Qad (QADA) 10-Q 2001 Q1 Quarterly report

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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, 2001

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
(State or other jurisdiction of
incorporation or organization) 77-0105228
(IRS Employer Identification No.)

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, 2001 was 33,989,846.

QAD INC.
INDEX

			Page
PART I
	FINANCIAL INFORMATION
	ITEM 1	Financial Statements
		Condensed Consolidated Balance Sheets as of April 30, 2001 and January 31, 2001	1
		Condensed Consolidated Statements of Operations for the Three Months Ended April 30, 2001 and 2000	2
		Condensed Consolidated Statements of Cash Flows for the Three Months Ended April 30, 2001 and 2000	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	8
PART II
	OTHER INFORMATION
	ITEM 1	Legal Proceedings	10
	ITEM 2	Changes in Securities and Use of Proceeds	10
	ITEM 3	Defaults Upon Senior Securities	10
	ITEM 4	Submission of Matters to a Vote of Security Holders	10
	ITEM 5	Other Information	10
	ITEM 6	Exhibits and Reports on Form 8-K	10

PART I

ITEM 1—FINANCIAL STATEMENTS

QAD INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)

			April 30, 2001			January 31, 2001
			(Unaudited)
Assets
Current assets:
	Cash and equivalents		$	42,288		$	36,500
	Accounts receivable, net			67,385			80,496
	Other current assets			11,541			12,601
		Total current assets		121,214			129,597
Property and equipment, net				23,606			25,437
Capitalized software development costs, net				5,643			6,701
Other assets, net				16,560			19,727
		Total assets	$	167,023		$	181,462
Liabilities and stockholders' equity
Current liabilities:
	Current portion of long-term debt		$	1,354		$	1,448
	Accounts payable			14,271			15,527
	Accrued expenses			26,964			31,298
	Deferred revenue and deposits			58,530			63,739
		Total current liabilities		101,119			112,012
Long-term debt				19,400			19,460
Other deferred liabilities				87			192
Minority interest				500			502
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 33,982,346 and 33,747,148 shares at April 30, 2001 and January 31, 2001, respectively			34			34
	Additional paid-in-capital			114,248			113,999
	Accumulated deficit			(61,971	)		(60,282	)
	Unearned compensation—restricted stock			(10	)		(112	)
	Accumulated other comprehensive loss			(6,384	)		(4,343	)
		Total stockholders' equity		45,917			49,296
		Total liabilities and stockholders' equity	$	167,023		$	181,462

See accompanying notes to condensed consolidated financial statements.

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QAD INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)

			Three Months Ended April 30,
			2001			2000
Revenue:
	License fees		$	15,108		$	15,085
	Maintenance and other			25,750			23,929
	Services			10,443			12,583
		Total revenue		51,301			51,597
Costs and expenses:
	Cost of license fees			2,946			3,751
	Other cost of revenue			19,458			22,323
	Sales and marketing			14,870			17,050
	Research and development			7,489			9,691
	General and administrative			5,816			5,661
	Amortization of intangibles from acquisitions			1,006			1,093
		Total costs and expenses		51,585			59,569
Operating loss				(284	)		(7,972	)
Other (income) expense:
	Interest income			(371	)		(420	)
	Interest expense			779			672
	Other (income) expense			197			(14	)
		Total other (income) expense		605			238
Loss before income taxes				(889	)		(8,210	)
Income tax expense				800			566
Net loss			$	(1,689	)	$	(8,776	)
Basic and diluted net loss per share			$	(0.05	)	$	(0.26	)

See accompanying notes to condensed consolidated financial statements.

2

QAD INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)

		Three Months Ended April 30,
		2001			2000
Net cash provided by operating activities		$	6,731		$	10,253
Cash flows from investing activities:
	Purchase of property and equipment		(749	)		(1,376	)
	Investment in software development		(262	)		(752	)
Net cash used in investing activities			(1,011	)		(2,128	)
Cash flows from financing activities:
	Reduction of notes payable		(88	)		(7,360	)
	Issuance of common stock for cash		249			873
	Other, net		—			(40	)
Net cash provided by (used in) financing activities			161			(6,527	)
Effect of exchange rates on cash and equivalents			(93	)		(959	)
	Net increase in cash and equivalents		5,788			639
Cash and equivalents at beginning of period			36,500			35,936
Cash and equivalents at end of period		$	42,288		$	36,575

See accompanying notes to condensed consolidated financial statements.

3

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 Annual Report on Form 10-K for the year ended January 31, 2001. The results of operations for the three months ended April 30, 2001 are not necessarily indicative of the results to be expected for the year ending January 31, 2002.

    Certain prior period balances 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:

	Three Months Ended April 30,
(In thousands)
	2001			2000
Net loss	$	(1,689	)	$	(8,776	)
Foreign currency translation adjustments		(2,041	)		365
Comprehensive loss	$	(3,730	)	$	(8,411	)

3.

PER SHARE INFORMATION

    The following table sets forth the computation of basic and diluted net loss per share:

	Three Months Ended April 30,
(In thousands, except per share data)
	2001			2000
Net loss	$	(1,689	)	$	(8,776	)
Weighted average shares of common stock outstanding used in basic net loss per share calculation		33,867			33,166
Weighted average shares of common stock equivalents issued using the treasury stock method		—			—
Weighted average shares of common stock and common stock equivalents outstanding used in diluted net loss per share calculation		33,867			33,166
Basic and diluted net loss per share	$	(0.05	)	$	(0.26	)

    Common stock equivalent shares consist of the shares issuable upon the exercise of stock options and warrants using the treasury stock method. Shares of common stock equivalents of approximately 266,000 and 1,278,000 for the three months ended April 30, 2001 and 2000, respectively, were not included in the diluted calculation because they were anti-dilutive. Due to the net loss for the three months ended April 30, 2001 and 2000, basic and diluted per share amounts are the same.

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4.

RESTRUCTURING CHARGES

    In the third quarter of fiscal year 2001, we undertook several initiatives to strengthen operating and financial performance by sharpening the focus of our e-business and business intelligence solutions for multi-national customers. The related actions included facility consolidations, a reduction of approximately 150 employees, contractors and consultants across most regions and functions and associated asset write-downs. These actions resulted in a $5.1 million charge taken in the third quarter of fiscal year 2001. As of April 30, 2001, $3.7 million of this charge was utilized, and we expect to pay the remaining balance of the employee termination costs during fiscal year 2002 and the lease obligations through fiscal year 2007. The restructuring charge, related utilization and the remaining $1.4 million balance as of April 30, 2001, are detailed by category as follows:

(In thousands)	Restructuring Charge		Utilization		Remaining Balance
Lease obligations	$	1,033	$	599	$	434
Employee termination costs		2,192		1,219		973
Asset write-downs		1,851		1,851		—
	$	5,076	$	3,669	$	1,407

5.

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 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

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costs are also included in the Corporate operating segment. Identifiable assets are assigned by region based upon the location of each legal entity.

		Three Months Ended April 30,
(In thousands)
		2001			2000
Revenue:
	North America	$	20,277		$	20,106
	EMEA		19,313			20,168
	Asia Pacific		9,025			8,270
	Latin America		2,686			3,053
		$	51,301		$	51,597
Operating income (loss):
	North America	$	684		$	540
	EMEA		(507	)		(835	)
	Asia Pacific		(1,363	)		(2,094	)
	Latin America		(956	)		(650	)
	Corporate		1,858			(4,933	)
		$	(284	)	$	(7,972	)

		April 30, 2001		January 31, 2001
Identifiable assets:
	North America	$	67,436	$	74,493
	EMEA		65,657		73,556
	Asia Pacific		27,067		26,345
	Latin America		6,863		7,068
		$	167,023	$	181,462

ITEM 2—MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

    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, 2001. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's opinions only as of the date hereof. We undertake 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 we file from time to time with the Securities and Exchange Commission.

    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.

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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:

			Three Months Ended April 30,
			2001		2000
Revenue:
	License fees		30	%	29	%
	Maintenance and other		50		46
	Services		20		25
		Total revenue	100		100
Costs and expenses:
	Cost of license fees		6		8
	Other cost of revenue		38		43
	Sales and marketing		29		33
	Research and development		15		19
	General and administrative		11		10
	Amortization of intangibles from acquisitions		2		2
		Total costs and expenses	101		115
Operating loss			(1	)	(15	)
Other (income)/expense			1		1
Loss before income taxes			(2	)	(16	)
Income tax expense			1		1
Net loss			(3	)%	(17	)%

    Total Revenue.  Total revenue for the first quarter of fiscal year 2002 was $51.3 million, nearly flat to the $51.6 million in the first quarter of fiscal year 2001. Well past the Y2K problem, our customers are cautiously focusing on developing coherent e-business strategies. This shift in focus has caused an "e-business pause" resulting in delayed purchasing decisions on both the traditional enterprise systems and the advanced e-business solutions we offer. We are encouraged by our relatively stable license revenue in such an environment and are implementing measures to augment our revenue stream. Maintenance and other revenue increased $1.9 million to $25.8 million at April 30, 2001 from $23.9 million at April 30, 2000 due primarily to the expansion of our installed base. First quarter services revenue decreased $2.1 million when compared to the first quarter of last year due to delays in project start dates and a lower volume of large projects.

    Total Cost of Revenue.  Total cost of revenue (combined cost of license fees and other cost of revenue) as a percentage of total revenue decreased to 44% in the first quarter of fiscal year 2002 from 51% in the first quarter of fiscal year 2001. The percentage decrease is primarily the result of a higher content of internally developed license and maintenance revenue, which do not carry third party royalties.

    Sales and Marketing.  Sales and marketing expense decreased 13% to $14.9 million for the first quarter of fiscal year 2002 from $17.1 million in the comparable prior year period. The decline in spending was primarily due to a lower content of revenue requiring sales agent commissions and partner splits.

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    Research and Development.  Research and development expense was $7.5 million for the first quarter of fiscal year 2002 down from $9.7 million in the first quarter of fiscal year 2001. The decrease primarily relates to decreased expenses resulting from the fiscal year 2001 restructuring that realigned resources toward our strategic product solutions.

    General and Administrative.  General and administrative expense remained relatively flat for the first quarters of fiscal year 2002 and 2001 at $5.8 million and $5.7 million, respectively.

    Income Taxes.  We recorded income tax expense of $0.8 million and $0.6 million for the three months ended April 30, 2001 and 2000, respectively. These amounts represent taxes in jurisdictions that were profitable during these periods. 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.

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 $20.1 million and $17.6 million as of April 30, 2001 and January 31, 2001, respectively. Cash and equivalents were $42.3 million and $36.5 million at April 30, 2001 and January 31, 2001, respectively.

    Accounts receivable, net of allowances, decreased to $67.4 million at April 30, 2001 from $80.5 million at January 31, 2001. Accounts receivable days sales outstanding remained relatively flat at 102 days as of April 30, 2001 compared to 99 days at January 31, 2001. The successful implementation of an automated collection system in the United States in fiscal year 2001 has led to the implementation of the system in Europe and a similar roll-out is planned in the Asia Pacific region.

    Net cash provided by operating activities was $6.7 million and $10.3 million for the three months ended April 30, 2001 and 2000, respectively. The year-over-year change relates mainly to a decline in accounts receivable collections primarily related to a $15.6 million balance collected from one customer during the first quarter of fiscal year 2001. This was partially offset by an improvement in net earnings and a decline in disbursements related to accrued expenses.

    Net cash used in investing activities, which aggregated to $1.0 million and $2.1 million in the three months ended April 30, 2001 and 2000, respectively, primarily relates to the purchase of property and equipment. At April 30, 2001 we had no material commitments for capital expenditures.

    Net cash provided by (used in) financing activities totaled $0.2 million and $(6.5) million for the three months ended April 30, 2001 and 2000, respectively, and was primarily composed of repayments of borrowings and proceeds from the issuance of common stock.

    We believe that the cash on hand, net cash provided by operating activities and the expected available borrowings under our 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

    Foreign Exchange.  Historically, our revenue from international operations has primarily been denominated in United States dollars. However, due to the acquisition of eight international distributors since September 1998 and the growth of QAD Services, which primarily conduct business in local currencies, a higher percentage of our business is now conducted in currencies other than the United States dollar. For the three months ended April 30, 2001 and 2000, approximately 40% of our revenue was denominated in foreign currencies. 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 currencies in which we generate revenue could adversely affect us.

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    Fluctuations in currencies relative to the United States dollar have affected and will continue to affect period-to-period comparisons of our reported results of operations. For the three months ended April 30, 2001 and 2000, foreign currency transaction (gains) and losses totaled $255,000 and $(671,000), respectively. Due to constantly changing currency exposures and the volatility of currency exchange rates, we may experience currency losses in the future, and we cannot predict the effect of exchange rate fluctuations upon future operating results. Although we do not currently undertake hedging transactions, we may choose to hedge a portion of our currency exposure in the future, as we deem appropriate.

    Interest Rates.  We invest our surplus cash in a variety of financial instruments, consisting principally of bank time deposits and short-term marketable securities with maturities of less than one year. QAD's investment securities are held for purposes other than trading. Cash balances held by subsidiaries are invested in short-term time deposits with the local operating banks. Additionally, our short-term and long-term debt bears interest at variable rates.

    We prepared sensitivity analyses of our interest rate exposure and our exposure from anticipated investment and borrowing levels for fiscal 2002 to assess the impact of hypothetical changes in interest rates. Based upon the results of these analyses, a 10% adverse change in interest rates from the 2001 fiscal year-end rates would not have a material adverse effect on the fair value of investments and would not materially impact our results of operations or financial condition for fiscal year 2002.

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PART II

ITEM 1—LEGAL PROCEEDINGS

    Not applicable

ITEM 2—CHANGES IN SECURITIES AND USE OF PROCEEDS

    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

Lease Agreement between the Registrant and The Wright Family C Limited Partnership for Building A located at 6410 Via Real, Carpinteria, California dated February 10, 2001.



10.2

Lease Renewal Letter dated February 21, 2001, related 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 December 29, 1993(1).

b)

Reports on Form 8-K

No reports on Form 8-K were filed during the three months ended April 30, 2001.

(1)

Incorporated by reference to the Registrant's Registration Statement on Form S-1 (Commission File No. 333-28441).

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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 14, 2001	By	/s/ KATHLEEN M. FISHER   Kathleen M. Fisher Chief Financial Officer (on behalf of the registrant)
	By	/s/ VALERIE J. MILLER   Valerie J. Miller Chief Accounting Officer (Principal Accounting Officer)

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QuickLinks

PART I

ITEM 1—FINANCIAL STATEMENTS

ITEM 2—MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 3—QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

PART II

ITEM 1—LEGAL PROCEEDINGS
ITEM 2—CHANGES IN SECURITIES AND USE OF PROCEEDS
ITEM 3—DEFAULTS UPON SENIOR SECURITIES
ITEM 4—SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 5—OTHER INFORMATION
ITEM 6—EXHIBITS AND REPORTS ON FORM 8-K