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 July 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 __________________________________
QAD INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0105228
(State or other jurisdiction of incorporation or (IRS Employer
organization) 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 August 31, 1999: 30,223,361.
QAD Inc.
Index
Part I
Financial Information Page
Item 1 Financial Statements
Condensed Consolidated Balance Sheets as of
July 31, 1999 and January 31, 1999 1
Condensed Consolidated Statements of Operations for the
Three and Six Months Ended July 31, 1999 and 1998 2
Condensed Consolidated Statements of Cash Flows
for the Six Months Ended July 31, 1999 and 1998 3
Notes to Condensed Consolidated Financial
Statements 4
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
Item 3 Quantitative and Qualitative Disclosures
About Market Risk 11
Part II
Other Information
Item 1 Legal Proceedings 12
Item 2 Changes in Securities 12
Item 3 Defaults upon Senior Securities 12
Item 4 Submission of Matters to a Vote of Security Holders 12
Item 5 Other Information 12
Item 6 Exhibits and Reports on Form 8-K 12
Part I - Financial Information
QAD Inc.
Condensed Consolidated Balance Sheets
(In thousands, except for share data)
Assets
July 31, January 31,
1999 1999
----------- -----------
(Unaudited)
Current assets:
Cash and equivalents $ 15,292 $ 16,078
Short-term cash investments -- 3,000
Accounts receivable, net 76,759 95,344
Other current assets 19,921 19,680
----------- -----------
Total current assets 111,972 134,102
Property and equipment, net 34,003 36,835
Goodwill and intangibles, net 26,114 25,152
Other assets 5,076 3,966
----------- -----------
$ 177,165 $ 200,055
Total assets =========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable $ 795 $ 7,166
Accounts payable 13,608 16,314
Accrued expenses 25,834 29,933
Deferred revenue and deposits 53,645 59,946
----------- -----------
Total current liabilities 93,882 113,359
Long-term debt 16,371 6,526
Other liabilities 1,088 741
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 30,223,361 at July 31, 1999 and
29,703,500 at January 31, 1999 30 30
Additional paid-in-capital 99,818 99,566
Accumulated deficit (32,438) (18,526)
Receivable from stockholders (28) (54)
Unearned compensation - restricted stock (265) (970)
Accumulated other comprehensive loss (1,293) (617)
----------- -----------
Total stockholders' equity 65,824 79,429
----------- -----------
Total liabilities and stockholders' equity $ 177,165 $ 200,055
=========== ===========
See accompanying notes to condensed consolidated financial statements
1
QAD Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
(In thousands, except per share amounts)
Three Months Ended Six Months Ended
July 31, July 31,
---------------------- ---------------------
1999 1998 1999 1998
--------- --------- --------- ---------
Revenue:
License fees $ 20,562 $ 28,656 $ 41,023 $ 55,847
Maintenance and other 23,283 16,515 44,284 32,177
Services 14,469 2,108 26,345 3,525
--------- --------- --------- ---------
Total revenue 58,314 47,279 111,652 91,549
Costs and expenses:
Cost of revenue 26,418 10,739 51,767 22,526
Sales and marketing 18,572 24,350 40,079 45,424
Research and development 8,457 13,118 17,463 24,540
General and administrative 6,337 6,699 13,217 11,743
Restructuring charge 1,152 -- 1,152 --
--------- --------- --------- ---------
Total costs and expenses 60,936 54,906 123,678 104,233
--------- --------- --------- ---------
Operating loss (2,622) (7,627) (12,026) (12,684)
Other (income) expense:
Interest income (105) (674) (212) (1,649)
Interest expense 499 92 793 101
Other, net (189) 101 163 (301)
--------- --------- --------- ---------
205 (481) 744 (1,849)
--------- --------- --------- ---------
Loss before income taxes (2,827) (7,146) (12,770) (10,835)
Income tax provision (benefit) 1,142 (2,715) 1,142 (4,117)
--------- --------- --------- ---------
Net loss $ (3,969) $ (4,431) $ (13,912) $ (6,718)
========= ========= ========= =========
Basic and diluted
net loss per share $ (0.13) $ (0.15) $ (0.46) $ (0.23)
========= ========= ========= =========
See accompanying notes to condensed consolidated financial statements
2
QAD Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
Six Months Ended
July 31,
---------------------------
1999 1998
--------- ---------
Net cash used in operating activities (2,402) (10,977)
Cash flows from investing activities:
Purchase of property and equipment (2,621) (9,651)
Capitalized software development costs (1,915) (2,247)
Proceeds from sale of short-term investments 3,000 --
Other, net (496) 9
--------- ---------
Net cash used in investing activities (2,032) (11,889)
Cash flows from financing activities:
Proceeds from notes payable and long-term debt 16,059 --
Repayment of notes payable and long-term debt (12,585) (119)
Issuance of common stock for cash 891 851
Other, net (41) 151
--------- ---------
Net cash provided by financing activities 4,324 883
Effect of exchange rates on cash and equivalents (676) (135)
--------- ---------
Net decrease in cash and equivalents (786) (22,118)
Cash and equivalents at beginning of period 16,078 70,082
--------- ---------
Cash and equivalents at end of period $ 15,292 $ 47,964
========= =========
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 Form 10-K for the year ended January 31, 1999. The results of
operations for the six months ended July 31, 1999 are not necessarily indicative
of the results to be expected for the year ending January 31, 2000.
Certain prior period financial statement items have been reclassified to conform
to current period presentation.
2. Comprehensive income (loss)
Comprehensive income (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 income
(loss) are as follows (in thousands):
Three Months Ended Six Months Ended
July 31, July 31,
------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- --------
Net loss $(3,969) $(4,431) $(13,912) $(6,718)
Foreign currency translation adjustments (415) 49 (676) (135)
------- ------- -------- -------
Comprehensive loss $(4,384) $(4,382) $(14,588) $(6,853)
======= ======= ======== =======
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 stock options (using the treasury stock method).
The following table sets forth the computation of basic and diluted income
(loss) per share (in thousands, except for per share amounts):
4
Three Months Ended Six Months Ended
July 31, July 31,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
Numerator:
Net loss $(3,969) $(4,431) $(13,912) $ (6,718)
======= ======= ======== ========
Denominator:
Weighted average basic
shares outstanding 30,169 29,234 30,052 29,179
Effect of dilutive options -- -- -- --
------- ------- -------- --------
Weighted average diluted
shares outstanding 30,169 29,234 30,052 29,179
======= ======= ======== ========
Basic and diluted
loss per share $ (0.13) $ (0.15) $ (0.46) $ (0.23)
======= ======= ======== ========
Common stock equivalents of approximately 143,000 and 169,000 for the three and
six months ended July 31, 1999 and 508,000 and 488,000 for the three and six
months ended July 31, 1998, respectively, were not included in the diluted
calculations because, due to the net loss positions, they were anti-dilutive.
4. Notes Payable and Long-Term Debt
July 31, January 31,
(In thousands) 1999 1999
-------- -----------
Line of credit $ 16,000 $ --
Subordinated notes -- 12,362
Capitalized leases 790 1,102
Other 376 228
-------- -----------
17,166 13,692
Less current maturities 795 7,166
-------- -----------
Total long-term debt $ 16,371 $ 6,526
======== ===========
In April 1999, we entered into a secured credit agreement with The First
National Bank of Chicago, which expires and we will be due on April 18, 2002.
The maximum amount that can be borrowed under this credit agreement is subject
to terms of the borrowing base, measured on a monthly basis, up to a maximum of
$30 million. As of July 31, 1999, a majority of the borrowing base was utilized.
This credit agreement is secured by certain QAD assets and can be terminated
voluntarily by us. Borrowings under this credit agreement bear interest equal to
the LIBOR plus 2.50 percent or ABR plus 1.00 percent. ABR is the higher of the
corporate base rate or the Federal Funds Effective Rate plus 0.50 percent. As of
July 31, 1999, the rate was 7.8125 percent based on a LIBOR of 5.3125 plus 2.50
percent. We pay an annual commitment fee of 0.625 percent calculated on the
average unused portion of the $30 million credit line.
In April 1999, the subordinated notes totaling $12.4 million in principal amount
were paid. We funded the payoff of the subordinated notes with a draw on The
First National Bank of Chicago line of credit.
5
5. Restructuring Charge
In response to changes in customers' manufacturing capital software spending
patterns during fiscal year 1999, we undertook a restructuring program that
would, among other things, more closely align 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. The
restructuring plan, which resulted in a fiscal year 1999 charge of $4.3 million,
was continued in fiscal year 2000 with an additional $1.2 million charge in the
quarter ended July 31, 1999. This charge was comprised of $0.9 million in
employee reduction costs and $0.3 million of facility consolidation costs. As of
July 31, 1999, $4.0 million of the total $5.5 million restructuring charge was
utilized and we expect to pay the remaining balance by January 31, 2003. The
liability was increased by $0.1 million during the three months ended July 31,
1999 to reflect changes in estimates used in determining the January 31, 1999
balance.
6. Business Acquisitions
During the six month period ended July 31, 1999, we acquired certain assets and
liabilities of two businesses:
. OpenPro (Pty.) Limited, a South Africa-based distributor, in February
1999.
. ATOS Integration SA, a France-based distributor, in June 1999.
The cost of the acquisitions totaled $0.9 million. The acquisitions were
accounted for using the purchase method. Goodwill related to the acquisitions of
$0.6 million is being amortized over ten years. Results of operations have been
included in the financial statements since the respective dates of acquisition.
Prior shareholders of OpenPro and ATOS have earnouts of up to $0.8 million and
$0.9 million, respectively, which may be added to the purchase price over the
next four years.
The historical operations of the companies acquired are not material,
individually, or in aggregate to our consolidated operations or financial
position. Therefore, supplemental pro forma information has not been presented.
7. Business Segment Information
We adopted Statement of Financial Accounting Standards No. 131 "Disclosures
about Segments of an Enterprise and Related Information," or SFAS No. 131, in
fiscal year 1999. SFAS No. 131 establishes annual and interim standards for
reporting financial and descriptive information regarding a company's operating
segments. As a result, amounts presented are determined on a consistent basis
in accordance with SFAS No. 131.
QAD operates in regions or geographic operating segments. Operations for the
North America region include the United States and Canada. 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).
6
Three Months Ended July 31, Six Months ended July 31,
----------------------------- -----------------------------
(In thousands) 1999 1998 1999 1998
---------- ---------- ---------- ----------
Revenue
- -------
North America $ 25,026 $ 28,317 $ 45,900 $ 55,124
Europe 21,034 11,900 42,119 21,183
Asia Pacific 9,318 6,032 17,236 13,384
Latin America 2,936 1,030 6,397 1,858
---------- ---------- ---------- ----------
$ 58,314 $ 47,279 $ 111,652 $ 91,549
========== ========== ========== ==========
Operating Income (Loss):
- ------------------------
North America 309 (2,610) (5,819) (3,571)
Europe (918) (743) (2,881) (3,125)
Asia Pacific (203) (3,429) (1,517) (3,861)
Latin America (658) (845) (657) (2,127)
Restructuring Charge (1,152) -- (1,152) --
---------- ---------- ---------- ----------
$ (2,622) $ (7,627) $ (12,026) $ (12,684)
========== ========== ========== ==========
July 31, January 31,
1999 1999
----------- -----------
Identifiable Assets:
- --------------------
North America $ 71,729 $ 87,128
Europe 73,876 83,850
Asia Pacific 21,770 17,811
Latin America 9,790 11,266
----------- -----------
$ 177,165 $ 200,055
=========== ===========
7
QAD Inc.
Management's Discussion & Analysis of Financial Condition and Results of
Operations
The following discussion should be read in conjunction with the condensed
consolidated statements and notes thereto. This Quarterly Report on Form 10-Q
may be deemed to include forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934 that involve risk and uncertainty, including financial,
business environment and trend projections. Forward-looking statements are
statements other than historical information or statements of current condition
and relate to future events or the future financial performance of QAD. Some
forward-looking statements may be identified by use of such terms as "believes,"
" anticipates," "intends," "plans," "expects" or similar language indicating the
expression of an opinion or view concerning the future.
Although QAD believes that its expectations are based on reasonable assumptions,
we can give no assurance that our goals will be achieved. The important factors
that could cause actual results to differ materially from those in the forward-
looking statements herein include, without limitation, historical fluctuations
in quarterly results and potential future significant fluctuations, risks
associated with the sales cycle, product mix, dependence on third-party
products, rapid technological change, supply chain solutions under development
and underlying technology, market concentration, dependence on key personnel,
dependence upon development and maintenance of sales and marketing channels,
reliance on and need to develop additional relationships with third parties,
risks associated with international operations, and other factors detailed in
our Annual Report on Form 10-K for the year ended January 31, 1999. These
factors, among other things, could cause actual results to differ materially
from historical results or those currently anticipated.
Total Revenue. Total revenue for the three months ended July 31, 1999 increased
23% to $58.3 million from $47.3 million in the same period in 1998. Total
revenue for the six months ended July 31, 1999 increased 22% to $111.7 million
from $91.5 million in the same period in 1998. The increase in second quarter
revenue over the comparable prior year period was primarily due to a 41%
increase in maintenance and other revenue and a 586% increase in services
revenue. The increase in year-to-date revenue over the comparable prior year
period was primarily due to a 38% increase in maintenance and other revenue and
a 647% increase in services revenue.
The increase in maintenance revenue was primarily due to the growing installed
base. The growth in services revenue was due to a new emphasis on services that
began in late fiscal year 1999 with the acquisition of several QAD distributors
and the launch of our QAD Global Services business. These increases were
partially offset by 28% and 27% declines in license fees for the second quarter
and year-to-date periods versus the comparable prior year periods, respectively,
stemming primarily from manufacturers' decisions to delay capital spending due
to concerns over Year 2000 readiness.
Cost of Revenue. Cost of revenue consists primarily of charges incurred from
reselling third-party databases (and associated maintenance contracts) which are
required to run MFG/PRO software, the performance of software service contracts,
support costs associated with MFG/PRO software maintenance contracts, and costs
to reproduce and deliver QAD software. During the three months ended July 31,
1999, cost of revenue increased 146% to $26.4 million (45% of total revenue)
from $10.7 million (23% of total revenue) in the same period in 1998. During
the six months ended July 31, 1999, cost of revenue increased 130% to $51.8
million (46% of total revenue) from $22.5 million (25% of total revenue) in the
same period in 1998. The increase as a percentage of total revenue was
primarily due to a shift in revenue mix toward the lower margin services
business, as well as toward externally sourced licenses which carry royalty
costs.
Sales and Marketing. During the three months ended July 31, 1999, sales and
marketing expense decreased 24% to $18.6 million (32% of total revenue) from
$24.4 million (52% of total revenue) compared to the same period last year.
During the six months ended July 31, 1999, sales and marketing expense decreased
12% to $40.1 million (36% of total revenue) from $45.4 million (50% of total
revenue) compared to the same period last year. The decreased spending was
primarily due to reduced personnel and directly related costs resulting from the
restructuring program which began in late fiscal year 1999.
Research and Development. During the three months ended July 31, 1999, research
and development expense decreased 36% to $8.5 million (15% of total revenue)
from $13.1 million (28% of total revenue) in
8
the same period in the prior year. During the six months ended July 31, 1999,
research and development expense decreased 29% to $17.5 million (16% of total
revenue) from $24.5 million (27% of total revenue) compared to the same period
last year. The decrease was primarily due to a reduction in the utilization of
third party developers, as well as the transfer of research and development
personnel into revenue generating positions within the Global Services
organization in late fiscal year 1999.
General and Administrative. During the three months ended July 31, 1999,
general and administrative expense decreased 5% to $6.3 million (11% of total
revenue) from $6.7 million (14% of total revenue) in the same period in 1998.
During the six months ended July 31, 1999, general and administrative expense
increased 13% to $13.2 million (12% of total revenue) from $11.7 million (13% of
total revenue) in the same period in 1998. The increase in absolute dollars on
a year-to-date basis resulted primarily from incremental expense related to the
distributors acquired in late fiscal year 1999, including $1.6 million in
amortization expense for the acquired intangible assets. This increase was
partially offset by a reduction in workforce related to the restructuring
program implemented in late fiscal year 1999. With the continuation of the
restructuring program in fiscal year 2000, the cost savings in personnel and
directly related expenses incrementally improved enough during the three months
ended July 31, 1999 to more than offset the additional acquisition-related
costs.
Restructuring Charge. In response to changes in customers' manufacturing
capital software spending patterns, we undertook a restructuring program in
October 1998 that would, among other things, more closely align costs with sales
expectations. This program was continued in fiscal year 2000 with an additional
charge of $1.2 million, representing $0.9 million in employee reduction costs
and $0.3 of facility consolidation costs recorded in the second quarter.
Other (Income) Expense. Total other (income) expense is composed primarily of
interest income, interest expense and foreign exchange transaction gains and
losses. During the three months ended July 31 1999, other (income) expense
decreased to $0.2 million from $(0.5) million. During the six months ended July
31, 1999, other (income) expense decreased to $0.7 million from $(1.8) million.
The decrease was primarily due to significantly reduced interest income related
to less invested cash and increased interest expense on higher debt levels.
Income Taxes. We recorded a provision for income taxes of $1.1 million for the
three and six months ended July 31, 1999. We have provided a tax provision in
tax jurisdictions in which profits have been reported for the six months ended
July 31, 1999. However, we have not provided a tax benefit in tax jurisdictions
in which losses have been reported due to Management's determination regarding
the uncertainty of realization of such tax 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. As of July 31, 1999, we had working capital and cash, equivalents
and short-term cash investments of $18.1 million and $15.3 million, respectively
as compared to $20.7 million and $19.1 million as of January 31, 1999.
Accounts receivable, net of allowance for doubtful accounts, decreased to $76.8
million at July 31, 1999 from $95.3 million at January 31, 1999. Accounts
receivable days sales outstanding decreased to 118 days at July 31, 1999 from
131 days at January 31, 1999. We are continuing our focus on sales terms and
collection processes to improve cash flows and working capital.
Cash flows used in operating activities were $2.4 million and $11.0 million for
the six months ended July 31, 1999 and 1998, respectively. The fiscal year 2000
decline in cash usage related to the increased net loss, more than offset by
increased depreciation/amortization and significantly higher accounts receivable
collections. Cash flows used in investing activities aggregated $2.0 million
and $11.9 million in the six months ended July 31, 1999 and 1998, respectively
and primarily related to investment in computer equipment, office furniture and
capitalized software development costs, partially offset in 1999 by the sale of
short-term investments. Cash flows provided by financing activities totaled
$4.3 million and $0.9 million for the six months ended July 31, 1999 and 1998,
respectively, and were comprised of net proceeds from borrowings and issuance of
common stock. At July 31, 1999, we had no material commitments for capital
expenditures.
9
In April 1999, we entered into a secured credit agreement with The First
National Bank of Chicago, which expires and will be due on April 18, 2002. The
maximum amount that can be borrowed under this credit agreement is subject to
terms of the borrowing base, measured on a monthly basis, up to a maximum of $30
million. As of July 31, 1999, a majority of the borrowing base was utilized.
This credit agreement is secured by certain QAD assets and can be terminated
voluntarily by us. Borrowings under this credit agreement bear interest equal
to the LIBOR plus 2.50 percent or ABR plus 1.00 percent. ABR is the higher of
the corporate base rate or the Federal Funds Effective Rate plus 0.50 percent.
As of July 31, 1999, the rate was 7.8125 percent based on a LIBOR of 5.3125 plus
2.50 percent. We pay an annual commitment fee of 0.625 percent calculated on
the average unused portion of the $30 million credit line.
We believe that the cash on hand and the available borrowings under the credit
agreement will provide us with sufficient resources to meet our working capital
requirements, debt service and other cash needs for the next twelve months.
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
Y2K and to ensure that 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 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, 2) Planning, 3)
Resources, 4) Technology and 5) Reporting. These phases are defined as follows:
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 taking
inventory 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
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 July 31, 1999, the direct costs incurred to remediate Y2K issues were not
material. Costs directly attributed to our overall Y2K program are estimated to
be approximately $1.1 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
10
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-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 certain Y2K issues.
QAD Inc.
Quantitative and Qualitative Disclosures About Market Risk
Foreign Exchange. QAD is subject to risks typical of a global business,
including, but not limited to differing economic conditions, changes in
political climate, differing tax structures, other regulations and restrictions
and foreign exchange volatility. Historically, our revenue from international
operations has primarily been denominated in United States dollars. We have
generally priced 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.
Due to recent acquisitions of several international distributors and the launch
of the QAD Global Services business, 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 have affected
and will continue to affect period-to-period comparison of our reported results
of operations. For the six months ended July 31, 1999 and 1998, (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 totaled $0.1 million and $(0.2) million,
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. We continue to
evaluate our currency management policies. 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. QAD invests its 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. QAD accounts for its investment instruments in accordance with Statement
of Financial Accounting Standards No. 115, "Accounting for Certain Investment in
Debt and Equity Securities" ("SFAS 115"). All of the cash equivalent and short-
term investments are treated as "available for sale" under SFAS 115.
Investments in both fixed rate and floating rate interest earning instruments
carry a degree of interest rate risk. Fixed rate securities may have their fair
market value adversely impacted due to a rise in interest rates, while floating
rate securities may produce less income than expected if interest rates fall.
Due in part to these factors, our future investment income may fall short of
expectations due to changes in interest rates or we may suffer losses in
principal if forced to sell securities which have seen a decline in market value
due to changes in interest rates.
11
Part II - Other Information
QAD Inc.
Item 1 - Legal Proceedings
Not applicable
Item 2 - Changes in Securities
Not applicable
Item 3 - Defaults upon Senior Securities
Not applicable
Item 4 - Submission of Matters to a Vote of Security Holders
At the annual meeting of stockholders held on June 22, 1999, the following
proposals were adopted by the margins indicated:
(1) To elect one director to hold office for a term of one year until the
annual meeting of stockholders in the year 2000 (Class I Director):
Votes
Votes For Withheld
--------- --------
Evan M. Bishop 27,130,546 793,918
Karl F. Lopker and Pamela M. Lopker continue as directors and were
elected at the prior year's annual meeting for a term of two years
(Class II directors). Peter R. van Cuylenburg and Koh Boon Hwee also
continue as directors and were elected at the prior year's annual
meeting for a term of three years (Class III directors).
(2) Increase of four million shares to the QAD Inc. 1997 Stock Incentive
Program.
Votes For Votes Against Abstentions
--------- ------------- -----------
20,893,937 1,436,225 33,633
(3) Ratification of appointment of KPMG LLP as the Company's independent
auditors for the Company's 2000 fiscal year.
Votes For Votes Against Abstentions
--------- ------------- -----------
27,839,761 56,771 27,932
Item 5 - Other Information
Not applicable
Item 6 - Exhibits and Reports on Form 8-K
a) Exhibits
10.1 Second Amendment to Credit Agreement between QAD Inc. and The First
National Bank of Chicago (incorporated by reference to Exhibit 10.1
to QAD Inc.'s Current Report on Form 8-K filed June 25, 1999.)
10.2 Eighth Amendment to Office Lease between the Registrant and Matco
Enterprises, Inc. for Suites I, K, L, C, J and Basement Room B
located at 5464 Carpinteria Avenue, Carpinteria, California dated
February 18, 1999.
12
10.3 Lease Surrender and Termination Agreement between Registrant and
Cito Corp. for the premises located at 201 North Salispuedes Street,
Suite 101 and 520 East Montecito Street, Suite 200, Santa Barbara,
California dated December 3, 1998.
10.4 Lease Termination Agreement between Registrant and Wright and
Company for Suites 1 and 2 located at 6430 Via Real, Carpinteria,
California dated September 9, 1999.
10.45 Related Facility Credit Agreement between the Registrant and The
First National Bank of Chicago.
27 Financial Data Schedule
b) Reports on Form 8-K
On June 25, 1999, QAD filed a Current Report on Form 8-K disclosing that we
entered into a Second Amendment to Credit Agreement with The First National
Bank of Chicago. The amendment was filed as Exhibit 10.1 to the Form 8-K.
13
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: September 13, 1999 By /s/ A.J. MOYER
--------------
A.J. Moyer
Chief Financial Officer
(on behalf of the registrant and as
Principal Financial Officer)
14