2012 ANN UAL REPORT
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© 2012 QAD INC. ALL RIGHTS RESERVED.
Amounts in thousands, except per share data
2 0 1 2
2 0 1 1
2 0 1 0
F I N A N C I A L H I G H L I G H T S:
Total Revenue
Net Income
Diluted Net Income Per Share
$247,258
10,784
$220,012
2,711
$215,231
1,349
FI S C A L YE A R S E N D E D jA N U A R Y 3 1
Class A
Class B
Cash and Equivalents
Total Debt
Cash Flow From Operations
0.67
0.56
76,927
16,134
21,448
0.17
0.14
67,276
16,442
25,902
0.09
0.07
44,678
16,728
17,696
REVENUE BY CATEGORY
REVENUE BY REGION
REVENUE BY VERTICAL MARKET
%
REVENUE
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ABOUT QAD: QAD provides innovative enterprise software applications for leading global manufacturing
companies. QAD applications are designed to simplify the management and enhance the efficiency of
manufacturing resources and operations both within and beyond the enterprise, enabling companies throughout
the world to collaborate with their customers, suppliers and partners.
C ORPORAT E I N FORM ATI ON
E xE C U T I V E OF F I C E R S
Pamela M. Lopker
Chairman of the Board
and President
BO A R D O F DI R E C T O R S
Pamela M. Lopker
Chairman of the Board
and President
Karl F. Lopker
Chief Executive Officer
Karl F. Lopker
Chief Executive Officer
Daniel Lender
Executive Vice President,
Chief Financial Officer
Gordon Fleming
Executive Vice President,
Chief Marketing Officer
Kara L. Bellamy
Senior Vice President,
Corporate Controller,
and Chief Accounting Officer
Scott J. Adelson
Senior Managing Director,
Global Co-Head of
Corporate Finance
Houlihan Lokey
Peter R. van Cuylenburg
Independent advisor to
high-technology companies
Thomas J. O’Malia
Director Emeritus, Lloyd
Greif Center for
Entrepreneurial Studies at
the University of Southern
California, Marshall
School of Business
Lee D. Roberts
President and CEO,
BlueWater Consulting, LLC
NO R T H AM E R I C A
LO C AT I O N S
California
Georgia
Illinois
Michigan
New Jersey
AS I A P A C I F I C
LO C AT I O N S
Australia
China
India
Japan
Singapore
Thailand
EU R O P E, MI D D L E
EA S T A N D AF R I C A
LO C AT I O N S
Belgium
France
Germany
Ireland
Italy
Netherlands
Poland
South Africa
Spain
United Kingdom
LAT I N AM E R I C A
L O C AT I O N S
Brazil
Mexico
IN D E P E N D E N T RE G I S T E R E D
PU B L I C AC C O U N T I N G FI R M
KPMG LLP
Los Angeles, California
LE G A L CO U N S E L
Manatt, Phelps & Phillips LLP
Los Angeles, California
IN V E S T O R RE L AT I O N S
PondelWilkinson Inc.
Los Angeles, California
Tel: 310.279.5980
TR A N S F E R AG E N T/ RE G I S T R A R
American Stock Transfer & Trust
New York, New York
Tel: 212.936.5100
ST O C K IN F O R M AT I O N
The company’s common stock trades
on the NASDAQ Global Select Market
under the symbols QADA and QADB.
AN N U A L RE P O R T O N FO R M 1 0 - K
A copy of the company’s annual
report to the Securities and Exchange
Commission on Form 10-K is available
without charge upon request to
the company’s Investor Relations
department or from the company’s
website at www.qad.com.
AN N U A L M E E T I N G
The annual meeting of stockholders will
be held on June 12, 2012 at 4:30 p.m.
PDT at QAD Inc., 100 Innovation Place,
Santa Barbara, California 93108.
Tel: 805.566.6000. A formal Notice
of Meeting, Proxy Statement and Proxy
will be sent to stockholders.
QAD CO RPORAT E HEADQU ARTER S
100 Innovation Place
Santa Barbara, California 93108
Tel: 805.566.6000
www.qad.com
To Our Shareholders:
In fiscal year 2012, we saw
regions. In our North America region
improvements in many areas of our
we benefitted from a continued
business. We extended our product
increase in manufacturing activity, in
suite with several innovative new
particular from the automotive sector.
products. We strengthened our
In our Europe, Middle East, and Africa
customer relationships with new
region we were pleased to show good
offerings and initiatives. We continued
performance, despite continued
to grow our revenues and we made
economic uncertainty in some parts of
significant gains in profitability.
the region. In our Asia Pacific region,
Throughout the year we shared our
vision of the Effective Enterprise with
our customers. We define an Effective
Enterprise as one where every
business process is working at peak
efficiency and is perfectly aligned
to achievement of strategic goals.
We strive to transform every QAD
strong performance from our Chinese
and Australian operations allowed us
to grow, despite a significant impact
felt by many customers affected
by the aftermath from the natural
disasters adversely affecting Japan
and Thailand. Finally, revenue in our
Latin America region grew in a good
economic environment with particular
customer into an Effective Enterprise.
strength in Brazil.
During the year we were pleased to
resume hosting EXPLORE, our annual
global user conference. EXPLORE
was well attended and allowed us
to share our product direction and
updates on key initiatives with many
of our customers. We had suspended
hosting the event during the economic
crisis and it was great to see so many
customers and hear about their return
to growth.
We focused on revenue growth and
profitability, as well as maintaining
a strong discipline on cost control.
Throughout the year, our operating
income increased to $17.9 million,
up from $6.6 million in the prior year.
We strengthened our cash position by
$9.6 million, to $76.9 million by the
end of the year. Our financial strength
supports our growth initiatives, as
well as providing our customers with
This year we experienced strong
the assurance of stability in their
revenue growth in all of our operating
relationship with QAD.
We made significant advances in our
We also developed a number of
cloud ERP offering (QAD On Demand),
services offerings aimed at helping
almost doubling our user count
customers measure and enhance
through the year with sales in all of our
the performance of key business
regions. North America played a major
processes. We enhanced our internal
role in this achievement. We will
skills and capabilities and continued
continue to focus on QAD On Demand
to develop our partner network.
and expect to drive significant growth
The demand from our customers
in all regions in the future.
for professional services continued
In addition to strong growth in
subscription revenue from sales of
QAD On Demand, our conventional
to grow throughout the year, thus
enabling us to grow our revenue in
this category by 19% from last year.
revenue from license sales improved
Our research and development
by 10% over the previous year. Our
organization introduced important
maintenance business remains strong
functionality to support our global
with customers renewing contracts at
manufacturing customers. In
our historical rates. Our continuous
particular, we expanded our
focus on developing and enhancing
internationalization capability to make
the functionality of our product suite,
it easier for customers to support the
strong industry specific capabilities,
local fiscal and legal requirements
and our ability to deliver high quality
wherever they operate in the world.
global support help ensure a high
We plan to continue to enhance our
retention rate for customers on
capabilities in these areas as our
maintenance contracts.
customers move into new markets
Our professional services business
continues to focus on assisting
and government regulations continue
to change.
customers to achieve their desired
We also delivered exciting new
business outcomes. Throughout
functionality in the areas of mobile
the year we delivered a number
computing and business intelligence.
of consulting offerings aimed at
We introduced a new Business
simplifying and accelerating the
Intelligence portal allowing customers
implementation of our solutions.
to easily visualize critical data using a
web browser or using a native mobile
with innovative new capabilities,
application for the Apple iPad in order
especially in the area of Business
to support timely decision making.
Process Management.
In addition to our operational activities,
We would like to thank our customers
we also look for other ways to enhance
for their continued partnership with
shareholder value. This year we
QAD and we look forward to working
increased our quarterly dividend
with them to become Effective
by 20% and initiated a share
Enterprises. We also thank our
repurchase program.
partners and employees for their
Looking forward to fiscal year 2013,
we are planning for continued
improvement across all areas of our
continued dedication to our business
and the value they bring to our
shareholders and customers.
business. Our efforts to grow revenue
Sincerely,
and our focus on QAD On Demand will
continue, supported by our Services
and Support organizations. We will
continue to evolve our product line
Pam and Karl Lopker
2012 QAD FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 31, 2012
OR
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
(I.R.S. Employer Identification No.)
100 Innovation Place
Santa Barbara, California 93108
(Address of principal executive offices and zip code)
Registrant’s telephone number, including area code (805) 566-6000
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Security
Class A Common Stock, $.001 par value
Class B Common Stock, $.001 par value
Name of Each Exchange on Which Registered
The NASDAQ Stock Market LLC
(NASDAQ Global Select Market)
Securities registered pursuant to Section 12(b) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES NO
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES NO
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or
an amendment to this Form 10-K.
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
Accelerated filer
Non-accelerated filer
(Do not check if a smaller reporting company)
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES NO
As of July 31, 2011, the last business day of the Registrant’s most recently completed second fiscal quarter, there were 12,970,085 shares of
the Registrant’s Class A common stock outstanding and 3,202,092 shares of the Registrant’s Class B common stock outstanding, and the aggregate
market value of such shares held by non-affiliates of the Registrant (based on the closing sale price of such shares on the NASDAQ Global Market on
July 31, 2011) was approximately $67.6 million. Shares of the Registrant’s common stock held by each executive officer and director and by each entity
that owns 5% or more of the Registrant’s outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination for other purposes.
As of March 30, 2012, there were 12,686,817 shares of the Registrant’s Class A common stock outstanding and 3,165,664 shares of the
Registrant’s Class B common stock outstanding.
Items 10 through 14 of Part III incorporate information by reference from the Definitive Proxy Statement for the Registrant’s Annual Meeting
of Stockholders to be held on June 12, 2012.
DOCUMENTS INCORPORATED BY REFERENCE
[This page intentionally left blank]
QAD INC.
FISCAL YEAR 2012 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
ITEM 1A. RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
ITEM 1B. UNRESOLVED STAFF COMMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
ITEM 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
ITEM 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
ITEM 4. MINE SAFETY DISCLOSURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
PART II
Page
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
21
ITEM 6. SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
25
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK . . . . . . 42
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . . . . . . . . . . . . . . . . . . . . . . . 43
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
43
ITEM 9A. CONTROLS AND PROCEDURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
ITEM 9B. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE . . . . . . . . . . . 46
ITEM 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
47
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
47
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
[This page intentionally left blank]
NOTE REGARDING FORWARD-LOOKING STATEMENTS
In addition to historical information, this Annual Report on Form 10-K contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities
Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995. Any statements contained
herein that are not statements of historical fact should be construed as forward looking statements, including
statements that are preceded or accompanied by such words as “may,” “believe,” “could,” “anticipate,”
“would,” “might,” “plan,” “expect,” “intend” and words of similar meaning or the negative of these terms or
other comparable terminology. Forward-looking statements are based on current expectations and assumptions
that are subject to risks and uncertainties that could cause actual results to differ materially from those
expressed or implied in the forward-looking statements. Factors that might cause such a difference include, but
are not limited to, those discussed in Item 1A entitled “Risk Factors” which are incorporated herein by
reference, and as may be updated in filings we make from time to time with the Securities and Exchange
Commission. Readers are cautioned not to place undue reliance on these forward-looking statements, which
reflect management’s opinions, expectations and projections only as of the date of this Annual Report on Form
10-K and are subject to risks, uncertainties and assumptions about our business. We undertake no obligation to
revise or update or publicly release the results of any revision or update to these forward-looking statements
except as required by applicable securities laws. Readers should carefully review the risk factors and other
information described in this Annual Report on Form 10-K and the other documents we file from time to time
with the Securities and Exchange Commission, including the Quarterly Reports on Form 10-Q to be filed by
QAD in fiscal year 2013.
ITEM 1. BUSINESS
ABOUT QAD
PART I
QAD Inc. (“QAD”, the “Company”, “we” or “us”) is a global provider of enterprise software
applications, and related services and support. QAD provides enterprise software applications to global
manufacturing companies primarily in the automotive, consumer products, food and beverage, high technology,
industrial products and life sciences industries. Over 2,500 global manufacturing companies use QAD software
and we employ approximately 1,500 people worldwide. QAD was founded in 1979, incorporated in California
in 1986 and reincorporated in Delaware in 1997.
QAD’s enterprise resource planning (“ERP”) suite is QAD Enterprise Applications, which is also
known as MFG/PRO. QAD Enterprise Applications supports the core business processes of our global
manufacturing customers and includes the following functional areas: financials, customer management,
manufacturing, supply chain, service and support, enterprise asset management, transportation management and
analytics.
QAD offers two deployment models: On Premise and On Demand. With the On Premise model, QAD
sells a perpetual license for the software and our customers then deploy the software on their own computer
servers. Under the perpetual licensing model, customers may separately purchase contracts for maintenance and
additional services. With QAD’s On Demand deployment model, customers subscribe to a service and QAD
provides access to the software as well as ongoing support services and management of the environment. The
majority of QAD’s customers use the On Premise model, although On Demand is increasing in acceptance and,
as a result, it is a deployment model we are focusing on.
Industries we serve:
Automotive: QAD solutions address the needs of global automotive parts manufacturers. Our
solutions support emerging industry practices such as the Materials Management Operational
(“MMOG/LE”), a set of guidelines for materials
Guidelines/Logistics Evaluation
1
management used as the framework for supplier certification by many automotive original
equipment manufacturers (“OEMs”). We support companies
the global
automotive markets, which include customers in the supply chains of most of the leading
automotive OEMs worldwide. We deliver unique capabilities to support the collaboration
requirements of the automotive OEM suppliers. QAD actively participates in key automotive
industry associations around the world. QAD solutions are in use at most of the market-
leading automotive parts companies throughout the world that manufacture a broad range of
components including car seats, engine components, axles, drivetrain and body parts.
throughout
Consumer Products: QAD delivers solutions for consumer products companies worldwide.
QAD solutions address the complex demand management and replenishment requirements of
companies supplying the retail supply chain, including promotional pricing and quality
compliance. Our customers in this market sell their products through many of the world’s
major retailers. Our customers in this market segment manufacture a diverse range of
products from sports equipment to domestic appliances.
Food and Beverage: QAD solutions address many sectors of the food and beverage industry.
Our solutions support regulatory and quality initiatives such as cold chain and hazard analysis
and critical control point analysis (“HACCP”). QAD solutions are used to control the entire
supply chain and manufacturing process from the primary produce end of the value chain to
the supermarket shelf. QAD provides solutions for food and beverage companies who
manufacture a broad range of products and manage many of the world’s most well known
brands. Our customers include global leaders in baking, daily fresh production, beverage and
full process producers.
High Technology (including Electronics): QAD solutions are used by many high technology
companies which manufacture a diverse range of products including semi-conductors, smart
cards, telecommunications equipment and test and measurement equipment. QAD solutions
are used to support key business processes, including after-sales service and support, and the
management of field engineers.
Industrial Products: QAD solutions address the needs of companies which make industrial
products for many different markets. Our solutions support multiple manufacturing
methodologies in parallel, including lean manufacturing. Our customers manufacture products
as diverse as machine tools, specialist ceramic materials used in aerospace and defense, and
equipment used in the oil and gas industries.
Life Sciences: QAD solutions support life sciences manufacturers, particularly those
manufacturing medical devices and biotechnology products. Our solutions support regulatory
compliance as defined in Current Good Manufacturing Practices (“cGMP”) and specified by
most global regulatory authorities. QAD provides solutions for life sciences companies
worldwide covering a variety of segments including medical device, pharmaceuticals, and
biotechnology manufacturers. Our customers’ products include artificial joints, surgical
instruments and prescription medications.
THE QAD STRATEGY
QAD has a vision for a future in which all of our customers operate as an Effective Enterprise. We
define an Effective Enterprise as one where every business process is working at peak efficiency, and is
perfectly aligned to achievement of their strategic goals. In support of our vision we focus on providing systems
and expertise that enable our customers to improve effectiveness of their business processes in areas such as
quality, manufacturing, supply chain, service and support, compliance and financial reporting. In addition, our
software is designed to support industry best practices, and to provide real-time visibility and measurement to
allow for business process improvement.
2
We focus on building solutions in specific industry segments within manufacturing in order to provide
our customers the capabilities they need to run their enterprises effectively. We then focus in those areas where
we see potential for increased growth due to industry or economic trends, such as the recent recovery in the
automotive supplier business, the growth in the life sciences markets, and the increased level of manufacturing
in developing economies such as Asia Pacific, Eastern Europe and Latin America.
We have a number of key strategies that support the achievement of QAD’s Vision:
Focus on Global Manufacturing Companies. QAD’s strategy is to focus on delivering the best
solutions possible for global manufacturers. We develop solutions and internal capabilities to address
the needs of global companies, including the unique information requirements that cross multiple
geographies and the capability of deploying a single solution in multiple locations with the required
local language and local compliance functionality.
Deliver Efficient Solutions that are Simple to Implement. We focus on delivering solutions that are
efficient to implement and use, making it easier for our customers to deploy or change their solutions
as their businesses change. QAD Transition Services and our Easy On Boarding deployment
methodology facilitate an efficient implementation process by providing pre-defined processes and
functionality. The QAD Easy On Boarding contents and tools are used to facilitate data definitions,
data migration, solution validation and user training. In addition, QAD has invested heavily over the
last several years in usability. Using Microsoft’s .Net User Interface framework, users have the ability
to configure their own screens, drill down from summary levels to the transaction level and create
custom browses. We aim to provide a complete product that addresses the needs of companies
operating in our target markets.
Promote QAD On Demand Deployment. QAD continues to embrace new technologies that deliver
value to our customers and support their ever-changing technological, financial and business
requirements. In fiscal year 2012, we continued to develop our Cloud ERP offering, QAD On Demand.
QAD On Demand delivers QAD Enterprise Applications in a Software as a Service (“SaaS”) model.
QAD On Demand continues to grow in popularity and we expect this trend will continue in the future.
We believe QAD On Demand is an intelligent investment because of the many benefits it delivers to
our customers, including low initial and predictable ongoing costs, high reliability and reduced IT
complexity and risk.
Enhance Customer Engagement to Deliver Continuous Value. QAD focuses heavily on close
engagement with our customers. We have developed a comprehensive customer engagement process
to help assess our customers’ business performance, identify options for improvement, provide counsel
and help deploy our solutions. We strive to engage with every customer on a continuous basis,
frequently conducting reviews of their business processes and presenting opportunities for
improvement.
Invest in Research and Development. QAD continues to commit significant investment in research
and development (“R&D”). Our goal is to bring the right products to market at the right time to meet
our customers’ needs. We have expanded the capabilities of QAD Enterprise Applications to enhance
its value to customers and to improve our competitive position. In support of our R&D strategy, we
acquire businesses and technologies that complement our core capabilities, or form partnerships to
deliver that capability by resale and other products. Additionally, we address customers’ requirements
through joint development initiatives, which help us develop new capabilities that appeal to many
customers.
Leverage QAD Expertise in Key Industries. QAD employs staff with specific knowledge and
experience in the industries in which our customers operate. We actively participate in several leading
industry associations and pride ourselves in the deep expertise of our staff. Our industry knowledge is
often guided and enhanced by regular interaction with customers in the industries we serve. This
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collective experience and customer interaction allows QAD to develop solutions with specific
capabilities that address our customers’ needs.
Leverage the QAD Brand in Emerging Markets. Many QAD customers are global manufacturing
companies. They rely on us to deliver products and services when and where they need them. These
customers often seek to establish operations in emerging markets, or countries with low labor costs. To
support our customers’ strategies, we too have established operations in many emerging markets. Our
local market presence and global partner network help us to develop products that support local
business practices as well as local language translation.
Leverage Our Global Partner Network. QAD’s network of strategic partnerships, alliances and
consultants extends the functionality of QAD solutions and supports our customers’ needs around the
world. Our network ensures QAD customers receive a consistent level of high quality sales, support,
solutions and services delivery across the globe, from major territories to remote geographies. This
QAD partner network allows us to augment our direct sales organization with distributors and sales
agents, and our services organizations with additional consulting and implementation services.
QAD SOLUTIONS
QAD products and services support common business processes of global manufacturing companies.
We continually monitor emerging business requirements and practices and incorporate them into our product
and solutions strategies. Our ERP suite, QAD Enterprise Applications, incorporates pre-defined business
processes that reflect best practices for customers in our target markets. In addition, QAD Applications has a
user-friendly interface design and over the last several years we have invested significant research and
development in the areas of usability to enhance the user experience.
In support of our focus on business process efficiency, we have integrated process maps for common
business processes into our software and developed the QAD Process Editor tool. This tool simplifies
implementation, maps common business processes, and facilitates navigation throughout the entire product
suite. In addition to the business process visualization provided by process maps, in fiscal year 2012, we
commenced work on embedding enhanced workflow via Business Process Management (“BPM”) capabilities
into the core of QAD Enterprise Applications. Business Process Management allows for tailoring and
configuration of business processes to precisely meet a company’s requirements as well as measurement of the
efficiency of the processes.
QAD customers often integrate QAD solutions with other systems they use within their organizations.
QAD solutions have been developed to facilitate integration. For example, we enable seamless integration
between QAD Enterprise Applications and common browser applications and spreadsheets. QAD solutions also
integrate easily with other Web applications and Web services. Using our QXtend toolset, customers can
connect to different software, even when remote, and use industry standard middleware products such as the
IBM MQ™ series or the Progress Software Sonic™ Enterprise Service Bus.
QAD Enterprise Applications
QAD Enterprise Applications is an integrated suite of software applications, which supports the core
business processes of global manufacturing companies. The suite provides specific functionality for global
manufacturing companies in targeted industries. QAD Enterprise Applications allows customers to monitor,
control and support their operations, whether operating a single plant or multiple sites, wherever they are
located around the world.
QAD Enterprise Applications is available in two editions, Standard Edition and Enterprise Edition.
The Enterprise Edition provides supplementary capabilities to the Standard Edition, primarily related to an
advanced Enterprise Financials suite, which has additional capabilities to assist companies with global
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complexities in their business models, such as compliance with local accounting practices and legislation, as
well as global reporting and performance.
QAD Enterprise Applications supports multiple deployment methods including: On Premise (the
system is installed support on a customer’s computer with the environment maintained by the customer) and On
Demand (the system is delivered in a SaaS/Cloud application model where QAD hosts the environment and
provides support services), or a hybrid of these options. Blended deployment allows customers to choose how
they deploy their business solutions based on their unique business needs.
QAD Enterprise Applications is comprised of the software suites detailed below.
QAD Financials
QAD Financials provides advanced capabilities to manage and control fiscal business processes at a
local, regional and global level. It supports multi-company, multi-currency, multi-language and multi-tax
jurisdictions, as well as consolidated reporting and budgeting controls. These capabilities give cross-functional
stakeholders instant access to their company’s entire financial position enabling faster, more informed decision-
making. QAD Financials covers both transactional accounting and corporate finance accounting and reporting
requirements.
QAD Customer Management
QAD Customer Management enables global manufacturers to acquire new customers efficiently, grow
revenue through multiple channels and retain customers through superior service and support. QAD Customer
Management helps customers measure the efficacy of marketing campaigns, manage the sales opportunity
lifecycle, and optimize order and fulfillment processes. Additionally, QAD Customer Management helps
customers anticipate their customer demand and ensure retention though multiple service channels and the
Customer Self Service module.
QAD Manufacturing
QAD Manufacturing delivers comprehensive capabilities in the areas of planning and scheduling, cost
management, material control, shop floor control and reporting in various mixed-mode manufacturing
environments. The manufacturing models supported include Discrete, Repetitive, Kanban (token-based visual
control particularly relevant when embracing lean manufacturing practices), Flow, Batch/Formula, Process, Co-
products/By-products, and configured products manufacturing environments.
QAD Manufacturing enables companies to deploy business processes in line with their industry’s best
practices. The integration between scheduling, planning, execution and materials allows tight control and simple
management of processes.
QAD Supply Chain
QAD Supply Chain is a comprehensive group of applications that fulfills the diverse materials
planning and logistics requirements of global companies. This solution set delivers functionality and capabilities
that help manufacturers optimize their business efficiency thus enhancing customer satisfaction and complying
with regulatory requirements. Manufacturers can align supply and demand to support the delivery of the right
product, to the right place, at the right time, at the most efficient cost.
QAD Supply Chain addresses simple or complex networks with enhanced functionality available as
the enterprise grows. Collaborative portals are available for both demand and supply side needs.
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QAD Service and Support
QAD Service and Support enables exceptional customer service and support after the sale, providing a
key opportunity for businesses to differentiate themselves from competitors. QAD Service and Support handles
service calls, manages service queues and organizes mobile field resources to promote customer satisfaction. It
also provides extensive project management support, helping organizations track materials and labor against
warranty and service work, compare actual costs to budget, and generate appropriate invoicing.
QAD Enterprise Asset Management
QAD Enterprise Asset Management delivers capabilities focused on maintaining plant and equipment
as well as managing capital projects such as refits or building and commissioning of new plants. QAD
Enterprise Asset Management enables companies to operate global manufacturing plants smoothly and keep
equipment running at the lowest cost. The QAD Enterprise Asset Management suite manages assets from
inception through operations and replacement.
QAD Transportation Management
QAD Transportation Management streamlines transportation processes, ensures shipping costs are at
the most efficient pricing and ensures global compliance. QAD Transportation Management addresses the needs
of distributors and manufacturers in the key areas of global trade management, freight management and trade
compliance. QAD markets QAD Transportation Management directly to existing manufacturing customers and
to companies outside of the manufacturing industry, under the Precision Software brand.
QAD Analytics
QAD Enterprise Applications provides decision makers and company stakeholders with key data.
QAD Analytics helps customers perform complex analyses, make informed decisions, and improve
performance management overall. The QAD Analytics suite consists of multiple analysis and data extraction
tools all working in harmony to provide user defined variations of analysis such as consolidated reporting or
reporting by geography, product line or cost center.
The suite consists of QAD Reporting Framework, which provides powerful yet simple reporting and real
time visibility into ad hoc inquiries; Operational Metrics, which enables key performance indicators to be
defined and monitored across data tracked within the system; and QAD Business Intelligence, which allows for
more sophisticated dynamic analysis and reporting of trends across multiple data sources. In fiscal year 2012,
we launched a mobile version of our QAD Business Intelligence suite, allowing customers to access QAD
Business Intelligence using the Apple iPad™. We also extended the number of underlying pre-defined analyses
across more business processes.
QAD Interoperability
QAD Enterprise Applications is built on a services-oriented architecture (“SOA”). This allows
customers to integrate QAD Enterprise Applications with other non-QAD core business applications. Through
our QAD QXtend toolset, we promote open interoperability and offer QAD customers a choice of technologies
in their software environments. This ease of integration lowers the total cost of ownership for our customers.
QAD On Demand and Other Products offered on a Subscription Basis
QAD products sold on a subscription basis include QAD Enterprise Applications On Demand (“QAD
On Demand”), QAD Supply Chain Portal and QAD Transportation Management System Content (“TMS
Content”).
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QAD On Demand
QAD delivers the capabilities of QAD Enterprise Applications in a SaaS model with its QAD On
Demand offering. QAD On Demand leverages a common infrastructure across our customers who benefit from
access to the most current release of an application, periodic upgrades, more rapid innovation and the
economies of a shared infrastructure. Application users can gain access to QAD On Demand via an Internet
browser on an as-needed basis, and are able to take advantage of a robust, secure, scalable and highly available
application without the risk and complexity of managing the hardware or software infrastructure in-house, in
addition to receiving ongoing support services.
QAD Supply Chain Portal
QAD Supply Chain Portal is a hosted Internet application that provides a customer’s authorized
suppliers real-time visibility into the customer’s inventory, schedule and order data for the supplier’s product.
The application improves supplier efficiency and reduces operating and inventory costs through real-time
supply chain collaboration.
QAD TMS Content
QAD TMS Content is a hosted Internet application, which obtains real time parcel carrier routing
information and rates and ensures that content data is both accurate and compliant. This subscription service
includes automatic carrier updates for routes, published rates, surcharges, and changes to service offerings.
Our subscription offerings provide our customers flexibility in how they manage their IT
environments. These products provide many benefits, including low initial and predictable ongoing costs,
reduced cost of ownership, high reliability and reduced IT complexity. Subscription revenues represented less
than 5% of our total revenues in each of fiscal 2012, 2011 and 2010.
QAD Customer Support and License Updates
We offer customer support services and product enhancements and upgrades. QAD Customer Support
includes Internet and telephone access to technical support personnel located in our global support centers.
Through our support offering, QAD provides the resources, tools and expertise needed to maximize the use of
QAD Enterprise Applications. We offer access to an extensive knowledge base, online training materials, a
virtual training environment, remote diagnostics, a software download center and live chat. Our global support
professionals focus on quickly resolving customers’ issues, maintaining optimal system performance, and
providing uninterrupted service for complete customer satisfaction. In addition, we provide other products as
part of our maintenance offering including operational metrics, workbenches and monitoring tools. Customers
may subscribe to these products for no fee, provided they have a current maintenance agreement in place with
QAD.
License updates provide customers with rights to unspecified software product upgrades during the
term of the support period. Customer support services and license updates are provided as part of our
maintenance contracts. Generally, our customers purchase maintenance when they acquire new licenses and
more than 90% of our customers renew their maintenance contracts annually. Our maintenance and other
revenue represented 56%, 59% and 60% of our total revenues in fiscal 2012, 2011 and 2010, respectively.
QAD Global Services
QAD Global Services offers a broad range of consulting and professional services aimed at assisting
customers in deploying QAD solutions and maximizing the value from using them. QAD Global Services has
approximately 400 consultants throughout the world, and, in addition, manages a larger network of QAD
Services partners around the globe. For global customers, QAD Global Services not only offers expertise and
methodologies for managing global implementations, but QAD Global Services often takes on a program
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management role to ensure consistency throughout the world, and acts as coordinator of QAD and partner
organizations in securing project goals.
QAD Global Services’ implementation philosophy is centered around enhancing and optimizing
business processes. We focus our solutions design on an effective model based on standards, in order to
implement our solutions as efficiently as possible. In support of this, we have developed, and continue to
enhance, an implementation methodology that is based on repeatable processes and best practices by industry,
that we call QAD Easy On Boarding. QAD Easy On Boarding offers a predefined project scope and predictable
costs. Customers map their specific business processes to predefined process maps and attach operating
procedures and other relevant information to each process step which assists in training users in addition to
providing further documentation for the process. This information is then easily accessed when the system is in
production, which reduces the need to document business processes and operating procedures, and accelerates
implementation. We will continue to invest in the advancement of QAD Easy On Boarding.
The QAD range of professional services includes:
● Program Management: Overseeing complex programs or clusters of projects to ensure
consistency and outcome
● Project Management: Managing step-by-step elements of projects to completion
● Business Process Consulting: Reviewing business processes and defining optimum ways to
deploy QAD solutions to achieve efficiency goals
● Technical Consulting: Consulting provided for infrastructure and customization projects
● Application Consulting and Training: Deploying specific solutions and training personnel
● Migration and Upgrade: Migration of QAD solutions, On Demand or On Premise; or
upgrading to the latest version of QAD software
● Applications Management Services: Fixed fee consulting services available to those
customers who have an On Premise model but would like QAD to develop or maintain
ongoing customizations, interfaces and/or perform other recurring services
● Education and Training: Training and use of QAD products ranging from online certification
and skills courses to personalized classroom training
● Q-Scans: A predefined review and measure of business process efficiency against QAD’s Key
Performance Indicator framework
QAD Education
QAD Education delivers an extensive course curriculum in a variety of convenient formats. QAD
Education includes instructor-led training (either in classroom or via distance learning such as live webcasts or
online training). We also offer independent, online learning modules, self-study training guides and direct
access to a training environment for hands-on practice. QAD also offers customized courses taught on-site to
meet specific company needs.
QAD Enterprise Applications course offerings are available to end users, IT professionals and
department managers, partners and consultants. QAD Education also provides industry-recognized certification
for most courses.
QAD Store
QAD has launched a new way of delivering software and support to customers through the QAD Store.
The primary role of the QAD Store is to simplify the ongoing support and operations of QAD Enterprise
Applications, and to make it even easier to work with QAD. The QAD Store operates as an online store where
customers can access QAD products and items specific to their version of QAD Enterprise Applications. The
QAD Store offers QAD products, product updates and patches, process maps, customizations, training
materials, mobile applications and partner products.
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QAD GLOBAL PARTNER NETWORK
QAD’s Global Partner Network is an ecosystem of strategic partnerships and alliances with solution
sellers, consultants, software and database developers, technology providers, independent software vendors,
system integrators and service organizations worldwide. QAD has more than 150 partnerships of varying size
and complexity, delivering sales support, solutions and services. From major territories to remote geographies,
QAD cultivates long-term relationships with partners that deliver value to our customers through their industry
knowledge and expertise.
COMPETITION
QAD Enterprise Applications are sold in either a traditional On-Premise licensing model or in a SaaS
model to global manufacturing companies in the automotive, consumer products, food and beverage, high
technology, industrial products and life sciences markets. We face significant competition from companies with
broad product suites and greater name recognition and resources than we have, as well as from smaller
companies focused on specialized solutions or niche offerings related to a specific functionality or product area.
Our markets are constantly evolving as new companies emerge, expand or are acquired; and as technology
evolves and customer demands change.
Larger ERP competitors, such as SAP, Oracle, Infor and Microsoft Dynamics, hold the largest market
share of the broad ERP marketplace. These companies have broad market footprints developing applications
targeted at many industries, not just manufacturing, and very often focus heavily on positioning their size as an
advantage. We typically differentiate against these companies based on the specific industry focus of our
solutions. Internationally, we face competition from local companies as well as the large ERP competitors,
many of which have products tailored for those local markets. We also compete in the emerging space of Cloud
ERP solutions delivered in a SaaS model with our QAD On Demand offering. The number of Cloud ERP
competitors and the increased functionality of their offerings is growing. This includes not only companies that
have traditionally offered on-premise solutions in the past, but also emerging competitors.
QAD believes the key competitive factors in our markets are total cost of ownership; performance and
reliability; security; service breadth and functionality; technological innovation; usability; ability to tailor and
customize services for a specific company, vertical or industry; speed and ease of deployment; sales and
marketing approach; and financial resources and reputation of the vendor.
We believe that we compete effectively with our competitors on the basis of each of the factors listed
above except that certain of our competitors have greater sales, marketing and financial resources, more
extensive geographic presence and greater name recognition than we do. We may face further competition in
our own markets from other larger, established companies as well as from emerging companies.
TECHNOLOGY
QAD Enterprise Applications was designed to accommodate customer requirements and integrate
simply with other systems. We embrace ‘openness’ as a core principle of our designs, aiming to allow
customers freedom of choice with regard to operating systems, hardware platforms and underlying databases
when deploying their software applications. The core of QAD Enterprise Applications, is built on a services-
oriented architecture, which allows QAD Enterprise Applications’ components to communicate with one
another through industry-standard messaging techniques. We also allow our customers the flexibility to use
other Web services to deliver the full benefit of QAD’s open architecture to their businesses.
QAD Enterprise Applications has been written in a programming language marketed by Progress
Software Corporation that works with relational databases provided by Progress and Oracle Corporation. We
also use Microsoft’s .NET framework, Java (originally created by Sun Microsystems) and the Progress Savvion
BPM suite. QAD Enterprise Applications supports most commercial operating systems, including LINUX-
derived operating systems, Windows Server System and most proprietary versions of UNIX including Hewlett
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Packard’s HP/UX and IBM’s AIX. Where practical, QAD uses open industry standards to collaborate and
integrate QAD Enterprise Applications with other systems.
QAD’s enterprise architecture provides great flexibility for global companies in deploying QAD
Enterprise Applications. Our enterprise architecture allows companies to separate the legal structure of their
business from physical operating locations or to separate both of these from the software instances and
computer hardware that support them. With QAD enterprise architecture, customers can choose which sites are
a part of which companies, which of these are supported on any instance of the application, or which operate as
one instance. Customers can also choose centralized, decentralized or hybrid computing architectures with parts
of their enterprise running from both central resources and local resources.
RESEARCH AND DEVELOPMENT
QAD develops and enhances its products primarily through its own internal network of QAD research
and development personnel. This autonomy enables QAD to maintain design and technical control of its
software and technology to meet the distinct and evolving needs of our customers. Our goal is to bring the right
products to market at the right time to meet our customers’ needs. QAD makes new product releases generally
available each year in March and September.
QAD’s R&D organization develops new products and enhances existing products that are focused on
the underlying functional areas of our application suite including financials, supply chain, manufacturing,
customer management and analytics. We also focus on the foundation and technology of our applications, such
as user interface and usability.
QAD develops new and enhanced product features based on extensive customer feedback.
Periodically, QAD R&D teams will work jointly with customers to develop functionality that meets precise
industry needs and introduces innovative capabilities to our product suite. This customer-driven development
validates market requirements and accelerates product development.
Additionally, QAD supplements its R&D organization with a number of technology partners that
support our underlying architecture or embedded technologies. We may purchase or license intellectual property
as necessary. These agreements extend QAD’s R&D capabilities to deliver rich, broad functionality and allow
QAD and its partners to focus on their respective core competencies.
QAD operates as a global R&D organization, comprised of 340 R&D employees located in QAD
offices in the United States, India, China, Ireland, Australia and Belgium. Our R&D expenses totaled $35.7
million, $34.6 million and $37.3 million in fiscal years 2012, 2011 and 2010, respectively.
SALES AND MARKETING
QAD sells its products and services through direct and indirect sales channels located throughout the
regions of North America, Latin America, Europe, Middle East and Africa (“EMEA”), and Asia Pacific. Each
region leverages global standards and systems to enhance consistency when interacting with global customers.
Additionally, we have a global strategic accounts team, which is responsible for managing QAD’s largest global
customers.
Our direct sales organization includes approximately 70 commissioned sales people. We continually
align our sales organization and business strategies with market conditions to maintain an effective sales
process. We cultivate the industries we serve within each territory through marketing, local product
development and sales training.
Our indirect sales channel consists of over 40 distributors and sales agents worldwide. We do not grant
exclusive rights to any of our distributors or sales agents. Our distributors and sales agents primarily sell
independently to companies within their geographic territory, but may also work in conjunction with our direct
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sales organization. We also identify global sales opportunities through our relationships with implementation
service providers, hardware vendors and other third parties.
Our marketing strategy is to build the QAD brand and develop demand for our products. Our main
objectives are to shape and strengthen our valuable business relationships and increase awareness and revenue-
driving leads. We do this by openly and consistently communicating with QAD customers, prospects, partners,
investors and other key audiences. We reach these audiences through many channels, including globally
integrated marketing campaigns, which are frequently executed at the regional and local levels; media and
analyst relations; customer events; Web-based communications; and sales tool development and field support.
EMPLOYEES
As of January 31, 2012, we had 1,460 full-time employees, including 630 in support, subscription and
professional services, 340 in research and development, 270 in sales and marketing and 220 in administration.
Generally, our employees are not represented by collective bargaining agreements. However, certain employees
of our Netherlands and French subsidiaries are represented by statutory works councils as required under local
law. Employees of our Brazilian subsidiary are represented by a collective bargaining agreement with the Data
Processing Union.
SEGMENT REPORTING
We operate in a single reporting segment. Geographical financial information for fiscal years 2012,
2011 and 2010 is presented in Note 12 within the Notes to Consolidated Financial Statements included in Item
15 of this Annual Report on Form 10-K.
AVAILABLE INFORMATION
Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K
and amendments filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934,
as amended, are available free of charge on our website at www.qad.com, as soon as reasonably practicable
after such reports have been electronically filed or otherwise furnished to the Securities and Exchange
Commission. We are not including the information contained on our website as part of, or incorporating it by
reference into, this annual report on Form 10-K.
ITEM 1A. RISK FACTORS
Our operations and financial results are subject to various risks and uncertainties, including those
described below, which could adversely affect our business, financial condition, results of operations, cash
flows, and the trading price of our Class A or Class B common stock.
THE ECONOMY WILL IMPACT OUR BUSINESS, OPERATING RESULTS AND FINANCIAL
CONDITION
The Company’s operations and performance are impacted by worldwide economic conditions, which
are themselves impacted by other events, such as financial crises, natural disasters and political turmoil. In
particular, the negative impact of economic conditions on manufacturers could have a substantial adverse effect
on our sales, because our products are focused on supporting global manufacturing companies. Ongoing
uncertainty about current global economic conditions may negatively affect our business, operating results and
financial condition as consumers and global manufacturing companies may continue to postpone spending in
response to tight credit, high unemployment, natural disasters, political unrest and negative financial news.
Uncertainty about current global economic conditions could also increase the volatility of the Company’s stock
price.
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RISK OF FLUCTUATIONS IN REVENUE AND EXPENSE
Because of significant fluctuations in our revenue, period-to-period comparisons of our revenue or
profit may not be meaningful. Our quarterly and annual operating results have fluctuated in the past and may
do so in the future. Such fluctuations have resulted from the seasonality of our customers’ manufacturing
businesses and budget cycles and other factors. Fluctuations in all categories of our revenue may also result
from the application of United States generally accepted accounting principles (“U.S. GAAP”). For example,
under U.S. GAAP, we may be required to defer revenue recognition for license fees in certain situations. As a
result, period-to-period comparisons should not be relied upon as indications of future performance. Moreover,
there can be no assurance that our revenue will grow in future periods or that we will be profitable on a
quarterly or annual basis.
A significant portion of our revenue in any quarter may be derived from a limited number of large,
non-recurring license sales. We may experience large individual license sales, which may cause significant
variations in license fees. We also believe that the purchase of our products is discretionary and may involve a
significant commitment of a customer’s capital resources. Therefore, a downturn in any significant customer’s
business could have a significant adverse impact on our revenue and profit. Further, we have historically
recognized a substantial portion of our revenue from sales booked and shipped in the last month of a quarter
and, as a result, the magnitude of quarterly fluctuations in license fees may not become evident until the end of
a particular quarter. Our revenue from license fees in any quarter is substantially dependent on orders booked
and shipped in that quarter. We are unlikely to be able to generate revenue from alternative sources if we
discover a shortfall near the end of a quarter.
The margins in the services business and On Demand offerings may fluctuate. Services revenue is
dependent upon the timing and size of customer orders to provide the services, as well as upon our related
license sales. In addition, continuous engagement services, such as our On Demand offerings, may involve
fixed price arrangements, fixed costs and significant staffing which require us to make estimates and
assumptions at the time we enter into these contracts. Variances between these estimates and assumptions and
actual results could have an adverse effect on our profit margin and/or generate negative cash flow. To the
extent that we are not successful in securing orders from customers to provide services, or to the extent we are
not successful in achieving the expected margin on such services, our results may be negatively affected.
A significant portion of our revenue is derived from maintenance renewals with our existing
installed base of customers. Significant portions of our maintenance revenues are generated from the
Company’s installed base of customers. Maintenance and support agreements with these customers are
traditionally renewed on an annual basis at the customer’s discretion, and there is normally no requirement that
a customer renew or that a customer pay new license or service fees to QAD following the initial purchase. If
our existing customers do not renew their maintenance agreements or fail to purchase new user licenses or
product enhancements or additional services at historical levels, our revenues and results of operations could be
materially impacted.
Our maintenance renewal rate is dependent upon a number of factors such as our ability to continue to
develop and maintain our products, our ability to continue to recruit and retain qualified personnel to assist our
customers, and our ability to promote the value of maintenance for our products to our customers. Maintenance
renewals are also dependent upon factors beyond our control such as technology changes and their adoption by
our customers, budgeting decisions by our customers, changes in our customers’ strategy or ownership and
plans by our customers to replace our products with competing products. If our maintenance renewal rate were
to decrease, our revenue would be adversely affected.
We may have exposure to additional tax liabilities. As a multinational organization, we are subject to
income taxes as well as non-income taxes in the United States and in various foreign jurisdictions. Significant
judgment is required in determining our worldwide income tax provision and other tax liabilities. In the
ordinary course of a global business, there are many intercompany transactions and calculations where the
ultimate tax determination is uncertain. Although we believe that our tax estimates are reasonable, the final
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determination of tax audits or tax disputes may differ from what is reflected in our historical income tax
provisions and accruals.
Our tax rate could be adversely affected by several factors, many of which are outside of our control,
including:
● Changes in the relative proportions of revenues and income before taxes in various
jurisdictions;
● Changing tax laws, regulations and interpretations thereof;
● Changes in tax rates;
● Tax effects of purchase accounting for acquisitions and restructuring charges that may cause
fluctuations between reporting periods;
● Changes to the valuation allowance on net deferred tax assets;
● Assessments and any related tax interest or penalties; and
● Discrete items which are not related to income.
We report our results of operations based on our determinations of the amount of taxes owed in the
various tax jurisdictions in which we operate. Periodically, we may receive notices that a tax authority to which
we are subject has determined that we owe a greater amount of tax than we have reported to such authority, in
which case, we may engage in discussions or possible disputes with these tax authorities. If the ultimate
determination of our taxes owed in any of these jurisdictions is for an amount in excess of the tax provision we
have recorded or reserved for, our operating results, cash flows, and financial condition could be adversely
affected. We are also subject to non-income taxes, such as payroll, sales, use, value-added, net worth, property
and goods and services taxes, in the United States and in various foreign jurisdictions. Audits or disputes
relating to non-income taxes may result in additional liabilities that could negatively affect our operating results,
cash flows and financial condition.
RISKS ASSOCIATED WITH SALES CYCLE
Our products involve a long sales cycle and the timing of sales is difficult to predict. Because the
licensing of our primary products generally involves a significant commitment of capital or a long-term
commitment by our customers, the sales cycle associated with a customer’s purchase of our products is
generally lengthy. This cycle varies from customer to customer and is subject to a number of significant risks
over which we have little or no control. The evaluation process that our customers follow generally involves
many of their personnel and requires complex demonstrations and presentations to satisfy their needs.
Significant effort is required from QAD to support this approach, whether we are ultimately successful or not. If
sales forecasted for a particular quarter are not realized in that quarter, then we are unlikely to be able to
generate revenue from alternative sources in time to compensate for the shortfall. As a result, a lost or delayed
sale could have an adverse effect on our quarterly and/or annual operating results.
SOLUTIONS
We may experience defects in our software products and services. Software products frequently
contain defects (including security flaws), especially when first introduced or when new versions are released.
The detection and correction of errors and security flaws can be time consuming and costly. Defects in our
software products, or in the software of third parties, could affect the ability of our products to work with other
hardware or software products. Our software product errors could delay the development or release of new
products or new versions of products and could adversely affect market acceptance of our products. Errors and
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security flaws may also adversely affect our ability to conduct our On Demand operations. Such defects,
together with third-party products, software customizations and other factors outside our control, may also
impair our ability to complete services implementations on time and within budget. Customers who rely on our
software products and services for applications that are critical to their businesses may have a greater sensitivity
to product errors and security vulnerabilities than customers for software products generally. Software product
errors and security flaws in our products or services could expose us to product liability, performance and/or
warranty claims as well as harm our reputation, which could impact our future sales of products and services.
DEPENDENCE ON THIRD-PARTY SUPPLIERS
We are dependent on Progress Software Corporation. The majority of QAD Enterprise Applications
are written in a programming language that is proprietary to Progress Software Corporation (“Progress”). These
QAD Enterprise Applications do not run within programming environments other than Progress and therefore
our customers must acquire rights to Progress software in order to use these QAD Enterprise Applications. We
have an agreement with Progress under which Progress licenses us to distribute and use Progress software
related to our products. This agreement remains in effect unless terminated either by a written three-year
advance notice or due to a material breach that is not remedied.
Our success is dependent upon our continuing relationship with Progress. It is also dependent upon
Progress continuing to develop, support and enhance its programming language, its toolset and its database, as
well as the continued market acceptance of Progress products. A change in Progress’ control, management or
direction may adversely impact our relationship with Progress and our ability to rely on Progress products in
our business. We have in the past, and may in the future, experience product release delays because of delays in
the release of Progress products or product enhancements. Any of these delays could have an adverse effect on
our business.
We are dependent on other third-party suppliers. We resell certain software which we license from
third parties other than Progress. There can be no assurance that these third-party software arrangements and
licenses will continue to be available to us on terms that provide us with the third-party software we require,
provide adequate functionality in our products on terms that adequately protect our proprietary rights or are
commercially favorable to us.
Certain QAD Enterprise Applications are developed using embedded programming tools from
Microsoft and Sun Microsystems (owned by our competitor Oracle) for the Microsoft .NET framework and
Java Programming environments, respectively. We rely on these environments’ continued compatibility with
customers’ desktop and server operating systems. In the event that this compatibility is limited, some of our
customers may not be able to easily upgrade their QAD software. If the present method of licensing the .NET
framework as part of Microsoft’s Desktop Operating systems is changed and a separate price were applied to
the .NET framework, our expenses could increase substantially. Similarly, if Oracle decided to charge fees or
otherwise change the historical licensing terms for Java technology, our expenses could increase substantially.
For both of the .Net and Java elements, we rely on market acceptance and maintenance of these environments
and we may be adversely affected if these were withdrawn or superseded in the market.
We also maintain development, product, and supplier services alliances with third-parties. These
alliances include software developed to be sold in conjunction with QAD Enterprise Applications, technology
developed to be included in or encapsulated within QAD Enterprise Applications, joint development efforts
with partners or customers, and third-party software programs that generally are not sold with QAD Enterprise
Applications, but interoperate directly with QAD Enterprise Applications. We also have a service provider
agreement for the provision of certain infrastructure related to our On Demand offerings. Our strategy may
include additional investment in research and development efforts involving third parties, as well as a greater
focus on potential acquisitions to aid in expanding the breadth of the product line.
Our partner agreements, including development, product acquisition and reseller agreements, contain
appropriate confidentiality, indemnity and non-disclosure provisions for the third-party and end-user. Failure to
14
establish or maintain successful relationships with these third parties or failure of these parties to develop and
support their software, provide appropriate services and fulfill confidentiality, indemnity and non-disclosure
obligations could have an adverse effect on us. We have been in the past, and expect to be in the future, party to
disputes about ownership, license scope and royalty or fee terms with respect to intellectual property.
RAPID TECHNOLOGICAL CHANGE
The market for QAD Enterprise Applications is characterized by rapid technological change.
Customer requirements for products can change rapidly as a result of innovation or change within the computer
hardware and software industries, the introduction of new products and technologies and the emergence of,
adoption of, or changes to, industry standards. Our future success will depend upon our ability to continue to
enhance our current product line and to develop and introduce new products that keep pace with technological
developments, satisfy increasingly sophisticated customer requirements, keep pace with industry and
compliance standards and achieve market acceptance. Our failure to successfully develop or acquire and market
product enhancements or new products could have an adverse effect on us.
New software releases and enhancements may adversely affect our software sales. The actual or
anticipated introduction of new products, technologies and industry standards can render existing products
obsolete or unmarketable or result in delays in the purchase of those products. Significant delays in launching
new products may also jeopardize our ability to compete. Failure by us to anticipate or respond to developments
in technology or customer requirements, significant delays in the introduction of new products or failure by us
to maintain overall customer satisfaction could have an adverse effect.
Evolution of the On Demand model. It is uncertain whether our cloud computing application services
will achieve and sustain high levels of demand and market acceptance. Customers may be unwilling to adopt
our services due to concerns about security, international transfers of data, other governmental regulation,
outsourcing critical systems to outside vendors, and potential abandonment of past infrastructure investments.
PROPRIETARY RIGHTS AND CUSTOMER CONTRACTS
Our success is dependent upon our proprietary technology and other intellectual property. We rely
on a combination of protections provided by applicable copyright, trademark, patent and trade secret laws, as
well as on confidentiality procedures and licensing arrangements, to establish and protect our rights in our
software and related materials and information. We enter into licensing agreements with each of our customers
and these agreements provide for the non-exclusive use of QAD Enterprise Applications. Our license contracts
contain confidentiality and non-disclosure provisions, a limited warranty covering our applications and
indemnification for the customer from infringement actions related to our applications.
We license our source code to our customers, which makes it possible for others to copy or modify
our software for impermissible purposes. We generally license our software to end-users in both object code
(machine-readable) and source code (human-readable) formats. While this practice facilitates customization,
making software available in source code also makes it possible for others to copy or modify our software for
impermissible purposes. Our license agreements generally allow for the use and customization of our software
solely by the customer for internal purposes without the right to sublicense or transfer the software to third-
parties.
We believe that the measures we take to protect our intellectual property afford only limited protection.
Despite our efforts, it may be possible for others to copy portions of our products, reverse engineer them or
obtain and use information that we regard as proprietary, all of which could adversely affect our competitive
position. Furthermore, there can be no assurance that our competitors will not independently develop
technology similar to ours. In addition, the laws of certain countries do not protect our proprietary rights to the
same extent as the laws of the United States.
15
The success of our business is highly dependent on maintenance of intellectual property rights. The
unauthorized use of our intellectual property rights may increase the cost of protecting these rights or reduce our
revenues. We may initiate, or be subject to, claims or litigation for infringement of proprietary rights or to
establish the validity of our proprietary rights, which could result in significant expense to us, cause product
shipment delays, require us to enter royalty or licensing agreements and divert the efforts of our technical and
management personnel from productive tasks, whether or not such litigation were determined in our favor.
We may be exposed to claims for infringement or misuse of intellectual property rights and/or
breach of license agreement provisions. Third parties may initiate proceedings against us claiming
infringement or other misuse of their intellectual property rights and/or breach of our agreements with them.
The likelihood of such claims may increase as new patents continue to be issued and the use of open source and
other third-party code becomes more prevalent, and may also increase if we acquire businesses or expand into
new markets in the future. Any such claims, regardless of validity, may:
● Cause us to pay license fees or monetary damages;
● Cause us to alter or stop selling our products;
● Cause us to satisfy indemnification obligations to our customers;
● Cause us to release source code to third parties, possibly under open source license terms; and
● Divert management’s time and attention from operating our business.
We may be exposed to product liability claims and other liability. While our customer agreements
typically contain provisions designed to limit our exposure to product liability claims and other liability, we
may still be exposed to liability in the event such provisions may not apply.
We have an errors and omissions insurance policy. However, this insurance may not continue to be
available to us on commercially reasonable terms or at all. We may be subject to product liability claims or
errors or omissions claims that could have an adverse effect on us. Moreover, defending a suit, regardless of its
merits, could entail substantial expense and require the time and attention of key management personnel.
ON DEMAND OFFERINGS
Our revenue, profitability and reputation could suffer if we do not properly manage the risks
associated with our On Demand offerings. The risks that accompany our On Demand offerings differ from
those of our other offerings and include the following:
● The pricing and other terms of some of our On Demand agreements require us to make
estimates and assumptions at the time we enter into these contracts that could differ from
actual results. Early termination, increased costs or unanticipated delays could have an
adverse affect on our profit margin and/or generate negative cash flow.
●
If we experience delays in implementing new On Demand customers (whether due to product
defects, system complexities or other factors) then customers may delay the deployment of
additional users and sites, which could adversely affect our revenue growth.
● We rely on third-party hosting and other service providers. These services may not continue
to be available at reasonable prices or on commercially reasonable terms, or at all. Any loss or
interruption of these services could significantly increase our expenses and/or result in errors
or a failure of our service which could harm our business.
● Our service involves the storage and transmission of customers’ proprietary information, and
security breaches could expose us to a risk of loss of this information, litigation and possible
liability. These security measures may be breached as a result of third-party action, including
intentional misconduct by computer hackers, employee error, malfeasance or otherwise,
during transfer of data to additional data centers or at any time, and result in unauthorized
access to our customers’ data or our data, including our intellectual property and other
confidential business information, or our information technology systems. Additionally, third
parties may attempt to fraudulently induce employees or customers into disclosing sensitive
16
information such as user names, passwords or other information in order to gain access to our
customers’ data or our data, including our intellectual property and other confidential business
information, or our information technology systems. Because the techniques used to obtain
unauthorized access, or to sabotage systems, change frequently and generally are not
recognized until launched against a target, we may be unable to anticipate these techniques or
to implement adequate preventative measures. Any security breach could result in a loss of
confidence in the security of our service, damage our reputation, disrupt our business, lead to
legal liability and negatively impact our future sales.
● The laws and regulations applicable to hosted service providers are unsettled, particularly in
the areas of privacy and security and export compliance. Changes in these laws could affect
our ability to provide services from or to some locations and could increase both the costs and
risks associated with providing the services.
● The market for enterprise cloud computing application services is not as mature as the market
for traditional enterprise software, and it is uncertain whether these services will achieve and
sustain high levels of demand and market acceptance. Our success will depend on the
willingness of customers to increase their use of enterprise cloud computing application
services in general, and for ERP applications in particular. Many customers have invested
substantial resources to integrate traditional enterprise software into their businesses and
therefore may be unwilling to migrate to an enterprise cloud computing application service.
Furthermore, some enterprises may be unwilling to use enterprise cloud computing
application services because they have concerns regarding security risks, international
transfers of data, government or other third-party access to data, and/or use of outsourced
services providers.
● We have focused our sales force, management team and other personnel toward growing our
On Demand business. This redirection of resources could potentially result in the loss of sales
opportunities in our traditional license, maintenance and services businesses. If our On
Demand business does not grow in accordance with our expectations and we are not able to
cover the shortfall with other sales opportunities, then our business could be harmed.
If any of these events were to occur, our business could be harmed. For example, customers may lose
confidence in our On Demand offerings and be induced not to purchase our On Demand services, and/or our
profit margin may be adversely affected, and/or we may incur liability.
MARKET CONCENTRATION
We are dependent upon achieving success in certain concentrated markets. We have made a
strategic decision to concentrate our product development, as well as our sales and marketing efforts, in certain
vertical manufacturing industry segments: automotive, consumer products, high technology, food and beverage,
industrial products and life sciences. An important element of our strategy is the achievement of technological
and market leadership recognition for our software products in these segments. The failure of our products to
achieve or maintain substantial market acceptance in one or more of these segments could have an adverse
effect on us. If any of these targeted industry segments experience a material slowdown or reduced growth, that
could adversely affect the demand for our products.
DEPENDENCE UPON THIRD-PARTY RELATIONSHIPS TO PROVIDE SALES, SERVICES AND
MARKETING FUNCTIONS
We are dependent upon the development and maintenance of sales, services and marketing
channels. We sell and support our products through direct and indirect sales, services and support organizations
throughout the world. We also maintain relationships with a number of consulting and systems integration
organizations that we believe are important to our worldwide sales, marketing, service and support activities
and to the implementation of our products. We believe this strategy allows for additional flexibility in ensuring
our customers’ needs for services are met in a cost effective, timely and high quality manner. Our services
17
providers generally do not receive fees for the sale of our software products unless they participate actively in a
sale as a sales agent or a distributor. We are aware that these third-party relationships do not work exclusively
with our products and in many instances these firms have similar, and often more established, relationships with
our principal competitors. If these third parties exclusively pursue products or technology other than QAD
software products or technology, or if these third parties fail to adequately support QAD software products and
technology or increase support for competitive products or technology, we could be adversely affected.
ACQUISITIONS AND INTEGRATION OF ACQUIRED BUSINESS AND INTELLECTUAL
PROPERTY
We may make acquisitions or investments in new businesses, products or technologies that involve
additional risks. As part of our business strategy, we have made, and expect to continue to make, acquisitions
of businesses or investments in companies that offer complementary products, services and technologies. Such
acquisitions or investments involve a number of risks, including the risks of assimilating the operations and
personnel of acquired companies, realizing the value of the acquired assets relative to the price paid, distraction
of management from our ongoing businesses and potential disruptions associated with the sale of the acquired
companies’ products. These factors could have a material adverse effect on our business, financial condition
and operating results. Consideration paid for any future acquisitions could include our stock. As a result, future
acquisitions could cause dilution to existing shareholders and to earnings per share, though the likelihood of
voting dilution is limited by the ability of the Company to use low-vote Class A common stock. Furthermore,
we may incur significant debt to pay for future acquisitions or investments.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
Our operations are international in scope, exposing us to additional risk. We derive over half of our
total revenue from sales outside the United States. A significant aspect of our strategy is to focus on developing
business in emerging markets. Our operating results could be negatively impacted by a variety of factors
affecting our foreign operations, many of which are beyond our control. These factors include currency
fluctuations, economic, political or regulatory conditions in a specific country or region, trade protection
measures and other regulatory requirements. Additional risks inherent in international business activities
generally include, among others:
● Longer accounts receivable collection cycles;
● Costs and difficulties of managing international operations and alliances;
● Greater difficulty enforcing intellectual property rights;
●
Import or export requirements;
● Natural disasters;
● Changes in political or economic conditions; and
● Changes in regulatory requirements or tax law.
We may experience foreign currency gains and losses. We conduct a portion of our business in
currencies other than the United States dollar. Our revenues and operating results may be negatively affected by
fluctuations in foreign currency exchange rates. Changes in the value of major foreign currencies, including the
euro, Australian dollar, British pound, Japanese yen, Mexican peso, Brazilian real and the South Africa rand
relative to the United States dollar can significantly affect our revenues and operating results.
18
THE MARKET FOR OUR STOCK IS VOLATILE
Our stock price could become more volatile and investments could lose value. The market price of
our common stock and the number of shares traded each day has experienced significant fluctuations and may
continue to fluctuate significantly. The market price for our common stock may be affected by a number of
factors, including, but not limited to:
● Shortfalls in our expected net revenue, earnings or key performance metrics;
● Changes in recommendations or estimates by securities analysts;
● The announcement of new products by us or our competitors;
● Quarterly variations in our or our competitors’ results of operations;
● A change in our dividend or stock repurchase activities;
● Developments in our industry or changes in the market for technology stocks;
● A change in our dividend or stock repurchase activities;
● Changes in rules or regulations applicable to our business; and
● Other factors, including economic instability and changes in political or market conditions.
A significant drop in our stock price could expose us to costly and time consuming litigation, which
could result in substantial costs and divert management’s attention and resources, resulting in an adverse effect
on our business.
Our dual-class stock structure could adversely impact the market for our stock. The liquidity of the
Company’s common stock may be adversely impacted by our dual-class structure because the total number of
shares outstanding immediately after the Recapitalization was reduced by approximately half. In addition, there
are fewer Class B shares than Class A shares and Class B shares may be less desirable to the public due to the
20% higher dividend on Class A shares. Additionally, the holding of lower voting Class A common stock may
not be permitted by the investment policies of certain institutional investors or may be less attractive to
managers of certain institutional investors.
OWNERSHIP OF OUR COMMON STOCK AND DEPENDENCE UPON KEY PERSONNEL
We are controlled by our principal stockholders. As of March 30, 2012, Karl Lopker and Pamela
Lopker jointly and beneficially owned approximately 60% of the voting power of our outstanding Class A and
Class B common stock and we are a “controlled company” within the meaning of NASDAQ rules. Currently
they have sufficient voting control to determine the outcome of a stockholder vote concerning:
● The election and removal of all members of our board of directors, who determine our
management and policies;
● The merger, consolidation or sale of the Company or all of its assets; and
● All other matters requiring stockholder approval, regardless of how our other stockholders
vote their shares.
This concentrated control limits the ability of our other stockholders to influence corporate matters.
Karl Lopker’s and Pamela Lopker’s concentrated control could discourage others from initiating potential
19
merger, takeover or other change of control transactions and transactions could be pursued that our other
stockholders do not view as beneficial. As a result, the market price of our Class A and Class B common stock
could be adversely affected.
We are not required to comply with certain corporate governance rules of NASDAQ that would
otherwise apply to us as a company listed on NASDAQ because we are a controlled company. Specifically, we
are not required to have a majority of independent directors on our board of directors and we are not required to
have nominating and compensation committees composed of independent directors. Should the interests of Karl
Lopker and Pamela Lopker differ from those of other shareholders, the other shareholders may not be afforded
the protections of having a majority of directors on the board who are independent from our principal
shareholders or our management.
Provisions in the Company’s charter documents or Delaware law could discourage a takeover that
stockholders may consider favorable. The Company’s Certificate of Incorporation contains certain other
provisions that may have an “anti-takeover” effect. The Certificate of Incorporation contains authority for the
Board to issue up to 5,000,000 shares of preferred stock without stockholder approval. Although the Company
has no present intention to issue any such shares, the Company could issue such shares in a manner that deters
or seeks to prevent an unsolicited bid for the Company. The Certificate of Incorporation also does not provide
for cumulative voting and, accordingly, a significant minority stockholder could not necessarily elect any
designee to the Board of Directors. In addition, Section 203 of the Delaware Corporation Law may discourage,
delay, or prevent a change in control of the Company by imposing certain restrictions on various business
combinations. As a result of these provisions in the Company’s Certificate of Incorporation and Delaware law,
stockholders of the Company may be deprived of an opportunity to sell their shares at a premium over
prevailing market prices and it would be more difficult to replace the directors and management of the
Company.
We are dependent upon highly skilled personnel. Our performance depends on the talents and efforts
of highly skilled employees, including the continued service of a relatively small number of key technical and
senior management personnel. In particular, our Chairman of the Board and President, Pamela Lopker, and
Chief Executive Officer, Karl Lopker, are critical to overall management of QAD, maintenance of our culture
and setting our strategic direction. All of our executive officers and key employees are at-will employees and
we do not have key-person insurance covering any of our employees. Our future success depends on our
continuing ability to attract and retain highly skilled personnel in all areas of our organization. Competition for
such personnel is intense and many of our competitors are larger and have greater financial resources for
attracting skilled personnel. The loss of key technical and senior management personnel or the inability to
attract and retain additional qualified personnel could have an adverse effect on our continued ability to
compete effectively.
IMPACT OF REGULATION
Our business is subject to changing regulations regarding corporate governance and public
disclosure that have increased both our costs and the risk of noncompliance. As a public company, we are
subject to laws, rules and regulations by various governing bodies, including the U.S. Congress, the Securities
and Exchange Commission, NASDAQ and the Public Company Accounting Oversight Board. These laws, rules
and regulations may increase the scope of applicable disclosure and governance-related requirements, resulting
in additional management time and costs spent satisfying the compliance requirements associated with being a
public company. These laws, rules and regulations may also increase the scope, complexity and cost of our
corporate governance, reporting and disclosure practices. If we do not adequately comply with applicable laws,
rules and regulations, we could be subject to liability, increased compliance costs, regulatory inquiries and
litigation.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
20
ITEM 2. PROPERTIES
QAD’s corporate headquarters are located in Santa Barbara, California. The corporate headquarters are
owned by QAD and consist of approximately 120,000 square feet situated on 28 acres of land.
In addition to the corporate headquarters, QAD owns a facility in Dublin, Ireland and leases over 25
offices throughout the world with lease commitment expirations occurring on various dates through fiscal year
2020. QAD’s leased properties include offices in the United States, Belgium, France, Germany, Ireland, Italy,
Poland, South Africa, Spain, The Netherlands, United Kingdom, Australia, China, India, Japan, Singapore,
Thailand, Brazil and Mexico. QAD will seek to review lease commitments in the future as may be required.
QAD anticipates that its current domestic and international facilities are substantially sufficient to meet its
needs for at least the next twelve months.
ITEM 3. LEGAL PROCEEDINGS
We are not party to any material legal proceedings. We are from time to time party, either as plaintiff
or defendant, subject to various legal proceedings and claims which arise in the ordinary course of business.
While the outcome of these claims cannot be predicted with certainty, management does not believe that the
outcome of any of these legal matters will have a material adverse effect on our consolidated financial position
or results of operations.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
QAD common stock has been traded on the NASDAQ Global Market (“NASDAQ”) since our initial
public offering in August 1997 (under the symbol QADI through December 14, 2010).
On December 14, 2010, QAD shareholders approved a Recapitalization plan (the “Recapitalization”)
pursuant to which the Company (i) established two classes of common stock, consisting of a new class of
common stock with one-twentieth (1/20th) of a vote per share, designated as Class A common stock $0.001 par
value per share (the “Class A Common Stock”) and a new class of common stock with one vote per share,
designated as Class B common stock $0.001 par value per share (the “Class B Common Stock”); (ii)
reclassified each issued and outstanding whole share of the Company’s existing $0.001 par value per share
common stock (the “Existing Stock”) as 0.1 shares of Class B Common Stock; and (iii) issued a dividend of
four shares of Class A Common Stock for each share of Class B Common Stock outstanding after giving effect
to the foregoing reclassification. The reclassification of Existing Stock into Class A Common Stock and Class B
Common Stock, together, reflects the effect of a two-to-one reverse stock split.
Our Class A Common Stock and Class B Common Stock are traded on the NASDAQ under the
symbol “QADA” and “QADB”, respectively. Prior to December 15, 2010, our Common Stock was traded
under the symbol “QADI.” The following table reflects the range of high and low sale prices of our Common
Stock as reported by NASDAQ. QADI share prices have been restated to reflect the effect of the two-to-one
reverse stock split for all periods presented:
QADA
QADB
Fiscal 2012:
Low Price
High Price
Low Price
Fourth quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
First quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
10.40 $
9.84
9.00
8.58
13.20 $
12.27
11.09
11.21
21
High Price
13.00
12.27
10.44
10.70
10.08 $
9.12
8.88
8.11
Fiscal year 2011:
Fourth quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
QADA
Low Price High Price
$
8.44 $
12.00 $
QADB
Low Price High Price
11.16
8.44 $
Fiscal year 2011:
Third quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Second quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
First quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
QADI
Low Price High Price
9.14
11.42
11.60
7.92 $
8.12
9.90
Holders
As of March 30, 2012, there were approximately 280 shareholders of record of our Class A common
stock and approximately 230 shareholders of record of our Class B common stock. Because many of our shares
of common stock are held by brokers or other institutions on behalf of stockholders, we are unable to estimate
the total number of stockholders represented by the record holders.
Dividends
In fiscal 2012, we declared quarterly dividends of $0.06 and $0.05 per share of Class A and Class B
stock, respectively, for the first and second quarters. In the third and fourth quarters of fiscal 2012 we declared
quarterly dividends of $0.072 and $0.06 per share of Class A and Class B stock, respectively. Our dividend
program gives investors the choice of receiving a stock dividend or electing a cash dividend payment.
Continuing quarterly cash dividends are subject to profitability measures, liquidity requirements of QAD and
Board discretion.
Recent Sales of Unregistered Securities
None.
Issuer Purchases of Equity Securities
In September 2011, our Board of Directors approved a stock repurchase plan. A total of one million
shares may be repurchased under the plan and repurchases may be suspended or discontinued at any time. Stock
repurchases may be effected from time to time through open market purchases or pursuant to the Rule 10b5-1
plan.
Below is a summary of stock repurchases for the three months ended January 31, 2012. See Note 8
within the Notes to Consolidated Financial Statements for information regarding our stock repurchase program.
Shares
Repurchased
Class A
Average
Price
per Share
Class A
Shares
Repurchased
Class B
Average
Price
per Share
Class B
Total Number of
Shares
Purchased as
Part of Publicly
Announced Plan
Maximum
Number of
Shares that May
Yet Be
Purchased Under
the Plan (1)
104,229 $
11.94
6,757 $
11.87
110,986
839,329
120,426 $
11.00
10,501 $
10.86
130,927
708,402
64,498 $
289,153
11.52
20,455 $
37,713
11.87
84,953
326,866
623,449
Period
November 1 through
November 30, 2011
Shares repurchased . . . . . .
December 1 through
December 31, 2011
Shares repurchased . . . . . .
January 1 through
January 31, 2012
Shares repurchased . . . . . .
Total . . . . . . . . . . . . . . . . . . .
(1) On September 22, 2011, the Company announced a share repurchase plan. A total of one million
shares may be repurchased under the plan. The plan may be suspended or discontinued at any
time.
22
STOCKHOLDER RETURN PERFORMANCE GRAPH
The line graph below compares the annual percentage change in the cumulative total stockholder
return on QAD’s common stock with the cumulative total return of the NASDAQ Composite Total Return
Index and the NASDAQ Computer Index, on an annual basis, for the period beginning January 31, 2007 and
ending January 31, 2012.
The graph assumes that $100 was invested in QAD common stock on January 31, 2007 and that all
dividends were reinvested. Historic stock price performance has been restated to reflect the effect of the
Recapitalization for all periods presented. Historic stock price performance should not be considered indicative
of future stock price performance.
The following Share Performance Graph shall not be deemed to be “filed” with the Securities and
Exchange Commission, nor shall such information be incorporated by reference into any future filings under
the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that the
Company specifically incorporates it by reference into such filing.
COMPARISON OF CUMULATIVE TOTAL RETURN
AMONG QAD INC., THE NASDAQ COMPOSITE TOTAL RETURN INDEX,
AND THE NASDAQ COMPUTER INDEX
Measurement Periods
(Annually from Fiscal
Year 2007 through
Fiscal Year 2012)
01/31/07(a) . . . . . . . .
01/31/08(a) . . . . . . . .
01/31/09(a) . . . . . . . .
01/31/10(a) . . . . . . . .
01/31/11 . . . . . . . . . .
01/31/12 . . . . . . . . . .
QADA
QADB
NASDAQ Composite
Total Return Index
100.00
110.71
32.49
71.39
57.14
88.10
100.00
110.71
32.49
71.39
58.71
88.27
100.00
96.99
59.92
87.15
109.58
114.20
NASDAQ
Computer Index
100.00
101.04
60.89
99.46
131.48
139.55
(a) Stock price performance has been restated to reflect the effect of the Recapitalization.
23
ITEM 6. SELECTED FINANCIAL DATA
2012
Years Ended January 31,(1)
2011
2009(2)
2010
(in thousands, except per share data)
2008
STATEMENTS OF OPERATIONS DATA:
Revenues:
License fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 33,166 $
Maintenance and other . . . . . . . . . . . . . . . . . . . . .
Subscription fees . . . . . . . . . . . . . . . . . . . . . . . . . .
Professional services . . . . . . . . . . . . . . . . . . . . . .
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income (loss) . . . . . . . . . . . . . . . . . . . . .
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,784 $
Basic net income (loss) per share:
137,659
9,787
66,646
247,258
17,892
29,821 $ 25,927 $ 43,892 $ 59,602
127,881
2,191
73,073
262,747
5,588
5,416
129,658
132,354
4,009
3,507
55,637
82,990
215,231
262,743
(23,863)
2,871
1,349 $ (23,720) $
130,104
5,773
54,314
220,012
6,591
2,711 $
Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Class B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted net income (loss) per share:
Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Class B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Dividends declared per common share:
Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Class B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
0.69 $
0.58 $
0.67 $
0.56 $
0.26 $
0.22 $
0.18 $
0.15 $
0.09 $
0.08 $
(1.60) $
(1.33) $
0.17 $
0.14 $
0.09 $
0.07 $
(1.60) $
(1.33) $
0.21 $
0.20 $
0.20 $
0.20 $
0.20 $
0.20 $
0.35
0.30
0.35
0.29
0.20
0.20
BALANCE SHEET DATA:
Cash and equivalents . . . . . . . . . . . . . . . . . . . . . . . .
Working capital (deficit) . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current portion of long-term debt . . . . . . . . . . . . .
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total stockholders’ equity. . . . . . . . . . . . . . . . . . . .
76,927
22,877
218,145
321
15,813
62,015
67,276
13,752
213,094
304
16,138
56,091
44,678
4,178
191,174
285
16,443
49,551
31,467
(3,648)
193,745
266
16,717
47,471
45,613
8,846
235,893
274
16,998
72,595
(1) Historical results of operations are not necessarily indicative of future results. Refer to Item 1A entitled
“Risk Factors” for discussion of factors that may impact future results.
(2) Fiscal year 2009 includes a goodwill impairment charge of $14.4 million.
24
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
The following discussion should be read in conjunction with our Consolidated Financial Statements
and Notes to Consolidated Financial Statements included in Item 15 of this Annual Report on Form 10-K.
OVERVIEW
QAD Inc. (“QAD”, the “Company”, “we” or “us”) is a global provider of enterprise software
applications, and related services and support. QAD provides enterprise software applications to global
manufacturing companies primarily in the automotive, consumer products, food and beverage, high technology,
industrial products and life sciences industries. Over 2,500 global manufacturing companies use QAD software
and we employ approximately 1,500 people worldwide. QAD was founded in 1979, incorporated in California
in 1986 and reincorporated in Delaware in 1997.
QAD’s enterprise resource planning (“ERP”) suite is QAD Enterprise Applications, which is also
known as MFG/PRO. QAD Enterprise Applications supports the core business processes of our global
manufacturing customers and includes the following functional areas: financials, customer management,
manufacturing, supply chain, service and support, enterprise asset management, transportation management and
analytics.
QAD offers two deployment models: On Premise and On Demand. With the On Premise model, QAD
sells a perpetual license for the software and our customers then deploy the software on their own computer
servers. Under the perpetual licensing model, customers may separately purchase contracts for maintenance and
additional services. With QAD’s On Demand deployment model, customers subscribe to a service and QAD
provides access to the software as well as ongoing support services and management of the environment. The
majority of QAD’s customers use the On Premise model, although On Demand is increasing in acceptance and,
as a result, it is a deployment model we are focusing on.
Although overall concerns about the global financial system and geopolitical issues remain, we have
seen improvement over the last year in the industries in which we operate. Our revenue has grown in all
categories and our overall revenue has increased by 12% when compared to fiscal 2011. In addition, our overall
headcount has increased by approximately 115 employees, or 8%, when comparing January 31, 2012 to January
31, 2011. We experienced large increases in headcount in our professional services and subscription businesses
to support customer upgrades, new implementations and our growing On Demand product offering. As
companies continue to shift toward our On Demand product we expect continued growth in our subscription
business, though the increase may be partially offset by modest declines in license revenues when our
customers choose an On Demand model versus an upfront license purchase under a perpetual licensing model.
Our strategy remains focused on the development and delivery of best-in-class enterprise resource
planning software applications for the manufacturing industry in our six key industry segments. We believe our
financial results confirm the strength and stability of our business and the attractiveness of our products to our
customers. Our revenue continues to recover to pre-recession levels and our operating cash flow has been
strong, which has supported our increase in headcount. We have remained cautious in our spending, which has
allowed us to grow our cash on hand. In addition, our strong cash balance has enabled us to return value to our
shareholders through a stock repurchase program and increased quarterly dividend payments.
CRITICAL ACCOUNTING POLICIES
We consider certain accounting policies related to revenue, accounts receivable allowances for
doubtful accounts, valuation of deferred tax assets and tax contingency reserves and stock-based compensation
to be critical policies due to the significance of these items to our operating results and the estimation processes
25
and management judgment involved in each. Historically, estimates described in our critical accounting policies
that have required significant judgment and estimation on the part of management have been reasonably
accurate.
Revenue. We primarily offer our software using two models. Our traditional model involves the sale or license
of software on a perpetual basis to customers who take possession of the software and install and maintain the
software on their own equipment; we sometimes refer to this as the “on-premise licensing model”. More
recently, we deliver our software on a hosted basis as a service and our customers generally do not have the
contractual right to take possession of the software; we sometimes refer to this as a “SaaS model”. We sell a
majority of our software through our on-premise licensing model and recognize revenue associated with these
offerings in accordance with the accounting guidance contained in ASC 985-605, Software Revenue.
Additionally, delivery of software under our SaaS model is typically over a contractual term of 12 to 36 months
and we recognize revenue associated with these offerings, which we call subscription revenue in our
consolidated statements of income, in accordance with the accounting guidance contained in ASC 605-25,
Revenue Recognition- Multiple-Deliverable Revenue Arrangements. Whether sales are made via an on-premise
model or a SaaS model, the arrangement typically consists of multiple elements, including revenue from one or
more of the following elements: license of software products, support services, hosting, consulting,
development, training, or other professional services.
Software Revenue Recognition (On-Premise Model)
The majority of our software is sold or licensed in multiple-element arrangements that include support
services and often consulting services or other elements. For software license arrangements that do not require
significant modification or customization of the underlying software, we recognize revenue when persuasive
evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability is
probable. Revenue is presented net of sales, use and value-added taxes collected from our customers.
Our typical payment terms vary by region. Occasionally, payment terms of up to one year may be
granted for software license fees to customers with an established history of collections without concessions.
Should we grant payment terms greater than one year or terms that are not in accordance with established
history for similar arrangements, revenue would be recognized as payments become due and payable assuming
all other criteria for software revenue recognition have been met.
Provided all other revenue recognition criteria have been met, we recognize license revenue on
delivery using the residual method when vendor-specific objective evidence of fair value (“VSOE”) exists for
all of the undelivered elements (for example, support services, consulting, or other services) in the arrangement.
We allocate revenue to each undelivered element based on VSOE, which is the price charged when that element
is sold separately or, for elements not yet sold separately, the price established by our management if it is
probable that the price will not change before the element is sold separately. We allocate revenue to undelivered
support services based on rates charged to renew the support services annually after an initial period. We
allocate revenue to undelivered consulting services based on time and materials rates of stand-alone services
engagements by role and by country. We review VSOE at least annually. If we were to be unable to establish or
maintain VSOE for one or more undelivered elements within a multiple-element software arrangement, it could
adversely impact revenues, results of operations and financial position because we may have to defer all or a
portion of the revenue or recognize revenue ratably from multiple-element software arrangements.
Multiple-element software arrangements for which VSOE does not exist for all undelivered elements
typically occur when we introduce a new product or product bundles for which we have not established VSOE
for support services or consulting or other services under our VSOE policy. In these instances, revenue is
deferred and recognized ratably over the longer of the support services (maintenance period) or consulting
services engagement, assuming there are no specified future deliverables. In the instances in which it has been
determined that revenue on these bundled arrangements will be recognized ratably due to lack of VSOE, at the
time of recognition, we allocate revenue from these bundled arrangement fees to all of the non-license revenue
categories based on VSOE of similar support services or consulting services. The remaining arrangement fees,
26
if any, are then allocated to software license fee revenues. The associated costs primarily consist of payroll and
related costs to perform both the consulting services and provide support services and royalty expense related to
the license and maintenance revenue. These costs are expensed as incurred and included in cost of maintenance,
subscription and other revenue, cost of professional services and cost of license fees.
Revenue from support services and product updates, referred to as maintenance revenue, is recognized
ratably over the term of the maintenance period, which in most instances is one year. Software license updates
provide customers with rights to unspecified software product upgrades, maintenance releases and patches
released during the term of the support period on a when-and-if available basis. Product support includes
Internet access to technical content, as well as Internet and telephone access to technical support personnel. Our
customers generally purchase both product support and license updates when they acquire new software
licenses. In addition, a majority of our customers renew their support services contracts annually.
Revenues from consulting services, which we call professional services in our consolidated statements
of income, are typically comprised of implementation, development, training or other consulting services.
Consulting services are generally sold on a time-and-materials basis and can include services ranging from
software installation to data conversion and building non-complex interfaces to allow the software to operate in
integrated environments. Consulting engagements can range anywhere from one day to several months and are
based strictly on the customer’s requirements and complexities and are independent of the functionality of our
software. Our software, as delivered, can generally be used by the customer for the customer’s purpose upon
installation. Further, implementation and integration services provided are generally not essential to the
functionality of the software, as delivered, and do not result in any material changes to the underlying software
code. On occasion, we enter into fixed fee arrangements in which customer payments are tied to achievement of
specific milestones. In fixed fee arrangements, revenue is recognized as services are performed as measured by
costs incurred to date, as compared to total estimated costs to be incurred to complete the work. In milestone
achievement arrangements, we recognize revenue as the respective milestones are achieved.
We occasionally resell third party systems as part of an end-to-end solution requested by our
customers. Hardware revenue is recognized on a gross basis in accordance with the guidance contained in ASC
605-45, Revenue Recognition – Principal Agent Considerations and when persuasive evidence of an
arrangement exists, delivery has occurred, the fee is fixed or determinable and collection is considered
reasonably assured. We consider delivery to occur when the product is shipped and title and risk of loss have
passed to the customer.
Although infrequent, when an arrangement does not qualify for separate accounting of the software
license and consulting transactions, the software license revenue is recognized together with the consulting
services based on contract accounting using either the percentage-of-completion or completed-contract method.
Arrangements that do not qualify for separate accounting of the software license fee and consulting services
typically occur when we are requested to customize software or when we view the installation of our software
as high risk in the customer’s environment. This requires us to make estimates about the total cost to complete
the project and the stage of completion. The assumptions, estimates, and uncertainties inherent in determining
the stage of completion affect the timing and amounts of revenues and expenses reported. Changes in estimates
of progress toward completion and of contract revenues and contract costs are accounted for using the
cumulative catch up approach. In certain arrangements, we do not have a sufficient basis to estimate the costs of
providing support services. As a result, revenue is typically recognized on a percent completion basis up to the
amount of costs incurred (zero margin). Once the consulting services are complete and support services are the
only undelivered item, the remaining revenue is recognized evenly over the remaining support period. If we do
not have a sufficient basis to measure the progress of completion or to estimate the total contract revenues and
costs, revenue is recognized when the project is complete and, if applicable, final acceptance is received from
the customer. We allocate these bundled arrangement fees to support services and consulting services revenues
based on VSOE. The remaining arrangement fees are then allocated to software license fee revenues. The
associated costs primarily consist of payroll and related costs to perform the consulting and support services and
royalty expense. These costs are expensed as incurred and included in cost of maintenance, subscription and
other revenue, cost of professional services and cost of license fees.
27
We execute arrangements through indirect sales channels via sales agents and distributors in which the
indirect sales channels are authorized to market our software products to end users. In arrangements with sales
agents, revenue is recognized on a sell-through basis once an order is received from the end user, collectability
from the end user is probable, a signed license agreement from the end user has been received, delivery has
been made to the end user and all other revenue recognition criteria have been satisfied. Sales agents are
compensated on a commission basis. Distributor arrangements are those in which the resellers are authorized to
market and distribute our software products to end users in specified territories and the distributor bears the risk
of collection from the end user customer. We recognize revenue from transactions with distributors when the
distributor submits a written purchase commitment, collectability from the distributor is probable, a signed
license agreement is received from the distributor and delivery has occurred to the distributor, provided that all
other revenue recognition criteria have been satisfied. Revenue from distributor transactions is recorded on a net
basis (the amount actually received by us from the distributor). We do not offer rights of return, product rotation
or price protection to any of our distributors.
Subscription Revenue Recognition
We recognize the following fees in subscription revenue from our SaaS model: i) subscription fees
from customers accessing our On Demand and our other subscription offerings, ii) providing consulting
services such as set up, process mapping, configuration, database conversion and migration, and iii) support
fees on hosted products. Our subscription arrangements do not provide customers with the right to take
possession of the subscribed software at any time.
We commence revenue recognition when there is persuasive evidence of an arrangement, the service is
being provided to the customer, the collection of the fees is reasonably assured and the amount of fees to be
paid by the customer is fixed or determinable.
Subscription revenue is recognized ratably over the initial subscription period committed to by the
customer commencing when the customer’s environment has been migrated to our hosted environment. The
initial subscription period is typically 12 to 36 months. Our subscription services are non-cancelable, though
customers typically have the right to terminate their contracts if we materially fail to perform. We generally
invoice our customers in advance in quarterly installments and typical payment terms provide that our
customers pay us within 30 days of invoice.
Other consulting services are typically sold on a time-and-materials basis and consist of fees from
consultation services such as configuration of features, implementing at various customer sites, testing and
training. These services are considered to have stand-alone value to the customer because we have sold
consulting services separately and there are several third-party vendors that routinely provide similar
professional services to our customers on a stand-alone basis. Accordingly, consulting services are a separate
unit of accounting and the associated services revenue is recognized as the services are performed and earned.
We may enter into multiple-element arrangements that may include a combination of our subscription
offering and other consulting services. Prior to February 1, 2011, the deliverables in multiple element
arrangements were accounted for separately if the delivered items had stand-alone value and VSOE was
available for the undelivered items. If the multiple-element arrangement could not be accounted for separately,
the total arrangement fee was recognized ratably over the initial subscription period.
In October 2009, the FASB issued Accounting Standards Update No. 2009-13, Revenue Recognition
(Topic 605), Multiple-Deliverable Revenue Arrangements (ASU 2009-13), which amended the previous
multiple-deliverable arrangements accounting guidance. Pursuant to the updated guidance, VSOE of the
deliverables to be delivered is no longer required in order to account for deliverables in a multiple-element
arrangement separately. Instead, arrangement consideration is allocated to deliverables based on their relative
selling price.
28
We adopted the accounting guidance in ASU 2009-13 for applicable arrangements entered into after
February 1, 2011 (the beginning of our fiscal year). As a result of the adoption of ASU 2009-13, we allocate
revenue to each element in an arrangement based on a selling price hierarchy. The selling price for a deliverable
is based on its VSOE, if available, Third Party Evidence (“TPE”), if VSOE is not available, or Estimated
Selling Price (“ESP”), if neither VSOE nor TPE is available. The determination for ESP is made through
consultation with and approval by management taking into consideration the go-to-market strategy. As our go-
to-market strategies evolve, we may modify our pricing practices in the future, which could result in changes in
both VSOE and ESP.
For multiple-element arrangements that may include a combination of our subscription offerings and
other consulting services, the total arrangement fee is allocated to each element based on the VSOE / ESP value
of each element. After allocation, the revenue associated with the subscription offering and other consulting
services are recognized as described above.
Allowance for Bad Debt. Trade accounts receivable are recorded at the invoiced amount and do not bear
interest. We review the collectability of our accounts receivable each period by analyzing balances based on age
and record specific allowances for any balances that we determine may not be fully collectible due to inability
of the customers to pay. We also provide for a general reserve based on historical data including analysis of
write-offs and other known factors. Provisions to the allowance for bad debt are included as bad debt expense in
general and administrative expense. Significant judgment is required in adjusting our receivables to amounts we
believe are realizable, especially when a customer is experiencing financial difficulty or is in bankruptcy.
Although we use the best information available in making our estimates, we may incur additional bad debt
expense in future periods which could have a material effect on earnings in any given quarter should additional
allowances for doubtful accounts be necessary. The determination to write-off specific accounts receivable
balances is made based on likelihood of collection and past due status. Past due status is based on invoice date
and terms specific to each customer.
Allowance for Sales Returns. We do not generally provide a contractual right of return; however, in the course
of business we have allowed sales returns and allowances. We record a provision against revenue for estimated
sales returns and allowances in the same period the related revenues are recorded or when current information
indicates additional amounts are required. These estimates are based on historical experience, specifically
identified customers and other known factors. Although we use the best information available in making our
estimates, we may incur additional provisions against revenue in future periods which could have a material
effect on earnings in any given quarter should additional allowances for sales returns be necessary.
The accounts receivable allowance for doubtful accounts is comprised of both the allowance for bad
debts and the allowance for sales returns.
Valuation of Deferred Tax Assets and Tax Contingency Reserves. The carrying value of our deferred tax
assets reflects an amount that is more likely than not to be realized. At January 31, 2012, we had $25.7 million
of deferred tax assets, net of valuation allowances, consisting of $36.7 million of gross deferred tax assets offset
by valuation allowances of $11.0 million. In assessing the likelihood of realizing tax benefits associated with
deferred tax assets and the need for a valuation allowance, we consider the weight of all available evidence,
both positive and negative, including expected future taxable income and tax planning strategies that are both
prudent and feasible. There was a net increase of valuation allowances recorded in fiscal 2012 of $0.4 million.
We are subject to income taxes in the U.S. and in various foreign jurisdictions. Significant judgment is
required in determining our worldwide income tax position. In the ordinary course of a global business, there
are transactions and calculations where the ultimate tax outcome is uncertain. Our estimate of the potential
outcome for any uncertain tax position requires judgment. For tax related contingencies, we account for
uncertain tax positions based on a two-step approach: recognition and measurement. We recognize a tax
position when we determine that it is more likely than not that the position will be sustained upon ultimate
settlement with a taxing authority that has full knowledge of all relevant information. For those positions that do
not meet the recognition threshold, no tax benefit is recognized in the financial statements. For those tax
29
positions that meet the recognition threshold, we measure the tax position as the largest amount of benefit that
has a greater than 50% likelihood of being realized upon ultimate settlement. We record interest and penalties
related to income tax liabilities as income tax expense. We have reserves to address tax positions that could be
challenged by taxing authorities, even though we believe that the positions taken are appropriate. Our tax
reserves are reviewed on a quarterly basis and adjusted as events occur that could affect our liability.
Stock-Based Compensation. We account for share-based payments (“equity awards”) to employees in
accordance with ASC 718, Compensation—Stock Compensation (“ASC 718”), which requires that share-based
payments (to the extent they are compensatory) be recognized in our consolidated statements of income based
on their fair values as measured at the grant date. The fair value of an equity award is recognized as stock-based
compensation expense ratably over the vesting period of the equity award. Determining the fair value of stock-
based awards at the grant date requires judgment and the fair value per share of historical grants of equity
awards may not be indicative of the fair value per share for future grants of equity awards.
Fair Value of SARs
The fair value of stock-settled stock appreciation rights (“SARs”) is determined on the grant date of the
award using the Black-Scholes-Merton valuation model. One of the inputs to the Black-Scholes-Merton
valuation model is the fair market value on the date of the grant. As our stock price fluctuates, so does the fair
value of our future SAR grants. Judgment is required in determining the remaining inputs to the Black-Scholes-
Merton valuation model. Furthermore, the values underlying these inputs fluctuate, which impacts the fair value
of our future SAR grants. These inputs include the expected life, volatility, the risk-free interest rate and the
dividend rate. The following describes our policies with respect to determining these valuation inputs:
Expected Life
The expected life valuation input includes a computation that is based on historical vested option and
SAR exercises and post-vest expiration patterns and an estimate of the expected life for options and
SARs that were fully vested and outstanding. Furthermore, based on our historical pattern of option
and SAR exercises and post-vest expiration patterns we determined that there are two discernable
populations, which include QAD’s directors and officers and all other QAD employees. The estimate
of the expected life for options and SARs that were fully vested and outstanding was determined as the
midpoint of a range as follows: the low end of the range assumes the fully vested and outstanding
options and SARs are exercised or expire unexercised on the evaluation date and the high end of the
range assumes that these options and SARs are exercised or expire unexercised upon contractual term.
Volatility
The volatility valuation input is based on the historical volatility of our common stock, which we
believe is representative of the expected volatility over the expected life of options and SARs.
Risk-Free Interest Rate
The risk-free interest rate is based on the U.S. Treasury constant maturities in effect at the time of grant
for the expected term of the option or SAR.
Dividend Rate
The dividend rate is based on our historical dividend payments per share. Historically, we paid
quarterly dividends at a rate of $0.060 per share of Class A common stock and $0.050 per share of
Class B common stock. On September 22, 2011, we announced that our Board of Directors approved a
20 percent increase in our quarterly dividend to $0.072 per share of Class A common stock and $0.060
per share of Class B common stock.
Fair Value of RSUs
The fair value of restricted stock units (“RSUs”) is determined on the grant date of the award as the
market price of our common stock on the date of grant, reduced by the present value of estimated dividends
30
foregone during the vesting period. As our stock price fluctuates, so does the fair value of our future RSU
grants. Judgment is required in determining the present value of estimated dividends foregone during the
vesting period. We estimate the dividends for purposes of this calculation based on our historical dividend
payments per share. See above for discussion of dividend rate.
While we recognize as stock-based compensation expense the entire amount of the fair value of a
vested equity award once it has vested, during the periods in which our equity awards are vesting, we are
required to estimate equity awards that we expect will cancel prior to vesting (“forfeitures”) and reduce the
stock-based compensation expense recognized in a given period for the effects of estimated forfeitures over the
expense recognition period (“forfeiture rate”). To determine the forfeiture rate, we examine the historical
pattern of forfeitures, which we believe is indicative of future forfeitures, in an effort to determine if there were
any discernable forfeiture patterns based on certain employee populations. From this analysis, we identified two
employee populations that have different historical forfeiture rates. One population includes QAD directors and
officers and the other population includes all other QAD employees. The impact of actual forfeitures, if
significantly different from our estimated forfeitures, could materially affect our operating results. We evaluate
the forfeiture rate annually or more frequently when there have been any significant changes in forfeiture
activity.
We record deferred tax assets for equity awards that result in deductions on our income tax returns,
based on the amount of stock-based compensation recognized and the fair values attributable to the vested
portion of those equity awards. Because the deferred tax assets we record are based upon the stock-based
compensation expenses in a particular jurisdiction, the aforementioned inputs that affect the fair values of our
equity awards may also indirectly affect our income tax expense. In addition, differences between the deferred
tax assets recognized for financial reporting purposes and the actual tax deduction reported on our income tax
returns are recorded in additional paid-in capital. If the tax deduction is less than the deferred tax asset, the
calculated shortfall reduces our pool of excess tax benefits. If the pool of excess tax benefits is reduced to zero,
then subsequent shortfalls would increase our income tax expense. Our pool of excess tax benefits is computed
in accordance with the alternative transition method pursuant to ASC 718.
To the extent we change the terms of our employee stock-based compensation programs, experience
fluctuations in the underlying criteria used to determine our equity award valuations and experience fluctuations
in our patterns of forfeitures that differ from our current estimates, amongst other potential impacts, the stock-
based compensation expense that we record in future periods and the tax benefits that we realize may differ
significantly from what we have recorded in previous reporting periods.
RECENTLY ISSUED ACCOUNTING STANDARDS
For a full description of recent accounting pronouncements, including the expected dates of adoption
and estimated effects on results of operations and financial condition, see Note 1 “Summary of Business and
Significant Accounting Policies” within the Notes to Consolidated Financial Statements included in Item 15 of
this Annual Report on Form 10-K.
RESULTS OF OPERATIONS
We operate in several geographical regions as described in Note 12 “Business Segment Information”
within the Notes to Consolidated Financial Statements. In order to present our results of operations without the
effects of changes in foreign currency exchange rates, we provide certain financial information on a “constant
currency basis”, which is in addition to the actual financial information presented in the following tables. In
order to calculate our constant currency results, we apply the foreign currency exchange rates that were in effect
during the prior year to the current year results.
31
Revenue
(in thousands)
Revenue:
Year Ended
January 31, 2012
Increase Compared
to Prior Period
$
%
Year Ended
January 31, 2011
Increase
(Decrease)
Compared
to Prior Period
%
$
Year Ended
January 31, 2010
License fees . . . . . . . . . . . . $
33,166 $ 3,345
11% $
29,821 $
3,894
15% $
25,927
Percentage of total
revenue . . . . . . . . . . .
Maintenance and other . .
Percentage of total
revenue . . . . . . . . . . .
Subscription fees . . . . . . .
Percentage of total
revenue . . . . . . . . . . .
Professional services . . . .
Percentage of total
revenue . . . . . . . . . . .
13%
14%
137,659
7,555
6%
130,104
446
0%
56%
59%
9,787
4,014
70%
5,773
1,764
44%
4%
3%
66,646
12,332
23%
54,314
(1,323)
-2%
12%
129,658
60%
4,009
2%
55,637
26%
Total revenue . . . . . . . . . . . . . $
247,258 $ 27,246
12% $
4,781
2% $
215,231
27%
24%
220,012 $
Total Revenue. Total revenue was $247.3 million, $220.0 million and $215.2 million for fiscal 2012, 2011 and
2010, respectively. Our customers are widely dispersed and no single customer accounted for more than 10% of
total revenue in any of the last three fiscal years. Holding foreign currency exchange rates constant to fiscal
2011, total revenue for fiscal 2012 would have been approximately $242.3 million, representing a $22.3 million,
or 10%, increase from the prior year. When comparing categories within total revenue at constant rates, our
fiscal 2012 results included increases across all revenue categories. Revenue outside the North America region
as a percentage of total revenue was 58% for fiscal 2012, as compared to 57% for fiscal 2011. Total revenue
increased across all geographic regions in which we operate during fiscal 2012 when compared to fiscal 2011.
Our products are sold to manufacturing companies that operate mainly in the following six industries:
automotive, consumer products, food and beverage, high technology, industrial products and life sciences.
Given the similarities between consumer products and food and beverage as well as between high technology
and industrial products, we aggregate them for management review. Revenue by industry for fiscal 2012 was
approximately 28% in automotive, 24% in consumer products and food and beverage, 36% in high technology
and industrial products and 12% in life sciences. In comparison, revenue by industry for fiscal 2011 was
approximately 24% in automotive, 23% in consumer products and food and beverage, 39% in high technology
and industrial products and 14% in life sciences.
Holding foreign currency exchange rates constant to fiscal 2010, total revenue for fiscal 2011 would
have been approximately $218.3 million, representing a $3.1 million, or 1%, increase from fiscal 2010. When
comparing categories within total revenue at constant rates, our fiscal 2011 results included increases in the
license and subscription revenue categories and decreases in the maintenance and other and professional
services revenue categories. Revenue outside the North America region as a percentage of total revenue was
consistent at 57% for fiscal 2011 and fiscal 2010. Total revenue increased in our North America, Latin America
and Asia Pacific regions offset by a slight decrease in our EMEA region in fiscal 2011 when compared to fiscal
2010. Revenue by industry for fiscal 2011 was approximately 24% in automotive, 23% in consumer products
and food and beverage, 39% in high technology and industrial products and 14% in life sciences. In
comparison, revenue by industry for fiscal 2010 was approximately 26% in automotive, 24% in consumer
products and food and beverage, 37% in high technology and industrial products and 13% in life sciences.
License Revenue. License revenue was $33.2 million, $29.8 million and $25.9 million for fiscal 2012, 2011 and
2010, respectively. Holding foreign currency exchange rates constant to fiscal 2011, license revenue for fiscal
2012 would have been approximately $32.7 million, representing a $2.9 million, or 10%, increase from the
prior year. License revenue increased across all geographic regions in which we operated during fiscal 2012
when compared to fiscal 2011. One of the metrics that management uses to measure license revenue
performance is the number of customers that have placed sizable license orders in the period. During fiscal
2012, 21 customers placed license orders totaling more than $0.3 million and no orders exceeded $1.0 million.
32
This compared to fiscal 2011 in which 12 customers placed license orders totaling more than $0.3 million,
including two orders which exceeded $1.0 million.
Holding foreign currency exchange rates constant to fiscal 2010, license revenue for fiscal 2011 would
have been unchanged at $29.8 million, representing a $3.9 million, or 15%, increase from fiscal 2010. When
comparing fiscal 2011 to fiscal 2010, license revenue increased in our North America, Latin America and Asia
Pacific regions, and decreased in our EMEA region. During fiscal 2011, 12 customers placed license orders
totaling more than $0.3 million, two of which exceeded $1.0 million. In comparison, during fiscal 2010, 13
customers placed license orders totaling more than $0.3 million, two of which exceeded $1.0 million. Although
there were a relatively consistent number of orders totaling more than $0.3 million during fiscal 2011 and 2010,
our total license revenue increased year over year due to higher revenue deferrals in fiscal 2010 on orders
greater than $0.3 million. In addition, we generated more license revenue from orders less than $0.3 million in
fiscal 2011 than in fiscal 2010.
Maintenance and Other Revenue. Maintenance and other revenue was $137.7 million, $130.1 million and
$129.7 million for fiscal 2012, 2011 and 2010, respectively. Holding foreign currency exchange rates constant
to fiscal 2011, maintenance and other revenue for fiscal 2012 would have been approximately $135.1 million,
representing a $5.0 million, or 4%, increase from the prior year. Maintenance and other revenue increased
across all geographic regions in which we operated during fiscal 2012 when compared to fiscal 2011. The
increase in maintenance and other revenue was related to price increases, new customers, new users and new
modules in excess of cancellations.
Holding foreign currency exchange rates constant to fiscal 2010, maintenance and other revenue for
fiscal 2011 would have been approximately $129.0 million, representing a $0.7 million, or 1%, decrease from
fiscal 2010. When comparing fiscal 2011 to fiscal 2010, maintenance and other revenue decreased in our North
America, EMEA and Latin America regions offset by an increase in our Asia Pacific region.
We track our rate of contract renewals by determining the number of customer sites with active
contracts as of the end of the previous reporting period and compare this to the number of customers that
renewed, or are in the process of renewing, their maintenance contracts as of the current period end. Our
maintenance contract renewal rate has remained in excess of 90% for fiscal 2012, 2011 and 2010.
Subscription Revenue. Subscription revenue was $9.8 million, $5.8 million and $4.0 million for fiscal 2012,
2011 and 2010, respectively. Holding foreign currency exchange rates constant to fiscal 2011, subscription
revenue for fiscal 2012 would have been $9.7 million, representing a $3.9 million, or 67%, increase from the
prior year. Subscription revenue increased in our North America, EMEA and Asia Pacific regions and
decreased in our Latin America region during fiscal 2012 when compared to fiscal 2011. The increase in
subscription revenue was due to additional revenue related to our On Demand product offering. Currently, a
majority of our On Demand sales are in the North America region. We expect the growth rate of subscription
revenue in the future to be primarily attributable to growth in sales of our On Demand product offering.
Holding foreign currency exchange rates constant to fiscal 2010, subscription revenue for fiscal 2011
would have been unchanged at $5.8 million, representing a $1.8 million, or 45%, increase from fiscal 2010.
When comparing fiscal 2011 to fiscal 2010, subscription revenue increased in our North America, Latin
America and Asia Pacific regions and was relatively flat in the EMEA region. The increase in subscription
revenue was due to additional revenue related to our On Demand product offering.
Products are generally shipped as orders are received or within a short period thereafter and our
subscription revenue is currently less than 5% of total revenue. Accordingly, we have historically operated with
little backlog. Because of the generally short cycle between order and shipment and the relatively low amount
of subscription sales, we believe that our backlog as of any particular date is not currently significant or
meaningful. Our total short-term deferred revenue as of January 31, 2012 was $93.9 million, of which $83.4
million was related to deferred maintenance and will be recognized over the period of the maintenance support.
Of the remaining short-term deferred revenue balance as of January 31, 2012, $3.7 million was related to
33
deferred subscriptions, $3.5 million was related to deferred services, $1.8 million was related to deferred
licenses and $1.5 million was related to deferred research and development funding. All of the remaining short-
term deferred revenue balances, with the exception of deferred subscriptions, relate to products already shipped
or services already provided but were deferred primarily due to software revenue recognition rules and will
generally be recognized within the next twelve months. Deferred subscription primarily relates to hosting and
On Demand services we will provide over periods up to the next twelve months.
Professional Services Revenue. Professional services revenue was $66.6 million, $54.3 million and $55.6
million for fiscal 2012, 2011 and 2010, respectively. Holding foreign currency exchange rates constant to fiscal
2011, professional services revenue for fiscal 2012 would have been $64.8 million, representing a $10.5
million, or 19%, increase from the prior year. Professional services revenue increased across all geographic
regions in which we operated during fiscal 2012 when compared to fiscal 2011. The increase in professional
services revenue period over period can be attributed to engagements in which we recognized a higher amount
of professional services revenue per customer per quarter, which we believe was a result of increased license
sales which has resulted in larger implementation or upgrade projects over recent quarters.
Holding foreign currency exchange rates constant to fiscal 2010, professional services revenue for
fiscal 2011 would have been $53.7 million, representing a $1.9 million, or 3%, decrease from fiscal 2010. When
comparing fiscal 2011 to fiscal 2010, we experienced decreases in our North America and EMEA regions offset
by increases in our Asia Pacific and Latin America regions.
Total Cost of Revenue
Year Ended
January 31, 2012
Increase (Decrease)
Compared
to Prior Period
Year Ended
$
% January 31, 2011
Increase (Decrease)
Compared
to Prior Period
%
$
Year Ended
January 31, 2010
(in thousands)
Cost of revenue
Cost of license
fees . . . . . . .
$
Cost of
4,585
$
(1,039)
-18% $
5,624 $
(882)
-14% $
6,506
maintenance,
subscription
and other . . .
Cost of
professional
services . . . .
Total cost
revenue . . . . . .
Percentage of
revenue . . . . . .
36,077
2,947
9%
33,130
1,461
5%
31,669
64,677
9,483
17%
55,194
1,742
$
105,339
$ 11,391
12% $
93,948 $ 2,321
43%
43%
3%
3% $
53,452
91,627
43%
Cost of license fees includes license royalties, amortization of capitalized software costs and shipping.
Cost of maintenance, subscription and other includes personnel costs of fulfilling maintenance and subscription
contracts, stock-based compensation for those employees, travel expense, professional fees, hosting costs,
royalties, direct material and an allocation of information technology and facilities costs. Direct material
charges include the cost of fulfilling maintenance and subscription contracts, hardware, costs associated with
transferring our software to electronic media, printing of user manuals and packaging materials. Cost of
professional services includes personnel costs of fulfilling service contracts, stock-based compensation for those
employees, third-party contractor expense, travel expense for services employees and an allocation of
information technology and facilities costs.
Total Cost of Revenue. Total cost of revenue (combined cost of license fees, cost of maintenance, subscription
and other and cost of professional services) was $105.3 million for fiscal 2012, $93.9 million for fiscal 2011
and $91.6 million for fiscal 2010, and as a percentage of total revenue was 43% for all three years. Holding
foreign currency exchange rates constant to fiscal 2011, total cost of revenue for fiscal 2012 would have been
approximately $103.2 million and as a percentage of total revenue would have been unchanged at 43%. The
non-currency related increase in cost of revenue of $9.3 million in fiscal 2012 compared to fiscal 2011 was
34
primarily due to higher personnel costs, higher third-party contractor costs and higher travel costs associated
with higher professional services revenues and higher personnel and hosting costs associated with higher
subscription revenue.
Holding foreign currency exchange rates constant to fiscal 2010, total cost of revenue for fiscal 2011
would have been approximately $93.3 million and as a percentage of total revenue would have been unchanged
at 43%. The non-currency related increase in total cost of revenue was $1.7 million in fiscal 2011 compared to
fiscal 2010. The increase was primarily due to higher services third-party contractor costs, higher services
bonuses, higher travel costs and higher hosting costs partially offset by lower information technology and
facilities allocated costs and lower severance.
Cost of License Fees. Cost of license fees was $4.6 million, $5.6 million and $6.5 million for fiscal 2012, 2011
and 2010, respectively. Holding foreign currency exchange rates constant to fiscal 2011, cost of license fees for
fiscal 2012 would have been unchanged at $4.6 million, representing a decrease of $1.0 million, or 18%. The
non-currency related decrease in cost of license fees of $1.0 million in fiscal 2012 compared to fiscal 2011 was
due to lower amortization of capitalized software costs partially offset by higher royalties. The majority of our
acquired software technology was fully amortized as of September 2010.
Holding foreign currency exchange rates constant to fiscal 2010, cost of license fees for fiscal 2011
would have been unchanged at $5.6 million. The non-currency related decrease in cost of license fees was $0.9
million, or 14%, in fiscal 2011 compared to fiscal 2010. The decrease was primarily a result of lower
amortization of acquired software.
Cost of Maintenance, Subscription and Other. Cost of maintenance, subscription and other was $36.1 million,
$33.1 million and $31.7 million for fiscal 2012, 2011 and 2010, respectively. Cost of maintenance, subscription
and other as a percentage of maintenance and other and subscription fees revenues were consistent at 24% in
fiscal 2012, 2011 and 2010. Holding foreign currency exchange rates constant to fiscal 2011, cost of
maintenance, subscription and other in fiscal 2012 would have been $35.6 million, representing an increase of
$2.5 million, or 8%. The non-currency increase in cost of maintenance, subscription and other of $2.5 million in
fiscal 2012 compared to fiscal 2011 was primarily due to higher subscription costs, which included higher
salaries and related costs of $1.0 million as a result of higher headcount of approximately 30 people in support
of our growing On Demand business, higher hosting costs of $0.5 million, higher information technology,
facilities allocated costs of $0.4 million and higher travel costs of $0.2 million.
Holding foreign currency exchange rates constant to fiscal 2010, cost of maintenance, subscription and
other for fiscal 2011 would have been approximately $33.0 million, representing an increase of $1.3 million, or
4%, from fiscal 2010. The non-currency related increase in cost of maintenance, subscription and other of $1.3
million in fiscal 2011 compared to fiscal 2010 was primarily due to higher hosting costs of $1.0 million related
to our growing On Demand business and higher hardware costs of $0.3 million.
Cost of Professional Services. Cost of professional services was $64.7 million, $55.2 million and $53.5 million
for fiscal 2012, 2011 and 2010, respectively. Cost of professional services as a percentage of professional
services revenues was 97%, 102% and 96% for fiscal 2012, 2011 and 2010, respectively. Holding foreign
currency exchange rates constant to fiscal 2011, cost of professional services in fiscal 2012 would have been
$63.0 million, representing an increase of $7.8 million, or 14%. The non-currency increase in cost of
professional services of $7.8 million in fiscal 2012 compared to fiscal 2011 was due primarily to higher salaries
and related costs of $3.5 million as a result of higher headcount of approximately 30 people, higher third-party
contractor costs of $3.2 million and higher travel costs of $1.3 million. The increase in services costs was to
support the increased professional services revenue.
Holding foreign currency exchange rates constant to fiscal 2010, cost of professional services for fiscal
2011 would have been approximately $54.8 million, representing an increase of $1.3 million, or 2%, from fiscal
2010. The non-currency related increase in cost of professional services of $1.3 million in fiscal 2011 compared
to fiscal 2010 was primarily due to higher third-party contractor costs of $1.8 million, higher bonuses of $1.4
35
million and higher travel costs of $0.6 million partially offset by lower salaries and related costs of $1.3 million,
lower information technology and facilities allocated costs of $1.0 million and lower severance of $0.5 million.
Sales and Marketing
Year Ended
January 31, 2012
Increase (Decrease)
Compared
to Prior Period
Year Ended
$
% January 31, 2011
Increase (Decrease)
Compared
to Prior Period
%
$
Year Ended
January 31, 2010
(in thousands)
Sales and
marketing . . . . .
$
58,336
$
4,130
8% $
54,206
$ 2,227
4% $
51,979
Percentage of
revenue . . . . . . .
24%
25%
24%
Sales and marketing expense includes salaries, benefits, bonuses, stock-based compensation and travel
expense for our sales and marketing employees in addition to costs of programs aimed at increasing revenue,
such as trade shows, user group events, advertising and various sales and promotional programs. Sales and
marketing expense also includes personnel costs of order processing, sales agent fees and an allocation of
information technology and facilities costs.
Sales and marketing expense was $58.3 million, $54.2 million and $52.0 million for fiscal 2012, 2011
and 2010, respectively. Holding foreign currency exchange rates constant to fiscal 2011, fiscal 2012 sales and
marketing expense would have been approximately $57.1 million, representing an increase of $2.9 million, or
5%. The non-currency related increase in sales and marketing expense of $2.9 million in fiscal 2012 compared
to fiscal 2011 was primarily due to higher salaries and related costs of $1.5 million as a result of higher
headcount of approximately 20 people, primarily in the pre-sales and marketing areas, higher commissions of
$1.3 million, higher travel costs of $0.5 million and higher professional fees of $0.3 million related to web
design services and customer events. These increases in sales and marketing expense were partially offset by
lower information technology and facilities allocated costs of $0.3 million and lower stock-based compensation
expense of $0.3 million.
Holding foreign currency exchange rates constant to fiscal 2010, fiscal 2011 sales and marketing
expense would have been approximately $53.7 million, representing an increase of $1.7 million, or 3%, from
fiscal 2010. The non-currency related increase in sales and marketing expense of $1.7 million in fiscal 2011
compared to fiscal 2010 was primarily due to higher bonuses of $1.1 million, higher travel costs of $0.6 million,
higher commissions of $0.5 million and higher marketing expense of $0.3 million. These increases in sales and
marketing expense were partially offset by lower severance of $0.9 million.
36
Research and Development
(in thousands)
Research and
development . . . . $
Year Ended
January 31, 2012
Increase (Decrease)
Compared
to Prior Period
Year Ended
$
% January 31, 2011
Increase (Decrease)
Compared
to Prior Period
%
$
Year Ended
January 31, 2010
35,708
$
1,133
3% $
34,575
$
(2,728)
-7% $
37,303
Percentage of
revenue . . . . . . . .
14%
16%
17%
Research and development expense is expensed as incurred and consists primarily of salaries, benefits,
bonuses, stock-based compensation and travel expense for research and development employees, professional
services, such as fees paid to software development firms and independent contractors, and training for such
personnel. Research and development expense also includes an allocation of information technology and
facilities costs, and is reduced by income from joint development projects.
Research and development expense was $35.7 million, $34.6 million and $37.3 million for fiscal 2012,
2011 and 2010, respectively. Holding foreign currency exchange rates constant to fiscal 2011, fiscal 2012
research and development expense would have been approximately $34.9 million, representing an increase of
$0.3 million, or 1%. The non-currency related increase in research and development expense of $0.3 million in
fiscal 2012 compared to fiscal 2011 was primarily due to higher salaries and related costs of $0.7 million as a
result of higher headcount of approximately 40 people hired in our China research and development center and
throughout the world to support internationalizations. In addition, travel costs increased by $0.2 million. These
increases in research and development expense were partially offset by lower consulting fees of $0.4 million
related to our QAD Business Intelligence project which was completed in the prior year and lower information
technology and facilities allocated costs of $0.4 million. Included in research and development expense for
fiscal 2012 is joint development income of $0.5 million per quarter related to one project which will conclude in
September 2012. As part of our vertical focus we regularly seek to engage in joint development arrangements
with our customers in order to enhance specific functionality and industry experience, although the number and
size of joint development arrangements may fluctuate.
Holding foreign currency exchange rates constant to fiscal 2010, fiscal 2011 research and development
expense would have been approximately $34.4 million, representing a decrease of $2.9 million, or 8%, from
fiscal 2010. The non-currency related decrease in research and development expense of $2.9 million in fiscal
2011 compared to fiscal 2010 was primarily due to higher joint development income of $2.0 million, lower
consulting fees of $0.7 million, lower information technology and facilities allocated costs of $0.6 million and
lower severance of $0.5 million. These decreases in research and development expense were partially offset by
higher bonuses of $0.6 million.
General and Administrative
Year Ended
Increase (Decrease)
Compared
to Prior Period
Year Ended
January 31, 2012
$
% January 31, 2011
Increase (Decrease)
Compared
to Prior Period
%
$
Year Ended
January 31, 2010
(in thousands)
General and
administrative . . $
Percentage of
revenue . . . . . . .
29,969
$
(668)
-2% $
30,637
$
(332)
-1% $
30,969
12 %
14%
14%
37
General and administrative expense includes salaries, benefits, bonuses, stock-based compensation and
travel expense for our finance, human resources, legal and executive personnel, as well as professional fees for
accounting and legal services, bad debt expense and an allocation of information technology and facilities costs.
General and administrative expense was $30.0 million, $30.6 million and $31.0 million for fiscal 2012,
2011 and 2010, respectively. Holding foreign currency exchange rates constant to fiscal 2011, fiscal 2012
general and administrative expense would have been approximately $29.4 million, representing a decrease of
$1.2 million, or 4%. The non-currency related decrease in general and administrative expense of $1.2 million in
fiscal 2012 compared to fiscal 2011 was primarily due to lower professional fees of $1.4 million as fiscal year
2011 included professional fees related to our Recapitalization, lower information technology and facilities
allocated costs of $0.3 million, lower stock-based compensation expense of $0.2 million, lower bonuses of $0.2
million and lower severance of $0.2 million. These decreases in general and administrative expense were
partially offset by higher salaries and related costs of $0.6 million and higher bad debt expense of $0.3 million.
Holding foreign currency exchange rates constant to fiscal 2010, fiscal 2011 general and administrative
expense would have been approximately $30.4 million, representing a decrease of $0.6 million, or 2%, from
fiscal 2010. The non-currency related decrease in general and administrative expense of $0.6 million in fiscal
2011 compared to fiscal 2010 was primarily due to lower bad debt of $1.5 million partially offset by higher
bonuses of $0.9 million.
Total Other (Income) Expense
Year Ended
January 31, 2012
Increase (Decrease)
Compared
to Prior Period
Year Ended
$
% January 31, 2011
Increase (Decrease)
Compared
to Prior Period
%
$
Year Ended
January 31, 2010
(in thousands)
Other (income)
expense
Interest income
Interest
expense . . . . .
Other (income)
expense, net
Total other
$
(630)
$
(115)
-22% $
(515) $
55
10% $
1,174
548
(74)
-6%
1,248
(25)
-2%
244
80%
304
593
205%
expense, net . . .
$
1,092
$
55
5% $
1,037
$
623
150% $
Percentage of
revenue . . . . . . .
0%
0%
(570)
1,273
(289)
414
0%
Total other expense, net was $1.1 million, $1.0 million and $0.4 million for fiscal 2012, 2011 and
2010, respectively. When comparing fiscal 2012 to fiscal 2011 all categories within other (income) expense
were relatively consistent. When comparing fiscal 2011 to fiscal 2010, other (income) expense increased by
$0.6 million primarily due to lower exchange gains and higher miscellaneous expenses due primarily to the
dissolution of an inactive entity.
38
Income Tax Expense
Year Ended
January 31, 2012
Increase (Decrease)
Compared to Prior
Period
Year Ended
Increase (Decrease)
Compared to Prior
Period
Year Ended
$
% January 31, 2011
$
%
January 31, 2010
$
6,016
$
3,173
112% $
2,843
$ 1,735
157% $
1,108
2%
36%
1%
51%
1%
45%
(in thousands)
Income tax
expense . . . .
Percentage of
revenue . . . .
Effective tax
rate . . . . . . .
We recorded income tax expense of $6.0 million, $2.8 million and $1.1 million for fiscal 2012, 2011
and 2010, respectively. QAD’s effective tax rate was 36%, 51%, and 45% for fiscal 2012, 2011 and 2010,
respectively. Our effective tax rate decreased in fiscal 2012 compared to fiscal 2011 primarily due to a
significant increase in income before income taxes as well as the release of a foreign subsidiary’s valuation
allowance due to the entity’s growth expectations and utilization of net operating losses. In addition, our
effective tax rate was higher in fiscal 2011 as compared to fiscal 2012 due to non-deductible professional fees
related to the Recapitalization. Our effective tax rate increased in fiscal 2011 compared to fiscal 2010 primarily
from the benefit recognized in fiscal 2010 due to the release of a tax contingency reserve after the conclusion of
a foreign tax audit and the non-deductible professional fees related to the Recapitalization.
For further information regarding income taxes, see Note 7 “Income Taxes” within the Notes to
Consolidated Financial Statements included in Item 15 of this Annual Report on Form 10-K.
LIQUIDITY AND CAPITAL RESOURCES
Our primary source of cash is from the sale of software licenses, maintenance, subscription and
professional services to our customers. Our primary use of cash is payment of our operating expenses which
mainly consist of employee-related expenses, such as compensation and benefits, as well as general operating
expenses for facilities and overhead costs. In addition to operating expenses, we also use cash for capital
expenditures and to invest in our growth initiatives, which could include acquisitions of products, technology
and businesses, as well as payments of dividends and stock repurchases.
Toward the end of the last fiscal year and continuing throughout the current fiscal year we have seen
some improvement in the industries in which we operate. We continue to monitor economic conditions as our
performance is heavily influenced by our customers’ outlook and production. We have remained focused on
conserving cash and as a result our cash balance increased from $67.3 million at January 31, 2011, to $76.9
million at January 31, 2012.
At January 31, 2012, our principal sources of liquidity were cash and equivalents totaling $76.9 million
and net accounts receivable of $64.8 million. Our cash and equivalents consisted of current bank accounts,
registered money market funds and time delineated deposits. Approximately 80% of our cash and equivalents
were held in U.S. dollar denominated accounts as of January 31, 2012 and 2011. We have a U.S. line of credit
facility that permits unsecured short-term borrowings of up to $20 million. Our line of credit agreement
contains customary covenants that could restrict our ability to incur additional indebtedness. Our line of credit is
available for working capital or other business needs. We have not drawn down on our line of credit during any
of the last three fiscal years nor do we expect to draw down on the line of credit during fiscal 2013.
Our primary commercial banking relationship is with Bank of America and its global affiliates. Our
cash and equivalents are held by diversified financial institutions globally, and as of January 31, 2012 the
portion of our cash and equivalents held by Bank of America was approximately 80%.
The amount of cash and equivalents held by foreign subsidiaries was $58.9 million and $46.8 million
as of January 31, 2012 and January 31, 2011, respectively. If these funds are needed for our operations in the
39
U.S., and if U.S. tax has not been previously provided, we would be required to accrue and pay taxes in the U.S.
to repatriate these funds. However, our intent is to permanently reinvest these funds outside the U.S. and our
current plans do not demonstrate a need to repatriate them to fund our operations in the U.S.
The following table summarizes our cash flows for the fiscal years ended January 31, 2012, 2011 and
2010, respectively.
(in thousands)
Net cash provided by operating activities . . . . . .
Net cash used in investing activities . . . . . . . . . . .
Net cash used in financing activities . . . . . . . . . .
Effect of foreign exchange rates on cash and
equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net increase in cash and equivalents . . . . . . . . . . . .
Year Ended
January 31, 2012
$
21,448
(4,147)
(7,725)
Year Ended
January 31, 2011
25,902
$
(1,922 )
(2,131 )
Year Ended
January 31, 2010
$
17,696
(1,357)
(4,507)
$
75
9,651
$
749
22,598
$
1,379
13,211
Net cash flows provided by operating activities was $21.4 million for fiscal 2012 compared to $25.9
million for fiscal 2011. The $4.5 million decrease in net cash flows provided by operating activities was due
primarily to the negative cashflow effect of changes in accounts payable, deferred revenue and other liabilities
of $15.3 million partially offset by the positive cashflow effect of changes in accounts receivable of $4.4
million. The negative impact of changes in deferred revenues was primarily caused by professional services
revenue and R&D joint development income recognized during the current fiscal year for which we received
payment in the previous fiscal years. The negative impact of changes in other liabilities was primarily driven by
higher bonus and commission payments in the current fiscal year.
Capital expenditures were $3.8 million for fiscal 2012, primarily relating to purchases of computer
equipment and leasehold improvements, compared to $1.4 million for fiscal 2011. We expect capital
expenditures in fiscal 2013 to remain fairly consistent with our capital expenditures during fiscal 2012.
Dividend-related payments for fiscal 2012 totaled $2.4 million compared to $2.2 million in fiscal 2011.
Our dividend program allows shareholders the choice of stock or cash, which has enabled us to conserve cash.
The number of shares issued to holders of record as a stock dividend is calculated based on the average closing
price of QAD’s Class A common stock for the three trading days immediately following the election deadline.
On September 22, 2011, we announced that our Board of Directors approved a 20 percent increase in our
quarterly dividend to $0.072 per share of Class A common stock and $0.060 per share of Class B common
stock. The Board of Directors evaluates our ability to continue to pay dividends and the structure of any
dividends on a quarterly basis.
On September 22, 2011, we announced that our Board of Directors approved a stock repurchase
program which authorizes management to purchase up to one million shares of the Company’s Class A and/or
Class B shares of common stock through open market transactions. The plan may be suspended or discontinued
at any time. During fiscal 2012, we repurchased 335,000 and 41,000 shares of Class A and Class B common
stock, respectively, for total consideration of $4.3 million. There was no stock repurchase-related activity during
fiscal 2011 or 2010.
We have historically calculated accounts receivable days’ sales outstanding (“DSO”), using the
countback, or last-in first-out, method. This method calculates the number of days of billed revenue represented
by the accounts receivable balance as of period end. When reviewing the performance of our entities, DSO
under the countback method is used by management. It is management’s belief that the countback method best
reflects the relative health of our accounts receivable as of a given quarter-end or year-end because of the
cyclical nature of our billings. Our billing cycle includes high annual maintenance renewal billings at year-end
that will not be recognized as earned revenue until future periods.
40
DSO under the countback method was consistent at 52 days for both January 31, 2012 and 2011. DSO
using the average method, which is calculated utilizing the accounts receivable balance and earned revenue for
the most recent quarter, was 89 days and 95 days at January 31, 2012 and 2011, respectively. The decrease in
DSO using the average method was primarily related to higher earned revenue in the fourth quarter of fiscal
2012 compared to the same period last year. We believe our reserve methodology is adequate and our reserves
are properly stated as of January 31, 2012 and the quality of our receivables remains good.
There have been no material changes in our contractual obligations or commercial commitments
outside the ordinary course of business. Cash requirements for items other than normal operating expenses are
anticipated for capital expenditures, dividend payments and stock repurchases. We may require cash for
acquisitions of new businesses, software products or technologies complementary to our business.
We believe that our 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, dividend payments, share repurchase payments and other
cash needs for at least the next twelve months.
CONTRACTUAL OBLIGATIONS
The following table summarizes our significant contractual obligations at January 31, 2012 and the
effect these contractual obligations are expected to have on our liquidity and cash flows in future periods.
2013
Year Ended January 31,
2015
2016
2014
2017
Thereafter
Total
Notes payable . . . . . . . . . .
Notes payable interest
payments . . . . . . . . . . . .
Lease obligations . . . . . . .
Purchase obligations . . . .
Total . . . . . . . . . . . . . . . .
$
0.3
$
0.3
$ 15.5
(In millions)
$ —
$ —
$
—
$
16.1
1.1
6.0
1.4
8.8
$
1.0
4.4
0.8
6.5
0.5
3.1
0.2
$ 19.3
$
—
1.9
—
1.9
$
—
1.6
—
1.6
$
$
—
2.9
—
2.9
$
2.6
19.9
2.4
41.0
Purchase obligations are contractual obligations for purchase of goods or services. They are defined as
agreements that are enforceable and legally binding on QAD and that specify all significant terms, including:
fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate
timing of the transaction. Purchase obligations relate primarily to information technology infrastructure costs
and hosting services agreements.
We have omitted unrecognized tax benefits from this table due to the inherent uncertainty regarding
the timing of potential issue resolution. Specifically, either (a) the underlying positions have not been fully
enough developed under audit to quantify at this time, or (b) the years relating to the issues for certain
jurisdictions are not currently under audit. As of January 31, 2012, we had $2.6 million of unrecognized tax
benefits. For further information regarding the unrecognized tax benefits see Note 7 “Income Taxes” within
Notes to Consolidated Financial Statements.
Purchase orders or contracts for the purchase of supplies and other goods and services are not included
in the table above. We are not able to determine the aggregate amount of such purchase orders that represent
contractual obligations, as purchase orders may represent authorizations to purchase rather than binding
agreements. Our purchase orders are based on our current procurement or development needs and are fulfilled
by our vendors within short time frames. We do not have significant agreements for the purchase of supplies or
other goods specifying minimum quantities or set prices that exceed our expected requirements for three
months. In addition, we have certain royalty commitments associated with the shipment and licensing of certain
products. Royalty expense is generally based on the number of units shipped or a percentage of the underlying
revenue. Royalty expense, included in cost of license fees, maintenance, subscription and other revenue, was
$15.7 million, $15.0 million and $14.3 million in fiscal 2012, 2011 and 2010, respectively.
41
Credit Facility
On July 8, 2011, we entered into an unsecured credit agreement with Rabobank, N.A. (the “Facility”).
The Facility provides a one-year commitment for a $20 million line of credit for working capital or other
business needs. We will pay a commitment fee of 0.25% per annum of the daily average of the unused portion
of the $20 million Facility. Borrowings under the Facility bear interest at a rate equal to LIBOR plus 0.75%.
The Facility provides that we maintain certain financial and operating ratios which include, among
other provisions, minimum liquidity on a consolidated basis of $25 million in cash and cash equivalents at all
times, a current ratio (calculated using current liabilities excluding deferred revenue) of not less than 1.3 to 1.0
determined at the end of each fiscal quarter, a leverage ratio of not more than 1.5 to 1.0 determined at the end of
each fiscal quarter, and a debt service coverage ratio of not less than 1.5 to 1.0 determined at the end of each
fiscal year. The Facility also contains customary covenants that could restrict our ability to incur additional
indebtedness. At January 31, 2012, the effective borrowing rate would have been 1.03%.
As of January 31, 2012, there were no borrowings under the Facility and we were in compliance with
the financial covenants. We expect to renew this facility upon its expiration in July 2012, under competitive
terms based on existing market conditions.
Notes Payable
In July 2004, we entered into a loan agreement with Mid-State Bank & Trust, a bank which was
subsequently purchased by Rabobank, N.A. The loan had an original principal amount of $18.0 million and
bears interest at a fixed rate of 6.5%. This loan is secured by our headquarters located in Santa Barbara,
California. The terms of the loan provide that we will make 119 monthly payments of $115,000 consisting of
principal and interest and one final principal payment of $15.4 million. The loan matures in July 2014. The
balance of the note payable at January 31, 2012 was $16.1 million.
Lease Obligations
We lease certain office facilities, office equipment and automobiles under operating lease agreements.
Future minimum rental payments under non-cancelable operating lease commitments with terms of more than
one year are included in the above table of contractual obligations. For further discussion of our leased office
facilities, see Item 2 entitled “Properties” included elsewhere in this Annual Report on Form 10-K.
Off-Balance Sheet Arrangements
As of January 31, 2012, we did not have any off-balance sheet arrangements as defined in Item
303(a)(4)(ii) of SEC Regulation S-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Exchange Rates. We have operations in foreign locations around the world and we are
exposed to risk resulting from fluctuations in foreign currency exchange rates. The foreign currencies for which
we currently have the most significant exposure are the euro, Australian dollar, British pound, Japanese yen,
Mexican peso, Brazilian real and South African rand. These foreign currency exchange rate movements could
create a foreign currency gain or loss that could be realized or unrealized for us. Unfavorable movements in
foreign currency exchange rates between the U. S. dollar and other foreign currencies may have an adverse
impact on our operations. We did not have any foreign currency forward or option contracts or other material
foreign currency denominated derivatives or other financial instruments open as of January 31, 2012.
We face two risks related to foreign currency exchange rates—translation risk and transaction risk.
Amounts invested in our foreign operations are translated into U.S. dollars using period-end exchange rates.
The resulting translation adjustments are recorded as a component of accumulated other comprehensive loss in
42
the consolidated balance sheets. Revenues and expenses in foreign currencies translate into higher or lower
revenues and expenses in U.S. dollars as the U.S. dollar weakens or strengthens against other currencies. Our
international subsidiaries hold U.S. dollar and euro-based net monetary accounts subject to revaluation that
results in realized or unrealized foreign currency gains or losses. Furthermore, we have exposure to foreign
exchange fluctuations arising from the remeasurement of non-functional currency assets, liabilities and
intercompany balances into U.S. dollars for financial reporting purposes.
For fiscal 2012 and 2011, approximately 40% of our revenue was denominated in foreign currencies
compared to 35% for fiscal 2010. We also incurred a significant portion of our expenses in currencies other than
the U.S. dollar, approximately 45% for fiscal 2012, 2011 and 2010. Based on a hypothetical 10% adverse
movement in all foreign currency exchange rates, our operating income would be adversely affected by less
than 2% (our expenses would be adversely affected by approximately 5%, partially offset by a positive effect on
our revenue of approximately 4%).
For fiscal 2012, 2011 and 2010, foreign currency transaction and remeasurement (gains) losses totaled
$0.8 million, $0.1 million and $(0.1) million, respectively, and are included in “Other (income) expense, net” in
our Consolidated Statements of Income. We performed a sensitivity analysis on the net U.S. dollar and euro-
based monetary accounts subject to revaluation that are held by our international subsidiaries and on the non-
functional currency assets, liabilities and intercompany balances that are remeasured into U.S. dollars. A
hypothetical 10% adverse movement in all foreign currency exchange rates would result in foreign currency
transaction and remeasurement losses of approximately $0.8 million and our income before taxes would be
adversely affected by less than 5%.
These estimates assume an adverse shift in all foreign currency exchange rates against the U.S. dollar,
which do not always move in the same direction or in the same degrees, and actual results may differ materially
from the hypothetical analysis.
Interest Rates. We invest our surplus cash in a variety of financial instruments, consisting principally
of short-term marketable securities with maturities of less than 90 days at the date of purchase. Our investment
securities are held for purposes other than trading. Cash balances held by subsidiaries are invested primarily in
registered money market funds with local operating banks. Our debt is comprised of a loan agreement, secured
by real property, which bears interest at a fixed rate of 6.5%. Additionally we have an unsecured loan
agreement which bears interest at variable rates. As of January 31, 2012, there were no borrowings under our
unsecured loan agreement.
We prepared sensitivity analyses of our interest rate exposure and our exposure from anticipated
investment and borrowing levels for fiscal 2012 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 2012 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 the next fiscal year.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is included in Item 15 of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
43
QAD maintains disclosure controls and procedures that are designed to ensure that information
required to be disclosed in reports that it files or submits under the Securities Exchange Act of 1934 (the
“Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms, and that such information is accumulated and
communicated to management to allow timely decisions regarding required disclosure. QAD’s management,
with the participation of the Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness
of QAD’s disclosure controls and procedures as of the end of the period covered by this Annual Report on Form
10-K. Based on this evaluation, QAD’s principal executive officer and principal financial officer have
concluded that QAD’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under
the Exchange Act) were effective.
(b) Management’s Report on Internal Control Over Financial Reporting
QAD’s management is responsible for establishing and maintaining adequate internal control over
financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as
amended. QAD’s system of internal control over financial reporting is designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of consolidated financial statements for
external purposes in accordance with generally accepted accounting principles. QAD’s internal control over
financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of QAD’s assets; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that QAD’s receipts and expenditures are being
made only in accordance with authorizations of QAD’s management and directors; and (iii) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of QAD’s
assets that could have a material effect on the financial statements.
Management has assessed the effectiveness of QAD’s internal control over financial reporting as of
January 31, 2012 based on the criteria described in Internal Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on management’s
assessment, management has concluded that QAD’s internal control over financial reporting was effective at the
reasonable assurance level as of January 31, 2012. We reviewed the results of management’s assessment with
our Audit Committee.
Our independent registered public accounting firm, KPMG LLP, has audited our internal control over
financial reporting as of January 31, 2012, as stated in their report included in this Annual Report on Form 10-
K.
(c) Changes in Internal Control over Financial Reporting
There were no changes in the Company’s internal control over financial reporting identified in
connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred
during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, internal
control over financial reporting.
(d) Limitations on the Effectiveness of Controls
QAD’s management does not expect that its disclosure controls and procedures or its internal control
over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived
and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are
met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute
assurance that all control issues and instances of fraud, if any, within QAD have been detected. The design of
any system of controls also is based in part upon certain assumptions about the likelihood of future events, and
there can be no assurance that any design will succeed in achieving its stated goals under all potential future
conditions; over time, controls may become inadequate because of changes in conditions, or the degree of
compliance with policies or procedures may deteriorate.
44
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
QAD Inc.:
We have audited the internal control over financial reporting of QAD Inc. as of January 31, 2012, based on
criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Management of QAD Inc. is responsible for maintaining
effective internal control over financial reporting and for its assessment of the effectiveness of internal control
over financial reporting, included in the accompanying report entitled Management’s Report on Internal Control
Over Financial Reporting included in Item 9A.(b). Our responsibility is to express an opinion on the internal
control over financial reporting of QAD Inc. based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether effective internal control over financial reporting was maintained in all material respects. Our
audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design and operating effectiveness of internal control
based on the assessed risk. Our audit also included performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles. A company’s internal control over financial
reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
In our opinion, QAD Inc. maintained, in all material respects, effective internal control over financial reporting
as of January 31, 2012, based on criteria established in Internal Control – Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the consolidated balance sheets of QAD Inc. and subsidiaries as of January 31, 2012 and 2011,
and the related consolidated statements of income, stockholders’ equity and comprehensive income (loss), and
cash flows for each of the years in the three-year period ended January 31, 2012, and our report dated April 4,
2012 expressed an unqualified opinion on those consolidated financial statements.
Los Angeles, California
April 4, 2012
/s/ KPMG LLP
45
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information regarding QAD directors is set forth in the section entitled “Election of Directors”
appearing in our Definitive Proxy Statement for the Annual Meeting of Stockholders (“Proxy Statement”) to be
filed with the Securities and Exchange Commission within 120 days after the end of our fiscal year ended
January 31, 2012, which information is incorporated herein by reference.
In addition, the other information required by Item 10 is incorporated by reference from the Proxy
Statement.
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is certain information concerning our executive officers. All ages are as of March 31,
2011.
NAME
Pamela M. Lopker . . . . . . . . . . . . .
Karl F. Lopker . . . . . . . . . . . . . . . .
Daniel Lender . . . . . . . . . . . . . . . . .
Gordon Fleming . . . . . . . . . . . . . .
Kara Bellamy . . . . . . . . . . . . . . . . .
AGE
57
60
45
48
36
POSITION(S)
Chairman of the Board and President
Chief Executive Officer
Executive Vice President and Chief Financial Officer
Executive Vice President and Chief Marketing Officer
Sr. Vice President, Corporate Controller and Chief Accounting
Officer
Pamela M. Lopker founded QAD in 1979 and has been Chairman of the Board and President since
QAD’s incorporation in 1981. Previously, Ms. Lopker served as Senior Systems Analyst for Comtek Research
from 1977 to 1979. She is certified in production and inventory management by the American Production and
Inventory Control Society. Ms. Lopker earned a bachelor of arts degree in mathematics from the University of
California, Santa Barbara. She is married to Karl F. Lopker, Chief Executive Officer of QAD.
Karl F. Lopker has served as Chief Executive Officer and a Director of QAD since joining QAD in
1981. Previously, he was President of Deckers Outdoor Corporation, a company that he founded in 1973. Mr.
Lopker is certified in production and inventory management by the American Production and Inventory Control
Society. He received a bachelor of science degree in electrical engineering from the University of California,
Santa Barbara. Mr. Lopker is married to Pamela M. Lopker, Chairman of the Board and President of QAD.
Daniel Lender was first appointed Executive Vice President and Chief Financial Officer in July 2003.
Previously, he served as QAD’s Vice President of Global Sales Operations and Vice President of Latin
America. Mr. Lender joined QAD in 1998 as Treasurer following a nine-year tenure with the former Republic
National Bank of New York, last serving as Vice President and Treasurer of the Bank’s Delaware subsidiary.
He earned a master of business administration degree from the Wharton School of the University of
Pennsylvania and a bachelor of science degree in applied economics and business management from Cornell
University.
Gordon Fleming has served as Executive Vice President and Chief Marketing Officer since December
2006. Previously he served in a number of roles including Vice President of Vertical Marketing and Managing
Director of QAD Australia Pty. Ltd. Mr. Fleming joined QAD as a Sales Manager in July 1995, working in the
Australian subsidiary. Mr. Fleming began his career as a telecommunications engineer working in both the
United Kingdom and Nigeria. Later Mr. Fleming moved into corporate finance holding sales and marketing
46
roles with Barclays plc and Schroders plc. Mr. Fleming is a Member of the Institute of Electrical and Electronic
Engineers (IEEE) and studied at Worthing College of Technology, UK.
Kara Bellamy has served as Senior Vice President, Corporate Controller and Chief Accounting Officer
since January 2008. Previously, she served as QAD’s Corporate Controller beginning December 2006. She
joined QAD as Assistant Corporate Controller in July 2004 after working for Somera Communications, Inc. as
its Corporate Controller from 2002 through 2004. Ms. Bellamy worked at the public accounting firm of Ernst &
Young from 1997 to 2002. She is a Certified Public Accountant (inactive) and received a bachelor of arts
degree in business economics with an accounting emphasis from the University of California, Santa Barbara.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation
is set forth under
the caption “Executive
Compensation” in the Proxy Statement, which information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
Information regarding security ownership of certain beneficial owners and management is set forth
under the caption “Stock Ownership of Directors, Executive Officers and Certain Beneficial Owners” in the
Proxy Statement, which information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
Information regarding certain relationships and related transactions is set forth under the caption
“Certain Transactions with Related Persons” in the Proxy Statement, which information is incorporated herein
by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information regarding services performed by, and fees paid to, our independent auditors is set forth
under the caption “Principal Accountant Fees and Services” in the Proxy Statement, which information is
incorporated herein by reference.
47
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
1. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheets as of January 31, 2012 and 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Income for the years ended January 31, 2012, 2011 and 2010 . . . . . . . . . . .
Consolidated Statement of Stockholders’ Equity and Comprehensive Income (Loss) for the years
ended January 31, 2012, 2011 and 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows for the years ended January 31, 2012, 2011 and 2010 . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Page
49
50
51
52
53
54
2. INDEX TO FINANCIAL STATEMENT SCHEDULES
The following financial statement schedule is filed as a part of this Annual Report on Form 10-K:
SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS . . . . . . . . . . . . . . . . . . . . . . . . . . .
Page
80
All other schedules are omitted because they are not required or the required information is presented
in the financial statements or notes thereto.
3. INDEX TO EXHIBITS
See the Index of Exhibits at page 82.
48
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
QAD Inc.:
We have audited the accompanying consolidated balance sheets of QAD Inc. and subsidiaries (the Company) as
of January 31, 2012 and 2011, and the related consolidated statements of income, stockholders’ equity and
comprehensive income (loss), and cash flows for each of the years in the three-year period ended January 31,
2012. In connection with our audits of the consolidated financial statements, we also have audited the related
financial statement schedule. These consolidated financial statements and financial statement schedule are the
responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
financial position of QAD Inc. and subsidiaries as of January 31, 2012 and 2011, and the results of their
operations and their cash flows for each of the years in the three-year period ended January 31, 2012, in
conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial
statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the internal control over financial reporting of QAD Inc. as of January 31, 2012, based on
criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report dated April 4, 2012 expressed an
unqualified opinion on the effectiveness of the internal control over financial reporting of QAD Inc.
Los Angeles, California
April 4, 2012
/s/ KPMG LLP
49
QAD INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
Assets
January 31,
2012
2011
76,927 $
67,276
Current assets:
Cash and equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Accounts receivable, net of allowances of $2,467 and $2,661 at January 31,
2012 and 2011, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capitalized software costs, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
65,620
3,954
12,553
149,403
33,795
841
6,457
20,080
2,518
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 218,145 $ 213,094
64,757
4,355
11,853
157,892
33,139
583
6,412
17,285
2,834
Liabilities and Stockholders’ Equity
Current liabilities:
Current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commitments and contingencies
Stockholders’ equity:
321 $
9,724
93,871
31,099
135,015
15,813
5,302
304
10,003
94,453
30,891
135,651
16,138
5,214
Preferred stock, $0.001 par value. Authorized 5,000,000 shares; none issued or
outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
Common stock:
Class A, $0.001 par value. Authorized 71,000,000 shares; issued
14,146,418 shares and 14,146,416 shares at January 31, 2012 and 2011,
respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Class B, $0.001 par value. Authorized 4,000,000 shares; issued 3,536,609
shares and 3,536,604 shares at January 31, 2012 and 2011,
respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock, at cost (1,804,137 shares and 1,721,601 shares at January 31,
14
14
4
148,993
4
146,898
2012 and 2011, respectively) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(28,070)
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(54,438)
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(8,317)
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
56,091
Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 218,145 $ 213,094
(27,968)
(48,974)
(10,054)
62,015
See accompanying notes to consolidated financial statements.
50
QAD INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
Revenue:
License fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maintenance and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subscription fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Professional services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Costs of revenue:
License fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maintenance, subscription and other revenue . . . . . . . . . .
Professional services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total cost of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Years Ended January 31,
2011
2010
2012
$
$
$
33,166
137,659
9,787
66,646
247,258
29,821
130,104
5,773
54,314
220,012
25,927
129,658
4,009
55,637
215,231
4,585
36,077
64,677
105,339
5,624
33,130
55,194
93,948
6,506
31,669
53,452
91,627
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
141,919
126,064
123,604
Operating expenses
Sales and marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of intangible assets from acquisitions . . . .
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . .
58,336
35,708
29,969
14
124,027
54,206
34,575
30,637
55
119,473
51,979
37,303
30,969
482
120,733
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
17,892
6,591
2,871
Other (income) expense:
Interest income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other (income) expense, net . . . . . . . . . . . . . . . . . . . . . . . . . .
Total other expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic net income per share:
Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Class B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted net income per share:
Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Class B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
$
(630)
1,174
548
1,092
16,800
6,016
(515)
1,248
304
1,037
5,554
2,843
(570)
1,273
(289)
414
2,457
1,108
10,784
$
2,711
$
1,349
0.69
0.58
0.67
0.56
$
$
$
$
0.18
0.15
0.17
0.14
$
$
$
$
0.09
0.08
0.09
0.07
See accompanying notes to consolidated financial statements.
51
QAD INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
(LOSS)
(in thousands)
Number of Shares
Class A Class B Treasury
Amount
Class A Class B
Additional
Paid-in
Capital
Treasury
Stock
Accumulated
Deficit
Accumulated
Other
Comprehensive
Loss
Total
Stockholders’
Equity
Comprehensive
Income (Loss)
Balance, January
31, 2009 . . . . . . . . . . . . . 14,145
3,536
(2,298) $
14 $
4 $
139,947 $
(36,614) $
(49,103) $
(6,777) $
47,471
Comprehensive loss:
Net income . . . . . . . . . . . . .
Foreign currency
translation adjustments
Total comprehensive
loss . . . . . . . . . . . . . . .
Stock award exercises . . . .
Stock compensation
expense . . . . . . . . . . . . . .
Dividends declared ($0.20
per share) . . . . . . . . . . .
Dividends paid in stock . .
Restricted stock . . . . . . . . .
Balance, January
—
—
1
—
—
—
—
—
—
—
—
—
—
—
—
—
45
—
—
160
87
—
—
—
—
—
—
—
31, 2010 . . . . . . . . . . . . . 14,146
3,536
(2,006)
14
Comprehensive income:
Net income . . . . . . . . . . . . .
Foreign currency
translation adjustments
Total comprehensive
income . . . . . . . . . . . .
Stock award exercises . . . .
Stock-based compensation
income tax benefits . . .
Stock compensation
expense . . . . . . . . . . . . . .
Dividends declared ($0.21
and $0.20 per Class A
and Class B share,
respectively) . . . . . . . .
Dividends paid in stock . .
Restricted stock . . . . . . . . .
Balance, January
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1
—
—
74
—
—
—
98
112
—
—
—
—
—
—
—
—
31, 2011 . . . . . . . . . . . . . 14,146
3,537
(1,722)
14
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
4
—
—
—
—
—
—
—
—
4
—
—
—
—
—
—
1,349
—
—
1,349 $
1,349
(2,073)
(2,073)
(2,073)
(724)
2,711
533
3,244
(6)
670
(392)
4,592
—
—
—
—
(1,395)
—
2,374
1,295
(3,110)
(1,149)
(75)
—
—
—
—
—
$
272
4,592
(3,110)
1,225
(175)
143,138
(32,275)
(52,480)
(8,850)
49,551
—
—
—
—
2,711
—
(25)
1,097
(633)
367
5,303
—
—
—
—
—
—
(1,885)
—
1,457
1,651
(3,296)
(511)
(229)
—
533
—
—
—
—
—
—
2,711 $
533
$
439
367
5,303
(3,296)
946
(463)
146,898
(28,070)
(54,438)
(8,317)
56,091
—
—
—
—
10,784
—
10,784 $
10,784
—
(1,737)
(1,737)
(1,737)
—
—
33
—
—
(436)
487
(156)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
141
120
—
—
—
—
—
(376)
—
—
—
—
—
—
—
(7)
4,507
—
—
—
—
—
—
(1,969)
—
2,132
1,802
(4,095)
(619)
(450)
—
(4,319)
—
9,047
—
—
—
—
—
—
—
$
(105)
(7)
4,507
(4,095)
1,513
(617)
(4,319)
Comprehensive income:
Net income . . . . . . . . . . . . .
Foreign currency
translation adjustments
Total comprehensive
income . . . . . . . . . . . .
Stock award exercises . . . .
Stock-based compensation
income tax
deficiencies . . . . . . . . . .
Stock compensation
expense . . . . . . . . . . . . . .
Dividends declared ($0.26
and $0.22 per Class A
and Class B share,
respectively) . . . . . . . . .
Dividends paid in stock
Restricted stock . . . . . . . . .
Repurchase of common
stock . . . . . . . . . . . . . . . .
Balance, January
31, 2012 . . . . . . . . . . . . . 14,146
3,537
(1,804) $
14 $
4 $
148,993 $
(27,968) $
(48,974) $
(10,054) $
62,015
See accompanying notes to consolidated financial statements.
52
QAD INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to net cash provided by
Years Ended January 31,
2011
2010
2012
$ 10,784
$ 2,711
$
1,349
operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for doubtful accounts and sales adjustments . . . . . . . .
Tax benefit from reversal of deferred tax valuation
allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on disposal of property and equipment . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exit costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Excess tax benefits from stock awards . . . . . . . . . . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in assets and liabilities, net of effects from acquisitions:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by operating activities . . . . . . . . . . . . . . . . . .
Cash flows from investing activities:
Purchase of property and equipment . . . . . . . . . . . . . . . . . . . . . . . .
Capitalized software costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . .
Cash flows from financing activities:
Repayments of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax payments, net of proceeds, related to stock awards . . . . . . .
Excess tax benefits from stock awards . . . . . . . . . . . . . . . . . . . . . .
Repurchase of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in cash overdraft . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . .
Effect of exchange rates on cash and equivalents. . . . . . . . . . . . . . .
Net increase in cash and equivalents . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and equivalents at beginning of year . . . . . . . . . . . . . . . . . . . . .
Cash and equivalents at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . .
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes, net of refunds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Supplemental disclosure of non-cash activities:
Obligations associated with dividend declaration. . . . . . . . . . . . . . .
Dividends paid in stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,721
1,160
(954)
33
735
—
4,507
(33)
(308)
6,960
468
(148)
65
(1,488)
—
5,303
(384)
(320)
(428)
1,567
(229)
(1,681)
1,574
21,448
(4,792)
2,591
2,069
7,548
5,319
25,902
(3,781)
(285)
(81)
(4,147)
(1,432)
(484)
(6)
(1,922)
(308)
(2,409)
(722)
33
(4,319)
—
(7,725)
75
9,651
67,276
$ 76,927
(287)
(2,204)
(24)
384
—
—
(2,131)
749
22,598
44,678
$ 67,276
$
1,123
3,913
$ 1,184
1,490
1,099
1,513
926
946
$
$
9,992
2,025
(1,194)
130
(1,344)
217
4,592
—
(554)
10,447
(153)
(2,457)
2,872
(8,226)
17,696
(963)
(426)
32
(1,357)
(255)
(1,873)
97
—
—
(2,476)
(4,507)
1,379
13,211
31,467
44,678
1,230
3,980
780
1,225
See accompanying notes to consolidated financial statements.
53
QAD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
QAD is a global provider of enterprise software applications, and related services and support. QAD’s
enterprise resource planning (“ERP”) product suite is QAD Enterprise Applications, which is also known as
MFG/PRO. The QAD Enterprise Applications suite provides a set of capabilities designed to support core
business operations and enable most common business processes. The Company is principally focused on
addressing the needs of global manufacturing companies. Its solutions are configured to address the
requirements of the following specific manufacturing industries: automotive, consumer products, food and
beverage, high technology, industrial products and life sciences.
On December 14, 2010, QAD shareholders approved a Recapitalization plan (the “Recapitalization”)
pursuant to which the Company (i) established two classes of common stock, consisting of a new class of
common stock with one-twentieth (1/20th) of a vote per share, designated as Class A common stock $0.001 par
value per share (the “Class A Common Stock”) and a new class of common stock with one vote per share,
designated as Class B common stock $0.001 par value per share (the “Class B Common Stock”);
(ii) reclassified each issued and outstanding whole share of the Company’s existing $0.001 par value per share
common stock (the “Existing Stock”) as 0.1 share of Class B Common Stock; and (iii) issued a dividend of four
shares of Class A Common Stock for each whole share of Class B Common Stock outstanding after giving
effect to the foregoing reclassification. The reclassification of Existing Stock into Class A Common Stock and
Class B Common Stock, together, reflects the effect of a two-to-one reverse stock split. Fractional shares were
paid in cash and were not material.
All references in the financial statements to the number of shares, stock options, restricted shares, stock
appreciation rights and related per-share amounts of the Company’s common stock have been retroactively
recast to reflect the effect of the Recapitalization for all periods presented.
Beginning in the quarter ended April 30, 2011, the Company began presenting subscription revenue as
a separate caption within revenue. Subscription revenue includes hosting arrangements and software as a
service arrangements. In addition, the Company began presenting costs of professional services as a separate
caption within costs of revenue. Prior period data has been reclassified to conform to the current presentation.
These reclassifications had no effect on reported net income, gross profit or total revenue.
REVENUE
The Company primarily offers its software using two models. The traditional model involves the sale
or license of software on a perpetual basis to customers who take possession of the software and install and
maintain the software on their own equipment; the Company sometimes refers to this as the “on-premise
licensing model”. More recently, the Company delivers its software on a hosted basis as a service and
customers generally do not have the contractual right to take possession of the software; the Company
sometimes refers to this as a “SaaS model”. The Company sells a majority of its software through its on-
premise licensing model and recognizes revenue associated with these offerings in accordance with the
accounting guidance contained in ASC 985-605, Software Revenue. Additionally, delivery of software under the
SaaS model is typically over a contractual term of 12 to 36 months and the Company recognizes revenue
associated with these offerings, which it calls subscription revenue in the accompanying consolidated
statements of income, in accordance with the accounting guidance contained in ASC 605-25, Revenue
Recognition - Multiple-Deliverable Revenue Arrangements. Whether sales are made via an on-premise model or
a SaaS model, the arrangement typically consists of multiple elements, including revenue from one or more of
the following elements: license of software products, support services, hosting, consulting, development,
training, or other professional services.
54
Software Revenue Recognition (On-Premise Model)
The majority of the Company’s software is sold or licensed in multiple-element arrangements that
include support services and often consulting services or other elements. For software license arrangements that
do not require significant modification or customization of the underlying software, the Company recognizes
revenue when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or
determinable, and collectability is probable. Revenue is presented net of sales, use and value-added taxes
collected from its customers.
The Company’s typical payment terms vary by region. Occasionally, payment terms of up to one year
may be granted for software license fees to customers with an established history of collections without
concessions. Should the Company grant payment terms greater than one year or terms that are not in accordance
with established history for similar arrangements, revenue would be recognized as payments become due and
payable assuming all other criteria for software revenue recognition have been met.
Provided all other revenue recognition criteria have been met, the Company recognizes license revenue
on delivery using the residual method when vendor-specific objective evidence of fair value (“VSOE”) exists
for all of the undelivered elements (for example, support services, consulting, or other services) in the
arrangement. The Company allocates revenue to each undelivered element based on VSOE, which is the price
charged when that element is sold separately or, for elements not yet sold separately, the price established by
the Company’s management if it is probable that the price will not change before the element is sold separately.
The Company allocates revenue to undelivered support services based on rates charged to renew the support
services annually after an initial period. The Company allocates revenue to undelivered consulting services
based on time and materials rates of stand-alone services engagements by role and by country. The Company
reviews VSOE at least annually. If the Company were to be unable to establish or maintain VSOE for one or
more undelivered elements within a multiple-element software arrangement, it could adversely impact revenues,
results of operations and financial position because the Company may have to defer all or a portion of the
revenue or recognize revenue ratably from multiple-element software arrangements.
Multiple-element software arrangements for which VSOE does not exist for all undelivered elements
typically occur when the Company introduces a new product or product bundles for which it has not established
VSOE for support services or consulting or other services under its VSOE policy. In these instances, revenue is
deferred and recognized ratably over the longer of the support services (maintenance period) or consulting
services engagement, assuming there are no specified future deliverables. In the instances in which it has been
determined that revenue on these bundled arrangements will be recognized ratably due to lack of VSOE, at the
time of recognition, the Company allocates revenue from these bundled arrangement fees to all of the non-
license revenue categories based on VSOE of similar support services or consulting services. The remaining
arrangement fees, if any, are then allocated to software license fee revenues. The associated costs primarily
consist of payroll and related costs to perform both the consulting services and provide support services and
royalty expense related to the license and maintenance revenue. These costs are expensed as incurred and
included in cost of maintenance, subscription and other revenue, cost of professional services and cost of license
fees.
Revenue from support services and product updates, referred to as maintenance revenue, is recognized
ratably over the term of the maintenance period, which in most instances is one year. Software license updates
provide customers with rights to unspecified software product upgrades, maintenance releases and patches
released during the term of the support period on a when-and-if available basis. Product support includes
Internet access to technical content, as well as Internet and telephone access to technical support personnel. The
Company’s customers generally purchase both product support and license updates when they acquire new
software licenses. In addition, a majority of customers renew their support services contracts annually.
Revenue from consulting services, which we call professional services in the consolidated statements
of income, are typically comprised of implementation, development, training or other consulting services.
Consulting services are generally sold on a time-and-materials basis and can include services ranging from
55
software installation to data conversion and building non-complex interfaces to allow the software to operate in
integrated environments. Consulting engagements can range anywhere from one day to several months and are
based strictly on the customer’s requirements and complexities and are independent of the functionality of the
Company’s software. The Company’s software, as delivered, can generally be used by the customer for the
customer’s purpose upon installation. Further, implementation and integration services provided are generally
not essential to the functionality of the software, as delivered, and do not result in any material changes to the
underlying software code. On occasion, the Company enters into fixed fee arrangements in which customer
payments are tied to achievement of specific milestones. In fixed fee arrangements, revenue is recognized as
services are performed as measured by costs incurred to date, as compared to total estimated costs to be
incurred to complete the work. In milestone achievement arrangements, the Company recognizes revenue as the
respective milestones are achieved.
The Company occasionally resells third party systems as part of an end-to-end solution requested by its
customers. Hardware revenue is recognized on a gross basis in accordance with the guidance contained in ASC
605-45, Revenue Recognition – Principal Agent Considerations and when persuasive evidence of an
arrangement exists, delivery has occurred, the fee is fixed or determinable and collection is considered
reasonably assured. The Company considers delivery to occur when the product is shipped and title and risk of
loss have passed to the customer.
Although infrequent, when an arrangement does not qualify for separate accounting of the software
license and consulting transactions, the software license revenue is recognized together with the consulting
services based on contract accounting using either the percentage-of-completion or completed-contract method.
Arrangements that do not qualify for separate accounting of the software license fee and consulting services
typically occur when the Company is requested to customize software or when the Company views the
installation of its software as high risk in the customer’s environment. This requires the Company to make
estimates about the total cost to complete the project and the stage of completion. The assumptions, estimates,
and uncertainties inherent in determining the stage of completion affect the timing and amounts of revenues and
expenses reported. Changes in estimates of progress toward completion and of contract revenues and contract
costs are accounted for using the cumulative catch up approach. In certain arrangements, the Company does not
have a sufficient basis to estimate the costs of providing support services. As a result, revenue is typically
recognized on a percent completion basis up to the amount of costs incurred (zero margin). Once the consulting
services are complete and support services are the only undelivered item, the remaining revenue is recognized
evenly over the remaining support period. If the Company does not have a sufficient basis to measure the
progress of completion or to estimate the total contract revenues and costs, revenue is recognized when the
project is complete and, if applicable, final acceptance is received from the customer. The Company allocates
these bundled arrangement fees to support services and consulting services revenues based on VSOE. The
remaining arrangement fees are then allocated to software license fee revenues. The associated costs primarily
consist of payroll and related costs to perform the consulting and support services and royalty expense. These
costs are expensed as incurred and are included in cost of maintenance, subscription and other revenue, cost of
professional services and cost of license fees.
The Company executes arrangements through indirect sales channels via sales agents and distributors
in which the indirect sales channels are authorized to market its software products to end users. In arrangements
with sales agents, revenue is recognized on a sell-through basis once an order is received from the end user,
collectability from the end user is probable, a signed license agreement from the end user has been received by
the Company, delivery has been made to the end user and all other revenue recognition criteria have been
satisfied. Sales agents are compensated on a commission basis. Distributor arrangements are those in which the
resellers are authorized to market and distribute the Company’s software products to end users in specified
territories and the distributor bears the risk of collection from the end user customer. The Company recognizes
revenue from transactions with distributors when the distributor submits a written purchase commitment,
collectability from the distributor is probable, a signed license agreement is received from the distributor and
delivery has occurred to the distributor, provided that all other revenue recognition criteria have been satisfied.
Revenue from distributor transactions is recorded on a net basis (the amount actually received by the Company
56
from the distributor). The Company does not offer rights of return, product rotation or price protection to any of
its distributors.
Subscription Revenue Recognition
The Company recognizes the following fees in subscription revenue from the SaaS model: i)
subscription fees from customers accessing our On Demand and our other subscription offerings, ii) providing
consulting services such as set up, process mapping, configuration, database conversion and migration, and iii)
support fees on hosted products. The Company’s subscription arrangements do not provide customers with the
right to take possession of the subscribed software at any time.
The Company commences revenue recognition when there is persuasive evidence of an arrangement,
the service is being provided to the customer, the collection of the fees is reasonably assured and the amount of
fees to be paid by the customer is fixed or determinable.
Subscription revenue is recognized ratably over the initial subscription period committed to by the
customer commencing when the customer’s environment has been migrated to the Company’s hosted
environment. The initial subscription period is typically 12 to 36 months. The Company’s subscription services
are non-cancelable, though customers typically have the right to terminate their contracts if the Company
materially fails to perform. The Company generally invoices its customers in advance in quarterly installments
and typical payment terms provide that customers pay the Company within 30 days of invoice.
Other consulting services are typically sold on a time-and-materials basis and consist of fees from
consultation services such as configuration of features, implementing at various customer sites, testing and
training. These services are considered to have stand-alone value to the customer because the Company has sold
consulting services separately and there are several third-party vendors that routinely provide similar
professional services to the Company’s customers on a stand-alone basis. Accordingly, consulting services are a
separate unit of accounting and the associated services revenue is recognized as the services are performed and
earned.
The Company may enter into multiple-element arrangements that may include a combination of our
subscription offering and other consulting services. Prior to February 1, 2011, the deliverables in multiple
element arrangements were accounted for separately if the delivered items had stand-alone value and
VSOE was available for the undelivered items. If the multiple-element arrangement could not be accounted for
separately, the total arrangement fee was recognized ratably over the initial subscription period.
In October 2009, the FASB issued Accounting Standards Update No. 2009-13, Revenue Recognition
(Topic 605), Multiple-Deliverable Revenue Arrangements (ASU 2009-13), which amended the previous
multiple-deliverable arrangements accounting guidance. Pursuant to the updated guidance, VSOE of the
deliverables to be delivered is no longer required in order to account for deliverables in a multiple-element
arrangement separately. Instead, arrangement consideration is allocated to deliverables based on their relative
selling price.
The Company adopted the accounting guidance in ASU 2009-13 for applicable arrangements entered
into after February 1, 2011 (the beginning of the Company’s fiscal year). As a result of the adoption of ASU
2009-13, the Company allocates revenue to each element in an arrangement based on a selling price hierarchy.
The selling price for a deliverable is based on its VSOE, if available, Third Party Evidence (“TPE”), if VSOE is
not available, or Estimated Selling Price (“ESP”), if neither VSOE nor TPE is available. The determination for
ESP is made through consultation with and approval by management taking into consideration the go-to-market
strategy. As the Company’s go-to-market strategies evolve, there may be modifications of pricing practices in
the future, which could result in changes in both VSOE and ESP.
57
For multiple-element arrangements that may include a combination of our subscription offerings and
other consulting services, the total arrangement fee is allocated to each element based on the VSOE / ESP value
of each element. After allocation, the revenue associated with the subscription offering and other consulting
services are recognized as described above.
ACCOUNTS RECEIVABLE ALLOWANCES
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The
collectability of accounts receivable is reviewed each period by analyzing balances based on age. Specific
allowances are recorded for any balances that the Company determines may not be fully collectible due to
inability of the customers to pay. The Company also provides a general reserve based on historical data
including analysis of write-offs and other known factors. Provisions to the allowance for bad debts are included
as bad debt expense in general and administrative expense. The determination to write-off specific accounts
receivable balances is made based on likelihood of collection and past due status. Past due status is based on
invoice date and terms specific to each customer.
The Company does not generally provide a contractual right of return; however, in the course of
business sales returns and allowances may occur. A provision is recorded against revenue for estimated sales
returns and allowances in the same period the related revenues are recorded or when current information
indicates additional amounts are required. These estimates are based on historical experience, specifically
identified customers and other known factors.
The accounts receivable allowance for doubtful accounts is comprised of both the allowance for bad
debts and the allowance for sales returns.
INCOME TAXES
The Company recognizes deferred tax assets and liabilities for temporary differences between the
financial reporting basis and the tax basis of its assets and liabilities and expected benefits of utilizing net
operating loss and credit carryforwards. In assessing whether there is a need for a valuation allowance on
deferred tax assets, the Company determines whether it is more likely than not that it will realize tax benefits
associated with deferred tax assets. In making this determination, the Company considers future taxable income
and tax planning strategies that are both prudent and feasible. For deferred tax assets that cannot be recognized
under the more-likely-than-not standard, the Company has established a valuation allowance. The impact on
deferred taxes of changes in tax rates and laws, if any, are reflected in the financial statements in the period of
enactment. No provision is made for taxes on unremitted earnings of foreign subsidiaries because they are
considered to be reinvested indefinitely in such operations.
The Company records a liability for taxes to address potential exposures involving uncertain tax
positions that could be challenged by taxing authorities, even though the Company believes that the positions
taken are appropriate. The tax reserves are reviewed on a quarterly basis and adjusted as events occur that affect
the Company’s potential liability for additional taxes. The Company is subject to income taxes in the U.S. and
in various foreign jurisdictions, and in the ordinary course of business there are many transactions and
calculations where the ultimate tax determination is uncertain. For tax positions that are more likely than not of
being sustained upon audit, the Company recognizes the largest amount of the benefit that is greater than 50%
likely of being realized upon ultimate settlement in the financial statements. For tax positions that do not meet
the more-likely-than-not standard the entire balance is reserved.
STOCK-BASED COMPENSATION
The Company accounts for share-based payments (“equity awards”) to employees in accordance with
ASC 718, Compensation—Stock Compensation (“ASC 718”), which requires that share-based payments (to the
extent they are compensatory) be recognized in the consolidated statements of income based on the fair values
of the equity awards as measured at the grant date. The fair value of an equity award is recognized as stock-
58
based compensation expense ratably over the vesting period of the equity award. Determining the fair value of
equity awards at the grant date requires judgment.
Fair Value of SARs
The fair value of stock-settled stock appreciation rights (“SARs”) is determined on the grant date of the
award using the Black-Scholes-Merton valuation model. One of the inputs to the Black-Scholes-Merton
valuation model is the fair market value of the Company’s stock on the date of the grant. Judgment is required
in determining the remaining inputs to the Black-Scholes-Merton valuation model. These inputs include the
expected life, volatility, the risk-free interest rate and the dividend rate. The following describes the Company’s
policies with respect to determining these valuation inputs:
Expected Life
The expected life valuation input includes a computation that is based on historical vested option and
SAR exercises and post-vest expiration patterns and an estimate of the expected life for options and
SARs that were fully vested and outstanding. Furthermore, based on the Company’s historical pattern
of option and SAR exercises and post-vest expiration patterns the Company determined that there are
two discernable populations which include the Company’s directors and officers (“D&O”) and all
other QAD employees. The estimate of the expected life for options and SARs that were fully vested
and outstanding is determined as the midpoint of a range as follows: the low end of the range assumes
the fully vested and outstanding options and SARs are exercised or expire unexercised on the
evaluation date and the high end of the range assumes that these options and SARs are exercised or
expire unexercised upon contractual term.
Volatility
The volatility valuation input is based on the historical volatility of the Company’s common stock,
which the Company believes is representative of the expected volatility over the expected life of SARs.
Risk-Free Interest Rate
The risk-free interest rate is based on the U.S. Treasury constant maturities in effect at the time of grant
for the expected term of the option or share.
Dividend Rate
The dividend rate is based on the Company’s historical dividend payments per share.
Fair Value of RSUs
The fair value of restricted stock units (“RSUs”) is determined on the grant date of the award as the
market price of the Company’s common stock on the date of grant, reduced by the present value of estimated
dividends foregone during the vesting period. Judgment is required in determining the present value of
estimated dividends foregone during the vesting period. The Company estimates the dividends for purposes of
this calculation based on the Company’s historical dividend payments per share.
While the Company recognizes as stock-based compensation expense the entire amount of the fair
value of a vested equity award once it has vested, during the periods in which the equity awards are vesting, the
Company is required to estimate equity awards that are expected to cancel prior to vesting (“forfeitures”) and
reduce the stock-based compensation expense recognized in a given period for the effects of estimated
forfeitures over the expense recognition period (“forfeiture rate”). To determine the forfeiture rate, the
Company examines the historical pattern of forfeitures which it believes is indicative of future forfeitures in an
effort to determine if there were any discernable forfeiture patterns based on certain employee populations.
From this analysis, the Company identified two employee populations that have different historical forfeiture
rates. One population includes D&O and the other population includes all other QAD employees. The Company
evaluates the forfeiture rate annually or more frequently when there have been any significant changes in
forfeiture activity.
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PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of QAD Inc. and all of its subsidiaries. All
subsidiaries are wholly-owned and all significant balances and transactions among the entities have been
eliminated from the consolidated financial statements.
USE OF ESTIMATES
The financial statements have been prepared in conformity with U.S. generally accepted accounting
principles and, accordingly, include amounts based on informed estimates and judgments of management that
affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of
the Company’s financial statements, and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates. Changes in estimates resulting from continuing changes
in the economic environment will be reflected in the financial statements in future periods.
The Company considers certain accounting policies related to revenue, accounts receivable allowances,
valuation of deferred tax assets and tax contingency reserves and accounting for stock-based compensation to
be critical policies due to the significance of these items to its operating results and the estimation processes and
management judgment involved in each.
CASH AND EQUIVALENTS
Cash and equivalents consist of cash and short-term marketable securities with maturities of less than
90 days at the date of purchase. The Company considers all highly liquid investments purchased with an
original maturity of 90 days or less to be cash equivalents. At January 31, 2012 and 2011, the Company’s cash
equivalents consisted of money market funds and the Company has no investments in securities with an
underlying exposure to sub-prime mortgages. Additionally, the Company has no holdings in auction rate notes
or similar securities.
LONG-LIVED ASSETS
Long-lived assets generally consist of property and equipment and intangible assets other than
goodwill. Property and equipment are stated at cost. Additions and significant improvements to property and
equipment are capitalized, while maintenance and repairs are expensed as incurred. For financial reporting
purposes, depreciation is generally expensed via the straight-line method over the useful life of three years for
computer equipment and software, five years for furniture and office equipment, 10 years for building
improvements, and 39 years for buildings. Leasehold improvements are depreciated over the shorter of the lease
term or the useful life of five years.
Certain costs associated with software developed for internal use, including direct costs of materials,
services and payroll costs for employees for time devoted to the software projects, are capitalized once the
project has reached the application development stage and are included in property and equipment classified as
software. These costs are amortized using the straight-line method over the expected useful life of the software,
beginning when the asset is substantially ready for use. Costs incurred during the preliminary project stage,
maintenance, training and research and development costs are expensed as incurred.
Intangible assets, other than goodwill, arise from business combinations and generally consist of
customer relationships, restrictive covenants related to employment agreements, trade names and intellectual
property that are amortized, on a straight-line basis, generally over periods of up to five years. Finite-lived
intangible assets are required to be amortized over their useful lives and are subject to impairment evaluation.
The Company assesses the realizability of its long-lived assets including intangible assets, other than goodwill,
whenever changes in circumstances indicate the carrying values of such assets may not be recoverable. The
Company considers the following factors important in determining when to perform an impairment review:
significant under-performance of a product relative to budget; shifts in business strategies which affect the
60
continued uses of the assets; significant negative industry or economic trends; and the results of past impairment
reviews.
In assessing the recoverability of these long-lived assets, the Company first compares undiscounted
cash flows expected to be generated by that asset or asset group to its carrying value. If the carrying value of the
long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, impairment is recognized
to the extent that the carrying value exceeds its fair value. Fair value of the assets or asset groups is determined
through various valuation techniques including discounted cash flow models, quoted market values and
independent third party appraisals, as considered necessary. In addition to recoverability assessments, the
Company routinely reviews the remaining estimated useful lives of its long-lived assets. Any reduction in the
useful life assumption will result in increased depreciation and amortization expense in the quarter when such
determinations are made, as well as in subsequent quarters.
GOODWILL
Goodwill represents the excess of the purchase price over the fair value of net assets of purchased
businesses. Goodwill is not amortized, but instead is subject to impairment tests on at least an annual basis and
whenever circumstances suggest that goodwill may be impaired. The Company tests goodwill for impairment in
the fourth quarter of each fiscal year. The Company performs a two-step impairment test. Under the first step of
the goodwill impairment test, the Company is required to compare the fair value of a reporting unit with its
carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill
of the reporting unit is not considered impaired and the second step is not performed. If the results of the first
step of the impairment test indicate that the fair value of a reporting unit does not exceed its carrying amount,
then the second step of the goodwill impairment test is required. The second step of the goodwill impairment
test compares the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill.
The impairment loss is measured by the excess of the carrying amount of the reporting unit goodwill over the
implied fair value of that goodwill.
Management evaluates the Company as a single reporting unit for business and operating purposes as
almost all of the Company’s revenue streams are generated by the same underlying technology whether
acquired, purchased or developed. In addition, the majority of QAD’s costs are, by their nature, shared costs
that are not specifically identifiable to a geography or product line but relate to almost all products. As a result,
there is a high degree of interdependency among the Company’s revenues and cash flows for levels below the
consolidated entity and identifiable cash flows for a reporting unit separate from the consolidated entity are not
meaningful. Therefore, the Company’s impairment test considered the consolidated entity as a single reporting
unit.
CAPITALIZED SOFTWARE COSTS
The Company capitalizes software development costs incurred in connection with the localization and
translation of its products once technological feasibility has been achieved based on a working model. A
working model is defined as an operative version of the computer software product that is completed in the
same software language as the product to be ultimately marketed, performs all the major functions planned for
the product and is ready for initial customer testing (usually identified as beta testing). In addition, the Company
capitalizes software purchased from third parties or through business combinations as acquired software
technology, if the related software under development has reached technological feasibility.
The amortization of capitalized software costs is the greater of the straight-line basis over three years,
the expected useful life, or computed using a ratio of current revenue for a product compared to the estimated
total of current and future revenues for that product. The Company periodically compares the unamortized
capitalized software costs to the estimated net realizable value of the associated product. The amount by which
the unamortized capitalized software costs of a particular software product exceeds the estimated net realizable
value of that asset would be reported as a charge to the Consolidated Statement of Income.
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COMPUTATION OF NET INCOME (LOSS) PER SHARE
In connection with the Recapitalization, each existing share of common stock was reclassified as 0.1
share Class B common stock and each whole share thereof was issued a dividend of four shares of Class A
common stock. The Recapitalization had the effect of a two-to-one reverse stock split, where, for example, the
holder of 10 shares of existing stock received in exchange one share of Class B common stock and four shares
of Class A common stock. Net income per share of Class A common stock and Class B common stock is
computed using the two-class method. Holders of Class A common stock are entitled to cash or stock dividends
equal to 120% of the amount of such dividend payable with respect to a share of Class B Common Stock. As a
result of the Recapitalization, prior period basic and diluted weighted-average shares outstanding have been
recast in order to reflect the two classes of common stock that now exist.
The following table sets forth the computation of basic and diluted net income per share:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Less: dividends declared . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Undistributed net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Years Ended January 31,
2012
2010
(in thousands, except per share data)
2011
10,784 $
(4,095)
6,689 $
2,711 $
(3,296 )
(585 ) $
1,349
(3,110)
(1,761)
Net income per share – Class A Common Stock
Dividends declared . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Allocation of undistributed net income (loss)
. . . . . . . . . . . . . . . . . . . . .
Net income attributable to Class A common stock. . . . . . . . . . . . . . . . $
3,393 $
5,542
8,935 $
2,728 $
(484 )
2,244 $
2,574
(1,458)
1,116
Weighted average shares of Class A common stock outstanding—
basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average potential shares of Class A common stock. . . . . .
Weighted average shares of Class A common stock and potential
common shares outstanding—diluted . . . . . . . . . . . . . . . . . . . . . . . . .
12,873
414
12,621
429
12,407
500
13,287
13,050
12,907
Basic net income per Class A common share . . . . . . . . . . . . . . . . . . . . $
Diluted net income per Class A common share. . . . . . . . . . . . . . . . . . . $
0.69 $
0.67 $
0.18 $
0.17 $
0.09
0.09
Net income per share – Class B Common Stock
Dividends declared . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Allocation of undistributed net income (loss)
. . . . . . . . . . . . . . . . . . . . .
Net income attributable to Class B common stock. . . . . . . . . . . . . . . . $
702 $
1,147
1,849 $
568 $
(101 )
467 $
536
(303)
233
Weighted average shares of Class B common stock outstanding—
basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average potential shares of Class B common stock. . . . . .
Weighted average shares of Class B common stock and potential
common shares outstanding—diluted . . . . . . . . . . . . . . . . . . . . . . . . .
3,193
100
3,155
107
3,102
125
3,293
3,262
3,227
Basic net income per Class B common share. . . . . . . . . . . . . . . . . . . . . $
Diluted net income per Class B common share. . . . . . . . . . . . . . . . . . . $
0.58 $
0.56 $
0.15 $
0.14 $
0.08
0.07
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Potential common shares consist of the shares issuable upon the release of restricted stock units
(RSUs) and the exercise of stock options and stock appreciation rights (SARs). The Company’s unvested RSUs,
stock options and SARs are not considered participating securities as they do not have rights to dividends or
dividend equivalents prior to release or exercise. Class A common stock equivalents of approximately 2.2
million, 1.9 million and 1.6 million for fiscal 2012, 2011 and 2010, respectively, were not included in the
diluted calculation because their effects were anti-dilutive. Class B common stock equivalents of approximately
0.5 million, 0.5 million and 0.4 million for fiscal 2012, 2011 and 2010, respectively, were not included in the
diluted calculation because their effects were anti-dilutive.
FOREIGN CURRENCY TRANSLATION
The financial position and results of operations of the Company’s foreign subsidiaries are generally
determined using the country’s local currency as the functional currency. Assets and liabilities recorded in
foreign currencies are translated at the exchange rates on the balance sheet date. Revenue and expenses are
translated at average rates of exchange prevailing during the year. Translation adjustments resulting from this
process are charged or credited to other comprehensive income (loss), which is included in “Accumulated other
comprehensive loss” within the Consolidated Balance Sheets.
Gains and losses resulting from foreign currency transactions and remeasurement adjustments of
monetary assets and liabilities not held in an entity’s functional currency are included in earnings. Foreign
currency transaction and remeasurement (gains) losses for fiscal 2012, 2011 and 2010 totaled $0.8 million, $0.1
million and $(0.1) million, respectively, and are included in “Other (income) expense, net” in the accompanying
Consolidated Statements of Income.
FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
The carrying amounts of cash and equivalents, accounts receivable and accounts payable approximate
fair value due to the short-term maturities of these instruments. The Company’s line of credit bears a variable
market interest rate, subject to certain minimum interest rates. Therefore, should the Company have any
amounts outstanding under the line of credit, the carrying value of the line of credit would reasonably
approximate fair value. The Company’s note payable bears a fixed rate of 6.5%. The estimated fair value of the
note payable was approximately $17.2 million at January 31, 2012 and the carrying value was $16.1 million.
The estimated fair value of the note payable is based primarily on expected market prices for bank loans with
similar terms and maturities.
Concentration of credit risk with respect to trade receivables is limited due to the large number of
customers comprising our customer base, and their dispersion across many different industries and locations
throughout the world. No single customer accounted for 10% or more of the Company’s total revenue in any of
the last three fiscal years. In addition, no single customer accounted for 10% or more of accounts receivable at
January 31, 2012 or January 31, 2011.
COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) includes changes in the balances of items that are reported directly as a
separate component of Stockholders’ Equity on the Consolidated Balance Sheets. The components of
comprehensive income (loss) are net income (loss) and foreign currency translation adjustments. The Company
does not provide for income taxes on foreign currency translation adjustments since it does not provide for taxes
on the unremitted earnings of its foreign subsidiaries. The changes in “Accumulated other comprehensive loss”
are included in the Company’s Consolidated Statement of Stockholders’ Equity and Comprehensive Income
(Loss).
63
RESEARCH AND DEVELOPMENT
All costs incurred to establish the technological feasibility of the Company’s software products are
expensed to research and development as incurred.
RECENT ACCOUNTING STANDARDS
In December 2011, the FASB issued ASU 2011-11 regarding ASC Topic 210 “Balance Sheet:
Disclosure about Offsetting Assets and Liabilities.” This ASU requires that entities disclose additional
information about offsetting and related arrangements to enable users of the financial statements to understand
the effect of those arrangements on the financial position. This ASU will be effective for the Company’s fiscal
year beginning February 1, 2013. The Company believes that the adoption of this ASU may impact future
disclosures but will not impact its consolidated financial position, results of operations or cash flows.
In September 2011, the FASB issued ASU 2011-08 “Intangibles – Goodwill and Other (Topic 350):
Testing Goodwill for Impairment” to simplify how entities test goodwill for impairment. The amendments in
this standard will allow an entity to first assess qualitative factors to determine whether it is more likely than not
that the fair value of a reporting unit is less than its carrying value as a basis for determining whether it needs to
perform the quantitative two-step goodwill impairment test. Only if an entity determines, based on qualitative
assessment, that it is more likely than not that a reporting unit’s fair value is less than its carrying value will it
be required to calculate the fair value of the reporting unit. This ASU is effective for the Company’s fiscal year
beginning February 1, 2012. The Company does not expect this guidance to have a significant impact on the
Company’s financial position, results of operations, cash flows, or related disclosures.
In June 2011, the FASB issued ASU 2011-05 regarding ASC Topic 220 “Comprehensive Income.”
This ASU eliminates the option to present components of other comprehensive income as part of the statement
of changes in stockholders’ equity and requires the presentation of the total of comprehensive income, the
components of net income, and the components of other comprehensive income either in a single continuous
statement of comprehensive income or in two separate but consecutive statements. This ASU is effective for the
Company’s fiscal year beginning February 1, 2012. While this new accounting pronouncement will impact the
presentation of other comprehensive income, it will not impact the Company’s consolidated financial position,
results of operations or cash flow.
In May 2011, the FASB issued ASU 2011-04 “Fair Value Measurement (Topic 820), Amendments to
Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS.” These
amendments were issued to provide a consistent definition of fair value and ensure that the fair value
measurement and disclosure requirements are similar between U.S. GAAP and International Financial
Reporting Standards. ASU 2011-04 changes certain fair value measurement principles and enhances the
disclosure requirements, particularly for level 3 fair value measurements. This ASU is effective for the
Company’s fiscal year beginning February 1, 2012. Early adoption is not permitted. The Company does not
believe that the adoption of this ASU will have a material impact on its consolidated statements of financial
position, results of operations or cash flows.
2. FAIR VALUE MEASUREMENTS
When determining fair value the Company uses a three-tier value hierarchy, which prioritizes the
inputs used in measuring fair value. Whenever possible, the Company uses observable market data and relies on
unobservable inputs only when observable market data is not available. Classification within the hierarchy is
determined based on the lowest level input that is significant to the fair value measurement.
64
The following table sets forth the Company’s financial assets, measured at fair value, as of January 31,
2012 and 2011:
Fair value measurement at reporting date using
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable Inputs
(Level 3)
Money market mutual funds as of January 31, 2012 . . . $
Money market mutual funds as of January 31, 2011 . . .
48,242 $
48,390
(in thousands)
— $
—
—
—
Money market mutual funds are classified as part of “Cash and equivalents” in the accompanying
Consolidated Balance Sheets and are classified within Level 1 of the fair value hierarchy because they are
valued using quoted market prices. As of January 31, 2012 and 2011, the amount of cash and cash equivalents
included cash deposited with commercial banks of $28.7 million and $18.9 million, respectively.
There have been no transfers between fair value measurement levels during the year ended January 31,
2012.
3. CAPITALIZED SOFTWARE COSTS
Capitalized software costs and accumulated amortization at January 31, 2012 and 2011 were as
follows:
Capitalized software costs:
Capitalized software development costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Acquired software technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less accumulated amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capitalized software costs, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
January 31,
2012
2011
(in thousands)
1,194 $
—
1,194
(611)
583 $
1,924
954
2,878
(2,037)
841
Capitalized software development costs relate to translations and localizations of QAD Enterprise
Applications. Acquired software technology costs relate to technology purchased from the Company’s fiscal
2007 acquisition of Bisgen and fiscal 2009 acquisition of FullTilt.
It is the Company’s policy to write-off capitalized software development costs once fully amortized.
Accordingly, during fiscal 2012, approximately $2.0 million of costs and accumulated amortization was
removed from the balance sheet.
Amortization of capitalized software costs for fiscal 2012, 2011 and 2010 was $0.5 million, $2.1
million and $3.8 million, respectively. Amortization of capitalized software costs is included in “Cost of license
fees” in the accompanying Consolidated Statements of Income. The estimated remaining amortization expense
related to capitalized software costs for the years ended January 31, 2013, 2014 and 2015 is $0.3 million, $0.2
million and $0.1 million, respectively.
65
4. GOODWILL
The changes in the carrying amount of goodwill for the fiscal years ended January 31, 2012 and 2011
were as follows:
Balance at January 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impact of foreign currency translation . . . . . . . . . . . . . . . . . . . . . .
Balance at January 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impact of foreign currency translation . . . . . . . . . . . . . . . . . . . . . .
Balance at January 31, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
There were no additions to goodwill in fiscal 2012 and 2011.
Gross Carrying
Amount
Accumulated
Impairment
(in thousands)
Goodwill, Net
21,956 $
109
22,065 $
(45)
22,020 $
(15,608) $
—
(15,608) $
—
(15,608) $
6,348
109
6,457
(45)
6,412
During each of the fourth quarters of fiscal 2012, 2011 and 2010, an impairment analysis was
performed at the enterprise level which compared the Company’s market capitalization to its net assets as of the
test date, November 30th. As the market capitalization substantially exceeded the Company’s net assets, there
was no indication of goodwill impairment for fiscal 2012, 2011 and 2010.
66
5. COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
Accounts receivable, net
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less allowance for:
Doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current assets
Deferred cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment, net
Buildings and building improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Computer equipment and software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture and office equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leasehold improvements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Automobiles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less accumulated depreciation and amortization . . . . . . . . . . . . . . . . . . . .
Accounts payable
Trade payables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
VAT payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue
Deferred maintenance revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred subscription revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred services revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred license revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred research and development funding . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current liabilities
Accrued commissions and bonus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued compensated absences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other accrued payroll . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued professional fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued travel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities
Long-term tax contingency reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
67
January 31,
2012
2011
(in thousands)
67,224
$
68,281
(1,283)
(1,184)
64,757
7,770
3,330
753
11,853
32,108
22,201
12,345
6,104
3,850
260
76,868
(43,729)
33,139
6,399
3,325
9,724
83,400
3,696
3,507
1,806
1,462
93,871
10,562
7,255
2,794
1,855
1,519
1,297
1,099
4,718
31,099
2,312
1,280
1,710
5,302
$
$
$
$
$
$
$
$
$
$
$
$
$
(1,165)
(1,496)
65,620
7,255
3,859
1,439
12,553
32,194
23,821
13,043
5,666
3,850
297
78,871
(45,076)
33,795
5,912
4,091
10,003
81,034
2,318
4,744
3,061
3,296
94,453
12,053
7,086
3,030
694
1,766
995
926
4,341
30,891
2,155
2,359
700
5,214
$
$
$
$
$
$
$
$
$
$
$
$
$
$
6. DEBT
January 31,
2012
2011
(in thousands)
Total debt
Note payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less current maturities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
16,134
(321)
15,813
$
$
16,442
(304)
16,138
The aggregate maturities of the note payable, for each of the next five fiscal years and thereafter are as
follows: $0.3 million in fiscal 2013; $0.3 million in fiscal 2014 and $15.5 million in fiscal 2015.
Notes Payable
In July 2004, the Company entered into a loan agreement with Mid-State Bank & Trust, a bank which
was subsequently purchased by Rabobank, N.A. The loan had an original principal amount of $18.0 million and
bears interest at a fixed rate of 6.5%. This loan is secured by real property located in Santa Barbara, California.
The terms of the loan provide for the Company to make 119 monthly payments consisting of principal and
interest totaling $115,000 and one final principal payment of $15.4 million. The loan matures in July 2014. The
unpaid balance as of January 31, 2012 was $16.1 million.
Credit Facility
On July 8, 2011, the Company entered into an unsecured credit agreement with Rabobank, N.A. (the
“Facility”). The Facility provides a one-year commitment for a $20 million line of credit for working capital or
other business needs. The Company will pay a commitment fee of 0.25% per annum of the daily average of the
unused portion of the $20 million Facility. Borrowings under the Facility bear interest at a rate equal to LIBOR
plus 0.75%.
The Facility provides that the Company maintain certain financial and operating ratios which include,
among other provisions, minimum liquidity on a consolidated basis of $25 million in cash and equivalents at all
times, a current ratio (calculated using current liabilities excluding deferred revenue) of not less than 1.3 to 1.0
determined at the end of each fiscal quarter, a leverage ratio of not more than 1.5 to 1.0 determined at the end of
each fiscal quarter, and a debt service coverage ratio of not less than 1.5 to 1.0 determined at the end of each
fiscal year. The Facility also contains customary covenants that could restrict the Company’s ability to incur
additional indebtedness. At January 31, 2012, the effective borrowing rate would have been 1.03%.
As of January 31, 2012, there were no borrowings under the Facility and the Company was in
compliance with the financial covenants.
68
7. INCOME TAXES
Income tax expense (benefit) is summarized as follows:
Current:
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred:
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
Years Ended January 31,
2012
2011
2010
(in thousands)
1,669
376
3,231
5,276
889
21
(175)
735
5
6,016
$
$
679
268
2,663
3,610
(1,206)
35
(317)
(1,488)
721
2,843
$
$
598
658
1,196
2,452
(49)
(829)
(466)
(1,344)
—
1,108
Actual income tax expense (benefit) differs from that obtained by applying the statutory federal
income tax rate of 34% to income before income taxes as follows:
Computed expected tax expense . . . . . . . . . . . . . . . . . . . . . . . .
State income taxes, net of federal income tax expense . . . .
Incremental tax benefit from foreign operations. . . . . . . . . .
Non-deductible equity compensation . . . . . . . . . . . . . . . . . . . .
Foreign withholding taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net change in valuation allowance . . . . . . . . . . . . . . . . . . . . . .
Net change in contingency reserve . . . . . . . . . . . . . . . . . . . . . .
Non-deductible expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefit of tax credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subpart F Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rate change impact . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividend income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Years Ended January 31,
2012
2011
2010
(in thousands)
$
$
5,712
580
(1,945)
898
981
(336)
147
354
(1,437)
784
(61)
—
339
6,016
$
$
1,888
491
(1,474)
335
776
99
91
969
(456)
383
20
—
(279)
2,843
$
$
836
804
(1,611)
795
891
(679)
(433)
79
(702)
312
(9)
848
(23)
1,108
Consolidated U.S. income (loss) before income taxes was $4.4 million, $(2.8) million, and $(2.6)
million for the fiscal years ended January 31, 2012, 2011 and 2010, respectively. The corresponding income
before income taxes for foreign operations was $12.4 million, $8.4 million and $5.1 million for the fiscal years
ended January 31, 2012, 2011 and 2010, respectively.
The Company files U.S. federal, state, and foreign tax returns that are subject to audit by various tax
authorities. The Company is currently under audit in India for fiscal years ended March 31, 1998, 1999, 2008,
2009, and 2010, South Africa for fiscal year 2010 and in California for fiscal years ended 2004 and 2005.
U.S. income and foreign withholding taxes have not been recorded on permanently reinvested earnings
of our foreign subsidiaries. These permanently reinvested earnings are approximately $49.1 million at January
31, 2012. It is not practicable for the Company to determine the amount of the related unrecognized deferred
69
income tax liability. Such earnings would become taxable upon the sale or liquidation of these subsidiaries or
upon the remittance of dividends.
Deferred income taxes reflect the net effects of the temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company’s deferred tax assets and liabilities are as follows:
January 31,
2012
2011
(in thousands)
Deferred tax assets:
Allowance for doubtful accounts and sales adjustments . . . . . . . . . . . . . . . .
Accrued vacation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net operating loss carry forwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses - other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Section 263(a) interest capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax assets, net of valuation allowance. . . . . . . . . . . . . . . . . . . .
Deferred tax liabilities:
Unrecognized capital gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total net deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current portion of deferred tax asset, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-current portion of deferred tax asset, net . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total net deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
713
1,850
7,455
5,607
12,066
1,751
395
5,338
1,517
36,692
(11,008)
25,684
914
2,823
307
4,044
21,640
4,355
17,285
21,640
$
$
$
$
559
1,570
7,749
6,063
13,703
1,569
406
5,376
1,464
38,459
(10,571)
27,888
947
2,559
348
3,854
24,034
3,954
20,080
24,034
The Company reviews its net deferred tax assets by jurisdiction on a quarterly basis to determine
whether a valuation allowance is necessary based on the more-likely-than-not standard. If and when the
Company’s operating performance improves on a sustained basis, the conclusion regarding the need for a
valuation allowance could change, resulting in the reversal of some or all of the valuation allowance in the
future. At January 31, 2012 and 2011, the valuation allowance attributable to deferred tax assets was $11.0
million and $10.6 million, respectively.
Deferred tax assets at January 31, 2012 and 2011 do not include $1.0 million and $0.9 million,
respectively, of excess tax benefits from employee stock exercises. Prior to fiscal 2011, the U.S. Consolidated
Group was utilizing net operating loss carryforwards to offset its tax liability and therefore was unable to
recognize the excess tax benefits from employee stock exercises. During fiscal 2012, the Company was able to
recognize $5,000 of excess tax benefits. Equity will be increased by an additional $1.0 million when such
excess tax benefits are ultimately realized.
The Company has net operating loss carryforwards of $45.9 million and tax credit carryforwards of
$9.3 million as of January 31, 2012. The majority of the Company’s net operating loss carryforwards do not
expire, the remaining begin to expire in fiscal year 2013. The majority of the Company’s tax credit
carryforwards do not expire, the remaining begin to expire in fiscal year 2018.
70
During the fiscal year ended January 31, 2012, the Company increased its reserves for uncertain tax
positions by $0.1 million. Interest and penalties on accrued but unpaid taxes are classified in the Consolidated
Statements of Income as income tax expense. The liability for unrecognized tax benefits that may be recognized
in the next twelve months is classified as short-term in the Company’s Consolidated Balance Sheet while the
remainder is classified as long-term.
The following table reconciles the gross amounts of unrecognized tax benefits at the beginning and end
of the period:
Unrecognized tax benefits at beginning of the year . . . . . . . . . . . . . . . . . . . . . .
Increases as a result of tax positions taken in a prior period . . . . . . . . . . . .
Increases as a result of tax positions taken in the current period. . . . . . . . .
Reduction as a result of a lapse of the statute of limitations. . . . . . . . . . . . .
Decreases as a result of tax settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrecognized tax benefit at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
Years Ended January 31,
2012
2011
(in thousands)
2,502
258
69
(180)
—
2,649
$
$
2,411
115
—
(11)
(13)
2,502
All of the unrecognized tax benefits included in the balance sheet at January 31, 2012 would impact
the effective tax rate on income from continuing operations, if recognized.
The total amount of interest expense recognized in the Consolidated Statement of Income for unpaid
taxes was zero for the year ended January 31, 2012. The total amount of interest and penalties recognized in the
Consolidated Balance Sheet at January 31, 2012 is $0.2 million.
In the next twelve months, due to a potential tax credit settlement and a statute expiration an estimated
$0.3 million of gross unrecognized tax benefits may be recognized.
The Company files U.S. federal, state, and foreign income tax returns in jurisdictions with varying
statute of limitations. The years that may be subject to examination will vary by jurisdiction. Below is a list of
our material jurisdictions and the years open for audit as of fiscal 2012:
Jurisdiction
Years Open for Audit
U.S. Federal . . . . . . . . . . . . . . . . . . . . . FY09 and beyond
California . . . . . . . . . . . . . . . . . . . . . . . FY08 and beyond
Michigan . . . . . . . . . . . . . . . . . . . . . . . . FY08 and beyond
New Jersey . . . . . . . . . . . . . . . . . . . . . . FY08 and beyond
Texas . . . . . . . . . . . . . . . . . . . . . . . . . . . FY07 and beyond
Australia . . . . . . . . . . . . . . . . . . . . . . . . FY08 and beyond
France . . . . . . . . . . . . . . . . . . . . . . . . . . . FY09 and beyond
Germany . . . . . . . . . . . . . . . . . . . . . . . . FY06 and beyond
Ireland . . . . . . . . . . . . . . . . . . . . . . . . . . FY08 and beyond
Netherlands . . . . . . . . . . . . . . . . . . . . . . FY06 and beyond
United Kingdom . . . . . . . . . . . . . . . . . FY09 and beyond
8. STOCKHOLDERS’ EQUITY
Common Stock
The Company has two classes of common stock (See Note 1). Each share of Class B Common Stock
entitles the holder to one vote and each share of Class A Common Stock entitles the holder to 1/20th of one
vote. On all matters, the Class A Common Stock and the Class B Common Stock will vote as a single class,
71
except as otherwise required by applicable law. Neither the Class A Common Stock nor the Class B Common
Stock will be convertible into the other, and there will be no restrictions on the transferability of either class.
The amount of any dividend payable in cash or non-cash property of the Company (other than a
dividend payable solely in the Company’s capital stock) with respect to each share of Class A Common Stock is
equal to 120% of the value of any such dividend payable with respect to a share of Class B Common Stock,
except for dividends declared for the purpose of distributing all or some of the proceeds received by the
Company from any transaction determined by the Board to be a material transaction not in the ordinary course
of business or for the purpose of effecting a spin-off of a subsidiary of the Company (in either case, such
dividend will be paid ratably, on a per share basis, to all holders of Common Stock).
Dividends
The following table sets forth the dividends declared and paid by the Company during fiscal 2012:
Declaration
Date
12/14/2011
9/20/2011
6/7/2011
4/6/2011
12/14/2010
Record Date
Payable
4/23/2012 $
3/13/2012
11/29/2011
1/9/2012 $
8/30/2011 10/10/2011 $
7/12/2011 $
6/1/2011
4/25/2011 $
3/15/2011
Dividend
Class A
Dividend
Class B
Amount
Paid
in Cash
Class A
Shares
Issued
Fair Value
of Class
A Shares
Issued
0.072 $
0.072 $
0.060 $
0.060 $
0.060 $
0.060
0.060 $ 978,000
0.050 $ 786,000
0.050 $ 315,000
0.050 $ 330,000
13,000 $ 144,000
14,000 $ 145,000
59,000 $ 628,000
55,000 $ 596,000
Shares issued in payment of these dividends were issued out of treasury stock.
Stock Repurchase Activity
In September 2011, the Company’s Board of Directors approved a stock repurchase plan. A total of
one million shares may be repurchased under the plan and it may be suspended or discontinued at any time.
Repurchases may be effected from time to time through open market purchases or pursuant to the Rule 10b5-1
plan.
In fiscal 2012, the Company repurchased 335,000 shares and 41,000 shares, respectively, of the
Company’s Class A and Class B common stock. The average share price was $11.45 and $11.59 for Class A
and Class B stock, respectively, for total cash consideration of $4.3 million including fees. A total of 624,000
shares remain available for purchase under the plan as of January 31, 2012.
In fiscal 2011 and fiscal 2010, the Company did not make any stock repurchases.
9. STOCK-BASED COMPENSATION
Stock Plans Summary
On June 7, 2006, the shareholders approved the QAD Inc. 2006 Stock Incentive Program (“2006
Program”). The 2006 Program replaced the QAD 1997 Stock Incentive Program (“1997 Program”). The 2006
Program allows for equity awards in the form of incentive stock options, non-statutory stock options, restricted
shares, rights to purchase stock, stock appreciation rights (“SARs”) and other stock rights. In connection with
the Recapitalization and pursuant to the terms of the 2006 Program, the maximum number of authorized shares
of stock to be issued or granted as equity awards under the 2006 Program was proportionately reduced by 50%
to account for the effective reverse stock split ratio, of which 80% consisted of Class A Common Stock and
20% consisted of Class B Common Stock. All references to the number of shares, stock options, restricted
shares, stock appreciation rights and related per-share amounts of the Company’s common stock have been
restated to reflect the effect of the Recapitalization for all periods presented. The shareholders authorized a
72
maximum of 4,150,000 shares to be issued under the 2006 Program, of which 3,320,000 are reserved for
issuance as Class A Common Stock and 830,000 are reserved for issuance as Class B Common Stock. As of
January 31, 2012, 598,000 Class A Common Shares and 305,000 Class B Common Shares were available for
issuance.
After the 2006 Program was adopted, the Company began issuing the majority of equity awards in the
form of stock-settled SARs. A SAR is a contractual right to receive value tied to the post-grant appreciation of
the underlying stock. Although the Company has the ability to grant stock-settled or cash-settled SARs, the
Company has only granted stock-settled SARs. Upon vesting, a holder of a stock-settled SAR receives shares in
the Company’s common stock equal to the intrinsic value of the SAR at time of exercise. Economically, a
stock-settled SAR provides the same compensation value as a stock option, but the employee is not required to
pay an exercise price upon exercise of the SAR. Stock compensation expense, as required under ASC 718, is
the same for stock-settled SARs and stock options. The Company also issues restricted stock units (“RSUs”)
beginning in fiscal 2008.
Under the 1997 Program and the 2006 Program, non-statutory stock options and SARs have generally
been granted for a term of eight years, they generally vest 25% after each year of service for four years and are
contingent upon employment with the Company on the vesting date. Since February 1, 2006, there have been no
grants of non-statutory stock options. RSUs granted to employees under the 2006 Program are generally
released 25% after each year of service for four years and are contingent upon employment with the Company
on the release date. Under the 2006 Program and 1997 Program, non-statutory stock options, SARs and RSUs
granted to non-employee directors generally vest over one to four years and are contingent upon providing
services to the Company. Stock based compensation is typically issued out of treasury shares.
Under both programs, officers, directors, employees, consultants and other independent contractors or
agents of the Company or subsidiaries of the Company who are responsible for or contribute to the
management, growth or profitability of its business are eligible for selection by the program administrators to
participate. However, incentive stock options granted under the programs may only be granted to a person who
is an employee of the Company or one of its subsidiaries.
Impact of Recapitalization
In connection with the Recapitalization, the Company’s outstanding stock options, RSUs and SARs
were adjusted to conform their terms to the Company’s capital structure following implementation of the
Recapitalization as follows: (i) each ten shares of stock covered by an outstanding option agreement, RSU or
SAR agreement was converted, as nearly as possible, into equivalent rights to receive one share of Class B
Common Stock and four shares of Class A Common Stock; and (ii) the exercise price per share of stock
covered by an outstanding option agreement, RSU and SAR agreement shall be proportionately increased by
100% to account for the effective reverse stock split ratio of the Recapitalization. At January 31, 2012,
outstanding under the 1997 Program, there were 340,000 non-statutory stock options to purchase Class A
Common Stock and 85,000 non-statutory stock options to purchase Class B Common Stock. Effective with the
adoption of the 2006 Program, no further awards were granted using the 1997 Program. At January 31, 2012,
outstanding under the 2006 Program, there were 2,049,000 SARs to purchase Class A Common Stock and
397,000 SARs to purchase Class B Common Stock. In addition, at January 31, 2012, outstanding under the
2006 Program, there were 364,000 RSUs of Class A Common Stock and 50,000 RSUs of Class B Common
Stock.
Exchange Program
On August 12, 2009, the Company completed a one-time Stock Option and Stock Appreciation Right
Exchange Program (the “Program”). Pursuant to the terms of the Program, eligible participants were able to
exchange outstanding stock options and SARs granted under QAD’s 1997 and 2006 Stock Incentive Programs
for a reduced number of new SARs. The stock options and SARs that were eligible for the Program had a per
share exercise price above the fair market value of QAD common stock as of the first business day following
73
the close of the exchange offer period. The eligible stock options and SARs were exchanged for a reduced
number of SARs based on predefined exchange ratios. The new SARs were issued at a per share exercise price
equal to the fair market value of the Company’s common stock on August 13, 2009, the date of issuance.
Stock options and SARs to purchase 1,689,000 shares of the Company’s common stock were tendered
and accepted in the exchange offer, which expired August 12, 2009. These surrendered equity awards represent
79% of the total shares subject to equity awards eligible for exchange in the exchange offer at the beginning of
the offer period or 85% of the total shares subject to equity awards eligible for exchange in the exchange offer
at the close of the offer period. The surrendered equity awards were cancelled as of August 13, 2009. In
exchange for these surrendered equity awards, the Company issued 770,000 new SARs at an exercise price of
$7.82 (“New SARs”). A total of 343,000 shares were returned to the pool of shares available for issuance. The
Company did not incur any incremental stock-based compensation expense nor will it incur any incremental
stock-based compensation expense in the future as a result of the Program.
The exchange ratios (the “Exchange Ratios”) under the Program were determined at the
commencement of the exchange period. The Exchange Ratios were intended to result in the issuance of New
SARs with a fair value approximately equal to the fair value of the eligible stock options and SARs surrendered.
The Black-Scholes-Merton valuation model was used to determine the fair value of the eligible stock options
and SARs and the New SARs for purposes of determining the Exchange Ratios. Because the closing price of
the Company’s common stock increased over the course of the exchange period, the Exchange Ratios resulted
in the issuance of New SARs with a fair value less than the fair value of the surrendered stock options and
SARs. For purposes of the Black-Scholes-Merton valuation model, the expected life of the surrendered stock
options and SARs was estimated to be the full remaining contractual term. The risk-free interest rate was based
on the U.S. Treasury yield for a term consistent with the expected life. The volatility was based on the historical
volatility of the Company’s common stock for a period equal to the expected life. The dividend rate was based
on the assumption of paying quarterly dividends at the same historical rate.
Stock- Based Compensation
The following table sets forth reported stock compensation expense included in the Company’s
Consolidated Statements of Income for the fiscal years ended January 31, 2012, 2011 and 2010.
Years Ended January 31,
2012
2011
(in thousands)
2010
Stock-based compensation expense:
Cost of maintenance, subscription and other revenue . . . . . . . . . . . . . .
Cost of professional services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales and marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total stock-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
221 $
526
813
667
2,280
4,507 $
276 $
664
1,076
846
2,441
5,303 $
217
589
829
622
2,335
4,592
The Company presents any benefits of realized tax deductions in excess of recognized compensation
expense as cash flow from financing activities in the accompanying Consolidated Statement of Cash Flows.
There were $33,000, $384,000 and zero excess tax benefits recorded for equity awards exercised in the fiscal
years ended January 31, 2012, 2011 and 2010, respectively.
74
Option/SAR Information
The weighted average assumptions used to value SARs are shown in the following table.
Expected life in years (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk free interest rate (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Volatility (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividend rate (4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Years Ended January 31,
2012
2011
2010 (5)
4.52
0.98%
67%
2.59%
5.79
2.27%
61%
2.23%
5.17
2.06%
66%
2.40%
(1)
(2)
(3)
(4)
The expected life of the New SARs was estimated to be the full remaining contractual term. Excluding the
effect of the New SARs granted as a result of the Program, the weighted average expected life in years in
fiscal 2010 was 4.78.
Excluding the effect of the New SARs granted as a result of the Program, the weighted average risk free rate
in fiscal 2010 was 1.17%.
Excluding the effect of the New SARs granted as a result of the Program, the weighted average volatility in
fiscal 2010 was 69%.
Excluding the effect of the New SARs granted as a result of the Program, the weighted average dividend
rate in fiscal 2010 was 2.16%.
(5)
The valuation of the New SARs granted as a result of the Program is included in the calculations above.
The following table summarizes the activity for outstanding options and SARs for the fiscal years ended
January 31, 2012, 2011 and 2010:
Outstanding at January 31, 2009 . . . . . . . . . . . . . . . . . . . .
Granted (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cancelled (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at January 31, 2010 . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at January 31, 2011 . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at January 31, 2012 . . . . . . . . . . . . . . . . . . . .
Vested and expected to vest at
January 31, 2012 (3) . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested and exercisable at January 31, 2012 . . . . . . . . .
Weighted
Average
Exercise
Price per
Share
Weighted
Average
Remaining
Contractual
Term
(years)
Aggregate
Intrinsic
Value (in
thousands)
Options/
SARs
(in thousands)
2,984 $
1,293
(45)
(172)
(157)
(1,689)
2,214 $
683
(88)
(58)
(98)
2,653 $
502
(164)
(46)
(74)
2,871 $
2,794 $
1,519 $
15.98
8.52
5.96
15.60
13.88
16.30
11.76
8.95
6.44
10.42
8.93
11.33
10.28
8.08
14.28
9.26
11.34
11.39
12.97
4.6 $
854
4.6 $
3.0 $
7,780
3,360
(1)
(2)
(3)
As a result of the Program a total of 770,000 SARs were granted during the third quarter of fiscal 2010 with
an exercise price of $7.82.
Options and SARs cancelled during the third quarter of fiscal 2010 as a part of the Program.
The expected-to-vest options and SARs are the result of applying the pre-vesting forfeiture rate assumptions
to total outstanding options and SARs.
75
The aggregate intrinsic value in the table above represents the total pretax intrinsic value (the aggregate
difference between the closing stock price of the Company’s common stock based on the last trading day as of
January 31, 2012 and the exercise price for in-the-money stock options and SARs) that would have been
received by the holders if all stock options and SARs had been exercised on January 31, 2012. The total
intrinsic value of stock options or SARs exercised in the years ended January 31, 2012, 2011 and 2010 was $0.5
million, $0.3 million and $0.2 million, respectively. The weighted average grant date fair value per share of
SARs granted in the years ended January 31, 2012, 2011 and 2010 was $4.51, $4.10 and $5.42, respectively.
Excluding the effect of the New SARs granted as a result of the Exchange Program, the weighted average grant
date fair value per share of SARs granted in the year ended January 31, 2010 was $4.62.
The number of SARs exercised includes shares withheld on behalf of employees to satisfy minimum
statutory tax withholding requirements. During the fiscal years ended January 31, 2012, 2011 and 2010, the
Company withheld 13,000 shares, 1,000 shares and zero shares for payment of these taxes. The value of the
withheld shares for the fiscal years ended January 31, 2012, 2011 and 2010 were $144,000, $10,000 and zero,
respectively.
At January 31, 2012, there was approximately $5.0 million of total unrecognized compensation cost
related to unvested SARs. This cost is expected to be recognized over a weighted average period of
approximately 2.6 years.
RSU Information
The following table summarizes the activity for RSUs for the fiscal years ended January 31, 2012,
2011 and 2010:
Restricted stock at January 31, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Released (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted stock at January 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Released (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted stock at January 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Released (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted stock at January 31, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted
Average
Grant Date
Fair Value
RSUs
(in thousands)
374 $
208
(102)
(5)
475 $
128
(165)
(3)
435 $
174
(178)
(17)
414 $
12.78
8.40
13.30
13.48
10.74
8.81
11.37
8.75
10.02
9.32
11.02
9.35
9.32
(1)
The number of RSUs released includes shares withheld on behalf of employees to satisfy minimum
statutory tax withholding requirements. During the fiscal years ended January 31, 2012, 2011 and
2010, the Company withheld 58,000 shares, 53,000 shares and 15,000 shares, respectively, for
payment of these taxes. The value of the withheld shares for the fiscal years ended January 31, 2012,
2011 and 2010 were $0.6 million, $0.5 million and $0.1 million, respectively.
Total unrecognized compensation cost related to RSUs was approximately $2.6 million as of January
31, 2012. This cost is expected to be recognized over a period of approximately 2.3 years.
76
10. EMPLOYEE BENEFIT PLANS
The Company has a defined contribution 401(k) plan which is available to U.S. employees after 30
days of employment. Employees may contribute up to the maximum allowable by the Internal Revenue Code.
The Company voluntarily matches 75% of the employees’ contributions up to the first four percent of the
employee’s eligible contribution. In addition, the Company can make additional contributions at the discretion
of the board of directors. Participants are immediately vested in their employee contributions. Employer
contributions vest over a five-year period. The Company’s contributions for fiscal years 2012, 2011 and 2010
were $1.4 million, $1.3 million and $1.2 million, respectively.
Various QAD foreign subsidiaries also contribute to what can be considered defined contribution
pension plans. Employer contributions in these plans are generally based on employee salary and range from
3% to 22%. These plans are funded at various times throughout the year according to plan provisions, with
aggregate employer contributions of $3.8 million, $3.3 million and $3.5 million during fiscal years 2012, 2011
and 2010, respectively.
11. COMMITMENTS AND CONTINGENCIES
Lease Obligations
The Company leases certain office facilities, office equipment and automobiles under operating lease
agreements. The leases generally provide that QAD pays taxes, insurance and maintenance expenses related to
the leased assets. Total rent expense for fiscal years 2012, 2011and 2010 was $6.5 million, $7.1 million and
$7.5 million, respectively. Future minimum rental payments under non-cancelable operating lease commitments
with terms of more than one year as of January 31, 2012 are as follows (in millions):
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
6.0
4.4
3.1
1.9
1.6
2.9
19.9
Indemnifications
The Company sells software licenses and services to its customers under written agreements. Each
agreement contains the relevant terms of the contractual arrangement with the customer, and generally includes
certain provisions for indemnifying the customer against losses, expenses and liabilities from damages that may
be awarded against the customer in the event the Company’s software is found to infringe upon certain
intellectual property rights of a third party. The agreements generally limit the scope of and remedies for such
indemnification obligations in a variety of industry-standard respects.
The Company believes its internal development processes and other policies and practices limit its
exposure related to the indemnification provisions of the agreements. For several reasons, including the lack of
prior indemnification claims and the lack of a monetary liability limit for certain infringement cases under the
agreements, the Company cannot determine the maximum amount of potential future payments, if any, related
to such indemnification provisions.
Legal Actions
The Company is subject to various legal proceedings and claims, either asserted or unasserted, which
arise in the ordinary course of business. While the outcome of these claims cannot be predicted with certainty,
77
management does not believe that the outcome of any of these legal matters will have a material adverse effect
on the Company’s consolidated results of operations, financial position or liquidity.
12. BUSINESS SEGMENT INFORMATION
The Company markets its products and services worldwide, primarily to companies in the
manufacturing industry, including automotive, industrial, high technology, food and beverage, consumer
products and life sciences. The Company sells and licenses its products through its direct sales force in four
geographic regions: North America, EMEA, Asia Pacific and Latin America and through distributors where
third parties can extend sales reach more effectively or efficiently. 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. The Company’s Chief Operating Decision Maker (“CODM”), the Chief Executive Officer, reviews the
consolidated results within one operating segment.
License and subscription revenues are assigned to the geographic regions based on the proportion of
commissions earned by each region. Maintenance revenue is allocated to the region where the end user
customer is located. Services revenue is assigned based on the region where the services are performed.
Capital expenditures and property and equipment, net are assigned by geographic region based on the
location of each legal entity.
Revenue:
North America (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
EMEA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asia Pacific . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Latin America . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital expenditures:
North America . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
EMEA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asia Pacific . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Latin America . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012
Years Ended January 31,
2011
(in thousands)
2010
$ 103,272
75,965
47,707
20,314
$ 247,258
$ 93,145
66,646
44,475
15,746
$ 220,012
$ 92,597
67,847
40,248
14,539
$ 215,231
$
$
1,724
935
1,004
118
3,781
$
$
873
216
309
34
1,432
$
$
441
254
262
6
963
Property and equipment, net:
North America . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
EMEA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asia Pacific . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Latin America . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
January 31,
2012
2011
(in thousands)
$ 27,854
3,904
1,146
235
$ 33,139
$ 28,943
3,835
785
232
$ 33,795
(1)
Sales into Canada accounted for 3% of North America total revenue in fiscal 2012 and 4% of North
America total revenue in fiscal 2011 and 2010, respectively.
78
13. QUARTERLY INFORMATION (Unaudited)
Fiscal 2012
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total costs and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic net income per share
Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Class B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted net income per share
Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Class B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fiscal 2011
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total costs and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating (loss) income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net (loss) income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic net (loss) income per share
Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Class B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Quarter Ended
April 30
July 31
Oct. 31
Jan. 31
(in thousands, except per share data)
$ 59,403
56,779
33,309
2,624
1,020
$ 61,957
57,310
35,145
4,647
3,070
$ 60,733
56,435
34,578
4,298
3,010
$ 65,165
58,842
38,887
6,323
3,684
$
$
0.07
0.06
0.06
0.05
0.20
0.16
0.19
0.16
$
0.19
0.16
0.19
0.15
$
0.24
0.20
0.23
0.19
$ 50,841
52,926
28,189
(2,085)
(1,220)
$ 51,305
50,217
29,817
1,088
315
$ 55,409
51,565
32,488
3,844
1,673
$ 62,457
58,713
35,570
3,744
1,943
$ (0.08) $
(0.07)
0.02
0.02
0.02
0.02
$
0.11
0.09
0.10
0.09
$
0.13
0.11
0.12
0.10
Diluted net (loss) income per share
Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Class B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(0.08)
(0.07)
79
SCHEDULE II
SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Balance at
Beginning of
Period
Charged
(Credited) to
Statements of
Income
Write-Offs
Net of,
Recoveries
Impact of
Foreign
Currency
Translation
Balance at
End of
Period
Year ended January 31, 2010
Allowance for bad debt . . . . . . .
Allowance for sales returns . . .
Total allowance for doubtful
accounts . . . . . . . . . . . . . . . . . $
Year ended January 31, 2011
Allowance for bad debt . . . . . . .
Allowance for sales returns . . .
Total allowance for doubtful
accounts . . . . . . . . . . . . . . . . . $
Year ended January 31, 2012
Allowance for bad debt . . . . . . .
Allowance for sales returns . . .
Total allowance for doubtful
accounts . . . . . . . . . . . . . . . . . $
1,305
2,268
1,413
612
(1,123)
(1,164)
62
69
1,657
1,785
3,573
$
2,025
$
(2,287) $
131
$
3,442
1,657
1,785
(186)
654
(328)
(968)
22
25
1,165
1,496
3,442
$
468
$
(1,296) $
47
$
2,661
1,165
1,496
171
989
(32)
(1,303)
(21 )
2
1,283
1,184
2,661
$
1,160
$
(1,335) $
(19 ) $
2,467
See accompanying report of independent registered public accounting firm.
80
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized,
on April 4, 2012.
QAD Inc.
By: /s/ DANIEL LENDER
Daniel Lender
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the
following persons on behalf of the Registrant and in the capacities and on the date indicated.
Signature
/s/ PAMELA M. LOPKER
Pamela M. Lopker
/s/ KARL F. LOPKER
Karl F. Lopker
/s/ DANIEL LENDER
Daniel Lender
/s/ KARA BELLAMY
Kara Bellamy
/s/ SCOTT ADELSON
Scott Adelson
/s/ PETER R. VAN CUYLENBURG
Peter R. van Cuylenburg
/s/ TOM O’MALIA
Tom O’Malia
/s/ LEE ROBERTS
Lee Roberts
Title
Date
Chairman of the Board, President
April 4, 2012
Director, Chief Executive Officer
(Principal Executive Officer)
Executive Vice President,
Chief Financial Officer
(Principal Financial Officer)
April 4, 2012
April 4, 2012
Sr. Vice President, Corporate Controller
(Chief Accounting Officer)
April 4, 2012
April 4, 2012
April 4, 2012
April 4, 2012
April 4, 2012
Director
Director
Director
Director
81
EXHIBIT
NUMBER
EXHIBIT TITLE
INDEX OF EXHIBITS
3.1
3.2
4.1
Amended and Restated Certificate of Incorporation of the Registrant, filed with the Delaware
Secretary of State on December 15, 2010 (Incorporated by reference to Exhibit 3.1 of the
Registrant’s Annual Report on Form 10-K for the fiscal year ended January 31, 2011)
Revised Bylaws of the Registrant (Incorporated by reference to Exhibit 3.2 of the Registrant’s
Annual Report on Form 10-K for the fiscal year ended January 31, 2011)
Specimen Class A and Class B Common Stock Certificate (Incorporated by reference to
Exhibit 4.1 of the Registrant’s Annual Report on Form 10-K for the fiscal year ended January
31, 2011)
10.1
QAD Inc. 1997 Stock Incentive Program (Incorporated by reference to Exhibit 10.2 of the
Registrant’s Registration Statement on Form S-1 (Commission File No. 333- 28441))
10.1(a)
Forms of Agreement for QAD Inc. 1997 Stock Incentive Program (Incorporated by reference
to Exhibit 10.1(a) of the Registrant’s Annual Report on Form 10-K for the fiscal year ended
January 31, 2009)
10.2
QAD Inc. 2006 Stock Incentive Program (Incorporated by reference to Exhibit 4.4 of the
Registrant’s Registration Statement on Form S-8 (Commission File No. 333-137417))
10.2(a)
10.3
Forms of Agreement for QAD Inc. 2006 Stock Incentive Program (Incorporated by reference
to Exhibit 10.2(a) of the Registrant’s Annual Report on Form 10-K for the fiscal year ended
January 31, 2009)
Form of Indemnification Agreement with Directors and Executive Officers (Incorporated by
reference to Exhibit 10.3 of the Registrant’s Registration Statement on Form S-1 (Commission
File No. 333- 28441))†
10.4
Executive Termination Policy (Incorporated by reference to Exhibit 10.2 of the Registrant’s
Quarterly Report on Form 10-Q for the quarter ended April 30, 2011)†
10.5
Change in Control Policy (Incorporated by reference to Exhibit 10.1 of the Registrant’s
Quarterly Report on Form 10-Q for the quarter ended April 30, 2011)†
10.5(a)
10.5(b)
10.5(c)
10.5(d)
10.6
Change in Control Agreement for Karl Lopker (Incorporated by reference to Exhibit 10.5 of
the Registrant’s Annual Report on Form 10-K for the fiscal year ended January 31, 2009)†
Change in Control Agreement for Pam Lopker (Incorporated by reference to Exhibit 10.6 of
the Registrant’s Annual Report on Form 10-K for the fiscal year ended January 31, 2009)†
Change in Control Agreement for Daniel Lender (Incorporated by reference to Exhibit 10.7(a)
of the Registrant’s Annual Report on Form 10-K for the fiscal year ended January 31, 2009)†
Change in Control Agreement for Gordon Fleming (Incorporated by reference to Exhibit 10.10
of the Registrant’s Annual Report on Form 10-K for the fiscal year ended January 31, 2010)†
Offer letter between the Registrant and Daniel Lender dated October 10, 2008 (Incorporated by
reference to Exhibit 10.72 of the Registrant’s Quarterly Report on Form 10-Q for the quarter
ended October 31, 2008)†
82
10.7
10.8
10.9
10.9(a)
10.9(b)
10.9(c)
10.10
10.10(a)
10.10(b)
21.1
23.1
31.1
31.2
Acknowledgement between the Registrant and Daniel Lender dated October 10, 2008
(Incorporated by reference to Exhibit 10.3 of the Registrant’s Quarterly Report on Form 10-Q
for the quarter ended April 30, 2011)†
Promissory Note between the Registrant and Mid-State Bank & Trust effective as of July 28,
2004 (Incorporated by reference to Exhibit 10.2 of the Registrant’s Quarterly Report on Form
10-Q for the quarter ended July 31, 2004)
Credit Agreement between the Registrant and Bank of America, N.A. effective as of April 10,
2008 (Incorporated by reference to Exhibit 10.71 of the Registrant’s Annual Report on Form
10-K for the fiscal year ended January 31, 2008) (superseded by Exhibit 10.10)
Amendment and Waiver to the Credit Agreement between the Registrant and Bank of America,
N.A. effective as of April 10, 2009 (Incorporated by reference to Exhibit 10.9(a) of the
Registrant’s Annual Report on Form 10-K for the fiscal year ended January 31, 2009)
(superseded by Exhibit 10.10)
Second Amendment to Credit Agreement between the Registrant and Bank of America, N.A.
effective as of April 11, 2011 (Incorporated by reference to Exhibit 10.9(b) of the Registrant’s
Annual Report on Form 10-K for the fiscal year ended January 31, 2011) (superseded by
Exhibit 10.10)
Third Amendment to Credit Agreement between the Registrant and Bank of America, N.A.
effective as of June 9, 2011 (Incorporated by reference to Exhibit 10.4 of the Registrant’s
Quarterly Report on Form 10-Q for the quarter ended April 30, 2011) (superseded by Exhibit
10.10)
Credit Agreement between the Registrant and Rabobank, N.A. effective as of July 8, 2011
(Incorporated by reference to Exhibit 10.1 of the Registrant’s Form 8-K filed on July 14, 2011)
Promissory Note between the Registrant and Rabobank, N.A. effective as of July 8, 2011
(Incorporated by reference to Exhibit 10.2 of the Registrant’s Form 8-K filed on July 14, 2011)
Disbursement Request and Authorization between the Registrant and Rabobank, N.A. effective
as of July 8, 2011 (Incorporated by reference to Exhibit 10.3 of the Registrant’s Form 8-K filed
on July 14, 2011)
Subsidiaries of the Registrant*
Consent of Independent Registered Public Accounting Firm*
Certification by the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities
Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
Certification by the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities
Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
32.1
Certification by the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
32.2
Certification by the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
83
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
(*) Indicates the document is filed herewith.
(†) Indicates a management contract or compensatory plan or arrangement required to be filed as an exhibit.
84
Amounts in thousands, except per share data
2 0 1 2
2 0 1 1
2 0 1 0
F I N A N C I A L H I G H L I G H T S:
Total Revenue
Net Income
Diluted Net Income Per Share
$247,258
10,784
$220,012
2,711
$215,231
1,349
FI S C A L YE A R S E N D E D jA N U A R Y 3 1
Class A
Class B
Cash and Equivalents
Total Debt
Cash Flow From Operations
0.67
0.56
76,927
16,134
21,448
0.17
0.14
67,276
16,442
25,902
0.09
0.07
44,678
16,728
17,696
REVENUE BY CATEGORY
REVENUE BY REGION
REVENUE BY VERTICAL MARKET
%
REVENUE
6
5
r
e
h
t
%
4
REVENUE
REVENUE
n
o
i
t
p
i
r
c
s
b
u
S
O
&
e
c
n
a
n
e
t
n
i
a
M
%
3
1
s
e
s
n
e
c
i
L
%
7
2
s
e
c
i
v
r
e
S
%
2
4
a
c
i
r
e
m
A
h
t
r
o
N
%
1
3
A
E
M
E
%
%
9
8
1
REGION
a
REGION
REGION
c
c
i
fi
r
e
i
c
m
a
P
A
a
n
i
i
s
t
a
A
L
/
y
g
o
l
o
n
h
c
e
T
h
g
i
H
%
6
3
s
t
c
u
d
o
r
P
l
a
i
r
t
s
u
d
n
I
VERTICAL
%
%
4
2
VERTICAL
VERTICAL
1
2
s
e
e
g
c
a
n
r
e
e
v
i
c
e
S
B
e
&
f
i
d
L
o
o
F
/
s
t
c
u
d
o
r
P
r
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m
u
s
n
o
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%
8
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v
i
t
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m
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u
A
ABOUT QAD: QAD provides innovative enterprise software applications for leading global manufacturing
companies. QAD applications are designed to simplify the management and enhance the efficiency of
manufacturing resources and operations both within and beyond the enterprise, enabling companies throughout
the world to collaborate with their customers, suppliers and partners.
C ORPORAT E I N FORM ATI ON
E xE C U T I V E OF F I C E R S
Pamela M. Lopker
Chairman of the Board
and President
BO A R D O F DI R E C T O R S
Pamela M. Lopker
Chairman of the Board
and President
Karl F. Lopker
Chief Executive Officer
Karl F. Lopker
Chief Executive Officer
Daniel Lender
Executive Vice President,
Chief Financial Officer
Gordon Fleming
Executive Vice President,
Chief Marketing Officer
Kara L. Bellamy
Senior Vice President,
Corporate Controller,
and Chief Accounting Officer
Scott J. Adelson
Senior Managing Director,
Global Co-Head of
Corporate Finance
Houlihan Lokey
Peter R. van Cuylenburg
Independent advisor to
high-technology companies
Thomas J. O’Malia
Director Emeritus, Lloyd
Greif Center for
Entrepreneurial Studies at
the University of Southern
California, Marshall
School of Business
Lee D. Roberts
President and CEO,
BlueWater Consulting, LLC
NO R T H AM E R I C A
LO C AT I O N S
California
Georgia
Illinois
Michigan
New Jersey
AS I A P A C I F I C
LO C AT I O N S
Australia
China
India
Japan
Singapore
Thailand
EU R O P E, MI D D L E
EA S T A N D AF R I C A
LO C AT I O N S
Belgium
France
Germany
Ireland
Italy
Netherlands
Poland
South Africa
Spain
United Kingdom
LAT I N AM E R I C A
L O C AT I O N S
Brazil
Mexico
IN D E P E N D E N T RE G I S T E R E D
PU B L I C AC C O U N T I N G FI R M
KPMG LLP
Los Angeles, California
LE G A L CO U N S E L
Manatt, Phelps & Phillips LLP
Los Angeles, California
IN V E S T O R RE L AT I O N S
PondelWilkinson Inc.
Los Angeles, California
Tel: 310.279.5980
TR A N S F E R AG E N T/ RE G I S T R A R
American Stock Transfer & Trust
New York, New York
Tel: 212.936.5100
ST O C K IN F O R M AT I O N
The company’s common stock trades
on the NASDAQ Global Select Market
under the symbols QADA and QADB.
AN N U A L RE P O R T O N FO R M 1 0 - K
A copy of the company’s annual
report to the Securities and Exchange
Commission on Form 10-K is available
without charge upon request to
the company’s Investor Relations
department or from the company’s
website at www.qad.com.
AN N U A L M E E T I N G
The annual meeting of stockholders will
be held on June 12, 2012 at 4:30 p.m.
PDT at QAD Inc., 100 Innovation Place,
Santa Barbara, California 93108.
Tel: 805.566.6000. A formal Notice
of Meeting, Proxy Statement and Proxy
will be sent to stockholders.
QAD CO RPORAT E HEADQU ARTER S
100 Innovation Place
Santa Barbara, California 93108
Tel: 805.566.6000
www.qad.com
2012 ANN UAL REPORT
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© 2012 QAD INC. ALL RIGHTS RESERVED.