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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM 10-K


/x/
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended January 31, 2001

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

6450 Via Real
Carpinteria, California 93013
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code (805) 684-6614

    Securities registered pursuant to Section 12(b) of the Act: None

    Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001 par value

    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 /x/  No / /

    Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or an amendment to this Form 10-K. / /

    The aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant, based on the closing price for the registrant's common stock in the Nasdaq National Market on April 9, 2001, was approximately $37,385,000. This calculation does not reflect a determination that certain persons are affiliates of the registrant for any other purposes. The number of outstanding shares of the registrant's common stock as of the close of business on April 9, 2001 was 33,989,846.

DOCUMENTS INCORPORATED BY REFERENCE

    Items 10, 11, 12 and 13 of Part III incorporate information by reference from the definitive proxy statement for the registrant's Annual Meeting of Stockholders to be held on June 7, 2001.


QAD INC.

FISCAL YEAR 2001 FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS

 
    
    
   Page
PART I            
    ITEM 1.   BUSINESS   1
    ITEM 2.   PROPERTIES   19
    ITEM 3.   LEGAL PROCEEDINGS   19
    ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS   19
PART II            
    ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS   20
    ITEM 6.   SELECTED FINANCIAL DATA   20
    ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS   21
    ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK   31
    ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA   32
    ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE   32
PART III            
    ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT   32
    ITEM 11.   EXECUTIVE COMPENSATION   32
    ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT   32
    ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS   32
PART IV            
    ITEM 14.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K   33

FORWARD-LOOKING STATEMENTS

    In addition to historical information, this Annual Report on Form 10-K 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 sections entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Factors That May Affect Future Results and Market Price of Stock." Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's 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 described in other documents we file from time to time with the Securities and Exchange Commission, including the Quarterly Reports on Form 10-Q to be filed by QAD in fiscal year 2002.


PART I

ITEM 1.  BUSINESS

ABOUT QAD

    Historically, QAD has been recognized as a leading provider of enterprise resource planning (ERP) software applications. With the advent of the Internet, we advanced our solutions to include e-business capabilities. And with the development of enabling technologies, our solutions have advanced even further to encompass collaborative commerce. Today's QAD solutions build on our core competency in multi-site manufacturing and distribution operations, and empower global manufacturers to efficiently manage resources within and beyond the enterprise to deliver value to customers.

    QAD has built a solid customer base of global Fortune 1000 manufacturers who are poised to embrace QAD's next generation collaborative commerce solutions. With a proven track record of 20 years of experience and leadership, and more than 5,100 installations around the world, QAD is ideally qualified to meet the business and technology requirements of global manufacturing enterprises in select industry segments: automotive, food and beverage, consumer products, electronics, industrial, and medical industries. We develop our products with constant and direct input from leading global manufacturers within the vertical markets we serve.

    Global service and support is an important component of our solutions. QAD Global Services utilizes a proven implementation methodology and enjoys a reputation for on-time implementations, and rapid time-to-benefit for our solutions.

    Regarding our reputation in the markets we serve:

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    QAD Solutions include:

    "QAD eQ" and "QAD Storefront" are trademarks, and "QAD" and "MFG/PRO" are registered trademarks, of QAD Inc. "MFGX.net" and "Supply Visualization" are service marks of QAD Inc.

CUSTOMERS

    As of January 31, 2001, our software was licensed to more than 200,000 users at more than 5,100 sites in over 80 countries. No single customer accounted for more than 10 percent of total revenue during any of our last three fiscal years. The following are among companies and/or subsidiaries of those companies that have each generated more than $1.0 million in software license, maintenance and service revenue over the last three fiscal years:

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INDUSTRY BACKGROUND

    In recent years, businesses have been subject to increasing global competition, resulting in pressure to lower production costs, improve product performance and quality, increase responsiveness to customers, and shorten product development, manufacturing, and delivery cycles. Globalization has greatly increased the scope and complexity of multi-national manufacturing organizations, while the Internet has had a profound effect on the way these companies conduct business.

    Using the Internet as the foundation for electronic communication, interaction and transaction, e-business revolutionized traditional business processes and practices—increasing and accelerating the flow of information between employees, partners, suppliers and the marketplace as a whole. With the advancement of enabling technologies, organizations leveraged the Internet to create a new sales and marketing tool—e-commerce. Today, these organizations are searching for ways to turn Web communication into a significant competitive advantage, where online collaboration is rapidly gaining acceptance as the key to achieving this goal.

    According to Gartner Group, a leading industry analyst firm, "Collaborative commerce (c-commerce) represents an important step beyond the buy/sell e-commerce model. Driven by evolving business demands and enabled by increasingly powerful Web technologies, c-commerce allows members of cyber communities to share intellectual capital and leverage the core competencies of their trading partners. It's a powerful combination that promises to deliver significant increases in corporate innovation, productivity and profitability."

    "Shared databases, open tracking systems and enhanced inter-enterprise visibility and cooperation mean streamlined business processes, new cost efficiencies, and an expanded customer base for every collaborative partner—all resulting in a competitive advantage that traditional business models simply can't duplicate."

    To respond, companies need to rethink their business models and implement solutions that can keep pace with the increased rate of change. We believe that collaborative commerce will impact each segment of the enterprise software market—corporate, plant and distribution/operations-level and supply chain. And, we believe that adopters of a new type of enterprise software—collaborative solutions—will realize enormous competitive advantages over those that don't.

    According to Gartner Research, in the next twelve months, c-commerce initiatives involving Web-enabled interaction between enterprises, their customers, trading partners and employees will surpass e-commerce as a top business priority. By 2005, nearly half of all Web-based commerce will be collaborative in nature.

    Traditional ERP software enables the integration and management of critical data within an enterprise and supports internal business processes such as sales order management, procurement, inventory management, manufacturing planning and control, project management, distribution and finance.

    Traditional supply chain management software, such as Advanced Planning & Optimization, and Demand Management, complement ERP software by enabling companies to make decisions related to the optimization of supply chains by using data from traditional ERP systems.

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    Today's collaborative commerce solutions help manage the supply chain by enhancing the flow of information to and from customers, suppliers, digital marketplaces and other business partners outside the enterprise. These solutions rely on the Internet as a vehicle for achieving collaboration.

    Collaborative Solutions.  Collaborative solutions provide companies with a framework which works with an established enterprise backbone and is integrated with other enterprise applications. They enable manufacturers and distributors to integrate their extended enterprise and corporate operations, interact with customers and suppliers, engage in e-business, collaborate, and expand their markets through online communities. Collaborative solutions enable companies to deliver individualized customer service as easily as they once delivered mass customer service, thereby increasing their market opportunities. We believe that the complexities of today's enterprise operations require that collaborative commerce solutions be open-architected with the ability to integrate to multiple enterprise applications.

    Plant and Distribution/Operations-Level Solutions.  Plant and distribution/operations-level solutions are primarily focused on the specific needs of mid-range to large manufacturing plants and distribution sites at the operations level of global companies. Users of plant and distribution/operations-level solutions are looking for flexible, highly inter-operable, full-featured, industry-specific solutions that can be implemented globally, rapidly and cost-effectively and that easily integrate with the company's overall business infrastructure.

    Supply Chain Management Solutions.  Supply chain management applications have expanded to include collaborative functions; thereby turning the supply chain into what is termed today, a value chain. Traditional providers of supply chain optimization software typically offer decision support applications that rely on transaction systems such as ERP to hold transaction information. The challenge these vendors face is twofold: 1) a decision support application is not designed for high volume transaction processing and, 2) it is not collaborative. New Internet-based collaborative applications reach outside the four walls of the enterprise to enable supply chain partners to interact directly with the manufacturer's transaction system. This new level of supply chain integration results in significant reduction in the cost of operations.

    Corporate Enterprise Solutions.  Corporate enterprise solutions are primarily focused on the consolidated information needs of Fortune 1000 companies such as corporate financial reporting, consolidations and human resources. These applications are generally characterized by their significant cost of ownership, broad scope and lack of flexibility, which limit their effectiveness in addressing the needs of individual plants or divisions. The largest and most well-known suppliers of corporate enterprise solutions are Oracle, PeopleSoft and SAP. The rollout of these corporate enterprise solutions into the plant and distribution/operations-level of organizations has proven to be difficult, primarily due to the cost of ownership and the need for flexibility and control at the level of the individual plants.

THE QAD STRATEGY

    Our objective is to be the leading provider of collaborative commerce software solutions for multi-national, large and mid-range manufacturing and distribution companies within our targeted markets. Our strategy is to expand our leadership position at the plant and operations level by providing software applications that not only run internal processes, but extend beyond the walls of the enterprise to manage relationships with customers, suppliers and other business partners.

    The key elements of our strategy for achieving our objective include the following:

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THE VALUE OF QAD SOLUTIONS

    In the Internet-enabled economy, manufacturing and distribution companies are becoming more profit oriented and customer focused. New customer-driven business models require comprehensive end-to-end solutions that manage all areas of the enterprise—including corporate, plant and distribution/operations-level, supply chain and collaborative commerce.

    QAD's unique approach provides companies with a collaborative business framework built on our established enterprise backbone and integrated with other enterprise applications—providing an end-to-end solution. Because of our open systems architecture, QAD solutions inter-operate with legacy systems and other leading applications. The result is a powerful, collaborative commerce enabled solution suite that leverages a company's existing information technology (IT) investment, supports their current business model and enables them to quickly adapt to new market conditions.

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    QAD meets multi-national, large and mid-range manufacturing customer requirements for enterprise solutions in our vertical markets by delivering:

    Expertise and Functionality for Key Vertical Markets.  Our industry expertise and strategy of developing industry-specific solutions provide our customers with significant competitive advantage. QAD's focus on key vertical markets has enabled it to achieve leadership positions in the automotive, food and beverage, consumer products, electronics, industrial and medical industries. In order to stay at the forefront of the industries we serve, we partner with our customers through active industry development groups, which play a vital role in driving the next generation of enhancements and delivering them ahead of the competition.

    Low Total Cost of Ownership.  The advanced industry-specific features and functionality of QAD solutions mean customers in the industries we serve can have feature rich solutions for significantly less cost than larger, more complicated ERP solutions, which typically require extensive, costly customization to achieve the type of industry-specific functionality available with QAD solutions. QAD solutions are easy to use, resulting in training times that are less than with other ERP solutions.

    Quick Time-to-Benefit.  Because we develop industry-specific solutions, customers access rich functionality the day their system goes live versus other enterprise solutions that require extensive customization—often taking a year or more to achieve. QAD's proven implementation methodology, together with our expertise in key vertical markets, and impressive track record of rapid installations, provides a quick time-to-benefit for our customers.

    Global Functionality for Multi-national, Large and Mid-range Companies.  Our reputation for best-in-class manufacturing applications is supported by a proven track record of successful deployments worldwide. Our solutions are available in as many as 26 languages and incorporate multi-currency capabilities tailored to local financial practices and requirements in many of our major markets.

    Increased Velocity and Efficiency of the Supply Chain.  QAD's collaborative commerce solutions streamline business processes and enable diverse and sophisticated interactions between partners, suppliers and customers. By enabling global manufacturers to efficiently manage resources within and beyond the enterprise, QAD solutions improve customer delivery performance and reduce purchase material and inventory costs.

    Adaptable, High-Performance Computing.  QAD solutions have the flexibility and scalability that multi- national, large and mid-range companies need to quickly and successfully adapt to growth, organizational change, technological advances, market shifts and other challenges. Customers are assured of robust performance that will continue as their needs and businesses change and adapt.

    Open Integration Architecture.  Our open systems architecture is compliant with Open Applications Group Integration Specification (OAGIS) standards and the most advanced Internet technologies such as Java and XML in order to deliver truly open, inter-operable end-to-end enterprise solutions. The ability of our solutions to inter-operate with other enterprise applications enables our customers to leverage their existing IT investments and move to collaborative commerce quickly.

    Single Face to Customers, Partners and Suppliers.  QAD's collaborative commerce solutions are designed to present a single face to customers, partners and suppliers in order to present a consistent image and process customer and supplier orders uniformly when operating with Web storefronts, public trading exchanges and private trading exchanges. By presenting a single face to trading partners, QAD solutions unify diverse global operations and process orders from anywhere to anywhere in a unified, consistent manner.

    Global Service and Support.  Global service and support is an important component of our solutions. Working in concert with a global network of QAD service alliance partners, QAD Global Services ensures that our customers receive the right combination of services for their system—from pre-installation, to

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implementation, to on-going service and support. QAD Global Services utilizes a proven implementation methodology and enjoys a reputation for on-time implementations and rapid time-to-benefit for our solutions. Our global service and support team, comprised of 600+ professionals, deliver service offerings to ensure that our customers implement our solutions effectively and efficiently to achieve business value. We support our customers' global operations through our call centers and online support, both of which are accessible 24 hours a day, seven days a week anywhere in the world.

QAD SOLUTIONS

    We target our solutions to address the needs of multi-national, large and mid-range manufacturing and distribution companies within the automotive, food and beverage, consumer products, electronics, industrial and medical industries. Our primary product lines are as follows:

THE QAD ENTERPRISE APPLICATION: MFG/PRO eB

    The successor to MFG/PRO, MFG/PRO eB is a best-in-class manufacturing solution designed for the demands of today's business environment. A foundation for collaborative commerce, MFG/PRO eB software includes an integrated set of manufacturing, distribution, financial and customer service applications designed to address the needs of customers in our targeted vertical markets. MFG/PRO eB consists of a core ERP application and a number of key extensions. The core ERP application consists of three areas of functionality—manufacturing, distribution and financials—while the MFG/PRO eB extensions provide additional business functionality.

    MFG/PRO eB also includes unique, industry-specific features that were developed through our customer development groups. The software supports multiple currencies and global tax management and is tailored to financial practices and requirements in many of our major geographic markets. Because of our open systems approach, MFG/PRO eB inter-operates with legacy systems and other leading enterprise applications to give companies best-in-class functionality.

    MFG/PRO eB software operates in hosted and distributed client/server and browser-based computing environments. It supports single or multiple sites, as well as multiple production and operational processes. These capabilities enable manufacturers to manage multiple hybrid production methods within a single organization or production site and provide the flexibility to adapt to additional sites and processes as an

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organization's business evolves. Accessible through a Web browser, MFG/PRO eB includes an easily deployable Java platform interface that minimizes internal system traffic and provides low-cost system access over a wide area network (WAN).

    In addition to the MFG/PRO eB core ERP application functionalities of manufacturing, distribution and financials, the MFG/PRO eB extensions provide additional business functionality. These extensions include:

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THE QAD ENTERPRISE EXCHANGE APPLICATION: QAD eQ

    QAD eQ is a private enterprise exchange that enables management of customer and supplier relationships, orders, replenishment and vendor-managed inventory. By managing internal and external access to an organization's back-office systems, QAD eQ essentially transforms a company's existing ERP system into a full-featured collaborative commerce solution. QAD eQ is designed to help manufacturers increase sales, lower costs, open new global markets, personalize trading relationships and improve customer satisfaction via e-business and collaborative commerce.

    QAD eQ enables a company to model its supply chains, including the rules and relationships that describe the preferences of its trading partners. QAD eQ then uses this relationship model to decide how a particular incoming order should be handled. Supply chains change frequently, so the relationship management function is flexible and easily adaptable to handle dynamic environments.

    QAD eQ inter-operates with other enterprise systems (including MFG/PRO eB) through an open message-based architecture. QAD eQ provides real-time integration with other enterprise systems, unifying multiple company systems into a single solution. Utilizing IBM's proven WebSphere development environment and Business Components framework, QAD eQ is engineered to meet the security requirements needed for the processing of Internet transactions.

    For manufacturers and distributors, the pressure to move into the realm of e-commerce is intense. Just when companies got comfortable developing storefronts, along comes collaborative commerce, which requires companies to conduct business in new ways via Internet connectivity. Collaborative commerce

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represents an important step beyond the buy/sell e-commerce model. Driven by evolving business demands and enabled by increasingly powerful Web technologies, collaborative commerce allows members of cyber communities to share intellectual capital and leverage the core competencies of their trading partners. QAD eQ enables c-commerce which promises to deliver significant increases in corporate innovation, productivity and profitability.

    Sell-side c-commerce offers the promise of reduced cost of sales through customer self-service, increased accuracy of sales orders, lead-time reduction and always being open for e-business. Buy-side c-commerce offers the promise of reduced purchasing costs through the improved selection of suppliers, new negotiation techniques such as reverse auctions, and the elimination of rogue buying. Supply chains are emerging as agile competitors in the global marketplace. Integrating back-office systems with the extended enterprise, QAD eQ can be vital to achieving higher profit margins, lower operating costs and improved customer service.

LOGO

    QAD eQ is a private enterprise exchange that enables management of customer and supplier relationships, orders, replenishment and vendor-managed inventory.

    QAD eQ consists of four distinct modules:

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    We believe that QAD eQ is unique in the industry due to the following capabilities:

    These characteristics give manufacturers the ability to take an order—unattended, at a single place, using one of many electronic conduits—and deliver that order intelligently to suppliers inside and outside of the enterprise.

    We believe that the combination of MFG/PRO eB, QAD eQ and QAD Supply Visualization is a well-positioned, end-to-end collaborative commerce solution that provides our customers with:

    QAD eQ Commerce Relationship Management and QAD eQ Sell-Side modules have already been released. QAD eQ Buy-Side and QAD eQ Replenishment modules are scheduled to be released in the 2001 calendar year.

MFGX.net VERTICAL EXCHANGE

    QAD has developed an Internet portal through which it can deliver a number of services to customers. This solution is called the MFGX.net vertical exchange. Through MFGX.net, we anticipate that we can meet a substantial number of customer needs. Delivered through a centralized, hosted, service-based delivery model, MFGX.net's initial offering is QAD Supply Visualization, a solution, which provides real-time inventory visibility to authorized suppliers via the Internet. Based on marketing demand and market conditions, QAD is exploring other potential services that may be offered by MFGX.net in the future.

QAD SUPPLY VISUALIZATION

    A significant number of suppliers, especially in the automotive and electronics industries, produce items that are single-sourced by their customers. In this case, the customer requires the supplier to restock the item on an as-needed basis when the inventory of the item falls below a certain threshold, this is referred to as vendor-managed inventory.

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    Collaborative commerce provides a unique capability to help in this type of relationship in that the supplier can track the usage of the item and the inventory level via the Internet, and then synchronize their production and delivery with the needs of the customer. We deliver this collaborative capability via our MFGX.net vertical exchange offering called QAD Supply Visualization. QAD Supply Visualization works by displaying the customer's usage and inventory information to the supplier over the Internet. The QAD Supply Visualization solution is tightly integrated with QAD MFG/PRO eB.

    QAD Supply Visualization is offered as a hosted solution on a monthly fee basis. As a result, the customer's upfront costs are minimal and the overall cost of implementation is low. In addition, we are partnering with PricewaterhouseCoopers to offer special QAD Supply Visualization service designed to get customers up and running rapidly.

    During fiscal year 2001, QAD secured beta customers for its QAD Supply Visualization which was released for general availability in the first quarter of fiscal year 2002.

ADAPTERS AND TOOLS: QAD/CONNECTS A2A

    In today's fast paced collaborative commerce environment, businesses rely on optimal operations that enable fast response to customer needs. As a result, most companies deploy best-in-class applications in critical areas of their business. The challenge is getting disparate applications to work together seamlessly. QAD has a number of adapters and tools it has developed which are the keys to successful integration of all QAD solutions across the enterprise's applications. Our set of adapters and tools are part of our solution suite called, QAD/Connects A2A (Application to Application). This set of tools is of prime importance in successful integration of other enterprise solutions such as financial, human resources, CRM, and legacy systems. They are one of the keys to QAD's rapid and successful implementations.

    QAD/Connects A2A adapters and tools provide data import and export between QAD applications and a variety of other industry applications reducing Application Program Interface (API) maintenance costs and maximizing data transfer efficiency.

    QAD/Connects A2A adapters and tools are:

    QAD/Connects A2A adapters and tools in conjunction with integration services provided by QAD Global Services can provide end-to-end connectivity across multi-national global enterprises.

CUSTOMER SERVICE AND SUPPORT

    We provide superior customer care worldwide through our Global Services organization. To broaden our customer service and support offerings, we have entered into strategic partnerships with IBM, PricewaterhouseCoopers and Deloitte & Touche LLP. Through these partnerships we provide additional

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business process and program management consulting services. These strategic partners are closely aligned to our organization, generating sales leads for us and participating in the selling process.

    Our Global Services organization offers the following services to our customers:

QAD PRODUCT ALLIANCES

    We have a number of ongoing business alliances that extend the functionality of our software through the addition of integrated best-in-class applications. We also have entered into select joint development agreements with third-party software developers who provide functionality that has been embedded into or integrated with QAD software to deliver more complete solutions for our targeted vertical markets. Our partners include IBM, Progress Software Corporation, Adexa, Inc., Demantra Ltd. and ACCESS Commerce.

TECHNOLOGY

QAD MFG/PRO eB Technology

    MFG/PRO was first introduced in 1986. We have subsequently released a number of product versions and enhancements. This past year, we released MFG/PRO eB. We have developed MFG/PRO eB software with a commercially available, fourth-generation language and tool set marketed by Progress Software Corporation (Progress) that works with relational databases provided by Oracle Corporation and Progress. MFG/PRO eB software operates under UNIX, Linux and Windows NT operating systems and takes advantage of advances in Progress software that open up this fourth-generation language to access by Sun Microsystems' Java language. MFG/PRO eB also features an Internet-enabled Java user interface called QAD eB Desktop.

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QAD eQ Technology

    The components of QAD eQ are built in Java, taking advantage of advanced techniques in object-oriented software design. QAD eQ is based on IBM's WebSphere development environment and Business Components framework. The solution's multi-tiered architecture utilizes Internet user interface technologies to capture and display information via Internet browsers. QAD eQ leverages a Web server and Apache-Tomcat combination that has features and functionality required for B2B, B2C and e-market exchanges. The technologies that QAD eQ deploys include DHTML, HTML, JSP, XML and Java Servlets. The QAD eQ interface is a thin client that decouples the display information from application logic.

QAD Supply Visualization Technology

    QAD Supply Visualization is a thin client product offered over the Internet requiring only a standard Web browser for customers and suppliers to share inventory and order information. Components of QAD Supply Visualization are built using Java, JSPs, DHTML, HTML and Java Servlets on the server side. Data is transported in XML format using standard HTTP protocol. The offering is hosted on the Linux operating system. These technologies allow us to leverage our legacy enterprise products while using the most advanced tools to provide our customers with true supply chain visibility.

RESEARCH AND DEVELOPMENT

    Our principal research and development staff is focused on continuing updates and enhancements to our MFG/PRO software, as well as the continual migration of MFG/PRO software to Java-interfaced components and to a Java user interface. We believe that the Internet capability of our products will be important to the future success of our ERP and supply chain solutions. Accordingly, we have developed and will continue to develop Internet-enabled versions of our products through in-house and third-party development.

    We maintain a separate technology development organization specifically focused on developing our QAD eQ e-business solutions. In addition, we maintain a separate technology development organization specifically focused on developing our QAD Supply Visualization solution and its accompanying portal, MFGX.net.

    As of January 31, 2001, approximately 125 research and development personnel were involved in the development of MFG/PRO eB, QAD eQ, QAD Supply Visualization, our vertical exchange MFGX.net and related third-party product APIs. Our research and development expenses totaled $34.5 million, $34.1 million and $48.3 million in fiscal years 2001, 2000 and 1999, respectively.

SALES AND MARKETING

    We sell and support our products and services through direct and indirect sales organizations located throughout the world.

    Our direct sales organization is composed of approximately 190 staff members. We continue to strengthen our sales force and our sales regions in order to improve our ability to deliver localized industry-specific solutions throughout the world. The distributor acquisitions we completed over the last four years gave us significant presence in additional countries. Within each territory, a focus on our vertical industries is maintained through marketing, local product development and sales training.

    Our indirect sales channel consists of over 30 distributors worldwide. We do not grant exclusive rights to any of our distributors. Our distributors primarily sell independently to companies within their geographic territory, but may also work in conjunction with our direct sales organization. In addition, we leverage our relationships with implementation providers, hardware vendors and other third-parties to identify sales opportunities on a global basis.

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    Our marketing strategy includes developing demand for our products by increasing awareness for QAD and our software. We participate in major industry tradeshows, sponsor regional and worldwide user conferences, support regional alliance conferences and advertise in leading business industry publications. We utilize leading marketing automation tools to support our field sales organization and are improving our Web site to consistently communicate our solutions' capabilities and their value propositions.

COMPETITION

    The enterprise software applications market is highly competitive, rapidly changing and affected by new product introductions and other market activities, including consolidations among industry participants and the entry of new participants.

    In the market for corporate enterprise and plant and distribution/operations-level enterprise applications, MFG/PRO eB currently competes with:

    In the supply chain optimization market, we compete primarily with companies such as i2 Technologies and Manugistics that have developed or are attempting to develop supply chain optimization software based on advanced planning and optimization technology that complements ERP solutions.

    In the collaborative commerce segment, various vendors from different backgrounds are currently competing for market presence and prominence. Segment borders move very rapidly and vendors are aggressively acquiring supporting applications to broaden their overall e-business offerings. Vendors are moving into the collaborative commerce space from a number of backgrounds including the following:

    Because of their various backgrounds and the relative immaturity of the market, each of these categories of vendors is challenged to deliver an end-to-end solution for e-business.

    As the collaborative commerce solutions market continues to develop, companies with significantly greater resources could attempt to increase their presence in these markets by acquiring or forming strategic alliances with our competitors or with our current or potential partners. The dynamic nature of the emerging e-business market space leads us to believe that numerous smaller but well-capitalized vendors may emerge as strong competitors.

    Increased competition in these markets is likely to result in price reductions, reduced operating margins and changes in market share, any one of which could adversely affect us. Many of our present or future competitors have significantly greater financial, technical, marketing and other resources, greater name recognition and a larger installed base of customers than we do. As a result, they may be able to

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devote greater resources to the development, promotion and sale of their products. Although we believe we offer and will continue to offer products that are competitive, we can make no assurance that we will be able to compete successfully with existing or new competitors or that competition will not adversely affect us.

BUSINESS SUMMARY

    We believe that QAD is well positioned to continue its success in the enterprise solutions space and leverage that success to become a market leader in the new emerging field of collaborative commerce solutions—in effect becoming a provider of end-to-end solutions for our multi-national, large, and mid-range manufacturing customers.

    We regard the combination of MFG/PRO eB, QAD eQ, the vertical exchange MFGX.net, QAD Supply Visualization, and QAD/Connects A2A adapters and tools as a well-positioned, end-to-end e-business solution that provides our customers with significant competitive advantage, synchronized processes across the enterprise, increased supply chain efficiency, and the ability to open new markets via e-business.

    In addition, we believe QAD eQ and QAD Supply Visualization are well positioned to succeed in the collaborative commerce segment for the following reasons:

    QAD's existing customer base of more than 5,100 sites, our Global Service operations and our strategic partnerships with select partners such as IBM, PricewaterhouseCoopers and Deloitte & Touche LLP provide significant resources with which to leverage our position in the market place.

PROPRIETARY RIGHTS AND LICENSING

    Our success is dependent upon our proprietary technology and other intellectual property.  We rely primarily on a combination of the protections provided by applicable copyright, trademark and trade secret laws, as well as on confidentiality procedures and licensing arrangements, to establish and protect our rights in our software and related materials and information. We enter into license agreements with each of our customers. Each of these license agreements provides for the non-exclusive license of QAD software. These licenses generally are perpetual and contain strict confidentiality and non-disclosure provisions, a limited warranty covering the QAD software and indemnification for the customer from infringement actions related to the QAD software.

    The pricing policy under each license is based on a standard price list and may vary based on a number of parameters including the number of end-users, number of sites, number of modules, number of languages, the country in which the license is granted and level of ongoing support, training and services to be provided by QAD. We have no patents or pending patent applications.

    To facilitate the customization required by most of our customers, we generally license our MFG/PRO software to end-users in both object code (machine-readable) and source code (human-readable) format.

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While this practice facilitates customization, making software available in source code also makes it easier for third-parties to copy or modify our software for non-permitted purposes. Distributors or other persons may independently develop a modified version of our software. Our license agreements generally allow the use of our software solely by the customer for internal purposes without the right to sublicense or transfer the software to third-parties.

    We believe that the measures we take to protect our proprietary technology and other intellectual property afford only limited protection. Despite our efforts, it may be possible for third-parties to copy portions of our products or reverse engineer or obtain and use information that we regard as proprietary. In addition, the laws of certain countries do not protect our proprietary rights to the same extent as the laws of the United States. Accordingly, there can be no assurance that we will be able to protect our proprietary software against unauthorized copying or use, which could adversely affect our competitive position. Furthermore, there can be no assurance that our competitors will not independently develop technology similar to ours.

    We may be faced with or need to bring infringement claims to protect our rights.  We have in the past been subject to claims of intellectual property infringement and may increasingly be subject to these types of claims as the number of products and competitors in our targeted vertical markets grows and the functionality of products in other industry segments overlaps. Although we do not believe that any of our products infringe upon the proprietary rights of third-parties, there can be no assurance that third-parties will not claim infringement by us with respect to current or future products. In addition, we periodically acquire intellectual property from third-parties. In some instances, this intellectual property is prepared on a work-for-hire or similar basis, and in some instances we license the intellectual property. We have in the past and expect in the future to be party to disputes about ownership, license scope and royalty or fee terms with respect to intellectual property. Any claims, with or without merit, could be time-consuming, result in costly litigation, cause product shipment delays or require us to enter into royalty or licensing agreements, any of which could have an adverse effect upon us. We may also initiate claims or litigation against third-parties for infringement of our proprietary rights or to establish the validity of our proprietary rights, which could result in significant expense to us and divert the efforts of our technical and management personnel from productive tasks, whether or not such litigation were determined in our favor.

    Our intellectual property rights may be significantly affected by third-party relationships and actions.  We have in the past, and may in the future, resell certain software which we license from third-parties. In addition, we have in the past and may in the future jointly develop software in which we will have co-ownership or cross-licensing rights. There can be no assurance that these third-party software arrangements and licenses will continue to be available to us on terms that: 1) provide us with the third-party software we require, 2) provide adequate functionality in our products, on terms that adequately protect QAD's proprietary rights, or 3) are commercially favorable to us. The loss of or inability to maintain or obtain any of these software licenses, including a loss as a result of a third-party infringement claim, could result in delays or reductions in product shipments until equivalent software, if any, could be identified, licensed and integrated.

    We may be exposed to product liability claims.  While our license agreements with our customers typically contain provisions designed to limit our exposure to potential product liability claims, it is possible that the limitation of liability provisions may not be effective under the laws of some jurisdictions. Although we have not experienced any product liability claims to date, we may be subject to claims in the future. We have an errors and omissions insurance policy. However, this insurance may not continue to be available to us on commercially reasonable terms, or at all. A successful product liability or errors or omissions claim brought against us could have an adverse effect on us. Moreover, defending a suit, regardless of its merits, could entail substantial expense and require the time and attention of key management personnel, either of which could have an adverse effect on us.

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EMPLOYEES

    As of January 31, 2001, we had approximately 1,350 full-time employees of which approximately 125 were in research and development, 650 were in support and services, 350 were in sales and marketing and 225 were in administration. Generally, our employees are not represented by collective bargaining agreements. However, certain employees of our Netherlands and France subsidiaries are represented by statutory Works Councils as required under the local laws. In addition, employees of our Brazilian subsidiary are represented by a collective bargaining agreement with the Data Processing Union. We believe that, in general, our employee relations are good.

    Our success depends to a significant extent upon a limited number of key employees and other members of our senior management and we have experienced attrition due to recruiting by Internet and other companies. We may not be successful in attracting and retaining qualified personnel, and the failure to attract and retain personnel could adversely effect us.

EXECUTIVE OFFICERS OF THE REGISTRANT

    Set forth below is certain information concerning our executive officers. All ages are as of March 31, 2001.

Name
   Age
   Position(s)
Pamela M. Lopker   46   Chairman of the Board and President
Karl F. Lopker   49   Chief Executive Officer
Kathleen M. Fisher   46   Executive Vice President and Chief Financial Officer
Vincent P. Niedzielski   46   Executive Vice President, Research and Development
Murray W. Ray   59   Executive Vice President, Global Services and Human Resources
Roland B. Desilets   39   Executive Vice President, General Counsel and Secretary
Cheryl M. Slomann   36   Vice President, Corporate Finance and Chief Accounting Officer

    Pamela M. Lopker founded QAD in 1979 and has been our Chairman of the Board and President since incorporation. Prior to founding QAD, Ms. Lopker served as Senior Systems Analyst for Comtek Research from 1977 to 1979. Ms. Lopker is certified in Production and Inventory Management by the American Production and Inventory Control Society. Ms. Lopker earned a Bachelor of Arts degree in Mathematics from the University of California at Santa Barbara. Ms. Lopker is married to Karl F. Lopker.

    Karl F. Lopker has served as Director and Chief Executive Officer since joining QAD in 1981. Mr. Lopker was founder and President of Deckers Outdoor Corporation from 1973 to 1981, where he currently serves as a Director. Mr. Lopker is certified in Production and Inventory Management at the Fellow level by the American Production and Inventory Control Society. Mr. Lopker studied Electrical Engineering and Computer Science at the University of California at Santa Barbara. Mr. Lopker is married to Pamela M. Lopker.

    Kathleen M. Fisher is Executive Vice President and Chief Financial Officer, (CFO). She joined QAD in March 2000. Prior to joining QAD, Ms. Fisher served as the financial executive of Adept Technology, an automation software and hardware manufacturer, in San Jose, California. She has also served as CFO for Inprise Corporation and Softbank Content, Inc. Ms. Fisher received a Bachelor of Science degree in Business Administration from the University of Redlands and a Master of Business Administration degree from the University of Southern California in Los Angeles.

    Vincent P. Niedzielski is Executive Vice President, Research and Development. He joined QAD in April 1996. Prior to joining QAD, Mr. Niedzielski served as Vice President, Production and Development at Candle Corporation from 1984 to 1996. Mr. Niedzielski holds a Bachelor of Science degree in Mathematics and Computer Science from the University of Scranton.

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    Murray W. Ray is Executive Vice President, Global Services and Human Resources. Mr. Ray was appointed Vice President of Global Services and Human Resources in October 1998 and February 2001, respectively. Prior to joining QAD, he served 11 years at Digital as Industrial Marketing Manager and then Director of Professional Services. He also served as Director of Professional Services at AT&T. Mr. Ray earned a Bachelor of Science Degree in Mathematics and Statistics from the University of Western Australia and he has graduated from the advanced management programs at the Australian Management College and the University of Hawaii.

    Roland B. Desilets joined QAD as Executive Vice President, General Counsel and Secretary in April 2001. For the past year, he was VP and General Counsel of Atlas Commerce, Inc., a Safeguard Scientifics company. Prior to this, he served as Corporate General Counsel and Regional General Counsel at QAD since 1998 and 1993, respectively. He holds a Juris Doctor degree from Widener University School of Law, a Master of Science degree in Computer Science from Villanova University, and a Bachelor of Science degree in Physics from Ursinus College.

    Cheryl M. Slomann joined QAD in May 1998 as Vice President, Corporate Controller and Chief Accounting Officer. In November 2000, Ms. Slomann was appointed Vice President, Corporate Finance and Treasurer. Prior to joining QAD, Ms. Slomann served nine years with Allergan, a specialty pharmaceutical company, in various financial positions. She began her career at the public accounting firm of Ernst & Young. Ms. Slomann is a Certified Public Accountant and received her Bachelor of Science degree in Business Administration/Accounting from the University of Southern California in Los Angeles.

SEGMENT REPORTING

    Segment financial information for fiscal years 2001, 2000 and 1999 is included in footnote 9 of our financial statements included in Item 14 of this Annual Report on Form 10-K.


ITEM 2.  PROPERTIES

    QAD is headquartered in Carpinteria, California, in approximately 87,000 square feet of leased space in three facilities. Leases are committed in a range from 2004 to 2011. We own 28 acres with approximately 54,000 square feet of office space in Summerland, a neighboring community. This property carries an entitlement from Santa Barbara County for the construction of a company headquarters. The company also owns a 34-acre parcel in Carpinteria, California, which was acquired for development as an additional facility. There are no immediate plans to develop the property.

    The company has over 30 additional offices located across our four geographic regions with aggregate square footage of approximately 250,000 square feet and lease commitments ranging from 2001 to 2011. This includes major offices located in the United States, the United Kingdom, the Netherlands, France, Poland, Mexico, China, Australia, Japan and Thailand.

    Although we may seek in the future new or expanded facilities, we expect that our current domestic and international facilities will be sufficient to meet our needs for at least the next 12 months.


ITEM 3.  LEGAL PROCEEDINGS

    We are not party to any material legal proceedings. We are from time to time party, either as plaintiff or defendant, to various legal proceedings and claims which arise in the ordinary course of business. While the outcome of these claims cannot be predicted with certainty, management does not believe that the outcome of any of these legal matters will have a material adverse effect on our consolidated results of operations or consolidated financial position.


ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

    None.

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PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

    QAD common stock has been traded on the Nasdaq National Market since our initial public offering in August 1997. According to records of our transfer agent, we had approximately 400 stockholders of record as of April 9, 2001. The following table sets forth the high and low closing prices for QAD's common stock as reported by Nasdaq in each quarter of the last two fiscal years.

 
   Low Sale Price
   High Sale Price
Fiscal 2001:            
  Fourth Quarter   $ 1.19   $ 3.06
  Third Quarter     2.16     3.63
  Second Quarter     3.06     7.00
  First Quarter     5.25     14.88

Fiscal 2000:
 
 
 
 
 
 
  Fourth Quarter   $ 3.06   $ 13.94
  Third Quarter     2.94     4.25
  Second Quarter     3.06     3.91
  First Quarter     2.91     4.38

    Our policy has been to reinvest earnings to fund future growth. Accordingly, we have not paid dividends and we do not anticipate declaring dividends on our common stock in the foreseeable future.

    On December 23, 1999, we issued in a private placement to Recovery Equity Investors II, L.P., 2,333,333 shares of our common stock for net consideration of $9.6 million. This private placement was effected under the exemption from registration provided by Section 4 (2) of the Securities Act of 1933.

    On December 15, 1999, we issued 120,000 shares of our common stock in connection with the purchase of the remaining equity in Enterprise Engines, Inc. not owned by QAD. The shares have been registered for resale under the Securities Act on Form S-3. Some of these shares were subject to forfeiture if certain specified performance milestones were not achieved by the former majority shareholder. Based on the performance achieved, 20,000 of these shares were forfeited in fiscal year 2001. The value of the common stock shares in the financial statements has been shown net of the forfeited shares.


ITEM 6.  SELECTED FINANCIAL DATA

 
   Years Ended January 31,
 
   2001
   2000
   1999
   1998
   1997
 
   (in thousands, except per share data)
STATEMENTS OF OPERATIONS DATA:                              
Total revenue   $ 214,075   $ 239,262   $ 193,344   $ 170,770   $ 126,444
Operating income (loss)     (19,011 )   (9,780 )   (34,806 )   14,695     2,720
Basic net income (loss) per share     (0.76 )   (0.54 )   (1.22 )   0.38     0.05
Diluted net income (loss) per share     (0.76 )   (0.54 )   (1.22 )   0.38     0.04

BALANCE SHEET DATA:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets     181,462     214,371     200,055     190,506     77,250
Long-term debt     19,460     21,890     6,526     39     5,036

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    We have made eight acquisitions since the third quarter of fiscal 1999. Results of operations of the acquired entities have been included in the financial statements since the respective dates of acquisition. These acquisitions are described in greater detail in footnote 2 of our financial statements included in Item 14 of this Annual Report on Form 10-K.


ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

INTRODUCTION

    The following discussion should be read in conjunction with our financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K.

OVERVIEW

    Founded in 1979, QAD has historically been recognized as a leading provider of ERP software applications. With the advent of the Internet, we advanced our solutions to include e-business capabilities. And with the development of enabling technologies, our solutions have advanced even further to encompass collaborative commerce. Today's QAD solutions build on our core competency in multi-site manufacturing and distribution operations, and empower global manufacturers to efficiently manage resources within and beyond the enterprise to deliver value to customers.

    QAD has built a solid customer base of global Fortune 1000 manufacturers who are poised to embrace QAD's next generation collaborative commerce solutions. With a proven track record of 20 years of experience and leadership, and more than 5,100 installations around the world, QAD is ideally qualified to meet the business and technology requirements of global manufacturing enterprises in select industry segments: automotive, food and beverage, consumer products, electronics, industrial, and medical industries.

    Global service and support is an important component of our solutions. QAD Global Services utilizes a proven implementation methodology and enjoys a reputation for on-time implementations and rapid time-to benefit for our solutions.

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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:

 
   Years Ended January 31,
  
 
   2001
   2000
   1999
  
Revenue:              
  License fees   32  % 40  % 55  %
  Maintenance and other   46   38   37  
  Services   22   22   8  
   
 
 
 
    Total revenue   100   100   100  
Costs and expenses:              
  Cost of license fees   6   9   9  
  Other cost of revenue   41   36   22  
  Sales and marketing   31   33   47