition, software programs as complex as
those offered by the Company may contain undetected errors or "bugs" when first
introduced or as new versions are released that, despite testing by the Company,
are discovered only after a product has been installed and used by customers.
While the Company has on occasion experienced delays in the scheduled
introduction of new and enhanced products, to date the Company's business has
not been materially adversely affected by delays or the release of products
containing errors. However, there can be no assurance that errors will not be
found in future releases of the Company's software, or that the Company will not
experience material delays in releasing product improvements or new products.
The occurrence of such errors could result in significant losses to the Company
or to customers. Such occurrences could also result in reduced market acceptance
of the Company's products, which would have a material adverse effect on the
Company's business, operating results and financial condition.
Market Concentration
The Company has made a strategic decision to concentrate its product
development and sales and marketing in five primary vertical industry segments:
electronics/industrial, food/beverage, consumer-packaged goods, medical and
automotive. An important element of the Company's strategy is to achieve
technological and market leadership recognition for its software products in
these segments. The failure of the Company's products to achieve or maintain
substantial market acceptance for its software products in one or more of these
segments could have a material adverse effect on the Company's product and
business strategy in that segment and on the business, operating results and
financial condition of the Company. If any of the industry segments targeted by
the Company experiences a material downturn in expansion or in prospects for
future growth, such downturn would materially adversely affect the demand for
the Company's products and will materially adversely affect its business,
operating results and financial condition. See "Business-Sales and Marketing."
Management of Growth
The Company's business has grown rapidly in the last seven years, with
revenue increasing from approximately $46.5 million in the fiscal year ended
December 31, 1993 to
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approximately $172.2 million in the fiscal year ended January 31, 1998. During
the fiscal year ended December 31, 1995 and continuing through the fiscal year
ended January 31, 1998, the Company significantly increased its sales and
marketing, service and support and research and development staffs, resulting in
substantial growth in the number of its full-time employees (from 521 at March
31, 1995 to 917 at January 31, 1998), the scope of its operating and financial
systems and the geographic distribution of its operations and customers. This
recent rapid growth has placed, and will continue to place, a significant strain
on the Company's management and operations. The Company expects to continue to
increase staffing levels, primarily in the sales and marketing and research and
development areas, and incur additional associated costs in future periods. The
Company's future operating results will depend on the ability of its officers
and other key employees to continue to implement and improve its operational,
customer support and financial control systems, and to effectively expand, train
and manage its employee base. There can be no assurance that the Company will be
able to manage any future expansion successfully, and any inability to do so
would have a material adverse effect on the Company's business, operating
results and financial condition. The Company has undertaken a project to
significantly upgrade its financial planning and control systems, including an
upgrade of its current transaction accounting systems through, among other
things, the implementation of the most recent release of the Company's own
software for financial controls. The Company believes the success of such
implementation will improve its budgeting, forecasting and financial statement
reporting capabilities. However, implementation of these systems upgrades will
require significant management and other employee attention and coordination,
and there can be no assurance that the implementation will be successful. The
failure to successfully implement the upgrades could materially adversely affect
the Company's future budgeting, forecasting and financial statement reporting
capabilities.
The Company has made a strategic decision to be a global provider of its
products. To accomplish this goal, over the last two years the Company has
expanded its direct sales and support operations from 12 countries to 19
countries. In addition, during that time, the Company has significantly expanded
its distributor and partner relationships. Currently, the Company has
approximately 40 distributors worldwide. The management of these widely
dispersed international operations has placed and will continue to place
significant strain on the Company's management and operations. The Company
believes that its ability to provide products and services on a global basis is
critical to the Company's success. However, there can be no assurance that the
Company will be able to continue to successfully manage its widespread
international operations or successfully manage future expansion of such
operations, and the failure by the Company to do so would have a material
adverse effect on its business, operating results and financial condition.
The Company days' sales outstanding have generally exceeded industry
averages. If the Company experiences rapid growth, this lengthy collection cycle
could result in a significant impairment of the Company's cash position. While
the Company has undertaken efforts to reduce the length of its collection cycle,
the failure of the Company to successfully implement such changes or the failure
of such changes to reduce such collection cycle could have a material adverse
effect on the Company's business, operating results and financial condition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Dependence Upon Key Personnel; Need to Hire Additional Personnel in All Areas
The Company's future operating results depend in significant part upon the
continued service of a relatively small number of key technical and senior
management personnel, including Pamela M. Lopker, its President and founder, and
Karl F. Lopker, its Chief Executive Officer, neither of whom is bound by an
employment agreement. Pamela and Karl Lopker are married to each other and
jointly own approximately 65% of the outstanding Common Stock. Although the
Company maintains key-individual insurance in the amount of $2.5
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million with respect to each of Pamela and Karl Lopker and the Company is the
beneficiary of such policies, the loss of one or more of these or other key
individuals could have a material adverse effect on the Company's business,
operating results and financial condition.
The Company's future success also depends on its continuing ability to
attract and retain other highly qualified technical and managerial personnel.
Competition for such personnel is intense, and the Company has at times in the
past experienced difficulty in recruiting qualified personnel. There can be no
assurance that the Company will retain its key technical and managerial
employees or that it will be successful in attracting, assimilating and
retaining other highly qualified technical and managerial personnel in the
future. The loss of any member of the Company's key technical and senior
management personnel or the inability to attract and retain additional qualified
personnel could have a material adverse effect on the Company's business,
operating results and financial condition. See "Business-Employees" and
"-Executive Officers of the Registrant."
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 the Company will be
successful in hiring such personnel in accordance with its plans. There can be
no assurance that the Company's recent and other planned expenses in sales and
marketing will ultimately prove to be successful or that the incremental revenue
generated will exceed the significant incremental costs associated with these
efforts. In addition, 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 approximately 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. There can be no assurance that current or future distributors
will provide the level and quality of expertise and service required to
successfully license the Company's products, that the Company will be able to
maintain effective, long-term relationships with distributors, or that selected
distributors will continue to meet the Company's sales needs. Further, there can
be no assurance that these distributors will not market software products in
competition with the Company in the future or will not otherwise reduce or
discontinue their relationships with or support of the Company and 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. In addition, if any of the Company's distributors
exclusively adopts a product other than the Company's products, or if any such
distributor materially reduces its sales efforts relating to the Company's
products or materially increases such support
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for competitive products, the Company's business, operating results and
financial condition could be materially and adversely affected. See
"Business-Sales and Marketing."
Competition
The ERP software market is highly competitive, rapidly changing and
affected by new product introductions and other market activities of industry
participants, including consolidations among 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, J.D. Edwards and 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 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, 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, IMI and
Manugistics, as well as from broad based solution providers such as Baan,
Oracle, 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, partners or potential partners
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. See "Business-Competition."
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, has not historically provided these
services. In the event the Company pursues certain acquisitions of distributors
and the Company is successful in the launch of its On/Q software and pursues
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its strategy of directly providing implementation services for such product, the
Company will increase its provision of installation and implementation 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 is aware that these
third-party providers do not provide systems integration services exclusively
for the Company's products and in many instances such firms have similar, and
often more established, relationships with the Company's principal competitors.
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.
There can be no assurance that these and other third parties will provide the
level and quality of service required to meet the needs of the Company's
customers, that the Company will be able to maintain an effective, long-term
relationship with such third parties, or that such third parties will continue
to meet the needs of the Company's customers. Further, there can be no assurance
that these third-party implementation providers, many of which have
significantly greater financial, technical, personnel and marketing resources
than the Company, will not market software products in competition with the
Company in the future or will not otherwise reduce or discontinue their
relationships with or support of the Company and 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, 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). The Company's installation and implementation partners generally do
not receive fees for the sale of the Company's software products unless they
participate actively in a sale as a sales agent. However, they generally are
permitted to set their own rates for their installation and implementation
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
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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. See
"Business-Sales and Marketing," "-Third-Party Implementation Providers" and
"-Proprietary Rights and Licensing."
Intellectual Property Rights; Use of Licensed Technology
The Company's success is dependent upon its proprietary technology and
other intellectual property. The Company relies primarily on a combination of
the protections provided by applicable copyright, trademark and trade secret
laws, as well as on confidentiality procedures and licensing arrangements, to
establish and protect its rights in its software. The Company enters into
license agreements with each of its customers. Each of the Company's license
agreements provides for the non-exclusive license of the Company's MFG/PRO
software. Such licenses generally are perpetual (unless terminated by either
party upon 30 days written notice) and contain strict confidentiality and
non-disclosure provisions, a limited warranty covering MFG/PRO software and
indemnification for the customer from any infringement action related to MFG/PRO
software. The pricing policy under each license is based on a standard price
list and may vary based on the number of end-users, number of sites, number of
modules, number of languages, the country in which the license is granted and
level of ongoing support, training and services to be provided by the Company.
The Company has no patents or pending patent applications. In order to
facilitate the customization required by most of the Company's customers, the
Company generally licenses its MFG/PRO software to end users in both object code
(machine-readable) and source code (human-readable) format. While this practice
facilitates customization, making software available in source code also makes
it easier for third parties to copy or modify the Company's software for
non-permitted purposes. One of the Company's distributors has developed
modifications to the Company's software, which it owns jointly with the Company.
The Company has entered into a reciprocal license with this distributor who
markets the product enhancements in conjunction with MFG/PRO software. This or
other distributors or other persons may continue to independently develop a
modified version of the Company's software. The Company seeks to protect its
software, documentation and other written materials under the legal provisions
relating to trade secret, copyright and contract law. The Company's license
agreements generally allow the use of MFG/PRO software solely by the customer
for internal purposes without the right to sublicense or transfer MFG/PRO
software to third parties. The Company believes that the foregoing measures
afford only limited protection. Despite the Company's efforts, it may be
possible for third parties to copy certain portions of the Company's products or
reverse engineer or obtain and use information that the Company regards as
proprietary. In addition, the laws of certain countries do not protect the
Company's proprietary rights to the same extent as do the laws of the United
States. Accordingly, there can be no assurance that the Company will be able to
protect its proprietary software against unauthorized third- party copying or
use, which could adversely affect the Company's
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competitive position. Policing unauthorized use of the Company's products is
difficult, and while the Company is unable to determine the extent to which
piracy of its software products exist, software piracy can be expected to be a
problem. Furthermore, there can be no assurance that the Company's competitors
will not independently develop technology similar to that of the Company.
The Company has in the past been subject to claims of intellectual property
infringement and may increasingly be subject to such claims as the number of
products and competitors in the Company's targeted vertical markets grows and
the functionality of products in other industry segments overlaps. Although the
Company is not aware that any of its products infringes upon the proprietary
rights of third parties, there can be no assurance that third parties will not
claim infringement by the Company with respect to current or future products.
Any such claims, with or without merit, could be time-consuming, result in
costly litigation, cause product shipment delays or require the Company to enter
into royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to the Company, or at all,
which could have a material adverse effect upon the Company's business,
operating results and financial condition. The Company may also initiate claims
or litigation against third parties for infringement of the Company's
proprietary rights or to establish the validity of the Company's proprietary
rights. Litigation to determine the validity of any claims could result in
significant expense to the Company and divert the efforts of the Company's
technical and management personnel from productive tasks, whether or not such
litigation were determined in favor of the Company.
The Company has in the past and may in the future resell certain software,
which it licenses from third parties. In addition, the Company has in the past
and may in the future jointly develop software in which the Company will have
co-ownership or cross-licensing rights. There can be no assurance that these
third-party software arrangements and licenses will continue to be available to
the Company on terms that provide the Company with the third-party software it
requires to provide adequate functionality in its products, on terms that
adequately protect the Company's proprietary rights or on terms that are
commercially favorable to the Company. The loss of or inability to maintain or
obtain any of these software licenses, including as a result of third-party
infringement claims, could result in delays or reductions in product shipments
until equivalent software, if any, could be identified, licensed and integrated,
which could materially and adversely affect the Company's business, operating
results and financial condition. See "Business-Products" and "-Research and
Development."
Risks Associated With International Operations
The Company derived approximately 44%, 42% and 39% of its total revenue
from sales outside the United States in the years ended December 31, 1995,
January 31, 1997 and January 31, 1998, respectively. Of the Company's
approximately 3,600 licensed sites in more than 80 countries as of January 31,
1998, over 70% are outside the United States. The Company's engineering and
research and development operations are located in the United States and Brazil
and its sales and support operations are located in the United States and in 16
other countries. The Company also has more than 40 distributors and numerous
partnerships and alliances worldwide. The geographic distance between these
locations has in the past led, and could in the future lead, to logistical and
communications difficulties. There can be no assurance that the geographic, time
zone, language and cultural differences between the Company's international
personnel and operations will not result in problems that materially adversely
affect the Company's business, operating results and financial condition.
The Company expects to commit additional time and resources to expanding
its worldwide sales and marketing activities, localizing its products for
selected markets and developing local sales and support channels. There can be
no assurance that such efforts
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will be successful. Failure to sustain or increase international revenue could
have a material adverse effect on the Company's business, operating results and
financial condition. The Company may also experience an operating loss in one or
more regions of the world for one or more periods. The Company's ability to
manage such operational fluctuations and to maintain adequate long-term
strategies in the face of such developments will be critical to the Company's
continued growth and profitability. International operations are subject to a
number of risks, including the
Costs of localizing products for different countries, longer accounts
receivable collection periods and greater difficulty in accounts receivable
collections in certain geographic regions, unexpected changes in regulatory
requirements, changes in tax rates or applications, dependence on distributors
and technology standards, import and export restrictions and tariffs,
difficulties and costs of staffing and managing international operations,
potentially adverse tax treatment and consequences, political instability, the
burdens of complying with multiple, potentially conflicting laws and the impact
of business cycles and economic instability. See "Management's Discussion and
Analysis of Consolidated Financial Condition and Results of Operations" and
"Business-Sales and Marketing."
Exposure to Currency Fluctuations
To date, the Company's revenue from international operations has primarily
been denominated in United States dollars. The Company prices its products in
United States dollars and over 90% of the Company's sales in the years ended
December 31, 1995, January 31, 1997 and 1998, were denominated in United States
dollars, with the remainder in ten different currencies. The Company expects
that a growing percentage of its business will be conducted in currencies other
than the United States dollar. The Company also incurs a significant portion of
its expenses in currencies other than the United States dollar, including a
substantial portion of its general and administrative expenses. As a result,
fluctuations in the values of the respective currencies relative to the other
currencies in which the Company generates revenue could materially adversely
affect its business, operating results and financial condition. While the
Company may in the future change its pricing practices, an increase in the value
of the United States dollar relative to foreign currencies could make the
Company's products more expensive and, therefore, less competitive in other
markets. Fluctuations in currencies relative to the United States dollar will
affect period-to-period comparisons of the Company's reported results of
operations. In the fiscal year ended January 31, 1998 and 1997, the Company
recognized $879,000 and $407,000, respectively in foreign currency transaction
gains, compared to losses of $477,000 the fiscal year ended December 31, 1995.
Due to the constantly changing currency exposures and the volatility of currency
exchange rates, there can be no assurance that the Company will not experience
currency losses in the future, nor can the Company predict the effect of
exchange rate fluctuations upon future operating results. Although the Company
does not currently undertake hedging transactions the Company may choose to
hedge a portion of its currency exposure in the future as it deems appropriate.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Control by Principal Stockholders
As of January 31, 1998, Pamela and Karl Lopker jointly beneficially own
approximately 65% of the Company's outstanding Common Stock. Current directors
and executive officers as a group will own approximately 70% of the Common
Stock. Consequently, the directors and executive officers, and the Lopkers in
particular, will be able to control the outcome of all matters submitted for
stockholder action, including the election of members to the Company's Board of
Directors and the approval of significant change in control transactions, and
will effectively control the management and affairs of the Company, which may
have the effect of delaying or preventing a change in control of the Company.
The Lopkers currently constitute two of the five directors and therefore have
significant influence in directing the actions of the Board of Directors.
39
<PAGE>
Product Liability
While the Company's license agreements with its customers typically contain
provisions designed to limit the Company's exposure to potential product
liability claims, it is possible that such limitation of liability provisions
may not be effective under the laws of certain jurisdictions. Although the
Company has not experienced any product liability claims to date, there can be
no assurance that the Company will not be subject to such claims in the future.
The Company has product liability insurance, but the Company currently does not
have errors and omissions coverage, and there can be no assurance that such
insurance will be available to the Company on commercially reasonable terms or
at all. A successful product liability or errors or omissions claim brought
against the Company could have a material adverse effect on the Company's
business, operating results and financial condition. Moreover, defending such a
suit, regardless of its merits, could entail substantial expense and require the
time and attention of key management personnel, either of which could have a
material adverse effect on the Company's business, operating results and
financial condition.
Anti-Takeover Provisions
The Company's Certificate of Incorporation and Bylaws, contain certain
provisions that may have the effect of discouraging, delaying or preventing a
change in control of the Company or unsolicited acquisition proposals that a
stockholder might consider favorable, including provisions which authorize the
issuance of "blank check" preferred stock, provide for a Board of Directors with
staggered three-year terms, require super-majority voting to effect certain
amendments to the Certificate of Incorporation and Bylaws, limit the persons who
may call special meetings of stockholders, and establish advance notice
requirements for stockholder nominations for election to the Board of Directors
or for stockholder proposals of business to be considered at stockholders
meetings. Certain provisions of Delaware law may also have the effect of
discouraging, delaying or preventing a change in control of the Company or
unsolicited acquisition proposals.
Dividend Policy
The Company has never declared or paid any cash dividends on its capital
stock and currently intends to retain any future earnings to fund the growth of
the Company's business. The payment of any future dividends will be determined
by the Board of Directors in light of conditions then existing, including the
Company's results of operations, financial condition, cash requirements,
restrictions in financing agreements, business conditions and other factors.
The Company is restricted by the terms of its outstanding debt and
financing agreements from paying cash dividends on its Common Stock, and may in
the future enter into loan or other agreements that restrict the payment of cash
dividends on the Common Stock. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations-Liquidity and Capital Resources"
and Note 4 of the Notes to Consolidated Financial Statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted as a separate section of this Form
10-K. See Item 14.
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
40
<PAGE>
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the Directors of the Company is incorporated by
reference to the section entitled "Election of Directors" appearing in the
Registrant's Definitive Proxy Statement for the Annual Meeting of Stockholders
to be filed with the Securities and Exchange Commission (the "Commission")
within 120 days after the end of the Company's fiscal year ended January 31,
1998. Certain information with respect to persons who are or may be deemd to be
executive officers of the Registrant is set forth under the caption "Executive
Officers of the Registrant" in Part I of this form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation is incorporated by reference
to the information set forth under the caption "Executive Compensation" in the
Company's Definitive Proxy Statement for the Annual Meeting of Stockholders to
be filed with Commission within 120 days after the end of the Company's fiscal
year ended January 31, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners and
management is incorporated by reference to the information set forth under the
caption "Security Ownership of Certain Beneficial Owners and Management
Ownership" in the Company's Definitive Proxy Statement for the Annual Meeting of
Stockholders to be filed with the Commission within 120 days after the end of
the Company's fiscal year ended January 31, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions are
incorporated by reference to the information set forth under the caption
"Certain Transactions" in the Company's Definitive Proxy Statement for the
Annual Meeting of Stockholders to be filed with the Commission within 120 days
after the end of the Company's fiscal year ended January 31, 1998.
41
<PAGE>
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) 1. FINANCIAL STATEMENTS
The following financial statements are filed as a part of this form 10-K:
QAD Inc.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
-------
Independent Auditors' Report........................................... F-1
Consolidated Balance Sheets as of January 31, 1998 and 1997............ F-2
Consolidated Statements of Income for the years ended January 31
1998 and 1997, the one month ended January 31, 1996 and
the year ended December 31 1995................................... F-3
Consolidated Statement of Stockholders' Equity for the years ended
January 31, 1998 and 1997, the one month ended January 31, 1996
and the year ended December 31 1995............................... F-4
Consolidated Statements of Cash Flows for the years ended January 31,
1998 and 1997, the one month ended January 31, 1996
and the year ended December 31, 1995.............................. F-5
Notes to Consolidated Financial Statements............................. F-6
(A) 2. FINANCIAL STATEMENT SCHEDULES
The following financial statement schedule is filed as a part of this
report:
II. Valuation and Qualifying Accounts............................ S-1
All other schedules are omitted because they are not required or the
required information is shown in the financial statements or notes thereto.
(A) 3. EXHIBITS
Reference is made to the Index to Exhibits included as part of this report.
(B) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the fourth quarter of the fiscal
year ended January 31, 1998.
44
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
QAD Inc.:
We have audited the accompanying consolidated balance sheets of QAD Inc. and
subsidiaries as of January 31, 1997 and 1998 and the related consolidated
statements of income, stockholders' equity and cash flows for the year ended
December 31, 1995, the one month ended January 31, 1996 and the years ended
January 31, 1997 and 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of QAD Inc. and
subsidiaries as of January 31, 1997 and 1998 and the results of their operations
and their cash flows for the year ended December 31, 1995, the one month ended
January 31, 1996 and the years ended January 31, 1997 and 1998 in conformity
with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Los Angeles, California
March 24, 1998
F-1
<PAGE>
QAD Inc.
Consolidated Balance Sheets
(in thousands, except for number of shares)
<TABLE>
<CAPTION>
January 31, January 31,
1997 1998
----------- -----------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents ............................................................... $ 301 $ 70,082
Trade accounts receivable, net of allowances of
$3,694 and $5,510 at January 31, 1997 and 1998, respectively ......................... 46,745 75,683
Deferred income taxes ................................................................... 4,816 1,858
Other current assets .................................................................... 2,112 8,584
--------- ---------
Total current assets .................................................................... 53,974 156,207
Property and equipment, net ................................................................. 18,071 25,717
Other assets, net ........................................................................... 3,051 6,402
Deferred income taxes ....................................................................... 2,154 2,180
--------- ---------
Total assets .................. $ 77,250 $ 190,506
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable and current installments of long-term debt ................................ $ 8,465 $ 143
Accounts payable ........................................................................ 9,403 12,778
Accrued expenses ........................................................................ 12,739 18,110
Income taxes payable .................................................................... 741 2,282
Deferred revenue and deposits ........................................................... 28,602 43,636
--------- ---------
Total current liabilities .................. 59,950 76,949
Long-term debt, less current installments ............................................... 5,036 39
Deferred revenue - non-current .......................................................... 991 424
Other deferred liabilities .............................................................. 379 708
Minority interest ....................................................................... 90 11
Stockholders' equity:
Preferred stock, 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 shares and 29,096,269 shares at January 31,
1997 and 1998, respectively .......................................................... 5,942 97,238
Retained earnings ....................................................................... 7,539 17,395
Receivable from stockholders ............................................................ (197) (397)
Unearned compensation-restricted stock .................................................. (2,129) (1,510)
Cumulative foreign currency translation adjustment ...................................... (351) (351)
--------- ---------
Total stockholders' equity .................. 10,804 112,375
--------- ---------
Total liabilities and stockholders' equity .................. $ 77,250 $ 190,506
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
QAD Inc.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except for share data)
<TABLE>
<CAPTION>
Year One Month Year Year
Ended Ended Ended Ended
--------- --------- --------- ---------
December 31, January 31, January 31, January 31,
1995 1996 1997 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue:
License fees ........................................................... $ 63,756 $ 993 $ 85,753 $ 113,447
Maintenance and other .................................................. 26,193 2,479 40,691 58,787
--------- --------- --------- ---------
Total revenues .......................... 89,949 3,472 126,444 172,234
Cost and expenses:
Cost of revenues ....................................................... 23,599 1,649 29,158 41,551
Sales and marketing .................................................... 38,341 3,294 53,194 67,249
Research and development ............................................... 17,037 1,547 25,434 29,317
General and administrative ............................................. 13,618 856 15,938 19,422
--------- --------- --------- ---------
Total cost and expenses ...................... 92,595 7,346 123,724 157,539
--------- --------- --------- ---------
Operating income (loss) .................................................... (2,646) (3,874) 2,720 14,695
Other (income) expense:
Interest income ........................................................ (38) -- (49) (1,785)
Interest expense ....................................................... 825 126 1,654 1,064
Other .................................................................. 48 (61) (608) (1,599)
--------- --------- --------- ---------
Total other (income) expense ............................................... 835 65 997 (2,320)
--------- --------- --------- ---------
Income (loss) before income taxes .......................................... (3,481) (3,939) 1,723 17,015
Income tax expense (benefit) ............................................... (2,795) (1,078) 723 7,159
--------- --------- --------- ---------
Net income (loss) .......................................................... $ (686) $ (2,861) $ 1,000 $ 9,856
========= ========= ========= =========
Basic net income (loss) per share .......................................... $ (0.03) $ (0.13) $ 0.05 $ 0.38
Diluted net income (loss) per share ........................................ $ (0.03) $ (0.13) $ 0.04 $ 0.38
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
QAD Inc.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Year ended December 31, 1995, one month ended January 31, 1996
and years ended January 31, 1997 and 1998
(in thousands, except for number of shares)
<TABLE>
<CAPTION>
Common Stock Retained Receivable Restricted Stock
Earnings from
Stockholders
--------------------------- -------------------------
Shares Amount Shares Amount
------------- ------------ ------------ ------------ ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 20,804,858 $ 1,805 $ 10,086 -- -- --
Common Stock Issued:
Under stock purchase plan 250,750 601 -- -- -- --
Under stock options 1,024,000 74 -- -- -- --
Pursuant to performance
awards 148,514 336 -- -- -- --
Common stock repurchases (1,262,370) (624) -- -- -- --
Receivable from stockholders -- -- -- (151) -- --
Translation adjustments -- -- -- -- -- --
Net loss -- -- (686) -- -- --
------------- ------------ ------------ ------------ ---------- ------------
Balance, December 31, 1995 20,965,752 2,192 9,400 (151) -- --
Common Stock Issued:
Pursuant to performance
awards 23,722 57 -- -- -- --
Common stock repurchases (10,720) (26) -- -- -- --
Translation adjustments -- -- -- -- -- --
Net loss -- -- (2,861) -- -- --
------------- ------------ ------------ ------------ ---------- ------------
Balance, January 31, 1996 20,978,754 2,223 6,539 (151) -- --
Common Stock Issued:
Under stock purchase plan 793,438 1,411 -- -- -- --
Under stock options 105,000 185 -- -- -- --
Pursuant to performance
awards 108,062 256 -- -- -- --
Pursuant to restricted
stock awards 559,066 2,584 -- -- (559,066) (2,584)
Common stock earned under
restricted stock awards -- -- -- -- 149,954 455
Common stock repurchases (325,748) (717) -- -- -- --
Receivable from stockholders -- -- -- (46) -- --
Translation adjustments -- -- -- -- -- --
Net income -- -- 1,000 -- -- --
------------- ------------ ------------ ------------ ---------- ------------
Balance, January 31, 1997 22,218,572 5,942 7,539 (197) (409,112) (2,129)
</TABLE>
<TABLE>
<CAPTION>
Cumulative Total
Translation Stockholders
Adjustment Equity
------------ ------------
<S> <C> <C>
Balance, December 31, 1994 $ 102 $ 11,993
Common Stock Issued:
Under stock purchase plan -- 601
Under stock options -- 74
Pursuant to performance
awards -- 336
Common stock repurchases -- (624)
Receivable from stockholders -- (151)
Translation adjustments 189 189
Net loss -- (686)
------------ ------------
Balance, December 31, 1995 291 11,732
Common Stock Issued:
Pursuant to performance
awards -- 57
Common stock repurchases -- (26)
Translation adjustments 121 121
Net loss -- (2,861)
------------ ------------
Balance, January 31, 1996 412 9,023
Common Stock Issued:
Under stock purchase plan -- 1,411
Under stock options -- 185
Pursuant to performance
awards -- 256
Pursuant to restricted
stock awards -- --
Common stock earned under
restricted stock awards -- 455
Common stock repurchases -- (717)
Receivable from stockholders -- (46)
Translation adjustments (763) (763)
Net income -- 1,000
------------ ------------
Balance, January 31, 1997 (351) 10,804
(Continued)
</TABLE>
<TABLE>
<CAPTION>
Common Stock Retained Receivable Restricted Stock
Earnings from
Stockholders
--------------------------- ------------------------
Shares Amount Shares Amount
------------- ------------ ------------ ------------ ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Common Stock Issued:
Under initial public
offering (net of offering
costs) 6,612,500 90,516 -- -- -- --
Under stock purchase and
incentive plan 251,129 2,413 -- -- -- --
Under stock options 299,000 709 -- -- -- --
Pursuant to performance
awards 50,060 431 -- -- -- --
Pursuant to restricted
stock awards 20,400 194,000 -- -- (20,400) (194,000)
Common stock earned under
restricted stock awards 1,536 -- -- -- 208,296 663
Tax benefit associated with
stock option exercise -- 523 -- -- -- --
Common stock repurchases (334,528) (3,340) -- -- -- --
Restricted stock awards
cancelled (22,400) (150,000) -- -- 22,400 150,000
Receivable from
stockholders -- -- -- (200) -- --
Net income -- -- 9,856 -- -- --
=========== =========== =========== =========== =========== ===========
Balance, January 31, 1998 29,096,269 $ 97,238 $ 17,395 $ (397) (198,816) $ (1,510)
=========== =========== =========== =========== =========== ===========
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
Cumulative Total
Translation Stockholders
Adjustment Equity
------------ ------------
<S> <C> <C>
Common Stock Issued:
Under initial public
offering (net of offering
costs) -- 90,516
Under stock purchase and
incentive plan -- 2,413
Under stock options -- 709
Pursuant to performance
awards -- 431
Pursuant to restricted
stock awards -- --
Common stock earned under
restricted stock awards -- 663
Tax benefit associated with
stock option exercise -- 523
Common stock repurchases -- (3,340)
Restricted stock awards
cancelled -- --
Receivable from
stockholders -- (200)
Net income -- 9,856
========= ===========
Balance, January 31, 1998 $ (351) $ 112,375
========= ===========
See accompanying notes to consolidated financial statements.
</TABLE>
F-5
<PAGE>
QAD Inc.
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Year Ended One Month Year Ended Year Ended
December 31, Ended January 31, January 31,
1995 January 31, 1997 1998
1996
-------------- --------------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (686) $ (2,861) $ 1,000 $ 9,856
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 4,346 390 5,345 6,921
Provision for doubtful accounts and sales returns 945 (25) 3,432 4,370
Loss on disposal of equipment -- -- 25 82
Minority interest -- 106 (16) (79)
Compensation expense pursuant to stock repurchase 2,408 -- -- --
Compensation expense pursuant to stock awards 336 57 1,044 1,361
Changes in assets and liabilities:
(Increase) decrease in assets:
Trade accounts receivable (15,103) 5,444 (14,941) (33,508)
Income tax receivable (231) 231 -- --
Deferred income taxes (3,780) (1,781) (1,398) 2,932
Other assets (1,929) (15) (2,408) (7,962)
Increase (decrease) in liabilities:
Accounts payable 6,283 (2,816) 2,991 3,375
Accrued expenses 2,236 (607) 4,137 5,577
Income taxes payable (1,192) 288 453 2,174
Deferred revenue and deposits 10,459 539 7,708 14,467
Other deferred liabilities -- -- 46 62
-------------- -------------- -------------- --------------
Net cash provided by (used in) operating activities 4,092 (1,050) 7,418 9,628
Cash flows from investing activities:
Additions to land and buildings (2,341) (206) (435) (281)
Purchase of property and equipment (7,243) (735) (3,008) (13,280)
Investment in equity securities -- -- -- (3,000)
Proceeds from disposition of property and equipment 117 -- 83 51
-------------- -------------- -------------- --------------
Net cash used in investing activities (9,467) (941) (3,360) (16,510)
Cash flows from financing activities:
Proceeds from notes payable and long-term debt 24,654 4,254 84,841 9,648
Reduction of notes payable and long-term debt (19,555) (2,414) (90,131) (22,967)
Proceeds from initial public offering -- -- -- 90,516
Issuance of common stock for cash 675 -- 1,596 2,474
Repurchase of common stock (624) (26) (717) (2,692)
Receivable from stockholders (151) -- (46) (200)
-------------- -------------- -------------- --------------
Net cash provided by (used in) financing activities 4,999 1,814 (4,457) 76,779
Effect of exchange rate changes on cash and 189 121 (763) (116)
cash equivalents
Net increase (decrease) in cash and cash equivalents (187) (56) (1,162) 69,781
Cash and cash equivalents at beginning of period 1,706 1,519 1,463 301
-------------- -------------- -------------- --------------
Cash and cash equivalents at end of period $ 1,519 $ 1,463 $ 301 $ 70,082
============== ============== ============== ==============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 824 $ 99 $ 1,553 $ 892
Income taxes $ 1,087 $ 6 $ 707 $ 1,179
</TABLE>
<PAGE>
Supplemental disclosure of non-cash investing and financing activities:
During the year ended December 31, 1995, one month ended January 31, 1996
and years ended January 31, 1997 and 1998, the Company acquired property and
equipment under capital lease obligations aggregating $1,081,000, $79,000,
$97,000 and $0.
During the year ended December 31, 1995, the Company issued a note payable
in the amount of $2,407,788 in connection with the repurchase of common shares.
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
QAD Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
The Company
The Company is a provider of Enterprise Resource Planning software for
multinational and other large manufacturing companies. The Company's software
solutions are designed to facilitate global management of resources and
information to allow manufacturers to reduce order fulfillment cycle times and
inventories, improve operating efficiencies and measure critical company
performance criteria against defined business plan objectives. The flexibility
of the Company's products also helps manufacturers adapt to growth,
organizational change, business process reengineering, supply chain management
and other challenges.
Effective February 1, 1996, the Company determined that it would change its
reporting period from years ending December 31 to fiscal years ending
January 31. Accordingly, the accompanying statements of income, stockholders'
equity and cash flows include results for the one-month transition period ending
January 31, 1996.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
QAD Inc. and its majority-owned subsidiaries. The Company also has various
branch offices worldwide. All significant intercompany accounts and transactions
have been eliminated in consolidation.
Concentrations of Credit Risk
Concentrations of credit risk with respect to trade receivables are limited
due to the large number of customers comprising the Company's customer base, and
their dispersion across many different industries and geographic locations
throughout the world. At January 31, 1997, one customer had an outstanding
receivable that constituted 12% of the Company's net trade accounts receivable.
There were no other concentrations of such credit risk for the periods
presented.
Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosures
of contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents
F-7
<PAGE>
Revenue Recognition
The Company's principal source of software license fee revenue is derived
from licensing MFG/PRO software. Revenues from maintenance and other activities
are generated from maintenance support services, training and consulting and are
billed separately from license revenues. Revenues from software license
agreements, including licenses sold through distributors, are recognized at the
time of shipment, net of any applicable distributor discount, provided there are
no remaining significant obligations to be fulfilled by the Company and
collectibility is probable. Where distributors have reproduction rights, revenue
is recognized upon notification of shipment by the distributor. Typically, the
Company's software licenses do not include significant vendor obligations. Where
license contracts call for payment terms in excess of 12 months from date of
shipment, revenue is recognized as payments become due. Maintenance revenues for
ongoing customer support and product updates are recognized ratably over the
term of the maintenance period, which is generally 12 months. Training and
consulting revenues are recognized as the services are performed. Returns and
allowances are estimated and provided for in the period of sale.
Revenue on all sales in which there are outstanding obligations to provide
resources over a period of time, as a component of the sale, is deferred and
recognized as services are provided on a percentage of completion basis. At
December 31, 1995, January 31, 1997 and 1998, $2,261,000, $811,000 and
$1,449,000, respectively, of revenue, net of related expenses, had been deferred
until future periods for recognition as services are provided. Further, the
Company recognizes revenue consistent with customer payment terms on all sales
where extended payment terms beyond one year are granted. At January 31, 1997
and 1998, sales contracts totaling $4,259,000 and $1,256,000, respectively
having payment terms through January 31, 2000 were deferred, to be recognized as
payments become due.
Depreciation and Amortization
Depreciation of property and equipment is provided on the straight-line
method over the estimated useful lives of the related assets. Asset lives range
from three to seven years. Leasehold improvements are amortized on a
straight-line basis over the term of the lease or the life of the related
improvements, whichever is shorter.
Computer Software Costs
Pursuant to Statement of SFAS No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed," issued by the Financial
Accounting Standards Board, the Company capitalizes software development costs
incurred in connection with the localization and translation of its products
once technological feasibility has been achieved. Capitalized development costs
are amortized on a straight-line basis over three years and charged to cost of
revenues. All other development costs are expensed to research and development
as incurred.
F-8
<PAGE>
Accrued Expenses
Accrued expenses are as follows:
January 31, January 31,
1997 1998
-------------- --------------
Accrued payroll ........................ $ 7,538 $ 9,268
Accrued other .......................... 5,201 8,842
-------------- --------------
$ 12,739 $ 18,110
============== ==============
Income Taxes
The Company provides for income taxes under SFAS No. 109, "Accounting for
Income Taxes," which employs an asset and liability approach in accounting for
income taxes payable or refundable at the date of the financial statements as a
result of all events that have been recognized in the financial statements and
as measured by the provisions of enacted laws. See Note 6.
Computation of Net Income (Loss) Per Share
In February 1997, the SFAS No. 128, Earnings Per Share. SFAS No. 128
specifies new standards designed to improve the earnings per share ("EPS")
information provided in financial statements by simplifying the existing
computational guidelines, revising the disclosure requirements and increasing
the comparability of EPS data on an international basis. Some of the changes
made to simplify the EPS computations include: (a) eliminating the presentation
of primary EPS and replacing it with basic EPS, with the principal difference
being that common stock equivalents are not considered in computing basic EPS,
(b) eliminating the modified treasury stock method and the three percent
materiality provision and (c) revising the contingent share provision and the
supplemental EPS data requirements. SFAS No. 128 also makes a number of changes
to existing disclosure requirements. SFAS No. 128 is effective for financial
statements issued for periods ending after December 15, 1997, including interim
periods. All prior period information has been restated to conform with the
provisions of the SFAS No. 128.
Net income (loss) per share has been computed using the weighted average
number of shares of common stock and common stock equivalents outstanding using
the treasury-stock method summarized as follows:
<TABLE>
<CAPTION>
Year One Month Year Year
Ended Ended Ended Ended
-------------- -------------- -------------- --------------
December 31, January 31, January 31, January 31,
1995 1996 1997 1998
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Weighted average shares of common stock
outstanding used in basic income (loss) per
share calculation ............................ 21,100,000 21,230,000 21,931,000 25,701,000
Weighted average shares of common stock
equivalents issued using the treasury stock
method ....................................... -- -- 1,083,000 582,000
-------------- -------------- -------------- --------------
Weighted average shares of common stock and
common stock equivalents outstanding used in
diluted income (loss) per share calculation .. 21,100,000 21,230,000 23,014,000 26,283,000
============== ============== ============== ==============
</TABLE>
F-9
<PAGE>
Net income (loss) for basic and diluted calculation is the same in each
respective period. Shares of common stock equivalents issued using the treasury
stock method of 2,177,000 and 1,244,000 for the year ended December 31, 1995 and
one month ended January 31, 1996, respectively were not included in the diluted
calculation because they were anti-dilutive.
Foreign Currency Translation
Foreign currency translation adjustments are accumulated as a separate
component of stockholders' equity. Revenues, costs and expenses are translated
at average rates for each month. (Gains) and losses from foreign currency
transactions are reflected in net earnings in the year incurred, classified as
"other income expense," and totaled approximately $477,000, $(34,000),
$(407,000) and $(879,000) for the year ended December 31, 1995, one month period
ended January 31, 1996 and years ended January 31, 1997 and 1998, respectively.
Fair Value of Financial Instruments
The carrying amounts of the following financial instruments approximate
fair value because of the short maturity of those instruments: cash and cash
equivalents, accounts receivable, accounts payable and accrued expenses.
The carrying value of the Company's obligations under capital leases, notes
payable and long-term debt approximates fair value and was estimated by
discounting the future cash flows of the capital leases, notes payable and
long-term debt at rates currently offered to the Company for similar capital
leases, notes payable and long-term debt of comparable maturities by the
Company's bankers.
Long-Lived Assets
The Company has adopted the provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
This statement requires that long-lived assets be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
the asset may not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset to future
undiscounted operating cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets.
Accounting for Stock Options
Prior to January 1, 1996, the Company accounted for its stock option grants
in accordance with the provisions of Accounting Principles Board (APB) Opinion
No. 25, "Accounting for Stock Issued to Employees," and related interpretations.
As such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. On
January 1, 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation," which permits entities to recognize as expense over the vesting
period the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net income and pro forma
earnings per share disclosures for employee stock option grants made in the year
ended December 31, 1995 and future years as if the fair value-based method
defined in SFAS No. 123 had been applied. The Company has elected to continue to
apply the provisions of
F-10
<PAGE>
APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No.
123 (see Note 10).
Effect of 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 SFAS No. 130 Reporting
Comprehensive Income and SFAS No.131 Disclosures about Segments of an Enterprise
and Related Information. SFAS No. 130 will affect the disclosure requirements
for the first quarter of the year ended January 31, 1999 financial statements.
SFAS No. 131 will affect the disclosure requirements for the year ended January
31, 1999 annual financial statements. The Company is currently evaluating the
effect of these new statements.
Reclassifications
Certain prior year balances have been reclassified to conform to current
year presentation.
2. Property and Equipment
Property and equipment is summarized as follows (in thousands):
<TABLE>
<CAPTION>
January 31, January 31,
1997 1998
-------------- --------------
<S> <C> <C>
Land and buildings .................................. $ 8,802 $ 9,082
Automobiles ......................................... 71 123
Computer equipment and software ..................... 12,306 23,479
Furniture and office equipment ...................... 6,160 7,654
Leasehold improvements .............................. 1,032 1,868
Equipment under capital lease ....................... 1,921 353
-------------- --------------
30,292 42,559
Less accumulated depreciation and amortization,
which includes $1,217 and $469 for January 31, 1997
and January 31, 1998 respectively, for equipment
under capital leases .............................. (12,221) (16,842)
-------------- --------------
Net property and equipment ................ $ 18,071 $ 25,717
============== ==============
</TABLE>
Included in land and buildings is capitalized interest aggregating $329,000
as of January 31, 1997 and 1998.
F-11
<PAGE>
3. Other Assets
Other assets at January 31, 1997 and 1998 include capitalized software
development costs of $1,065,000 and $2,416,000 (net of $2,341,000 and $3,034,000
of accumulated amortization), respectively. Amortization of these costs totaled
$694,000, $61,000, $671,000 and $693,000 during the year ended December 31,
1995, one month ended January 31, 1996, and years ended January 31, 1997 and
1998, respectively. Amortization costs are included in cost of revenues.
Software development costs incurred prior to achieving technological feasibility
are expensed as incurred as research and development. Such costs aggregated
$17,037,000, $1,547,000, $25,434,000 and $29,317,000 for the year ended
December 31, 1995, one month ended January 31, 1996, and years ended January 31,
1997 and 1998, respectively.
F-12
<PAGE>
4. Notes Payable and Long-Term Debt
Notes payable and long-term debt are summarized as follows (in thousands):
<TABLE>
<CAPTION>
January 31, January 31,
1997 1998
---------------- ---------------
<S> <C> <C>
Advances under a $16,000,000 revolving credit agreement with a bank, secured by
substantially all assets and guarantees of certain stockholders, bearing
interest at the highest LIBOR for the period (5.49% at January 31, 1997)
plus 4.875% per annum, expiring July 1997 ................................. $ 4,349 $ --
Term notes payable, secured by property and equipment, payable in monthly
installments ranging from $6,276 to $41,667, at interest rates ranging from
8.29% to 10.365% per annum, expiring from June 1997 to December 1999,
repaid in 1998 ............................................................ 5,258 --
Note payable under term portion of credit agreement, secured by real estate,
principal payable commencing August 1996 in monthly installments of $66,666
plus interest at the highest LIBOR during the month (5.49% at January 31,
1997) plus 4.875% per annum (to be no less than 8% per annum), through
July 2001, repaid in 1998 ................................................. 3,600 --
Note payable, secured by leasehold improvements, payable in monthly
installments of $681 through February 1998................................. 9 1
Capital lease obligations ..................................................... 285 181
-------------- --------------
13,501 182
Less current installments ..................................................... (8,465) (143)
-------------- --------------
$ 5,036 $ 39
============== ==============
</TABLE>
At January 31, 1998, future minimum principal payments of notes payable and
long-term debt are as follows (in thousands):
Year ending January 31:
1999 ......................... $ 143
2000 ......................... 39
--------
$ 182
========
Subsequent to the initial public offering the Company entered into a
revolving credit agreement with Bank of America National Trust and Savings
Association ("Bank"), which expires on August 4, 1999. The maximum available
amount of borrowings under the revolving credit agreement is equal to $20
million, unless there is a voluntary termination or reduction of commitment by
the Company. The total amount of available borrowings under the revolving credit
agreement at January 31, 1998 was approximately $20 million. Borrowings under
the revolving credit agreement bear interest at a rate per annum equal to the
Offshore Rate plus the Applicable Margin or the Base Rate plus the Applicable
Margin. The Applicable Margin means, with respect to Base Rate Loans, 0%, and
with respect to Offshore Rate Loans, 1.25% when 50% or less of the Commitment is
being utilized, and 1.50% when more than 50% of the Commitment is being
utilized. The Company pays a commitment fee on the average unused portion of the
Commitment to the Bank, equal to one-half of one percent (.50%) per annum.
F-13
<PAGE>
5. Deferred Revenue
The Company bills for ongoing maintenance and post-sale customer support
separately from sales of products and records such amounts as deferred revenue
when billed. Deferred revenue aggregated $29,125,000 and $43,226,000 at
January 31, 1997 and 1998, respectively. Revenue under maintenance contracts is
recognized ratably over the term of the contract, which is typically 12 months.
6. Income Taxes
Components of income tax expense (benefit) are as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended One Month Year Ended
Ended --------------------------------
December 31, January 31, January 31, January 31,
1995 1996 1997 1998
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Current:
Federal ................. $ 371 $ (1,402) $ 881 $ 1,675
State ................... 110 (203) (63) 197
Foreign ................. 503 890 227 2,421
-------------- -------------- -------------- --------------
Total 984 (715) 1,045 4,293
Deferred:
Federal ................. (1,946) 80 (94) 2,449
State ................... (290) 9 (10) (573)
Foreign ................. (1,543) (452) (218) 990
-------------- -------------- -------------- --------------
Total (3,779) (363) (322) 2,866
-------------- -------------- -------------- --------------
$ (2,795) $ (1,078) $ 723 $ 7,159
============== ============== ============== ==============
</TABLE>
SFAS No. 109 requires companies to record deferred tax assets for the
benefit to be derived from deductible temporary differences, net of appropriate
valuation reserves to reflect management estimates of realizability of such
deferred tax assets. The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax liabilities are
presented below (in thousands):
F-14
<PAGE>
<TABLE>
<CAPTION>
January 31, 1997 January 31, 1998
-------------------- ---------------------
<S> <C> <C>
Deferred tax assets:
Allowance for bad debts .................................. $ 1,387 $ 1,999
Accrued vacation ......................................... 524 751
Accrued commission ....................................... -- 267
Alternative minimum tax .................................. 98 98
Research and development credits ......................... 1,217 1,149
Foreign tax credits ...................................... 778 320
Stock awards/discounts ................................... -- 266
Long term contract ....................................... 328 --
Net operating loss carry forwards ........................ 5,054 2,417
Other .................................................... 34 213
-------------------- --------------------
9,420 7,480
Less valuation allowance ................................. (2,081) (1,814)
-------------------- --------------------
Net deferred tax assets ................................ 7,339 5,666
Less current portion ................................... (5,288) (2,719)
-------------------- --------------------
Long-term net deferred tax assets (net of $2,081 and $1,814
valuation allowance, respectively) ....................... 2,051 2,947
-------------------- --------------------
Deferred tax liabilities:
Capitalized translation and research and development costs 355 1,056
State income taxes ....................................... 119 (68)
Other .................................................... (2) 195
Mark to market ........................................... -- 807
Depreciation and amortization ............................ (103) (362)
-------------------- --------------------
369 1,628
Less current portion ............................... (472) (861)
-------------------- --------------------
Long-term net deferred tax liabilities ............. $ (103) $ 767
==================== ====================
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible.
For U.S. tax purposes, management has determined that the realization of
recorded deferred tax assets arising in the United States is reasonably assured,
and accordingly, no valuation allowance has been recorded on such items. With
available tax planning strategies and projections of future income over the
periods in which the foreign deferred tax assets are deductible, management
believes it is more likely than not that the Company will realize a portion of
the benefits of these deductible differences on tax returns filed in foreign
jurisdictions. The Company's net operating loss carryforward benefits
aggregating $5.1 million and $2.4 million at January 31, 1997 and 1998,
respectively arise principally from losses incurred by foreign subsidiaries and
expire commencing in 2001.
The Company's net operating loss carryforward benefits aggregating $5.1
million and $2.4 million at January 31, 1997 and 1998, respectively arise
principally from losses incurred by foreign subsidiaries and expire commencing
in 2001.
F-15
<PAGE>
At January 31, 1997 and 1998, the valuation allowance attributable to
deferred tax assets was $2,081,000 and $1,814,000, respectively, an overall
decrease of $267,000.
Actual income tax expense (benefit) differs from that obtained by applying
the statutory Federal income tax rate to earnings (loss) before income taxes as
follows (in thousands):
<TABLE>
<CAPTION>
Year One Month Year Ended
Ended Ended --------------------------------
December 31, January 31, January 31, January 31,
1995 1996 1997 1998
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Computed expected tax expense (benefit) ...... $ (1,183) $ (1,339) $ 586 $ 5,968
State income taxes, net of Federal income tax
benefit ................................... (209) (236) 103 815
Incremental tax expense from foreign
operations ................................ -- 649 117 203
Alternative minimum tax ("AMT") .............. 182 -- -- --
Net change in deferred tax assets and
liabilities ............................... (1,856) (87) 918 (267)
Meals and entertainment ...................... 279 9 286 325
Foreign sales corporation .................... 1,341 -- (539) --
Research, AMT and foreign tax credits ........ (1,386) (174) (1,082) (1,135)
Foreign dividends ............................ -- -- -- 541
Reduction of research and development credits
and foreign tax credits previously recorded -- 94 350 600
Other ........................................ 37 6 (16) 109
-------------- -------------- -------------- --------------
$ (2,795) $ (1,078) $ 723 $ 7,159
============== ============== ============== ==============
</TABLE>
7. 401(k) Plan
The Company has a defined contribution 401(k) plan, which is available to
U.S. employees after 30 days of employment. Employees may contribute up to the
maximum allowable by the Internal Revenue Code. The Company may make additional
contributions at the discretion of the Board of Directors. Participants are
immediately vested in their employee contributions. Employer contributions vest
over a five-year period. The employer contributions for the years ended
December 31, 1995, January 31, 1997 and 1998 were $101,000, $422,000 and
$371,000, respectively, which are included in general and administrative
expenses in the accompanying consolidated statements of income.
F-16
<PAGE>
8. Commitments and Contingencies
The Company finances equipment under capital leases and leases office
facilities under operating lease agreements expiring through 2004. The present
value of future minimum capital lease payments and future minimum lease payments
under non-cancelable operating leases are as follows (in thousands):
Capital Operating Leases
Leases
------------- ----------------
Year ending January 31,:
1999 .................................... $ 152 $ 4,784
2000 .................................... 41 3,402
2001 .................................... -- 2,281
2002 .................................... -- 1,548
2003 .................................... -- 639
Thereafter .............................. -- 26
------------- ---------------
Total minimum lease payments 193 $ 12,680
Less amount representing interest at rates
ranging from 11% to 14.5% .............. (12)
-------------
Present value of minimum lease payments ..... $ 181
=============
Total rent expense for the year ended December 31, 1995, one month ended
January 31, 1996 and years ended January 31, 1997 and 1998 aggregated
$4,981,000, $457,000, $5,929,000 and $6,509,000, respectively.
The Company is subject to various legal proceedings and claims, either
asserted or unasserted, which arise in the ordinary course of business. While
the outcome of these claims cannot be predicted with certainty, management does
not believe that the outcome of any of these legal matters will have a material
adverse effect on the Company's consolidated results of operations or
consolidated financial position.
F-17
<PAGE>
9. Geographic Information
The following table shows revenues, operating income (loss) and
identifiable assets by geographic segment (in thousands):
<TABLE>
<CAPTION>
Year Ended
--------------------------------------------------
December 31, January 31, January 31,
1995 1997 1998
-------------- -------------- ---------------
<S> <C> <C> <C>
Revenue:
U.S .......................... $ 49,955 $ 73,519 $ 105,446
Europe ....................... 24,619 32,725 43,027
Asia/Pacific ................. 12,354 15,543 18,354
Other ........................ 3,021 4,657 5,407
-------------- -------------- --------------
$ 89,949 $ 126,444 $ 172,234
============== ============== ==============
Operating income (loss):
U.S .......................... $ 1,094 $ 6,839 $ 12,054
Europe ....................... 1,251 341 9,870
Asia/Pacific ................. (5,621) (5,691) (8,982)
Other ........................ 630 1,231 1,753
-------------- -------------- --------------
$ (2,646) $ 2,720 $ 14,695
============== ============== ==============
</TABLE>
<TABLE>
<CAPTION>
January 31, January 31,
1997 1998
-------------- --------------
<S> <C> <C>
Identifiable assets:
U.S .......................... $ 46,959 $ 150,744
Europe ....................... 18,691 24,366
Asia/Pacific ................. 9,226 8,871
Other ........................ 2,374 6,525
-------------- --------------
$ 77,250 $ 190,506
============== ==============
</TABLE>
F-18
<PAGE>
10. Employee Stock Option, Purchase Plans and Restricted Stock Awards
Employee Stock Option Agreements
The Company has stock option agreements with certain key employees. As of
January 31, 1997 and 1998, options to purchase 1,121,000 and 2,724,000 shares of
common stock had been granted and were outstanding. Outstanding options
generally vest over a five-year period and have contractual lives of 10 years.
Transactions in stock options are summarized as follows:
<TABLE>
<CAPTION>
Shares Weighted Average Options
Exercise Price Exercisable
-------------- ------------------- ------------
<S> <C> <C> <C>
Outstanding options at December 31, 1994 2,350,000 $ 0.18 2,114,000
Options issued ......................... --
Options exercised ...................... (1,024,000) 0.02
Options expired and terminated ......... --
--------------
Outstanding options at December 31, 1995 1,326,000 0.31 1,240,000
Options issued ......................... --
Options exercised ...................... --
Options expired and terminated ......... --
--------------
Outstanding options at January 31, 1996 1,326,000 0.31 1,240,000
Options issued ......................... --
Options exercised ...................... (105,000) 0.40
Options expired and terminated ......... (100,000) 1.61
--------------
Outstanding options at January 31, 1997 1,121,000 0.18 1,121,000
Options issued ......................... 2,040,000 13.61
Options exercised ...................... (299,000) 0.21
Options expired and terminated ......... (138,000) 11.01
--------------
Outstanding options at January 31, 1998 2,724,000 $ 9.68 822,000
==============
</TABLE>
The weighted average remaining contractual life of stock options
outstanding as of January 31, 1998 was as follows:
<TABLE>
<CAPTION>
Options Exercisable
Weighted ---------------------------------
Average Weignted Weighted
Range of Number of Remaining Average Number Average
Exercise Prices Options Contractual Exercise Exercisable Exercise
Outstanding Life (years) Price Price
- --------------- ------------- --------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$ 0.12 - $ 0.39 822,000 2.3 $ 0.17 822,000 $ 0.17
$11.88 - $14.88 815,000 9.9 12.06 -- --
$15.00 - $18.75 1,087,000 9.5 15.09 -- --
------------- -------------- -------------- -------------- --------------
Total 2,724,000 7.4 $ 9.68 822,000 $ 0.17
============= ==============
</TABLE>
The Company applies APB Opinion No. 25 in accounting for its option plans
and, accordingly, no compensation cost was recognized as the exercise price of
the stock options equaled the fair value at the grant date. The pro forma impact
of applying SFAS No. 123 is not presented for the years ended December 31, 1995
and January 31, 1997 as SFAS 123 is applicable only to options granted during
the year ended December 31, 1995 and later, and all options outstanding as of
January 31, 1997 were granted prior to 1995. The
F-19
<PAGE>
fair value of the options at date of grant was estimated using the Black Scholes
model with the following assumptions:
January 31, 1998
----------------
Expected Life (years).......................................... 6.00
Interest Rate.................................................. 5.95%
Volatility..................................................... 0.41
Dividend Yield................................................. $ 0.00
If the Company had recognized compensation cost for stock-based employee
compensation in accordance with SFAS No. 123, the Company's net income for the
year ended January 31, 1998 would have decreased as follows:
As Reported Pro Forma
----------- ---------
Net income ............... $ 9,856 $ 8,201
Basic earnings per share . $ 0.38 $ 0.32
Diluted earnings per share $ 0.38 $ 0.31
During 1995, the Company repurchased 1,000,000 shares issued to an employee
immediately upon exercise of stock options. Accordingly, the Company recorded
compensation expense of $2,408,000 in the accompanying consolidated financial
statements for the year ended December 31, 1995. Additionally, during the year
ended January 31, 1997 certain employees holding vested options with respect to
70,000 shares at an average of $0.27 per share gave noticed as to their
intention to terminate employment. The Company determined that it would
reacquire the shares, which would be issued to the employees. Accordingly,
$648,000 of compensation expense representing the difference between exercise
price and acquisition cost, has been accrued as compensation expense at
January 31, 1997.
1994 Stock Ownership Program
The Company has also established the QAD Inc. 1994 Stock Ownership Program
(the "Plan") covering 4,800,000 shares of its common stock. Subject to certain
limitations, the Plan allows eligible employees to purchase shares of common
stock at the fair market value of the common stock by direct cash payment or at
95% of the fair market value through payroll deduction. The Company has the
right, but not the obligation, to repurchase shares at fair value upon the
termination of employment. During the years ended December 31, 1995, and
January 31, 1997 and 1998, 250,750, 793,438 and 215,160 shares, respectively,
were issued under the Plan at average prices of $2.40, $1.78 and $9.42,
respectively. No shares were issued under the Plan in January 1996.
During the year ended January 31, 1997 and 1998, respectively, 559,066 and
20,400 restricted shares of the Company's common stock were granted to certain
employees. The fair market value of shares awarded was $2,584,000 and $194,000,
respectively. These amounts were recorded as unearned compensation-restricted
stock, shown as a separate component of stockholders' equity. Unearned
compensation is being amortized to expense over the periods in which the
restrictions lapse, generally one to three years from date of award. Such
expenses amounted to $788,000 and $930,000 in the years ended January 31, 1997
and 1998, respectively, $333,000 and $600,000 of which is included in accrued
expense, respectively, and $455,000 and $663,000 of which has been recorded as a
reduction in unearned compensation-restricted stock as the restricted shares are
issued to employees.
F-20
<PAGE>
During the year ended December 31, 1995, one month ended January 31, 1996
and years ended January 31, 1997 and 1998, the Company granted 148,514, 23,722,
108,062 and 50,060 unrestricted shares, respectively, to certain employees
having a fair value of $336,000, $57,000, $256,000 and $431,000 at date of
grant, respectively. Compensation expense has been recognized in each respective
period for the fair value of such stock grants.
1997 Stock Incentive Program
The Company has adopted the 1997 Stock Incentive Program (the "Program").
The Program consists of seven parts:
The first part is the Incentive Stock Option Plan under which incentive
stock options are granted. The second part is the Non-Qualified Stock Option
Plan under which nonqualified stock options are granted. The third part is the
Restricted Share Plan under which restricted shares of Common Stock are granted.
The fourth part is the Employee Stock Purchase Plan. The Plan allows
participating employees to purchase shares of common stock through payroll
deductions at 85% of the lower of the beginning or the ending calendar quarter
share price. During the three months ended December 31, 1997, 35,969 shares were
issued at $10.73. The fifth part is the Non-Employee Director Stock Option Plan
under which grants of options to purchase shares of Common Stock may be made to
non-employee directors of the Company. The sixth part is the Stock Appreciation
Rights Plan under which SARs (as defined therein) are granted. The seventh part
is the Other Stock Rights Plan under which (i) units representing the equivalent
shares of Common Stock are granted; (ii) payments of compensation in the form of
shares of Common Stock are granted; and (iii) rights to receive cash or shares
of Common Stock based on the value of dividends paid with respect to a share of
Common Stock are granted. The maximum aggregate number of shares of Common Stock
subject to the Program is 4,000,000 shares. The Program will be valid for 10
years from the date of adoption.
Total Compensation Cost Recognized for Stock-Based Compensation Plans
Total compensation cost recognized for stock-based employee compensation
awards was as follows:
<TABLE>
<CAPTION>
December 31, 1995 January 31, 1997 January 31, 1998
------------------ ------------------ ------------------
<S> <C> <C> <C>
Pursuant to performance awards ............................ $ 336,000 $ 256,000 $ 431,000
Pursuant to restricted stock grants ....................... -- 788,000 930,000
Pursuant to optioned shares repurchased immediately upon
exercise ............................................... 2,408,000 648,000 --
------------------ ------------------ ------------------
TOTAL .......................... $ 2,744,000 $ 1,692,000 $ 1,361,000
================== ================== ==================
</TABLE>
During the one-month period ended January 31, 1996 compensation cost
aggregating $57,000 was recognized pursuant to stock performance awards.
Receivable from Stockholders
In connection with the 1994 Stock Ownership Program, the Company has
guaranteed indebtedness incurred by certain stockholders to purchase shares with
cash deposited with a lending institution. These amounts are classified as
"Receivable from Stockholders" in the accompanying balance sheets.
F-21
<PAGE>
11. Quarterly information (unaudited)
The following table sets forth selected unaudited quarterly information for
the Company's last eight fiscal quarters. The Company believes that all
necessary adjustments (which consisted only of normal recurring adjustments)
have been included in the amounts stated below to present fairly the results of
such periods when read in conjunction with the financial statements and related
notes included elsewhere herein (in thousands):
<TABLE>
<CAPTION>
--------------------------------------------------------------
Quarter Ended
--------------------------------------------------------------
April 30 July 31 Oct. 31 Jan. 31
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
1997
Statement of Income Data:
Total revenues ......................... $ 20,116 $ 33,555 $ 23,806 $ 48,967
Operating income (loss) ................ (10,158) 5,545 (3,554) 10,887
Net income (loss) ...................... (7,317) 3,513 (2,790) 7,594
Basic net income (loss) per share ...... (0.33) 0.17 (0.13) 0.35
Diluted net income (loss) per share .... $ (0.33) $ 0.16 $ (0.13) $ 0.33
1998
Statement of Income Data:
Total revenues ......................... $ 32,073 $ 41,661 $ 44,021 $ 54,479
Operating income ....................... 317 2,706 2,502 9,170
Net income ............................. 560 1,665 1,385 6,246
Basic net income (loss) per share ...... 0.03 0.07 0.05 0.21
Diluted net income (loss) per share .... $ 0.02 $ 0.07 $ 0.05 $ 0.21
</TABLE>
An allocation of accrued expenses of $1.5 million has been recorded into
the second quarter ended July 31, 1997. This adjustment related primarily to
reallocation of accruals between the fourth quarter and the second quarter and
resulted in an increase in net income of $924,000, or 4 cents per share, in the
previously reported second quarter.
F-22
<PAGE>
Schedule II
SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Description Balance at Charged to (1) Adjustments Balance at
Beginning of Costs and Deletions End of
Period Expenses Period
- ----------------------------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts and sales returns
Year ended:
December 31, 1995 ............. $ 2,528 $ 945 $ (1,209) $ 34 $ 2,298
One month ended:
January 31, 1996 .............. 2,298 (25) -- 7 2,280
Years ended:
January 31, 1997 .............. 2,280 3,432 (1,983) (35) 3,694
January 31, 1998 .............. $ 3,694 $ 4,370 $ (2,554) $ -- $ 5,510
- ------------------
<FN>
(1) Actual write-offs and product returns.
</FN>
</TABLE>
F-23
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on May 18, 1998.
QAD Inc.
By: /s/ KARL F. LOPKER
Karl F. Lopker
Chief Executive Officer,
Chief Financial Officer and Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the date indicated.
Signature Title Date
/s/ PAMELA M. LOPKER Chairman of the Board May 18, 1998
Pamela M. Lopker and President
(Principal Executive Officer)
/s/ KARL F. LOPKER Director, Chief Executive Officer May 18, 1998
Karl F. Lopker and Chief Financial Officer
(Principal Financial
and Accounting Officer)
/s/ KOH BOON HWEE Director May 18, 1998
Koh Boon Hwee
/s/ PETER VAN CUYLENBURG Director May 18, 1998
Peter Van Cuylenburg
/s/ EVAN M. BISHOP Director, Vice President
Evan M. Bishop Technology May 18, 1998
<PAGE>
INDEX TO EXHIBITS
The following exhibits are filed herewith or are incorporated by reference
to exhibits previously filed with the Commission. The Company shall furnish
copies of exhibits for a reasonable fee (covering the expense of furnishing
copies) upon request.
EXHIBIT EXHIBIT TITLE
NUMBER
3.1 Certificate of Incorporation of the Registrant, filed with the
Delaware Secretary of State on May 15, 1997*
3.2 Certificate of Amendment of Certificate of Inspection of the
Registrant, filed with the Delaware Secretary of State on June 19,
1997*
3.9 Bylaws of the Registrant*
4.1 Specimen Stock Certificate*
10.1 QAD Inc. 1994 Stock Ownership Program*
10.2 QAD Inc. 1997 Stock Incentive Program*
10.3 Form of Indemnification Agreement with Directors and Executive
Officers*
10.4 Loan and Security Agreement between Greyrock Business Credit, a
Division of Nations Credit Commercial Corporation ("GBC") and the
Registrant dated July 3, 1996*
10.5 Schedule to Loan Agreement between GBC and the Registrant dated
July 3, 1996*
10.6 Letter Agreement between the Registrant and GBC dated July 3, 1996*
10.7 Letter Agreement between the Registrant and GBC dated July 5, 1996*
10.8 Letter Agreement between the Registrant and GBC dated July 5, 1996*
10.9 Secured Promissory Note in the original principal amount of $4,000,000
made by the Registrant to the order of GBC dated July 3, 1996*
10.10 Trademark Security Agreement between GBC and the Registrant dated
July 3, 1996*
10.11 Security Agreement in Copyrighted Works executed by the Registrant in
favor of GBC dated July 3, 1996*
10.12 Deed of Trust with respect to real property located in Santa Barbara
County, California executed by the Registrant in favor of GBC dated
July 3, 1996*
10.13 Employment Offer Letter between the Registrant and Dennis R. Raney
dated January 15, 1997*
10.14 Master License Agreement between the Registrant and Progress Software
Corporation dated June 30, 1995*+
10.15 Lease Agreement between the Registrant and Matco Enterprises, Inc.
for Suites I, K and L located at 5464 Carpinteria Ave., Carpinteria,
California dated November 30, 1992*
10.16 First Amendment to Office Lease between the Registrant and Matco
Enterprises, Inc. for Suites C and H located at 5464 Carpinteria Ave.,
Carpinteria, California dated September 9, 1993*
10.17 Second Amendment to Office Lease between the Registrant and Matco
Enterprises, Inc. for Suite J located at 5464 Carpinteria Ave.,
Carpinteria, California dated January 14, 1994*
10.18 Third Amendment to Office Lease between the Registrant and Matco
Enterprises, Inc. for Suites B and C located at 5464 Carpinteria Ave.,
Carpinteria, California dated January 14, 1994*
10.19 Fourth Amendment to Office Lease between the Registrant and Matco
Enterprises, Inc. for Suite H located at 5464 Carpinteria Ave.,
Carpinteria, California dated February 15, 1994*
10.20 Fifth Amendment to Office Lease between the Registrant and Matco
Enterprises, Inc. for Suites G and E located at 5464 Carpinteria Ave.,
Carpinteria, California dated September 12, 1994*
<PAGE>
10.21 Sixth Amendment to Office Lease between the Registrant and Matco
Enterprises, Inc. for Suites A, B, D, F and H, and Room A located at
5464 Carpinteria Ave., Carpinteria, California dated October 30, 1996*
10.22 Lease Agreement between the Registrant and William D. and Edna J.
Wright dba South Coast Business Park for Suites 3 through 8 located at
6430 Via Real, Carpinteria, California dated November 30, 1993*
10.23 Addendum to Lease between the Registrant and William D. and Edna J.
Wright dba South Coast Business Park for Suites 3 through 8 located at
6430 Via Real, Carpinteria, California dated November 30, 1993*
10.24 Lease Agreement between the Registrant and William D. and Edna J.
Wright dba South Coast Business Park for 6450 Via Real, Carpinteria,
California dated November 30, 1993*
10.25 Addendum to Lease between the Registrant and William D. and Edna J.
Wright dba South Coast Business Park for 6450 Via Real, Carpinteria,
California dated November 30, 1993*
10.26 Lease Agreement between the Registrant and William D. and Edna J.
Wright dba South Coast Business Park for Suites 1 through 5 located at
6460 Via Real, Carpinteria, California dated November 30, 1993*
10.27 Addendum to Lease between the Registrant and William D. and Edna J.
Wright dba South Coast Business Park for Suites 1 through 5 located at
6460 Via Real, Carpinteria, California dated November 30, 1993*
10.28 Lease Agreement between the Registrant and William D. and Edna J.
Wright dba South Coast Business Park for Suites 7 and 8 located at
6440 Via Real, Carpinteria, California dated September 8, 1995*
10.29 Addendum to Lease between the Registrant and William D. and Edna J.
Wright dba South Coast Business Park for Suites 7 and 8 located at
6440 Via Real, Carpinteria, California dated September 8, 1995*
10.30 Lease Agreement between the Registrant and William D. and Edna J.
Wright dba South Coast Business Park for Suites 9 and 10 located at
6440 Via Real, Carpinteria, California dated September 8, 1995*
10.31 Addendum to Lease between the Registrant and William D. and Edna J.
Wright dba South Coast Business Park for Suites 9 and 10 located at
6440 Via Real, Carpinteria, California dated September 8, 1995*
10.32 Lease Agreement between the Registrant and William D. and Edna J.
Wright dba South Coast Business Park for Suites 1 and 2 located at
6430 Via Real, Carpinteria, California dated September 8, 1995*
10.33 Addendum to Lease between the Registrant and William D. and Edna J.
Wright dba South Coast Business Park for Suites 1 and 2 located at
6430 Via Real, Carpinteria, California dated September 8, 1995*
10.34 Lease Agreement between the Registrant and William D. and Edna J.
Wright dba South Coast Business Park for Suites 1 through 7 and 10
located at 6420 Via Real, Carpinteria, California dated January 27,
1997*
10.35 Addendum to Lease between the Registrant and William D. and Edna J.
Wright dba South Coast Business Park for Suites 1 through 7 and 10
located at 6420 Via Real, Carpinteria, California dated January 27,
1997*
10.36 Multi-Tenant Office Lease Agreement between the Registrant and EDB
Property Partners, LP III, successor to Laurel Larchmont Office, Inc.
located at 10,000 Midlantic Drive, Mt. Laurel, New Jersey dated
December 29, 1993*
10.37 Amendment to Multi-Tenant Office Lease Agreement between the
Registrant and EDB Property Partners, LP III, successor to Laurel
Larchmont Office, Inc. located at 10,000 Midlantic Drive, Mt. Laurel,
New Jersey dated April 26, 1994*
10.38 Second Amendment to Multi-Tenant Lease Agreement between the
Registrant and EDB Property Partners, LP III, dated May 30, 1995*
10.39 Third Amendment to Multi-Tenant Lease Agreement between the
Registrant and EDB
<PAGE>
Property Partners L.P. I dated November 30, 1995*
10.40 Agreement and Plan of Merger between QAD California and the
Registrant dated July 8, 1997*
10.41 Credit Agreement dated as of August 4, 1997 between the Registrant
and Bank of America National Trust and Savings Association**
10.42 Standard Industrial Commercial Multi-Tenant Lease--Modified Net dated
as of December 29, 1997 between the Registrant and CITO Corp.**
21.1 Subsidiaries of the Registrant*
23.1 Consent of KPMG Peat Marwick LLP and opinion on Schedule II**
23.2 Consent of KPMG Peat Marwick LLP to Incorporation by Reference
27.1 Financial Data Schedule**
________________________
(*) Incorporated by reference to the Registrant's Registration Statement in
Form S-1 (Commission File No. 333-28441).
(**) Previously filed.
(+) Certain portions of exhibit have been omitted based upon a request for
confidential treatment. The omitted portions have been separately filed
with the Securities and Exchange Commission.
Exhibit 23.2
The Board of Directors
QAD Inc.:
We consent to the incorporation by reference in the Registration Statement on
Form S-8 (No. 333-48381) of QAD Inc. of our reports included herein.
KPMG PEAT MARWICK LLP
Los Angeles, California
May 14, 1998
