QAD INC (Form: 10-K, Received: 04/15/2011 06:03:14)

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

1. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

	Page
Report of Independent Registered Public Accounting Firm	47
Consolidated Balance Sheets as of January 31, 2011 and 2010	48
Consolidated Statements of Operations for the years ended January 31, 2011, 2010 and 2009	49
Consolidated Statement of Stockholders’ Equity and Comprehensive Income (Loss) for the years ended January 31, 2011, 2010 and 2009	50
Consolidated Statements of Cash Flows for the years ended January 31, 2011, 2010 and 2009	51
Notes to Consolidated Financial Statements	52

2. INDEX TO FINANCIAL STATEMENT SCHEDULES

The following financial statement schedule is filed as a part of this Annual Report on Form 10-K:

	Page
SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS	76

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 79.

Table of Contents

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 as of January 31, 2011 and 2010, and the related consolidated statements of operations, stockholders’ equity and comprehensive income (loss), and cash flows for each of the years in the three-year period ended January 31, 2011. In connection with our audits of the consolidated financial statements, we also have audited the related financial statement Schedule II. 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, 2011 and 2010, and the results of their operations and their cash flows for each of the years in the three-year period ended January 31, 2011, 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), QAD Inc.’s internal control over financial reporting as of January 31, 2011, 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 15, 2011 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

/s/ KPMG LLP

Los Angeles, California

April 15, 2011

Table of Contents

QAD INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

	January 31,
	2011			2010
Assets
Current assets:
Cash and equivalents	$	67,276		$	44,678
Accounts receivable, net of allowances of $2,661 and $3,442 at January 31, 2011 and 2010, respectively		65,620			61,089
Deferred tax assets, net		3,954			3,548
Other current assets		12,553			13,680
Total current assets		149,403			122,995
Property and equipment, net		33,795			37,219
Capitalized software costs, net		841			2,446
Goodwill		6,457			6,348
Deferred tax assets, net		20,080			19,411
Other assets, net		2,518			2,755
Total assets	$	213,094		$	191,174
Liabilities and Stockholders’ Equity
Current liabilities:
Current portion of long-term debt	$	304		$	285
Accounts payable		10,003			7,952
Deferred revenue		94,453			85,745
Other current liabilities		30,891			24,835
Total current liabilities		135,651			118,817
Long-term debt		16,138			16,443
Other liabilities		5,214			6,363
Commitments and contingencies
Stockholders’ equity:
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 14,146,416 shares and 14,145,564 shares at January 31, 2011 and 2010, respectively		14			14
Class B, $0.001 par value. Authorized 4,000,000 shares; issued 3,536,604 shares and 3,536,391 shares at January 31, 2011 and 2010, respectively		4			4
Additional paid-in capital		146,898			143,138
Treasury stock, at cost (1,721,601 shares and 2,005,763 shares at January 31, 2011 and 2010, respectively)		(28,070	)		(32,275	)
Accumulated deficit		(54,438	)		(52,480	)
Accumulated other comprehensive loss		(8,317	)		(8,850	)
Total stockholders’ equity		56,091			49,551
Total liabilities and stockholders’ equity	$	213,094		$	191,174

See accompanying notes to consolidated financial statements.

Table of Contents

QAD INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

	Years Ended January 31,
	2011			2010			2009
Revenue:
License fees	$	32,446		$	28,452		$	46,673
Maintenance and other		131,162			131,142			133,080
Services		56,404			55,637			82,990
Total revenue		220,012			215,231			262,743
Costs and expenses:
Cost of license fees		5,698			6,941			9,752
Cost of maintenance, service and other revenue		88,250			84,686			111,819
Sales and marketing		54,206			51,979			73,025
Research and development		34,575			37,303			43,107
General and administrative		30,637			30,969			33,763
Amortization of intangibles from acquisitions		55			482			734
Goodwill impairment loss		—			—			14,406
Total costs and expenses		213,421			212,360			286,606
Operating income (loss)		6,591			2,871			(23,863	)
Other (income) expense:
Interest income		(515	)		(570	)		(1,433	)
Interest expense		1,248			1,273			1,245
Other (income) expense, net		304			(289	)		(244	)
Total other (income) expense		1,037			414			(432	)
Income (loss) before income taxes		5,554			2,457			(23,431	)
Income tax expense		2,843			1,108			289
Net income (loss)	$	2,711		$	1,349		$	(23,720	)
Basic net income (loss) per share:
Class A	$	0.18		$	0.09		$	(1.60	)
Class B	$	0.15		$	0.08		$	(1.33	)
Diluted net income (loss) per share:
Class A	$	0.17		$	0.09		$	(1.60	)
Class B	$	0.14		$	0.07		$	(1.33	)

See accompanying notes to consolidated financial statements.

Table of Contents

QAD INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)

(in thousands)

	Number of Shares							Amount				Additional Paid-									Accumulated Other			Total			Comprehensive
	Class A		Class B		Treasury			Class A		Class B		in Capital			Treasury Stock			Accumulated Deficit			Comprehensive Loss			Stockholders’ Equity			Income (Loss)
Balance, January 31, 2008		14,144		3,536		(2,299	)	$	14	$	4	$	135,379		$	(36,336	)	$	(21,596	)	$	(4,870	)	$	72,595
Comprehensive loss:
Net loss		—		—		—			—		—		—			—			(23,720	)		—			(23,720	)	$	(23,720	)
Foreign currency translation adjustments		—		—		—			—		—		—			—			—			(1,907	)		(1,907	)		(1,907	)
Total comprehensive loss																											$	(25,627	)
Stock award exercises		1		—		94			—		—		(1	)		1,382			(798	)		—			583
Stock-based compensation income tax deficiencies		—		—		—			—		—		(355	)		—			—			—			(355	)
Stock compensation expense		—		—		—			—		—		5,505			—			—			—			5,505
Dividends declared ($0.20 per share)		—		—		—			—		—		—			—			(3,055	)		—			(3,055	)
Restricted stock		—		—		38			—		—		(625	)		559			66			—			—
Unearned compensation-restricted stock		—		—		—			—		—		44			—			—			—			44
Repurchase of common stock		—		—		(131	)		—		—		—			(2,219	)		—			—			(2,219	)
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		—		—		—			—		—		—			—			1,349			—			1,349		$	1,349
Foreign currency translation adjustments		—		—		—			—		—		—			—			—			(2,073	)		(2,073	)		(2,073	)
Total comprehensive loss																											$	(724	)
Stock award exercises		1		—		45			—		—		(6	)		670			(392	)		—			272
Stock compensation expense		—		—		—			—		—		4,592			—			—			—			4,592
Dividends declared ($0.20 per share)		—		—		—			—		—		—			—			(3,110	)		—			(3,110	)
Dividends paid in stock		—		—		160			—		—		—			2,374			(1,149	)		—			1,225
Restricted stock		—		—		87			—		—		(1,395	)		1,295			(75	)		—			(175	)
Balance, January 31, 2010		14,146		3,536		(2,006	)		14		4		143,138			(32,275	)		(52,480	)		(8,850	)		49,551
Comprehensive income:
Net income		—		—		—			—		—		—			—			2,711			—			2,711		$	2,711
Foreign currency translation adjustments		—		—		—			—		—		—			—			—			533			533			533
Total comprehensive income																											$	3,244
Stock award exercises	—		—			74			—		—		(25	)		1,097			(633	)		—			439
Stock-based compensation income tax benefits		—		—		—			—		—		367			—			—			—			367
Stock compensation expense	—			—	—				—		—		5,303		—			—				—			5,303
Dividends declared ($0.21 and $0.20 per Class A and Class B share, respectively)		—		—		—			—		—		—			—			(3,296	)		—			(3,296	)
Dividends paid in stock		—		—		98			—		—		—			1,457			(511	)		—			946
Restricted stock		—		1		112			—		—		(1,885	)		1,651			(229	)		—			(463	)
Balance, January 31, 2011		14,146		3,537		(1,722	)	$	14	$	4	$	146,898		$	(28,070	)	$	(54,438	)	$	(8,317	)	$	56,091

See accompanying notes to consolidated financial statements.

Table of Contents

QAD INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

	Years Ended January 31,
	2011			2010			2009
Cash flows from operating activities:
Net income (loss)	$	2,711		$	1,349		$	(23,720	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		6,960			9,992			11,134
Provision for doubtful accounts and sales adjustments		468			2,025			1,665
Tax benefit from reversal of deferred tax valuation allowance		(148	)		(1,194	)		(658	)
Loss on disposal of property and equipment		65			130			11
Deferred income taxes		(1,488	)		(1,344	)		(3,563	)
Goodwill impairment loss		—			—			14,406
Exit costs		—			217			385
Stock compensation expense		5,303			4,592			5,516
Excess tax benefits from stock awards		(384	)		—			(75	)
Other, net		(320	)		(554	)		(474	)
Changes in assets and liabilities, net of effects from acquisitions:
Accounts receivable		(4,792	)		10,447			7,593
Other assets		2,591			(153	)		(397	)
Accounts payable		2,069			(2,457	)		1,496
Deferred revenue		7,548			2,872			(2,988	)
Other liabilities		5,319			(8,226	)		(3,078	)
Net cash provided by operating activities		25,902			17,696			7,253
Cash flows from investing activities:
Purchase of property and equipment		(1,432	)		(963	)		(6,338	)
Proceeds from sale of marketable securities		—			—			275
Capitalized software costs		(484	)		(426	)		(894	)
Acquisitions of businesses, net of cash acquired		(9	)		(14	)		(7,059	)
Proceeds from sale of property and equipment		3			46			—
Net cash used in investing activities		(1,922	)		(1,357	)		(14,016	)
Cash flows from financing activities:
Repayments of debt		(287	)		(255	)		(288	)
Dividends paid		(2,204	)		(1,873	)		(3,067	)
Proceeds from issuance of common stock		439			272			583
Tax payments related to net share settlements of stock awards		(463	)		(175	)		—
Excess tax benefits from stock awards		384			—			75
Repurchase of common stock		—			—			(2,219	)
Changes in cash overdraft		—			(2,476	)		468
Net cash used in financing activities		(2,131	)		(4,507	)		(4,448	)
Effect of exchange rates on cash and equivalents		749			1,379			(2,935	)
Net increase (decrease) in cash and equivalents		22,598			13,211			(14,146	)
Cash and equivalents at beginning of year		44,678			31,467			45,613
Cash and equivalents at end of year	$	67,276		$	44,678		$	31,467
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	1,184		$	1,230		$	1,184
Income taxes, net of refunds		1,490			3,980			3,942
Supplemental disclosure of non-cash activities:
Obligations associated with dividend declaration		926			780			768
Dividends paid in stock		946			1,225			—

See accompanying notes to consolidated financial statements.

Table of Contents

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 main Enterprise Resource Planning (“ERP”) product suite is called QAD Enterprise Applications, formerly marketed 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 (1/20 th ) 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.

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 recognition, accounts receivable allowances, long-lived assets, goodwill, capitalized software costs, 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, 2011 and 2010, 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.

REVENUE RECOGNITION

The Company derives its revenues from the sale or the license of software products and from support services, subscriptions, consulting, development, training, and other professional services. 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 collectibility is probable. A majority of the Company’s license revenue is recognized in this manner. Revenue is presented net of sales, use and value-add taxes collected on behalf of its customers.

Table of Contents

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 its established history for similar arrangements, revenue would be recognized revenue 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 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 arrangements.

Multiple element 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, services and other and cost of license based on the allocated revenue categories.

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. A majority of the Company’s customers 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.

Revenues from consulting services 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 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 hours incurred to date, as compared to total estimated hours to be incurred to complete the work. In milestone achievement arrangements, the Company recognizes revenue as the respective milestones are achieved.

Revenue from the Company’s subscription product offerings, including On Demand products, is recognized ratably over the contract period when the customer does not have the right to take possession of the software. For subscription arrangements where the customer has the right and ability to take possession of the software, revenue is recognized using the residual method.

Table of Contents

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 when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and collection is considered probable. 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 where 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 these 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 and are included in cost of license, maintenance, services and other based on the allocation of the related revenue categories.

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 our 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 for distributor transactions is recorded on a net basis (the amount actually received by the Company from the distributor). The Company does not offer rights of return, product rotation or price protection to any of its distributors.

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.

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. 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.

Table of Contents

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 and training costs 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 and related 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 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 fiscal fourth quarter of each 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.

Effective February 1, 2009, the Company determined that it has one reporting unit. 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.

Prior to February 1, 2009, the Company allocated goodwill to four geographic reporting units. Accordingly, goodwill impairment tests were conducted annually for each of the four reporting units. Prior to combining reporting units on February 1, 2009, the Company performed an impairment test on each of the three reporting units that had goodwill remaining and determined there was no impairment to any reporting unit. This change in reporting unit structure was brought about by an internal reorganization of the Company’s sales operations and de-emphasis on regional results as a result of the importance of the global nature of the Company’s customer base. An example of the Company’s internal reorganization is the creation of the strategic accounts group, which is accountable for sales to QAD’s multi-national customers, irrespective of geography, who generate a large portion of QAD’s revenue. The purpose of the strategic accounts group within the sales organization is to provide additional expertise and devote additional time to global customer accounts with revenues spanning across all regions. In order to serve this base of global customers, the Company must maintain a presence in certain foreign locations where it may not be profitable to do so and sales and support efforts are devoted to these customers irrespective of where the end users are located.

Table of Contents

CAPITALIZED SOFTWARE COSTS

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. In addition, 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).

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 Operations.

STOCK-BASED COMPENSATION

The Company accounts for share-based payments (“equity awards”) to employees in accordance with ASC 718, Compensation—Stock Compensation, which requires that share-based payments (to the extent they are compensatory) be recognized in the consolidated statements of operations 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-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 exercise 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. Historically, the Company paid quarterly dividends at a rate of $0.05 per common share.

Table of Contents

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. Historically, the Company paid quarterly dividends at a rate of $0.05 per common 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 examined 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.

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.

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 divided of 4 shares of Class A common stock. The Recapitalization had the effect of a two-for-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 4 shares of Class A common stock. Net income or loss 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.

Table of Contents

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

	Years Ended January 31,
	2011			2010			2009
	(in thousands, except per share data)
Net income (loss)	$	2,711		$	1,349		$	(23,720	)
Less: Dividends declared		(3,296	)		(3,110	)		(3,055	)
Undistributed net loss	$	(585	)	$	(1,761	)	$	(26,775	)

Net income (loss) per share – Class A Common Stock
Dividends declared	$	2,728		$	2,574		$	2,529
Allocation of undistributed net loss		(484	)		(1,458	)		(22,159	)
Net income (loss) attributable to Class A common stock	$	2,244		$	1,116		$	(19,630	)

Weighted average shares of Class A common stock outstanding— basic		12,621			12,407			12,270
Weighted average potential shares of Class A common stock		429			500			—
Weighted average shares of Class A common stock and potential common shares outstanding— diluted		13,050			12,907			12,270

Basic net income (loss) per Class A common share	$	0.18		$	0.09		$	(1.60	)
Diluted net income (loss) per Class A common share	$	0.17		$	0.09		$	(1.60	)

Net income (loss) per share – Class B Common Stock
Dividends declared	$	568		$	536		$	526
Allocation of undistributed net loss		(101	)		(303	)		(4,616	)
Net income (loss) attributable to Class B common stock	$	467		$	233		$	(4,090	)

Weighted average shares of Class B common stock outstanding— basic		3,155			3,102			3,068
Weighted average potential shares of Class B common stock		107			125			—
Weighted average shares of Class B common stock and potential common shares outstanding— diluted		3,262			3,227			3,068

Basic net income (loss) per Class B common share	$	0.15		$	0.08		$	(1.33	)
Diluted net income (loss) per Class B common share	$	0.14		$	0.07		$	(1.33	)

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 of exercise. Class A common stock equivalents of approximately 1.9 million, 1.6 million and 2.6 million for fiscal 2011, 2010 and 2009, respectively, were not included in the diluted calculation because their effects were anti-dilutive. Class B common stock equivalents of approximately 0.5 million, 0.4 million and 0.6 million for fiscal 2011, 2010 and 2009, 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 2011, 2010 and 2009 totaled $0.1 million, $(0.1) million and $(0.1) million, respectively, and are included in “Other (income) expense, net” in the accompanying Consolidated Statements of Operations.

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 $17.1 million at January 31, 2011 and the carrying value was $16.4 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, 2011 or January 31, 2010.

Table of Contents

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.

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).

RECENT ACCOUNTING STANDARDS

Recently Issued Accounting Standards

Milestone Method of Revenue Recognition

In April 2010, the FASB issued Accounting Standards Update No. 2010-17, Revenue Recognition—Milestone Method (Topic 605) – Revenue Recognition (“ASU 2010-17”). ASU 2010-17 provides guidance on defining the milestone and determining when the use of the milestone method of revenue recognition for research or development transactions is appropriate. It provides criteria for evaluating if the milestone is substantive and clarifies that a vendor can recognize consideration that is contingent upon achievement of a milestone as revenue in the period in which the milestone is achieved, if the milestone meets all the criteria to be considered substantive. ASU 2010-17 is effective for us in fiscal 2012 and should be applied prospectively. The Company is currently evaluating the impact of the pending adoption of ASU 2010-17 on its consolidated financial statements.

Fair Value Disclosures

In January 2010 the FASB issued guidance that expands the interim and annual disclosure requirements of fair value measurements, including the information about movement of assets between Level 1 and 2 of the three-tier fair value hierarchy established under its fair value measurement guidance. This guidance also requires separate disclosure for purchases, sales, issuances and settlements in the reconciliation for fair value measurements using significant unobservable inputs using Level 3 methodologies. Except for the detailed disclosure in the Level 3 reconciliation, which is effective for the fiscal years beginning after December 15, 2010, the Company adopted the relevant provisions of this guidance effective February 1, 2010, which did not have a material impact on its financial statements.

Table of Contents

Recently Adopted Accounting Standards

Revenue Recognition

In September 2009 the Financial Accounting Standards Board, or FASB, reached a consensus on Accounting Standards Update, or ASU, 2009-13, Revenue Recognition (Topic 605) — Multiple-Deliverable Revenue Arrangements (“ASU 2009-13”) and ASU 2009-14, Software (Topic 985) — Certain Revenue Arrangements That Include Software Elements (“ASU 2009-14”). ASU 2009-13 modifies the requirements that must be met for an entity to recognize revenue from the sale of a delivered item that is part of a multiple-element arrangement when other items have not yet been delivered. ASU 2009-13 establishes a selling price hierarchy that allows for the use of an estimated selling price to determine the allocation of arrangement consideration to a deliverable in a multiple element arrangement where neither VSOE nor third-party evidence (“TPE”), is available for that deliverable. In the absence of VSOE or TPE of the standalone selling price for one or more delivered or undelivered elements in a multiple-element arrangement, entities are required to estimate the selling prices of those elements. Overall arrangement consideration is allocated to each element (both delivered and undelivered items) based on their relative selling prices, regardless of whether those selling prices are evidenced by VSOE or TPE or are based on the entity’s estimated selling price. The residual method of allocating arrangement consideration has been eliminated for transactions outside of the scope of Topic 985. ASU 2009-14 modifies the software revenue recognition guidance to exclude from its scope tangible products that contain both software and non-software components that function together to deliver a product’s essential functionality. The Company adopted the provisions of these ASUs effective February 1, 2010 and they did not have a material impact on its results of operations.

Table of Contents

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.

The following table sets forth the financial assets, measured at fair value, as of January 31, 2011 and 2010:

	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)
	(in thousands)
Money market mutual funds as of January 31, 2011	$	48,390	$	—	$	—
Money market mutual funds as of January 31, 2010		26,930		—		—

Money market mutual funds are classified as part of “Cash and equivalents” in the accompanying Condensed 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, 2011 and 2010, the amount of cash and cash equivalents included cash deposited with commercial banks of $18.9 million and $17.8 million, respectively.

There have been no transfers between fair value measurement levels during the year ended January 31, 2011.

3. CAPITALIZED SOFTWARE COSTS

Capitalized software costs and accumulated amortization at January 31, 2011 and 2010 were as follows:

	January 31,
	2011			2010
	(in thousands)
Capitalized software costs:
Acquired software technology	$	954		$	4,402
Capitalized software development costs		1,924			4,167
		2,878			8,569
Less accumulated amortization		(2,037	)		(6,123	)
Capitalized software costs, net	$	841		$	2,446

The acquired software technology costs primarily relate to technology purchased from the Company’s fiscal 2007 acquisitions of Precision, Soft Cell and Bisgen and from the FullTilt acquisition completed in fiscal 2009, none of which were significant. QAD acquired the rights to the SoftCell technology in two steps: co-ownership rights in fiscal 2006 and full ownership rights as part of the fiscal 2007 acquisition. In addition to the acquired software technology, the Company has capitalized internally developed software costs related to the Soft Cell technology and costs related to translations and localizations of QAD Enterprise Applications.

It is the Company’s policy to write-off capitalized software development costs once fully amortized. Accordingly, during fiscal 2011, $6.2 million of costs and accumulated amortization was removed from the balance sheet.

Amortization of capitalized software costs for fiscal 2011, 2010 and 2009 was $2.1 million, $3.8 million and $4.2 million, respectively. Amortization of capitalized software costs is included in “Cost of license fees” in the accompanying Consolidated Statements of Operations. The estimated remaining amortization expense related to capitalized software costs for the years ended January 31, 2012, 2013 and 2014 is $0.5 million, $0.2 million and $0.1 million, respectively.

Table of Contents

4. GOODWILL

Goodwill

The changes in the carrying amount of goodwill for the fiscal years ended January 31, 2011 and 2010 were as follows (in thousands):

	Gross Carrying Amount		Accumulated Impairment			Goodwill, Net
	(in thousands)
Balance at January 31, 2009	$	21,845	$	(15,608	)	$	6,237
Impact of foreign currency translation		111		—			111
Balance at January 31, 2010	$	21,956	$	(15,608	)	$	6,348
Impact of foreign currency translation		109		—			109
Balance at January 31, 2011	$	22,065	$	(15,608	)	$	6,457

There were no additions to goodwill in fiscal 2011 and 2010.

During the fourth quarter of fiscal 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 30 th . As the market capitalization substantially exceeded the Company’s net assets, there was no indication of goodwill impairment for fiscal 2011 and 2010.

Prior to fiscal 2010, the Company’s reporting units were identified at the geographic level: North America, EMEA, Asia Pacific and Latin America. Upon completion of the fiscal 2009 impairment assessment, the Company determined that the carrying value of the EMEA reporting unit exceeded its estimated fair value. Because indicators of impairment existed for this reporting unit, the Company performed the second step of the test to determine the fair value of the goodwill of the EMEA reporting unit. The implied fair value of goodwill was determined in the same manner utilized to estimate the amount of goodwill recognized in a business combination. As part of the second step of the impairment test, the Company calculated the fair value of certain assets, including distribution network, developed technology, trade name and workforce. To determine the implied value of goodwill, fair values were allocated to the assets and liabilities of the EMEA reporting unit as of November 30, 2008. The implied fair value of goodwill was measured as the excess of the fair value of the EMEA reporting unit over the amounts assigned to its assets and liabilities. The impairment loss for the EMEA reporting unit was measured by the amount the carrying value of goodwill exceeded the implied fair value of the goodwill. Based on this assessment, the Company recorded a charge of $14.4 million in the fourth quarter of fiscal 2009, which represented all of the goodwill related to the EMEA reporting unit. The primary factor contributing to this impairment charge was the significant economic downturn in the fourth quarter of fiscal 2009, which caused a decline in revenue and cash flow projections.

Table of Contents

5. COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS

	January 31,
	2011			2010
	(in thousands)
Accounts receivable, net
Accounts receivable	$	68,281		$	64,531
Less allowance for:
Doubtful accounts		(1,165	)		(1,657	)
Sales adjustments		(1,496	)		(1,785	)
	$	65,620		$	61,089
Other current assets
Deferred cost of revenues	$	7,255		$	7,449
Prepaid expenses		3,859			3,474
Income tax receivable		—			1,133
Other		1,439			1,624
	$	12,553		$	13,680
Property and equipment, net
Buildings and building improvements	$	32,194		$	32,249
Computer equipment and software		23,821			26,308
Furniture and office equipment		13,043			13,836
Leasehold improvements		5,666			5,756
Land		3,850			3,850
Automobiles (including under capital lease)		297			248
		78,871			82,247
Less accumulated depreciation and amortization		(45,076	)		(45,028	)
	$	33,795		$	37,219
Accounts payable
Other payables	$	5,912		$	4,880
VAT payable		4,091			3,072
	$	10,003		$	7,952
Deferred revenue
Deferred maintenance revenue	$	81,034		$	76,336
Deferred services revenue		4,744			1,839
Deferred research and development funding		3,246			3,112
Deferred license revenue		3,061			2,932
Deferred subscription revenue		2,318			1,495
Other deferred revenue		50			31
	$	94,453		$	85,745
Other current liabilities
Accrued commissions and bonus	$	12,053		$	7,268
Accrued compensated absences		7,086			6,913
Other accrued payroll		3,030			1,740
Accrued professional fees		1,766			2,394
Accrued travel		995			985
Dividends payable		926			780
Other current liabilities		5,035			4,755
	$	30,891		$	24,835
Other liabilities
Long-term deferred revenue	$	2,359		$	2,985
Long-term tax contingency reserve		2,155			2,411
Other		700			967
	$	5,214		$	6,363

Table of Contents

6. DEBT

	January 31,
	2011			2010
	(in thousands)
Total debt
Note payable	$	16,442		$	16,728
Less current maturities		(304	)		(285	)
Long-term debt	$	16,138		$	16,443

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 2012; $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, 2011 was $16.4 million.

Credit Facility

Effective April 10, 2008, the Company entered into an unsecured loan agreement with Bank of America N.A. (the “Facility”). The Facility provides a three-year commitment for a $20 million line of credit. The Company pays an annual commitment fee of between 0.25% and 0.50% calculated on the average unused portion of the $20 million Facility. The rate is determined by the ratio of funded debt to the Company’s 12-month trailing Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”).

The Facility provided that the Company maintain certain financial and operating covenants which include, among other provisions, a maximum total leverage ratio of 1.5 to 1.0, a minimum liquidity ratio of 1.3 to 1.0, a minimum 12-month trailing EBITDA of $10 million and a minimum fixed charge coverage ratio of 2.00 to 1.00. Borrowings under the Facility bear interest at a floating rate based on LIBOR or prime plus the corresponding applicable margins, ranging from 0.75% to 1.75% for the LIBOR option or -0.25% to 0.25% for the prime option, depending on the Company’s funded debt to 12-month trailing EBITDA ratio. At January 31, 2011, a prime rate borrowing would have had an effective rate of 3.0% and a 30-day LIBOR borrowing would have had an effective rate of approximately 1.01%.

Effective April 10, 2009, the Company executed an amendment to the Facility to amend the 12-month trailing EBITDA and fixed charge ratio covenants for future reporting periods. For the reporting period beginning February 1, 2009 through the expiration of the Facility, the minimum 12-month trailing EBITDA is reduced to $5.0 million with the definition of EBITDA amended to exclude goodwill impairment charges. Although the Facility was originally scheduled to expire on April 10, 2011, the Company has agreed to a 60-day extension with Bank of America to June 9, 2011. The Company is currently negotiating the extension or replacement of the expiring line of credit with a credit agreement with materially similar terms. Although this is the Company’s current expectation, extension or renewal of the credit agreement is not solely within its control, so there is no assurance that the credit agreement will be renewed on similar terms, if at all.

As of January 31, 2011 there were no borrowings under the Facility.

Table of Contents

7. INCOME TAXES

Income tax expense (benefit) is summarized as follows:

	Years Ended January 31,
	2011			2010			2009
	(in thousands)
Current:
Federal	$	679		$	598		$	501
State		268			658			21
Foreign		2,663			1,196			3,330
Subtotal		3,610			2,452			3,852
Deferred:
Federal		(1,206	)		(49	)		(1,965	)
State		35			(829	)		(440	)
Foreign		(317	)		(466	)		(1,158	)
Subtotal		(1,488	)		(1,344	)		(3,563	)
Equity		721			¾			¾
Total	$	2,843		$	1,108		$	289

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:

	Years Ended January 31,
	2011			2010			2009
	(in thousands)
Computed expected tax expense	$	1,888		$	836		$	(7,730	)
State income taxes, net of federal income tax expense		491			804			(45	)
Incremental tax benefit from foreign operations		(1,474	)		(1,611	)		3,130
Non-deductible equity compensation		335			795			319
Foreign withholding taxes		776			891			772
Net change in valuation allowance		99			(679	)		(3,154	)
Net change in contingency reserve		91			(433	)		499
Non-deductible expenses		969			79			527
Benefit of tax credits		(456	)		(702	)		(590	)
Subpart F Income		383			312			557
Non-deductible goodwill impairment		¾			¾			2,100
Rate change impact		20			(9	)		2,635
Dividend income		¾			848			¾
Other		(279	)		(23	)		1,269
	$	2,843		$	1,108		$	289

Consolidated U.S. book income/(loss) before income taxes was $(2.8) million, $(2.6) million, and $(9.8) million for the fiscal years ended January 31, 2011, 2010 and 2009, respectively. The corresponding book income/loss before income taxes for foreign operations was $8.4 million, 5.1 million, and $(13.6) million for the fiscal years ended January 31, 2011, 2010 and 2009, 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 and 2009, South Africa for fiscal year 2010 and in California for fiscal years ended 2004 and 2005. In fiscal year 2011, the following audits were completed without adjustment: Japan fiscal years 2008 through 2010 and Tennessee fiscal years 2006 through 2008.

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 $41.1 million at fiscal year 2011. It is not practicable for the Company to determine the amount of the related unrecognized deferred 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.

Table of Contents

Significant components of the Company’s deferred tax assets and liabilities are as follows:

	January 31,
	2011			2010
	(in thousands)
Deferred tax assets:
Allowance for doubtful accounts and sales adjustments	$	559		$	1,097
Accrued vacation		1,570			1,581
Accrued commissions		464			413
Alternative minimum tax credits		565			784
Research and development credits		6,955			7,067
Foreign tax credits		229			209
Deferred revenue		6,063			2,594
Depreciation and amortization		840			642
Net operating loss carry forwards		13,703			15,171
Intangibles		129			561
Accrued expenses - other		1,105			652
Section 263(a) interest capitalization		406			417
Stock compensation		5,376			4,838
Unrecognized gain/loss on translation		45			(197	)
Other		450			526
Total deferred tax assets		38,459			36,355
Less valuation allowance		(10,571	)		(9,589	)
Deferred tax assets, net of valuation allowance	$	27,888		$	26,766
Deferred tax liabilities:
Capitalized software development costs	$	291		$	539
Unrecognized capital gain		947			972
Other comprehensive income		2,559			2,141
Other		57			155
Total deferred tax liabilities		3,854			3,807
Total net deferred tax asset	$	24,034		$	22,959
Current portion of deferred tax asset, net		3,954			3,548
Non-current portion of deferred tax asset, net		20,080			19,411
Total net deferred tax asset	$	24,034		$	22,959

The Company has revised its presentation of deferred tax assets and liabilities to reflect the federal benefit of state as it pertains to each line item. In prior years the federal benefit of state was reflected as a separate line item in the liabilities section of the deferred tax assets and liabilities. Fiscal year 2010 balances have been reclassified to reflect this change.

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, 2011 and 2010, the valuation allowance attributable to deferred tax assets was $10.6 million and $9.6 million, respectively.

Deferred tax assets at January 31, 2011 and 2010 do not include $0.9 million and $1.6 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 2011, the Company utilized all of its net operating loss carryforwards that were available to be utilized during fiscal 2011 and was able to recognize $0.7 million of excess tax benefits. Equity will be increased by an additional $0.9 million when such excess tax benefits are ultimately realized.

The Company has net operating loss carryforwards of $52.0 million and tax credit carryforwards of $9.0 million as of January 31, 2011. The majority of our net operating loss carryforwards do not expire, the remaining begin to expire in fiscal year 2012. The majority of our tax credit carryforwards do not expire, the remaining begin to expire in fiscal year 2016.

Table of Contents

During the fiscal year ended January 31, 2011, 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 Statement of Operations 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:

	Years Ended January 31
	2011			2010
	(in thousands)
Unrecognized tax benefits at beginning of the year	$	2,411		$	2,844
Increases as a result of tax positions taken in a prior period		115			29
Decreases as a result of tax positions taken in a prior period		¾			(12	)
Reduction as a result of a lapse of the statute of limitations		(11	)		¾
Decreases as a result of tax settlements		(13	)		(450	)
Unrecognized tax benefit at end of year	$	2,502		$	2,411

All of the unrecognized tax benefits included in the balance sheet at January 31, 2011 would impact the effective tax rate on income from continuing operations, if recognized.

The total amount of interest expense recognized in the Consolidated Statements of Operations for unpaid taxes is $0.1 million for the year ended January 31, 2011. The total amount of interest and penalties recognized in the Consolidated Balance Sheet at January 31, 2011 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 2011:

Jurisdiction	Years Open for Audit
US Federal	FY08 and beyond
California	FY07 and beyond
Michigan	FY07 and beyond
New Jersey	FY07 and beyond
Texas	FY06 and beyond
Australia	FY07 and beyond
France	FY09 and beyond
Germany	FY06 and beyond
Ireland	FY06 and beyond
Netherlands	FY05 and beyond
United Kingdom	FY08 and beyond

Table of Contents

8. STOCKHOLDERS’ EQUITY

Common Stock

Effective December 15, 2010, 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, 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.

T he 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

On January 13, 2010, the Company’s Board of Directors declared a quarterly dividend of $0.05 per share of common stock payable on April 26, 2010 to shareholders of record at the close of business on March 16, 2010. The dividend was payable in either cash or shares of the Company’s common stock, at the election of each shareholder. Based on the shareholder election, the Company paid $0.6 million in cash and issued 17,000 shares of common stock at a fair value of $0.2 million.

On April 9, 2010, the Company’s Board of Directors approved a quarterly dividend of $0.05 per share of common stock payable on July 12, 2010 to shareholders of record at the close of business on June 1, 2010. The dividend was payable in either cash or shares of the Company’s common stock, at the election of each shareholder. Based on the shareholder election, the Company paid $0.7 million in cash and issued 13,000 shares of common stock at a fair value of $0.1 million.

On June 9, 2010, the Company’s Board of Directors approved a quarterly dividend of $0.05 per share of common stock payable on October 12, 2010 to shareholders of record at the close of business on August 31, 2010. The dividend was payable in either cash or shares of the Company’s common stock, at the election of each shareholder. Based on the shareholder election, the Company paid $0.7 million in cash and issued 15,000 shares of common stock at a fair value of $0.1 million.

On September 21, 2010, the Company’s Board of Directors approved a quarterly dividend of $0.05 per share of common stock payable on January 10, 2011 to shareholders of record at the close of business on November 30, 2010. The dividend was payable in either cash or shares of the Company’s common stock, at the election of each shareholder. Based on the shareholder election, the Company paid $0.3 million in cash and issued 53,000 shares of Class A common stock at a fair value of $0.5 million.

On December 14, 2010, the Company’s Board of Directors declared a quarterly dividend of $0.06 per share of Class A common stock and $0.05 per share of Class B common stock payable on April 25, 2011 to shareholders of record at the close of business on March 15, 2011. QAD will pay its quarterly dividend in either cash or Class A shares of the Company’s common stock, at the election of each shareholder.

Stock Repurchase Activity

In fiscal 2011 and fiscal 2010, the Company did not make any stock repurchases, and as of January 31, 2011, the Company does not have a stock repurchase program in place.

In fiscal 2009, the Company repurchased 131,000 shares of the Company’s common stock for $16.84 per share for total cash consideration of $2.2 million including fees. The shares were repurchased as part of the stock repurchase program approved by the Company’s Board of Directors in September 2007.

9. STOCK-BASED COMPENSATION

Stock Plans

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 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, 2011, 1,010,000 Class A Common Shares and 252,000 Class B Common Shares were available for issuance.

Table of Contents

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 SFAS 123R, is the same for stock-settled SARs and stock options. The Company also issues restricted stock units (“RSUs”) beginning in fiscal 2008.

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, 2011, outstanding under the 1997 Program, there were 370,000 non-statutory stock options to purchase Class A Common Stock and 91,000 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, 2011, outstanding under the 2006 Program, there were 1,753,000 SARs to purchase Class A Common Stock and 439,000 SARs to purchase Class B Common Stock. In addition, at January 31, 2011, outstanding under the 2006 Program, there were 348,000 RSUs to purchase Class A Common Stock and 87,000 RSUs to purchase Class B Common Stock.

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. 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 to non-employee directors generally vest over three or four years and are contingent upon providing services to the Company.

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.

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 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.

Table of Contents

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 Operations for the fiscal years ended January 31, 2011, 2010 and 2009.

	Years Ended January 31,
	2011		2010		2009
	(in thousands)
Stock-based compensation expense:
Cost of maintenance, service and other revenue	$	940	$	806	$	1,042
Sales and marketing		1,076		829		1,330
Research and development		846		622		740
General and administrative		2,441		2,335		2,404
Total stock-based compensation expense	$	5,303	$	4,592	$	5,516

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 $0.4 million, zero, and $0.1 million excess tax benefits recorded for equity awards exercised in the fiscal years ended January 31, 2011, 2010 and 2009, respectively.

Option/SAR Information

The weighted average assumptions used to value SARs are shown in the following table.

	Years Ended January 31,
	2011			2010 (5)			2009
Expected life in years (1)		5.79			5.17			5.25
Risk free interest rate (2)		2.27	%		2.06	%		3.20	%
Volatility (3)		61	%		66	%		50	%
Dividend rate (4)		2.23	%		2.40	%		1.37	%

____________________________

(1)	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.

(2)	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%.

(3)	Excluding the effect of the New SARs granted as a result of the Program, the weighted average volatility in fiscal 2010 was 69%.

(4)	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.

Table of Contents

The following table summarizes the activity for outstanding options and SARs for the fiscal years ended January 31, 2011, 2010 and 2009:

	Options/ SARs (in thousands)			Weighted Average Exercise Price per Share		Weighted Average Remaining Contractual Term (years)		Aggregate Intrinsic Value (in thousands)
Outstanding at January 31, 2008		2,814		$	15.96
Granted		616			14.86
Exercised		(97	)		6.34
Expired		(169	)		16.76
Forfeited		(180	)		16.04
Outstanding at January 31, 2009		2,984		$	15.98
Granted (1)		1,293			8.52
Exercised		(45	)		5.96
Expired		(172	)		15.60
Forfeited		(157	)		13.88
Cancelled (2)		(1,689	)		16.30
Outstanding at January 31, 2010		2,214		$	11.76
Granted		683			8.95
Exercised		(88	)		6.44
Expired		(58	)		10.42
Forfeited		(98	)		8.93
Outstanding at January 31, 2011		2,653		$	11.33		4.9	$	667
Vested and expected to vest at January 31, 2011 (3)		2,536		$	11.43		4.8	$	644
Vested and exercisable at January 31, 2011		1,289		$	13.64		3.2	$	356

____________

(1)	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.

(2)	Options and SARs cancelled during the third quarter of fiscal 2010 as a part of the Program.

(3)	The expected-to-vest options and SARs are the result of applying the pre-vesting forfeiture rate assumptions to total outstanding options and SARs.

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 on January 31, 2011 and the exercise price for in-the-money options) that would have been received by the option holders if all options and SARs had been exercised on January 31, 2011. The total intrinsic value of options and SARs exercised in the years ended January 31, 2011, 2010 and 2009 was $0.3 million, $0.2 million and $0.6 million, respectively. The weighted average grant date fair value per share of SARs granted in the years ended January 31, 2011, 2010 and 2009 was $4.10, $5.42 and $6.34, respectively. Excluding the effect of the New SARs granted as a result of the Program, the weighted average grant date fair value per share of SARs granted in the year ended January 31, 2010 was $4.62.

At January 31, 2011, there was approximately $5.3 million of total unrecognized compensation cost related to unvested stock options and 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, 2011, 2010 and 2009:

	RSUs			Weighted Average Grant Date Fair Value
	(in thousands)
Restricted stock at January 31, 2008		167		$	16.34
Granted		282			11.50
Released (1)		(41	)		16.60
Forfeited		(34	)		14.98
Restricted stock at January 31, 2009		374		$	12.78
Granted		208			8.40
Released (1)		(102	)		13.30
Forfeited		(5	)		13.48
Restricted stock at January 31, 2010		475		$	10.74
Granted		128			8.81
Released (1)		(165	)		11.37
Forfeited		(3	)		8.75
Restricted stock at January 31, 2011		435		$	10.02

____________

(1)	The number of RSUs released includes shares withheld on behalf of employees to satisfy minimum statutory tax withholding requirements.

Table of Contents

The fair value of RSUs that were released in the fiscal years ended January 31, 2011, 2010 and 2009 was $1.5 million, $1.3 million and $0.7 million, respectively.

Total unrecognized compensation cost related to RSUs was approximately $3.3 million as of January 31, 2011. This cost is expected to be recognized over a period of approximately 2.3 years.

10. RESTRUCTURING CHARGES

In response to the difficult economic environment, the Company took steps to reduce its headcount and lower expenses beginning in the fourth quarter of fiscal 2009 and again in the second and third quarters of fiscal 2010. Related to these restructuring initiatives the Company reduced its headcount by 260 full-time positions, or approximately 15% of the workforce, and incurred costs related to employee severance and benefits of $6.5 million. The Company has not incurred any additional restructuring charges in fiscal 2011 and as of January 31, 2011, all plans are complete.

Restructuring charges included in the Consolidated Statements of Operations for the fiscal years ended January 31, 2010 and 2009 were as follows:

	Years Ended January 31,
	2010		2009
	(in thousands)
Cost of maintenance, services and other revenue	$	1,054	$	854
Sales and marketing		1,113		1,607
Research and development		633		590
General and administrative		316		300
Total restructuring charges	$	3,116	$	3,351

Restructuring Accruals

The activity in the Company’s restructuring accrual for the fiscal years ended January 31, 2011, 2010 and 2009 is summarized as follows:

	Q4 Fiscal 2009 Restructuring Plan			Q2 Fiscal 2010 Restructuring Plan			Q3 Fiscal 2010 Restructuring Plan			Total
	(in thousands)
Balance as of January 31, 2008	$	¾		$	¾		$	¾		$	¾
Employee severance pay and related expenses		3,351			¾			¾			3,351
Cash paid		(479	)		¾			¾			(479	)
Balance as of January 31, 2009	$	2,872		$	¾		$	¾		$	2,872
Employee severance pay and related expenses		819			1,496			927			3,242
Cash paid		(3,526	)		(1,456	)		(930	)		(5,912	)
(Reversal of) adjustment to previous charges		(92	)		(43	)		9			(126	)
Impact of foreign currency translation		24			3			¾			27
Balance as of January 31, 2010	$	97		$	¾		$	6		$	103
Cash paid		(93	)		¾			(6	)		(99	)
Impact of foreign currency translation		(4	)		¾			¾			(4	)
Balance as of January 31, 2011	$	¾		$	¾		$	¾		$	¾

Table of Contents

11. 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 2011, 2010 and 2009 were $1.3 million, $1.2 million and $1.3 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 $3.3 million, $3.5 million and $3.8 million during fiscal years 2011, 2010 and 2009, respectively.

12. 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 2011, 2010 and 2009 was $7.1 million, $7.5 million and $8.5 million, respectively. Future minimum rental payments under non-cancelable operating lease commitments with terms of more than one year as of January 31, 2011 are as follows (in millions):

2012	$	6.6
2013		3.9
2014		1.6
2015		0.8
2016		0.6
Thereafter		1.0
		14.5
Less sublease income		(0.2	)
	$	14.3

Exit Costs

The Company has been subleasing office space in Carpinteria, California related to the facilities vacated in fiscal 2005 when QAD moved to its new headquarters in Santa Barbara, California. This sublease activity resulted in exit costs, primarily due to declines in fair market value of estimated sublease income, of $0.2 million and $0.4 million for fiscal years 2010 and 2009, respectively.

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 agreement generally limits the scope of and remedies for such indemnification obligations in a variety of industry-standard respects, including, but not limited to, certain time-based limitations and a right to replace an infringing product.

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, 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.

Table of Contents

13. 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 revenue is 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.

	Years Ended January 31,
	2011		2010		2009
	(in thousands)
Revenue:
North America (1)	$	93,145	$	92,597	$	114,447
EMEA		66,646		67,847		83,567
Asia Pacific		44,475		40,248		46,140
Latin America		15,746		14,539		18,589
	$	220,012	$	215,231	$	262,743

Capital expenditures:
North America	$	873	$	441	$	3,608
EMEA		216		254		971
Asia Pacific		309		262		1,504
Latin America		34		6		255
	$	1,432	$	963	$	6,338

	January 31,
	2011		2010
	(in thousands)
Property and equipment, net:
North America	$	28,943	$	31,257
EMEA		3,835		4,470
Asia Pacific		785		1,217
Latin America		232		275
	$	33,795	$	37,219

____________

(1)	North America revenue includes sales into Canada, which accounted for approximately 4% of total revenue in fiscal years 2011, 2010 and 2009.

Table of Contents

14. QUARTERLY INFORMATION (Unaudited)

	Quarter Ended
	April 30			July 31			Oct. 31		Jan. 31(1)
	(in thousands, except per share data)
Fiscal 2011
Total revenue	$	50,841		$	51,305		$	55,409	$	62,457
Total costs and expenses		52,926			50,217			51,565		58,713
Gross margin		28,189			29,817			32,488		35,570
Operating (loss) income		(2,085	)		1,088			3,844		3,744
Net (loss) income		(1,220	)		315			1,673		1,943
Basic net (loss) income per share
Class A	$	(0.08	)	$	0.02		$	0.11	$	0.13
Class B		(0.07	)		0.02			0.09		0.11
Diluted net (loss) income per share
Class A		(0.08	)		0.02			0.10		0.12
Class B		(0.07	)		0.02			0.09		0.10
Fiscal 2010
Total revenue	$	54,998		$	51,310		$	56,240	$	52,683
Total costs and expenses		57,540			53,430			50,600		50,790
Gross margin		29,226			29,084			33,708		31,586
Operating (loss) income		(2,542	)		(2,120	)		5,640		1,893
Net (loss) income		(2,665	)		(1,425	)		4,754		685
Basic net (loss) income per share
Class A	$	(0.18	)	$	(0.10	)	$	0.32	$	0.05
Class B		(0.15	)		(0.08	)		0.26		0.04
Diluted net (loss) income per share
Class A	$	(0.18	)	$	( 0.10	)	$	0.30	$	0.04
Class B		(0.15	)		(0.08	)		0.25		0.04

____________

(1) Financial results for the fourth quarter of fiscal 2011 include an immaterial correction of an error related to an accounting policy. Prior to the fourth quarter, the Company’s policy was to defer costs and recognize them in proportion to revenue recognized in multiple-element revenue arrangements which, for revenue recognition purposes, are considered a single unit of accounting. In the fourth quarter of fiscal 2011, the Company began expensing those costs in the period incurred. The impact of this correction in the quarterly information for the quarter ended January 31, 2011, was an increase to costs of maintenance, service and other revenue of $1.6 million and a resulting decrease in net income of $1.1 million, or $0.07 and $0.06 per diluted Class A and B shares, respectively.

Table of Contents

SCHEDULE II

SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS

(in thousands)

	Balance at Beginning of Period		Charged (Credited) to Statements of Operations			Write-Offs Net of, Recoveries			Impact of Foreign Currency Translation			Balance at End of Period
Year ended January 31, 2009
Allowance for bad debt		1,288		989			(924	)		(48	)		1,305
Allowance for sales returns		2,369		676			(642	)		(135	)		2,268
Total allowance for doubtful accounts	$	3,657	$	1,665		$	(1,566	)	$	(183	)	$	3,573
Year ended January 31, 2010
Allowance for bad debt		1,305		1,413			(1,123	)		62			1,657
Allowance for sales returns		2,268		612			(1,164	)		69			1,785
Total allowance for doubtful accounts	$	3,573	$	2,025		$	(2,287	)	$	131		$	3,442
Year ended January 31, 2011
Allowance for bad debt		1,657		(186	)		(328	)		22			1,165
Allowance for sales returns		1,785		654			(968	)		25			1,496
Total allowance for doubtful accounts	$	3,442	$	468		$	(1,296	)	$	47		$	2,661

See accompanying report of independent registered public accounting firm.

Table of Contents

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 15, 2011.

	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	Title	Date

/s/ Pamela M. Lopker	Chairman of the Board, President	April 15, 2011
Pamela M. Lopker

/s/ Karl F. Lopker	Director, Chief Executive Officer	April 15, 2011
Karl F. Lopker	(Principal Executive Officer)

/s/ Daniel Lender	Executive Vice President,	April 15, 2011
Daniel Lender	Chief Financial Officer (Principal Financial Officer)

/s/ Kara Bellamy	Sr. Vice President, Corporate Controller	April 15, 2011
Kara Bellamy	(Chief Accounting Officer)

/s/ Scott Adelson	Director	April 15, 2011
Scott Adelson

/s/ Terry Cunningham	Director	April 15, 2011
Terry Cunningham

/s/ Peter R. van Cuylenburg	Director	April 15, 2011
Peter R. van Cuylenburg

/s/ Tom O’Malia	Director	April 15, 2011
Tom O’Malia

/s/ Lee Roberts	Director	April 15, 2011
Lee Roberts

Table of Contents

INDEX OF EXHIBITS

EXHIBIT NUMBER		EXHIBIT TITLE

3.1		Amended and Restated Certificate of Incorporation of the Registrant, filed with the Delaware Secretary of State on December 15, 2010*

3.2		Revised Bylaws of the Registrant *

4.1		Specimen Class A and Class B Common Stock Certificate*

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)		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)

10.3		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 10.4 of the Registrant’s Annual Report on Form 10-K for the fiscal year ended January 31, 2009)†

10.5		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)†

10.6		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)†

10.7		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)†

10.7(a)		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)†

10.8		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)

10.9		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)

10.9(a)		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)

10.9(b)		Second Amendment to Credit Agreement between the Registrant and Bank of America, N.A. effective as of April 11, 2011*

Table of Contents

10.10		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)†

21.1		Subsidiaries of the Registrant*

23.1		Consent of Independent Registered Public Accounting Firm*

31.1		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*

31.2		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*

____________

(*)	Indicates the document is filed herewith.

(†)	Indicates a management contract or compensatory plan or arrangement required to be filed as an exhibit.

Delaware	77-0105228
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

£ Large accelerated filer	£ Accelerated filer	£ Non-accelerated filer	R Smaller reporting company
	(Do not check if a smaller reporting company)

	QADA				QADB
Fiscal 2011:	Low Price		High Price		Low Price		High Price
Fourth Quarter	$	8.44	$	12.00	$	8.44	$	11.16

					QADI
Fiscal year 2011:					Low Price		High Price
Third quarter					$	7.92	$	9.14
Second quarter						8.12		11.42
First quarter						9.90		11.60

Fiscal year 2010:
Fourth quarter					$	8.70	$	12.62
Third quarter						7.32		10.26
Second quarter						5.64		7.74
First quarter						4.30		6.40

Measurement Periods (Annually from Fiscal Year 2007 through Fiscal Year 2011)	QADA		QADB		NASDAQ Composite Total Return Index		NASDAQ Computer Index
01/31/06(a)		100.00		100.00		100.00		100.00
01/31/07(a)		102.06		102.06		106.86		104.19
01/31/08(a)		113.00		113.00		103.64		105.28
01/31/09(a)		33.16		33.16		64.03		63.45
01/31/10(a)		72.87		72.87		93.13		103.63
01/31/11		58.33		59.93		113.50		131.70

	Year Ended			Increase (Decrease) Compared to Prior Period					Year Ended			Increase (Decrease) Compared to Prior Period					Year Ended
(in thousands)	January 31, 2011			$			%		January 31, 2010			$			%		January 31, 2009
Cost of revenue
Cost of license fees	$	5,698		$	(1,243	)	-18	%	$	6,941		$	(2,811	)	-29	%	$	9,752
Cost of maintenance, services and other		88,250			3,564		4	%		84,686			(27,133	)	-24	%		111,819
Total cost revenue	$	93,948		$	2,321		3	%	$	91,627		$	(29,944	)	-25	%	$	121,571
Percentage of revenue		43	%							43	%							46	%

	Page
PART I
ITEM 1. BUSINESS	3
ITEM 1A. RISK FACTORS	11
ITEM 1B. UNRESOLVED STAFF COMMENTS	21
ITEM 2. PROPERTIES	21
ITEM 3. LEGAL PROCEEDINGS	21
ITEM 4. RESERVED	21
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES	22
ITEM 6. SELECTED FINANCIAL DATA	25
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	26
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	41
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	41
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	41
ITEM 9A. CONTROLS AND PROCEDURES	41
ITEM 9B. OTHER INFORMATION	44
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE	44
ITEM 11. EXECUTIVE COMPENSATION	45
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS	45
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE	45
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES	45
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES	46
SIGNATURES	77

	Years Ended January 31,(1)
	2011		2010		2009(2)			2008		2007
	(in thousands, except per share data)
STATEMENTS OF OPERATIONS DATA:
Revenues:
License fees	$	32,446	$	28,452	$	46,673		$	61,491	$	54,425
Maintenance and other		131,162		131,142		133,080			128,183		122,740
Services		56,404		55,637		82,990			73,073		58,422
Total revenue		220,012		215,231		262,743			262,747		235,587
Operating income (loss)		6,591		2,871		(23,863	)		5,588		8,137
Net income (loss)	$	2,711	$	1,349	$	(23,720	)	$	5,416	$	7,276
Basic net income (loss) per share:
Class A	$	0.18	$	0.09	$	(1.60	)	$	0.35	$	0.46
Class B	$	0.15	$	0.08	$	(1.33	)	$	0.30	$	0.39
Diluted net income (loss) per share:
Class A	$	0.17	$	0.09	$	(1.60	)	$	0.35	$	0.45
Class B	$	0.14	$	0.07	$	(1.33	)	$	0.29	$	0.38
Dividends declared per common share:
Class A	$	0.21	$	0.20	$	0.20		$	0.20	$	0.20
Class B	$	0.20	$	0.20	$	0.20		$	0.20	$	0.20
BALANCE SHEET DATA:
Cash and equivalents		67,276		44,678		31,467			45,613		54,192
Working capital (deficit)		13,752		4,178		(3,648	)		8,846		14,762
Total assets		213,094		191,174		193,745			235,893		227,132
Current portion of long-term debt		304		285		266			274		272
Long-term debt		16,138		16,443		16,717			16,998		17,271
Total stockholders’ equity		56,091		49,551		47,471			72,595		76,572

	Year Ended			Increase (Decrease) Compared to Prior Period					Year Ended			Increase (Decrease) Compared to Prior Period						Year Ended
(in thousands)	January 31, 2011			$		%			January 31, 2010			$			%			January 31, 2009
Revenue:
License fees	$	32,446		$	3,994		14	%	$	28,452		$	(18,221	)		-39	%	$	46,673
Percentage of total revenue		15	%							13	%								18	%
Maintenance and other		131,162			20		0	%		131,142			(1,938	)		-1	%		133,080
Percentage of total revenue		60	%							61	%								51	%
Services		56,404			767		1	%		55,637			(27,353	)		-33	%		82,990
Percentage of total revenue		25	%							26	%								31	%
Total revenue	$	220,012		$	4,781		2	%	$	215,231		$	(47,512	)		-18	%	$	262,743

(in thousands)	Year Ended January 31, 2011			Year Ended January 31, 2010			Year Ended January 31, 2009
Net cash provided by operating activities	$	25,902		$	17,696		$	7,253
Net cash used in investing activities		(1,922	)		(1,357	)		(14,016	)
Net cash used in financing activities		(2,131	)		(4,507	)		(4,448	)
Effect of foreign exchange rates on cash and equivalents		749			1,379			(2,935	)
Net increase (decrease) in cash and equivalents	$	22,598		$	13,211		$	(14,146	)

	Year Ended January 31,
	2012		2013		2014		2015		2016		Thereafter		Total
	(In millions)
Notes payable	$	0.3	$	0.3	$	0.3	$	15.5	$	¾	$	¾	$	16.4
Notes payable interest payments		1.1		1.1		1.0		0.5		¾		¾		3.7
Lease obligations		6.6		3.9		1.6		0.8		0.6		1.0		14.5
Purchase obligations		1.1		0.8		0.2		¾		¾		¾		2.1
Total	$	9.1	$	6.1	$	3.1	$	16.8	$	0.6	$	1.0	$	36.7

NAME	AGE	POSITION(S)
Pamela M. Lopker	56	Chairman of the Board and President
Karl F. Lopker	59	Chief Executive Officer
Daniel Lender	44	Executive Vice President and Chief Financial Officer
Gordon Fleming	47	Executive Vice President and Chief Marketing Officer
Kara Bellamy	35	Sr. Vice President, Corporate Controller and Chief Accounting Officer

	/s/ Jeffrey W. Bullock
	Jeffrey W. Bullock, Secretary of State
2751720 8100 101185236	AUTHENTICATION: DATE:	8425620 12-14-10

	State of Delaware
	Secretary of State
	Division of Corporations
	Delivered 01:00 PM 12/14/2010
	FILED 12:57 PM 12/14/2010
	SRV 101185236 - 2751720 FILE

	QAD Inc.

	/s/ Karl F. Lopker
	Karl F. Lopker, Chief Executive Officer

	ARTICLE I

	Office and Records

Section 1.1	Delaware Office	4
Section 1.2	Other Offices	4
Section 1.3	Books and Records	4

	ARTICLE II

	Stockholders

Section 2.1	Annual Meeting	4
Section 2.2	Special Meetings	4
Section 2.3	Notice of Meetings	5
Section 2.4	Quorum	5
Section 2.5	Voting	5
Section 2.6	Proxies	6
Section 2.7	Notice of Stockholder Business and Nominations	6
Section 2.8	Inspectors of Elections; Opening and Closing the Polls	8
Section 2.9	List of Stockholders	8
Section 2.10	Written Consent of Stockholders in Lieu of Meeting	8

	ARTICLE III

	Directors

Section 3.1	General Powers	9
Section 3.2	Number, Tenure and Qualifications	9
Section 3.3	Vacancies and Newly Created Directorships	10
Section 3.4	Resignation	10
Section 3.5	Removal	10
Section 3.6	Meetings	10
Section 3.7	Quorum and Voting	11
Section 3.8	Written Consent of Directors in Lieu of a Meeting	11
Section 3.9	Compensation	11
Section 3.10	Committees of the Board of Directors	11

	ARTICLE IV

	Officers

Section 4.1	Elected Officers	12
Section 4.2	Election and Term of Office	12
Section 4.3	Resignation and Removal	12
Section 4.4	Compensation and Bond	12
Section 4.5	Chairman of the Board	12
Section 4.6	President	13
Section 4.7	Vice Presidents	13

Section 4.8	Treasurer	13
Section 4.9	Secretary	13
Section 4.10	Assistant Treasurers	13
Section 4.11	Assistant Secretaries	13
Section 4.12	Delegation of Duties	13

	ARTICLE V

	Indemnification and Insurance

Section 5.1	Right to Indemnification	14
Section 5.2	Right to advancement of Expenses	14
Section 5.3	Right of Indemnitee to Bring Suit	14
Section 5.4	Non-Exclusivity of Rights	15
Section 5.5	Insurance	15
Section 5.6	Indemnification of Employees and Agents of the Corporation	15
Section 5.7	Contract Rights	15

	ARTICLE VI

	Common Stock

Section 6.1	Certificates	15
Section 6.2	Transfers of Stock	16
Section 6.3	Lost, Stolen or Destroyed Certificates	16
Section 6.4	Stockholder Record Date	16

	ARTICLE VII

	Seal

Section 7.1	Seal	17

	ARTICLE VIII

	Waiver of Notice

Section 8.1	Waiver of Notice	17

	ARTICLE IX

	Checks, Notes, Drafts, Etc.

Section 9.1	Checks, Notes, Drafts, Etc.	17

	ARTICLE X

	Amendments

Section 10.1	Amendments	18

ABnote North America
711 ARMSTRONG LANE		PROOF OF: DECEMBER 1, 2010
COLUMBIA, TENNESSEE 38401		QAD INC.
(931) 388-3003		WO 2781 LOT 1 FC
SALES: HOLLY GROWER 931-490-7660		OPERATOR: JB
		NEW

TEN COM	-	as tenants in common	UNIF GIFT MIN ACT	-	..........................	Custodian	...........................
TEN ENT	-	as tenants by the entireties			(Cust)		(Minor)
JT TEN	-	as joint tenants with			under Uniform Gifts to Minors
		right of suviviorship and not as			Act .................................................................
		tenants in common				(State)
			UNIF GIFT MIN ACT	-	..........................	Custodian (until age).......)
					(Cust)
					..........................	under Uniform Transfers
					(Minor)
					to Minors Act...............................................
						(State)

PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE






(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING POSTAL ZIP CODE, OF ASSIGNEE)


	Shares
of the Classroom A common stock represented by the within Certificate, and do herby irrevocably constitute and appoint

	Attorney
to transfer the said stock on the books of the within named Corporation with full power to substitution in the premises.

	X
	X

	NOTICE :	THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE, IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.

THE SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR
INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS
AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE
GUARANTEE MEDALLION PROGRAM). PURSUANT TO S.E.C. RULE 17Ad - 15


	Shares
of the Classroom B common stock represented by the within Certificate, and do herby irrevocably constitute and appoint

	Attorney
to transfer the said stock on the books of the within named Corporation with full power to substitution in the premises.

	QAD INC. , as the Borrower


	By: /s/ DANIEL LENDER

	Name: Daniel Lender

	Title: CFO

	BANK OF AMERICA, N.A. , as the Lender


	By: /s/ KEVIN MCMAHON

	Name: Kevin McMahon

	Title: Managing Director

Percentage Owned by QAD Inc.		Country of Organization
QAD Australia Pty. Limited — 100%		Australia
QAD Europe NV/SA — 100%		Belgium
QAD Brasil Ltda. — 100%		Brazil
QAD (Bermuda) Ltd. — 100%		Bermuda
QAD Canada ULC — 100%		Canada
QAD China Ltd. — 100%		China
QAD Europe s.r.o. — 100%		Czech Republic
QAD Europe S.A.S. — 100%		France
QAD Europe GmbH — 100%		Germany
QAD Asia Limited — 100%		Hong Kong
QAD India Private Limited — 100%		India
Precision Software Limited — 100%		Ireland
QAD Ireland Limited — 100%		Ireland
QAD Italy S.r.l. — 100%		Italy
QAD Japan k.k. — 100%		Japan
QAD Korea Limited — 100%		Korea
QAD Mexicana, S.A. de C.V. — 100%		Mexico
QAD Sistemas Integrados Servicios de Consultoria, S.A. de C.V. — 100%		Mexico
QAD EMEA Holdings B.V. — 100%		Netherlands
QAD Europe B.V. — 100%		Netherlands
QAD Holland Holdings B.V. — 100%		Netherlands
QAD Netherlands B.V. — 100%		Netherlands
QAD NZ Limited — 100%		New Zealand
QAD Polska Sp. zo.o. — 100%		Poland
QAD Lusitana Europe — Software e Servicos, Unipessoal, Limitada — 100%		Portugal
QAD Singapore Private Limited — 100%		Singapore
QAD Software South Africa (Proprietary) Limited — 100%		South Africa
QAD Europe S.l. — 100%		Spain
QAD Europe SA/AG — 100%		Switzerland
QAD (Thailand) Ltd. — 100%		Thailand
QAD EMEA Limited — 100%		United Kingdom
QAD Europe Limited — 100%		United Kingdom
QAD Holding Limited — 100%		United Kingdom
QAD United Kingdom Limited — 100%		United Kingdom
Enterprise Engines Inc. — 100%		USA
QAD Brazil, Inc. — 100%		USA
QAD Holdings Inc. — 100%		USA
QAD Japan Inc. — 100%		USA
QAD Ortega Hill, LLC — 100%		USA