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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/ X / QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 1998
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OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition from to
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Commission File Number 000-22823
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QAD INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0105228
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
6450 Via Real, Carpinteria, California 93013
(805) 684-6614
(address, including zip code and telephone number including area code, of
registrant's principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to filing requirements
for the past 90 days. Yes X No .
----- ----
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15 (d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes X No .
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The number of shares outstanding of the issuer's common stock as of the close of
business on December 4, 1998: 29,526,676.
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QAD Inc.
Index
<TABLE>
<CAPTION>
<S> <C>
Part I
Financial Information Page
Item 1 Financial Statements
Condensed Consolidated Balance Sheets as of
October 31, 1998 and January 31, 1998 1
Condensed Consolidated Statements of Income for the
three and nine months ended October 31, 1998 and 1997 2
Condensed Consolidated Statements of Cash Flows
for the nine months ended October 31, 1998 and 1997 3
Notes to Condensed Consolidated Financial
Statements 4
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
Part II
Other Information
Item 6 Exhibits and Reports on Form 8-K 11
</TABLE>
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Part I - Financial Information
QAD Inc.
Condensed Consolidated Balance Sheets
As of October 31, 1998 (unaudited) and January 31, 1998
(In thousands, except for number of shares)
Assets
<TABLE>
<CAPTION>
October 31, January 31,
1998 1998
----------- -----------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 28,263 $ 70,082
Trade accounts receivable, net of allowances of $4,936 for
October 31, 1998 and $5,510 for January 31, 1998 66,196 75,683
Notes receivable 537 59
Other current assets 12,864 10,383
----------- -----------
Total current assets 107,860 156,207
Property and equipment, net 34,099 25,717
Capitalized software costs 5,402 2,416
Intangible assets, net 5,548 217
Other assets, net 6,919 5,949
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$159,828 $190,506
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----------- -----------
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 12,289 $ 12,921
Accrued expenses 18,252 20,392
Deferred revenue and deposits 46,370 43,636
----------- -----------
Total current liabilities 76,911 76,949
Other deferred liabilities 1,201 1,182
Stockholders' equity:
Preferred stock, $0.001 par value. Authorized
5,000,000 shares; none issued and outstanding -- --
Common stock, $0.001 par value. Authorized 150,000,000
shares; issued and outstanding 29,524,609 at October 31, 1998
and 29,096,269 at January 31, 1998 97,496 97,238
Retained earnings (accumulated deficit) (13,663) 17,395
Stockholders' receivable (72) (397)
Unearned compensation - restricted stock (1,228) (1,510)
Cumulative other comprehensive loss (817) (351)
----------- -----------
Total stockholders' equity 81,716 112,375
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$ 159,828 $190,506
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</TABLE>
See accompanying notes to condensed consolidated financial statements
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QAD Inc.
Condensed Consolidated Statements of Income
For the three and nine months ended October 31, 1998 and 1997
(Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
October 31, October 31,
---------------------- ----------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
License fees $ 17,071 $ 29,616 $ 72,918 $ 73,723
Maintenance and other 19,364 14,405 55,066 42,568
--------- --------- --------- ---------
Total revenues 36,435 44,021 127,984 116,291
Cost and expenses:
Cost of revenues 11,359 11,842 33,885 29,915
Sales and marketing 24,143 17,154 69,567 46,573
Research and development 14,012 7,927 38,552 20,669
General and administrative 5,394 4,596 17,137 13,609
Restructuring charge 1,889 -- 1,889 --
--------- --------- --------- ---------
Total cost and expenses 56,797 41,519 161,030 110,766
--------- --------- --------- ---------
Operating income (loss) (20,362) 2,502 (33,046) 5,525
Other (income) (139) (678) (1,988) (1,093)
--------- --------- --------- ---------
Income (loss) before income taxes (20,223) 3,180 (31,058) 6,618
Income tax expense 4,117 1,795 -- 3,007
--------- --------- --------- ---------
Net income (loss) $ (24,340) $ 1,385 $ (31,058) $ 3,611
--------- --------- --------- ---------
--------- --------- --------- ---------
Diluted net income (loss) per share $ (0.83) $ 0.05 $ (1.06) $ 0.14
--------- --------- --------- ---------
--------- --------- --------- ---------
Basic net income (loss) per share $ (0.83) $ 0.05 $ (1.06) $ 0.15
--------- --------- --------- ---------
--------- --------- --------- ---------
Diluted shares used in computation 29,454 29,477 29,271 25,183
--------- --------- --------- ---------
--------- --------- --------- ---------
Basic shares used in computation 29,454 28,695 29,271 24,604
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
See accompanying notes to condensed consolidated financial statements
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QAD Inc.
Condensed Consolidated Statements of Cash Flows
For the nine months ended October 31, 1998 and 1997
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
October 31,
---------------------
1998 1997
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<S> <C> <C>
Net cash provided by (used in) operating activities $(20,568) $ 442
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Investing activities:
Purchases of property and equipment (15,270) (9,087)
Purchase of investments -- (3,000)
Acquisition of businesses, net of cash acquired (6,022) --
Proceeds from disposition of property and equipment 12 --
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Net cash used in investing activities (21,280) (12,087)
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Financing activities:
Proceeds from notes payable and long-term debt -- 68,608
Reduction of notes payable and long-term debt
and capital lease obligations (225) (82,076)
Issuance of common stock for cash 1,288 93,260
Repurchase of common stock (944) (2,958)
Receivable from stockholders 325 (200)
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Net cash provided by financing activities 444 76,634
--------- --------
Effect of exchange rate changes on cash and cash equivalents (415) (212)
--------- --------
Net increase (decrease) in cash and cash equivalents (41,819) 64,777
Cash and cash equivalents at beginning of period 70,082 301
--------- --------
Cash and cash equivalents at end of period $ 28,263 $ 65,078
--------- --------
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</TABLE>
Supplemental disclosure of non-cash investing activities:
During the nine months ended October 31, 1998 and 1997, the Company acquired
property and equipment under capital lease obligations aggregating $688,000 and
$202,000, respectively.
See accompanying notes to condensed consolidated financial statements
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QAD Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
The Condensed Consolidated Balance Sheets as of October 31, 1998 and January 31,
1998, the Condensed Consolidated Statements of Income for the three and nine
months ended October 31, 1998 and 1997 and Condensed Consolidated Statements of
Cash Flows for the nine months ended October 31, 1998 and 1997 are unaudited. In
the opinion of management, all adjustments (which include reclassifications and
normal recurring adjustments) necessary to present fairly the financial
position, results of operations and cash flows at October 31, 1998 and 1997 have
been made.
Certain information and footnote disclosures normally included in the financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these condensed
consolidated financial statements be read in conjunction with the financial
statements and notes thereto included in the Company's Annual Report on Form
10-K for the year ended January 31, 1998. The results of operations for the
three and nine months ended October 31, 1998 are not necessarily indicative of
the operating results for the full year.
2. Comprehensive Income
Comprehensive income includes changes in the balances of items that are reported
directly in a separate component of stockholders' equity on the Condensed
Consolidated Balance Sheets. A reconciliation of comprehensive income for the
three and nine months ended October 31, 1998 and 1997 are as follows (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
October 31, October 31,
-------------------- ---------------------
1998 1997 1998 1997
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Net income (loss) $(24,340) $ 1,385 $(31,058) $ 3,611
Foreign currency translation adjustments (331) 8 (466) (175)
--------- -------- --------- --------
Comprehensive income (loss) $(24,671) $ 1,393 $(31,524) $ 3,436
--------- -------- --------- --------
--------- -------- --------- --------
</TABLE>
3. Net Income (Loss) Per Share
The Company computes net income (loss) per share in accordance with the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 128,
Earnings per Share. Basic income (loss) per share is computed using the weighted
average number of common shares outstanding during the period. Diluted income
(loss) per share is computed using the weighted average number of common and
dilutive common equivalent shares outstanding during the period. Common
equivalent shares consist of the shares issuable upon the exercise of stock
options using the treasury stock method. The following table sets forth the
computation of basic and diluted income (loss) per share:
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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 (in thousands, except for per share
amounts):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
October 31, October 31,
--------------------- ---------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net income (loss) $(24,340) $ 1,385 $(31,058) $ 3,611
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average shares
outstanding (basic) 29,454 28,695 29,271 24,604
Diluted effect of employee stock options -- 782 -- 579
--------- --------- --------- ---------
Weighted average shares
outstanding (diluted) 29,454 29,477 29,271 25,183
--------- --------- --------- ---------
--------- --------- --------- ---------
Diluted income
(loss) per share $ (0.83) $ 0.05 $ (1.06) $ 0.14
--------- --------- --------- ---------
--------- --------- --------- ---------
Basic income
(loss) per share $ (0.83) $ 0.05 $ (1.06) $ 0.15
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
Shares of common stock equivalents issued using the treasury stock method of
approximately 652,000 and 870,000 for the three and nine months ended October
31, 1998, respectively were not included in the diluted calculation because they
were anti-dilutive. Due to the net loss for the three and nine months ended
October 31, 1998, basic and diluted per share amounts are the same.
4. Revenue Recognition
In October 1997, the American Institute of Certified Public Accountants (AICPA)
issued Statement of Position (SOP) 97-2: Software Revenue Recognition, which is
effective for software transactions entered into in fiscal years beginning after
December 15, 1997. The Company believes its current revenue recognition policies
and practices are consistent with SOP 97-2.
5. Acquisition of Businesses
In October 1998, the Company acquired certain assets and resources of Poland
distributor, Computer Systems for Business International S.A. ("CSBI"). The
acquisition was accounted for as a purchase and accordingly, CSBI's results are
included in the condensed consolidated financial statements since the date of
acquisition. The aggregate purchase price was approximately $1.4 million, which
includes costs of acquisition. The aggregate purchase price, which was financed
through available cash, has been allocated to the assets of the Company, based
upon their respective fair market values. The excess of the purchase price over
assets acquired (Goodwill) approximated $0.6 million and is being amortized on a
straight line basis over ten years.
In October 1998, the Company acquired a majority stake in its Thailand-based
distributor and systems integrator, Iris-Ifec Co., Ltd., forming a newly created
QAD subsidiary, QAD I & I Co., Ltd. The acquisition was accounted for as a
purchase and accordingly, QAD I & I Co., Ltd.'s assets and liabilities are
included in the condensed consolidated balance sheet as of October 31, 1998. The
results of QAD I & I Co., Ltd.'s operations from the date of the acquisition to
October 31, 1998 were not significant. The
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aggregate purchase price was approximately $1.8 million, which includes costs of
acquisition. An earn-out of up to $1.6 million may be added to the aggregate
purchase price. The actual amount of the earn-out will be determined using an
agreed upon formula based on financial results over the next five fiscal years.
The aggregate purchase price, which was financed with available cash, has been
allocated to the net assets of the Company, based upon their respective fair
market values. The excess of the purchase price over net assets acquired
(Goodwill) approximated $0.4 million and is being amortized on a straight line
basis over ten years.
In October 1998, the Company acquired a majority stake in Sistemas Integrados
Casa de Software and Sistemas Integrados Servicios de Consultoria (together
known as "Sistemas"). The acquisition was accounted for as a purchase and
accordingly, Sistemas's assets and liabilities are included in the condensed
consolidated balance sheet as of October 31, 1998. The results of Sistemas's
operations from the date of acquisition to October 31, 1998 were not
significant. The aggregate purchase price was approximately $3.3 million, which
includes costs of acquisition. An earn-out of up to $2.0 million may be added to
the aggregate purchase price. The actual amount of the earn-out will be
determined using an agreed upon formula based on financial results over the next
five fiscal years. The aggregate purchase price, which was financed with
available cash, has been allocated to the net assets of the Company, based upon
the companies' respective fair market values. The excess of the purchase price
over the net assets acquired (Goodwill) approximated $0.9 million and is being
amortized on a straight line basis over ten years.
The historical operations of the companies acquired in October 1998 are not
material, individually, or in the aggregate to the Company's consolidated
operations or financial position, and therefore, supplemental pro forma
information has not been presented.
6. Restructuring Charge
During the three months ended October 31, 1998, the Company recorded a $1.9
million charge in conjunction with a program aimed at better aligning the
Company's cost structure with sales performance. This charge was composed of
$0.4 million of severance expense, which resulted from a workforce reduction of
approximately 30 employees, or approximately three percent and the write-off of
$1.5 million of costs due to the narrowed scope of the Company's facilities
expansion plans.
7. Subsequent Events
In November 1998, the Company acquired the United Kingdom and the Netherlands
software distribution operations and assets of the TRW Integrated Supply
Chain Solutions. The acquisition was accounted for as a purchase. The
aggregate purchase price was approximately $20.7 million, which includes
costs of the acquisition. The final purchase price is subject to post closing
adjustments based upon the net assets acquired. At this time the Company
believes such adjustments will be a reduction in the purchase price of
approximately $2.0 million. The aggregate purchase price, which was financed
through available cash and promissory notes has been allocated to the net
assets of the Company based upon the net assets' respective fair market
values. The excess purchase price over net assets acquired (Goodwill)
approximated $2.8 million and is being amortized on a straight line basis
over 15 years.
In December 1998, the Company announced an approximate 200 employees or 15
percent reduction in its global workforce, as part of a company-wide
restructuring plan to reduce its cost structure and improve profitability. The
restructuring plan includes the consolidation of certain offices and facilities
and reductions in staff across a broad cross-section of the company. Annualized
cost savings are expected to exceed $20 million. The Company plans to take a
charge against fourth quarter results relating to the restructuring. The amount
of the charge will be determined upon completion of the restructuring plan.
8. Reclassification
Certain prior period amounts have been reclassified to conform to current period
presentation.
6
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QAD Inc.
Management's Discussion & Analysis of Financial Condition and
Results of Operations
Forward-looking statements are statements other than historical information or
statements of current condition and relate to future events or the future
financial performance of the Company. Some forward-looking statements may be
identified by use of such terms as "believes," " anticipates," "intends" or
"expects."
The following discussion should be read in conjunction with the condensed
consolidated statements and notes thereto. This Quarterly Report on Form 10-Q
may be deemed to include forward looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934 that involve risk and uncertainty, including financial,
business environment and trend projections. Although QAD Inc. (the "Company")
believes that its expectations are based on reasonable assumptions it can give
no assurance that its goals will be achieved. The important factors that could
cause actual results to differ materially from those in the forward looking
statements herein include, without limitation, the historical fluctuations in
quarterly results and the potential future significant fluctuations, seasonality
of operating results, product concentration, the dependence on Progress Software
products, the rapid technological change, the supply chain solutions under
development and the underlying technology, dependence upon development and
maintenance of sales and marketing channels, the competition, the reliance on
and need to develop additional relationships with third parties, the Company's
inability to address Year 2000 issues and other factors detailed in the
Company's annual report on Form 10-K for the year ended January 31, 1998. These
factors, among other things, could cause actual results to differ materially
from historical results or those currently anticipated.
Results of Operations:
Total Revenues. Total revenues for the three months ended October 31, 1998
decreased 17% to $36.4 million from $44.0 million in the same period in 1997.
Total revenues for the nine months ended October 31, 1998 increased 10% to
$128.0 million from $116.3 million in the same period in 1997. The decrease in
quarterly revenues was primarily due to manufacturers' decisions to delay
capital spending due to concerns of a global economic slowdown and year 2000
problems. The increase in year to date total revenues was primarily due to the
revenue growth in the first two quarters of the year partially offset by the
decline in the third quarter. License fees continue to be the Company's major
revenue source. For the three and nine months ended October 31, 1998, license
revenue accounted for $17.1 and $72.9 million, respectively. This compared to
$29.6 and $73.7 million for the same periods in the prior year. For the three
and nine months ended October 31, 1998, maintenance and other revenues as a
percentage of total revenues increased to 53% and 43%, respectively as compared
to 33% and 37% in the same periods in 1997. The increases were due to the
continued growth of maintenance revenues from the installed base and new
customers combined with the third quarter decline in license revenues.
Cost of Revenues. Cost of revenues consists primarily of the following: charges
incurred from reselling third-party databases (and their associated maintenance
contracts) on which MFG/PRO software runs; support costs associated with MFG/PRO
software maintenance contracts; costs associated with the reproduction and
delivery of the Company's software; and, the performance of service contracts.
During the three months ended October 31, 1998, cost of revenues decreased 4% to
$11.4 million (31% of total revenues) from $11.8 million (27% of total revenues)
in the same period in 1997. The higher cost to total revenues ratio was
primarily attributable to the fixed cost portion of the expense base (i.e.
personnel, information system and facilities management costs) remaining flat
while revenues decreased. Year to date in 1998, cost of revenues increased 13%
to $33.9 million (26% of total revenues) from $29.9 million (26% of total
revenues) for the prior year's same period. The ratio remained flat as a result
of the hiring of additional support personnel in anticipation of increased
revenues, partially offset by the absorption of existing fixed costs.
Sales and Marketing. Sales and marketing expense consists primarily of
salaries, commissions and associated benefits, travel and entertainment expenses
and promotional and advertising costs. During the three months ended October 31,
1998, sales and marketing expense increased 41% to $24.1 million (66% of total
revenues) from $17.2 million (39% of total revenues). Year to date, sales and
marketing expense increased 49% to $69.6 million (54% of total revenues) in 1998
from $46.6 million (40% of total revenues) for the same period in the prior
year. The increase in absolute dollars was primarily due to the year to date
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expansion of the Company's global sales force, continued investment in the
Company's supply chain solution, On/Q, and increased revenues through sales
agents resulting in higher commission expense.
Research and Development. Research and development expense consists primarily
of salaries and associated benefits, related overhead expenses and amounts paid
to consultants and third-party developers to supplement the product development
efforts of the Company's in-house staff. These expenses were partially offset by
funds that the Company received from third parties as a result of joint venture
research and development projects. During the three months ended October 31,
1998, research and development expense increased 77% to $14.0 million (38% of
total revenues) from $7.9 million (18% of total revenues) for the same period in
the prior year. Year to date, research and development expense increased 87% to
$38.6 million (30% of total revenues) in 1998 from $20.7 million (18% of total
revenues) for the same period in the prior year. The increase in absolute
dollars and as a percentage of total revenues was due primarily to the continued
investment in On/Q, including a one time expense related to the acquisition
of a license for software tools from a third-party vendor.
General and Administrative. During the three months ended October 31, 1998,
general and administrative expense increased 17% to $5.4 million (15% of total
revenues) from $4.6 million (10% of total revenues) in the same period in 1997.
Year to date, general and administrative expense increased 26% to $17.1 million
(13% of total revenues) in 1998 from $13.6 million (12% of total revenues) from
same period in the prior year. The increase in spending resulted primarily from
hiring of additional personnel and related infrastructure to support the
Company's growth.
Restructuring Charge. During the three months ended October 31, 1998, the
Company recorded a $1.9 million charge in conjunction with a program aimed at
better aligning the Company's cost structure with sales performance. This charge
was composed of $0.4 million of severance expense, which resulted from a
workforce reduction of approximately 30 employees, or approximately three
percent and the write-off of $1.5 million of costs due to the narrowed scope of
the Company's facilities expansion plans.
Other (Income) Expense. Total other (income) expense is composed primarily of
interest income, interest expense and transaction gains and losses. During the
three months ended October 31, 1998, other (income) expense decreased to
$(139,000) from $(678,000). Year to date, other (income) expense increased to
$(2.0) million in 1998 from $(1.1) million for the same period in the prior
year. The improvement on a year to date basis was due to significantly reduced
interest expense as the proceeds of the Company's initial public offering in
August 1997 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.
Provision for Income Taxes. The Company's effective tax rate for the three and
nine months ended October 31, 1998 was (20)% and zero, respectively. The Company
has determined that a tax benefit cannot be recognized at this time and
previously recognized tax benefits must be reversed as the Company does not
expect to report a profit for the fiscal year ended January 31, 1999. The
effective tax rate for the three and nine months ended October 31, 1997 was 56%
and 45%, respectively. The effective tax rates varied significantly from the
U.S. statutory rate due primarily to reduction in research and development tax
credits and foreign tax credits previously recorded.
Liquidity and Capital Resources
The Company has historically financed its operations and met its capital
expenditures requirements through cash flows from operations, sales of equity
securities and short-term borrowings. As of October 31, 1998, the Company had
working capital and cash and cash equivalents of $30.9 million and $28.3
million, respectively as compared to $79.3 million and $70.1 million as of
January 31, 1998. The decrease in working capital and cash and cash equivalents
was primarily due to the cash used in operations, capital expenditures and
acquisition of businesses.
Cash flows provided by (used in) operating activities were $(20.6) million and
$0.4 million for the nine months ended October 31, 1998 and 1997, respectively.
Cash used in investing activities aggregated $21.3 million and $12.1 million in
the nine months ended October 31, 1998 and 1997, respectively. The cash used in
investing activities for the nine months ended October 31, 1998 was primarily
related to the purchase of computer equipment, office furniture and the
acquisition of businesses. The cash used in investing activities for the nine
months ended October 31, 1997 was primarily related to the purchase of computer
equipment and office furniture and the purchase of an investment. Cash flows
from financing
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activities totaled $0.4 million and $76.6 million for the nine months ended
October 31, 1998 and 1997, respectively, and were composed of proceeds from
borrowings and issuance of common stock.
The Company believes that the cash on hand and cash generated by operations will
satisfy the Company's working capital requirements for at least the next 12
months.
Commitments and Contingencies
In November 1998, the Company acquired the United Kingdom and the Netherlands
software distribution operations and assets of the TRW Integrated Supply Chain
solutions. The aggregate purchase price was approximately $20.7 million, which
was financed approximately one-third from available cash and approximately
two-thirds with two-year promissory notes, payable to the seller. The Company
plans to settle the promissory notes with available cash. The company has no
other material commitments for capital expenditures.
Year 2000 Compliance
The Company's business operations are significantly dependent upon the same
proprietary software products it licenses to customers. Management believes it
has successfully addressed the Year 2000 ("Y2K") issues in its proprietary
software products and does not anticipate any business interruptions associated
with these applications. To ensure that the Company has adequately addressed
exposures related to the Y2K and is Y2K ready, the Company has established a Y2K
program that includes business partners and other third-party relationships. The
Company defines systems as "Y2K Ready" if they are either "Y2K Compliant" or
otherwise will operate without any substantial decrease in performance as a
result of processing date data into the next century. "Y2K Compliant" means the
system must perform fault-free in the processing of date and date related data
(including but not limited to calculating, comparing and sequencing) by all
software of components individually and in combination, upon installation.
Fault-free performance includes the manipulation of this data with dates prior
to, through and beyond January 1, 2000.
The Company's Y2K program consists of these five phases: 1) Assessment, 2)
Planning, 3) Resources, 4) Technology and 5) Reporting. These phases are defined
as follows: 1) Assessment - which identifies the magnitude of Y2K exposure, a
process that includes estimating the business risk of not becoming Y2K
compliant, determining its potential areas for Y2K exposure, and developing an
internal definition of compliance, 2) Planning - which details corporate
planning efforts, including inventorying and analyzing its systems for Y2K
impact and developing contingency plans for systems that pose unusual compliance
issues, 3) Resources - which ensures that funds and resources are sufficient,
given the magnitude of the Y2K plan. This is facilitated by obtaining funds
through internal mechanisms and assessing staff capacity for remediation and
testing, 4) Technology - which executes the work needed to repair or retire
existing systems, through a process which includes programming, code testing,
user testing data conversion and program implementation and 5) Reporting which
includes providing status of program activities to business and regulatory
bodies.
The Company has completed the first three phases and is beginning its fourth
phase in addressing the readiness of its information technology (IT) systems,
excluding the Company's proprietary software products which the Company believes
to be generally Y2K compliant currently. The Company is in the "assessment"
phase with regard to its state of readiness for areas classified as non-IT
systems. The Company is almost complete with the second phase, which encompasses
"planning" for third party products that constitute material relationships. The
Company expects to have substantially completed all five phases within the next
nine months.
As of October 31, 1998, the direct costs incurred to remediate Y2K issues were
not material. Cost directly attributed to the Company's Y2K program is estimated
to be approximately $1.8 million.
Significant uncertainty exists in the software industry concerning the potential
effects associated with Y2K readiness. Although the Company currently offers
software products that are designed and have been tested to be ready for the
Year 2000, there can be no assurance that the Company's software products
contain all necessary date code changes. Furthermore, it has been widely
reported that a significant amount of litigation surrounding business
interruptions will arise out of Y2K issues. It is uncertain whether, or to what
extent, the Company may be affected by such litigation. Additionally,
third-party software, computer
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and other equipment used internally may materially impact the Company if not Y2K
compliant. The Company's operations may be at risk if its suppliers and other
third parties fail to adequately address the problem or if software conversions
result in system incompatibilities with these third parties. This issue could
result in system failures, the generation of erroneous information, and other
significant disruptions of business activities. To the extent that either the
Company or a third-party vendor or service provider on which the Company relies
does not achieve Y2K readiness, the Company's results of operations may be
adversely impacted. As part of the five phase process outlined above, specific
contingency plans are being developed in connection with the assessment and
resolution of the risks identified. The Company has currently established
certain IT contingency plans, and it is continuing to develop such plans
regarding each specific area of risk associated with this issue as part of its
Y2K program.
Recent Accounting Pronouncements
The Financial Accounting Standards Board has issued SFAS No. 131: Disclosures
about Segments of an Enterprise and Related Information. SFAS No. 131 will
affect the disclosure requirements for the year ended January 31, 1999 annual
financial statements.
The AICPA issued SOP 98-1: Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use, which is effective for financial
statements for fiscal years beginning after December 15, 1998. The Company has
adopted SOP 98-1 and there were no material impacts on its financial condition
or results of operations.
10
<PAGE>
QAD Inc.
Part II - Other Information
Item 6 - Exhibits and Reports on Form 8-K
a) Exhibit Index
<TABLE>
<CAPTION>
Index
Number Index Description
------ -----------------
<S> <C>
27 Financial Data Schedule
</TABLE>
b) Reports on Form 8-K
1. On December 4, 1998 the Company filed a Current Report on Form 8-K
following its issuance of a press release on November 18, 1998
announcing that it had completed the acquisition of the United
Kingdom and the Netherlands software distribution operations and
assets of TRW Integrated Supply Chain Solutions.
11
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
QAD INC.
(Registrant)
Date: December 15, 1998 By /s/ A.J. MOYER
-----------------------------------
A.J. Moyer
Chief Financial Officer
(on behalf of the registrant and as
Principal Financial Officer)
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AS OF OCTOBER 31, 1998 AND THE
CONDENSED CONSOLIDATED STATEMENT OF INCOME FOR THE NINE MONTHS ENDED
OCTOBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-01-1998
<PERIOD-END> OCT-31-1998
<CASH> 28,263
<SECURITIES> 0
<RECEIVABLES> 71,132
<ALLOWANCES> 4,936
<INVENTORY> 0
<CURRENT-ASSETS> 107,860
<PP&E> 56,676
<DEPRECIATION> 22,577
<TOTAL-ASSETS> 159,828
<CURRENT-LIABILITIES> 76,911
<BONDS> 0
0
0
<COMMON> 97,496
<OTHER-SE> (15,780)
<TOTAL-LIABILITY-AND-EQUITY> 81,716
<SALES> 379
<TOTAL-REVENUES> 127,984
<CGS> 298
<TOTAL-COSTS> 33,885
<OTHER-EXPENSES> 127,145
<LOSS-PROVISION> 598
<INTEREST-EXPENSE> 254
<INCOME-PRETAX> (31,058)
<INCOME-TAX> 0
<INCOME-CONTINUING> (31,058)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (31,058)
<EPS-PRIMARY> (1.06)
<EPS-DILUTED> (1.06)
</TABLE>
