10-Q 1 a10-q.txt 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended April 30, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition from ____________________ to _________________________ Commission File Number 0-22823 QAD Inc. (Exact name of registrant as specified in its charter) Delaware 77-0105228 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 6450 Via Real, Carpinteria, California 93013 (Address of principal executive offices) (805) 684-6614 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days. Yes X No______. The number of shares outstanding of the issuer's common stock as of the close of business on May 31, 2000 was 33,358,058. QAD INC. INDEX PART I FINANCIAL INFORMATION Page ITEM 1 Financial Statements Condensed Consolidated Balance Sheets as of April 30, 2000 and January 31, 2000 1 Condensed Consolidated Statements of Operations for the Three Months Ended April 30, 2000 and 1999 2 Condensed Consolidated Statements of Cash Flows for the Three Months Ended April 30, 2000 and 1999 3 Notes to Condensed Consolidated Financial Statements 4 ITEM 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 6 ITEM 3 Quantitative and Qualitative Disclosures About Market Risk 7 PART II OTHER INFORMATION ITEM 1 Legal Proceedings 8 ITEM 2 Changes in Securities 8 ITEM 3 Defaults upon Senior Securities 8 ITEM 4 Submission of Matters to a Vote of Security Holders 8 ITEM 5 Other Information 8 ITEM 6 Exhibits and Reports on Form 8-K 8
PART I ITEM 1 - FINANCIAL STATEMENTS QAD INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share data)
April 30, January 31, 2000 2000 ------------ ----------- (Unaudited) ASSETS Current assets: Cash and equivalents $ 36,575 $ 35,936 Accounts receivable, net 67,780 98,567 Other current assets 14,587 15,523 --------- --------- Total current assets 118,942 150,026 Property and equipment, net 31,038 32,729 Capitalized software development costs, net 8,094 8,233 Other assets, net 22,833 23,383 --------- --------- Total assets $ 180,907 $ 214,371 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable and capital lease obligations $ 969 $ 1,240 Accounts payable 16,154 17,671 Accrued expenses 25,637 34,647 Deferred revenue and deposits 56,685 64,731 --------- --------- Total current liabilities 99,445 118,289 Notes payable and capital lease obligations, less current portion 14,804 21,890 Other liabilities 112 200 Minority interest 504 563 Commitments and contingencies -- -- Stockholders' equity: Preferred stock, $0.001 par value. Authorized 5,000,000 shares; none issued and outstanding -- -- Common stock, $0.001 par value. Authorized 150,000,000 shares; issued and outstanding 33,292,908 and 33,012,210 shares at April 30, 2000 and January 31, 2000, respectively 33 33 Additional paid-in-capital 112,543 111,553 Accumulated deficit (43,652) (34,876) Unearned compensation - restricted stock (112) (146) Accumulated other comprehensive loss (2,770) (3,135) --------- --------- Total stockholders' equity 66,042 73,429 --------- --------- Total liabilities and stockholders' equity $ 180,907 $ 214,371 ========= =========
See accompanying notes to condensed consolidated financial statements 1 QAD INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (In thousands, except per share amounts)
Three Months Ended April 30, ----------------------------------- 2000 1999 -------- --------- Revenue: License fees $ 15,085 $ 20,461 Maintenance and other 23,929 21,001 Services 12,583 11,876 -------- -------- Total revenue 51,597 53,338 Costs and expenses: Cost of license fees 3,998 5,588 Other cost of revenue 22,323 19,761 Sales and marketing 17,050 21,507 Research and development 9,691 9,006 General and administrative 6,507 6,880 -------- -------- Total costs and expenses 59,569 62,742 -------- -------- Operating loss (7,972) (9,404) Other (income) expense: Interest income (420) (107) Interest expense 672 294 Other (income) expense (14) 352 -------- -------- Total other (income) expense 238 539 Loss before income taxes (8,210) (9,943) Income tax expense 566 -- -------- -------- Net loss $ (8,776) $ (9,943) ======== ======== Basic and diluted net loss per share $ (0.26) $ (0.33) ======== ======== Basic and diluted weighted average shares 33,166 29,931 ======== ========
See accompanying notes to condensed consolidated financial statements 2 QAD INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands)
Three Months Ended April 30, --------------------------------- 2000 1999 -------- --------- Net cash provided by (used in) operating activities $ 10,253 $ (41) Cash flows from investing activities: Purchase of property and equipment (1,376) (1,423) Investment in software development (752) (671) Proceeds from sale of short-term investments -- 3,000 Investment in equity securities -- (500) Other, net -- 78 -------- -------- Net cash provided by (used in) investing activities (2,128) 484 Cash flows from financing activities: Proceeds from notes payable -- 16,000 Reduction of notes payable (7,360) (12,455) Issuance of common stock for cash 873 548 Repurchase of common stock (45) (67) Other, net 5 9 -------- -------- Net cash provided by (used in) financing activities (6,527) 4,035 Effect of exchange rates on cash and equivalents (959) (261) -------- -------- Net increase in cash and equivalents 639 4,217 Cash and equivalents at beginning of period 35,936 16,078 -------- -------- Cash and equivalents at end of period $ 36,575 $ 20,295 ======== ========
See accompanying notes to condensed consolidated financial statements 3 QAD INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. BASIS OF PRESENTATION In the opinion of management, the accompanying condensed consolidated financial statements contain all adjustments necessary (consisting only of reclassifications and normal recurring adjustments) to present fairly the financial information contained therein. These statements do not include all disclosures required by generally accepted accounting principles and should be read in conjunction with the audited financial statements and related notes included in our Form 10-K for the year ended January 31, 2000. The results of operations for the three months ended April 30, 2000 are not necessarily indicative of the results to be expected for the year ending January 31, 2001. Certain prior period financial statement items have been reclassified to conform to current period presentation. 2. COMPREHENSIVE LOSS Comprehensive loss includes changes in the balances of items that are reported directly in a separate component of stockholders' equity on the Condensed Consolidated Balance Sheets. The components of comprehensive loss are as follows:
Three Months Ended April 30, ------------------------------------ (In thousands) 2000 1999 ---------- --------- Net loss $ (8,776) $ (9,943) Foreign currency translation adjustments 365 (261) -------- -------- Comprehensive loss $ (8,411) $(10,204) ======== ========
3. PER SHARE INFORMATION Net income (loss) per share is computed in accordance with Statement of Financial Accounting Standards No. 128, Earnings Per Share. Basic income (loss) per share is computed using the weighted average number of common shares outstanding during the period. Diluted income (loss) per share is computed using the weighted average number of common and dilutive common stock equivalents outstanding during the period. Common stock equivalents consist of the shares issuable upon the exercise of warrants and stock options using the treasury stock method. The following table sets forth the computation of basic and diluted income (loss) per share:
Three Months Ended April 30, ------------------------------ (In thousands, except per share amounts) 2000 1999 -------- -------- Numerator: Net loss $ (8,776) $ (9,943) ======== ======== Denominator: Weighted average basic shares outstanding 33,166 29,931 Effect of dilutive common stock equivalents -- -- -------- -------- Weighted average diluted shares outstanding 33,166 29,931 ======== ======== Basic and diluted loss per share $ (0.26) $ (0.33) ======== ========
4 Common stock equivalent shares of approximately 1,278,000 and 256,000 for the three months ended April 30, 2000 and 1999, respectively, were not included in the diluted calculations because, due to the net loss positions, they were anti-dilutive. 4. NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS In consideration for the ability to execute up to $5.5 million of potential acquisitions between May 1, 2000 and January 31, 2001, with a maximum cash outflow of $3.0 million during that period, the commitment under our revolving credit facility with Bank One was reduced by $5.0 million to $20.0 million. 5. RESTRUCTURING CHARGE In response to changes in customers' manufacturing capital software spending patterns during fiscal year 1999, we undertook a restructuring program that, among other things, more closely aligned costs with sales expectations. The program included the consolidation of certain facilities and an approximate reduction of 230 positions across a broad cross-section of QAD. As of April 30, 2000, $5.2 million of the total $5.5 million restructuring charge was utilized, and we expect to pay the remaining balance by January 31, 2002. 6. BUSINESS SEGMENT INFORMATION QAD operates in geographic regions. 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. Operating income attributable to each business segment is based upon the management assignment of revenue and costs. Regional cost of revenue includes the cost of goods produced by QAD's manufacturing operations at the transfer price charged to the distribution operation. Income from manufacturing operations is included in the Corporate operating segment. Research and development costs are also included in the Corporate operating segment. Identifiable assets are assigned by region based upon the location of each legal entity. During the latter part of fiscal year 2000, management changed the composition of our reportable segments for operating income (loss), in order to disclose components related to the corporate segment. Prior period segment information has not been restated to separately disclose corporate segment data, as it is impracticable to do so.
Three Months Ended April 30, ---------------------------- (In thousands) 2000 1999 --------- --------- REVENUE North America $ 21,091 $ 20,874 EMEA 20,407 21,085 Asia Pacific 7,924 7,918 Latin America 2,175 3,461 --------- --------- $ 51,597 $ 53,338 ========= ========= OPERATING INCOME (LOSS): North America $ 1,205 $ (6,128) EMEA (888) (1,963) Asia Pacific (2,267) (1,314) Latin America (1,089) 1 Corporate (4,933) -- --------- --------- $ (7,972) $ (9,404) ========= ========= April 30, January 31, 2000 2000 --------- ----------- IDENTIFIABLE ASSETS: North America $ 80,254 $ 96,853 EMEA 68,558 84,233 Asia Pacific 23,672 24,575 Latin America 8,423 8,710 --------- --------- $ 180,907 $ 214,371 ========= =========
7. RECENT ACCOUNTING STANDARDS In March 2000, the Financial Accounting Standards Board issued FASB Interpretation No. 44, "Accounting for Certain Transactions involving Stock Compensation" (FIN 44). FIN 44 provides guidance for issues arising in applying APB Opinion No. 25, "Accounting for Stock Issued to Employees". FIN 44 applies specifically to new awards, exchanges of awards in a business combination, modification to outstanding awards, and changes in grantee status that occur on or after July 1, 2000, except for the provisions related to repricings and the definition of an employee which apply to awards issued after December 15, 1998. Application of FIN 44 did not have an effect on the Company's financial reporting. 5 ITEM 2 - MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD LOOKING STATEMENT 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 the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations," as well as other factors detailed in our Annual Report on Form 10-K for the year ended January 31, 2000. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's opinions only as of the date hereof. QAD undertakes no obligation to revise, update or publicly release the results of any revision or update to these forward-looking statements. Readers should carefully review the risk factors described in other documents QAD files from time to time with the Securities and Exchange Commission, including future Quarterly Reports on Form 10-Q to be filed by QAD in fiscal year 2001. The following discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q. 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 April 30, ------------------------------- 2000 1999 ---- ---- Revenue: License fees 29% 38% Maintenance and other 46 40 Services 25 22 ---- ---- Total revenue 100 100 Costs and expenses: Cost of license fees 8 11 Other cost of revenue 43 37 Sales and marketing 33 40 Research and development 19 17 General and administrative 12 13 ---- ---- Total costs and expenses 115 118 ---- ---- Operating loss (15) (18) Other expense 1 1 ---- ---- Loss before income taxes (16) (19) Income tax expense 1 0 ---- ---- Net loss (17)% (19)% ---- ----
Total revenue for the first quarter of fiscal year 2001 was $51.6 million, a decrease of $1.7 million, or 3%, from $53.3 million in the first quarter of fiscal 2000. This decline was due to a 26% decrease in license revenue, offset by 14% and 6% growth rates in maintenance and other, and services revenue, respectively. Although the Year 2000 capital spending lock-down is substantially over, customers have not yet resumed former buying levels. They are instead taking the time to evaluate their e-business strategies before investing in associated software, resulting in our license revenue decline. Maintenance revenue continues to grow due to expansion of our installed base. The increase in services revenue is due to greater utilization in our Global Services business, which was launched late in fiscal year 1999. As a result of these factors, our revenue mix has shifted away from higher margin license revenue, from 38% of total revenue in the first quarter of fiscal year 2000 to 29% in the first quarter of fiscal year 2001, toward lower margin maintenance and services revenue. 6 TOTAL COST OF REVENUE. Total cost of revenue (combined cost of license fees and other cost of revenue) as a percentage of total revenue increased from 48% in the first quarter of fiscal year 2000 to 51% in the first quarter of fiscal year 2001. This increase was primarily due to the shift in revenue mix away from the higher margin license business and toward lower margin maintenance and services. SALES AND MARKETING. Sales and marketing expense decreased 21% to $17.1 million for the first quarter of fiscal 2001, from $21.5 million in the same period last year. The decreased spending was primarily due to reduced personnel costs resulting from the restructuring program initiated late in fiscal 1999. RESEARCH AND DEVELOPMENT. Research and development expense increased 8% to $9.7 million for the first quarter of fiscal 2001, from $9.0 million in the first quarter of fiscal 2000. The change was primarily due to increased investment in QAD eQ and our web-enabled ERP products. GENERAL AND ADMINISTRATIVE. General and administrative expense decreased 5% to $6.5 million for the first quarter of fiscal 2001 from $6.9 million in the same prior year period. The decreased spending was primarily due to reduced personnel costs resulting from the restructuring program initiated late in fiscal 1999. INCOME TAXES. We recorded income tax expense of $0.6 million for the three months ended April 30, 2000 to provide for taxes in the jurisdictions that were profitable for the quarter. We have not provided benefit for the jurisdictions in loss positions due to management's determination regarding the uncertainty of the realization of these benefits in the current year. LIQUIDITY AND CAPITAL RESOURCES We have historically financed our operations and met our capital expenditure requirements through cash flows from operations, sale of equity securities and borrowings. We had working capital of $19.5 million and $31.7 million as of April 30, 2000 and January 31, 2000, respectively. Cash and equivalents were $36.6 million and $35.9 million at April 30, 2000 and January 31, 2000, respectively. Accounts receivable, net of allowances, decreased to $67.8 million at April 30, 2000 from $98.6 million at January 31, 2000. Accounts receivable day's sales outstanding decreased to 118 days at April 30, 2000 from 125 days at January 31, 2000. We are continuing our focus on sales terms and collection processes to further improve cash flows and working capital. Net cash provided by (used in) operating activities was $10.3 million and $(41,000) for the three months ended April 30, 2000 and 1999, respectively. The increase relates primarily to significantly higher accounts receivable collections, partially offset by a larger decline in the deferred revenue balance. Net cash provided by (used in) investing activities primarily relates to the purchase of property and equipment and the sale of short-term cash investments in the three months ended April 30, 1999, and aggregated $(2.1) million and $0.5 million in the three months ended April 30, 2000 and 1999, respectively. At April 30, 2000 we had no material commitments for capital expenditures. Net cash provided by (used in) financing activities totaled $(6.5) million and $4.0 million for the three months ended April 30, 2000 and 1999, respectively, and was comprised of net proceeds and repayments of borrowings and issuance of common stock. 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. ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK No material changes from our Annual Report on Form 10-K for the fiscal year ended January 31, 2000. 7 PART II ITEM 1 - LEGAL PROCEEDINGS Not applicable ITEM 2 - CHANGES IN SECURITIES Not applicable ITEM 3 - DEFAULTS UPON SENIOR SECURITIES Not applicable ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable ITEM 5 - OTHER INFORMATION Not applicable ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K a) Exhibits 10.1 Third Amendment to Credit Agreement between QAD Inc. and Bank One, NA. 10.2 Fourth Amendment to Credit Agreement between QAD Inc. and Bank One, NA. 10.3 Fifth Amendment to Credit Agreement between QAD Inc. and Bank One, NA. 27 Financial Data Schedule b) Reports on Form 8-K No reports on Form 8-K were filed during the three months ended April 30, 2000. 8 Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. QAD INC. (Registrant) Date: June 13, 2000 By /s/ KATHLEEN M. FISHER ------------------------------ Kathleen M. Fisher Chief Financial Officer (on behalf of the registrant and as Principal Financial Officer) 9