Exhibit 99.3
QAD Inc.
UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED FINANCIAL INFORMATION
QAD INC.
UNAUDITED PRO FORMA COMBINED CONDENSED
CONSOLIDATED FINANCIAL INFORMATTION
On November 12, 2002, QAD Inc. ("QAD") acquired the TRW Integrated Supply Chain Solutions ("TRW ISCS") business covering 10 European countries and North America from BDM International, Inc. (a wholly-owned subsidiary of TRW Inc.) and TRW Inc. Prior to the acquisition, TRW ISCS, a QAD alliance partner per an agreement with QAD, operated businesses that primarily focused on systems installation, integration and services in connection with the MFG/PRO software owned and licensed by QAD and other QAD-related goods and services.
Under the terms of the Stock and Asset Purchase Agreement, QAD paid $1 million in cash and will incur transaction costs, including direct acquisition costs and costs to exit activities, of approximately $5 million. The transaction included the purchase of the stock of BDM UK Limited ("BDM UK") and its thirteen wholly-owned European subsidiaries, the acquisition of assets and assumption of certain liabilities of the businesses in Germany and North America, and TRW Systems' agreement not to compete for the next 3 years. QAD funded the purchase price received by BDM International, Inc. and TRW Inc. with cash generated from operating activities. Pursuant to the agreement, BDM UK became a wholly-owned subsidiary of QAD. The acquisition is accounted for as a business combination and, accordingly, the total purchase price is allocated to the acquired assets, including goodwill and other intangible assets and liabilities at their fair values as of November 12, 2002. QAD's consolidated statement of operations will not include revenue or expenses related to BDM UK prior to November 12, 2002.
The unaudited pro forma combined condensed consolidated balance sheet as of October 31, 2002 gives effect to the acquisition as if it had occurred on October 31, 2002, combining the historical consolidated balance sheet of QAD as of October 31, 2002 and the historical consolidated balance sheet of BDM UK as of September 30, 2002. The assets, liabilities and results of operations of the acquired North American business have been deemed immaterial for purposes of the pro forma financial information and are not included herein. The German business acquired is included in the financial position and results of operations of BDM UK as it was a wholly-owned subsidiary of BDM UK prior to the acquisition. The assets and liabilities of the German business not acquired in the acquisition have been deemed immaterial for purposes of the pro forma financial information.
The historical balance sheet and statement of operations of BDM UK were originally stated in the British Pound and were presented in accordance with accounting principles generally accepted in the United Kingdom. No differences arose between accounting principles generally accepted in the United Kingdom from those of the United States for the periods presented in these unaudited pro forma financial statements. For purposes of the unaudited pro forma combined condensed consolidated balance sheet and statement of operations, BDM UK amounts have been translated into the United States Dollar and reclassified to conform to QAD presentation.
Pro forma financial statements require the presentation of income from continuing operations after income tax expense but before discontinued operations, extraordinary items, and cumulative effect of a change in accounting principle. Therefore, the cumulative effect change in accounting principle of $1.1 million related to goodwill impairment under SFAS 142 included in the historical statement of operations of QAD for the nine months ended October 31, 2002, has been omitted.
The combining companies have different year-ends for reporting purposes. BDM UK maintained its accounting records on a calendar basis, ending on December 31, and QAD maintains its accounting records on a fiscal basis, ending on January 31. The unaudited pro forma combined condensed consolidated statements of operations for the twelve months ended January 31, 2002 and the nine months ended October 31, 2002, gives effect to the acquisition as if it had occurred on February 1, 2001, combining the historical consolidated statements of operations of QAD for the fiscal year ended January 31, 2002 and the nine months ended October 31, 2002, with the historical consolidated
statements of operations of BDM UK for the calendar year ended December 31, 2001 and the nine months ended September 30, 2002, respectively.
The unaudited pro forma combined condensed consolidated financial information has been prepared and should be read in conjunction with the historical consolidated financial statements and the related notes thereto of QAD, the "Management Discussion and Analysis of Financial Condition and Results of Operations," included in QAD's Annual Report on Form 10-K for the year ended January 31, 2002, QAD's Quarterly Report on Form 10-Q as of October 31, 2002 filed with the Securities and Exchange Commission, and the financial statements and related notes thereto of BDM UK for the calendar years ended December 31, 2001, 2000 and 1999 and the nine months ended September 30, 2002, included herein in this Amended Current Report on Form 8-K/A.
The pro forma adjustments do not reflect any operating efficiencies and cost savings that may be achieved with respect to the combined entity. The pro forma adjustments do not include any adjustments to historical revenue for any future price changes nor any adjustments to selling, marketing or any other expenses for any future operating changes.
The following unaudited pro forma combined condensed consolidated financial information has been prepared to give effect to the acquisition, accounted for using the purchase method of accounting. This financial information reflects certain assumptions and estimates deemed probable by management regarding the acquisition based upon the assets and liabilities acquired, including estimated involuntary termination costs and facility related costs. These estimates and assumptions are preliminary and have been made solely for purposes of developing this pro forma information. Unaudited pro forma combined condensed consolidated financial information is presented for illustrative purposes only and is not necessarily indicative of the results that actually would have been realized had the entities been a single entity during this period. Additionally, the future consolidated financial position and results of operations will differ, perhaps significantly, from the pro forma amounts reflected herein because of a variety of factors, including access to additional information, changes in values not currently identified and changes in operating results, which could result in adjustment to, among other items, identifiable assets and goodwill. The purchase price allocation is preliminary and a final determination of required purchase accounting adjustments will be made upon the completion of a final analysis of the total purchase cost and the fair value of the assets and liabilities assumed, including estimated involuntary employee termination costs and facility related costs.
QAD INC.
UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands)
| | Historical (in USD) | | | | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | QAD Inc. As of October 31, 2002 | BDM UK As of September 30, 2002 | Pro Forma | |||||||||||||||
| | Adjustments | Ref. | Combined | |||||||||||||||
| Assets | ||||||||||||||||||
| Current assets: | ||||||||||||||||||
| Cash and equivalents | $ | 48,139 | $ | 1,773 | $ | (1,000 | ) | (b) | $ | 48,912 | ||||||||
| Accounts receivable, net | 38,400 | 14,602 | (6,274 | ) | (e) | 46,078 | ||||||||||||
| (650 | ) | (h) | ||||||||||||||||
| Other current assets | 13,771 | 2,071 | (100 | ) | (g) | 15,742 | ||||||||||||
| Total current assets | 100,310 | 18,446 | 110,732 | |||||||||||||||
Property and equipment, net | 20,998 | 808 | (808 | ) | (d) | 20,998 | ||||||||||||
| Capitalized software development costs, net | 2,422 | — | 2,422 | |||||||||||||||
| Other assets, net | 11,188 | 3,206 | 1,000 | (b) | 11,188 | |||||||||||||
| 4,650 | (c) | |||||||||||||||||
| 808 | (d) | |||||||||||||||||
| 398 | (d) | |||||||||||||||||
| (3,206 | ) | (e) | ||||||||||||||||
| (3,456 | ) | (f) | ||||||||||||||||
| (2,600 | ) | (g) | ||||||||||||||||
| (800 | ) | (h) | ||||||||||||||||
| Total assets | $ | 134,918 | $ | 22,460 | $ | 145,340 | ||||||||||||
| Liabilities & Stockholders' equity | ||||||||||||||||||
| Current liabilities: | ||||||||||||||||||
| Current portion of long-term debt | $ | 1,743 | $ | — | $ | 1,743 | ||||||||||||
| Accounts payable | 7,513 | 68,372 | $ | (64,627 | ) | (e) | 9,308 | |||||||||||
| (500 | ) | (g) | ||||||||||||||||
| (1,450 | ) | (h) | ||||||||||||||||
| Accrued expenses | 26,624 | 4,946 | 4,650 | (c) | 34,020 | |||||||||||||
| (2,200 | ) | (g) | ||||||||||||||||
| Deferred revenue and other | 50,573 | 833 | 51,406 | |||||||||||||||
| Total current liabilities | 86,453 | 74,151 | 96,477 | |||||||||||||||
Long-term debt | 14,060 | 14,060 | ||||||||||||||||
| Other deferred liabilities | 731 | 731 | ||||||||||||||||
| Minority interest | 384 | 384 | ||||||||||||||||
| Stockholders' equity: | ||||||||||||||||||
| Preferred stock | — | — | ||||||||||||||||
| Common stock | 34 | — | 34 | |||||||||||||||
| Additional paid-in capital | 115,589 | 1,219 | 55,147 | (e) | 115,589 | |||||||||||||
| (56,366 | ) | (f) | ||||||||||||||||
| Accumulated deficit | (74,917 | ) | (52,910 | ) | 398 | (d) | (74,519 | ) | ||||||||||
| 52,910 | (f) | |||||||||||||||||
| Accumulated other comprehensive loss | (7,416 | ) | — | (7,416 | ) | |||||||||||||
| Total stockholders' equity | 33,290 | (51,691 | ) | 33,688 | ||||||||||||||
| Total liabilities & stockholders' equity | $ | 134,918 | $ | 22,460 | $ | 145,340 | ||||||||||||
See accompanying Notes to Unaudited Pro Forma Combined Condensed Consolidated Financial Information.
QAD INC.
UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share data)
| | Historical (in USD) | | | | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Nine Months Ended | | | | |||||||||||||
| | Pro Forma | ||||||||||||||||
| | QAD Inc. October 31, 2002 | BDM UK September 30, 2002 | |||||||||||||||
| | Adjustments | Ref. | Combined | ||||||||||||||
| Revenue: | |||||||||||||||||
| License fees | $ | 37,194 | $ | 1,060 | $ | 38,254 | |||||||||||
| Maintenance and other | 78,534 | 3,652 | $ | (242 | ) | (i) | 81,944 | ||||||||||
| Services | 22,408 | 14,368 | (65 | ) | (i) | 36,711 | |||||||||||
| Total revenue | 138,136 | 19,080 | 156,909 | ||||||||||||||
Costs and expenses: | |||||||||||||||||
| Cost of license fees | 6,171 | 627 | 6,798 | ||||||||||||||
| Other cost of revenue | 47,116 | 16,307 | (271 | ) | (i) | 63,152 | |||||||||||
| Sales and marketing | 45,808 | 1,775 | (36 | ) | (i) | 47,547 | |||||||||||
| Research and development | 25,207 | — | 25,207 | ||||||||||||||
| General and administrative | 15,910 | 4,465 | (121 | ) | (j) | 20,254 | |||||||||||
| Amortization of intangibles from acquisitions | 840 | — | 840 | ||||||||||||||
| Impairment loss | 151 | — | 151 | ||||||||||||||
| Restructuring | 3,192 | — | 3,192 | ||||||||||||||
| Total costs and expenses | 144,395 | 23,174 | 167,141 | ||||||||||||||
Operating loss | (6,259 | ) | (4,094 | ) | (10,232 | ) | |||||||||||
Other (income) expense: | |||||||||||||||||
| Interest income | (599 | ) | (168 | ) | (767 | ) | |||||||||||
| Interest expense | 1,295 | 594 | 1,889 | ||||||||||||||
| Other (income) expense, net | 416 | — | 416 | ||||||||||||||
Total other (income) expense | 1,112 | 426 | 1,538 | ||||||||||||||
Loss before income taxes | (7,371 | ) | (4,520 | ) | (11,770 | ) | |||||||||||
| Income tax expense | 900 | 112 | 1,012 | ||||||||||||||
Net income loss | $ | (8,271 | ) | $ | (4,632 | ) | $ | (12,782 | ) | ||||||||
Basic and diluted net loss per share | $ | (0.24 | ) | $ | (0.13 | ) | $ | (0.37 | ) | ||||||||
| Basic and diluted weighted shares | 34,403 | 34,403 | 34,403 | ||||||||||||||
See accompanying Notes to Unaudited Pro Forma Combined Condensed Consolidated Financial Information.
QAD INC.
UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share data)
| | Historical (in USD) | | | | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Twelve Months Ended | | | | |||||||||||||
| | Pro Forma | ||||||||||||||||
| | QAD Inc. January 31, 2002 | BDM UK December 31, 2001 | |||||||||||||||
| | Adjustments | Ref. | Combined | ||||||||||||||
| Revenue: | |||||||||||||||||
| License fees | $ | 62,820 | $ | 1,310 | $ | (39 | ) | (i) | $ | 64,091 | |||||||
| Maintenance and other | 103,624 | 4,646 | (684 | ) | (i) | 107,586 | |||||||||||
| Services | 39,341 | 24,394 | (249 | ) | (i) | 63,486 | |||||||||||
| Total revenue | 205,785 | 30,350 | 235,163 | ||||||||||||||
Costs and expenses: | |||||||||||||||||
| Cost of license fees | 12,396 | 538 | (39 | ) | (i) | 12,895 | |||||||||||
| Other cost of revenue | 74,605 | 27,119 | (346 | ) | (i) | 101,378 | |||||||||||
| Sales and marketing | 59,365 | 3,321 | (587 | ) | (i) | 62,099 | |||||||||||
| Research and development | 31,672 | — | 31,672 | ||||||||||||||
| General and administrative | 22,882 | 8,338 | (162 | ) | (j) | 31,058 | |||||||||||
| Amortization of intangibles from acquisitions | 3,538 | — | 3,538 | ||||||||||||||
| Impairment loss | 2,066 | — | 2,066 | ||||||||||||||
| Restructuring | 93 | — | 93 | ||||||||||||||
| Total costs and expenses | 206,617 | 39,316 | 244,799 | ||||||||||||||
| Operating loss | (832 | ) | (8,966 | ) | (9,636 | ) | |||||||||||
Other (income) expense: | |||||||||||||||||
| Interest income | (1,365 | ) | (288 | ) | (1,653 | ) | |||||||||||
| Interest expense | 2,359 | 1,179 | 3,538 | ||||||||||||||
| Other (income) expense, net | 587 | — | 587 | ||||||||||||||
| Total other (income) expense | 1,581 | 891 | 2,472 | ||||||||||||||
Loss before income taxes | (2,413 | ) | (9,857 | ) | (12,108 | ) | |||||||||||
| Income tax expense | 2,900 | 299 | 3,199 | ||||||||||||||
Net loss | $ | (5,313 | ) | $ | (10,156 | ) | $ | (15,307 | ) | ||||||||
Basic and diluted net loss per share | $ | (0.16 | ) | $ | (0.30 | ) | $ | (0.45 | ) | ||||||||
| Basic and diluted weighted shares | 34,055 | 34,055 | 34,055 | ||||||||||||||
See accompanying Notes to Unaudited Pro Forma Combined Condensed Consolidated Financial Information.
QAD INC.
UNAUDITED NOTES TO PRO FORMA COMBINED
CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The following pro forma adjustments have been reflected in the unaudited pro forma combined condensed consolidated balance sheet and statements of operations:
| (in thousands): | |||||
Cash paid (see note b) | $ | 1,000 | |||
| Acquisition related expenses (see note c) | 4,650 | ||||
| Forgiveness of debt (see note g) | (2,600 | ) | |||
| Total purchase price | $ | 3,050 | |||
Under Statement of Financial Accounting Standard No. 141, "Business Combinations," (SFAS 141) the total purchase price was allocated to the acquired assets and liabilities based on their estimated fair values. The total purchase price was allocated to tangible assets and liabilities, and identifiable intangible assets, including customer contracts, intellectual property and a non-compete agreement. No goodwill arose as a result of this acquisition. The excess fair value of net assets acquired over the purchase price paid served to reduce the value of fixed assets and other intangible assets acquired as discussed in (d) below.
The allocation of the preliminary purchase price to the net assets acquired as of November 12, 2002 is presented below:
| (in thousands): | |||||
Assets: | |||||
| Fair value of acquired assets | $ | 11,521 | |||
Liabilities: | |||||
| Fair value of assumed liabilities | (8,073 | ) | |||
Extraordinary Gain: | |||||
| Excess of fair value of net assets acquired over purchase price paid after pro rata reduction of non-financial assets | (398 | ) | |||
Total purchase price | $ | 3,050 | |||
Specifically identified intangible assets include customer contracts, intellectual property acquired and a non-compete agreement with the seller. These intangible assets are included in "Other assets, net" on the accompanying pro form balance sheet. Intellectual property is comprised of certain software developed by TRW ISCS that is complimentary to MFG/PRO, such as AIM Warehousing.
In valuing the intangible assets, an income-based approach was determined to best quantify the economic benefits and risks. The economic benefits were quantified using projections of net cash flows and the risks by applying an appropriate discount rate. The estimated fair value assigned to customer contracts, intellectual property and the non-compete agreement was $0.3 million, $0.2 million and $0.1 million, respectively.
In accordance with SFAS 141, the excess fair value of net assets acquired over the purchase price paid ($1.8 million) was allocated pro rata to certain non-financial assets. This pro rata allocation served to eliminate the assigned estimated values of intangible assets ($0.6 million) and property and equipment ($0.8 million). The additional excess fair value of net assets acquired over the purchase price paid ($0.4 million) is treated as an extraordinary gain during the period of acquisition. Accordingly, this gain is reflected as an increase to retained earnings on the accompanying pro forma balance sheet.
No deferred tax adjustment was made related to the TRW ISCS acquisition since QAD provided a valuation allowance to fully offset its deferred tax assets as of October 31, 2002. The valuation allowance was recorded after considering a number of factors, including the company's cumulative operating losses in fiscal 2000, 2001, and 2002. Based upon the weight of both positive and negative evidence regarding the recoverability of deferred tax assets, QAD concluded that a valuation allowance was required to fully offset the net deferred tax assets, as it is more likely than not that the deferred tax assets will not be realized.
