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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition from ____________________ to _________________________
Commission File Number 0-22823
QAD Inc.
(Exact name of registrant as specified in its charter)
Delaware 77-0105228
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
6450 Via Real, Carpinteria, California 93013
(Address of principal executive offices)
(805) 684-6614
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to filing requirements
for the past 90 days. Yes X No______.
The number of shares outstanding of the issuer's common stock as of the close of
business on May 31, 2000 was 33,358,058.
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QAD INC.
INDEX
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<S> <C>
PART I
FINANCIAL INFORMATION Page
ITEM 1 Financial Statements
Condensed Consolidated Balance Sheets as of
April 30, 2000 and January 31, 2000 1
Condensed Consolidated Statements of Operations
for the Three Months Ended April 30, 2000 and 1999 2
Condensed Consolidated Statements of Cash Flows
for the Three Months Ended April 30, 2000 and 1999 3
Notes to Condensed Consolidated Financial
Statements 4
ITEM 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 6
ITEM 3 Quantitative and Qualitative Disclosures
About Market Risk 7
PART II
OTHER INFORMATION
ITEM 1 Legal Proceedings 8
ITEM 2 Changes in Securities 8
ITEM 3 Defaults upon Senior Securities 8
ITEM 4 Submission of Matters to a Vote of Security Holders 8
ITEM 5 Other Information 8
ITEM 6 Exhibits and Reports on Form 8-K 8
</TABLE>
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PART I
ITEM 1 - FINANCIAL STATEMENTS
QAD INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
April 30, January 31,
2000 2000
------------ -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 36,575 $ 35,936
Accounts receivable, net 67,780 98,567
Other current assets 14,587 15,523
--------- ---------
Total current assets 118,942 150,026
Property and equipment, net 31,038 32,729
Capitalized software development costs, net 8,094 8,233
Other assets, net 22,833 23,383
--------- ---------
Total assets $ 180,907 $ 214,371
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and capital lease obligations $ 969 $ 1,240
Accounts payable 16,154 17,671
Accrued expenses 25,637 34,647
Deferred revenue and deposits 56,685 64,731
--------- ---------
Total current liabilities 99,445 118,289
Notes payable and capital lease obligations, less current portion 14,804 21,890
Other liabilities 112 200
Minority interest 504 563
Commitments and contingencies -- --
Stockholders' equity:
Preferred stock, $0.001 par value. Authorized 5,000,000 shares;
none issued and outstanding -- --
Common stock, $0.001 par value. Authorized 150,000,000
shares; issued and outstanding 33,292,908 and 33,012,210
shares at April 30, 2000 and January 31, 2000, respectively 33 33
Additional paid-in-capital 112,543 111,553
Accumulated deficit (43,652) (34,876)
Unearned compensation - restricted stock (112) (146)
Accumulated other comprehensive loss (2,770) (3,135)
--------- ---------
Total stockholders' equity 66,042 73,429
--------- ---------
Total liabilities and stockholders' equity $ 180,907 $ 214,371
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements
1
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QAD INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
April 30,
-----------------------------------
2000 1999
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<S> <C> <C>
Revenue:
License fees $ 15,085 $ 20,461
Maintenance and other 23,929 21,001
Services 12,583 11,876
-------- --------
Total revenue 51,597 53,338
Costs and expenses:
Cost of license fees 3,998 5,588
Other cost of revenue 22,323 19,761
Sales and marketing 17,050 21,507
Research and development 9,691 9,006
General and administrative 6,507 6,880
-------- --------
Total costs and expenses 59,569 62,742
-------- --------
Operating loss (7,972) (9,404)
Other (income) expense:
Interest income (420) (107)
Interest expense 672 294
Other (income) expense (14) 352
-------- --------
Total other (income) expense 238 539
Loss before income taxes (8,210) (9,943)
Income tax expense 566 --
-------- --------
Net loss $ (8,776) $ (9,943)
======== ========
Basic and diluted net loss per share $ (0.26) $ (0.33)
======== ========
Basic and diluted weighted average shares 33,166 29,931
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements
2
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QAD INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended
April 30,
---------------------------------
2000 1999
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<S> <C> <C>
Net cash provided by (used in) operating activities $ 10,253 $ (41)
Cash flows from investing activities:
Purchase of property and equipment (1,376) (1,423)
Investment in software development (752) (671)
Proceeds from sale of short-term investments -- 3,000
Investment in equity securities -- (500)
Other, net -- 78
-------- --------
Net cash provided by (used in) investing activities (2,128) 484
Cash flows from financing activities:
Proceeds from notes payable -- 16,000
Reduction of notes payable (7,360) (12,455)
Issuance of common stock for cash 873 548
Repurchase of common stock (45) (67)
Other, net 5 9
-------- --------
Net cash provided by (used in) financing activities (6,527) 4,035
Effect of exchange rates on cash and equivalents (959) (261)
-------- --------
Net increase in cash and equivalents 639 4,217
Cash and equivalents at beginning of period 35,936 16,078
-------- --------
Cash and equivalents at end of period $ 36,575 $ 20,295
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements
3
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QAD INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
In the opinion of management, the accompanying condensed consolidated financial
statements contain all adjustments necessary (consisting only of
reclassifications and normal recurring adjustments) to present fairly the
financial information contained therein. These statements do not include all
disclosures required by generally accepted accounting principles and should be
read in conjunction with the audited financial statements and related notes
included in our Form 10-K for the year ended January 31, 2000. The results of
operations for the three months ended April 30, 2000 are not necessarily
indicative of the results to be expected for the year ending January 31, 2001.
Certain prior period financial statement items have been reclassified to conform
to current period presentation.
2. COMPREHENSIVE LOSS
Comprehensive loss includes changes in the balances of items that are reported
directly in a separate component of stockholders' equity on the Condensed
Consolidated Balance Sheets. The components of comprehensive loss are as
follows:
<TABLE>
<CAPTION>
Three Months Ended April 30,
------------------------------------
(In thousands) 2000 1999
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<S> <C> <C>
Net loss $ (8,776) $ (9,943)
Foreign currency translation adjustments 365 (261)
-------- --------
Comprehensive loss $ (8,411) $(10,204)
======== ========
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3. PER SHARE INFORMATION
Net income (loss) per share is computed in accordance with Statement of
Financial Accounting Standards No. 128, Earnings Per Share. Basic income (loss)
per share is computed using the weighted average number of common shares
outstanding during the period. Diluted income (loss) per share is computed using
the weighted average number of common and dilutive common stock equivalents
outstanding during the period. Common stock equivalents consist of the shares
issuable upon the exercise of warrants and stock options using the treasury
stock method. The following table sets forth the computation of basic and
diluted income (loss) per share:
<TABLE>
<CAPTION>
Three Months Ended April 30,
------------------------------
(In thousands, except per share amounts) 2000 1999
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<S> <C> <C>
Numerator:
Net loss $ (8,776) $ (9,943)
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Denominator:
Weighted average basic shares outstanding 33,166 29,931
Effect of dilutive common stock equivalents -- --
-------- --------
Weighted average diluted shares outstanding 33,166 29,931
======== ========
Basic and diluted loss per share $ (0.26) $ (0.33)
======== ========
</TABLE>
4
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Common stock equivalent shares of approximately 1,278,000 and 256,000 for the
three months ended April 30, 2000 and 1999, respectively, were not included in
the diluted calculations because, due to the net loss positions, they were
anti-dilutive.
4. NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS
In consideration for the ability to execute up to $5.5 million of potential
acquisitions between May 1, 2000 and January 31, 2001, with a maximum cash
outflow of $3.0 million during that period, the commitment under our revolving
credit facility with Bank One was reduced by $5.0 million to $20.0 million.
5. RESTRUCTURING CHARGE
In response to changes in customers' manufacturing capital software spending
patterns during fiscal year 1999, we undertook a restructuring program that,
among other things, more closely aligned costs with sales expectations. The
program included the consolidation of certain facilities and an approximate
reduction of 230 positions across a broad cross-section of QAD. As of April 30,
2000, $5.2 million of the total $5.5 million restructuring charge was utilized,
and we expect to pay the remaining balance by January 31, 2002.
6. BUSINESS SEGMENT INFORMATION
QAD operates in geographic regions. The North America region includes the United
States and Canada. The EMEA region includes Europe, the Middle East and Africa.
The Asia Pacific region includes Asia and Australia. The Latin America region
includes South America, Central America and Mexico.
Operating income attributable to each business segment is based upon the
management assignment of revenue and costs. Regional cost of revenue includes
the cost of goods produced by QAD's manufacturing operations at the transfer
price charged to the distribution operation. Income from manufacturing
operations is included in the Corporate operating segment. Research and
development costs are also included in the Corporate operating segment.
Identifiable assets are assigned by region based upon the location of each legal
entity.
During the latter part of fiscal year 2000, management changed the composition
of our reportable segments for operating income (loss), in order to disclose
components related to the corporate segment. Prior period segment information
has not been restated to separately disclose corporate segment data, as it is
impracticable to do so.
<TABLE>
<CAPTION>
Three Months Ended April 30,
----------------------------
(In thousands) 2000 1999
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<S> <C> <C>
REVENUE
North America $ 21,091 $ 20,874
EMEA 20,407 21,085
Asia Pacific 7,924 7,918
Latin America 2,175 3,461
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$ 51,597 $ 53,338
========= =========
OPERATING INCOME (LOSS):
North America $ 1,205 $ (6,128)
EMEA (888) (1,963)
Asia Pacific (2,267) (1,314)
Latin America (1,089) 1
Corporate (4,933) --
--------- ---------
$ (7,972) $ (9,404)
========= =========
<CAPTION>
April 30, January 31,
2000 2000
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<S> <C> <C>
IDENTIFIABLE ASSETS:
North America $ 80,254 $ 96,853
EMEA 68,558 84,233
Asia Pacific 23,672 24,575
Latin America 8,423 8,710
--------- ---------
$ 180,907 $ 214,371
========= =========
</TABLE>
7. RECENT ACCOUNTING STANDARDS
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions involving Stock
Compensation" (FIN 44). FIN 44 provides guidance for issues arising in
applying APB Opinion No. 25, "Accounting for Stock Issued to Employees". FIN
44 applies specifically to new awards, exchanges of awards in a business
combination, modification to outstanding awards, and changes in grantee
status that occur on or after July 1, 2000, except for the provisions related
to repricings and the definition of an employee which apply to awards issued
after December 15, 1998. Application of FIN 44 did not have an effect on the
Company's financial reporting.
5
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ITEM 2 - MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENT
In addition to historical information, this Quarterly Report on Form 10-Q
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 section
entitled "Management's Discussion and Analysis of Financial Condition and
Results of Operations," as well as other factors detailed in our Annual Report
on Form 10-K for the year ended January 31, 2000. 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, 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 future Quarterly Reports on Form
10-Q to be filed by QAD in fiscal year 2001.
The following discussion should be read in conjunction with the condensed
consolidated financial statements and notes thereto included elsewhere in this
Quarterly Report on Form 10-Q.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage of
total revenue represented by certain items reflected in our statements of
operations:
<TABLE>
<CAPTION>
Three Months Ended April 30,
-------------------------------
2000 1999
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<S> <C> <C>
Revenue:
License fees 29% 38%
Maintenance and other 46 40
Services 25 22
---- ----
Total revenue 100 100
Costs and expenses:
Cost of license fees 8 11
Other cost of revenue 43 37
Sales and marketing 33 40
Research and development 19 17
General and administrative 12 13
---- ----
Total costs and expenses 115 118
---- ----
Operating loss (15) (18)
Other expense 1 1
---- ----
Loss before income taxes (16) (19)
Income tax expense 1 0
---- ----
Net loss (17)% (19)%
---- ----
</TABLE>
Total revenue for the first quarter of fiscal year 2001 was $51.6 million, a
decrease of $1.7 million, or 3%, from $53.3 million in the first quarter of
fiscal 2000. This decline was due to a 26% decrease in license revenue,
offset by 14% and 6% growth rates in maintenance and other, and services
revenue, respectively.
Although the Year 2000 capital spending lock-down is substantially over,
customers have not yet resumed former buying levels. They are instead taking the
time to evaluate their e-business strategies before investing in associated
software, resulting in our license revenue decline. Maintenance revenue
continues to grow due to expansion of our installed base. The increase in
services revenue is due to greater utilization in our Global Services business,
which was launched late in fiscal year 1999.
As a result of these factors, our revenue mix has shifted away from higher
margin license revenue, from 38% of total revenue in the first quarter of fiscal
year 2000 to 29% in the first quarter of fiscal year 2001, toward lower margin
maintenance and services revenue.
6
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TOTAL COST OF REVENUE. Total cost of revenue (combined cost of license fees and
other cost of revenue) as a percentage of total revenue increased from 48% in
the first quarter of fiscal year 2000 to 51% in the first quarter of fiscal year
2001. This increase was primarily due to the shift in revenue mix away from the
higher margin license business and toward lower margin maintenance and services.
SALES AND MARKETING. Sales and marketing expense decreased 21% to $17.1 million
for the first quarter of fiscal 2001, from $21.5 million in the same period last
year. The decreased spending was primarily due to reduced personnel costs
resulting from the restructuring program initiated late in fiscal 1999.
RESEARCH AND DEVELOPMENT. Research and development expense increased 8% to $9.7
million for the first quarter of fiscal 2001, from $9.0 million in the first
quarter of fiscal 2000. The change was primarily due to increased investment in
QAD eQ and our web-enabled ERP products.
GENERAL AND ADMINISTRATIVE. General and administrative expense decreased 5% to
$6.5 million for the first quarter of fiscal 2001 from $6.9 million in the same
prior year period. The decreased spending was primarily due to reduced personnel
costs resulting from the restructuring program initiated late in fiscal 1999.
INCOME TAXES. We recorded income tax expense of $0.6 million for the three
months ended April 30, 2000 to provide for taxes in the jurisdictions that were
profitable for the quarter. We have not provided benefit for the jurisdictions
in loss positions due to management's determination regarding the uncertainty of
the realization of these benefits in the current year.
LIQUIDITY AND CAPITAL RESOURCES
We have historically financed our operations and met our capital expenditure
requirements through cash flows from operations, sale of equity securities and
borrowings. We had working capital of $19.5 million and $31.7 million as of
April 30, 2000 and January 31, 2000, respectively. Cash and equivalents were
$36.6 million and $35.9 million at April 30, 2000 and January 31, 2000,
respectively.
Accounts receivable, net of allowances, decreased to $67.8 million at April 30,
2000 from $98.6 million at January 31, 2000. Accounts receivable day's sales
outstanding decreased to 118 days at April 30, 2000 from 125 days at January 31,
2000. We are continuing our focus on sales terms and collection processes to
further improve cash flows and working capital.
Net cash provided by (used in) operating activities was $10.3 million and
$(41,000) for the three months ended April 30, 2000 and 1999, respectively. The
increase relates primarily to significantly higher accounts receivable
collections, partially offset by a larger decline in the deferred revenue
balance.
Net cash provided by (used in) investing activities primarily relates to the
purchase of property and equipment and the sale of short-term cash investments
in the three months ended April 30, 1999, and aggregated $(2.1) million and $0.5
million in the three months ended April 30, 2000 and 1999, respectively. At
April 30, 2000 we had no material commitments for capital expenditures.
Net cash provided by (used in) financing activities totaled $(6.5) million and
$4.0 million for the three months ended April 30, 2000 and 1999, respectively,
and was comprised of net proceeds and repayments of borrowings and issuance of
common stock.
We believe that the cash on hand, net cash provided by operating activities and
the available borrowings 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.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
No material changes from our Annual Report on Form 10-K for the fiscal year
ended January 31, 2000.
7
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PART II
ITEM 1 - LEGAL PROCEEDINGS
Not applicable
ITEM 2 - CHANGES IN SECURITIES
Not applicable
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5 - OTHER INFORMATION
Not applicable
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
10.1 Third Amendment to Credit Agreement between QAD Inc. and
Bank One, NA.
10.2 Fourth Amendment to Credit Agreement between QAD Inc. and
Bank One, NA.
10.3 Fifth Amendment to Credit Agreement between QAD Inc. and Bank
One, NA.
27 Financial Data Schedule
b) Reports on Form 8-K
No reports on Form 8-K were filed during the three months ended April
30, 2000.
8
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
QAD INC.
(Registrant)
Date: June 13, 2000 By /s/ KATHLEEN M. FISHER
------------------------------
Kathleen M. Fisher
Chief Financial Officer
(on behalf of the registrant and as
Principal Financial Officer)
9
