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 April 30, 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.
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(Exact name of registrant as specified in its charter)
Delaware 77-0462381
---------------------------- ---------------------
(State or other jurisdiction of incorporation (IRS Employer Identification No.)
or organization)
6450 Via Real, Carpinteria, California 93013
(805) 681-6614
--------------------------------------------------------------------
(address, including zip code and telephone number including area code, of
registrant's principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to filing requirements
for the past 90 days. Yes___X___. No______.
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15 (d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes___X___. No______.
The number of shares outstanding of the issuer's common stock as of the close of
business on April 30, 1998: 29,161,194
<PAGE>
QAD Inc.
Index
Part I
Financial Information Page
Item 1 Financial Statements
Condensed Consolidated Balance Sheets
as of April 30, 1998 and January 31, 1998 ...................... 1
Condensed Consolidated Statements of
Income for the three months ended April 30,
1998 and 1997 .................................................. 2
Condensed Consolidated Statements of Cash Flows
for the three months ended April 30, 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 ......................... 6
Part II
Other Information
Item 1 Legal Proceedings ........................................... 8
Item 2 Changes in Securities ....................................... 8
Item 3 Defaults upon Senior Securities ............................. 8
Item 4 Submission of Matters to a Vote of Security Holders ......... 8
Item 5 Other Information ........................................... 8
Item 6 Exhibits and Reports on Form 8-K ............................ 8
<PAGE>
Part I - Financial Information
<TABLE>
QAD Inc.
Condensed Consolidated Balance Sheets
As of April 30, 1998 (unaudited) and January 31, 1998
(In thousands, except for number of shares)
Assets
<CAPTION>
April 30, January 31,
1998 1998
---------- -----------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents ............................ $ 64,021 $ 70,082
Trade accounts receivable, net of allowances
of $5,127 for April 30, 1998 and $5,510
for January 31, 1998 ............................ 67,790 75,683
Other current assets ................................. 14,400 10,442
-------- --------
Total current assets ............................ 146,211 156,207
Property and equipment, net .............................. 28,352 25,717
Other assets, net ........................................ 9,421 8,582
-------- --------
$183,984 $190,506
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable ..................................... $ 10,005 $ 12,921
Accrued expenses ..................................... 19,542 20,392
Deferred revenue and deposits ........................ 42,954 43,636
-------- --------
Total current liabilities ....................... 72,501 76,949
Other deferred liabilities ............................... 787 1,182
Stockholders' equity:
Preferred stock, no par value. Authorized
5,000,000 shares; none issued and outstanding ... -- --
Common stock, no par value. Authorized 150,000,000
shares; issued and outstanding 29,161,194 at
April 30, 1998 and 22,096,269 at January 31, 1998 97,242 97,238
Retained earnings 15,108 17,395
Stockholders' receivable ............................. (170) (397)
Unearned compensation - restricted stock ............. (949) (1,510)
Cumulative other comprehensive loss .................. (535) (351)
-------- --------
Total stockholders' equity ...................... 110,696 112,375
-------- --------
$183,984 $190,506
======== ========
See accompanying notes to condensed consolidated financial statements
</TABLE>
1
<PAGE>
QAD Inc.
Condensed Consolidated Statements of Income
For the three months ended April 30, 1998 and 1997
(Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
April 30,
--------------------
1998 1997
-------- --------
<S> <C> <C>
Revenues:
License fees .................. $ 27,191 $ 19,149
Maintenance and other ......... 17,079 12,924
-------- --------
Total revenues ........... 44,270 32,073
Cost and expenses:
Cost of revenues .............. 11,787 8,462
Sales and marketing ........... 21,074 13,566
Research and development ...... 11,422 6,171
General and administrative .... 5,044 3,557
-------- --------
Total cost and expenses .. 49,327 31,756
-------- --------
Operating income (loss) ........... (5,057) 317
Other (income) .................... (1,368) (416)
-------- --------
Income (loss) before income taxes . (3,689) 733
Income tax expense (benefit) ...... (1,402) 173
-------- --------
Net income (loss) ................. $ (2,287) $ 560
======== ========
Basic net income (loss) per share . $ (0.08) $ 0.03
======== ========
Diluted net income (loss) per share $ (0.08) $ 0.02
======== ========
Basic shares used in computation .. 29,122 22,415
======== ========
Diluted shares used in computation 29,122 23,227
======== ========
See accompanying notes to condensed consolidated financial statements
</TABLE>
2
<PAGE>
QAD Inc.
Condensed Consolidated Statements of Cash Flows
For the three months ended April 30, 1998 and 1997
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended
April 30,
--------------------
1998 1997
-------- --------
<S> <C> <C>
Net cash used in operating activities ........................... $ (1,957) $ (1,597)
-------- --------
Investing activities:
Purchases of property and equipment ........................ (4,500) (2,469)
Proceeds from disposition of property and equipment ........ 6 20
-------- --------
Net cash used in investing activities ........................... (4,494) (2,449)
-------- --------
Financing activities:
Proceeds from notes payable, long-term debt and capital
lease obligations ........................................ -- 32,980
Reduction of notes payable, long-term debt and capital lease
obligations .............................................. (38) (27,018)
Issuance of common stock for cash .......................... 446 2,726
Repurchase of common stock ................................. (61) (2,739)
Receivable from stockholders ............................... 227 (445)
-------- --------
Net cash provided by financing activities ....................... 574 5,504
-------- --------
Effect of exchange rate changes on cash and cash equivalents .... (184) (453)
-------- --------
Net increase (decrease) in cash and cash equivalents ............ (6,061) 1,005
Cash and cash equivalents at beginning of period ................ 70,082 301
-------- --------
Cash and cash equivalents at end of period ...................... $ 64,021 $ 1,306
======== ========
See accompanying notes to condensed consolidated financial statements
</TABLE>
3
<PAGE>
QAD Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
The Condensed Consolidated Balance Sheets as of April 30, 1998 and January 31,
1998, the Condensed Consolidated Statements of Income and Condensed Consolidated
Statements of Cash Flows for the three months ended April 30, 1998 and 1997 have
been prepared by the Company. In the opinion of management, all adjustments
(which include reclassifications and normal recurring adjustments) necessary to
present fairly the financial position, results of operations and cash flows at
April 30, 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 are read in conjunction with the financial
statements and notes thereto included in the Company's Form 10-K for the year
ended January 31, 1998. The results of operations for the three months ended
April 30, 1998 are not necessarily indicative of the operating results for the
full year.
2. Comprehensive income
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
130, "Reporting Comprehensive Income," on February 1, 1998. 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. The Company had comprehensive income adjustments comprised of foreign
currency translation adjustments totaling $184,000 and $453,000 for the three
months ended April 30, 1998 and 1997, respectively. Accordingly, a
reconciliation of comprehensive income for the first quarters ended April 30,
1998 and 1997 is as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
April 30,
------------------
1998 1997
------- ------
<S> <C> <C>
Net income (loss) ......................................... $(2,287) $ 560
Foreign currency translation adjustments .................. 184 453
------- ------
Comprehensive income (loss) ............................... $(2,103) $1,013
======= ======
</TABLE>
3. Per Share Information
In February 1997, the Financial Accounting Standards Board issued 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.
4
<PAGE>
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>
Three Months Ended
April 30,
------------------
1998 1997
------- -------
(in thousands, except
for number per share
amounts)
<S> <C> <C>
Net income (loss) ...................................... $(2,287) $ 560
======= =======
Weighted average shares outstanding (basic) ............ 29,122 22,415
Diluted effect of employee stock options ............... -- 812
------- -------
Weighted average diluted shares outstanding ............ 29,122 23,227
======= =======
Basic net income (loss) per share ...................... $ (0.08) $ 0.03
======= =======
Diluted net income (loss) per share .................... $ (0.08) $ 0.02
======= =======
</TABLE>
Shares of common stock equivalents issued using the treasury stock method of
approximately 640,000 for the quarter ended April 30, 1998 were not included in
the diluted calculation because they were anti-dilutive. Due to the net loss for
1998, basic and diluted per share amounts are the same.
5
<PAGE>
QAD Inc.
Management's Discussion & Analysis of Financial Condition
and Results of Operations
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 with 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 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
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 and other
factors detailed in the Company's Annual Report on Form 10-K for the year ended
January 31, 1998.
This report contains forward-looking statements, which reflect the current views
of the Company with respect to future events that will have an effect on its
future financial performance. These statements include the words, "expects,"
"believes" and similar expressions. These forward-looking statements are subject
to various risks and uncertainties, including the Company's historical
fluctuations in quarterly results and the potential for future significant
fluctuations, risks associated with the sales cycle for the Comapny's products,
seasonality of the Company's operating results, risks associated with the
development of the Company's supply chain solutions, those referred to elsewhere
herein and those contained in the Company's Form 10-K filed with the Securities
and Exchange Commission. These factors, among other things, could cause actual
results to differ materially from historical results or those currently
anticipated.
Results for the Quarters Ended April 30, 1998 and 1997:
Total Revenues. Total revenues for the three months ended April 30, 1998
increased 38% to $44.3 million from $32.1 million in the same period in 1997.
The increase in total revenues was primarily due to continued growth in revenues
generated from the Company's targeted vertical markets. License fees continue to
be the Company's major revenue source, accounting for $27.2 million in revenues,
ahead of $19.1 million in the prior year. For the three months ended April 30,
1998, maintenance and other revenue as a percentage of total revenues decreased
to 39% as compared to 40% in the same period in 1997 due to relatively faster
license revenue growth.
Cost of Revenues. Cost of revenues consists primarily of charges incurred from
reselling third-party databases (and their associated maintenance contracts)
which are required to run MFG/PRO software, support costs associated with
MFG/PRO software maintenance contracts, costs associated with the reproduction
and delivery of the Company's software and with the performance of service
contracts. During the three months ended April 30, 1998, cost of revenues
increased 39% to $11.8 million (26% of total revenues) from $8.5 million (26% of
total revenues) in the same period in 1997. The increase in absolute dollars was
due to higher support costs associated with MFG/PRO software maintenance
contracts and higher costs associated with reselling third-party databases.
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 April 30, 1998,
sales and marketing expense increased 55% to $21.1 million (48% of total
revenues) from $13.6 million (42% of total revenues). The increase in absolute
dollars and as a percentage of total revenues was primarily due to the expansion
of the Company's global sales force.
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. During the three months ended April 30,
1998, research and development expense increased 85% to $11.4 million (26% of
total revenues) from $6.2 million (19% of total revenues) in the same period in
the prior year. The increase in absolute dollars and as a percentage of total
revenues was due primarily to higher staffing for the development of On/Q
software. Increased expenses were partially offset by funds that the Company
received from third parties as a result of joint venture research and
development projects.
6
<PAGE>
In accordance with Statement of Financial Accounting Standards No. 86, the
Company expenses software development costs as they are incurred until
technological feasibility has been established, at which time such costs are
capitalized until the product is available for general release to customers. To
date, the establishment of technological feasibility of the Company's products
and general release of such software has substantially coincided. Accordingly,
the only costs capitalized relate to translation and localization.
General and Administrative. During the three months ended April 30, 1998,
general and administrative expense increased 42% to $5.0 million (11% of total
revenues) from $3.6 million (11% of total revenues) in the same period in 1997.
The increase in spending resulted primarily from hiring of additional personnel
and accruals for a new 401k matching program (implemented August 1, 1997).
Other (Income) Expense. Total other (income) expense is composed primarily of
interest income and interest expense. During the three months ended April 30,
1998, other (income) expense increased to $(1.4) million from $(0.4) million.
The improvement was due to significantly reduced interest expense as the IPO
proceeds were applied to the repayment and retirement of debt, and to interest
income accruing from investment of the remaining proceeds in short-term
investment-grade securities and money market instruments.
Liquidity and Capital Resources
At April 30, 1998, the Company had approximately $64.0 million in cash and cash
equivalents. Cash flows used in operating activities were $2.0 million and $1.6
million for the three months ended April 30, 1998 and 1997, respectively. Cash
used in investing activities aggregated $4.5 million and $2.5 million in the
three months ended April 30, 1998 and 1997, respectively and was primarily
related to the purchase of computer equipment and office furniture in both
periods. Cash flows from financing activities totaled $0.6 million and $5.5
million for the three months ended April 30, 1998 and 1997, respectively and
were comprised of proceeds from borrowings and issuance of common stock. At
April 30, 1998, the Company had no material commitments for capital
expenditures.
At April 30, 1998, the Company had working capital of $73.7 million. Accounts
receivable, net of allowance for doubtful accounts, decreased to $67.8 million
from $75.7 million at January 31, 1998. The Companys accounts receivable days'
sales outstanding ("DSO"), calculated on a quarterly basis has demonstrated
seasonal fluctuations. For the three months ended April 30, 1998, DSO was 138
which represents an increase from 125 days for the three months ended January
31, 1998. 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 decreased to
$42.5 million at April 30, 1998 from $43.5 million at January 31, 1998 primarily
as a result of decreased 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 the net proceeds from the offering, the available
borrowings under its new revolving credit agreement and cash generated by
operations, will satisfy the Company's working capital requirements for at least
the next 12 months.
7
<PAGE>
Part II - Other Information
QAD Inc.
Item 1 - Legal Proceedings
Not applicable
Item 2 - Changes in Securities
Not applicable
Item 3 - Defaults upon Senior Securities
Not applicable
Item 4 - Submission of Matters to a Vote of Security Holders
Not applicable
Item 5 - Other Information
Not applicable
Item 6 - Exhibits and Reports on Form 8-K
a. Exhibits
See Exhibit Index on page 10.
b. Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
April 30, 1998.
8
<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: June 5, 1998 By /s/ A.J. MOYER
-----------------------------
A.J. Moyer
Chief Financial Officer
(on behalf of the registrant and as
Principal Financial Officer)
9
<PAGE>
Exhibit Index
Exhibit
Number Exhibit Title
- ---------- ---------------
27.1 Financial Data Schedule
10
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Exhibit 27.1
QAD Inc.
Financial Data Schedule
The schedule contains summary financial information extracted from the Condensed
Consolidated Balance Sheet as of April 30, 1998 and the Condensed Consolidated
Statement of Income for the Quarter Ended April 30, 1998 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Jan-31-1998
<PERIOD-START> Feb-01-1998
<PERIOD-END> Apr-30-1998
<CASH> 64,021
<SECURITIES> 0
<RECEIVABLES> 72,917
<ALLOWANCES> 5,127
<INVENTORY> 0
<CURRENT-ASSETS> 146,211
<PP&E> 46,957
<DEPRECIATION> 18,605
<TOTAL-ASSETS> 183,984
<CURRENT-LIABILITIES> 72,501
<BONDS> 10
0
0
<COMMON> 97,242
<OTHER-SE> 13,454
<TOTAL-LIABILITY-AND-EQUITY> 110,696
<SALES> 63
<TOTAL-REVENUES> 44,270
<CGS> 24
<TOTAL-COSTS> 13,691
<OTHER-EXPENSES> 35,636
<LOSS-PROVISION> 84
<INTEREST-EXPENSE> (975)
<INCOME-PRETAX> (3,689)
<INCOME-TAX> (1,402)
<INCOME-CONTINUING> (2,287)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,287)
<EPS-PRIMARY> (.08)
<EPS-DILUTED> (.08)
</TABLE>
