UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended October 31, 2008
OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
to
Commission file number 0-22823
QAD Inc.
(Exact name of Registrant as specified in its charter)
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Delaware
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77-0105228
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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100 Innovation Place, Santa Barbara, California 93108
(Address of principal executive offices)
(805) 566-6000
(Registrants telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes
þ
No
o
.
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See definition of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check One):
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Large accelerated filer
o
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Accelerated filer
þ
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Non-accelerated filer
o
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Smaller reporting company
o
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes
o
No
þ
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The number of shares outstanding of the issuers common stock as of November 30, 2008 was
30,711,860.
PART I
ITEM 1 FINANCIAL STATEMENTS
QAD INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
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October 31,
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January 31,
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2008
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2008
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Assets
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Current assets:
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Cash and equivalents
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$
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36,228
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$
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45,613
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Accounts receivable, net
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53,660
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83,027
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Other current assets
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23,851
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22,742
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Total current assets
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113,739
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151,382
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Property and equipment, net
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41,769
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42,450
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Capitalized software costs, net
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6,722
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8,783
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Goodwill
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20,472
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22,591
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Other assets, net
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11,632
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10,687
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Total assets
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$
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194,334
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$
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235,893
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Liabilities and stockholders equity
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Current liabilities:
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Current portion of long-term debt
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$
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262
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$
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274
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Accounts payable
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9,702
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12,249
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Deferred revenue
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63,466
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89,349
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Other current liabilities
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33,081
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40,664
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Total current liabilities
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106,511
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142,536
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Long-term debt
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16,789
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16,998
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Other liabilities
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3,815
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3,764
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Commitments and contingencies
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Stockholders equity:
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Preferred stock, $0.001 par value. Authorized 5,000,000
shares; none issued and outstanding
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Common stock, $0.001 par value. Authorized 150,000,000
shares; issued 35,350,481 and 35,347,367 shares at
October 31, 2008 and January 31, 2008, respectively
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35
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35
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Additional paid-in capital
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139,312
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135,362
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Treasury stock, at cost (4,675,229 and 4,596,476 shares at
October 31, 2008 and January 31, 2008, respectively)
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(37,187
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)
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(36,336
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)
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Accumulated deficit
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(28,228
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)
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(21,596
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)
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Accumulated other comprehensive loss
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(6,713
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)
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(4,870
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)
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Total stockholders equity
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67,219
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72,595
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Total liabilities and stockholders equity
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$
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194,334
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$
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235,893
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See Accompanying Notes to Condensed Consolidated Financial Statements.
1
QAD INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
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Three Months Ended
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Nine Months Ended
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October 31,
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October 31,
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2008
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2007
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2008
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2007
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Revenue:
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License fees
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$
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13,055
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$
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14,074
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$
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36,448
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$
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39,082
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Maintenance and other
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32,687
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32,287
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101,341
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95,090
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Services
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22,025
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20,247
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66,329
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53,277
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Total revenue
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67,767
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66,608
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204,118
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187,449
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Costs and expenses:
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Cost of license fees
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2,689
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2,294
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7,474
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6,217
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Cost of maintenance, service and other revenue
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28,548
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25,820
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86,200
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73,531
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Sales and marketing
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17,825
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17,167
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55,938
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51,154
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Research and development
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10,794
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9,986
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33,165
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30,375
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General and administrative
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8,260
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8,017
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25,180
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24,726
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Amortization of intangibles from acquisitions
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184
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168
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559
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576
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Total costs and expenses
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68,300
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63,452
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208,516
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186,579
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Operating (loss) income
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(533
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)
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3,156
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(4,398
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)
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870
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Other expense (income):
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Interest income
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(366
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)
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(550
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)
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(1,213
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)
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(1,713
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)
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Interest expense
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309
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325
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948
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1,025
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Other expense (income), net
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20
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506
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456
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431
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Total other expense (income)
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(37
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)
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281
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191
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(257
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)
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(Loss) income before income taxes
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(496
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)
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2,875
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(4,589
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)
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1,127
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Income tax expense (benefit)
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1,325
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1,359
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(605
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)
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|
959
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Net (loss) income
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$
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(1,821
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)
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$
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1,516
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$
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(3,984
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)
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$
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168
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Basic net (loss) income per share
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$
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(0.06
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)
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$
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0.05
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$
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(0.13
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)
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$
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0.01
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Diluted net (loss) income per share
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$
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(0.06
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)
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$
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0.05
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$
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(0.13
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)
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$
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0.01
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|
|
|
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See Accompanying Notes to Condensed Consolidated Financial Statements.
2
QAD INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
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Nine Months Ended
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October 31,
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2008
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2007
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Cash flows from operating activities:
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Net (loss) income
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$
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(3,984
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)
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$
|
168
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Adjustments to reconcile net (loss) income to net cash provided by
operating activities:
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Depreciation and amortization
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8,232
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6,850
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Provision for doubtful accounts and sales adjustments
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562
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496
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Gain on disposal of property and equipment
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(83
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)
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Exit costs
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206
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|
24
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Stock compensation expense
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4,468
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4,456
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Other, net
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(278
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)
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(366
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)
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Changes in assets and liabilities, net of effects from acquisitions:
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Accounts receivable
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26,410
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18,310
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Other assets
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(2,180
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)
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|
1,877
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Accounts payable
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|
95
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|
|
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(2,935
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)
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Deferred revenue
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|
(21,840
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)
|
|
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(15,485
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)
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Other liabilities
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(2,085
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)
|
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(1,838
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)
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Net cash provided by operating activities
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|
9,606
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11,474
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Cash flows from investing activities:
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Purchase of property and equipment
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(4,810
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)
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(3,969
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)
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Capitalized software costs
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(821
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)
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|
|
(984
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)
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Acquisition of businesses, net of cash acquired
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(6,235
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)
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(4,706
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)
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Proceeds from sale of marketable securities
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275
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|
|
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Proceeds from sale of property and equipment
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|
3
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|
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|
100
|
|
|
|
|
|
|
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Net cash used in investing activities
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|
|
(11,588
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)
|
|
|
(9,559
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)
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Cash flows from financing activities:
|
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|
|
|
|
|
|
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Repayments of debt
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|
|
(221
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)
|
|
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(209
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)
|
Proceeds from issuance of common stock
|
|
|
456
|
|
|
|
2,579
|
|
Changes in cash overdraft
|
|
|
(1,015
|
)
|
|
|
(1,359
|
)
|
Dividends paid
|
|
|
(2,300
|
)
|
|
|
(2,407
|
)
|
Repurchase of common stock
|
|
|
(2,219
|
)
|
|
|
(14,218
|
)
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(5,299
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)
|
|
|
(15,614
|
)
|
|
|
|
|
|
|
|
|
|
Effect of exchange rates on cash and equivalents
|
|
|
(2,104
|
)
|
|
|
3,542
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and equivalents
|
|
|
(9,385
|
)
|
|
|
(10,157
|
)
|
|
|
|
|
|
|
|
|
|
Cash and equivalents at beginning of period
|
|
|
45,613
|
|
|
|
54,192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and equivalents at end of period
|
|
$
|
36,228
|
|
|
$
|
44,035
|
|
|
|
|
|
|
|
|
See Accompanying Notes to Condensed Consolidated Financial Statements.
3
QAD INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited Condensed Consolidated Financial
Statements fairly present the financial information contained therein. These statements have been
prepared in accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. The Condensed
Consolidated Financial Statements do not include all disclosures required by accounting principles
generally accepted in the United States of America for annual financial statements and should be
read in conjunction with the audited financial statements and related notes included in the Annual
Report on Form 10-K for the year ended January 31, 2008 of QAD Inc. (QAD or the Company). The
results of operations for the three and nine months ended October 31, 2008 are not necessarily
indicative of the results to be expected for the year ending January 31, 2009.
2. RECENT ACCOUNTING PRONOUNCEMENTS
Determination of the Useful Life of Intangible Assets
In April 2008, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) FAS
142-3, Determination of the Useful Life of Intangible Assets. This FSP amends the factors that
should be considered in developing renewal or extension assumptions used to determine the useful
life of a recognized intangible asset under Statement of Financial Accounting Standards (SFAS)
No. 142, Goodwill and Other Intangible Assets (SFAS 142). The intent of this FSP is to improve
the consistency between the useful life of a recognized intangible asset under SFAS 142 and the
period of expected cash flows used to measure the fair value of the asset under SFAS 141 (Revised
2007), Business Combinations, and other U.S. generally accepted accounting principles (GAAP).
This FSP is effective for financial statements issued for fiscal years beginning after December 15,
2008 and interim periods within those fiscal years. Early adoption is prohibited. The Company is
currently assessing the impact the adoption of this FSP will have on its financial position,
results of operations or cash flows.
Business Combinations
In December 2007, the FASB issued SFAS 141 (revised 2007), Business Combinations (SFAS 141R). The
objective of the Statement is to improve the relevance, representational faithfulness and
comparability of the information that a reporting entity provides in its financial reports about a
business combination and its effects. SFAS 141R requires that all business combinations be
accounted for by applying the acquisition method (previously referred to as the purchase method)
and most identifiable assets, liabilities, noncontrolling interests and goodwill acquired in
business combinations to be recorded at full fair value.
SFAS 141R also broadens the definition
of a business and changes the treatment of direct acquisition-related costs from being included in
the purchase price to instead being generally expensed if they are not costs associated with
issuing debt or equity securities. SFAS 141R is effective for the Company beginning February 1,
2009, and will be applied prospectively to any new business combination.
Minority Interests
In December 2007, the FASB issued SFAS 160, Accounting and Reporting of Noncontrolling Interests
in Consolidated Financial Statements, amendment of ARB 51 (SFAS 160). The objective of the
Statement is to improve the relevance, comparability and transparency of the financial information
that a reporting entity provides in its consolidated financial statements by establishing
accounting and reporting standards for noncontrolling interests in a subsidiary and for the
deconsolidation of a subsidiary. SFAS 160 specifies that noncontrolling interests (previously
referred to as minority interests) be reported as a separate component of equity, not as a
liability or other item outside of equity, which changes the accounting for transactions with
noncontrolling interest holders. SFAS 160 is effective for the Company beginning February 1, 2009,
and will be applied prospectively to all noncontrolling interests, including any that arose before
that date.
4
QAD INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
3. COMPUTATION OF NET (LOSS) INCOME PER SHARE
The following table sets forth the computation of basic and diluted net (loss) income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
October 31,
|
|
|
October 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(1,821
|
)
|
|
$
|
1,516
|
|
|
$
|
(3,984
|
)
|
|
$
|
168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common
stock outstanding
basic
|
|
|
30,671
|
|
|
|
31,210
|
|
|
|
30,656
|
|
|
|
31,829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common
stock equivalents issued using the
treasury stock method
|
|
|
|
|
|
|
813
|
|
|
|
|
|
|
|
708
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common
stock and common stock equivalents
outstanding
diluted
|
|
|
30,671
|
|
|
|
32,023
|
|
|
|
30,656
|
|
|
|
32,537
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net (loss) income per share
|
|
$
|
(0.06
|
)
|
|
$
|
0.05
|
|
|
$
|
(0.13
|
)
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net (loss) income per share
|
|
$
|
(0.06
|
)
|
|
$
|
0.05
|
|
|
$
|
(0.13
|
)
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock equivalent shares consist of the shares issuable upon the vesting of restricted stock
units (RSUs) and the exercise of stock options and stock-settled stock appreciation rights (SARs)
using the treasury stock method. For the three and nine months ended October 31, 2008, shares of
potential common stock of approximately 6.7 million and 5.4 million, respectively, were not
included in the diluted calculation because the effect would be anti-dilutive. For the three and
nine months ended October 31, 2007, shares of potential common stock of approximately 2.6 million
and 3.7 million, respectively, were not included in the diluted calculation because the effect would
be anti-dilutive.
4. COMPREHENSIVE (LOSS) INCOME
Comprehensive (loss) income includes changes in the balances of items that are reported directly as
a separate component of stockholders equity in the Companys Condensed Consolidated Balance
Sheets. The components of comprehensive (loss) income are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
October 31,
|
|
|
October 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(1,821
|
)
|
|
$
|
1,516
|
|
|
$
|
(3,984
|
)
|
|
$
|
168
|
|
Foreign currency translation adjustments
|
|
|
(2,143
|
)
|
|
|
1,460
|
|
|
|
(1,843
|
)
|
|
|
3,188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive (loss) income
|
|
$
|
(3,964
|
)
|
|
$
|
2,976
|
|
|
$
|
(5,827
|
)
|
|
$
|
3,356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5
QAD INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
5. FAIR VALUE MEASUREMENTS
Effective February 1, 2008, the Company adopted SFAS 157 Fair Value Measurements (SFAS 157),
except as it applies to the non-financial assets and non-financial liabilities subject to FSP SFAS
157-2. SFAS 157 clarifies that fair value is an exit price, representing the amount that would be
received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants. As such, fair value is a market-based measurement that should be determined based on
assumptions that market participants would use in pricing an asset or a liability. As a basis for
considering such assumptions, SFAS 157 establishes a three-tier value hierarchy, which prioritizes
the inputs used in the valuation methodologies in measuring fair value.
Level 1 Observable inputs that reflect quoted prices (unadjusted) for identical assets or
liabilities in active markets.
Level 2 Includes other inputs that are directly or indirectly observable in the marketplace.
Level 3 Unobservable inputs which are supported by little or no market activity.
The fair value hierarchy also requires an entity to maximize the use of observable inputs and
minimize the use of unobservable inputs when measuring fair value.
In accordance with SFAS 157, the Company measures its cash equivalents at fair value. Cash
equivalents are classified within Level 1. This is because cash equivalents are valued using quoted
market prices. In the first quarter of fiscal 2009, the Company acquired auction rate securities
through its acquisition of FullTilt. These securities were sold during the third quarter of fiscal
2009.
Assets measured at fair value are summarized below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value measurement at reporting date using
|
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets for
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
October 31,
|
|
|
Identical Assets
|
|
|
Observable Inputs
|
|
|
Unobservable Inputs
|
|
Description
|
|
2008
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market mutual funds
|
|
$
|
27,677
|
|
|
$
|
27,677
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
27,677
|
|
|
$
|
27,677
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective February 1, 2008, the Company also adopted SFAS 159, The Fair Value Option for Financial
Assets and Financial Liabilities including an Amendment of FASB Statement No. 115, which allows
an entity to choose to measure certain financial instruments and liabilities at fair value on a
contract-by-contract basis. Subsequent fair value measurement for the financial instruments and
liabilities an entity chooses to measure will be recognized in earnings. The Company did not elect
such option for its financial instruments and liabilities.
6
QAD INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
6. BUSINESS COMBINATIONS
FullTilt
On April 28, 2008, the Company acquired certain assets of FullTilt Solutions, Inc. (FullTilt), in a
transaction that constitutes a business combination. FullTilt is a provider of enterprise product
information management software solutions. The acquisition was an investment aimed at expanding the
Companys product offering and driving revenue growth. The total purchase price including
acquisition expenses was $1.2 million. The purchase price was allocated to net tangible assets
acquired of $0.2 million, amortizable intangible assets comprised of intellectual property, trade
name and customer relationships, totaling $0.6 million and goodwill of $0.4 million. Goodwill is
allocated evenly among the North America and EMEA reporting units, where the Companys two main
product fulfillment centers are located. The results of FullTilt operations are included in the
Consolidated Financial Statements from the date of acquisition. The acquisition was not deemed
material, thus pro forma supplemental information has not been provided.
Thailand Subsidiary Minority Interest
The minority shareholders of the Companys subsidiary in Thailand exercised their put option in
April 2007 to sell their shares, representing 25% ownership in the Thailand subsidiary, at fair
value to the Company. Goodwill related to the transaction of $0.7 million was allocated to the Asia
Pacific reporting unit. During the first quarter of fiscal 2009, the execution of the put was
finalized and $1.2 million was paid to the minority shareholders.
7. CAPITALIZED SOFTWARE COSTS
Capitalized software costs and accumulated amortization at October 31, 2008 and January 31, 2008
were as follows:
|
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
|
January 31,
|
|
|
|
2008
|
|
|
2008
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
Capitalized software costs:
|
|
|
|
|
|
|
|
|
Acquired software technology
|
|
$
|
8,627
|
|
|
$
|
8,884
|
|
Capitalized software development costs
|
|
|
3,840
|
|
|
|
3,103
|
|
|
|
|
|
|
|
|
|
|
|
12,467
|
|
|
|
11,987
|
|
Less: accumulated amortization
|
|
|
(5,745
|
)
|
|
|
(3,204
|
)
|
|
|
|
|
|
|
|
Capitalized software costs, net
|
|
$
|
6,722
|
|
|
$
|
8,783
|
|
|
|
|
|
|
|
|
7
QAD INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
7. CAPITALIZED SOFTWARE COSTS (Continued)
The acquired software technology costs primarily relate to technology purchased from the Companys
fiscal 2007 acquisitions of Precision and Soft Cell and from the FullTilt acquisition completed in
fiscal 2009. 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.
Amortization of capitalized software costs was $1.1 million and $3.1 million for the three and nine
months ended October 31, 2008, and $0.7 million and $1.7 million for the three and nine months
ended October 31, 2007. Capitalized software costs are amortized on a straight-line basis over the
products estimated useful life, which is typically three years. Amortization of capitalized
software costs is included in Cost of license fees in the accompanying Condensed Consolidated
Statements of Operations. The estimated remaining amortization expenses related to capitalized
software costs for the years ended January 31, 2009, 2010, 2011 and 2012 are $1.0 million, $3.6
million, $1.9 million and $0.2 million, respectively.
8. GOODWILL AND INTANGIBLE ASSETS
Goodwill
The changes in the carrying amounts of goodwill for the nine months ended October 31, 2008, by
reporting unit, were as follows (reporting unit regions are defined in note 14 Business Segment
Information within these Notes to Condensed Consolidated Financial Statements):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North
|
|
|
|
|
|
|
Asia
|
|
|
Latin
|
|
|
|
|
|
|
America
|
|
|
EMEA
|
|
|
Pacific
|
|
|
America
|
|
|
Total
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, January 31, 2008
|
|
$
|
4,133
|
|
|
$
|
16,650
|
|
|
$
|
991
|
|
|
$
|
817
|
|
|
$
|
22,591
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
|
|
|
429
|
|
|
|
428
|
|
|
|
|
|
|
|
|
|
|
|
857
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact of foreign
currency translation
|
|
|
|
|
|
|
(2,741
|
)
|
|
|
(106
|
)
|
|
|
(129
|
)
|
|
|
(2,976
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, October 31, 2008
|
|
$
|
4,562
|
|
|
$
|
14,337
|
|
|
$
|
885
|
|
|
$
|
688
|
|
|
$
|
20,472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in goodwill from January 31, 2008 to October 31, 2008 is partially due to $0.4 million
in goodwill recorded in connection with the FullTilt acquisition due to the excess of purchase
price over estimated fair value of acquired net assets. In addition, during the third quarter of
fiscal 2009 the Companys goodwill increased by $0.5 million related to a performance payment
issuable in connection with the fiscal 2007 acquisition of FBO Systems, Inc. For further
explanation of
acquisition-related transactions, see note 6 within these Notes to Condensed
Consolidated Financial Statements.
The Company is required to analyze goodwill for impairment on at least an annual basis. Impairment
is determined by estimating the fair value of the Companys reporting units and comparing that
value to the net carrying value (or book value). The Company has chosen the fourth quarter of its
fiscal year as its annual test period. The Company performed its annual impairment test of goodwill
in the fourth quarter of fiscal 2008 and determined that goodwill was not impaired.
8
QAD INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
8. GOODWILL AND INTANGIBLE ASSETS (Continued)
Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
|
January 31,
|
|
|
|
2008
|
|
|
2008
|
|
|
|
(in thousands)
|
|
|
Amortizable intangible assets:
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
1,546
|
|
|
$
|
1,528
|
|
Trade name
|
|
|
499
|
|
|
|
565
|
|
Covenant not to compete
|
|
|
150
|
|
|
|
185
|
|
|
|
|
|
|
|
|
|
|
|
2,195
|
|
|
|
2,278
|
|
Less: accumulated amortization
|
|
|
(1,489
|
)
|
|
|
(1,130
|
)
|
|
|
|
|
|
|
|
Amortizable intangible assets, net
|
|
$
|
706
|
|
|
$
|
1,148
|
|
|
|
|
|
|
|
|
Intangible assets are included in Other assets, net in the accompanying Condensed Consolidated
Balance Sheets. As of October 31, 2008 and January 31, 2008, all of the Companys intangible
assets, excluding goodwill, were determined to have finite useful lives and were subject to
amortization. The aggregate amortization expense related to amortizable intangible assets was $0.2
million and $0.6 million for the three and nine months ended October 31, 2008 and $0.2 million and
$0.6 million for the three and nine months ended October 31, 2007. The estimated remaining
amortization expense related to amortizable intangible assets for the years ended January 31, 2009
and 2010 is $0.2 million and $0.5 million, respectively. No additional amortization of these assets
is estimated in fiscal 2011 and thereafter.
9. DEBT
|
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
|
January 31,
|
|
|
|
2008
|
|
|
2008
|
|
|
|
(in thousands)
|
|
Total debt:
|
|
|
|
|
|
|
|
|
Notes payable
|
|
$
|
17,051
|
|
|
$
|
17,245
|
|
Capital lease obligations
|
|
|
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
17,051
|
|
|
|
17,272
|
|
Less current maturities
|
|
|
(262
|
)
|
|
|
(274
|
)
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
16,789
|
|
|
$
|
16,998
|
|
|
|
|
|
|
|
|
Notes Payable
In July 2004, the Company entered into a loan agreement with Mid-State Bank & Trust, 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.
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 will pay 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 12-month trailing EBITDA.
9
QAD INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
9. DEBT (Continued)
The Facility provides that the Company will 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 Companys
funded debt to 12-month trailing EBITDA ratio. At October 31, 2008, a prime rate borrowing would
have had an effective rate of 3.75% and a 30-day LIBOR borrowing would have had an effective rate
of approximately 3.33%.
As of October 31, 2008, there were no borrowings under the Facility and the Company was in
compliance with the financial covenants.
10. INCOME TAXES
The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes (FIN 48) on February 1, 2007. The total amount of gross unrecognized tax benefits as
of the period ended October 31, 2008 was $2.4 million. The entire amount of unrecognized tax
benefits will impact the effective tax rate if recognized. Under FIN 48, the liability for
unrecognized tax benefits is classified as long-term unless the liability is expected to conclude
within 12 months of the reporting date. The Company reasonably expects that the unrecognized
long-term tax liabilities will not materially change during the next 12 months.
The Companys policy is to include interest and penalties related to unrecognized tax contingencies
within the provision for taxes on the Condensed Consolidated Statements of Operations. Upon
adoption of FIN 48, the Company accrued approximately $0.2 million for the payment of interest and
penalties relating to unrecognized tax benefits. No other material adjustments have been made since
adoption.
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 the United Kingdom and India for the
fiscal year ended 2006, France for the fiscal years ended 2005 through 2008, California for the
fiscal years ended 2004 and 2005 and Michigan for the fiscal years ended 2004 thru 2007.
11. STOCK-BASED COMPENSATION
The Companys equity awards consist of options, stock-settled SARs and RSUs. For a description of
the Companys stock-based compensation plans, see Note 11 Stock-Based Compensation, in Notes to
Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended
January 31, 2008.
10
QAD INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
11. STOCK-BASED COMPENSATION (Continued)
The following table sets forth reported stock compensation expense for the three- and nine-month
periods ended October 31, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
October 31,
|
|
|
October 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of maintenance, service and other revenue
|
|
$
|
271
|
|
|
$
|
251
|
|
|
$
|
884
|
|
|
$
|
760
|
|
Sales and marketing
|
|
|
299
|
|
|
|
418
|
|
|
|
1,107
|
|
|
|
1,074
|
|
Research and development
|
|
|
207
|
|
|
|
247
|
|
|
|
667
|
|
|
|
579
|
|
General and administrative
|
|
|
494
|
|
|
|
540
|
|
|
|
1,810
|
|
|
|
2,043
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
1,271
|
|
|
$
|
1,456
|
|
|
$
|
4,468
|
|
|
$
|
4,456
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash received from options and SARs exercised for the nine months ended October 31, 2008 and
2007 was $0.5 million and $2.6 million, respectively. There were no excess tax benefits recorded
for equity awards exercised in the nine months ended October 31, 2008 and 2007.
The weighted average assumptions used to value SARs are shown in the following table.
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
October 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Expected life in years (1)
|
|
|
5.25
|
|
|
|
5.25
|
|
Risk free interest rate (2)
|
|
|
3.20
|
%
|
|
|
4.58
|
%
|
Volatility (3)
|
|
|
50
|
%
|
|
|
59
|
%
|
Dividend rate (4)
|
|
|
1.37
|
%
|
|
|
1.05
|
%
|
|
|
|
(1)
|
|
The expected life of SARs granted under the stock plans is based on historical exercise
patterns, which the Company believes are representative of future behavior.
|
|
(2)
|
|
The risk-free interest rate is based on the U.S. Treasury yield for a term consistent with
the expected life of the SARs in effect at the time of grant.
|
|
(3)
|
|
The Company estimates the volatility of its common stock at the date of grant based on the
historical volatility of the Companys common stock, which it believes is representative of
the expected volatility over the expected life of SARs.
|
|
(4)
|
|
The Company expects to continue paying quarterly dividends at the same rate as it has over
the last year.
|
11
QAD INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
11. STOCK-BASED COMPENSATION (Continued)
The following table summarizes the activity for outstanding options and SARs for the nine months
ended October 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Exercise
|
|
|
Remaining
|
|
|
|
|
|
|
Options/
|
|
|
Price per
|
|
|
Contractual
|
|
|
Aggregate
|
|
|
|
SARs
|
|
|
Share
|
|
|
Term
|
|
|
Intrinsic Value
|
|
|
|
(in thousands)
|
|
|
|
|
|
(years)
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 31, 2008
|
|
|
5,628
|
|
|
$
|
7.98
|
|
|
|
5.4
|
|
|
$
|
7,273
|
|
Granted
|
|
|
1,220
|
|
|
|
7.45
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(124
|
)
|
|
|
3.91
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(92
|
)
|
|
|
10.13
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(197
|
)
|
|
|
8.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at October 31, 2008
|
|
|
6,435
|
|
|
$
|
7.92
|
|
|
|
5.1
|
|
|
$
|
979
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at
October 31, 2008 (1)
|
|
|
6,080
|
|
|
$
|
7.93
|
|
|
|
5.0
|
|
|
$
|
978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and exercisable at October 31, 2008
|
|
|
3,432
|
|
|
$
|
7.96
|
|
|
|
3.9
|
|
|
$
|
977
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The expected-to-vest options and SARs are the result of applying the
pre-vesting forfeiture rate assumptions to total outstanding equity
awards.
|
The aggregate intrinsic value in the table above represents the total pretax intrinsic value (the
aggregate difference between the closing stock price of the Companys common stock on October 31,
2008 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 October 31, 2008.
The total intrinsic value of options and SARs exercised in the three and nine months ended October
31, 2008, was $40,000 and $0.5 million, respectively. The total intrinsic value of options and SARs
exercised in the three and nine months ended October 31, 2007 was $1.1 million and $3.1 million,
respectively. The weighted average grant date fair value per share of SARs granted in the three and
nine months ended October 31, 2008 was $2.25 and $3.18, respectively. The weighted average grant
date fair value per share of SARs granted in the three and nine months ended October 31, 2007 was
$4.08 and $4.65, respectively. At October 31, 2008, there was approximately $7.9 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 1.3 years.
The estimated fair value of the RSUs was calculated based on the closing price of the Companys
common stock on the date of grant, reduced by the present value of dividends foregone during the
vesting period.
The following table summarizes the activity for RSUs for the nine months ended October 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Grant Date
|
|
|
|
RSUs
|
|
|
Fair Value
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 31, 2008
|
|
|
334
|
|
|
$
|
8.17
|
|
Granted
|
|
|
553
|
|
|
|
5.57
|
|
Vested
|
|
|
(74
|
)
|
|
|
8.25
|
|
Forfeited
|
|
|
(27
|
)
|
|
|
8.25
|
|
|
|
|
|
|
|
|
Balance at October 31, 2008
|
|
|
786
|
|
|
$
|
5.99
|
|
|
|
|
|
|
|
|
Total unrecognized compensation cost related to RSUs was approximately $4.7 million as of October
31, 2008. This cost is expected to be recognized over a period of approximately 3.5 years.
12
QAD INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
12. STOCKHOLDERS EQUITY
Stock Repurchase Program
On September 6, 2007, the Companys Board of Directors approved a stock repurchase program which
authorized management to purchase up to one million shares of the Companys common stock over the
course of one year. As of January 31, 2008, 736,300 shares had been repurchased under the program
at an average price of $8.75 per share, including fees. During the first quarter of fiscal 2009,
the Company repurchased the remaining 263,700 shares authorized under the program at an average
price of $8.42 per share, including fees, for total consideration of $2.2 million. This program was
completed as of April 30, 2008.
13. COMMITMENTS AND CONTINGENCIES
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 Companys
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 and
geography-based scope 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 Companys consolidated results of operations,
financial position or liquidity.
14. BUSINESS SEGMENT INFORMATION
The Company operates in geographic business segments. 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 geographic business segments derive revenue from the sale of licenses, maintenance and services
to third-party customers. License revenue is assigned to the 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.
13
QAD INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
14. BUSINESS SEGMENT INFORMATION (Continued)
Operating income (loss) attributable to each business segment is based upon managements assignment
of revenue and costs. Regional cost of revenue includes the cost of goods produced by the Companys
manufacturing operations at the price charged to the distribution operation. Income from
manufacturing operations and research and development costs are included in the corporate operating
segment. Property and equipment, net, are assigned by geographic region based upon the location of
each legal entity.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
October 31,
|
|
|
October 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America (1)
|
|
$
|
30,504
|
|
|
$
|
29,531
|
|
|
$
|
88,803
|
|
|
$
|
82,407
|
|
EMEA
|
|
|
21,487
|
|
|
|
21,329
|
|
|
|
64,790
|
|
|
|
60,916
|
|
Asia Pacific
|
|
|
11,308
|
|
|
|
11,146
|
|
|
|
36,647
|
|
|
|
31,512
|
|
Latin America
|
|
|
4,468
|
|
|
|
4,602
|
|
|
|
13,878
|
|
|
|
12,614
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
67,767
|
|
|
$
|
66,608
|
|
|
$
|
204,118
|
|
|
$
|
187,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
2,958
|
|
|
$
|
4,578
|
|
|
$
|
8,698
|
|
|
$
|
12,076
|
|
EMEA
|
|
|
(934
|
)
|
|
|
1,997
|
|
|
|
(1,622
|
)
|
|
|
2,271
|
|
Asia Pacific
|
|
|
268
|
|
|
|
204
|
|
|
|
2,450
|
|
|
|
979
|
|
Latin America
|
|
|
(125
|
)
|
|
|
241
|
|
|
|
(383
|
)
|
|
|
219
|
|
Corporate
|
|
|
(2,700
|
)
|
|
|
(3,864
|
)
|
|
|
(13,541
|
)
|
|
|
(14,675
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(533
|
)
|
|
$
|
3,156
|
|
|
$
|
(4,398
|
)
|
|
$
|
870
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
|
January 31,
|
|
|
|
2008
|
|
|
2008
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
34,905
|
|
|
$
|
34,682
|
|
EMEA
|
|
|
5,156
|
|
|
|
6,082
|
|
Asia Pacific
|
|
|
1,287
|
|
|
|
1,247
|
|
Latin America
|
|
|
421
|
|
|
|
439
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
41,769
|
|
|
$
|
42,450
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Sales into Canada accounted for 4% and 3% of North America total revenue in the three- and
nine-month periods ended October 31, 2008, respectively, compared to 3% of North America total revenue for the
three- and nine- month periods ended October 31, 2007.
|
14
|
|
|
ITEM 2
|
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
FORWARD-LOOKING STATEMENTS
In addition to historical information, this Quarterly Report on Form 10-Q contains forward-looking
statements. These statements typically are preceded or accompanied by words like believe,
anticipate, expect and words of similar meaning. These forward-looking statements are subject
to certain risks and uncertainties that could cause actual results to differ materially from those
reflected in these forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those discussed in Part I, Item 1A entitled Risk Factors within our
Annual Report on Form 10-K for the year ended January 31, 2008. Readers are cautioned not to place
undue reliance on these forward-looking statements, which reflect managements opinions only as of
the date hereof. We undertake no obligation to revise or update or publicly release the results of
any revision or update to these forward-looking statements. Readers should carefully review the
risk factors and other information described in other documents we file from time to time with the
Securities and Exchange Commission.
INTRODUCTION
The following discussion should be read in conjunction with the information included within our
Annual Report on Form 10-K for the year ended January 31, 2008, and the Condensed Consolidated
Financial Statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q.
OVERVIEW
The Business
QAD Inc. was founded in 1979 and is a provider of enterprise software applications, professional
services and application support that address the requirements of manufacturing companies. QAD
Enterprise Applications includes modules formerly marketed as MFG/PRO and is QADs core product
suite. QAD Enterprise Applications has been developed to address the needs of manufacturers in six
principal industry segments: automotive, consumer products, high technology, food and beverage,
industrial products and life sciences. We develop our products and services through consultation
with customers and partners, ensuring that we are knowledgeable of requirements in the markets we
serve. A key focus for QAD is addressing the needs of global manufacturers, enabling them to
implement software applications to run their businesses almost anywhere in the world and meet local
requirements while maintaining control of their business as a whole.
In addition to the delivery of QAD Enterprise Applications, QAD has developed a global services and
application support capability with over 600 skilled personnel located throughout the world. QADs
services and support capabilities are critical in delivering the value of its solutions to
customers.
CRITICAL ACCOUNTING POLICIES
We consider certain accounting policies related to revenue recognition, accounts receivable
allowances, goodwill and intangible assets, capitalized software development costs, valuation of
deferred tax assets and tax contingency reserves and stock-based compensation expense to be
critical policies due to the significance of these items to our operating results and the
estimation processes and management judgment involved in each. Historically, estimates described in
our critical accounting policies that have required significant judgment and estimation on the part
of management have been reasonably accurate.
Revenue Recognition
. We recognize revenue when the earnings process is complete. The earnings
process is complete when all of the following criteria are met: (1) there is persuasive evidence of
an arrangement; (2) the service or product has been delivered to the customer and no uncertainties
exist surrounding product acceptance; (3) the collection of our fees is probable; and (4) the
amount of fees to be paid by the customer is fixed or determinable.
Our typical payment terms vary by region. Occasionally, payment terms of up to one year may be
granted for software license fees to customers with an established history of collections without
concessions.
15
License Revenue.
Provided all other revenue recognition criteria have been met, we recognize
license revenue on delivery using the residual method. When a license agreement includes one
or more elements to be delivered at a future date, we recognize revenue in one of two ways.
If vendor-specific objective evidence (VSOE) of the fair value of all undelivered elements
exists, the revenue for the undelivered elements is deferred and the residual amount is
allocated to the license revenue and recognized when the above criteria have been met. If
VSOE for the fair value of the undelivered elements does not exist, revenue is deferred and
recognized when VSOE for the fair value of the undelivered elements has been established or
when delivery of all elements occurs. If VSOE does not exist for any of the undelivered
elements and those undelivered elements relate to a separable services or maintenance, the
entire arrangement fee is recognized ratably over the longer of the expected services term or
the maintenance term. VSOE fair value is determined based on historical evidence of
stand-alone sales of these elements to customers.
Revenue from our subscription product offerings, including our On Demand product, 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.
Our standard products do not require significant production, modification or customization of
software or services that are essential to the functionality of the software. Certain
judgments affect the application of our license revenue recognition policy, such as the
assessment of collectibility, for which we review a customers credit worthiness and our
historical experience with that customer, as applicable.
Maintenance Revenue.
Revenue from ongoing customer support and product updates 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.
Services Revenue.
Revenue from technical and implementation services is recognized as
services are performed for
time-and-materials contracts. At times our license and support
arrangements include consulting implementation services sold separately under consulting
engagement contracts. Consulting revenues from these arrangements are generally accounted for
separately from software license revenues, because the arrangements qualify as separate
service transactions and we have VSOE for the fair value of services. When the services are
determined not to have been sold separately from our license and support arrangements, we
allocate revenue to services based on the VSOE determined value of the services. Revenues for
consulting services are generally recognized as the services are performed based on time and
materials incurred during each reporting period. If there is a significant uncertainty about
the project completion or receipt of payment for the consulting services, revenue is deferred
until the uncertainty is resolved.
On occasion, we enter into fixed-price services arrangements. We recognize revenues based on
an estimate of the proportional performance on contracts with fixed or not to exceed fees
on a monthly basis utilizing hours incurred to date as a percentage of total estimated hours
to complete the project.
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.
Accounts Receivable Allowances
. We review the collectibility of our accounts receivable each
period by analyzing balances based on age and record specific allowances for any balances that we
determine may not be fully collectible. We also provide an additional reserve based on historical
data including analysis of write-offs and other known factors. The allowance for sales adjustments
primarily relates to reserves required to adjust revenue to the amount that will actually be
realized and provisions for sales adjustments are recorded against revenue. The allowance for
doubtful accounts relates to the customers inability to pay existing accounts receivable balances
and provisions for doubtful accounts are included in bad debt expense in general and administrative
expenses. Actual results may differ from our estimates for a variety of reasons.
16
Goodwill and Intangible Assets
. Goodwill and other intangible assets at October 31, 2008 were
$20.5 million and $0.7 million, respectively, and accounted for 11% of our total assets. All of our
goodwill and intangible assets have been accounted for under the provisions of Statement of
Financial Accounting Standards (SFAS) 142, Goodwill and Other Intangible Assets
(SFAS 142).
The
excess cost of the acquisition over the fair value of the net assets acquired is recorded as
goodwill. SFAS 142 requires that goodwill and intangible assets deemed to have indefinite lives not
be amortized, but rather be tested for impairment on an annual basis, or more frequently if events
or changes in circumstances indicate potential impairment. Finite-lived intangible assets are
required to be amortized over their useful lives and are subject to impairment evaluation under the
provisions of SFAS 144, Accounting for the Impairment or
Disposal of Long-Lived Assets (SFAS 144).
Goodwill is tested for impairment at least annually utilizing an income approach methodology,
which utilizes a discounted cash flow method to determine the fair value of the reporting unit
based on the present value of future benefits the reporting unit is expected to generate. In
assessing the recoverability of goodwill and intangible assets, we estimate future revenue and cash
flow attributable to our reporting units and other factors in determining the fair value of our
reporting units. These estimates contain managements best estimates, using appropriate and
customary assumptions available at the time. For further discussion of goodwill, see note 8
Goodwill and Intangible Assets within the Notes to Condensed Consolidated Financial Statements.
Other intangible assets are tested for impairment when, in our judgment, events or changes in
circumstances suggest that the carrying value of an asset may not be fully recoverable in
accordance with SFAS 144. Other intangible assets arise from business combinations and consist of
customer relationships, restrictive covenants related to employment agreements and trade names that
are amortized, on a straight-line basis, over periods of up to five years. For further discussion
of other intangible assets, see
note 8
Goodwill and Intangible Assets within the Notes to
Condensed Consolidated Financial Statements.
Capitalized Software Development Costs.
We capitalize software development costs incurred once
technological feasibility has been achieved in the form of a working model. These costs are
primarily related to the localization and translation of our products. 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. We also capitalize software purchased from third
parties or through business combinations as acquired software technology if such software has
reached technological feasibility. Capitalized software costs are amortized on a product-by-product
basis and charged to Cost of license fees. Capitalized software costs are amortized on a
straight-line basis over the products estimated useful life, which is typically three years. We
periodically compare 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 exceed the estimated net realizable value of that asset is reported
as a charge to the statement of operations. This review requires management judgment regarding
future cash flows. If these estimates or their related assumptions require updating in the future,
we may incur substantial losses due to the write-down or write-off of these assets.
Valuation of Deferred Tax Assets and Tax Contingency Reserves
. SFAS 109, Accounting for Income
Taxes (SFAS 109), requires that the carrying value of our deferred tax assets reflects an amount
that is more likely than not to be realized. At October 31, 2008, we had $21.5 million of deferred
tax assets, net of valuation allowances, consisting of $34.2 million of gross deferred tax assets
offset by valuation allowances of $12.7 million. In assessing the likelihood of realizing tax
benefits associated with deferred tax assets and the need for a valuation allowance, we consider
the weight of all available evidence, both positive and negative, including expected future taxable
income and tax planning strategies that are both prudent and feasible. There was a net increase of
valuation allowances recorded in the third quarter of fiscal 2009 of $0.2 million. Should we
determine that we would not be able to realize all or part of the net deferred tax asset in the
future, an adjustment to deferred tax assets would increase tax expense in the period such
determination was made.
17
We adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes an
Interpretation of FASB Statement No. 109 (FIN 48) in fiscal 2008. Under FIN 48, we recognize a tax
position when we determine that it is more likely than not that the position will be sustained upon
examination, including resolution of any related appeals or litigation processes, based on the
technical merits of the position. For tax positions that are more
likely than not to be sustained, we measure the tax position at the largest amount of benefit that
has a greater than 50 percent likelihood of being realized when it is ultimately settled. FIN 48
also provides guidance on derecognition, classification, interest and penalties, accounting in
interim periods, disclosure and transition with respect to tax positions. We reflect interest and
penalties related to income tax liabilities as income tax expense.
We have reserves for taxes to address potential exposures involving tax positions that could be
challenged by taxing authorities, even though we believe that the positions taken on previously
filed tax returns are appropriate. The tax reserves are reviewed as circumstances warrant and
adjusted as events occur that affect our potential liability for additional taxes. We are subject
to income taxes in the U.S. and in numerous foreign jurisdictions, and in the ordinary course of
business there are many transactions and calculations where the ultimate tax determination is
uncertain.
Stock-based Compensation Expense
. Share-based payment transactions with employees are accounted
for using a
fair-value-based method and expensed ratably over the vesting period of the stock
instrument.
Stock-based compensation expense is based on the fair values of all stock-based awards as of the
grant date. Determining the fair value of stock-based awards at the grant date requires judgment,
including estimating volatility, the expected life of the award, the percentage of awards that will
be forfeited and other inputs. If actual forfeitures differ significantly from the estimates,
stock-based compensation expense and our results of operations could be materially impacted.
Equity instruments issued to non-employees in exchange for services are recorded in accordance with
the provisions of Emerging Issues Task Force Issue No. 96-18, Accounting for Equity Instruments
that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services (EITF 96-18). Under this guidance, the fair value of the equity instruments is
re-measured each period until the instruments vest. The incremental change is recorded as an
expense in the period in which the change occurred.
18
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage of total revenue
represented by certain items reflected in our statements of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
October 31,
|
|
|
October 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License fees
|
|
|
19
|
%
|
|
|
21
|
%
|
|
|
18
|
%
|
|
|
21
|
%
|
Maintenance and other
|
|
|
48
|
|
|
|
49
|
|
|
|
50
|
|
|
|
51
|
|
Services
|
|
|
33
|
|
|
|
30
|
|
|
|
32
|
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
100
|
|
|
|
100
|
|
|
|
100
|
|
|
|
100
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of license fees
|
|
|
4
|
|
|
|
3
|
|
|
|
4
|
|
|
|
3
|
|
Cost of maintenance, service and other revenue
|
|
|
42
|
|
|
|
39
|
|
|
|
42
|
|
|
|
40
|
|
Sales and marketing
|
|
|
27
|
|
|
|
26
|
|
|
|
28
|
|
|
|
27
|
|
Research and development
|
|
|
16
|
|
|
|
15
|
|
|
|
16
|
|
|
|
16
|
|
General and administrative
|
|
|
12
|
|
|
|
12
|
|
|
|
12
|
|
|
|
13
|
|
Amortization of intangibles from acquisitions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
101
|
|
|
|
95
|
|
|
|
102
|
|
|
|
99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(1
|
)
|
|
|
5
|
|
|
|
(2
|
)
|
|
|
1
|
|
Other expense (income)
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes
|
|
|
(1
|
)
|
|
|
4
|
|
|
|
(2
|
)
|
|
|
1
|
|
Income tax expense (benefit)
|
|
|
2
|
|
|
|
2
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
|
(3
|
)%
|
|
|
2
|
%
|
|
|
(2
|
)%
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
. Total revenue for the third quarter of fiscal 2009 was $67.8 million, an increase
of $1.2 million, or 2%, from $66.6 million in the third quarter of fiscal 2008. Holding foreign
currency exchange rates constant to those prevailing in the third quarter of fiscal 2008, total
revenue for the current quarter would have been approximately $68.4 million, or $1.8 million higher
when compared to the same period last year. When comparing categories within total revenue at
constant rates, our current quarter results included an increase in revenue in the services and
maintenance and other revenue categories partially offset by a decrease in the license revenue
category. Revenue outside the North America region as a percentage of total revenue was 55% in the
third quarter of fiscal 2009, as compared to 56% in the same period of the prior fiscal year.
Revenue increased in the North America, Asia Pacific and the Europe, Middle East and Africa (EMEA)
geographic regions during the third quarter of fiscal 2009 compared to the third quarter of fiscal
2008 while total revenue attributable to the Latin America region decreased during the third
quarter of fiscal 2009 compared to the third quarter of fiscal 2008. The unfavorable currency
impact of approximately $0.6 million for the third quarter of fiscal 2009 related mainly to
fluctuations in the Australian Dollar and the British Pound.
Total revenue for the nine months ended October 31, 2008 was $204.1 million, an increase of
$16.7 million, or 9%, from $187.4 million over the same period of fiscal 2008. Holding foreign
currency exchange rates constant to those applicable in the same period of fiscal 2008, total
revenue for the nine months ended October 31, 2008 would have been approximately $199.5 million, or
$12.1 million higher when compared to the same period last year. When comparing categories within
total revenue at constant rates, our current quarter results included an increase in revenue in the
services and maintenance and other revenue categories offset by a decrease in the license revenue
category. Revenue outside the North America region as a percent of total revenue was 57% and 56%
for the nine months ended October 31, 2008 and 2007, respectively. When comparing the nine months
ended October 31, 2008 to the same period ended October 31, 2007, revenue increased across all our
geographic regions. The favorable currency impact of approximately $4.6 million for the nine months
ended October 31, 2008 related mainly to fluctuations in the Euro, Polish Zloty, Australian Dollar,
Japanese Yen, Brazilian Real and Chinese Yuan.
19
License Revenue
. License revenue was $13.1 million for the third quarter of fiscal 2009, down $1.0
million, or 7%, from $14.1 million in the third quarter of fiscal 2008. Holding foreign currency
exchange rates constant to those
prevailing in the third quarter of fiscal 2008, license revenue for the current quarter would have
been approximately $13.3 million, representing a $0.8 million, or 6%, decrease from the same period
last year. We experienced decreases in license revenue in our North America, Latin America and Asia
Pacific geographic regions, partially offset by an increase in our EMEA region. One of the metrics
that management uses to measure license revenue performance is the number of customers that have
placed sizable license orders in the period. During the third quarter of fiscal 2009, 10 customers
placed license orders totaling more than $0.3 million, of which one order exceeded $1.0 million.
This compared to the fiscal 2008 third quarter in which 12 customers placed license orders totaling
more than $0.3 million, one of which exceeded $1.0 million. Discounts associated with license
revenue were consistent when comparing the quarter ended October 31, 2008 to the same period in the
previous year.
License revenue was $36.4 million for the nine months ended October 31, 2008, a decrease of $2.7
million, or 7%, from $39.1 million for the nine months ended October 31, 2007. Holding foreign
currency exchange rates constant to fiscal 2008, license revenue for the current nine-month period
would have been approximately $36.0 million, representing a $3.1 million, or 8%, decrease from the
same period last year. When comparing the year-to-date results as of
October 31, 2008 with the
year-to-date
results as of October 31, 2007, we experienced decreases in license revenue in the
North America and Latin America geographic regions, partially offset by increases in license
revenue in our EMEA and Asia Pacific regions. During the nine months ended October 31, 2008, 18
customers placed license orders totaling more than $0.3 million, three of which were greater than
$1.0 million. This is compared to 26 customers who placed license orders totaling more than $0.3
million in the nine-month period ended October 31, 2007, two of which exceeded $1.0 million.
Discounts associated with license revenue were consistent when compared to the same period in the
prior year.
Maintenance and Other Revenue
. Maintenance and other revenue was $32.7 million for the third
quarter of fiscal 2009, representing an increase of $0.4 million, or 1%, from $32.3 million for the
third quarter of fiscal 2008. Holding foreign currency exchange rates constant to those prevailing
in the third quarter of fiscal 2008, the third quarter fiscal 2009 maintenance and other revenue
would have been approximately $32.9 million, representing a $0.6 million, or 2%, increase when
compared to the prior year. Maintenance and other revenue increased across all our geographic
regions during the third quarter of fiscal 2009 compared to the third quarter of fiscal 2008 except
for maintenance and other revenue attributable to the EMEA region, which decreased for the third
quarter of fiscal 2009 compared to the third quarter of fiscal 2008.
Maintenance and other revenue was $101.3 million for the nine months ended October, 31 2008,
representing an increase of $6.2 million, or 7%, from $95.1 million over the same period in fiscal
2008. When we hold exchange rates constant to those prevailing in the same period of fiscal 2008,
maintenance and other revenue for the first nine months of fiscal 2009 would have been
approximately $99.9 million, representing a $4.8 million, or 5%, increase when compared to the
prior year. Maintenance and other revenue increased across all our
geographic regions except maintenance and other
revenue attributable to the EMEA region, which decreased for the first nine months of fiscal 2009
compared to the first nine months of fiscal 2008.
We track our rate of contract renewals by determining the number of customer sites with active
contracts as of the end of the previous reporting period and compare this to the number of
customers that renewed, or are in the process of renewing, their maintenance contract as of the
current period end. Our maintenance contract renewal rate for the three- and nine-month periods
ended October 31, 2008 and 2007 continues to be in excess of 90%.
Services Revenue.
Services revenue was $22.0 million for the third quarter of fiscal 2009,
representing an increase of $1.8 million, or 9%, when compared to the same period last year at
$20.2 million. Holding foreign currency exchange rates constant to those prevailing in the third
quarter of fiscal 2008, services revenue for the third quarter of fiscal 2009 would have been
approximately $22.2 million, reflecting a $2.0 million, or 10%, increase from the same period last
year. The increase in services revenue quarter over quarter was primarily due to global services
implementations related to a small number of large, multi-national customers. Services revenue
increased across all our geographic regions quarter over quarter except services revenue
attributable to the Latin America region, which decreased quarter over quarter.
20
Services revenue was $66.3 million for the nine months ended October 31, 2008. This represents an
increase of $13.0 million, or 24%, when compared to services revenue of $53.3 million earned in the
same period last year.
Holding exchange rates constant to those prevailing during the prior year period, services revenue
for the first nine months of fiscal 2009 would have been approximately $63.7 million, reflecting a
$10.4 million, or 20%, increase from the same period last year. The increase in services revenue
period over period was primarily due to global services implementations related to a small
number of large,
multi-national
customers. When comparing the first nine months of fiscal 2009 to
the same period in fiscal 2008, services revenue increased across all our geographic regions.
Total Cost of Revenue.
Total cost of revenue, the combination of costs for license fees,
maintenance and other, and service revenue, was $31.2 million for the third quarter of fiscal 2009
and $28.1 million for the third quarter of fiscal 2008, and as a percentage of total revenue was
46% for the third quarter of fiscal 2009 and 42% for the third quarter of fiscal 2008. Holding
foreign currency exchange rates constant to those prevailing during the third quarter of fiscal
2008, total cost of revenue for the third quarter of fiscal 2009 would have been approximately $3.3
million higher at $31.4 million and the cost of revenue percentage would have been the same at 46%.
Changes in the cost of revenue as a percentage of total revenue were due to the decrease in license
revenue and the increase in services revenue as a percentage of total revenue as margins related to
services revenue are lower than the margins related to license and maintenance and other revenue.
Additionally, for the third quarter of fiscal 2009, the cost of maintenance, service and other
revenue has increased as a percentage of maintenance, service and other revenue when compared to
the same period in the prior year due primarily to an increase in salaries and related expenses.
The increase in the salaries and related expenses was primarily attributable to an increase in
headcount.
Total cost of revenue for the nine months ended October 31, 2008 increased $14.0 million to
$93.7 million from $79.7 million for the nine months ended October 31, 2007. As a percentage of
total revenue, total cost of revenue increased to 46% for the first nine months of fiscal 2009 from
43% in the same period of fiscal 2008. Holding exchange rates constant to those prevailing during
the same period last year, total cost of revenue for the nine months ended October 31, 2008 would
have been approximately $11.0 million higher at $90.7 million, and as a percent of revenue would
have been 45%, reflecting a 1% negative foreign exchange effect on our margin. The remaining 2%
increase in cost of revenues for the first nine months of fiscal 2009 when compared to the same
period in fiscal 2008 was due to the decrease in license revenue and the increase in services
revenue as a percentage of total revenue as margins related to services revenue are lower than the
margins related to license and maintenance and other revenue.
Sales and Marketing.
Sales and marketing expense increased $0.6 million, or 3%, to $17.8 million
for the third quarter of fiscal 2009 from $17.2 million in the comparable prior year period.
Holding foreign currency exchange rates constant to those prevailing in the third quarter of fiscal
2008, current quarter expense would have increased approximately $0.8 million to $18.0 million when
compared with the same period last year. The increase in sales and marketing expense was primarily
due to an increase in salaries and related expenses amounting to $1.6 million. The increase in
sales and marketing salaries and related expenses was primarily
attributable to increased headcount as we invested in our sales support infrastructure to support a
more complex sales effort associated with our broadening product line. The increase in sales and
marketing salaries and related expenses was partially offset by
decreases of $0.7 million in third-party sales
agent fees, marketing related consulting fees and travel-related expenses.
Sales and marketing expense increased $4.7 million, or 9%, to $55.9 million in the nine months
ended October 31, 2008 from $51.2 million in the same period of the previous year. Holding exchange
rates constant to the first nine months of the prior year, sales and marketing expense would have
been approximately $3.2 million higher at $54.4 million. The increase in sales and marketing
expense in the nine months ended October 31, 2008 compared to the same period of last year was
primarily due to an increase in salaries and related expenses amounting to $3.9 million. The increase in sales and marketing salaries and related expenses was
primarily attributable to increased headcount as we invested in our sales support infrastructure to
support a more complex sales effort associated with our broadening product line.
Research and Development.
Research and development expense increased $0.8 million, or 8%, to $10.8
million for the third quarter of fiscal 2009, when compared to the same quarter last year at
$10.0 million. Holding foreign currency exchange rates constant to those prevailing in the third
quarter of fiscal 2008, current quarter expense would have been unchanged at approximately $10.8
million. The increase in research and development expense
when comparing the third quarter of fiscal 2009 to the same quarter of the previous year was
primarily due to a $0.7 million increase in salaries and related expenses.
21
For the nine months ended October 31, 2008, research and development expense increased
$2.8 million, or 9%, to $33.2 million from $30.4 million during the same period last year. Holding
exchange rates constant to those prevailing in the same period of fiscal 2008, research and
development expense would have been approximately $1.8 million higher at $32.2 million. The
increase in research and development expense when comparing the first nine months of fiscal 2009 to
the same period of the previous year was primarily due to a $1.7 million increase in salaries and
related expenses.
General and Administrative.
General and administrative expense increased $0.3 million, or 4%, to
$8.3 million for the third quarter of fiscal 2009, when compared to the same quarter last year at
$8.0 million. Holding exchange rates constant to those prevailing in the third quarter of fiscal
2008, current quarter expense would have been unchanged at approximately $8.3 million. The increase
in general and administrative expense when comparing the third quarter of fiscal 2009 to the same
quarter of the previous year was primarily due to a $0.6 million increase in salaries and related
expenses and a $0.3 million increase in the provision for doubtful accounts partially offset by a
decrease of $0.3 million in professional fees primarily related to tax consulting fees.
For the nine months ended October 31, 2008, general and administrative expense increased $0.5
million, or 2%, to $25.2 million from $24.7 million during the same period last year. Holding
exchange rates constant to those prevailing in the same period of
fiscal 2008, general and administrative expense would have
been approximately $24.8 million, or $0.1 million higher than the same period last year. The
increase in general and administrative expense when comparing the first nine months of fiscal 2009
to the same period in fiscal 2008 was primarily due to a $1.2 million increase in salaries and
related expenses partially
offset by a decrease of $0.8 million in professional fees primarily related to tax consulting fees.
Amortization of Intangibles from Acquisitions.
Amortization of intangibles from acquisitions was
consistent quarter over quarter at $0.2 million for the current quarter compared to $0.2 million in
the same quarter last year and primarily related to intangible assets acquired from our fiscal 2007
acquisitions.
For the nine months ended October 31, 2008, amortization of intangible assets from acquisitions was
consistent at $0.6 million compared to $0.6 million for the same period in the prior year and
primarily related to intangible assets acquired from our fiscal 2007 acquisitions.
Other Expense (Income)
. Net other expense (income) was approximately breakeven and $0.3 million
for the third quarter of fiscal 2009 and 2008, respectively. The $0.3 million favorable change
primarily related to a decrease in foreign currency exchange losses of $0.4 million partially
offset by a decrease in interest income of $0.2 million in the third quarter of fiscal 2009. The
decrease in interest income was primarily attributable to lower
interest rates earned on our cash and equivalents
balances available for investment.
Net other expense (income) declined $0.5 million to $0.2 million of expense during the nine-month
period ended October 31, 2008 from $(0.3) million of income for the same period last year related
primarily to a decrease in interest income of $0.5 million. The decrease in interest income was
primarily attributable to lower average cash and equivalents balances available for investment
mainly due to share repurchases made in fiscal 2008.
Income Tax Expense (Benefit).
For the quarter ended October 31, 2008, we recorded an income tax
expense of $1.3 million compared to income tax expense of $1.4 million for the quarter ended
October 31, 2007. Our effective income tax rate is -267% for the third quarter of fiscal 2009
compared to 47% for the same period in the prior year. Projected full year pre-tax income at
October 31, 2008 for the fiscal year was near breakeven causing items such as withholding tax to
become more significant relative to the projected income. As a
result, we believe
the best estimate of our annual effective tax rate would be derived by using actual pre-tax income
for the nine month period ended October 31, 2008. The components used to calculate the rate are
consistent with prior quarters.
22
For the nine months ended October 31, 2008, we recorded an income tax benefit of $(0.6) million
compared to an income tax expense of $1.0 million for the nine months ended October 31, 2007. Our
year-to-date effective tax rate decreased due to a significant decline in our pre-tax income.
LIQUIDITY AND CAPITAL RESOURCES
We have historically financed our operations and met our capital expenditure requirements through
cash flows from operations, sale of equity securities and borrowings. Our principal sources of
liquidity are cash flows generated from operations and our cash and equivalents balances. Cash and
equivalents were $36.2 million at October 31, 2008, and $45.6 million at January 31, 2008.
Working Capital
Our working capital was $7.2 million and $8.8 million as of October 31, 2008 and January 31, 2008,
respectively. The $1.6 million decrease in working capital was primarily due to a $37.6 million
decrease in current assets, partially offset by a $36.0 million decrease in current liabilities.
The primary reason for the decrease in working capital was a larger decrease in the accounts
receivable balance compared to the decrease in the deferred revenue balance.
The $37.6 million decrease in current assets related to a $29.3 million decrease in accounts
receivable, net and a $9.4 million decrease in cash and equivalents partially offset by a
$1.1 million increase in other current assets. The decrease in accounts receivable related
primarily to seasonal declines following high year-end maintenance renewal billings. Other current
assets increased primarily due to higher income tax receivables and deferred tax assets partially
offset by lower deferred royalties due to seasonal declines following high year-end maintenance
renewal billings. Cash and equivalents decreased from $45.6 million at January 31, 2008 to $36.2
million as of October 31, 2008. The decrease in cash and equivalents was mainly due to
acquisition-related
payments made during the first nine months of fiscal 2009, purchases of
property and equipment, dividend payments and stock repurchases. These cash expenditures were
partially offset by cash flow from operations and more specifically from cash collected from our
accounts receivable balances. For additional explanation of cash changes, see the Cash Flows
section below.
Current liabilities declined $36.0 million due to a $25.9 million decrease in deferred revenue, a
$7.6 million decrease in other current liabilities and a $2.5 million decrease in accounts payable.
Deferred revenue decreased $25.9 million due to seasonal declines following high year-end
maintenance renewal billings. The decrease in other current liabilities was primarily attributable
to payments in the current year of prior year-end liabilities which included the accrual of the
final payment for the acquisition of Precision Software Limited and seasonally higher year-end
royalty, commission and bonus liabilities.
We have historically calculated accounts receivable days sales outstanding (DSO) using the
countback, or last-in first-out, method. This method calculates the number of days of billed
revenue in the accounts receivable balance as of the period end represented. When reviewing the
performance of our business units, DSO under the countback method is used by management. It is
managements belief that the countback method best reflects the relative health of our accounts
receivable as of a given quarter-end or year-end because of the cyclical nature of our billings.
Our billing cycle includes high maintenance renewal billings at year-end that will not be
recognized as earned revenue until future periods.
DSO under the countback method was 68 days at October 31, 2008, compared to 58 days at January 31,
2008 and 66 days at October 31, 2007. DSO using the average method, which utilizes the accounts
receivable balance and earned revenue in the calculation, was 71 days at October 31, 2008, compared
to 99 days at January, 31 2008 and 69 days at October 31, 2007.
23
Cash Flows
The following is a summary of cash flows for the first nine months of fiscal 2009 and 2008:
Operating Activities
Net cash provided by operating activities was $9.6 million and $11.5 million in the first
nine months of fiscal 2009 and 2008, respectively. The decrease from fiscal 2008 to 2009
related primarily to $6.4 million of additional deferred revenue being recognized in the
first nine months of fiscal 2009 compared to the same period in fiscal 2008. In addition,
the change in other assets period over period negatively impacted cash flow by $4.1 million.
Other assets increased primarily due to a non-cash related increase in the balance of our
income tax receivables due to an increase in our current period net operating loss. These
changes which negatively affected cash flow were partially offset by positive effects on
cash flow related to accounts receivable of $8.1 million due to higher collections in fiscal
2009.
Investing Activities
Net cash used in investing activities for the first nine months of fiscal 2009 and 2008 was
$11.6 million and $9.6 million, respectively. Property and equipment purchases amounted to
$4.8 million and $4.0 million in the first nine months of fiscal 2009 and 2008,
respectively. Both fiscal 2009 and 2008 purchases primarily related to computer equipment
and software. During the first nine months of fiscal 2009, we made acquisition-related
payments totaling $6.2 million primarily associated with the final payment of $3.5 million
for the acquisition of Precision Software Limited, the acquisition of certain assets of
FullTilt Solutions, Inc. for $1.2 million and the final payment of $1.2 million to buy out
the minority interest shareholders in our Thailand subsidiary. In the same period in the
prior year, we made additional progress payments of $4.7 million related to our fiscal 2007
acquisitions. For further discussion of business combinations, see note 6 within the Notes
to Condensed Consolidated Financial Statements included elsewhere in the Quarterly Report on
Form 10-Q.
Financing Activities
Net cash used in financing activities was $5.3 million and $15.6 million for the first nine
months of fiscal 2009 and 2008, respectively. The first nine months of fiscal year 2009
included repurchases of common stock for $2.2 million compared to repurchases of common
stock for $14.2 million during the same period in the prior year. In fiscal 2009, all common
stock repurchases were acquired on the open market while in fiscal 2008 the repurchases
included one million shares acquired in a single, privately negotiated transaction. Proceeds
from the issuance of common stock, primarily related to the exercise of equity awards, were
$0.5 million and $2.6 million in the first nine months of fiscal 2009 and 2008,
respectively. In addition, $2.3 million and $2.4 million in dividends were paid to owners of
QAD common stock during each of the first nine months of fiscal 2009 and 2008, respectively.
We believe that the cash on hand, net cash provided by operating activities and the available
borrowings under our existing credit facility will provide us with sufficient resources to meet our
current and long-term working capital requirements, debt service and other cash needs over the next
twelve months.
24
Contractual Obligations
Credit Facility
Effective April 10, 2008, we entered into an unsecured loan agreement with Bank of America, N.A.
The agreement provides a three-year commitment for a $20 million line of credit (the Facility). We
will pay 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 our ratio of funded debt to our
12-month trailing EBITDA.
The Facility provides that we will 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 our funded debt to 12-month
trailing EBITDA ratio. At October 31, 2008, a prime rate borrowing would have had an effective rate
of 3.75% and a 30-day LIBOR borrowing would have had an effective rate of approximately 3.33%.
As of October 31, 2008, there were no borrowings under the Facility and we were in compliance with
the financial covenants of the Facility.
Notes Payable
In July 2004, we entered into a loan agreement with Mid-State Bank & Trust, 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 a
non-recourse
loan, which is secured by real
property located in Santa Barbara, California. The terms of the loan provide that we will 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. A portion of these proceeds were used to
repay our then-existing construction loan with Santa Barbara Bank and Trust. The balance of the
note payable at October 31, 2008 was $17.1 million.
Obligations Associated with Acquisitions
In connection with the acquisitions of Precision and Bisgen in fiscal 2007, part of the purchase
price consideration for each of these companies included deferred payments. Consideration for
Precision included total deferred payments of $7.2 million. In September 2007, we made the first
anniversary payment of $3.7 million and in September 2008, we made the second anniversary payment
of $3.5 million. Consideration for Bisgen included deferred payments of $0.7 million. In fiscal
2008 and for the first nine months of fiscal 2009, we paid $0.5 million. An additional $0.2 million
is due to be paid by June 2011. Additionally, the purchase price consideration for the FBO Systems
acquisition in fiscal 2007 included performance payments based on revenue growth, of which $0.5
million is issuable by the end of fiscal 2009.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Exchange
. For the nine months ended October 31, 2008 and 2007, approximately 34% and 30%
of our revenue was denominated in currencies other than the U.S. Dollar. Approximately 44% and 40% of our expenses
were denominated in currencies other than the U.S. Dollar for the nine months ended October 31,
2008 and 2007, respectively. As a result, fluctuations in the values of the respective currencies
relative to the currencies in which we generate revenue and incur expenses could adversely impact
our results.
Fluctuations in currencies relative to the U.S. Dollar have affected and will continue to affect
period-to-period comparisons of our reported results of operations. Foreign currency transaction
losses totaled $0.6 million for both the nine months ended October 31, 2008 and 2007. Due to
constantly changing currency exposures and the volatility of currency exchange rates, we may
experience foreign currency losses in the future. We cannot predict the effect of
exchange rate fluctuations upon future operating results. Although we do not currently undertake
hedging transactions, we may choose to hedge a portion of our currency exposure in the future.
25
Interest Rates.
We invest our surplus cash in a variety of financial instruments, consisting
principally of bank time deposits and short-term marketable securities with maturities of less than
one year. Our investment securities are held for purposes other than trading. Cash balances held by
subsidiaries are generally invested in short-term time deposits with local operating banks.
Additionally, our short-term and long-term debt bears interest at variable rates.
We prepared sensitivity analyses of our interest rate exposure and our exposure from anticipated
investment and borrowing levels for fiscal 2009 to assess the impact of hypothetical changes in
interest rates. Based upon the results of these analyses, a 10% adverse change in interest rates
from the 2008 fiscal year-end rates would not have a material adverse effect on the fair value of
investments and would not materially impact our results of operations or financial condition for
fiscal 2009.
ITEM 4 CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures.
Under the supervision and with the participation
of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted
an evaluation of the effectiveness of our disclosure controls and procedures, as such term is
defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended.
Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer, have concluded
that our disclosure controls and procedures were effective at the reasonable assurance level to
ensure that the information required to be disclosed by us in this Quarterly Report on Form 10-Q
was recorded, processed, summarized and reported within the time periods specified in the SECs
rules and instructions for Form 10-Q.
Changes in internal control over financial reporting.
There were no changes in our internal
control over financial reporting during our most recent fiscal quarter that have materially
affected, or are reasonably likely to materially affect, our internal control over financial
reporting.
26
PART II
ITEM 1. LEGAL PROCEEDINGS
The Company is not party to any material legal proceedings. QAD is from time to time party, either
as plaintiff or defendant, to various legal proceedings and claims which arise in the ordinary
course of business. While the outcome of these claims cannot be predicted with certainty,
management does not believe that the outcome of any of these legal matters will have a material
adverse effect on the Companys consolidated financial position, results of operations or
liquidity.
ITEM 1A. RISK FACTORS
There have been no material changes to the risk factors reported in Item 1A within the Companys
Annual Report on Form 10-K for the year ended January 31, 2008.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
Exhibits
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10.72
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Employment
agreement between the Registrant and Daniel Lender, dated
October 10, 2008
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31.1
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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
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31.2
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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
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32.1
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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
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32.2
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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
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27
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
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QAD Inc.
(Registrant)
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Date: December 10, 2008
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By:
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/s/ DANIEL LENDER
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Daniel Lender
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Executive Vice President, Chief Financial Officer
(on behalf of the Registrant)
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By:
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/s/ KARA BELLAMY
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Kara Bellamy
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Vice President, Corporate Controller
(Chief Accounting Officer)
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28
Exhibit Index
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Exhibit
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No.
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Description
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10.72
|
|
|
Employment
agreement between the Registrant and Daniel Lender, dated
October 10, 2008
|
|
|
|
|
|
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31.1
|
|
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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
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|
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31.2
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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
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32.1
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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
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32.2
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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
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29