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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 31, 1999
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 000-22823
QAD INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0105228
(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 15, 1999, was
approximately $104,531,644. 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 15, 1999 was 30,124,393.
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 22, 1999.
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QAD INC.
FISCAL YEAR 1999 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
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PART I
ITEM 1. BUSINESS................................................................................ 1
ITEM 2. PROPERTIES.............................................................................. 16
ITEM 3. LEGAL PROCEEDINGS....................................................................... 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................................... 17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS................... 18
ITEM 6. SELECTED FINANCIAL DATA (in thousands, except per share data)........................... 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS... 19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............................................. 31
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE..... 31
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..................................... 31
ITEM 11. EXECUTIVE COMPENSATION................................................................. 31
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT......................... 31
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......................................... 31
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K........................ 32
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Forward Looking Statement
In addition to historical information, this Annual Report on Form 10-K
contains forward-looking statements. These statements typically are preceded or
accompanied by words like "believe," "anticipate," "expect" and words of similar
meaning. 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. QAD undertakes no obligation to revise or update or publicly
release the results of any revision or update to these forward-looking
statements. Readers should carefully review the risk factors described in other
documents QAD files from time to time with the Securities and Exchange
Commission, including the Quarterly Reports on Form 10-Q to be filed by QAD in
fiscal year 2000.
PART I
ITEM 1. BUSINESS
QAD is a leading provider of supply-chain-enabled Enterprise Resource
Planning, or ERP, software for mid-range and large multinational manufacturing
companies. Our 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 between supply chain
links and measure critical company performance criteria against defined business
plan objectives. Our solution's flexibility and scalability also helps
manufacturers adapt to growth, organizational change, business process
reengineering, supply chain management and other challenges. In the latter part
of fiscal 1999, we established QAD Global Services in response to customer
requests for direct implementation and integration support from QAD.
QAD's principal products address ERP and supply chain needs. MFG/PRO
software is specifically designed for deployment at the plant or operations
levels of mid-range and multinational manufacturers in four targeted industry
segments: automotive, consumer products, electronics/industrial, and medical.
MFG/PRO software provides multinational organizations with an integrated ERP
solution that is based on an open system, Internet-enabled manufacturing,
distribution, financial, service/support management applications.
We currently are focused on extending our presence in multisite
manufacturing by developing a line of optimized supply chain management
solutions, named On/Q software. Our initial On/Q software product, Advanced
Planning and Scheduling, or APS, is designed to improve asset utilization at
every link of the supply chain. We released Advanced Planning and Scheduling in
September 1998. We are designing another key On/Q application, On/Q Outbound
Logistics, to allow for consolidation of orders, contract management, shipping
and logistics management. Logistics is currently in development, and we expect
our initial release to be commercially available in the latter part of 1999.
As of January 31, 1999, QAD had licensed QAD software at more than 4,000
sites in more than 80 countries. QAD's customers include Cargill, Colgate-
Palmolive, Johnson Controls, Johnson & Johnson, Lucent Technologies, Philips
Electronics, St. Jude Medical, Unilever, Lear Seating, Genzyme and Stryker.
"QAD", "Qwizard", "Q/LinQ" and "On/Q" are trademarks and "MFG/PRO" is a
registered trademark of QAD. This Annual Report on 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.
Many organizations are reengineering, and will continue 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 that will enable them to better
manage resources across the enterprise and facilitate the integration of various
essential functions on a global basis. These functions include:
. sales management
. component procurement
. inventory management
. manufacturing control
. project management
. distribution
. transportation
. finance
While historically many companies have developed their ERP software
internally, companies are increasingly deploying open system ERP applications
developed by third parties which reduce internal software development costs and
enable increased flexibility and interoperability across a broad range of
hardware and software platforms.
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 that operates across the
Internet and intranets. Customers are demanding applications and tools that
allow them to link back-office ERP systems, with front-office Customer
Relationship Management systems. They are also demanding enhanced capabilities
for electronic business, especially business-to-business and business-to-
customer electronic commerce.
We believe 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 manufacturers. This has led to the emergence of three
distinct segments within the enterprise software market:
. corporate
. plant/operations
. 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, PeopleSoft, and
SAP. While corporate ERP systems offer robust functionality, we believe 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/operations ERP solutions are primarily focused on the specific needs
of mid-range manufacturing plants and distribution sites or the operations level
of global companies. This ERP market segment needs to automate manufacturing
planning, production control and distribution. Leading vendors of these ERP
solutions include QAD, SAP, Baan, J.D. Edwards and Symix Systems. Given the
diverse and constantly changing needs of
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manufacturing and distribution sites, ERP users demand highly flexible,
industry-specific plant/operations-level ERP solutions that can be deployed
rapidly and cost-effectively across multiple sites on a global basis.
Increasingly, they are also requiring Internet-enabled ERP.
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 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, Industri-Matematik International, and Manugistics
Group, as well as certain corporate-level ERP software vendors. We believe that
supply chain management represents one of the greatest current opportunities for
companies to reduce costs and enhance customer relationships.
Market Opportunity
The ARC Advisory Group, formerly Automation Research Company, believes the
ERP market will grow at a compounded annual growth rate of nearly 25 percent
through the year 2003. By focusing on four targeted vertical markets
(automotive, consumer products, electronics/industrial and medical), we believe
we can maximize our growth potential.
We also believe the market for ERP solutions and supply chain software will
continue to grow over the next several years. However, our success depends on
continued market acceptance of MFG/PRO and On/Q applications, as well as the
ability to introduce new versions of QAD software products. Although demand for
QAD software products has grown in recent years, there can be no assurance that
it will continue to grow or that, even if the market does grow, businesses will
continue to adopt QAD software.
The failure of the market for ERP software to grow, any reduction or slack
in demand for MFG/PRO software or newly developed or to be developed On/Q
software caused by increased competition in the market for ERP software,
technological change, failure by QAD to introduce products, or new versions of
products that are acceptable to the marketplace, or other similar factors, would
have a material adverse effect on us.
We have spent, and intend to continue to spend, considerable resources
educating potential customers about ERP and supply chain issues in general and
about the features and functions of MFG/PRO and On/Q software in particular.
However, we cannot be sure that these expenditures will enable QAD software to
achieve any additional degree of market penetration or a higher level of market
acceptance, nor can we be sure that any new software products we develop will
achieve the market acceptance necessary to make our products profitable. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Products" below.
For the latter part of fiscal 1999, QAD sales, along with those of several
of our competitors have been negatively impacted by the Asian financial crisis
and concerns about Year 2000, or Y2K, readiness. We believe that these concerns
have caused a change in capital spending patterns of manufacturers worldwide.
However, we believe their remains a need for ERP and supply chain management
solutions that meet customers' needs for plant/operations-level deployments and
global supply chain management. As a result, we anticipate that once these
concerns are addressed, manufacturers will return their focus to the significant
benefits afforded to companies that integrate management of the enterprise.
However, we cannot guarantee that this change in manufacturer's spending will
occur, or that if spending does accelerate, that we will benefit from these
changes.
Nonetheless, we believe that the adoption of open ERP and supply chain
management solutions at the plant/operations-level will accelerate as potential
customers transition from legacy systems in coming years. In addition, we
believe that supply chain management represents a compelling market opportunity.
To be successful in meeting customer requirements in these market segments, we
believe ERP software vendors must:
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. Offer localized, multilingual, multicurrency (including euro) functionality
to support global deployments;
. Offer industry-specific product functionality and expertise in key vertical
markets;
. Provide global service and support, both directly and through third
parties;
. Offer ease of implementation and rapid time to benefit;
. Provide flexibility to meet the diverse needs and business practices of
global, multisite manufacturing implementations;
. Interoperate and coexist with corporate-level ERP solutions and other
supply chain management solutions;
. Address supply chain management challenges by offering Internet-enabled
technology which integrates and optimizes interactions between companies
and their customers, suppliers and other business partners;
. Develop and utilize advanced technologies to deliver superior product
functionality; and,
. Offer enhanced capabilities for electronic business, especially
business-to-business and business-to-customer electronic commerce.
We believe our products will continue to be the choice of manufacturers due
to our products' fit with customer requirements for industry-specific
functionality, flexibility, ease of implementation and Internet-readiness.
The QAD Solution
QAD is a leading provider of ERP software for multinational and other large
manufacturing companies. Our principal product, MFG/PRO software, is a modular
software program designed specifically to address the plant- and operations-
level needs of mid-range and multinational manufacturers for flexible,
interoperable and rapidly deployable ERP software solutions. Additionally, we
are currently focused on extending our presence in multisite manufacturing by
continuing to develop a line of supply chain solutions designed to serve the
needs of multinational manufacturing companies. We meet customer requirements
in our vertical markets by delivering the following:
. Global Solutions for Multinational Manufacturers. QAD focuses on the
plant/operations-level ERP, mid-range and supply chain management
requirements of mid-range and multinational manufacturers. Our MFG/PRO
software incorporates multicurrency capabilities, is available in more
than 20 languages and is tailored to local financial practices and
requirements in many of our major markets. QAD's customers have deployed
MFG/PRO software in more than 80 countries.
. Expertise and Functionality for Key Vertical Markets. We target and have
achieved leadership positions in the automotive, consumer products,
electronics/industrial and medical industries. We believe that our
substantial expertise in these markets, together with our strategy of
developing Internet-enabled ERP and supply chain software modules that
address specific industry needs, provide us with a competitive
advantage. For example, our software includes features that facilitate
United States Food and Drug Administration, or FDA, compliance and
validation for the medical industry; advanced pricing and promotion
management for the consumer products industry; customer/supplier
scheduling via electronic data interchange for the automotive industry;
and product change control module for sophisticated engineering change
management for the electronics/industrial industry.
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. Global Service and Support. We believe that a high level of global
service and support is a critical component of our ERP and supply chain
solutions. In the latter part of fiscal 1999, we responded to customer
requests for more direct involvement in their system solutions by
establishing QAD Global Services. Working in concert with a global
network of services alliance partners, QAD Global Services makes sure
that QAD software users receive the right combination of software and
services. QAD Global Services include: Technical Services,
Implementation Services, Learning Services, and Support Services.
We offer product service and support directly through our sales and
support offices in 20 countries and indirectly through our global
network of implementation and systems integration partners and
distributors.
. Ease of Implementation. The modular product design of QAD software,
together with our focus and expertise in our key vertical markets,
enables rapid product implementation, often within six months at a
particular site. Because QAD product modules already include features
designed to address the specific needs of customers in our targeted
markets, customization of the software is minimized, a key
differentiator for QAD. We develop many of these industry-specific
features through customer-driven Development Groups established by our
vertical units. As a result, customers are able to implement only those
modules with functionality appropriate to their needs.
. Open Systems Solutions. QAD's ERP products are based on an open,
client/server computing architecture. We believe that this architecture
enables superior flexibility, scalability and interoperability and
addresses the desire of customers to migrate critical business software
to an open platform. QAD software operates in Windows NT and major UNIX
environments and is compatible with Oracle and Progress databases. In
addition, with the release of MFG/PRO 9.0, QAD applications operate over
the Internet using a Web browser.
The QAD Strategy
QAD's objective is to expand our leadership position in providing
plant/operations-level solutions to mid-range and multinational manufacturing
companies, and to expand our reach by becoming a leading provider of supply
chain management software solutions. The key elements of our strategy for
achieving these objectives include the following:
. Maintain and Leverage Leadership in Plant-Level Manufacturing. QAD`s
MFG/PRO software is a leading open systems ERP solution for plant-level
deployments worldwide. As of January 31, 1999, we had MFG/PRO software
at more than 4,000 licensed sites in more than 80 countries. We believe
this is a substantial customer base from which we can leverage future
sales. We target the sale of additional software applications to
existing customers, as well as targeting sales to new customers. We will
continue to aggressively pursue plant/operations-level opportunities in
our targeted markets. In addition, we intend to leverage our installed
base of MFG/PRO software customers in order to accelerate the adoption
of On/Q software, our new supply chain management solution.
. Focus on Global Supply Chain Management Solutions. We believe that
supply chain optimization represents one of the greatest current
opportunities for companies to reduce costs and enhance customer
relationships. We are developing On/Q software for this market. We
released the initial On/Q product, Advanced Planning and Scheduling, in
September 1998. We expect to follow this with the delivery of our On/Q
Outbound Logistics product at the end of 1999. We intend to follow the
release of On/Q Outbound Logistics with additional supply chain
products, which will be released shortly thereafter. We believe that
these new products, coupled with our strength in plant/operations-level
ERP solutions and
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QAD products' demonstrated ability to interoperate with other corporate
applications, positions us to succeed in the emerging supply chain
management marketplace.
. Leverage Alliances. We leverage the expertise of distribution,
implementation and technology partners to meet the diverse needs of our
customers. We augment our direct sales organization with a global
network of approximately 30 distributors and numerous implementation
providers. We plan to leverage our network of distributors and
implementation providers to further penetrate our vertical markets. In
the latter part of 1998, we established QAD Global Services in response
to customer requests for direct implementation and integration support
from QAD. While we believe the introduction of QAD Global Services did
not materially affect our on-going relationships with third-party
implementation and integration providers in fiscal 1999, we may in the
future experience competitive situations with third-party implementation
and integration providers that could impair these relationships. In
addition, we have entered into a number of joint development agreements
with third-party software developers who provide functionality that has
been embedded into or integrated with QAD software to deliver a more
complete solution for our targeted vertical markets.
. Maintain Technology Leadership. QAD was one of the first providers of
open systems ERP software and we are committed to maintaining our
technology leadership. Our technology strategy is focused on migrating
our products to a component object architecture in order to enable
customers to improve interoperability with existing software
applications and to deploy and integrate new "best-of-breed" software
applications across the enterprise. We believe interoperability will
remain an important requirement of software applications as
organizations seek fully integrated ERP solutions. We believe this
object architecture will enable us to provide enhanced functionality in
our new On/Q software. In addition, in September 1998 we became one of
the first solution providers to introduce a plant/operations-level
Advanced Planning and Scheduling Application together with an APS
solution for supply chain optimizations.
. Realignment of Operations and Restructuring. During fiscal 1999, we
believe our sales cycle was negatively impacted by manufacturers'
concerns about a global economic slowdown and Y2K readiness. These
concerns caused manufacturers to temporarily redirect capital spending
toward modifying their existing systems, rather than implementing new
enterprise software. In response to changes in manufacturing capital
software spending patterns, we undertook a restructuring and re-
alignment that would, among other things, more closely align costs with
sales expectations. The restructuring is expected to reduce costs by
more than $20 million annually.
As part of the realignment, we reduced our spending on research and
development by transferring research and development personnel into revenue-
generating positions within the newly created Global Services organization. In
all, we reduced our workforce (excluding staff added from the acquisitions) by
approximately 15 percent, adjusted administrative and marketing costs and
narrowed our facilities expansion plans. In addition, the realignment expanded
our vertical market and geographic accountability, making each group a profit
center responsible for its own revenue and cost structures.
It is our belief that these actions will improve our competitiveness.
Products
QAD targets our ERP and optimized supply chain software to manufacturing
companies within the automotive, consumer products, electronics/industrial, and
medical industries.
Our products address the needs of mid-range and large multinational
companies. MFG/PRO software provides companies with an integrated and Internet-
enabled ERP solution
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that includes manufacturing, distribution, financial and service/support
management applications within an open systems environment. On/Q APS software
optimizes supply chain functions and interoperates with MFG/PRO software.
MFG/PRO software is composed of an extensive set of manufacturing,
distribution and financial modules designed to address the needs of customers in
our vertical markets. This modular design enables our customers to select the
modules appropriate to meet their specific operational needs. Some of these
modules include unique industry-specific features that were developed in close
cooperation with customers and we continue to involve customers by encouraging
participation in our vertical development groups.
Our software supports multiple currencies and global tax management and is
tailored to financial practices and requirements in many of our major geographic
markets. MFG/PRO software supports more than 20 languages, including most major
European languages, Japanese, Chinese and Korean.
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 mid-
range and large 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.
We have a number of ongoing business alliances to extend the functionality
of QAD software through the addition of integrated best-of-breed applications.
We also have entered into a number of joint development agreements with third-
party software developers who provide functionality that has been embedded into
or integrated with QAD software to deliver more complete solutions for our
targeted vertical markets.
Our Qwizard software reduces the time it takes to implement MFG/PRO and
rollout training to employees. The application includes: a Business Modeler
that allows customers to quickly model business practices and adapt them to
MFG/PRO, customizable implementation tools, and self-paced interactive learning
tools 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' workflow and job responsibilities.
QAD sales have generally consisted of MFG/PRO software and related
maintenance. With the introduction in September 1998 of On/Q APS, we have
entered the market for supply chain management solutions. Our initial On/Q
software product, APS, is designed to improve asset utilization at the
plant/operations-level and at every link of the supply chain. The launch of QAD
Global Services in the latter part of 1998, adds a broad range of services to
our product mix. As a result, we anticipate an increased percentage of revenue
in future periods will come from services, including QAD software implementation
and training.
Products Under Development
We are currently developing additional On/Q optimized supply chain
applications, as well as new e-business applications.
Our e-business applications support industry standard communications.
These applications include:
. a Network User Interface, or NetUI, written in Java
. Q/LinQ messaging interface
. ECommerce Gateway
We believe our e-business applications will enable our customers to
effectively link back-office ERP applications with front-office Customer
Relationship Management
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applications. They are being designed to also enhance our customers' ability to
support business-to-business and business-to-customer applications.
. NetUI provides access to the full functionality of QAD software using a
Web browser. NetUI is an easily deployed Java platform interface that
minimizes internal system traffic and provides low-cost system access
over a wide-area network. To enhance security, NetUI features password
protection.
. Q/LinQ, an integration tool that works with commercially available
messaging products and data mapping applications. This product can be
used to provide interoperability between MFG/PRO and other software
applications, even among multiple revision levels of the same or
different products.
. ECommerce Gateway is our new offering in the Electronic Document
Interchange, or EDI, space. This product features Internet downloadable
mapping libraries, which prescribe the conversions necessary to enable
Electronic Document Interchange between trading partners and MFG/PRO
software. This product is designed to allow each trading partner's
unique requirements to be captured in a tailored library and assessed on
an as-needed basis when transactions with that partner are effected.
A key On/Q application, Outbound Logistics, is under development and
scheduled for release in late 1999. On/Q Outbound Logistics is being designed to
allow for consolidation of orders, contract management, shipping and logistics
management. On/Q Outbound Logistics is being specifically designed to meet
demand-side requirements of global multinationals, including complex high-volume
order processing. Outbound Logistics also is being designed to provide cost-
efficient consolidation and to support multilingual and multicurrency
capabilities. In addition, our Outbound Logistics software solution also is
being designed to be Internet enabled.
We plan to follow Outbound Logistics with additional On/Q optimized supply
chain products. However, there are risks that one or more of our supply chain
management solutions is not successfully developed in accordance with planned
schedules or at all, or that if it is developed, that is might not achieve
market acceptance. See "Factors That May Affect Future Results and Market Price
of Stock-Supply Chain Solutions Under Development and Underlying Technology."
Technology
We have developed MFG/PRO software with a commercially available, fourth
generation language and tool set marketed by Progress Software that works with
relational databases provided by Oracle and Progress. See "Factors That May
Affect Future Results and Market Price of Stock-Dependence on Third-Party
Products." MFG/PRO software is now taking advantage of advances in Progress
Software that open up this fourth generation language to access by Sun's Java
language and through the Microsoft ActiveX component model. With the release of
our MFG/PRO version 9.0, MFG/PRO will feature an Internet-enabled Java user
interface and a new architecture called QAD/Connects. We believe these features
will:
. enable customers to improve connectivity with existing software
applications
. enable customers to deploy and integrate new "best-of-breed" software
applications across the enterprise
. provide important connectivity with the Internet and allow customers to
conduct secure e-business transactions with trading partners
We are currently converting our MFG/PRO software modules to Java-interfaced
Progress components. We believe this conversion effort will provide value to
customers by making MFG/PRO accessible to new kinds of users.
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In addition to MFG/PRO's traditional user who works inside the
manufacturing enterprise, MFG/PRO version 9.0 will support secure access by
trading partners, casual Internet shoppers and mobile users. Connectivity with
e-business (through EDI and the Web) is another significant facet of the
QAD/Connects architecture, and it is this connectivity that provides business-
to-business and business-to-consumer access to MFG/PRO.
MFG/PRO software operates under the Windows NT and major UNIX operating
systems. MFG/PRO software now supports distributed and mirrored databases,
local and wide area networks and character-based, graphical, and Java Internet-
enabled, thin-client user interfaces.
We also are reliant on the Java programming language in developing and
supporting our Java user interface for MFG/PRO and our On/Q software products.
The failure to successfully incorporate Java in new products, to convert MFG/PRO
software to Java-interfaced Progress components, to extend the MFG/PRO Java user
interfaces, or of Java or Enterprise Java Beans to achieve market acceptance
could have a material adverse effect on us.
The On/Q Logistics software relies upon a technology being developed by
Enterprise Engines. This technology provides the foundation upon which On/Q is
being built and will execute.
Research and Development
MFG/PRO was originally introduced in 1986 and we have subsequently released
a number of product versions and enhancements. In fiscal 2000, we will release
MFG/PRO version 9.0, which is Internet enabled. Our principal research and
development staff, which is augmented by third-party development resources, is
focused on continuing updates and enhancements to our MFG/PRO software, as well
as the continual migration of MFG/PRO software to component objects and to a
Java user interface. We believe that Internet capability for our products will
be important to the future success of our ERP and supply chain products.
Accordingly, we have developed and will continue to develop Internet-enabled
versions of our products through in-house and third-party development.
We also maintain a separate advanced technology development organization
specifically focused on developing our On/Q software supply chain management
solutions. In addition, Enterprise Engines is assisting in the development of
QAD Logistics software. During the fiscal year ended January 31, 1999, we
delivered our APS Product, which primarily consists of OEM components from
Paragon Software. Meanwhile, because of the decision to utilize Enterprise
Engine and Gemstone technology to create a more robust Java solution, Logistics
was delayed until late 1999 from late 1998.
Due to rising research and development costs experienced in fiscal 1999,
and the need for cost containment, we initiated a reorganization that resulted
in the reduction of the research and development staff. Prior to the
reorganization, their were approximately 340 employees in the research and
development department. At January 31, 1999 research and development personnel
totaled approximated 270, representing a reduction of 21 percent. Many of these
employees were redeployed into our newly created Global Services organization
where we believe their technical skills will be an asset for providing
implementation and other support services to QAD customers.
There can be no assurance that we will be successful in converting our
MFG/PRO software to Java-interfaced Progress Software components or extending
the Java User Interface, on a timely basis, if at all. We similarly have no
assurance that if this software is converted or developed it will achieve
necessary market acceptance. We or our development partner, Enterprise Engines,
might not be successful in developing any new products or enhancements. We
may experience difficulties that delay or prevent successful development,
introduction or sale of these products or our new products may not adequately
meet the requirements of the marketplace or achieve market acceptance. See
"Management's
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<PAGE>
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
We sell and support our products through direct and indirect sales
organizations located throughout the world.
Our indirect sales channel consists of approximately 30 distributors
worldwide. We do not grant exclusive rights to any of our distributors. Our
distributors primarily sell independently to companies within their geographic
territory but may also work in conjunction with our direct sales organization.
In addition, we leverage our relationships with implementation providers,
hardware vendors and other third parties to identify sales opportunities on a
global basis.
In fiscal 1999, after the departure of our vice president of sales and
marketing, we restructured to strengthen our focus on our vertical markets and
our ability to deliver regionally. Under the direction of the Chief Executive
Officer, vertical marketing was decentralized, with vertical sales reporting
directly to the Chief Executive Officer. Simultaneously, territorial structure
was centralized under the direction of the Chief Financial Officer. In
addition, strategic marketing was centralized under the direction of the
President.
Our sales and marketing strategy includes developing demand for our
products by creating visibility for QAD and awareness of our software. We
participate in major computer and vertical market industry trade shows, sponsor
regional and worldwide user conferences and regional alliance conferences, and
advertise in leading business and targeted industry publications.
Our future success depends in part upon the productivity of our sales and
marketing force, our ability to continue to attract, integrate, train, motivate
and retain new sales and marketing personnel, and our ability to successfully
maintain our distributor relationships and establish new relationships in the
future. Competition for sales and marketing personnel in the ERP software
industry is intense. Should we fail to hire qualified personnel in accordance
with our plans or to establish and maintain or distributor relationships then we
would be materially and adversely affected. See "Factors That May Affect Future
Results and Market Price of Stock--Dependence Upon Development and Maintenance
of Sales and Marketing Channels."
Following the conclusion of our initial public offering, we commenced
discussions with certain of our distributors regarding possible acquisitions of
controlling interests in those distributors. We have been pursuing this
acquisition strategy to enhance the effectiveness and allegiance of existing
distributors and provide capital to help those distributors meet our growth
targets. During fiscal 1999, we acquired control of distributor organizations
in Thailand, Poland, Mexico, the United Kingdom and the Netherlands. On a pro-
forma basis, these acquisitions would have added approximately $48 million to
QAD revenue for fiscal 1999.
Third-Party Implementation Providers
We have historically followed a strategy of utilizing third parties
extensively to provide implementation and customization services to QAD
customers. In addition to providing consulting, implementation and training
services for QAD customers, these third parties also generate sales leads for
QAD. Implementation and system integration services are provided by a network
of consultants and system integrators, including Arthur Andersen, Deloitte &
Touche, Ernst & Young, Integrated Systems & Services and TRW ISCS. In most
cases, our distributors also deliver consulting and integration services. All
third-party providers are required to be certified in the applications and
methodologies of QAD products.
10
<PAGE>
We revised our service strategy in fiscal 1999 and purchased several of our
distributors who provided third-party implementation and integration services,
including the distribution assets of TRW Integrated Supply Chain Solutions in
the United Kingdom and the Netherlands, CSBI in Poland, Iris-Ifec in Thailand,
and Sistemas Integrados in Mexico. These purchases, coupled with our
redeployment of personnel from research and development to implementation and
integration positions in fiscal 1999, served as the foundation of QAD Global
Services. The formation of QAD Global Services allow us to respond to customer
requests for more direct involvement in their system solutions. QAD Global
Services includes:
. Technical Services
. Implementation Services
. Learning Services and
. Support Services
In addition, we intend to provide implementation services for our new On/Q
software products. We believe 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.
We typically enter into separate agreements when working with installation
and implementation partners that provide these partners with the non-exclusive
right to promote and market QAD products, and to provide training, installation,
implementation and other services for QAD products, within a defined territory
for a specified period of time. Our installation and implementation partners
generally are permitted to set their own rates for related services and we
typically do not collect a royalty or percentage fee from these partners on
services performed.
We also enter into similar agreements with our distributor partners that
grant these partners the non-exclusive right, within a specified territory, to
market, license, deliver and support QAD products. In exchange for granting
distributors these rights, we receive a negotiated royalty fee for each license
of our software products. We also rely on third parties, primarily
distributors, for the development of localizations or interfaces appropriate for
the territory in which the distributors operate. See "Factors That May Affect
Future Results and Market Price of Stock-Reliance on and Need to Develop
Additional Relationships with Third Parties."
Customers
We target the automotive, consumer products, electronics/industrial, and
medical sectors worldwide. As of January 31, 1999, we had MFG/PRO software at
more than 4,000 licensed sites in more than 80 countries. No one customer
accounted for more than 10 percent of total revenue during any of our last three
fiscal years. The following are among companies and/or subsidiaries of those
companies in each of our target vertical markets that have each generated more
than $400,000 in software license and maintenance revenue over the last three
fiscal years:
Automotive
Aeroquip Corporation
Caterpillar
Daewoo
Delphi
Ford
Johnson Controls
Lear Seating
LucasVarity
Tower Automotive
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<PAGE>
Webasto
Consumer Products
Avery Dennison
Avon
Cargill
Coca-Cola
Gillette
Heinz
Quaker Oats
Sherwin-Williams
U.S. Sugar
Unilever
Electronics/Industrial
Courtaulds
Ingersoll-Rand
Matsushita
Philips
Price Pfister
Sauer Sundstrand
Schlumberger
Sun Microsystems
Synnex
Xerox
Medical
Alza
Arterial Vascular
C.R. Bard
Datex-Ohmeda
Genzyme
Johnson & Johnson
Maxxim Medical
Rexall
St. Jude Medical
Stryker
Customer Service and Support
We believe that providing a high level of customer service and support is
essential to customer satisfaction and to our long-term success. QAD Global
Services, including support services, is based primarily in several major
regional centers. We also provide global service and support through our
extensive network of alliance partners. This global presence helps us support
customers and partners in different regions and time zones worldwide.
We also provide our customers with access to information and customer
support services via the World Wide Web. Our Internet-enabled services
facilitate the exchange of information seven days a 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 our alliance partners helps ensure that customers are up to date
on the latest technologies and product enhancements offered by QAD.
12
<PAGE>
We also offer, for a fee, a comprehensive education and training program to
our customers and end-users, as well as our implementation providers. Classes
are offered through in-house facilities at QAD offices in various locations, as
well as on-site training services at customer locations. We also assist
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. We compete
in the ERP software market primarily on the basis of functionality, ease of use
and implementation, technology (including connectivity and adaptability), time
to benefit, supplier viability, service and cost. We intend to continue to
acquire, develop and allocate our resources to focus on these targeted
competitive areas, as well as to identify additional or different areas where we
perceive competitive advantage.
We currently compete primarily with:
. vendors such as Baan, J.D. Edwards and Symix, that market software
focused on the specific needs of manufacturing plants and distribution
sites of multinational manufacturing companies;
. smaller independent companies that have developed or are attempting to
develop advanced planning and scheduling software which complement or
compete with ERP or supply chain solutions;
. internal development efforts by corporate information technology
departments; and
. companies offering standardized or customized products on mainframe
and/or mid-range computer systems.
We expect that competition for MFG/PRO software will increase as other
large companies like Oracle and SAP, as well as other business application
software vendors, enter the market for plant/operations-level ERP solutions. We
may also face market resistance from potential customers with installed legacy
systems because of the reluctance of these potential customers to commit the
time, effort and resources necessary to convert to an open systems ERP solution
or because of their own internal attempts to address Y2K readiness issues.
With our strategic entry into the supply chain management software market,
we expect to meet substantial additional competition from companies presently
serving that market, including i2, IMI and Manugistics. We also expect
competition to come from broad-based solution providers like Baan, Oracle,
PeopleSoft and SAP who state they are increasingly focusing on this segment. In
addition, some of our competitors, such as Baan, Oracle, PeopleSoft and SAP,
have well-established relationships with our current or potential customers.
Further, as the supply chain management solution market continues to develop,
companies with significantly greater resources could attempt to increase their
presence in these markets by acquiring or forming strategic alliances with our
competitors or our partners or potential partners.
Increased competition in these markets is likely to result in price
reductions, reduced operating margins and loss of market share, any one of which
could adversely affect us. Many of our 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. 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.
Although we believe we offer and will continue to offer products that are
competitive, we can make no assurance that we will be able to compete
successfully with existing or new competitors or that competition will not
adversely affect us.
13
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Proprietary Rights and Licensing
Our success is dependent upon our proprietary technology and other
intellectual property. We rely 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
our rights in our software and related materials and information. We enter into
license agreements with each of our customers. Each of these license agreements
provides for the non-exclusive license of QAD software. These licenses
generally are perpetual and contain strict confidentiality and non-disclosure
provisions, a limited warranty covering the QAD software and indemnification for
the customer from infringement actions related to the QAD software.
The pricing policy under each license is based on a standard price list and
may vary based on such parameters as 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
QAD. Payment terms are generally 30 days from the date of shipment. We have no
patents or pending patent applications.
In order to facilitate the customization required by most of our customers,
we generally license our 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 our software for non-permitted
purposes. Distributors or other persons may independently develop a modified
version of our software. Our license agreements generally allow the use of our
software solely by the customer for internal purposes without the right to
sublicense or transfer the software to third parties.
We believe that these measures afford only limited protection. Despite our
efforts, it may be possible for third parties to copy certain portions of our
products or reverse engineer or obtain and use information that we regard as
proprietary. In addition, the laws of certain countries do not protect our
proprietary rights to the same extent, as do the laws of the United States.
Accordingly, there can be no assurance that we will be able to protect our
proprietary software against unauthorized third-party copying or use, which
could adversely affect our competitive position. Furthermore, there can be no
assurance that our competitors will not independently develop technology similar
to ours.
We have 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 our targeted vertical markets grows and the
functionality of products in other industry segments overlaps. Although we are
not aware that any of our products infringes upon the proprietary rights of
third parties, there can be no assurance that third parties will not claim
infringement by us with respect to current or future products. Any claims, with
or without merit, could be time-consuming, result in costly litigation, cause
product shipment delays or require us to enter into royalty or licensing
agreements, any of which could have a material adverse effect upon us. We may
also initiate claims or litigation against third parties for infringement of our
proprietary rights or to establish the validity of our proprietary rights which
could result in significant expense to us and divert the efforts of our
technical and management personnel from productive tasks, whether or not such
litigation were determined in our favor.
We have in the past and may in the future resell certain software, which we
license from third parties. In addition, we have in the past and may in the
future jointly develop software in which we 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 us on terms that: 1)
provide us with the third-party software we require, 2) provide adequate
functionality in our products, on terms that adequately protect QAD's
proprietary rights, or 3) are commercially favorable to us. 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
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until equivalent software, if any, could be identified, licensed and integrated.
This could materially and adversely affect us. See "Products" and "Research and
Development."
Employees
As of January 31, 1999, we had approximately 1,550 full-time employees of
which approximately 270 were in research and development, 620 were in global
services, 450 were in sales and marketing, and 210 were in administration and
other. In addition, we contracted with approximately 70 temporary employees.
Excluding the acquisitions, completed in fiscal 1999 we had approximately 1,110
full-time employees as of January 31, 1999. None of our workers are represented
by collective bargaining agreements, with the exception of certain employees of
our Netherlands subsidiaries who are represented by statutory Works Councils as
required under the laws of the Netherlands. We believe that our employee
relations are good.
Our success depends to a significant extent upon a limited number of key
employees and other members of our senior management. There can be no assurance
that we will be successful in attracting and retaining these personnel, and the
failure to attract and retain such personnel could have a material adverse
effect us. 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 our executive officers as
of March 31, 1999.
<TABLE>
<CAPTION>
Name Age Position(s)
- ---- --- -----------
<S> <C> <C>
Pamela M. Lopker............................................ 44 Chairman of the Board and President
Karl F. Lopker.............................................. 47 Chief Executive Officer
A. J. Moyer................................................. 55 Executive Vice President and Chief Financial Officer
Vincent P. Niedzielski...................................... 44 Executive Vice President, Research and Development
Barry R. Anderson........................................... 47 Executive Vice President, Administration
Roland B. Desilets.......................................... 37 Vice President and General Counsel
Cheryl M. Slomann........................................... 34 Vice President, Corporate Controller and Chief Accounting
Officer
</TABLE>
Pamela M. Lopker founded QAD in 1979 and has been our Chairman of the Board
and President since incorporation. Prior to founding QAD, 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 and Chief Executive Officer since
joining QAD in 1981. Mr. Lopker also serves as QAD's Assistant Treasurer. 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 to each other.
A. J. Moyer has served as Executive Vice President and Chief Financial
Officer since joining QAD in March 1998. Prior to joining QAD, Mr. Moyer served
as Chief Financial Officer of Allergan, a specialty pharmaceutical company based
in Irvine, California. Mr.
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Moyer received his Bachelor of Science degree in Business Administration from
Duquesne University. In 1973, he graduated from the Advanced Management Program
at the University of Texas, Austin.
Vincent P. Niedzielski is Executive Vice President, Development. He joined
QAD in April 1996. Prior to joining QAD, Mr. Niedzielski served as Vice
President, Production and Development at Candle Corporation from 1984 to 1996.
Mr. Niedzielski holds a Bachelor of Science degree in Mathematics and Computer
Science from the University of Scranton.
Barry R. Anderson is Executive Vice President, Administration. He joined
QAD in April 1997. Prior to joining QAD, Mr. Anderson was Chief Administrative
Officer at the Bank South in Atlanta, Georgia. His previous experience also
includes 10 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 Doctor degree from Atlanta Law School.
Roland B. Desilets joined QAD in 1993 as Regional General Counsel. In
January 1998 he was named Corporate General Counsel. Prior to joining QAD, he
was Patent Counsel with Unisys Corporation. He holds a Juris Doctor degree from
Widener University School of Law, a Master of Science degree in Computer Science
from Villanova University, and a Bachelor of Science degree in Physics from
Ursinus College. He is the author of "Software Vendors' Exposure to Products
Liability for Computer Viruses, " University of Southern California Computer/Law
Journal, 1989.
Cheryl M. Slomann joined QAD in May 1998 as Vice President, Corporate
Controller and Chief Accounting Officer. Prior to joining QAD, Ms. Slomann
served nine years with Allergan, a specialty pharmaceutical company, in various
financial positions, including Director, Corporate Financial Planning and
Manager, Corporate Reporting. She began her career at the public accounting
firm of Ernst & Young. Ms. Slomann is a Certified Public Accountant and
received her Bachelor of Science degree in Business Administration/Accounting
from the University of Southern California.
ITEM 2. PROPERTIES
QAD's executive offices are located at 6450 Via Real, Carpinteria,
California 93013, the telephone number is (805) 684-6614. We also lease
facilities to support our operations in several locations throughout the world.
Our corporate headquarters are located in Carpinteria, California in
approximately 110,000 square feet of leased space in three facilities subject to
leases with expiration dates ranging from 1999 to 2003. We own approximately 28
acres and 54,000 square feet of office space in a neighboring location, which
also supports portions of our operations. We also own a 34-acre parcel located
in Carpinteria, California, which is under consideration for developing as an
additional facility.
Major offices are located in Mount Laurel, New Jersey; Sao Paulo, Brazil;
Birmingham, United Kingdom; Hoofddorp, Netherlands; Hong Kong; China; Tokyo,
Japan; and Sydney, Australia in space aggregating to approximately 114,000
square feet and subject to leases expiring on dates ranging from 2001 to 2011.
QAD has satellite offices in the Americas, Europe, Asia and Australia in
space aggregating approximately 157,000 square feet and subject to leases
expiring on dates
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ranging from 2001 to 2003.
All of our leases have been negotiated with independent third parties on an
arms length basis, and we believe they are on commercially reasonable terms.
Total rent expense for the fiscal years 1997, 1998 and 1999 totaled $5.9
million, $6.5 million and $7.7 million, respectively. Our global presence is
supported by offices located in the United States, Canada, Mexico, Brazil, The
Netherlands, United Kingdom, Ireland, France, Germany, Poland, Turkey,
Australia, Singapore, Japan, Korea, India and China (Hong Kong and Shanghai). We
are currently engaged in a selective office consolidation process, having
already vacated approximately 22,000 square feet, and we are seeking to sublet
an additional 60,000 square feet worldwide. Although we have from time to time
sought and will in the future seek new or expanded facilities for existing or
additional offices, we expect that our current domestic and international
facilities will be sufficient to meet our needs for at least the next 12 months.
ITEM 3. LEGAL PROCEEDINGS
We are not party to any material legal proceedings. We may from time to
time be party, either as plaintiff or defendant to various legal proceedings and
claims, 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 our consolidated results of operations or consolidated financial
position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
QAD common stock has been traded on the Nasdaq National Market since our
initial public offering in August 1997. According to records of our transfer
agent, we had approximately 429 stockholders of record as of January 31, 1999.
The following table sets forth the low and high sale price as of the close of
market of QAD's common stock in each of the fiscal quarters since our initial
public offering.
<TABLE>
<CAPTION>
Low Sale Price High Sale Price
-------------- ---------------
<S> <C> <C>
Fiscal 1999:
Fourth Quarter................... $ 3.50 $ 7.00
Third Quarter.................... $ 2.87 $ 8.75
Second Quarter................... $ 7.44 $15.00
First Quarter.................... $13.00 $17.38
Low Sale Price High Sale Price
-------------- ---------------
Fiscal 1998:
Fourth Quarter................... $11.75 $15.75
Third Quarter.................... $13.63 $22.50
</TABLE>
Our policy has been to reinvest earnings to fund future growth.
Accordingly, we have not paid dividends and we do not anticipate declaring
dividends on our common stock in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA (in thousands, except per share data)
The following information was derived from our historical financial
statements. Our financial statements for the fiscal years ended January 31,
1997, 1998 and 1999 with the accompanying notes and the related report of KPMG
LLP are included evidence in this Annual Report on Form 10-K. The selected
financial data set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" below
and our financial statements and related notes. Effective February 1, 1996, we
changed our financial reporting year end from December 31 to January 31.
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, January 31,
--------------------------- ----------------------------------------
1994 1995 1997 1998 1999
------------ ------------- ------------ ------------- -----------
<S> <C> <C> <C> <C> <C>
Statement of Operation Data:
Revenue............................................ $66,360 $89,949 $126,444 $170,770 $193,344
Operating income (loss)............................ 4,084 (2,646) 2,720 14,695 (34,806)
Net income (loss).................................. 2,878 (686) 1,000 9,856 (35,921)
Basic net income (loss) per share.................. 0.14 (0.03) 0.05 0.38 (1.22)
Diluted net income (loss) per share $ 0.12 $ (0.03) $ 0.04 $ 0.38 $ (1.22)
</TABLE>
<TABLE>
<CAPTION>
December 31, January 31,
--------------------------- ----------------------------------------
1994 1995 1997 1998 1999
------------ ------------- ------------ ------------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and equivalents and short-term
cash investments............................. $ 1,706 $ 1,519 $ 301 $ 70,082 $ 19,078
Working capital (deficiency)..................... 2,271 (2,814) (5,976) 79,258 20,743
Total assets..................................... 44,361 68,466 77,250 190,506 200,055
Notes payable, long-term debt and
capital lease obligations...................... 4,767 9,610 8,465 143 7,166
Notes payable, long-term debt and
capital lease obligations, less
current portion................................ 4,677 7,341 5,036 39 6,526
Total stockholders' equity....................... $11,993 $11,732 $10,804 $112,375 $ 79,429
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Introduction
The following discussion should be read in conjunction with our financial
statements included elsewhere in this Annual Report on Form 10-K. Effective
February 1, 1996, we changed its financial reporting year end from December 31
to January 31.
Overview
Founded in 1979, QAD is a leading provider of ERP software for
multinational and other large manufacturing companies. In 1986, we commercially
released our open systems ERP application, MFG/PRO software. Since that time,
we have introduced several new generations of our open systems MFG/PRO software,
and have significantly expanded our operations. As of January 31, 1999, we had
approximately 1,550 full time employees, direct sales and support offices in 20
countries, approximately 30 distributors worldwide and more than 4,000 licensed
sites in more than 80 countries. Our total revenue has grown significantly in
recent years, increasing from $66.4 million in the year ended December 31, 1994
to $193.3 million and in the year ended January 31, 1999.
We derive revenue from license fees, maintenance and services and other
products. License fees are primarily derived from the licensing of our software
products and also include fees from third-party software sold in conjunction
with QAD software. Maintenance and other revenue consist primarily of
maintenance contracts and, to a lesser extent, revenue from consulting, training
and other services.
License fee 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 the date of shipment. Typically, our software
licenses do not include significant vendor obligations. Maintenance revenue for
ongoing customer support and product updates typically represents 15 percent of
the software license list price (net of any distributor discounts) and is
recognized ratably over the term of the maintenance period, which is typically
12 months. Service revenue is derived mainly from training, consulting and
manual sales and is recognized as the services are performed.
We have historically followed a strategy of relying on our network of
third-party distribution and implementation alliances to provide hardware,
consulting and implementation services. In fiscal 1999, we pursued a strategy
of acquiring distributors. Our revenue related to license fees and maintenance
contracts as a percentage of total revenue remained relatively stable between 89
percent to 92 percent for the years ended December 31, 1993 through the year
ended January 31, 1999. However, we anticipate revenue from services will
increase as a percentage of total revenue as a result of these recent
acquisitions and as a result of our decision to establish QAD Global Services.
Further, we anticipate that as we continue to release our On/Q software and
directly provide services related to these products, service revenue will
increase both in absolute dollars and as a percentage of total revenue.
Contracts for our products and services range from $50,000 to several
million dollars, depending on the number of sites, the number of users and the
number of services offered. No single customer has accounted for greater than
10 percent of our total revenue in any of the last three fiscal years. However,
it is not uncommon to conclude a multi-million dollar contract with a single
customer.
During fiscal year 1997 through fiscal year 1999, we significantly
increased our sales and marketing, service and support and research and
development staffs. These increases resulted in substantial growth in the
number of full-time employees (from approximately 520 at December 31, 1995, to
approximately 1,550 at January 31, 1999), the
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<PAGE>
scope of our financial and operating systems and the geographic distribution of
our direct sales and support operations (from 12 to 20 countries). These
investments were incurred in connection with our strategy to establish and
maintain a leadership position as a global supplier of ERP solutions at the
plant/operations level as well as to enter new markets such as supply chain
management software. We believe that these investments were essential in the
development of our products and operations.
We record revenue primarily in United States dollars. Foreign currency
transaction and translation gains and losses are recorded in accordance with
Statement of Financial Accounting Standards (SFAS) No. 52. In the fiscal years
1997, 1998 and 1999, foreign currency transaction (gains) and losses totaled
$(407,000), $(879,000) and $61,000, respectively. We have not previously
undertaken hedging transactions to cover our 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".
Results of Operations
The following table sets forth for the periods indicated the percentage of
total revenue represented by certain items reflected on our statements of
operations:
<TABLE>
<CAPTION>
Year Ended January 31,
----------------------
<S> <C> <C> <C>
1997 1998 1999
---- ---- ----
Revenue:
License fees...................................................... 68% 66% 55%
Maintenance and other............................................. 32 34 45
--------------------------------------
Total revenue................................................ 100 100 100
Cost and expenses:
Cost of revenue................................................... 23 24 31
Sales and marketing............................................... 42 39 47
Research and development.......................................... 20 17 25
General and administrative........................................ 13 11 13
Restructuring charge - - 2
--------------------------------------
Total cost and expenses...................................... 98 91 118
--------------------------------------
Operating income (loss)............................................. 2 9 (18)
Other (income) expense.............................................. 1 (1) -
--------------------------------------
Income (loss) before income taxes................................... 1 10 (18)
Income tax expense.................................................. 0 4 1
--------------------------------------
Net income (loss)................................................... 1% 6% (19%)
======================================
</TABLE>
Total Revenue. Total revenue for fiscal year 1999 was $193.3 million,
which was an increase of $22.5 million or 13 percent over fiscal year 1998.
This increase was primarily due to an increase in maintenance revenue from the
growing installed base and the acquisition of four of our distributors, which
added incremental revenue of approximately $12.4 million. These increases were
partially offset by manufacturers' decisions to delay capital spending due to
concerns of a global economic slowdown and Y2K readiness. Total revenue for
fiscal year 1998 was $170.8 million, which was an increase of $44.4 million or
35 percent over fiscal year 1997. This increase was primarily due to continued
market penetration into our targeted vertical markets and expansion into new
geographical markets. Maintenance and other revenue has increased as a
percentage of total revenue from 32 percent in fiscal year 1997 to 34 percent
and 45 percent in fiscal years 1998 and 1999, respectively. This shift relates
to an increase in maintenance revenue from the growing installed base, as well
as a new emphasis on services beginning late in fiscal year 1999 with the
acquired distributors and the launch of our QAD Global Services business.
Cost of Revenue. Cost of revenue as a percentage of total revenue
increased to 31 percent in fiscal year 1999 from 24 percent in fiscal year 1998.
This increase was
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primarily due to the higher costs associated with reselling third-party
databases, as well as a higher cost structure related to our expanding services
business. Cost of revenue, as a percentage of total revenue in fiscal year 1998
was 24 percent, which was consistent with the 23 percent ratio for fiscal year
1997.
Sales and Marketing. Sales and marketing expense increased 39 percent to
$91.1 million in fiscal year 1999 from $65.8 million in fiscal year 1998, and
increased 26 percent in fiscal year 1998 from $53.2 million in fiscal year 1997.
The increase during the three-year period was primarily due to the expansion of
our global sales force, opening and supporting global sales offices, increased
marketing expense to promote the QAD name and products and increased commission
expense related to higher revenue.
Research and Development. Research and development expense increased 65
percent to $48.3 million in fiscal year 1999 from $29.3 million in fiscal year
1998, and increased 15 percent in fiscal year 1998 from $25.4 million in fiscal
year 1997. The increases were primarily due to 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 and
associated support related to development of On/Q software, our supply chain
management product.
General and Administrative. General and administrative expense increased
31 percent to $25.4 million in fiscal year 1999 from $19.4 million in fiscal
year 1998, and increased 22 percent in fiscal year 1998 from $15.9 million in
fiscal year 1997. These increases were primarily the result of costs associated
with the expansion of our administrative infrastructure to support the growing
operations, as well as the amortization of intangible assets related to the
fiscal year 1999 acquisitions.
Restructuring Charge. In response to changes in manufacturing capital
software spending patterns during fiscal 1999, we undertook a restructuring and
re-alignment that would, among other things, more closely align costs with sales
expectations. As part of the re-alignment, we reduced spending on research and
development including the transfer of research and development personnel into
revenue-generating positions within our QAD Global Service Organization. In
all, we reduced our workforce (excluding staff added from the acquisitions) by
approximately 15 percent, adjusted administration and marketing costs and
narrowed our facilities expansion plans. We recorded a restructuring charge of
$4.3 million for the fiscal year 1999. This charge included the costs
associated with the consolidation of certain facilities ($3.3 million) and a
reduction of approximately 230 positions across a broad cross-section of our
operations ($1.0 million).
Total Other (Income) Expense. Total other (income) expense was $(23,000),
$(2,320,000) and $997,000 in fiscal years 1999, 1998 and 1997, respectively.
The decrease from fiscal year 1998 to 1999 was primarily the result of a $1.5
million write-down to adjust an equity investment to the current estimated fair
market value, as well as a $940,000 change in foreign currency transaction and
remeasurement (gains) and losses from ($879,000) in fiscal year 1998 to $61,000
in fiscal year 1999. The increase from fiscal year 1997 to 1998 was primarily
the result of significantly reduced interest expense as the proceeds of our
initial public offering 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.
Income Tax Expense. We recorded income tax expense of $1.1 million, $7.2
million and $723,000 in the years ended January 31, 1999, 1998 and 1997,
respectively. Our effective income tax rates were (3) percent in the year
ended January 31, 1999 and 42 percent in the years ended January 31, 1998 and
1997. QAD'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. We have available tax benefits
associated with net operating loss carryforwards aggregating $14.9 million at
January 31, 1999. See note 8 to the financial statements.
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Liquidity and Capital Resources
We have historically financed our operations and met our capital
expenditures requirements through cash flows from operations, sales of equity
securities and short-term borrowings. As of January 31, 1999, we had working
capital and cash, cash equivalents and short-term cash investments of $20.7
million and $19.1 million, respectively as compared to $79.3 million and $70.1
million as of January 31, 1998. The declines were primarily due to the cash
used in operations, capital expenditures and acquisition of businesses.
Accounts receivable, net of allowance for doubtful accounts, increased to
$95.3 million at January 31, 1999 from $75.7 million at January 31, 1998.
Accounts receivable days' sales outstanding increased slightly to 131 days at
January 31, 1999 from 126 days at January 31, 1998. We believe the days' sales
outstanding are higher than desired and we are focusing on sales terms and
collection processes to improve cash flows and working capital.
Net cash provided by (used in) operating activities was ($21.1) million,
$9.9 million and $7.4 million in the fiscal years 1999 and 1998 and 1997,
respectively. Net cash used in investing activities was primarily related to
the purchase of property and equipment and the fiscal year 1999 acquisition of
businesses and aggregated $46.0 million, $16.8 million and $3.4 million in the
fiscal years 1999 and 1998 and 1997, respectively. Net cash provided by (used
in) financing activities was primarily related to proceeds from the fiscal year
1998 initial public offering, as well as proceeds and payment of borrowings and
totaled $13.4 million, $76.8 million and $(4.5) million in fiscal years 1999 and
1998 and 1997, respectively. At January 31, 1999, we did not have any material
commitments for capital expenditures.
Subsequent to January 31, 1999, we entered into a secured credit agreement
with The First National Bank of Chicago, which expires on April 18, 2002. The
maximum amount that can be borrowed under this credit agreement is subject to
terms of the borrowing base, up to a maximum of $30 million. This credit
agreement can be terminated voluntarily by QAD. This credit agreement is secured
by certain QAD assets. Borrowings under this credit agreement bear interest
equal to the LIBOR rate plus 2.25 percent or ABR. ABR is the higher of the
corporate base rate or the Federal Funds Effective Rate plus 0.50 percent. We
pay an annual commitment fee of 0.50 percent calculated on the average unused
portion of the $30 million credit line.
We believe that the cash on hand and net cash provided by operating
activities, supplemented as necessary with borrowings available under our
existing credit facility, will provide us with sufficient resources to meet our
current and long-term working capital requirements, debt service and other cash
needs for the next 12 months.
Recent Accounting Pronouncements
In 1998, the AICPA provided further guidance on recognizing revenue on
software transactions by issuing SOP No. 98-9, "Modification of SOP No. 97-2,
Software Revenue Recognition, With Respect to Certain Transactions." In fiscal
year 2000, we will recognize software license revenue in accordance with SOP No.
97-2, as modified by SOP No. 98-9. We believe the adoption of SOP No. 98-9 will
not have a material impact on our financial condition or results of operations.
The AICPA issued SOP No. 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. We
have adopted this SOP with no material impact on our financial condition or
results of operations.
The Financial Accounting Standards Board issued SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." We adopted SFAS No.
131 for fiscal year 1999. Appropriate disclosures are presented in Note 11 to
the financial statements.
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Year 2000 Compliance
Our business operations are significantly dependent upon the same
proprietary software products we license to customers. Our management believes
it has successfully addressed Y2K readiness in our proprietary software products
and does not anticipate any business interruptions associated with these
applications. To ensure that we have adequately addressed exposures related to
the Y2K and we are Y2K ready, we have established a Y2K program that includes
business partners and other third-party relationships. We define 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 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.
Our Y2K program consists of these five phases:
1) Assessment, which identifies the magnitude of Y2K exposure, a process that
includes estimating the business risk of not becoming Y2K compliant,
determining our potential areas for Y2K exposure, and developing an
internal definition of compliance;
2) Planning, which details corporate planning efforts, including inventorying
and analyzing our 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.
We have completed the first three phases and are near completion of our
fourth phase in addressing the readiness of our information technology (IT)
systems, excluding our proprietary software products which QAD believes to be
generally Y2K compliant currently. We are in the "Resources" phase with regard
to our state of readiness for areas classified as non-IT systems. We are almost
complete with the fourth phase, which encompasses "Technology" for third-party
products that constitute material relationships. We expect to have
substantially completed all five phases by October 31, 1999.
As of January 31, 1999, the direct costs incurred to remediate Y2K issues
were not material. Cost directly attributed to our overall 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 we currently offer
software products that are designed and have been tested to be ready for the
Year 2000, there can be no assurance that our 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, this type of
litigation may affect us. Additionally, third-party software, computer and
other equipment used internally may materially impact us if it is not Y2K
compliant. Our operations may be at risk if our suppliers and other third
parties fail to adequately address the problem or if software conversions result
in system incompatibilities. This issue could result in system failures, the
generation of erroneous information, and other significant disruptions of
business activities. To the extent that either QAD or a third-
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<PAGE>
party vendor or service provider on which we rely does not achieve Y2K
readiness, we may be adversely impacted. As part of the five-phase process
outlined above, we are developing specific contingency plans in connection with
the assessment and resolution of the risks identified. We have established
certain IT contingency plans, and we are continuing to develop additional plans
regarding each specific area of risk associated with this issue as part of our
Y2K program. We also hold insurance coverage for errors and omissions, which
includes coverage for customer claims associated with Y2K issues.
International Operations
We have reassessed and we continue to closely monitor our international
business risks due to the recent economic conditions in the Asian, Yugoslavian
and Russian markets. Although we do not anticipate that these conditions will
materially impact our business, there can be no assurance that the current
economic conditions in such markets will not worsen or that the situation will
not negatively impact us.
FACTORS THAT MAY AFFECT FUTURE RESULTS AND MARKET PRICE OF STOCK
Historical Fluctuations in Quarterly Results and Potential Future Significant
Fluctuations
Our quarterly revenue, expenses and operating results have varied
significantly in the past, and we anticipate that such fluctuations will
continue in the future as a result of a number of factors, many of which are
outside our control. The factors affecting these fluctuations include demand
for our products and services, the size, timing and structure of significant
licenses by customers, market acceptance of new or enhanced versions of our
software products and products that operate with our products, the publication
of opinions about QAD, our products and technology by industry analysts, the
entry of new competitors and technological advances by competitors, delays in
localizing our 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 our pricing policies or those of our competitors,
customer order deferrals in anticipation of product enhancements or new product
offerings by us or those of our competitors, the timing of the release of new or
enhanced versions of our software products and products that operate with our
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 us, customer cancellation of major
planned software development programs.
A significant portion of our revenue in any quarter may be derived from a
limited number of large, non-recurring license sales. We expect to continue to
experience from time to time large, individual license sales, which may cause
significant variations in quarterly license fees. We also believe that the
purchase of our 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 our 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 QAD products.
We have also historically recognized a substantial portion of our 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, we
are 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 our quarterly operating results. To the extent that
significant sales occur earlier than expected, operating results for subsequent
quarters may be adversely affected. We have also historically operated with
little backlog because orders are generally shipped as they are received. As a
result, revenue from license fees in any quarter is substantially dependent on
orders
24
<PAGE>
booked and shipped in that quarter and on sales by our distributors and other
resellers. Sales derived through indirect channels are harder to predict and may
have lower profit margins than direct sales.
Our 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.
In fiscal year 1999, we implemented various changes designed to mitigate
the quarterly fluctuations in our operating results. These changes included the
hiring of additional financial personnel, including a new Chief Financial
Officer, a Vice President - Corporate Controller, and Vice President - Tax and
Treasury, the changing of our planning systems to incorporate quarterly
performance goals and quarterly forecasting procedures and inclusion of
quarterly financial incentives into our sales compensation structure. In
addition, as the percentage of revenue derived from maintenance and services
increases and the less predictable license fees become a smaller proportion,
these quarterly fluctuations should diminish.
There can be no assurance that these changes will alleviate the quarterly
or other fluctuations in our financial results. Moreover, although our revenue
has generally increased in recent periods, there can be no assurance that our
revenue will grow in future periods, at past rates or at all, or that we will be
profitable on a quarterly or annual basis. We have in the past experienced and
may in the future experience quarterly losses.
In future periods, our operating results may be below the expectations of
stock market analysts and investors. If this occurs, the price of our common
stock could be materially adversely affected. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Risks Associated with Sales Cycle
Because the license of our 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 QAD
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 we have little or no control. These risks include customers'
budgetary constraints, timing of budget cycle, concerns about the introduction
of new products by QAD or our competitors and general economic downturns which
can result in delays or cancellations of information systems investments. Due
in part to the strategic nature of our products, potential customers are
typically cautious in making product acquisition decisions. The decision to
license QAD products generally requires us to provide a significant level of
education to prospective customers regarding the uses and benefits of QAD
products, and we must frequently commit substantial presales support resources.
We have historically relied on third-parties for implementation and systems
support services, which in the past caused sales cycles to be lengthened and may
have resulted in the loss of sales. Since the launch of QAD Global Services in
late 1998, we no longer rely exclusively on third-parties for implementation and
systems integration services, which should significantly mitigate these risks.
However, uncertain outcome of our sales efforts and the length of our 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 we are 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 our quarterly operating results. See
"Management's Discussion and Analysis of Consolidated Financial Condition and
Results of Operations."
Product Mix
We have historically derived substantially all of our revenue from the
licensing and maintenance of MFG/PRO software and third-party software. In the
fiscal years 1998 and
25
<PAGE>
1999, this revenue equaled approximately 91 percent and 89 percent,
respectively, of our total revenue. As a result of our acquisition of
distributors in fiscal 1999, as well as the launch in the latter part of 1998 of
QAD Global Services, we expect that revenue from services will increase from
approximately six percent of revenue to 20 to 25 percent of total revenue. In
addition, if we are successful in releasing the remainder of our planned On/Q
software components, we anticipate that the demand for service revenue will
increase accordingly.
Dependence on Third-Party Products
Our MFG/PRO software is written in a programming language that is
proprietary to Progress Software. We have entered into a license agreement with
Progress that provides us and each of our subsidiaries, among other things, with
the perpetual, worldwide, royalty-free right to use the Progress programming
language to develop, market, distribute and license QAD software products. The
Progress agreement also provides for continued software support from Progress
through June 2002 without charge to QAD. Progress may only terminate the
Progress agreement upon adjudication of QAD as bankrupt, our liquidation or
other similar event, or if we have ceased business operations in full. Under a
separate value-added reseller agreement we have the right to distribute Progress
software products. Other than for a material breach by us, the VAR agreement may
not be terminated on less than 12 months notice by Progress.
Our success is dependent upon Progress continuing to develop, support and
enhance this programming language, our tool set and database, as well as the
continued market acceptance of Progress as a standard database program. We have
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 delays
of this sort could have a material adverse effect on us. The increased market
acceptance of programming languages other than Progress in our market or our
inability to adapt our software to such other languages could have a material
adverse effect on us.
MFG/PRO software employs Progress programming interfaces, which allow
MFG/PRO software to operate with Oracle database software. However, our
software programs do not run within programming environments other than Progress
and our customers must acquire rights to Progress software in order to use
MFG/PRO software.
Our On/Q software products, which include the available APS products and
Outbound Logistics, which is currently under development, are not dependent upon
Progress technology but are dependent on Enterprise Engines Inc.'s technology.
See "Supply Chain Solution Under Development and Underlying Technology."
We also maintain a number of development and product alliances with other
third parties. These alliances include software developed to be sold in
conjunction with QAD software products, technology developed to be included in
or encapsulated within QAD software products and numerous third-party software
programs that generally are not sold with QAD software but interoperate directly
with QAD software through application program interfaces. We generally enter
into joint development agreements with our third-party software development
partners that govern ownership of the technology collectively developed. Each
of our partner agreements and third-party development or re-seller agreements
contain strict confidentiality and non-disclosure provisions for the service
provider, end user and third-party developer and our third-party development
agreements contain restrictions on the use of QAD technology outside of the
development process. Any failure 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 us.
26
<PAGE>
Rapid Technological Change
The market for our 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. Our future success will depend upon our ability to
continue to enhance our 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, we believe our future success will depend on our ability to convert
our products to object-oriented technology as well as our ability to develop
products that will operate across the Internet. There can be no assurance that
we 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 our products will achieve market
acceptance. Any failure to successfully develop and market product enhancements
or new products could have a material adverse effect on us.
While we generally take 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 QAD
software, which could have a material adverse effect on us. 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 QAD software
products are difficult to estimate. We must respond to developments rapidly and
incur substantial product development expenses. Any failure 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 new
releases, significant problems in the installation or implementation of new
releases, or customer dissatisfaction with such new releases, could materially
and adversely affect us. See "Business-Products" and "Third-Party
Implementation Providers."
Supply Chain Solutions Under Development and Underlying Technology
A significant element of our strategy is our development of On/Q software,
a series of new products targeted at the supply chain management needs of
manufacturing companies. Over the past three fiscal years, we have devoted
substantial resources to developing our 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. Our first On/Q software product, APS, was
released in September 1998. We have not performed preliminary tests on our
follow on product, Outbound Logistics, nor have we completed development or
commenced beta testing of Outbound Logistics. Therefore, there can be no
assurance that Outbound Logistics or any other of our planned On/Q software
products developed by us or third parties will achieve the performance standards
required for commercialization or that these products will achieve market
acceptance or be profitable. If Outbound Logistics or our other planned supply
chain management software products do not achieve such performance standards or
do not achieve market acceptance, we would be materially and adversely affected.
We are currently working jointly with Enterprise Engines, Inc. of San
Mateo, California, to develop On/Q Outbound Logistics. On/Q Outbound Logistics
is being designed and built using the object-oriented technology of Sun
Microsystems - Enterprise Java Beans. On/Q depends on the commercial success of
platforms that support Enterprise Java Beans in Application Server environments
such as the Gemstone/J Application Server supplied by Gemstone of Beaverton,
Oregon. Similar to the way our MFG/PRO software is
27
<PAGE>
dependent upon Progress language and database technology, our new On/Q software
is dependent on Java, Enterprise Java Beans, Gemstone, and technology supplied
by EEI. See "Factors That May Affect Future Results and Market Price of Stock-
Reliance on and Need to Develop Additional Relationships with Third Parties."
Object-oriented applications, such as On/Q Outbound Logistics, 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. We believe that the flexibility inherent
in 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 our targeted industry
segments. There can be no assurance that we will be successful in developing
our new supply chain management software on a timely basis, if at all, or that
if developed this software will achieve market acceptance.
Market Concentration
We have made a strategic decision to concentrate our sales and marketing in
four primary vertical industry segments: automotive, consumer products,
electronics/industrial, and medical. An important element of our strategy is to
achieve technological and market leadership recognition for our software
products in these segments. The failure of QAD's products to achieve or
maintain substantial market acceptance for our software products in one or more
of these segments could have a material adverse effect on our product and
business strategy in that segment and on our business, operating results and
financial condition. If any of the industry segments we target experiences a
material downturn in expansion or in prospects for future growth, that downturn
would similarly adversely affect the demand for our products and our business.
See "Business-Sales and Marketing."
Dependence Upon Key Personnel
Our future operating results depend in significant part upon the continued
service of a relatively small number of key technical and senior management
personnel, including Founder, Chairman of the Board and President Pamela M.
Lopker, and Chief Executive Officer Karl F. Lopker, neither of whom is bound by
an employment agreement. Pamela and Karl Lopker are married to each other and
jointly own approximately 63 percent of QAD's outstanding common stock. The
loss of one or more of these or other key individuals could have a material
adverse effect on QAD. We do not currently have key individual insurance. See
"Business-Executive Officers of the Registrant."
Dependence Upon Development and Maintenance of Sales and Marketing Channels
We sell and support our products through direct and indirect sales
organizations throughout the world. We have made significant expenditures in
recent years in the expansion of our sales and marketing force, primarily
outside the United States, and we plan to continue to expand our sales and
marketing force. Our future success will depend in part upon the productivity
of our sales and marketing force and our ability to continue to attract,
integrate, train, motivate and retain new sales and marketing personnel.
Competition for sales and marketing personnel in the software industry is
intense. There can be no assurance that we will be successful in hiring such
personnel in accordance with our plans. Neither can there be assurance that our
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 our 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 our current and potential competitors.
If we were unable to develop and manage our sales and marketing force expansion
effectively, QAD's business, operating results and financial condition would be
materially adversely affected.
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Our indirect sales channel consists of approximately 30 distributors
worldwide. We do not grant exclusive distribution rights to any of our
distributors. Our distributors primarily sell independently to companies within
their geographic territory but may also work in conjunction with our direct
sales organization. We will need to maintain and expand our relationships with
our existing distributors and enter into relationships with additional
distributors in order to expand the distribution of our 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 QAD software
products, that we will be able to maintain effective, long-term relationships
with distributors, or that selected distributors will continue to meet our sales
needs. Further, there can be no assurance that these distributors will not
market software products in competition with us in the future or will not
otherwise reduce or discontinue their relationships with or support of us and
our products. This may become more likely as we compete with some of our
distributors through our own acquisition of distributors. Any failure to
maintain successfully our existing distributor relationships or to establish new
relationships in the future would have a material adverse effect on us. In
addition, if any of our distributors exclusively adopts a product other than QAD
software products, or if any distributor materially reduces its sales efforts
relating to QAD software products or materially increases such support for
competitive products, we could be materially and adversely affected. See
"Business-Sales and Marketing."
Reliance on and Need to Develop Additional Relationships with Third Parties
We have established strategic relationships with a number of consulting and
systems integration organizations that we believe are important to our worldwide
sales, marketing, service and support activities and the implementation of our
products. We are aware that these third-party providers do not provide systems
integration services exclusively for our products and in many instances such
firms have similar, and often more established, relationships with our principal
competitors. We expect to continue to utilize third-party system integrators.
Beginning in the fourth quarter of fiscal 1999, we created QAD Global
Services to offer implementation and integration services to our customers. We
have designed our service organization so that we can subcontract our services
to partners for specific technical needs and also subcontract services from our
partners to meet our capacity requirements. We believe this method allows for
additional flexibility in ensuring our customer's needs for implementation and
installation services are met. These relationships also assist us in keeping
pace with the technological and marketing developments of major software
vendors, and, in certain instances, provide us with technical assistance for our
product development efforts.
Organizations providing consulting and systems integration and
implementation services in connection with QAD software products include Arthur
Andersen, Deloitte & Touche, Ernst & Young, Origin Technology, Sligos and STCS
Systems. In most cases distributors also will deliver consulting and systems
integration services. These and other third parties may not provide the level
and quality of service required to meet the needs of our customers, we may not
be able to maintain an effective, long-term relationship with these third
parties, or these third parties may not continue to meet the needs of our
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 QAD, will not market software
products in competition with us in the future or will not otherwise reduce or
discontinue their relationships with or support of us and our products. Any
failure to maintain our existing relationships or to establish new relationships
in the future, or the failure of these third parties to meet the needs of our
customers, could have a material adverse effect on us. In addition, if these
third parties exclusively adopt a product or technology other than QAD software
products or technology, or if these third parties materially reduce their
support of QAD software products and technology or materially increase such
support for competitive products or technology, we could be materially and
adversely affected.
29
<PAGE>
We typically enter into separate agreements with each of our installation
and implementation partners that provide these partners with the non-exclusive
right to promote and market QAD software products, and to provide training,
installation, implementation and other services for QAD software products,
within a defined territory for a specified period of time (generally two years).
Our installation and implementation partners generally do not receive fees for
the sale of QAD 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 we typically do not collect
a royalty or percentage fee from these partners on services performed. We also
enter into similar agreements with our distribution partners that grant these
partners the non-exclusive right, within a specified territory, to market,
license, deliver and support QAD software products. In exchange for these
distributors' services, We grant a discount to the distributor for the license
of our software products.
We also rely on third parties for the development or interoperation of key
components of our software so those users of QAD software products will obtain
the functionality demanded. These research and product alliances develop
software to be sold in conjunction with QAD software products, technology to be
included in or encapsulated within QAD software products and numerous third-
party software programs that generally are not sold with QAD software products
but interoperate directly with QAD software through application program
interfaces. We generally enter into reseller or joint development agreements
with our third-party software development partners that govern ownership of the
technology collectively developed. Each of our 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 our
third-party development agreements contain restrictions on the use of our
technology outside of the development process. Any failure to establish or
maintain successful relationships with these third-party software providers or
these third-party installation, implementation and development partners or the
failure of these third-party software providers to develop and support their
software could have a material adverse effect on us. See "Business-Sales and
Marketing," "Third-Party Implementation Providers" and "Proprietary Rights and
Licensing."
Risks Associated With International Operations
We derived approximately 42 percent, 39 percent and 48 percent of our total
revenue from sales outside the United States in the fiscal years 1997, 1998 and
1999, respectively. Of our more than 4,000 licensed sites in more than 80
countries as of January 31, 1999, over 70 percent are outside the United States.
To date, our revenue from international operations has primarily been
denominated in United States dollars. We generally price our products in United
States dollars and over 90 percent of our sales in the fiscal years 1997, 1998
and 1999, were denominated in United States dollars, with the remainder in
approximately ten different currencies. We expect that a growing percentage of
our business will be conducted in currencies other than the United States
dollar. We also incur a significant portion of our expenses in currencies other
than the United States dollar. As a result, fluctuations in the values of the
respective currencies relative to the other currencies in which we generate
revenue could materially adversely affect us. While we may in the future change
our pricing practices, an increase in the value of the United States dollar
relative to foreign currencies could make QAD software 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
our reported results of operations. In the fiscal years 1997, 1998 and 1999,
foreign currency transaction (gains) and losses totaled $(407,000), $(879,000)
and $61,000, respectively. Due to the constantly changing currency exposures and
the volatility of currency exchange rates, there can be no assurance that we
will not experience currency losses in the future, nor can we predict the effect
of exchange rate fluctuations upon future operating results. Although we do not
currently undertake hedging
30
<PAGE>
transactions, we may choose to hedge a portion of our currency exposure in the
future as we deem appropriate. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Control by Principal Stockholders
As of January 31, 1999, Pamela and Karl Lopker jointly beneficially own
approximately 63 percent of QAD's outstanding common stock. Current directors
and executive officers as a group own approximately 66 percent of the common
stock. The Lopkers currently constitute two of the five directors and therefore
have significant influence in directing the actions of the Board of Directors.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted as a separate section of this Annual
Report on Form 10-K. See Item 14.
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the directors is incorporated by reference to the
section entitled "Election of Directors" appearing in our Definitive Proxy
Statement for the Annual Meeting of Stockholders to be filed with the Securities
and Exchange Commission, or the Commission, within 120 days after the end of our
fiscal year 1999. Certain information with respect to persons who are or may be
deemed to be executive officers of the Registrant is set forth under the caption
"Executive Officers of the Registrant" in Part I of this Annual Report on 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 our
Definitive Proxy Statement for the Annual Meeting of Stockholders to be filed
with the Commission within 120 days after the end of our fiscal year 1999.
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 our Definitive Proxy Statement for the Annual Meeting of
Stockholders to be filed with the Commission within 120 days after the end of
our fiscal year 1999.
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 our Definitive Proxy Statement for the Annual Meeting
of Stockholders to be filed with the Commission within 120 days after the end of
our fiscal year 1999.
31
<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 Annual
Report on Form 10-K:
QAD Inc.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
------
<S> <C>
Independent Auditors' Report............................................................................................. F-1
Consolidated Balance Sheets as of January 31, 1998 and 1999.............................................................. F-2
Consolidated Statements of Operations for the years ended January 31, 1997, 1998
and 1999.............................................................................................................. F-3
Consolidated Statement of Stockholders' Equity for the years ended January 31, 1997,
1998 and 1999......................................................................................................... F-4
Consolidated Statements of Cash Flows for the years ended January 31, 1997,
1998 and 1999......................................................................................................... F-5
Notes to Consolidated Financial Statements............................................................................... F-6
</TABLE>
(A) 2. FINANCIAL STATEMENT SCHEDULES
The following financial statement schedule is filed as a part of this
Annual Report on Form 10-K report:
<TABLE>
<CAPTION>
<S> <C>
Page
------
II. Valuation and Qualifying Accounts.............................................................................. S-1
</TABLE>
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
The following exhibits are filed herewith or are incorporated by reference
to exhibits previously filed with the Commission. QAD shall furnish copies of
exhibits for a reasonable fee (covering the expense of furnishing copies) upon
request.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- ------ -------------
<S> <C>
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 Incorporation 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*
</TABLE>
32
<PAGE>
<TABLE>
<S> <C>
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*
10.14 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*
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*
</TABLE>
33
<PAGE>
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 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.*
10.43 Value Added Reseller Agreement dated as of April 13, 1998 between the
Registrant and Paragon Management Systems, Inc.
10.44 Lease Agreement between the Registrant and Goodaston Limited for Unit
1 Phase 8 Business Park, The Waterfront Merry Hill, West Midlands
dated April 30, 1996
21.1 Subsidiaries of the Registrant*
23.1 Consent of KPMG LLP and opinion on Schedule II
27.1 Financial Data Schedule
________________________
(*) Incorporated by reference to the Registrant's Registration Statement in
Form S-1 (Commission File No. 333-28441).
(+) 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.
(B) REPORTS ON FORM 8-K
On November 17, 1998 QAD filed a current report on Form 8-K under Item 2
relating to the Registrant's acquisition of certain assets of TRW Integrated
Supply Chain Solutions. No financial statements were required. The acquisition
agreement was filed as an Exhibit to the Form 8-K.
34
<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, 1998 and 1999 and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
years in the three year period ended January 31, 1999. These consolidated
financial statements are the responsibility of QAD'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, 1998 and 1999 and the results of their operations
and their cash flows for each of the years in the three year period ended
January 31, 1999 in conformity with generally accepted accounting principles.
KPMG LLP
Los Angeles, California
March 5, 1999, except for
Note 7 which is
as of April 26, 1999
F-1
<PAGE>
QAD Inc.
Consolidated Balance Sheets
As of January 31, 1998 and 1999
(in thousands, except for number of shares)
<TABLE>
<CAPTION>
1998 1999
-------------- ------------
<S> <C> <C>
Assets
Current assets:
Cash and equivalents............................................................. $ 70,082 $ 16,078
Short-term cash investments...................................................... - 3,000
Accounts receivable, net......................................................... 75,683 95,344
Other current assets............................................................. 10,442 19,680
-------------- ------------
Total current assets........................................................... 156,207 134,102
Property and equipment, net........................................................ 25,717 36,835
Capitalized software development costs, net........................................ 2,416 8,646
Other assets, net.................................................................. 6,166 20,472
-------------- ------------
Total assets.................................................................... $190,506 $200,055
============== ============
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable and capital lease obligations,..................................... $ 143 $ 7,166
Accounts payable................................................................. 15,060 16,314
Accrued expenses................................................................. 18,110 29,933
Deferred revenue and deposits.................................................... 43,636 59,946
-------------- ------------
Total current liabilities....................................................... 76,949 113,359
Notes payable and capital lease obligations, less current portion................ 39 6,526
Other deferred liabilities....................................................... 1,132 581
Minority interest................................................................ 11 160
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 29 30
outstanding 29,096,269 shares and 29,703,500 shares at January 31, 1998 and
1999, respectively..............................................................
Additional Paid-in-Capital....................................................... 97,209 99,566
Retained earnings (accumulated deficit).......................................... 17,395 (18,526)
Receivable from stockholders..................................................... (397) (54)
Unearned compensation-restricted stock........................................... (1,510) (970)
Accumulated other comprehensive loss............................................. (351) (617)
-------------- ------------
Total stockholders' equity...................................................... 112,375 79,429
-------------- ------------
Total liabilities and stockholders' equity................................... $190,506 $200,055
============== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
QAD Inc.
Consolidated Statements of Operations
For the years ended January 31, 1997, 1998 and 1999
(in thousands, except per share data)
<TABLE>
<CAPTION>
1997 1998 1999
------------- -------------- -------------
Revenue:
<S> <C> <C> <C>
License fees.............................................. $ 85,753 $113,447 $105,928
Maintenance and other..................................... 40,691 57,323 87,416
------------- -------------- -------------
Total revenue........................................... 126,444 170,770 193,344
Cost and expenses:
Cost of revenue........................................... 29,158 41,551 59,015
Sales and marketing....................................... 53,194 65,785 91,128
Research and development.................................. 25,434 29,317 48,332
General and administrative................................ 15,938 19,422 25,361
Restructuring charge...................................... - - 4,314
------------- -------------- -------------
Total cost and expenses................................. 123,724 156,075 228,150
------------- -------------- -------------
Operating income (loss)..................................... 2,720 14,695 (34,806)
Other (income) expense:
Interest income........................................... (49) (1,785) (2,152)
Interest expense.......................................... 1,654 1,064 602
Other (income) expense.................................... (608) (1,599) 1,527
------------- -------------- -------------
Total other (income) expense............................ 997 (2,320) (23)
------------- -------------- -------------
Income (loss) before income taxes........................... 1,723 17,015 (34,783)
Income tax expense.......................................... 723 7,159 1,138
------------- -------------- -------------
Net income (loss)........................................... $ 1,000 $ 9,856 $(35,921)
============= ============== =============
Basic net income (loss) per share........................... $0.05 $0.38 $(1.22)
Diluted net income (loss) per share......................... $0.04 $0.38 $(1.22)
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
QAD Inc.
Consolidated Statement of Stockholders' Equity
For the years ended January 31, 1997, 1998 and 1999
(in thousands, except for number of shares)
<TABLE>
<CAPTION>
Common Stock Accumulated
and Additional Retained Receivable Other
Paid-in-Capital Earnings from Restricted Stock Comprehensive Total Comprehensive
------------------- (Accumulated Stock ---------------- Income Stockholders' Income
Shares Amount Deficit) holders Shares Amount (Loss) Equity (Loss)
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 31, 1996 20,978,754 $ 2,223 $ 6,539 (151) - $ - $ 412 $ 9,023 -
Comprehensive Income:
Net Income 1,000 1,000 $ 1,000
Translation Adjustments (763) (763) (763)
----------
Total Comprehensive Income $ 237
==========
Common Stock Issued:
Under stock purchase plan 793,438 1,411 - - - - - 1,411
Under stock options 105,000 185 - - - - - 185
Under performance awards 108,062 256 - - - - - 256
Under restricted stock awards 559,066 2,584 - - (559,066) (2,584) - -
Common stock earned under - - - - 149,954 455 - 455
restricted stock awards
Common stock repurchases (325,748) (717) - - - - - (717)
Receivable from stockholders - - (46) - - - (46)
---------------------------------------------------------------------------------
Balance January 31, 1997 22,218,572 5,942 7,539 (197) (409,112) (2,129) (351) 10,804
Comprehensive Income:
Net Income 9,856 9,856 $ 9,856
Translation Adjustments - - -
----------
Total Comprehensive Income $ 9,856
==========
Common Stock Issued:
Under initial public offering 6,612,500 90,516 - - - - - 90,516
(net of offer costs)
Under stock purchase plan and 251,129 2,413 - - - - - 2,413
incentive plan
Under stock options 299,000 709 - - - - - 709
Under performance awards 50,060 431 - - - - - 431
Under restricted stock awards 20,400 194 - - (20,400) (194) - -
Common stock earned under 1,536 - - - 208,296 663 - 663
restricted stock awards
Tax benefit associated with - 523 - - - - - 523
stock option exercise
Common stock repurchases (334,528) (3,340) - - - - - (3,340)
Restricted stock awards cancelled (22,400) (150) - - 22,400 150 - -
Receivable from stockholders - - - (200) - - - (200)
---------------------------------------------------------------------------------
Balance January 31, 1998 29,096,269 97,238 17,395 (397) (198,816) (1,510) (351) 112,375
Comprehensive Income:
Net Loss (35,921) (35,921) $(35,921)
Translation Adjustments (266) (266) (266)
----------
Total Comprehensive Loss $(36,187)
==========
Common Stock Issued:
Under stock purchase plan 372,153 1,804 - - - - - 1,804
and incentive plan
Under stock options 282,050 38 - - - - - 38
Under restricted stock awards - 305 - - - (305) - -
Common stock earned under 7,267 - - - 62,382 447 - 447
restricted stock awards
Tax benefit associated with - 1,553 - - - - - 1,553
stock option exercise
Common stock repurchases (5,739) (944) - - - - - (944)
Restricted stock awards cancelled (48,500) (398) - - 48,500 398 - -
Receivable from stockholders - - - 343 - - 343
---------------------------------------------------------------------------------
Balance January 31, 1999 29,703,500 $99,596 $(18,526) $ (54) (87,934) $ (970) $(617) $ 79,429
=================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
QAD Inc.
Consolidated Statements of Cash Flows
For the years ended January 31, 1997, 1998 and 1999
(in thousands)
<TABLE>
<CAPTION>
1997 1998 1999
------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 1,000 $ 9,856 $(35,921)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating
activities:
Depreciation and amortization 5,345 6,921 11,055
Provision for doubtful accounts and sales returns 3,432 4,370 3,627
Loss on disposal of equipment 25 82 698
Asset write-off - - 3,060
Minority interest (16) (79) (45)
Compensation expense under stock awards 1,044 1,361 320
Changes in assets and liabilities, net of effects from acquisitions:
Accounts receivable (14,941) (33,508) (8,420)
Other assets (3,307) (2,534) (13,309)
Accounts payable 2,991 3,375 2,629
Accrued expenses 4,137 5,577 4,739
Deferred revenue and deposits 7,708 14,467 10,451
------------------------------------------
Net cash provided by (used in) operating activities 7,418 9,888 (21,116)
Cash flows from investing activities:
Purchase of property and equipment (3,443) (13,561) (17,670)
Acquisitions of businesses, net of cash acquired - - (25,176)
Investment in equity securities - (3,000) -
Purchase of short-term cash investment - - (3,000)
Other, net 83 (209) (179)
------------------------------------------
Net cash used in investing activities (3,360) (16,770) (46,025)
Cash flows from financing activities:
Proceeds from notes payable and capital lease obligations 84,841 9,648 12,363
Reduction of notes payable and capital lease obligations (90,131) (22,967) (252)
Proceeds from initial public offering - 90,516 -
Issuance of common stock for cash 1,596 3,122 1,842
Repurchase of common stock (717) (3,340) (944)
Receivable from stockholders (46) (200) 343
------------------------------------------
Net cash provided by (used in) financing activities (4,457) 76,779 13,352
Effect of exchange rates on cash and equivalents (763) (116) (215)
Net increase (decrease) in cash and equivalents (1,162) 69,781 (54,004)
Cash and equivalents at beginning of period 1,463 301 70,082
------------------------------------------
Cash and equivalents at end of period $ 301 $ 70,082 $ 16,078
==========================================
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 1,553 $ 892 $ 335
Income taxes $ 707 $ 1,179 $ 4,390
</TABLE>
Supplemental disclosure of non-cash investing and financing activities:
During the fiscal years 1997, 1998 and 1999, we acquired property and
equipment under capital lease obligations aggregating $97,000, $0 and $604,000,
respectively.
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
QAD Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
QAD Inc. and our majority-owned subsidiaries. We also have 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 our customer base, and their
dispersion across many different industries and geographic locations throughout
the world. No single customer accounted for ten percent or more of revenue for
fiscal 1997, 1998 or 1999 or of accounts receivable at January 31, 1998 or 1999.
Use of Estimates
The financial statements have been prepared in conformity with generally
accepted accounting principles and, as such, include amounts based on informed
estimates and judgments of management with consideration given to materially.
Actual results could differ from those estimates.
Cash and Equivalents and Short-Term Cash Investments
We consider all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents. Short-term cash
investments include those investments with original maturities in excess of
three months.
F-6
<PAGE>
Revenue Recognition
Our principal source of software license revenue is derived from
licensing MFG/PRO software. Revenue from maintenance and other activities is
generated from maintenance support services, training and consulting and is
billed separately from license revenue. Revenue is recognized in accordance
with Statement of Position, or SOP No. 97-2, "Software Revenue Recognition."
Revenue from software license agreements, including licenses sold through
distributors, is recognized at the time of shipment, net of any applicable
distributor discount, provided there are no remaining significant obligations to
be fulfilled by us and collectibility is probable. Where distributors have
reproduction rights, the distributor recognizes revenue upon notification of
shipment. Typically, our 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 revenue 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 revenue is recognized as the services are
performed. Returns and allowances are estimated and provided for in the period
of sale.
In 1998, the American Institute of Certified Public Accountants, or AICPA,
provided further guidance on recognizing revenue on software transactions by
issuing SOP No. 98-9, "Modification of SOP No. 97-2, Software Revenue
Recognition, With Respect to Certain Transactions." In fiscal year 2000,
software license revenue will be recognized in accordance with SOP No. 97-2, as
modified by SOP No. 98-9. We believe the adoption of SOP No. 98-9 will not have
a material impact on our financial condition and result of operations.
Computer Software Costs
Consistent with SFAS No. 86, "Accounting for the Costs of Computer Software
to be Sold, Leased or Otherwise Marketed," issued by the Financial Accounting
Standards Board, we capitalize software development costs incurred in connection
with the localization and translation of our 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 revenue. All other
development costs are expensed to research and development as incurred.
Income Taxes
We recognize deferred tax assets and liabilities for temporary differences
between the financial reporting basis and the tax basis of our assets and
liabilities and expected benefits of utilizing net operating loss and credit
carryforwards. The impact on deferred taxes of changes in tax rates and laws,
if any, are applied to the years during which temporary differences are expected
to be settled and reflected in the financial statements in the period of
enactment. No provision is made for taxes on unremitted earnings of certain
non-U.S. subsidiaries, which are or will be reinvested indefinitely in such
operations.
Computation of Net Income (Loss) Per Share
The following table sets forth the computation of basic and diluted net
income (loss) per share:
<TABLE>
<CAPTION>
Year Ended January 31,
---------------------------------------------
1997 1998 1999
---------------------------------------------
<S> <C> <C> <C>
Net income (loss) $ 1,000 $ 9,856 $ (35,921)
=============================================
Weighted average shares of common stock outstanding used in basic income 21,931,000 25,701,000 29,356,000
(loss) per share calculation. . . . . . . .
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. . . .
23,014,000 26,283,000 29,356,000
=============================================
Basic net income (loss) per share $ 0.05 $ 0.38 $ (1.22)
Diluted net income (loss) per share $ 0.04 $ 0.38 $ (1.22)
</TABLE>
Common stock equivalent shares consist of the shares issuable upon the
exercise of stock options using the treasury stock method. There were no anti-
dilutive common stock equivalent shares in fiscal year 1997 and 1998. Shares of
common stock equivalents of approximately 1,172,000 for the fiscal year 1999
were not included in the diluted calculation because they were anti-dilutive.
Due to the net loss for the fiscal year 1999, basic and diluted per share
amounts are the same.
Foreign Currency Translation
The financial position and results of operations of our foreign
subsidiaries are generally determined using the U.S. dollar as the functional
currency. Gains and losses resulting from foreign currency transactions and
remeasurement adjustments for those foreign entities whose books of record are
not maintained in the functional currency are included in earnings. Foreign
currency transaction and remeasurement (gains) and losses for the fiscal years
1997, 1998 and 1999 totaled $(407,000), $(879,000) and $61,000, respectively.
Fair Value of Financial Instruments
The carrying amounts of cash and equivalents, short-term cash investments,
accounts receivable, accounts payable and accrued expenses approximate fair
value due to the short-term maturities of these instruments.
The carrying value of our obligations under capital leases and notes
payable approximates fair value and was estimated by discounting the future cash
flows at rates currently offered to us for similar capital leases and notes
payable of comparable maturities by QAD's bankers.
Long-Lived Assets
Property and equipment are stated at cost. Additions, major renewals and
improvements are capitalized, while maintenance and repairs are expensed. Upon
disposition, the net book value of assets is relieved and resulting gains or
losses are reflected in earnings. For financial reporting purposes,
depreciation is generally provided on the straight-line method over the useful
life of the related
F-7
<PAGE>
asset. Asset lives range from three to 39 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.
Included in land and buildings is capitalized interest aggregating $329,000
as of January 31, 1998 and 1999.
Goodwill represents the excess of acquisition costs over the fair value of
net assets of purchased businesses and is being amortized on a straight-line
basis over periods of 10 to 15 years. Other intangible assets include
employment agreements, contracts not to compete, customer contracts and
trademarks, which are being amortized over their estimated useful lives of two
to five years. Amortization expense for the fiscal years 1997, 1998 and 1999
was $94,000, $82,000 and $1,036,000, respectively.
Long-lived assets and certain identifiable intangibles are reviewed for
impairment in value based upon undiscounted future operating cash flows, and
appropriate losses are recognized, whenever the carrying amount of an asset may
not be recovered.
F-8
<PAGE>
Accounting for Stock Options
Prior to January 1, 1996, we accounted for our stock option grants in
accordance with the provisions of Accounting Principles Board, or 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, we 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. We have elected to continue to apply
the provisions of APB Opinion No. 25 and provide the pro forma disclosure
provisions of SFAS No. 123 (see Note 12.)
Reclassifications
Certain prior year balances have been reclassified to conform to current
year presentation.
2. Acquisitions
During fiscal 1999, we acquired controlling interest in four businesses:
- Distributor operations and assets of Computer Systems for Business
International S.A., a distributor in Poland in September 1998.
- Iris-Ifec Co., Ltd., a Thailand-based distributor and systems integrator
in October 1998.
- QAD Sistemas Integrados Casa de Software, S.A. de C.V. and QAD Sistemas
Integrados Servicios de Consultoria, S.A. de C.V., ("Sistemas") a
Mexico-based distributor in October 1998.
- United Kingdom and Netherlands software distributor operations and
assets of TRW Integrated Supply Chain Solutions in November 1998.
The cost of the acquisitions totaled $25.8 million. The acquisitions were
accounted for using the purchase method. Goodwill related to the acquisitions
of $9.5 million is being amortized over periods of 10 to 15 years. Results of
operations of each of the acquisitions have been included in our income
statements since their respective dates of acquisition.
Iris-Ifec and Sistemas have earn outs of up to $1.6 million and $2.0
million, respectively, which may be added to the purchase price over the next
five years.
The historical operations of the companies acquired are not material,
individually, or in aggregate to our consolidated operations or financial
position, and therefore, supplemental pro forma information has not been
presented.
3. Restructuring Charge
F-9
<PAGE>
In October 1998, we approved implementing a plan to restructure operations.
Pursuant to the Plan, we recorded a restructuring charge of $4.3 million for the
fiscal year 1999. This charge included the costs associated with the
consolidation of certain facilities ($3.3 million) and an approximate reduction
of 230 positions across a broad cross-section of QAD ($1.0 million). As of
January 31, 1999, $2.6 million of the $4.3 million was paid and we expect to pay
the remaining balance by January 31, 2003.
4. Composition of Certain Financial Statement Captions
<TABLE>
<CAPTION>
January 31,
-----------------------------
1998 1999
----------- -----------
(in thousands)
<S> <C> <C> <C>
Accounts receivable, net
Accounts receivable............................................................. $ 81,193 $103,368
Less allowance for doubtful accounts....................................... (5,510) (8,024)
----------- -----------
$ 75,683 $ 95,344
=========== ===========
Other current assets
Prepaid expenses................................................................ $ 3,482 $ 5,896
Deferred income taxes........................................................... 1,858 3,772
Other........................................................................... 5,102 10,012
----------- -----------
$ 10,442 $ 19,680
=========== ===========
Property and equipment, net
Land and buildings.............................................................. $ 9,082 $ 8,208
Automobiles..................................................................... 123 138
Computer equipment and software................................................. 23,479 36,687
Furniture and office equipment.................................................. 7,654 12,948
Leasehold improvements.......................................................... 1,868 4,323
Equipment under capital lease................................................... 353 1,879
----------- -----------
42,559 64,183
Less accumulated depreciation............................................... (16,842) (27,348)
----------- -----------
$ 25,717 $ 36,835
=========== ===========
Capitalized software development costs, net
Capitalized software development costs.......................................... $ 5,451 $ 12,533
Less accumulated amortization............................................... (3,035) (3,887)
----------- -----------
$ 2,416 $ 8,646
=========== ===========
Other assets, net
Goodwill........................................................................ $ 444 $ 9,929
Other intangible assets......................................................... - 7,840
Less accumulated amortization............................................... (227) (1,263)
----------- -----------
217 16,506
Deferred income taxes........................................................... 2,180 1,073
Other assets.................................................................... 3,769 2,893
----------- -----------
$ 6,166 $ 20,472
=========== ===========
Accrued expenses
Accrued payroll................................................................. $ 9,268 $ 12,595
Accrued other................................................................... 8,842 17,338
----------- -----------
$ 18,110 $ 29,933
=========== ===========
</TABLE>
F-10
<PAGE>
5. Comprehensive Income
In June 1997, Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income, or SFAS No. 130, was issued. SFAS No. 130
establishes standards for reporting and displaying of comprehensive income and
its components (revenues, expenses, gains and losses) in a full set of general-
purpose financial statements. We adopted SFAS No. 130 in 1999.
Comprehensive income includes changes in the balances of items that are
reported directly in a separate component of stockholders' equity on the
Consolidated Balance Sheets. Accumulated other comprehensive loss consists of
the following:
<TABLE>
<CAPTION>
Year Ended January 31,
------------------------------------------------------
1997 1998 1999
------------- -------------- -------------
(in thousands)
<S> <C> <C> <C>
Foreign currency translation adjustments
Beginning balance............................................... $ 412 $(351) $(351)
Current year change............................................. (763) - (266)
------------- -------------- ---------------
Ending balance.................................................. (351) (351) (617)
------------- -------------- ---------------
Total accumulated other
comprehensive loss............................................ $(351) $(351) $(617)
============= ============== ===============
</TABLE>
6. Notes Payable
On November 17, 1998, we issued Subordinated Notes totaling $12,362,000.
Borrowings under the Subordinated Notes bear interest at a rate per annum equal
to 3-month LIBOR plus a margin equal to 3.50 percent. As of January 31, 1999 the
rate was 8.47 percent based on LIBOR rate of 4.97 percent plus a margin rate of
3.50 percent. Principal payments on the Subordinated Notes are scheduled for
$6,181,000 on November 17, 1999 and $6,181,000 on November 17, 2000.
7. Subsequent Events
Subsequent to January 31, 1999, we entered into a secured credit agreement
with The First National Bank of Chicago, which expires on April 18, 2002. The
maximum amount that can be borrowed under this credit agreement is subject to
terms of the borrowing base, up to a maximum of $30 million. This credit
agreement can be terminated voluntarily by QAD. This credit agreement is secured
by certain QAD assets. Borrowings under this credit agreement bear interest
equal to the LIBOR rate plus 2.25 percent or ABR. ABR is the higher of the
corporate base rate or the Federal Funds Effective Rate plus 0.50 percent. We
pay an annual commitment fee of 0.50 percent calculated on the average unused
portion of the $30 million credit line.
Subsequent to January 31, 1999, the Subordinated Notes (See Note 6)
totaling $12,362,000 in Principal Amount were paid. We funded the payment
of the Subordinated Notes with a draw on The First National Bank of Chicago
line of credit.
8. Income Taxes
Components of income tax expense (benefit) are as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended January 31,
---------------------------------------------------------------
1997 1998 1999
------------------- ----------------- -----------------
<S> <C> <C> <C>
Current:
</TABLE>
F-11
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Federal.................. $ 881 $1,675 $ 3,080
State.................... (63) 197 (775)
Foreign.................. 227 2,421 (361)
------------------- ----------------- -----------------
Total.................... 1,045 4,293 1,944
Deferred:
Federal.................. (94) 2,449 (1,914)
State.................... (10) (573) 881
Foreign.................. (218) 990 227
------------------- ----------------- -----------------
Total.................... (322) 2,866 (806)
------------------- ----------------- -----------------
$ 723 $7,159 $ 1,138
=================== ================= =================
</TABLE>
Actual income tax expense (benefit) differs from that obtained by applying
the statutory Federal income tax rate of 34 percent (35 percent in fiscal 1998)
to income (loss) before income taxes as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended January 31,
-------------------------------------------------------------
1997 1998 1999
------------------ ----------------- ----------------
<S> <C> <C> <C>
Statutory Federal income tax rate................ 34% 35% 34%
Computed expected tax expense (benefit).......... $ 586 $ 5,968 $(11,827)
State income taxes, net of Federal income tax 103 815 (806)
benefit.........................................
Incremental tax expense from foreign operations.. 117 203 415
Net change in valuation allowance................ 918 (267) 13,401
Meals and entertainment.......................... 286 325 407
Foreign sales corporation........................ (539) -
Research, AMT and foreign tax credits............ (1,082) (1,135) (408)
Foreign dividends................................ - 541 -
Reduction of research and development credits
and foreign tax credits previously recorded.....
350 600 -
Other............................................ (16) 109 (44)
------------------ ----------------- ----------------
$ 723 $ 7,159 $ 1,138
================== ================= ================
</TABLE>
Withholding and U.S. taxes have not been provided on approximately $6.8
million of unremitted earnings of certain non-U.S. subsidiaries because such
earnings are or will be reinvested in operations or will be offset by
appropriate credits for foreign income taxes paid. Such earnings would become
taxable upon the sale or liquidation of these non-U.S. subsidiaries or upon the
remittance of dividends. Upon remittance, certain foreign countries impose
withholding taxes that are then available, subject to certain limitations, for
use as credits against our U.S. tax liability, if any.
Significant components of the deferred tax assets and liabilities are as
follows:
F-12
<PAGE>
<TABLE>
<CAPTION>
January 31,
--------------------------------------------------
1998 1999
---------------------- ----------------------
<S> <C> <C>
Deferred tax assets:
Allowance for bad debts....................................... $ 1,999 $ 2,231
Accrued vacation.............................................. 751 661
Accrued commission............................................ 267 369
Alternative minimum tax....................................... 98 91
Research and development credits.............................. 1,149 1,232
Foreign tax credits........................................... 320 1,594
Stock awards/discounts........................................ 266 -
Depreciation and amortization................................. - 269
Net operating loss carry forwards............................. 2,417 14,937
Other......................................................... 213 2,292
---------------------- ----------------------
7,480 23,676
Less valuation allowance...................................... (1,814) (15,215)
---------------------- ----------------------
Net deferred tax assets....................................... 5,666 8,461
Deferred tax liabilities:
Capitalized translation and research and
development costs............................................. 1,056 2,142
State income taxes.............................................. (68) 87
Other........................................................... 195 983
Mark to market.................................................. 807 404
Depreciation and amortization................................... (362) -
---------------------- ---------------------
1,628 3,616
---------------------- ---------------------
Total net deferred tax asset................................ $4,038 $4,845
====================== =====================
</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.
We have net operating loss carryforwards, with various expiration dates, of
$44.1 million as of January 31, 1999.
At January 31, 1998 and 1999, the valuation allowance attributable to
deferred tax assets was $1,814,000 and $15,215,000, respectively, an overall
increase of $13,401,000. The increase in the valuation allowance relates
primarily to benefits associated with net operations losses and tax credit
carryforwards.
F-13
<PAGE>
9. 401(k) Plan
We have 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. We match 75 percent of the
employees' contributions up to the first four percent. We 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 fiscal years 1997,
1998 and 1999 were $422,000, $371,000 and, $1,430,000, respectively.
10. Commitments and Contingencies
We lease office facilities under operating lease agreements expiring
through 2004. The future minimum lease payments under non-cancelable operating
leases and present value of future minimum capital lease payments are as follows
(in thousands):
<TABLE>
<CAPTION>
Operating Leases Capital Leases
----------------------- ----------------------
Year ending January 31,:
<S> <C> <C>
2000........................................................... $ 4,991 $ 765
2001........................................................... 3,447 303
2002........................................................... 2,241 130
2003........................................................... 1,227 -
2004........................................................... 466 -
----------------------- ----------------------
Total minimum lease payments........................... $12,372 $1,198
Less amount representing interest at rates
ranging from 8.2% to 17.0%.................................... (111)
----------------------
Present value of minimum lease payments.......................... $1,087
======================
</TABLE>
Total rent expense for the fiscal years 1997, 1998 and 1999 aggregated
$5,929,000, $6,509,000 and $7,702,000, respectively.
We are 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 our consolidated results of operations or financial position.
11. Segment Information and International Operations
We adopted Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" or SFAS
No. 131 for fiscal year 1999. SFAS No. 131 establishes annual and interim
standards for reporting information regarding operating segments, as well as
related disclosures about products, services and geographic areas. As a result,
amounts presented are determined on a consistent basis in accordance with SFAS
No. 131.
We operate in regions or geographic operating segments. Operations for the
Europe region include sales to customers in the Middle East and Africa.
Operations for the Asia Pacific region include sales to customers in Australia
and New Zealand. Management-based cost allocations have been utilized for
purposes of determining regional operating income (loss).
F-14
<PAGE>
<TABLE>
<CAPTION>
Year Ended January 31,
-----------------------------------------------------------------------------------
1997 1998 1999
------------------------ ------------------------ -----------------------
<S> <C> <C> <C>
Revenue:
North America................................... $ 76,296 $105,886 $103,708
Europe.......................................... 32,725 42,918 57,511
Asia/Pacific.................................... 15,409 18,168 26,534
Other........................................... 2,014 3,798 5,591
------------------------ ------------------------ -----------------------
$126,444 $170,770 $193,344
======================== ======================== =======================
Operating income (loss):
North America................................... $ 13,646 $ 24,569 $ (8,539)
Europe.......................................... (3,076) 1,190 (7,591)
Asia/Pacific.................................... (7,742) (10,484) (10,800)
Other........................................... (108) (580) (3,562)
Restructuring charge............................ - - (4,314)
------------------------ ------------------------ -----------------------
$ 2,720 $ 14,695 $(34,806)
======================== ======================== =======================
Depreciation and Amortization:
North America................................... $ 4,044 $ 5,446 $ 7,892
Europe.......................................... 647 560 1,885
Asia/Pacific.................................... 642 829 867
Other........................................... 12 86 411
------------------------ ------------------------ -----------------------
$ 5,345 $ 6,921 $ 11,055
======================== ======================== =======================
</TABLE>
<TABLE>
<CAPTION>
January 31,
----------------------------------------------------
1998 1999
----------------------- -----------------------
Identifiable assets:
<S> <C> <C>
North America................................................... $149,319 $ 87,128
Europe.......................................................... 25,998 83,850
Asia/Pacific.................................................... 9,056 17,811
Other........................................................... 6,133 11,266
----------------------- -----------------------
$190,506 $200,055
======================= =======================
</TABLE>
12. Employee Stock Option, Purchase Plans and Restricted Stock Awards
Employee Stock Option Agreements
We have stock option agreements with certain key employees. As of January
31, 1998 and 1999, options to purchase 2,724,000 and 3,676,000 shares of common
stock had been granted and were outstanding. Outstanding options generally vest
over a four-year period and have contractual lives of eight years. Stock option
activity is summarized as follows:
<TABLE>
<CAPTION>
Weighted
Average
Exercise Options
Shares Price Exercisable
--------------------- --------------------- -------------------
<S> <C> <C> <C>
Outstanding options at January 31, 1996....................... 1,326,000 $ 0.31 1,240,000
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
---------------------
</TABLE>
F-15
<PAGE>
<TABLE>
<S> <C> <C> <C>
Outstanding options at January 31, 1998....................... 2,724,000 9.68 822,000
Options issued................................................ 1,917,000 5.62
Options exercised............................................. (282,000) 0.16
Options expired and terminated................................ (683,000) 10.74
-----------------------
Outstanding options at January 31, 1999....................... 3,676,000 $ 5.45 642,000
=======================
</TABLE>
In August 1998, our board agreed that in order to provide incentives to our
employees, repricing of outstanding options was needed to align the option
exercise price more closely with the fair market value of the underlying common
stock as determined by the marketplace. Therefore, we implemented a program
under which option holders under the 1997 Stock Incentive Program could exchange
higher priced option shares for the same number of lower priced shares. The new
options were issued on August 14, 1998 at $5.1875 per share. The repricing
excluded our officers and directors and prohibits employees from exercising
these options for the next twelve months. Certain QAD officers and directors
were issued additional grants under the same plan.
The weighted average remaining contractual life of stock options
outstanding as of January 31, 1999 was as follows:
<TABLE>
<CAPTION>
Options Exercisable
Weighted -----------------------------------
Average Weighted Weighted
Number of Remaining Average Average
Range of Options Contractual Exercise Number Exercise
Exercise Prices Outstanding Life (years) Price Exercisable Price
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 0.12 - $ 0.39 540,000 1.42 $ 0.18 540,000 $ 0.18
$ 3.00 - $ 5.00 1,148,000 7.81 4.12 - -
$ 5.00 - $10.00 1,509,000 6.90 5.24 - -
$10.00 - $15.75 479,000 6.96 14.35 102,000 14.34
--------------- --------------- --------------- --------------- ---------------
Total 3,676,000 6.50 $ 5.45 642,000 $ 2.43
================ ===============
</TABLE>
We apply APB Opinion No. 25 in accounting for QAD's 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 fiscal year 1997 as SFAS No. 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 fair value of the options at date of grant was estimated using the
Black-Scholes model with the following assumptions:
<TABLE>
<CAPTION>
January 31, 1998 January 31, 1999
---------------- ----------------
<S> <C> <C>
Expected Life (years)......... 6.00 6.50
Interest Rate................. 5.95% 5.50%
Volatility.................... 0.41 0.75
Dividend Yield................ $0.00 $0.00
</TABLE>
No compensation expense has been recognized for stock-based incentive
compensation plans other than for restricted stock awards. If we had recognized
compensation expense for stock-based employee compensation based upon the fair
value for options granted, our net income (loss) for the fiscal years 1998, and
1999 would have decreased as follows:
<TABLE>
<CAPTION>
1998 As Reported Pro Forma
------------------------- -----------------------
<S> <C> <C>
</TABLE>
F-16
<PAGE>
<TABLE>
<S> <C> <C>
Net income....................................... $9,856 $8,201
Basic earnings per share......................... $ 0.38 $ 0.32
Diluted earnings per share....................... $ 0.38 $ 0.31
1999 As Reported Pro Forma
------------------------- -----------------------
Net loss......................................... $(35,921) $(42,756)
Basic loss per share............................. $ (1.22) $ (1.46)
Diluted loss per share........................... $ (1.22) $ (1.46)
</TABLE>
These pro forma effects are not indicative of future amounts. We expect
to grant additional options in future years.
1994 Stock Ownership Program
We established the QAD Inc. 1994 Stock Ownership Program (the "Plan")
covering 4,800,000 shares of our 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 percent of
the fair market value through payroll deduction. We have the right, but not the
obligation, to repurchase shares at fair value upon the termination of
employment. During the fiscal years 1997 and 1998, 793,438 and 215,160 shares,
respectively, were issued under the Plan at average prices of $1.78 and $9.42,
respectively. No shares were issued under the Plan during the fiscal year 1999.
During the fiscal year 1998, 20,400 restricted shares of our common stock
were granted to certain employees. The fair market value of shares awarded was
$194,000. 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 $1,263,000 for the fiscal year 1998, $600,000 of which is
included in accrued expense and $663,000 of which has been recorded as a
reduction in unearned compensation-restricted stock as the restricted shares are
issued to employees.
During the fiscal years 1997 and 1998, we granted 108,062, and 50,060
unrestricted shares, respectively, to certain employees having a fair value of
$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
We have adopted the 1997 Stock Incentive Program or Program. The Program
consists of seven parts:
F-17
<PAGE>
The first part is the Incentive Stock Option Plan under which incentive
stock options may be granted. The second part is the Non-Qualified Stock Option
Plan under which nonqualified stock options may be granted. The third part is
the Restricted Share Plan under which restricted shares of common stock may be
granted. During fiscal year 1999, we issued 20,000 restricted shares under the
Plan. 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 percent of the lower of the beginning or the ending calendar
quarter share price. We have issued options under the Plan as follows:
<TABLE>
<CAPTION>
3 Months Ended Options Issued Price
-------------- -------------- -----
<S> <C> <C>
December 31, 1997 36,000 $10.73
March 31, 1998 40,000 11.05
June 30, 1998 51,000 7.65
September 30, 1998 129,000 3.29
December 31, 1998 152,000 $ 3.03
</TABLE>
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 QAD. The sixth part is the Stock Appreciation Rights Plan under
which SARs (as defined in the plan) may be granted. The seventh part is the
Other Stock Rights Plan under which (1) units representing the equivalent shares
of common stock may be granted; (2) payments of compensation in the form of
shares of common stock may be granted; and (3) rights to receive cash or shares
of common stock based on the value of dividends paid with respect to a share of
common stock may be 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>
January 31,
-------------------------------------------------------------------------
1997 1998 1999
----------------------- ----------------------- --------------------
<S> <C> <C> <C>
Under performance awards.................................. $ 256,000 $ 431,000 $ -
Under restricted stock grants............................. 788,000 930,000 471,000
Under optioned shares repurchased immediately upon
exercise................................................. 648,000 - -
---------------- ------------------- ------------------
TOTAL.................................................... $1,692,000 $1,361,000 $471,000
================ =================== ==================
</TABLE>
Receivable from Stockholders
In connection with the 1994 Stock Ownership Program, we have 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.
13. Quarterly information (unaudited)
<TABLE>
<CAPTION>
Quarter Ended
----------------------------------------------------------------------
April 30 July 31 Oct. 31 Jan. 31
----------------------------------------------------------------------
1998 (in thousands, except per share data)
<S> <C> <C> <C> <C>
Total revenue..................................... $32,073 $41,661 $ 44,021 $53,015
Operating income.................................. 317 2,706 2,502 9,170
</TABLE>
F-18
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Net income........................................ 560 1,665 1,385 6,246
Basic net income per share........................ 0.03 0.07 0.05 0.21
Diluted net income per share...................... $ 0.02 $ 0.07 $ 0.05 $ 0.21
1999
Total revenue..................................... $44,270 $47,279 $ 36,435 $65,360
Operating (loss).................................. (5,057) (7,627) (20,362) (1,760)
Net (loss)........................................ (2,287) (4,431) (24,340) (4,863)
Basic net (loss) per share........................ (0.08) (0.15) (0.83) (0.16)
Diluted net (loss) per share...................... $ (0.08) $ (0.15) $ (0.83) $ (0.16)
</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-19
<PAGE>
Schedule II
SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
Balance at Charged to Balance at
Beginning of Costs and (1) End of
Description Period Expenses Deletions Adjustments Period
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts and sales returns
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
January 31, 1999.... $5,510 $3,627 $(1,083) $(30) $8,024
</TABLE>
(1) Actual write-offs and product returns.
S-1
<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
our behalf by the undersigned, thereunto duly authorized, on April 28, 1999.
QAD Inc.
By: /s/ KARL F. LOPKER
------------------------
Karl F. Lopker
Chief Executive Officer
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.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ PAMELA M. LOPKER Chairman of the Board and President April 28, 1999
- ----------------------- (Principal Executive Officer)
Pamela M. Lopker
/s/ KARL F. LOPKER Director, Chief Executive Officer April 28, 1999
- -----------------------
Karl F. Lopker
/s/ A. J. MOYER Executive Vice President, Chief Financial Officer
- ----------------------- (Principal Financial Officer) April 28, 1999
A. J. Moyer
/s/ CHERYL M. SLOMANN Vice President, Corporate Controller, Chief
- ----------------------- Accounting Officer (Principal Accounting Officer) April 28, 1999
Cheryl M. Slomann
/s/ KOH BOON HWEE Director April 28, 1999
- ------------------------
Koh Boon Hwee
/s/ PETER R. VAN CUYLENBURG Director April 28, 1999
- ------------------------
Peter R. van Cuylenburg
/s/ EVAN M. BISHOP Director, Vice President Technology April 28, 1999
- ------------------------
Evan M. Bishop
</TABLE>
<PAGE>
Exhibit 10.43
VALUE ADDED RESELLER AGREEMENT
This Agreement is made as of the 13th day of April, 1998 (the "Effective Date")
by and between QAD Inc., 6450 Via Real, Carpinteria, CA 93013 ("QAD") and
Paragon Management Systems, Inc., 5933 West Century Blvd., 12th Floor, Los
Angeles, CA 90045 ("Paragon").
Paragon Management Systems and QAD Inc. agree as follows:
Article 1 Rights and Obligations
1.1 Paragon hereby grants to QAD, and QAD hereby accepts from Paragon, a non-
exclusive, world-wide, transferable right to copy (when sublicensed to
distributors), modify, market, use, license, sublicense and distribute
Paragon Applications software as a QAD product to Licensee's of QAD MFG/PRO
Software and On/Q Software.
1.2 Paragon shall provide QAD copies of the latest Paragon Applications
software and all future releases, updates and enhancements of Paragon
Applications software throughout the term of this Agreement and for a
period of one (1) year after termination of this Agreement. New releases
of Paragon Applications shall be provided to QAD at each stage of
development including, but not limited to alpha, beta and general release.
1.3 Paragon shall create/maintain an Application Program Interface ("API")
between Paragon Applications and QAD MFG/PRO Software and On/Q Software
required for integration of Paragon Applications to MFG/PRO Software and
On/Q Software. New versions of Paragon's API shall be concurrent with new
releases of MFG/PRO Software and On/Q Software.
1.4 The API between Paragon Applications and MFG/PRO Software and On/Q Software
consists of Paragon owned ERP API and QAD owned MFG/PRO Software and On/Q
Software specific interface program ("Specific Interface Program"). QAD
shall own the Specific Interface Program.
1.5 During the term of this Agreement, Paragon shall provide QAD ninety (90)
days advance written notice before entering into a business arrangement to
license Paragon Applications to a QAD competitor, including, but not
limited to SAP, Baan, SSA or JD Edwards. QAD shall provide ninety (90) days
advance written notice before entering into an agreement to provide a
competitive application of Paragon Applications including, but not limited
to, i2, Manugistics, Red Pepper, etc..
1.6 QAD and Paragon agree to enter into a mutually acceptable contract
modification or a separate agreement to cover development of the API
between Paragon Applications and MFG/PRO Software and On/Q Software. QAD
and Paragon shall endeavor to complete negotiation of this
modification/separate agreement within forty-five (45) days of the date of
execution of this Agreement. The terms of such agreement shall, include,
but not be limited to technical details of the interface, development
milestones, ownership, warranties,
<PAGE>
indemnities, support, quality, etc. In the event the parties are unable to
reach agreement on this modification/separate agreement either party may
terminate this Agreement without further liability.
Article 2 Prices, Discounts and Payment Terms
2.1 QAD shall pay Paragon a royalty calculated as a percentage of the net sales
price received by QAD for Paragon Applications licensed by QAD and/or its
distributors and partners. The royalty percentages are listed in the
Royalty Schedule attached hereto as Schedule 1. QAD shall have the right to
discount the Paragon list price up to twenty-five percent (25%). Discounts
in excess of twenty five percent (25%) shall be mutually agreed upon by the
parties.
2.2 QAD shall pay Paragon, a one time payment of $500,000 consisting of the
following: (1) $250,000 to compensate Paragon for the integration of
Paragon's Applications to the MFG/PRO Software and the On/Q Software; and
(2) $250,000 shall be an initial prepaid royalty payment. The effective
schedule of the payments are listed below:
a. $250,000 upon QAD receipt and acceptance of Paragon Applications and
support materials with all references to Paragon and Paragon
Applications changed to QAD and On/Q Planning and Optimization. These
changes will include but are not limited to all references found in
menus, help, documentation, training materials, marketing materials,
etc. and shall be made within thirty (30) days of execution of this
Agreement. All future releases to QAD shall follow this format.
b. $150,000 upon QAD receipt and acceptance of the API within ninety (90)
days of execution of this Agreement.
c. $25,000 upon QAD receipt and acceptance of Paragon's eighteen (18)
month road map for Paragon's Demand Planning application products,
including Paragon's internal development as well as all products which
Paragon may sublicense from third parties This milestone shall be
completed within ninety (90) days of execution of this Agreement.
d. $75,000 upon QAD receipt and acceptance of Paragon's development plan*
detailing QAD's additional functionality requirements for Paragon
Applications software for the following QAD verticals:
1. CPG/Food and beverage
2. Automotive
3. Electronic/Industrial
4. Medical
QAD and Paragon shall jointly define the specific vertical market
requirements within ninety (90) days following execution of this
Agreement.
*This plan shall be submitted to QAD not later than one hundred and
eighty (180) days following execution of this Agreement.
2.3 Paragon Applications pricing for MFG/PRO Software and On/Q Software shall
be consistent with the level of pricing established for Paragon
Applications as set by Paragon; however, such pricing shall be consistent
with QAD product pricing guidelines.
2.4 QAD and Paragon shall review prices on an annual basis. Prices shall not
change more than one (1) time per year unless approved in writing by QAD
and
<PAGE>
Paragon. Any change to the price for Paragon Applications shall not affect
outstanding offers by QAD or QAD distributors and partners which result in
an order within one hundred-twenty (120) days of the date of the original
offer.
2.5 Payments to Paragon shall be made quarterly and shall be net thirty (30)
days from the date following the quarter end and such payments shall be for
licenses granted in the previous quarter.
Article 3 Sales, Marketing and Order Administration
3.1 Demonstration and evaluation licenses shall be available to QAD on an as
required basis at no cost to QAD, QAD distributors or partners and to
prospective licensees of MFG/PRO Software or On/Q Software ("End Users").
For the purpose of this section a demonstration license shall be a standard
license which may be limited in application or use; and an evaluation
license shall be a standard license which has the same functionality as a
regular copy of the software.
3.2 QAD may offer Paragon Applications to any End User or site to which QAD, a
QAD distributor or partner has licensed MFG/PRO Software or On/Q Software.
Paragon may license Paragon Applications into any site that is not a QAD
MFG/PRO Software and/or On/Q Software site. On an annual basis, QAD and
Paragon shall review the activity in QAD MFG/PRO and On/Q sites surrounding
Paragon Applications. If QAD does not meet the mutually agreed upon revenue
plan, Paragon shall have access into QAD MFG/PRO and On/Q sites.
3.3 Sites not currently using MFG/PRO Software or On/Q Software may be offered
Paragon Applications if such site has expressed a desire to purchase either
MFG/PRO Software or On/Q Software. Such sites must intend to purchase
MFG/PRO Software or On/Q Software within one (1) year of receipt of QAD's
offer to purchase such software in conjunction with Paragon Applications.
3.4 Paragon reserves the right to license Paragon Applications to any site not
intending to license MFG/PRO Software or On/Q Software at the time of first
contact by Paragon.
3.5 Generally, QAD shall not utilize Paragon personnel in its selling cycle
except in conjunction with the licensing of Paragon.. In the event Paragon
personnel, in addition to those assigned in section 4.1, are needed in the
selling cycle QAD shall pay reasonable time and expenses subject to
approval by QAD's Director of Sales or his or her designee.
3.6 On a quarterly basis, QAD shall report the number of Paragon Applications
licenses issued and detail the funnel for global sales activity related to
Paragon Applications, including the company name, location and projected
revenue. The funnel information shall be used by Paragon for planning
purposes only.
3.7 Annually, QAD shall update the revenue plan for Paragon Applications based
on QAD's current revenue projections through the end of the then current
contract term. The revenue plan shall be determined by good faith
negotiation of both parties at the beginning of each calendar year.
<PAGE>
3.8 All license agreements with End Users shall be based upon QAD standard
software license terms and conditions. Paragon shall have an opportunity to
review QAD's form of license agreement and any changes made thereto by QAD
during the term of this Agreement.
3.9 Any public announcements, media releases, or public disclosure for general
distribution (including, but not limited to, promotional or marketing
material) by either party, or by their employees or agents, relating to
this Agreement or its subject matter shall be coordinated with and approved
in writing by the other party prior to its release.
3.10 Paragon shall in electronic format make available to QAD, and QAD
distributors and partners, advertising literature relating to Paragon
Applications which Paragon has prepared or may in the future prepare, and
marketing materials to be used by QAD in performing its rights under this
Agreement. QAD shall have the right to determine the use of such literature
as it deems appropriate. QAD may employ any marketing collateral provided
by Paragon, and any portion thereof, in its marketing activity or material
QAD chooses to develop, including any translation or modification of the
Paragon marketing material.
Article 4 Training and Support
4.1 During the first full year of this Agreement, Paragon shall dedicate one
(1) full time pre-sales support person to QAD to provide sales training to
QAD personnel.
4.2 During the term of this Agreement, Paragon shall dedicate the following
personnel resources to support of QAD's licensing Paragon Applications: an
Alliance Product Manager, Response Center Consultants and R&D Interface
Programmers. QAD shall designate an Alliance Product Manager and shall
provide sufficient resource to facilitate its obligations under this
Agreement.
4.3 Paragon shall offer training for the Paragon Applications in the form of
one (1) "Train the Trainer" session for QAD personnel at a QAD location, at
a reasonable time as QAD may elect. QAD shall bear its own out of pocket
expenses for travel, meals and lodging in attending such training session.
Within thirty (30) days of each major release of Paragon Applications,
Paragon shall offer to provide one (1) free training session to "Train the
Trainer" for QAD personnel or its designated partner. Pricing for
additional training sessions shall be eighty per cent (80%) of Paragon list
training price and may include QAD personnel, QAD distributors, partners
and End Users.
4.4 QAD shall provide worldwide support to all QAD customers utilizing MFG/PRO
Software or On/Q Software in conjunction with Paragon Applications. QAD
shall provide level 1 and level 2 support; however, during the first twelve
(12) months of this Agreement, Paragon and QAD shall create a support plan
utilizing QAD and Paragon support personnel. Following sufficient training
from Paragon and the initial twelve (12) month term of this Agreement, QAD
shall support Paragon Applications for level 1 and level 2 and Paragon
shall be responsible for level 3 support.
<PAGE>
a. Level 1 support: receive and log support calls from partners and End
Users.
b. Level 2 support: research the reported problem and provide an
appropriate remedy for such problem if QAD is able to determine one.
c. Level 3 support: research problems with Paragon Applications which QAD
is unable to remedy and provide an appropriate remedy to all reported
errors in the Paragon Applications. Paragon shall have the following goals:
Severity 1: Within 24 hours, notify QAD of receipt of the error
report, identify the nature of the problem and provide a commitment
date by which the issue shall be remedied.
Severity 2: Within one (1) week, notify QAD of receipt of the error
report, identify the nature of the problem and provide a commitment
date by which the issue shall be remedied.
Severity 3: Within two (2) weeks, notify QAD of receipt of the error
report, identify the nature of the problem and provide a commitment
date by which the issue shall be remedied.
Article 5 Term and Termination
5.1 This Agreement shall remain in force for four (4) years from the effective
date unless terminated by either party in accordance with this Section 5.
The parties shall have the option to extend the term of this Agreement at
the end of the this four (4) year period for an additional two (2) years
upon mutual agreement of both parties by providing written notice of such
intention at least ninety (90) days prior to the expiration of the initial
four (4) year term.
5.2 Either party may terminate this Agreement upon thirty (30) days notice in
writing to the other party if the other party has breached a material
provision of this Agreement. The party breaching a material provision of
this Agreement shall have thirty (30) days to cure the breach, in which
case the notifying party shall withdraw its notice of termination. In the
event that the breach is not capable of being remedied within the thirty
(30) day period to cure, the party in breach shall receive a reasonable
extension of the cure period, not to exceed thirty (30) days.
5.3 A party may terminate this Agreement immediately by written notice to the
other party if the other party enters into liquidation, whether voluntary
or compulsory, or enters into a settlement with its creditors or applies
for suspension of payment or admits its inability to pay its debts when due
or is declared bankrupt or takes or suffers any similar action in
consequence of debt.
5.4 Either party may terminate the Agreement immediately by notice in writing
in the event the other party sells or disposes of substantially all its
assets or in the event that the control, management or ownership of the
other party's business passes into other hands other than those now
exercising or entitled to the same, either voluntarily or by law.
5.5 In the event of a pending acquisition of Paragon or investment into Paragon
of more than twenty percent (20%) of Paragon's market value, Paragon shall
<PAGE>
immediately notify QAD. Paragon agrees to notify QAD of Paragon's intention
to be acquired by a competitor of QAD ninety (90) days prior to such
acquisition. QAD agrees to notify Paragon of QAD's intention to be acquired
by a competitor of Paragon ninety (90) days prior to such acquisition. In
the event QAD is purchased by a direct competitor of Paragon, Paragon may
terminate this Agreement upon written notice to QAD.
5.6 Should controlling interest in Paragon be acquired by a third party during
the term of this Agreement, QAD shall have the right to continue to license
Paragon Applications and receive all new release of Paragon Applications
for a period of one (1) year following termination of this Agreement.
Article 6 Warranties, Indemnities and Limitation of Liability
6.1 Paragon shall defend, indemnify and hold harmless QAD against all costs
(including reasonable attorneys fees arising from a claim that Paragon
Applications furnished and used within the scope of this Agreement infringe
a copyright or patent, trade secret, or other intellectual property right,
provided that: (i) QAD notifies Paragon in writing within thirty (30) days
of the claim; (ii) Paragon has control of the defense and all related
settlement negotiations; and (iii) QAD provides Paragon with the
assistance, information, and authority necessary to perform the above.
Reasonable out-of-pocked expenses incurred by QAD in providing such
assistance shall be reimbursed by Paragon.
a. Paragon shall have no liability for any claim of infringement based on:
(i) use of a superseded or altered release of Paragon Applications if
such infringement would have been avoided by the use of a current
unaltered release of Paragon Applications that Paragon provides to QAD;
or (ii) the combination, operation, or use of Paragon Applications
furnished under this Agreement with programs or data not furnished by
Paragon if such infringement would have been avoided by the use of
Paragon Applications without such programs or data.
b. In the event Paragon Applications is held or are believed by Paragon to
infringe, Paragon shall have the option, at its expense, to: (i) modify
Paragon Applications to be noninfringing; (ii) obtain for QAD a license
to continue using Paragon Applications; or (iii) substitute Paragon
Applications with other software reasonably suitable to QAD.
6.2 QAD warrants that, to the knowledge of QAD, it has the right to grant all
the rights to Paragon as specified in the Agreement. In no event shall QAD
be liable for any loss, damage or expense whatsoever including, without
limitation, time, money or goodwill arising from, or in connection with,
the use or inability to use the MFG/PRO Software or On/Q Software.
6.3 THE ABOVE WARRANTY IS THE ONLY WARRANTY MADE BY QAD CONCERNING THE
OBLIGATIONS OF QAD UNDER THIS AGREEMENT. TO THE MAXIMUM EXTENT PERMITTED BY
APPLICABLE LAW, NO OTHER WARRANTY IS MADE HEREUNDER BY QAD AND ALL OTHER
CONDITIONS, WARRANTIES, AND REPRESENTATIONS, EITHER EXPRESS OR IMPLIED, ARE
EXCLUDED, INCLUDING, BUT NOT LIMITED TO, CONDITIONS OR WARRRANTIES RELATING
TO THE WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.
<PAGE>
6.4 Paragon warrants that Paragon Applications will be free of material defects
and will perform the functions described in the associated documentation
when operated on the specified platform for a period of one (1) year from
the date of shipment of Paragon Applications to an End User.
6.5 Paragon warrants all media delivered to QAD to be free of defects in
materials and workmanship under normal use for ninety (90) days from the
receipt. Paragon warrants that its technical support, consulting, training
and other services will be of a professional quality confirming to
generally accepted industry standards and practices. This warranty shall be
valid for ninety (90) days from completion of service. For any breach of
the above warranty, Paragon shall: (i) repeat the service; or (ii) if
Paragon is unable to perform the services as warranted, QAD shall recover
reasonable direct costs incurred associated with such deficient services.
6.6 THE WARRANTIES ABOVE ARE EXCLUSIVE AND IN LIEU OF ALL OTHER WARRANTIES,
WHETHER EXPRESS OR IMPLIED, INCLUDING THE IMPLIED WARRANTIES OF
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.
6.7 IN NO EVENT SHALL EITHER PARTY BE LIABLE FOR LOSS OF PROFITS, REVENUE OR
PRODUCT USE, OR LOSS OR INACCURACY OF DATA, AND IN NO EVENT, SHALL EITHER
PARTY BE LIABLE FOR ANY INDIRECT, INCIDENTAL, SPECIAL, OR CONSEQUENTIAL
DAMAGES INCURRED BY EITHER PARTY OR ANY THIRD PARTY, EVEN IF THE OTHER
PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
Article 7 Confidentiality
7.1 It is recognized that each party under this Agreement, as well as the End
Users, may make available to the other party confidential information.
Confidential information may include in any form, but is not limited to,
processes, formulae, specifications, programs, instructions, source code
for operating system-dependent routines, technical know-how, methods and
procedures of operation, benchmark test results, business or technical
plans and proposals.
It is agreed that confidential information received by a party under this
Agreement shall:
a. be kept confidential by the receiving party;
b. be treated by the receiving party in the same way as it treats
confidential information generated by itself;
c. not be used by the receiving party otherwise than in connection with
the implementation of this Agreement; and
d. be divulged to the receiving party's personnel, or End User's
personnel, only if they have need to know and have undertaken to keep
confidential information secret.
Each party agrees to use all reasonable steps to ensure that confidential
information received under this Agreement is not disclosed by its employees
or agents in violation of this Article.
7.2 The commitments pursuant to provision 7.1 shall continue during the term of
this Agreement and survive the termination of this Agreement for five (5)
years.
<PAGE>
These commitments shall cease if, but only to the extent that,
confidential information:
a. Is or becomes generally known or available to the public at large
through no act or omission of the receiving party; or
b. Can be demonstrated to be available lawfully to the receiving party
prior to the disclosure or has thereafter been furnished to the
receiving party without restrictions as to disclosure or use; or
c. Can be demonstrated to be independently developed by the receiving
party without use of any confidential information received under
this Agreement.
Each party may disclose confidential information to any of its associated
companies on condition that such associated companies shall be bound by the
same commitments undertaken under this Article 7.
7.3 QAD considers MFG/PRO Software and On/Q Software and the API to such
software to be a trade secret. QAD does not disclose such information to
QAD competitors or potential competitors. Paragon shall not use design,
code or documentation gained by access to the MFG/PRO Software or On/Q
Software for purposes other than those contemplated under this Agreement
and without the prior written consent of QAD.
7.4 Paragon considers Paragon Applications and the API to such software to be a
trade secret. Paragon does not disclose such information to Paragon
competitors or potential competitors. QAD shall not use design, code or
documentation gained by access to the Paragon Applications for purposes
other than those contemplated under this Agreement and without the prior
written consent of Paragon.
Article 8 General Provisions
8.1 Law. This Agreement shall be construed, interpreted, and applied in
---
accordance with the laws of the State of California, USA, without regard to
that body of law known as conflict of laws and without reference to the
1980 United Nations Convention on Contracts for the Sale of Goods and any
amendments thereto. Any dispute arising between the parties shall be
settled by arbitration under the rules of the American Arbitration
Association in the city of Los Angeles, CA before a single arbitrator
selected under those rules.
8.2 Force Majeure. A party shall be excused for failures and delays in
-------------
performance of its obligations under this Agreement caused by war, riots,
or insurrections, laws and regulations, strikes, floods, fires, explosions
or other catastrophes beyond the control of such party but excluding the
financial well being of that party. Such party shall use commercially
reasonable efforts to avoid or remove such cause and such party shall
continue performance hereunder promptly whenever such causes are removed.
The party claiming force majeure shall give prompt written notice thereof
to the other party. This Paragraph shall not apply to any obligation to
pay money.
8.3 Taxes. All payments under this Agreement (the" Payments") are exclusive of
-----
all federal, state, provincial and local sales, use excise, import or
export, value added and similar taxes or duties (the "Taxes"). Each party
required to make any Payment agrees to pay any Taxes incurred with respect
to such
<PAGE>
payment. Each party is responsible for payment of any net income taxes due
on its own income resulting from Payments.
8.4 Assignment. The Agreement may not be assigned by Paragon without the prior
----------
written consent of QAD.
8.5 Enforcement. The failure of either party to enforce any provision of the
-----------
Agreement shall not be construed to be a waiver of such provision or such
party's right to thereafter enforce the same, and no waiver of any breach
shall be construed as an agreement by such party to waive any subsequent
breach of the same or other provisions.
8.6 Source Code Escrow. Paragon shall deposit a copy of the latest version of
------------------
the source code for Paragon Applications and the Paragon Applications API
(including modifications thereto and new releases thereof) and all
documentation required for the maintenance and modification of the source
codes with an escrow agent agreed upon by Paragon and QAD.
8.7 Survival. The provisions of Article 6 entitled "Warranties, Indemnities
--------
and Limitation of Liability", Article 7 entitled "Confidentiality" and
Article 8 entitled "General Provisions" shall survive the expiration or
termination of this Agreement, as well as the termination or expiration of
any license granted under this Agreement.
8.8 Entire Agreement. This Agreement, including any schedules attached hereto,
----------------
contain the entire agreement between the parties hereto with respect to the
subject matter hereof and shall supersede any and all prior communications,
representations, agreements, and/or undertakings, wither verbal or written,
between the parties hereto in respect to the said subject matter. Any
amendment or other modification of any of the terms and provisions hereof
must be in writing and signed by duly authorized representatives of the
parties hereto
The undersigned hereby agree that by causing their duly authorized
representatives to sign this document, they become parties to said Agreement and
agree to be bound by all terms, conditions and obligations contained therein
effective as of the 13th day of April, 1998.
<TABLE>
<CAPTION>
QAD Inc Paragon Management Systems, Inc.
<S> <C>
- ----------------------------------------------------- -------------------------------------------------
Signature Signature
- ----------------------------------------------------- -------------------------------------------------
Name Name
- ----------------------------------------------------- -------------------------------------------------
Title Title
- ----------------------------------------------------- -------------------------------------------------
Date Date
</TABLE>
<PAGE>
Schedule 1
Royalty Schedule
Royalty Payment Allocation by Percentage of Net Sales Paid to QAD
<TABLE>
<CAPTION>
Percentage of Net Price Percentage of List Price
Received by QAD Maintenance
- ---------------------------------------------------------------------------------------------------------------
<S> <C>
45% year 1 (50% of QAD maintenance)
- ---------------------------------------------------------------------------------------------------------------
35% year 2 & beyond (50% of QAD maintenance)
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
EXHIBIT 10.44
GOODASTON LIMITED
and
LARGOTIM LIMITED
and
LARGOTIM HOLDINGS LIMITED
OCCUPATION LEASE
Of
Unit 1 Phase 8 Business Park
The Waterfront Merry Hill
West Midlands
Term Commences: 19
For Years: 15
Expires: 20
LINKLATE" & PAINES
Barrington Howse
59-67 Gresham Street
London EC2V 7JA
Tel: 0 171-506 7080
Ref: RLAH
<PAGE>
This Underlease made the day of One thousand nine hundred and ninety-six
Between:
(1) Goodaston Limited (Company Number 1693635) whose registered office is at 12
St James's Square London SW1 Y 4.13 (hereinafter called "the Landlord"); and
(2) Largotim Limited (Company Number 1416672) whose registered office is at
Largotim House King Street Dudley West Midlands DY2 RPR (hereinafter called
"the Tenant"); and
(3) Largotim Holdings Limited (Company Number 1416690) whose registered office
is at Largotim House King Street Dudley West Midlands DY2 8PR (hereinafter
called "the Guarantor").
Witnesses as follows:
1 Definitions
1.1 in this Lease save where the context otherwise requires:
1 1.1 Covenants by the Tenant and Guarantor shall be deemed to be made by all
persons included in those expressions jointly and severally;
1.1.2 Any covenant by the Tenant or Guarantor not to do any act or thing
includes an obligation not to permit or suffer such act or thing to be done;
1.1.3 The approval or consent of the Landlord where required shall not have
effect unless in writing;
1.1.4 Clause headings shall not affect the construction of this Lease;
1.1.5 "the Common Area" means the roads footpaths forecourts service yards car
parks grassed or landscaped areas traffic Islands, loading areas, ramps, refuse
or disposal and any other areas within the Business Park which have not been and
are not intended to be demised by the Landlord;
1.1.6 "the insured Risks" means fire lightning earthquake aircraft (other than
hostile aircraft) and aerial devices -or articles dropped therefrom subsidence
explosion riot civil commotion malicious damage storm tempest bursting or
overflowing of water tanks apparatus Or Pipes flood impact by road vehicles (to
the extent that insurance against such risks may ordinarily be arranged with an
insurer of good repute) and such other risks as the Landlord may require from
time to time;
1.1.7 "the Landlord" includes the person entitled for the time being to the
immediate reversion to the Term;
1.1.8 "this Lease" means this lease and any document supplemental or collateral
to it or entered into pursuant to its terms;
1.1.9 "the Loss of Rent" means the loss of the rent FIRSTLY AND SECONDLY
reserved and any Value Added Tax for such period (not less than three years) and
in such amount as the Landlord may require;
1.1.10 "the Premises" means the land and Premises known as Unit 1 Phase 8
Business Park, Waterfront West shown co1pured purple on Plan A and each and
every part thereof and all additions and alterations thereto (except tenant's
fixtures and fittings but including the Tenant's Works) but excluding Service
Systems not serving the Premises exclusively;
1.1.11 "the Prescribed Rate" means four per centum per annum over the Base Rate
from time to time of Barclays Bank PLC or-over such other equivalent rate as the
Landlord may
<PAGE>
reasonably require;
11.12 "the Rent" means 180,000 per annum exclusive of VAT (subject to review at
the expiry of the fifth year and each period of five years thereafter of the
Term);
1.1.13 "the Service Systems" means the sewers drains gutters manholes pipes
ducts wires cables and other conducting media from time to time in or passing
through or servicing the Business Park save insofar as the same exclusively
serve any property (excluding the Premises) demised by the Landlord;
1.1.14 "the Plant and Equipment" Means all plant machinery and equipment from
time to time in use or available for use in connection with the Common Areas
including (without prejudice to the generality of the foregoing) lifts, alarm
and sprinkler systems, compactor and, other refuse or storage systems,
ventilation and air conditioning equipment, security and display systems;
1.1.15 "Business Park"- means the land and premises shown edged blue on Plan A
and each and every part thereof together with any building or buildings from
time to time thereon:
1.11.16 "the Tenant" and "the Guarantor" includes its successors in title and
the personal representatives of-individuals;
1.1.17 "the Tenant's Works" Means the works carried out at the Premises prior to
the date hereof at the Tenant's cost and described in the Fifth Schedule;
1.1.18 "the Term" means a 15 years from ____ 1999 and includes any continuations
thereof whether by statute holding over of otherwise;
1.1.19 "the Superior Lease" means a lease dated 31 December 1991 (as varied by a
deed dated 31 December 1993) and made between Goodaston Limited (1) V&P Midlands
Limited (2) and a lease dated 6 May 1994 made between Goodaston Limited (1) V&P
Midlands Limited (2):
1.1.20 "the Curtilage Area" means the area shown on Plan A coloured blue which
comprises a paved patio and amenity area and steps leading thereto;
1.1.21 "Light van" means a commercial vehicle having an unladen weight of not
more than 3 tons;
1.1.22 "Tenants Fixtures and Fittings" means all furniture equipment and
demountable partitions belonging to the Tenant whether or not the same have been
supplied to the Tenant by the landlord and/or any of its associated companies;
1.1.23 "Landlords Agent" means a competent experienced surveyor appointed by or
employed by the Landlord to Manage " Business Park;
1.1.24 "the full reinstatement value" shall mean the cost, which would be likely
to be incurred (including fees plus Value Added Tax) in reinstating the Premises
in accordance with the requirements of this Lease at Any time during the period
in which any insurance policy or policies shall be in force including (but
without prejudice to the generally of the foregoing) the anticipated increase
(if any) in the cost of labour and/or materials during such period and any
additional cost which might be incurred in reinstating the Premises in
accordance with building regulations and bylaws in force at the time of
reinstatement;
1.1.25 "working day" means Monday to Friday (both days inclusive) of each week
save for any day which is a Bank or statutory holiday in England;
1.1.26 "Plan A" means the plan attached hereto and marked "Plan A":
<PAGE>
1.1.27 "Plan 8" means the Plan attar-had hereto and marked "Plan 13".
2 DEMISE AND RENTS
The Landlord HEREBY DEMISES to the 'Tenant the Premises TOGETHER WITH the
easements and other rights mentioned in the First Schedule EXCEPT AND RESERVING
as mentioned in the Second Schedule SUBJECT to the matters mentioned in the
Third Schedule and to all other rights easements quasi-easements and privileges
to which the Premises are subject for the Term YIELDING AND PAYING the following
rents clear of all deductions or set off (legal or equitable) whatsoever
FIRST the RENT (and any increase pursuant to Clause 7) (to be paid by bankers
standing order or via the BACS system if the Landlord so requires) to a UK
clearing bank in advance by equal quarterly payments on the usual quarterly days
with a first payment in respect of the period from to the next following quarter
clay to be made on 19:
SECONDLY the service charge as stated in the Fourth Schedule at the times and in
the manner therein stated;
THIRDLY within 14 days of written demand the proper costs incurred by the
Landlord in insuring against the Loss of Rent and a fair proportion as from time
to time reasonably determined by the Landlord of the costs incurred by the
Landlord in insuring the Business Park.
3 TENANTS CONVENANTS
The Tenant to the intent that the obligations hereby created shall continue
throughout the Term COVENANTS with the Landlord:
3.1 Rent
To pay the rents reserved as mentioned in Clause 2;
3.2 interest
Without prejudice to the Landlord's other remedies to pay to the Landlord on
demand as additional rent interest (at the Prescribed Rate) to be compounded on
the usual quarter days on any-sum payable under this Lease from the due date
until payment (as well after as before any judgment),
3.3 Rates and Tax
To pay all existing and future rates taxes water rates duties charges
assessments impositions and outgoings whatsoever (whether or not of a capital or
non-recurring nature) for or in respect of the Premises other than those in
respect of the Landlord's interest under the Superior Lease or in respect of the
freehold reversion:
3.4 To pay VAT
Where the Tenant is to pay to the Landlord any sum or provide any consideration.
it shall on the Same due date also pay Value Added Tax in respect of such sum or
consideration at the rate for the time being then in force and the Landlord
shall provide an appropriate VAT invoice or receipt to the Tenant and where the
Tenant is to indemnify or reimburse or pay costs incurred by the Landlord It
shall also pay Value Added Tax at the rate for the time being then in force on
such costs to the extent that the Landlord does not recover It;
<PAGE>
3.5 Repair
To keep the Premises and Service Systems serving the Premises exclusively in
good and substantial repair and condition;
3.6 Electrical regulations
To comply with the requirements and regulations of the supply authority With
regard to the electrical wiring installation and equipment in the Premises and
not to overload the same;
3.7 Decoration
To decorate such parts of the Premises as are normally decorated in a good and
workmanlike manner as often as is reasonably necessary which in respect of the
outside of the Premises shall not be less than once in every three years (and in
the final year of the term howsoever determined) and in respect of the inside of
the Premises shall not be less than once in every five years (and in the final
year of the term howsoever determined);
3.8 Cleaning
To keep the Premises in a clean and tidy condition and clear of rubbish;
3.9 Notices to repair
To have commenced and be proceeding diligently with the repair and making good
of all defects and disrepair for which the Tenant is liable L4nder this Lease
within one month (or sooner if reasonably required) of written notice from the
Landlord;
3.10 To permit entry
To permit the Landlord and all persons authorized by It on giving at least 48
hours' prior written notice (except in emergency) to enter the Premises to
inspect its condition to take a schedule of the Landlord's fixtures and of any
dilapidation's or to exercise any of the rights excepted and *reserved by this
Lease or to carry out any necessary repairs or works or to inspect or Test any
check motors on the Premises or to remedy any breach of the Tenant's covenants
in this Lease making good as soon as reasonably practicable any damage
occasioned thereby to the Premises and the Tenant's Fixtures and Fittings and
chattels:
3.11 Not to, introduce dangerous things
Not to bring into or keep in the Premises any thing which is or may become
dangerous nor to carry on any hazardous trade nor do anything which might cause
the insurance of the Premises or any other part of the Business Park to be
vitiated or the premiums to be increased:
3.12 Overloading
Not, to overload the Premises nor to overload or cause any obstruction Or injury
to the Service Systems or the Plant and Equipment nor to cause any obstruction
of the Common Areas;
3.13 Undesirable uses
Not to use the Premises for any noisy noisome offensive dangerous hazardous
illegal or immoral purpose nor to do on the Premises any thing which in the
reasonable opinion of the Landlord may be a nuisance or cause damage disturbance
or inconvenience to or be to the prejudice of the Landlord or any other owners
or occupiers of any neighboring premises:
3.14 Permitted use
<PAGE>
Not to use the Premises otherwise than for a use which falls within Class 81 of
the Town and Country Planning (Use Classes) Order 1987 (notwithstanding any
amendment or revocation of such Order);
3.15 Compliance requirements
To comply with:
<PAGE>
3.15.1 all legislation from time to time in force relating to the Premises; and
3.15.2 the requirements of the Landlord's insurers and any competent authority;
and
3.15.3 the reasonable requirements of the Landlord relating to the Premises,
the rights granted by this Lease, the Common Areas the Service Systems, the Plan
and Equipment and/or and the management and control of the Business Park;
3.16 Irrecoverable insurance monies
To pay to the Landlord within 14 days of receiving written demand the amount of
any insurance monies in respect of the Premises or any other premises of the
Landlord which cannot be recovered by reason of any act or default of the Tenant
or any person deriving title under the Tenant or its or their servants agents
licensees or invitees;
3.17 Planning
To comply with the conditions in anypi4nning permission relating to the Premises
and the Tights granted by this Lease and not to make any application for
planning permission in respect of the Premises, or for determination as to
whether particular works or change of use would constitute development of the
Premises;
3.18 Alterations
Not to make any structural alterations or additions to the Premises whatsoever
and not to Make any other alterations or additions to the Premises without the
prior consent of the Landlord such consent not to be unreasonably withheld or
delayed PROVIDED THAT no consent shall be required for any alteration to the
internal layout of the Premises which involves moving demountable partitions and
any fittings thereto provided that it does not involve any structural
alterations to the Premises:
3.19 Signs
Not to exhibit on the Premises any sign visible from the outside of the Premises
without the prior consent of the Landlord (such consent not to be unreasonably
withheld or delayed);
3.2 Allenation
3.20.1 Not to mortgage charge or grant any security or interest over the
Premises nor to assign or underlet any part of the Premises nor to share or part
with the possession or occupation of the Premises or any part thereof,
3.20.2 If the Tenant wishes to assign the Premises and procures:
(i) that the tenant who Is to assign the Lease (and its Guarantor if any)
enters into an Authorizes Guarantee Agreement with the Landlord in a form
permitted by the Landlord & Tenant (Covenants) Act 1995; and
(ii) that such persons as the Landlord may reasonably require act as guarantors
for such assignee in such form as the Landlord may reasonably reqUiT8; and
(iii) that all rent and other monetary payments due under the terms of this
Lease have been paid and all obligation on the part of the Tenant have
been performed prior to completion of the intended assignment: and
(iv) that there shall be no assignment of this Lease to a company in the same
group (as defined in s,42 Landlord & Tenant Act 1954) as the assignor unless the
holding company of such group shall guarantee the assignee's obligations in such
form as the Landlord may reasonably require; then the Tenant may an obtaining
the prior written consent of the Landlord assign the whole of the Premises to
such assignee;
3.20.3 If the Tenant wishes to underlet the whole or any part of the Premises
and procures;
<PAGE>
(i) that any intended underlessee covenants with the Landlord throughout the
residue of the term to observe and perform the Tenant's covenants and the
conditions in this Lease so far as they relate to the Premises to be underlet
(excluding the covenant to pay rent) and not to underlet share or part with
possession or occupation of the Premises and not without the prior consent of
the Landlord to assign the Premises: and
(ii) that no intended underlease is granted at a premium nor at a rent less
than the open market rental value of the premises to be underlet nor to
permit the reduction of rent paid or payable by any underlessee: and
(iii) that any underlease of part of the Premises shall be for a term of no more
than one year and shall contain an agreement authorized by the Court to
exclude the provisions of Sections 24 to 28 of the Landlord and Tenant Act
1954; and
(iv) that the part to be underlet shall be an entire floor of the Premises or
such lesser part of a floor as the Landlord shall approve (such approval
not to be unreasonably withheld or delayed (an "approved part"); and
(y) that there shall be no more than two underleases/three occupiers of the
Premises at any time:
then the Tenant may on obtaining the prior written consent of the Landlord (such
consent not to be unreasonably withheld or delayed) underlet the whole or an
approved part of the Premises to such intended underlessee,
3.20.4 The Tenant may on obtaining the prior written consent of the Landlord
(such consent not to be unreasonably withheld or delayed) mortgage charge
or grant any security interest over the whole of the Premises.
3.21 Registration
To supply to the Landlord a certified copy of any document effecting an
assignment underlease or charge of this Lease within twenty-one days of
completion thereof and to pay to the Landlord's solicitors or as the Landlord
may direct such a registration fee as it may reasonably require;
3.22 Breaches by underlessees
Forthwith to remedy any breach by any underlessee of any of the covenants or
conditions in this Lease;
3.23 Costs
To pay to the Landlord on demand as additional rent and as a debt all costs it
properly incurs in connection with or in contemplation of:
3.23.1 the preparation and service of a notice and/or any proceedings under
Section 146 or 147 of the Law of Property Act 1925 or under the Leasehold
Property (Repairs) Act 1938 (notwithstanding that forfeiture is avoided);
3.23.2 the preparation and service of a schedule of d1lapidations at any time
during or after termination of the Term;
3.23.3 any applications for -consent -or approval whether or not consent Is
refused or the application is withdrawn to the extent that such costs are
reasonable and proper and
3.23.4 the remedying of any breach of the Tenant's covenants or the conditions
in this Lease;
3.24 Applications for consent
On applying for " consent or approval the Tenant shall disclose to the Landlord
such information as the Landlord may reasonably require;
<PAGE>
3.25 To inform Landlord of damages defects and notices
To inform the Landlord as soon as reasonably practicable immediately in writing
of any defect in the demised premises which might give rise to a duty imposed by
common law or statute on the Landlord in favour of the Tenant or any other
person;
3.26 Reletting notices
Within six months of the expiration of the Term to permit the Landlord to fix on
the Premises a notice board for the reletting of the same and/or the sale of the
Premises which shall not be fixed in such a position as to interfere materially
with the passage of light and air to the Premises and not to take down or
obscure such notice board and to permit all persons authorized by the Landlord
to view the Premises at reasonable hours and an reasonable notice;
3.27 To indemnify Landlord
To indemnity the Landlord against all actions proceedings costs claims and
demands in respect of the use or occupation of the Premise tile execution of any
alterations additions or repairs to the Premises or any breach or non-observance
by the Tenant of the covenants conditions or other provisions of this Lease;
3.28 Yielding up
Immediately before the end of the Term to remove all tenant's fixtures and
fittings other than the Tenant's Works and (unless the Landlord otherwise
requires) all alterations or additions made to the Premises during the Term and
in o h case to make good and reinstate the Premises to the Landlord's reasonable
satisfaction and on the end of the Term to yield up to the Landlord the Premises
in accordance with the Tenanittv1p covenants and the conditions in this Lease;
3.29 To observe covenants
To observe and perform the obligations and conditions contained or referred to
in the documents, listed in the Third Schedule relating to a Premises and those
contained in any Superior Lease save as to payment of rent and interest thereon
or otherwise arising thereunder as a result of any act or default on the part of
the Landlord PIROVIDED THAT it there is any conflict between the obligations and
conditions contained in I such documents and those in this Lease the latter
shall prevail.
4 Landlord's covenants
The Landlord COVENANTS with the Tenant while it owns the reversion immediately
expectant on the term hereby granted:
4.1 Quiet enjoyment
To permit the Tenant peaceably to hold and enjoy the Premises without any lawful
interruption by the Landlord or any person lawfully claiming through under or in
trust for It;
4.2 To insure
Unless such insurance shall be vitiated by any act or omission of the Tenant or
any person deriving title under the Tenant or any of its or their servants
agents licensees or invitees to insure to the full reinstatement value thereof
or procure the insurance of the Business Park including the Premises against
loss or damage by the insured Risks to the full reinstatement value thereof and
to insure against the Loss of Rent consequent upon such damage PROVIDED THAT:
4-2.1 the Landlord shall produce to the Tenant on demand (but not more often
than once in every twelve months) a summary of such insurance and evidence that
the premium has been paid; and
<PAGE>
4.2.2 to supply to the Tenant on request written confirmation that the insurers
have agreed to waive all rights of subrogation against the Tenant;
4.3 To rebuild
If the Premises shall be destroyed or damaged by any insured Risk then the
Landlord shall pursue a claim for the insurance monies with all due speed and
diligence and subject to all necessary planning consents or permissions to apply
all insurance moneys received (other than for Loss of Rent) towards rebuilding
or reinstating the Premises as soon as reasonably practicable in substantially
the same form or with such variations as the Landlord may reasonably require;
4.4 To pay
the rents reserved by the Superior Lease and to observe and perform the
covenants on the part of the tenant thereunder save in so far as the same or any
of them are assumed by the Tenant hereunder
4.5 To use
all reasonable endeavours (at the cost and expense of the Tenant) to procure the
observance and performance by the landlord under the Superior Lease of the
covenants on its part therein contained insofar as they relate to the Premises;
4.6 To use all reasonable endeavours to ensure that it and its employees and
agents incur expenditure in relation to insurance and the Service Charge
items referred to in the Fourth Schedule in accordance with the principles
of good estate management.
4.7 To erect and maintain a sign at the entrance of the Business Park to
indicate that the estate road shown hatched brown on Plan A are to be for
the use of cars or commercial vehicles having a 0~dbn weight of not more
than 3 tons.
PROVIDED ALWAYS AND IT IS HEREBY AGREED AND DECLARED as follows,
5.1 Forfeiture
5.1.1 If the rents or any other sum due under this Lease shall be in arrear for
twenty-eight days (whether formally demanded or not); or
5.1.2 If the Tenant shall fail to observe or perform any of its covenants or the
conditions in this Lease; or
5.1.3 If distress or other execution shall be levied on the Premises or their
contents; or
5.1.4 If a Bankruptcy Order or an Administration Order Is made in respect of the
Tenant; or
5.1.5 It a resolution Is passed or an Order is made to wind up the Tenant; or
5.1.6 If a Receiver Is appointed over the whole or any part of the property
assets or undertaking of the Tenant; or
5.1.7 It the Tenant is struck off the Register of Companies or is dissolved or
otherwise ceases to exist under the laws of the country or state of its
incorporation;
then the Landlord may forfeit this Lease but without prejudice to any other
remedy of the Landlord in respect of any antecedent t)reach of any of the
covenants or conditions contained in this Lease PROVIDED THAT if at any time
while this Lease Is vested in Largotim Limited and the Guarantor is the ultimate
holding company of Largotim Limited and the Landlord has the right to terminate
this Lease by re-entering the Premises the Landlord shall prior to exercising
its right to re-enter the, Premises give notice to the Guarantor of its
intention to terminate and the grounds therefor and in the event that the
grounds consist of a breach which can be remedied
<PAGE>
or arrears of rents or other sums or one of the events in sub-clauses 5.1.3 to
5.1.7 the Guarantor may then within 28 days following such notice notify the
Landlord that the guarantor wishes the Premises to be assigned as a whole to the
Guarantor and subject to the Guarantor remedying the breach or settling the
arrears (or both) as appropriate to the Landlord's reasonable satisfaction the
Landlord shall authorize the Premises as a whole to be assigned to the
Guarantor,
5.2 No implied easements
Nothing in this Lease shall confer upon the Tenant any easement right or
privilege whatsoever over or against any property adjoining or neighboring the
Premises which now or hereafter shall belong to the Landlord or impose any
restriction on the use of any property not comprised in this I-ease save as
expressly hereby granted or imposed.
5.3 No compensation
The right of the Tenant (or any undertenant) to compensation on quitting the
Premises is excluded (so far as the law permits),
5.4 Cesser of rent
If the Premises shall be damaged or destroyed by any of the insured Risks so as
to be unfit for occupation and use in accordance with this Lease then (save to
the extent that the insurance money shall be Irrecoverable by reason solely or
in part of any act or default of the Tenant or any person deriving title under
the Tenant or any of its or their servants agents licensees or invitees) the
rent FIRST and SECOND reserved or a fair proportion (determined by the
Landlord's Agent) according to the nature and extent of the damage shall be
suspended until the Premises shall again be fit for occupation and use or (if
earlier) until the Loss of Rent insurance proceeds shall be exhausted and any
rent paid in advance of such period during which the Premises shall be unfit for
occupation or a proportionate Part thereof shall be repaid to the Tenant
5.5.1 It upon the expiry of three years commencing on the date of the damage or
destruction the Premises shall not have been rendered fit for occupation
and use either the Landlord or the Tenant may by notice served at any time
within three months of the expiry invoke the provisions of Clause 5.5.2
hereof,
5.5.2 Upon service of a notice inn accordance with Clause S.5.1 hereof the Term
will absolutely cease but without prejudice to any rights or remedies that
may have accrued to either party against the other
5.6 Disputes,
Any dispute arising as between the Tenant and the tenants or occupiers of other
parts of the Business Park in relation to this Lease or the Premises shall be
decided by the Landlord's Agent acting as an expert whose decision on Matters of
fact shall be binding upon all parties to the dispute;
5.7 Notices
Section 196 of the Law of Property Act 1925 (as amended) shall be deemed to be
incorporated herein.
6.1 Superior lessors
6.1.1 all rights at entry reserved herein shall be exercisable with the
Landlord's consent by any superior lessor as well as to the Landlord;
6.1.2 where the consent of the Landlord Is required to any act matter or thing
under the terms hereof the consent of any superior lessor in writing shall also
be required whenever requisite under the covenants and conditions of any
superior lease;
6.1.3 whenever necessary or appropriate under the covenants and conditions of
any superior
<PAGE>
lease:
(i) where any matter is to be carried out to the satisfaction or approval of
the Landlord it shall also be carried out to the satisfaction and approval of
any superior lessor,
(ii) all registrations whenever requisite under the terms of any superior lease
shall be effect8d by the Tenant with ally superior lessor as well as the
Landlord;
6.1.4 where any issue question or matter arises out of or under or relating to
any superior lease which affects or relates to the provisions hereof is to be
determined as therein provided It shall also be so determined under this Lease
and the determination of such issue question or matter pursuant to the
provisions of any said superior lease shall be binding on the Tenant as well
a!5,the Landlord for the purposes of any superior lease and this Lease.
7 Rent Review
7.1 Date of review
On the expiration of the fifth year and each period of five years thereafter of
the Term (each such date being "the Relevant Date of Review") the rent FIRST
reserved shall be an amount ("the Revised Rent") equal to whichever is the
greater of
7.1.1 the rent FIRST reserved immed4dely before the Relevant Date of Review;
and
7.1.2 the Market Sent of the Prernisa4 at the Relevant Date of Review as agreed
between the Landlord and the Tenant or determined in accordance with the
following provisions in this Clause.
7.2 Valuation
7.2.1 the Market Rent ("the Market Rent") shall be the best annual rent
(excluding any Value Added Tax) reasonably obtainable in the open market for the
Premises at the Relevant Date -of Review for a term of tin years commencing on
the Relevant Date of Review as between a willing lessor and a willing lessee
with vacant possession without payment of a premium on the terms and conditions
of this Lease (other than the rent but including the provisions for the review
of rent) and assuming that:
(i) the Premises are then ready fit and available for immediate occupation and
use; and
(ii) the Landlord and the Tenant have observed and performed their covenants
and the conditions in this Lease (but without prejudice to any rights of
the parties in regard thereto), and
(iii) the Premises or the means of access or any services thereto shall not
have been destroyed or damaged;
(iv) the Premises comprise a total net internal floor area of 20,000 square
feet of office accommodation:
<PAGE>
(v) the Premises have the benefit of an adequate central heating system and an
adequate mechanical ventilation system wherever necessary and any other
items specified in the Sixth Schedule;
but taking no account of:
(i) any goodwill attributable to the Premises by reason of the Tenant's
business; and
(ii) any effect on rent of the Tenant's Works and any works at the Premises
carried out by the Tenant and/or its undertenant (to which the Landlord
gave its consent) (which shall include without limitation to the foregoing
any works which have the effect of reducing the not internal floor area of
the Premises except works carried out pursuant to an obligation to the
Landlord or by or at the expense of the Landlord; and
(iii) the Tenant's (or any other permitted occupant's) occupation of the
Premises;
7.2.2 The Market Rent shall be q4icertalnecl without making any allowance to
reflect (or compensate the Tenant for the absence at) any rent free period or
concessionary rent period or contribution to fitting out works or other
inducement which it might then be the practice in open market lettings for a
lessor to make and such Market Rent shall be that which would be payable after
the expiry of any such rent free or concessionary rent period and after receipt
of any such contribution or other inducement
7.3 Expert's decision
If the Landlord and the Tenant shall be unable to agree on the amount of the
market rent by two months before the relevant Date of Review either party may
require it to be determined by a Surveyor acting as an expert who shall be an
Associate or fellow of the Royal institution of Chartered Surveyors with at
least ten years experience in a substantial commercial practice of dealing with
the letting and valuation of buildings like the Premises to be agreed upon by
both parties or If they fail so to agree then nominated at any time at the
request of either party by the President (or if he Is unable so to nominate the
Vice-President) for the time being of The Royal institution of Chartered
Surveyors and the fees of the President and the fees of any such Surveyor "shall
be borne and paid by the parties in such shares and in such manner as the
Surveyor who determines the amount of the Market Rent shall determine but
subject thereto in equal shares Provided always that if the Surveyor dies or is
for any other reason unable to act before he shall have made his determination
then either party may request the nomination of a further Surveyor to act in
accordance with this sub-clause.
7.4 Representations
The Surveyor shall allow the parties to make written representations which may
contain rental evidence and a rental valuation of the Premises and shall
promptly pass details of any party's representations to the other party initial
within fourteen days comments in reply to matters raised in the initial
representations.
7.5 Payment after date of review
Unfit the Market Rent shall have been agreed or determined the Tenant shall
continue to Pay the rent FIRST reserved at the rate payable immediately before
the Relevant Date of Review but on such agreement or determination the Tenant
shall pay to the Landlord any difference between the rent which would have been
payable had the Market Rent been so agreed or determined before the Relevant
Date of Review and the rent which has actually been paid together with interest
thereon at the Bass Rate of Barclays Bank Pic from the quarter day when each
part of such rent would have been payable until payment,
<PAGE>
7.15 Memorandum
The Market Rent shall when agreed or determine be recorded by a memorandum
prepared at the cost of the Tenant and signed by the Landlord and the Tenant.
8 GUARANTEE
8.1 The Guarantor COVENANTS with the Landlord that
8.1.1 Largotim Limited will pay the rents reserved by and observe and perform
its covenants and the conditions in this Lease and the Guarantor will indemnify
the Landlord on demand against all losses damages costs and expenses arising out
of any default by Largotim Limited;
8.1-2 if this Lease is disclaimed or determined by forfeiture or re-entry and
within three months of any such event the Landlord by notice in writing so
requires the Guarantor will enter into a new lease of the Premises at the cost
of the Guarantor on the same terms as this Lease for the residue of the Term
which would have remained had there been no disclaimer forfeiture or re-entry;
8.2 The liability of the Guarantor hereunder, shall not be affected by any
failure by the Landlord to enforce the payment of the rents or the
observance or performance of the covenants and conditions or any refusal by
the Landlord to accept rent at a time when the Landlord was entitled (or
would after the service of a notice 9'nder Section 146 of the Law of
Property Act 1925 have been entitled) to re-enter the Premises or any
variation of the terms of this Lease or any change in the constitution
structure or powers of the Guarantor Largotim Limited or the Landlord or
any act which Is beyond the powers of Largotim Limited or the surrender of
part of the Premises;
8.3 As between the Landlord and the Guarantor shall be deemed to be a
principal debtor.
8.4 The Guarantor shall not be entitled to participate in any security held by
the Landlord in respect of the 6bligations of Largotim Limited or stand in
the Landlord's place in respect of such security;
8.5 Where, the Guarantor is more than one Person the release of one or more of
them shall not release the others.
In witness whereof this document has been executed as a Deed the day and year
first before written.
<PAGE>
THE FIRST SCHEDULE: Easements and other rights included in this Lease
1 The rights in common (save in respect of 2 and 3 below) with the Landlord and
all others authorized by the Landlord:
1.1 of way on foot over and along footpaths and with vehicles over and along and
otherwise to use the estate roads shown coloured brown on the attached Plan
A and Plan B and all other roadways within the Common Areas designated for
use by the Tenant at all times and for all purposes reasonably connected
with the use mid occupation of the Premises:
1.2 of free passage and running of water soil gas telecommunications digital
and/or analogue signals and electricity and other services through the
Service Systems serving the Premises.
2 The exclusive rights:
2.1 to park vehicles and take or dispatch deliveries to or from the Premises an
the area shown coloured pink on Plan A ("the Service Yard");
2.2 to park 49 motorcars on the spaces shown coloured yellow an Plan A ("the
Car Parking Spaces");
2.3 to use the Curtilage Area but subject to the rights of entry for the
Landlord and others authorized by this Lease
3 A., right of support and protection for the Premises by and from the remainder
of the Business ParK.
<PAGE>
THE SECOND SCHEDULE: Exceptions and Reservations out of this Lease
To the Landlord and all others authorized by the Landlord or similarly entitled
including any superior landlord:
1 the right to carry out or consent to the carrying out by any person on other
parts of the Business Park (but not on any part of the Premises the Curtilage
Area or the Car Parking Spaces) or on the Service Yard or on any adjacent or
neighboring land as it or they shall think fit of any erection of a new
building notwithstanding any diminution in the light or air enjoyed by the
Premises;
2 the right of support and protection to adjoining or adjacent premises
comprised in the Business Park;
3. the right on giving reasonable notice (except in emergency) to the Tenant to
enter and remain upon the Premises with or without workmen with all necessary
appliances and materials (making good all damage occasioned thereby to the
Premises) for all purposes in connection with the carrying out of any works
providing any service or fulfilling the Landlord's obligations under this Lease;
4. the right of free passage and running of water soil gas electricity
telecommunication digital and/or analogue signals and other media through the
Service Systems within the Premises;
5 the right to provide regulate alter and control in a reasonable manner having
regard (inter alia) to the interests of the tenants of the Business Park
generally the use of the Common Areas and the Plant and Equipment;
6 the right to install use maintain repair renew and remove security equipment
on the exterior of the Premises and to run lay use maintain repair renew and
remove cables wires and other service media connecting to such security
equipment.
<PAGE>
THE THIRD SCHEDULE: Documents which affect or relate to the Building
Those matters referred to in the Property and Charges Register of the Title
Numbers relating to land at the Business Park.
<PAGE>
THE FOURTH SCHEDULE: The Service Charge
Part I (Calculation and payment of the Service Charge)
1.1 "the Relevant Year" means the calendar year or Such other period as the
Landlord may from time to time determine;
1.2 'the Relevant Proportion" means such fair and reasonable proportion as the
Landlord may from time to time determine having regard to the area of the
Premises and the area of all other Premises at the Business Park let or
intended to be let and having the benefit of such services;
1.3 "the Service Charge Cost" means the aggregate of the gross costs of the
services set out in Part IIA of this Schedule and the expenses set out in Part
1113 of this Schedule reasonably incurred by the Landlord in the Relevant Year
and shall include (without limitation) such amount as the Landlord may
reasonably determine to be fair in the circumstance as a contribution towards
anticipated costs and expenses and any Value Added Tax payable by the Landlord
in respect of such costs and expenses insofar as the i5ame is not recovered by
the Landlord;
1.4 "the Service Charge" means in respect of each Relevant Year the Relevant
Proportion of the Service Charge Cost;
2 The Landlord shall as soon as practicable after the expiry of the Relevant
Year serve on the Tenant a notice containing a summary of the Service Charge
Cost and a statement of the Service Charge which notice shall be conclusive
(save in the case of manifest error);
3 The Tenant shall with every payment of rent FIRST reserved pay to the
Landlord such sum on account of the Service Charge for the then current Relevant
Year ("interim Payment") as the Landlord may from time to time specify-,
4 An amount equal to the difference between the Service Charge for any Relevant
Year and the aggregate of interim Payments made for that Relevant Year shall be
paid by the Tenant to the Landlord within fourteen days of the date of the
notice relating to that Relevant Year or allowed by the Landlord to the Tenant
against the interim payment or payments due from the Tenant next following the
date of the said notice.
Part II (A) Services
I Inspecting maintaining cleaning repairing replacing renewing and lighting the
Common Areas Service Systems and Plant and Equipment including any
contributions towards the maintenance and repair of that part of the estate
road referred to in paragraph 1.1 of the First Schedule which is outside the
Common Areas
2 Procuring the supply of water and sewerage services to the Common Areas.
3 Planting maintaining tending and re-planting any landscaped areas at the
Business Park.
4 Providing any other service which the landlord shall reasonably think
appropriate for the benefit of the Business Park its facilities and amenities
and the tenants of the Business Park or any of them.
Part II (B) Expenses
<PAGE>
1 The cost of insuring any Plant and Equipment at the Business Park against the
insured Risks and of insuring against property owner's employer's and third
party liability and such other risks as the Landlord shall require in respect
of the Business Park and of undertaking periodical independent professional
valuations of the Business Park for insurance purposes.
2 Any existing or future taxes (other than those of an income or capita) nature
levied upon the Landlord as a result of income arising of deemed to have
arisen under the terms of this Lease in respect of the Pr6mises) charges
assessment and other outgoings payable in respect of the Business Park
(excluding the Premises and other parts of the Business Park from time to time
let or remaining unlet until initially let by the Landlord) including general
rates and water rates assessed in respect of the Common Areas".
3 The cost of taking all steps deemed desirable or expedient by the Landlord for
enforcing the tenant's covenants or conditions in respect of the Business Park
and of complying with or making representations against otherwise contesting
the incidence of the provisions of any legislation or instrument regulation
notice or requirement deriving validity therefrom relating to or alleged to
relate to the Business Park or any part thereof.
4 The reasonable and proper fees of accountants surveyors engineers solicitors
and others in connection with the provision of services and the administration
of the Service Charge.
5 The reasonable and proper few of any agents retained to manage the Business
Park (or if no such managing agents are retained the equivalent thereof in
respect of the provision of such management by the Landlord) or (at the
discretion of the Landlord) ten per centum of the cost of providing the
services and paying the expenses referred to in this Schedule (excluding this
paragraph)
6 The cost including interest commission and banking charges of borrowing any
necessary sums in connection with the provision of the services or the payment
of the expenses referred to in this Schedule.
<PAGE>
THE FIFTH SCHEDULE: Details of the Tenant's Works
1. Central Core: Extra over cost of extended central core area to Provide an
extra male and female toilet at first floor, (total 5 No. of each) and shower
room for male and female at ground floor. Toilets and showers fitted out
complete with all finishing and fittings.
Extra over cost for increased size of passenger lift.
Provision of service lift including all associated builders work.
2 Reception Area: Floor finishings comprising areas of granite, polished
stainiess steel. timber strip flooring, mats and matwell, brass division
strips.
Granite surrounds to lift door.
Glass screens and feature rolled hollow section columns.
Gyproc MF suspended ceiling with dropped feature.
Planter box with pea single.
Extra over cost for designed lighting system,
3 Vending Areas: Water supplies and wastes to vending machine areas.
4 Partition Works and Doors: All partition works including glazed panels and
doors. internal doors between core area and office areas at each floor level.
5 Floor Finishings: Vinyl sheet flooring to Food Preparation . Goods inward Area
and Vending areas.
6 Shelving/Racking/Sundry Fittings: Provisional sum of l.000-00.
7 Kitchen/Food Preparation! Provision of water supplies, waste pipes, sink unit
and basin. Full height wall tiling.
8 Decorations: Extra over cost of wallpaper in lieu of emulsion paint to all
plastered walls.
9 Power and Lighting: Comprehensive power supply and distribution system and
telephone and d6ta wiring systems excluding underfloor trunking electrical
wiring and flexible conduits.
Extra over cost of lighting to the Reception Area and Break Out Areas with
provision of dirnmers to Demonstration and Training Rooms.
10 Security System: Provision of Security System to satisfy the additional
requirements of the insurers of Largotim Limited beyond that required by the
Landlord.
11 Heating Coling and ventilation:
A four pipe tan coil or comfort cooling system providing heating cooling and
ventilation to the office areas of the Premises at ground and first floor
levels.
<PAGE>
THE SIXTH SCHEDULE: Central Hooting and Ventilation Systems; etc. for rent
review purposes
1 Central heating to be assumed to be a 1Qw temperature hot water heating system
capable of maintaining a temperature of 21 degrees c in the office area and 18
degrees c in the toilet and other such intermittently occupied areas, these
temperatures being achieved within three hours of start up based on the night
setback temperature of 10%. The boiler to be gas fired. Panel radiators and
individual thermostatic radiator values as appropriate to all perimeter areas.
Mechanical ventilation provided to the plant areas as required to comply with
current regulations.
2 A mechanical ventilation system installed to service the Premises providing a
minimum of 6 air changes per hour to the male and female toilets and the
minimum- of 1.2 air changes per hour to the remainder of the Premises. The air
heated to the appropriate temperature.
3 Premises carpeted to an appropriate standard and specification.
Floor outlet boxes provided at the rate of two socket outlets per 10 square
metres of office floor area. Boxes to provide space for telephone outlet and
data transmission compartment and with 13 amp small power outlet and wiring.
THE COMMON SEAL of GOODASTON LIFAFTED was hereunto affixed in the presence of:
Director
Secretary
THE COMMON SEAL of LARGOTIM LIMITED was hereunto 0fixed in the presence of:
Director
Secretary
THE COMMON SEAL of LARGOTIM HOLDINGS LIMITED was hereunto affixed in the
presence of
Director
Secretary
<PAGE>
Exhibit 23.1
AUDITOR'S REPORT ON SCHEDULE AND
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
QAD Inc.:
The audits referred to in our report dated March 5, 1999, except for Note 7,
which is as of April 26, 1999, included the related financial statement schedule
as of January 31, 1999, included in the annual report on Form 10-K of QAD Inc.
for the fiscal year ended January 31, 1999. This financial statement schedule is
the responsibility of the Company's management. Our responsibility is to express
an opinion on this financial statement schedule based on our audits. In our
opinion, such financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
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 LLP
Los Angeles, California
April 27, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF JANUARY 31, 1999 AND THE CONSOLIDATED STATEMENT
OF INCOME FOR THE FISCAL YEAR 1999 AND IS QUALIFIED IN OUR ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<S> <C>
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<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> JAN-31-1999
<CASH> 16,078
<SECURITIES> 3,000
<RECEIVABLES> 103,368
<ALLOWANCES> 8,024
<INVENTORY> 0
<CURRENT-ASSETS> 134,102
<PP&E> 64,183
<DEPRECIATION> 27,348
<TOTAL-ASSETS> 200,055
<CURRENT-LIABILITIES> 113,359
<BONDS> 6,158
0
0
<COMMON> 30
<OTHER-SE> 79,396
<TOTAL-LIABILITY-AND-EQUITY> 79,429
<SALES> 991
<TOTAL-REVENUES> 193,344
<CGS> 514
<TOTAL-COSTS> 59,015
<OTHER-EXPENSES> 169,135
<LOSS-PROVISION> 1,805
<INTEREST-EXPENSE> 2,152
<INCOME-PRETAX> (34,783)
<INCOME-TAX> 1,138
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<NET-INCOME> (35,921)
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