Back to GetFilings.com




QuickLinks -- Click here to rapidly navigate through this document

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

FORM 10-K


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

For the fiscal year ended January 31, 2002

OR

o 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 ý    No o

        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. o

        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 15, 2002, was approximately $55,150,000. 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 15, 2002, was 34,369,905.

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 6, 2002.

QAD INC.
FISCAL YEAR 2002 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS

 
    
    
   Page
PART I            
    ITEM 1.   BUSINESS   1
    ITEM 2.   PROPERTIES   21
    ITEM 3.   LEGAL PROCEEDINGS   21
    ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS   21
PART II            
    ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS   22
    ITEM 6.   SELECTED FINANCIAL DATA   22
    ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS   23
    ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK   38
    ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA   39
    ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE   39
PART III            
    ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT   40
    ITEM 11.   EXECUTIVE COMPENSATION   40
    ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT   40
    ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS   40
PART IV            
    ITEM 14.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K   41

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 2003.

PART I

ITEM 1.    BUSINESS

ABOUT QAD

        Historically, QAD has been recognized as a leading provider of enterprise resource planning (ERP) software applications for manufacturers. With the advent of the Internet, we advanced our manufacturing solutions to include e-business capabilities. With the development of enabling technologies, our solutions have advanced even further to include features that enable collaborative commerce for manufacturers. Today's QAD solutions build on our core competency in multi-site manufacturing and distribution operations and help global manufacturers efficiently manage resources within and beyond the enterprise. QAD solutions empower manufacturers to collaborate with their customers, suppliers and partners to make and deliver the right product, at the right cost and at the right time.

        QAD has built a solid customer base of global Fortune 1000 manufacturers who are excellent prospects for QAD's next generation collaborative commerce solutions. With a proven track record of over 20 years of industry leadership, and more than 5,300 installations of our software around the world, QAD is ideally qualified to meet the business and technology requirements of global manufacturing enterprises worldwide. QAD focuses its efforts in select industry segments: automotive, consumer products, electronics, food and beverage, 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 are an important component of our solutions. QAD offers service and support capabilities that are truly global in scope, and we are one of a few select organizations with the capability to implement our solutions across the globe and support them in multiple languages and currencies. Our geographic management structure ensures that our global practices meet local requirements and that our services are delivered effectively within each region around the globe. We support our customers' global operations through our network of regional support centers and online support, accessible 24 hours a day, seven days a week, anywhere in the world.

1


        QAD solutions include:

        For a further discussion of QAD solutions, please see "QAD SOLUTIONS" below in this Item 1.

        "QAD eQ" is a trademark, and "QAD" and "MFG/PRO" are registered trademarks of QAD Inc. "MFGx.net" and "Supply Visualization" are service marks of QAD Inc. This Annual Report on Form 10-K may contain trademarks, service marks and registered trademarks of companies other than QAD.

CUSTOMERS

        As of January 31, 2002, our software was licensed to more than 225,000 users at more than 5,300 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 billings over the last three fiscal years:

        Automotive

        Consumer Products

        Electronics

        Food and Beverage

        Industrial

2

        Medical

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, the first wave of 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—where buying and selling over the Internet via Web storefronts and public e-market exchanges gained popularity.

        Today's manufacturing organizations are searching for ways to turn Web technology into a significant competitive advantage, where online collaboration across the enterprise, as well as with customers, suppliers and trading partners, is rapidly gaining acceptance as the key to achieving this goal. This new way of conducting business via electronic communication is called collaborative commerce.

        In the opinion of Gartner Inc., a leading industry analyst firm, "Enterprises of all sizes must cooperate more than ever to meet the demands of their customers. They need to collaborate with customers, suppliers and business partners to develop the right products, for the right markets, at the right time. Collaborative commerce (c-commerce) is a key enabler to make this happen."

        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 including corporate, plant and distribution/operations-level, and supply chain. We also believe that those who adopt a new type of enterprise software—collaborative solutions—will realize enormous competitive advantages over those who do not.

        Gartner Inc. estimates, "By 2004, more than 75 percent of enterprises worldwide will leverage c-commerce technologies to engage customers and members of their value chain in enhancing more than 50 percent of their key product and service development and operation processes (0.7 probability)."

Today's Enterprise, Manufacturing and Supply Chain Software

        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, service and support, project management, distribution and finance. QAD MFG/PRO eB software is an ERP application designed specifically to handle these internal business processes for manufacturing companies.

3


        Collaborative commerce solutions help manage and optimize 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 largely on the Internet as a vehicle for achieving collaboration. MFG/PRO eB, QAD eQ and MFGx.net, QAD's hosted exchange, are collaborative solutions for manufacturers.

        Expanded definitions of the types of solutions in use today by manufacturing organizations follow:

        Collaborative Solutions.    Collaborative solutions provide companies with an information systems framework which works with an established ERP backbone and is integrated with other enterprise applications. Collaborative solutions enable manufacturers and distributors to integrate and extend their enterprise and corporate operations, interacting with customers and suppliers, engaging in e-business, collaborating, and expanding 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 designed using open architecture, open messaging standards, and advanced Internet technologies, with the ability to deliver interoperability 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. We believe users of plant and distribution/operations-level solutions are looking for flexible, highly interoperable, 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. Supply chain planning and optimization applications will increasingly be used for facility location and layout decisions while collaborative solutions will process actual supply demand based on "what is" rather than "what if."

        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 limits their effectiveness in addressing the needs of manufacturing enterprises, individual plants or divisions. 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 manufacturing, and specifically, 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

4


internal processes, but also extend beyond the walls of the enterprise to manage collaborative relationships with customers, suppliers and other business partners.

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

5

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 approach provides companies with a collaborative business framework built on our established enterprise resource planning application suite, and integrated with other enterprise applications, to provide an end-to-end solution. Because of our open systems architecture, QAD solutions can interoperate with legacy systems and other leading applications. The result is a powerful, collaborative commerce solution suite that leverages a company's existing information technology (IT) investment, supports their evolving business model, and enables them to quickly adapt to new market opportunities.

        Investment in IT systems for manufacturing retracted last year following the global manufacturing sector decline. However, the manufacturing sector is beginning to show indications of growth again and, considering the trend toward collaborative commerce solutions, we believe that QAD solutions are well positioned to benefit from a recovery.

        QAD meets multi-national, large and mid-range manufacturing customer requirements for enterprise collaborative commerce 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 a significant competitive advantage. QAD's focus on key vertical markets has enabled us to achieve leadership positions in the automotive, consumer products, electronics, food and beverage, industrial and medical industries. In order to stay at the forefront of the industries we serve, QAD partners with our customers through active industry development groups, which play a vital role in driving the next generation of enhancements.

        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 often require extensive, costly customization to achieve the type of industry-specific functionality available "out-of-the-box" with QAD solutions. QAD solutions implement quickly and are easy to use, resulting in training times and support costs that are less than with other ERP solutions.

        Quick Time-to-Benefit.    Our 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 compared to our larger competitors whose software often takes longer and is much more complex to implement for manufacturing 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 global tax management and 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

6


resources within and beyond the enterprise, QAD solutions can improve customer delivery performance and reduce purchasing 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. QAD solutions have a reputation for delivering robust performance that will continue as their needs and businesses change and adapt.

        Open Integration Architecture.    Our open systems architecture incorporates Open Applications Group Integration Specification (OAGIS) standards and advanced Internet technologies such as Web-Services, Java and XML in order to deliver truly open, interoperable end-to-end enterprise and supply chain solutions. The ability of our solutions to interoperate with other enterprise applications enables our customers to leverage their existing IT investments and move to collaborative commerce quickly.

        Single Point-of-Contact for Customers, Partners and Suppliers.    QAD's collaborative commerce solutions provide a single point-of-contact for customer, partner, and supplier interactions across multiple sales channels such as Web storefronts, public e-market exchanges and private trading exchanges. For example, each customer profile and the personalization of information unique to that customer can be managed in a single location and used to power all customer interactions globally. The same is true for supplier and partner communications. By presenting a single point-of-contact for all trading partner interactions, QAD solutions help unify diverse global operations and process orders intelligently from anywhere to anywhere in the world.

        Global Service and Support.    Global service and support are an important component of our solutions. QAD offers service and support capabilities that are truly global in scope, and we are one of a few select organizations with the capability to implement our solutions across the globe and support those solutions in multiple languages and currencies. Our organization is staffed with more than 500 support and services professionals whose focus is on bringing world-class, value-added services to our customers. Our geographic management structure ensures that our global organization meets local requirements and that our services are delivered effectively within each region around the globe. Working in concert with a 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 implementation, to ongoing service and support.

        QAD Global Services utilizes a proven implementation methodology and has earned a reputation for on-time implementations and rapid time-to-benefit for our solutions. We support our customers' global operations through our network of regional support centers and online support, accessible 24 hours a day, seven days a week, anywhere in the world. In addition, we offer an extensive menu of training for our customers available either online or via one of our many global training centers.

QAD SOLUTIONS

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

7

MFG/PRO eB: The QAD Enterprise Application

        Our flagship product, 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 extensions provide additional business functionality.

        QAD's deep industry experience has allowed it to develop MFG/PRO eB with unique, industry-specific features. Additional industry-specific functionality is developed in conjunction with our customers through our Industry Development Groups. MFG/PRO eB 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 is able to interoperate with legacy systems and other leading enterprise applications to give companies best-in-class functionality.

        MFG/PRO eB software 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 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 for end users.

        MFG/PRO eB delivers value to our manufacturing customers by helping to increase inventory turns and improve the productivity of manufacturing enterprise operations.

QAD eQ: The QAD Private Trading Exchange Application

        As supply chains emerge as agile competitors in the global marketplace, manufacturers are moving towards collaborative commerce by applying technology and new business processes in

8


order to optimize their operations and make huge gains in operational efficiencies. We believe that manufacturers focused on collaborating with their distribution channels, downstream partners, suppliers, engineering associates, and all the other members of their extended supply chain, will reap major benefits.

        QAD eQ enables collaborative commerce, which promises to deliver significant increases in corporate innovation, productivity and profitability. QAD eQ is a private trading exchange (PTX) suite of Sell-Side, Buy-Side and Replenishment order management applications built on a Commerce Management Foundation (CMF) that essentially transforms a company's existing ERP system(s) into a unified collaborative commerce solution. We believe that our PTX application suite, QAD eQ, uniquely positions QAD to benefit from growing demand for this type of sophisticated software. QAD eQ is designed to help manufacturers increase sales, lower costs, open new global markets, personalize trading relationships and improve customer satisfaction via its collaborative commerce capabilities.

LOGO

        QAD eQ is a private trading exchange, which connects the manufacturing organization to customers and suppliers, enabling the enterprise to achieve higher profit margins, lower operating costs and improve customer service through collaborative commerce.

The QAD eQ private trading exchange application suite consists of four distinct modules:

        QAD eQ Commerce Management Foundation

        QAD eQ Sell-Side

9

        QAD eQ Buy-Side

        QAD eQ Replenishment

QAD eQ in Summary

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

        These capabilities give manufacturers the ability to take an order—unattended, at a single place, using one of many electronic conduits (such as Web storefront, EDI, e-market exchanges)—and deliver that order intelligently to suppliers inside and outside of the enterprise by coordinating Sell-Side, Buy-Side, and Replenishment operations simultaneously. The application platform

10


enables manufacturers to implement and monitor their trading interface with both suppliers and customers via the Internet to achieve dramatic reductions of supply chain costs, improved delivery time, and greater customer satisfaction.

        A strength of QAD eQ is its ability for real-time integration with other enterprise systems, unifying multiple disparate company systems into a single, unified solution. QAD eQ interoperates with other enterprise systems through an open message-based architecture and is engineered with IBM's proven WebSphere development environment and business components framework to meet the security requirements needed for the processing of Internet transactions. Integrating back-office systems with the extended enterprise, QAD eQ offers greater operational efficiencies for manufacturers via its four distinct modules.

        All modules of the QAD eQ application suite have been released for general availability. Most recently, QAD eQ Replenishment was made available in the QAD eQ v3.5 release announced for general availability in January 2002.

MFGx.net: The QAD Hosted Exchange

        QAD has developed an Internet portal through which it can deliver valuable information to the manufacturing community as well as a number of service-based solutions to customers. This portal is called MFGx.net. Through MFGx.net, we anticipate that we can meet a substantial number of our manufacturing customers' collaborative commerce needs.

        Our vision is for MFGx.net to provide a collaborative environment within the manufacturing community where trading partners can share information and can work together to achieve overall competitiveness. We plan for MFGx.net to provide a growing number of hosted, Web-based services for manufacturers.

        MFGx.net's initial offering is QAD Supply Visualization, a service which provides real-time inventory visibility to authorized suppliers via the Internet. QAD Supply Visualization was first offered in early fiscal year 2002 and has since gained a significant number of trial customers and momentum in the marketplace.

        In addition to the already available QAD Supply Visualization service, we are planning additional services via MFGx.net, including QAD Alerts which will notify manufacturers of conditions such as low inventory, late shipments, design changes and new products; and QAD Product Visualization which will offer manufacturers product life-cycle management capabilities.

MFGx.net Service Offering: QAD Supply Visualization

        A significant number of manufacturers, especially in the automotive and electronics industries, use items that are provided under contract by a single supplier. In those cases, the manufacturer 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.

        Collaborative commerce solutions from QAD provide 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 its production and delivery with the needs of the manufacturer. We deliver this collaborative capability via our MFGx.net hosted exchange offering called QAD Supply Visualization, which works by displaying a manufacturer's usage and inventory information, in real-time, to its supplier over the Internet.

11


        QAD Supply Visualization improves our manufacturing customers' communications with their suppliers, offering the opportunity to reduce operating and inventory costs, reduce expediting charges, minimize production line shutdowns due to stock outs, improve fulfillment times and increase inventory accuracy. QAD Supply Visualization is also easy to implement, easy to use, and is able to deliver a rapid return on investment (ROI).

        QAD Supply Visualization is offered as a hosted solution on a monthly fee basis resulting in minimal upfront costs, including low implementation costs for the customer.

        During fiscal year 2002, QAD went from having a small number of QAD Supply Visualization beta customers to having a significant number of customers and their trading partners who are evaluating or using the service.

QAD Interoperability Solutions

        In today's fast paced collaborative commerce environment, businesses rely on optimal operations that enable fast response to customer needs. As a result, many companies deploy best-in-class applications in critical areas of their business. The challenge is getting disparate applications to work together seamlessly. QAD has developed a number of interoperability solutions, which are the keys to successful integration of all QAD solutions within and across multi-site manufacturing enterprises.

        QAD Interoperability Solutions provide effective interoperability across the enterprise linking other applications, such as financials, human resources, customer relationship management (CRM), and legacy applications, seamlessly to QAD applications. In addition to linking within the enterprise, QAD Interoperability Solutions can link between enterprises for electronic data interchange (EDI).

        QAD's Interoperability Solutions include QAD/Connects A2A, a complete suite of connectivity adapters and tools, and QAD EDI ECommerce, an application for EDI transactions.

        QAD/Connects A2A

12

CUSTOMER SERVICE AND SUPPORT

        QAD offers service and support capabilities that are truly global in scope, and we are one of a few select organizations with the capability to implement our solutions across the globe and support those solutions in multiple languages and currencies. Our organization is staffed with more than 500 support and service professionals whose focus is on bringing world-class, value-added services to our customers. Our geographic management structure ensures that our global organization meets local requirements and that our services are delivered effectively within each region around the globe.

        QAD Global Services utilizes a proven implementation methodology and has earned a reputation for on-time implementations and rapid time-to-benefit for our solutions. We support our customers' global operations through our network of regional support centers and online support, accessible 24 hours a day, seven days a week, anywhere in the world. In addition, we offer an extensive menu of training for our customers available either online or via one of our many global training centers.

        To broaden our customer service and support offerings, we have entered into strategic partnerships with IBM, Deloitte & Touche, Atos Origin, and other select organizations. Through these partnerships, we provide additional business process and program management consulting services. These strategic partners are closely aligned to our organization and participate in the selling process.

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

13

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 have also 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 alliances include IBM, Progress Software Corporation and others.

TECHNOLOGY

QAD MFG/PRO eB Technology

        MFG/PRO was first introduced in 1986. We have subsequently released a number of product versions and enhancements. Our most recent version, MFG/PRO eB, has been developed with a commercially available toolset marketed by Progress Software Corporation, 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.

QAD eQ Technology

        The business 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 thin-client architecture requires only a standard Web browser to display user information. Components of QAD eQ architecture consist of Java, JSPs, DHTML, HTML, Java Scripts, Java Servlets and XML. QAD eQ leverages a Web server and Apache-Tomcat combination that has features and functionality required for the demands of secure, scalable collaborative commerce. QAD eQ is designed to run on a variety of hardware platforms, such as IBM pSeries, HP-UX Solaris, NT, MS2000 and IBM iSeries. It is designed to support major databases such as Oracle and DB2.

14


MFGx.net and QAD Supply Visualization Technology

        Our current MFGx.net offering, 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 eB software, including the continual migration of MFG/PRO eB to components, and advancements to our HTML 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 three separate technology development organizations, MFG/PRO eB, QAD eQ, and MFGx.net, each specifically focused on developing its portion of QAD's end-to-end manufacturing solutions.

        As of January 31, 2002, approximately 200 research and development personnel were involved in the development of MFG/PRO eB, QAD eQ, and our hosted exchange, MFGx.net. Our research and development expenses totaled $31.7 million, $34.5 million and $34.1 million in fiscal years 2002, 2001 and 2000, respectively.

SALES AND MARKETING

        QAD sells and supports its products and services through direct and indirect sales channels and service organizations located throughout the world.

        Our direct sales organization is composed of approximately 200 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. 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 and sales agents worldwide. We do not grant exclusive rights to any of our distributors or sales agents. Our distributors and sales agents primarily sell independently to companies within their geographic territory, but may also work in conjunction with our direct sales organization. In addition, we leverage our relationships with implementation service providers, hardware vendors and other third parties to identify sales opportunities on a global basis.

        Our marketing strategy includes developing demand for our products by increasing awareness of 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 marketing automation tools to support our field sales organization and provide e-marketing capabilities. We continue to improve our Web site to consistently communicate our solutions' capabilities and their value propositions.

15


COMPETITION

        The enterprise software applications market is highly competitive, is rapidly changing and is 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 management market, we compete primarily with companies such as i2 Technologies, Manugistics and SAP, that have developed or are attempting to develop supply chain management software 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 collaborative 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 collaborative commerce.

        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 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 may 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 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

16


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.

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.

        To facilitate our customers ability to customize, we generally license our MFG/PRO software to end-users in both object code (machine-readable) and source code (human-readable) format. 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 impermissable 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 have no patents, but have one pending patent application.

        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, to reverse engineer or to 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 been in the past, and may be in the future, 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 other instances, we license the intellectual property. We have been in the past, and expect to be in the future, party to disputes about ownership, license scope and royalty or fee terms with respect to intellectual property. 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

17


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 developed 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 provide us with the third-party software we require, provide adequate functionality in our products on terms that adequately protect QAD's proprietary rights, or 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 or developed 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 material 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.

EMPLOYEES

        As of January 31, 2002, we had approximately 1,300 full-time employees of which approximately 200 were in research and development, 500 were in support and services, 350 were in sales and marketing and 250 were in administration. Generally, our employees are not represented by collective bargaining agreements. However, certain employees of our Netherlands and France based subsidiaries are represented by statutory Works Councils as required under the local laws. Employees of our Brazil based subsidiary are represented by a collective bargaining agreement with the Data Processing Union. We believe that, in general, our employee relations are good.

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 for our multi-national, large and mid-range manufacturing customers.

        We regard the combination of our applications MFG/PRO eB and QAD eQ, our QAD Interoperability Solutions, our MFGx.net service offerings, as well as our extensive global support and implementation capabilities, as a uniquely positioned end-to-end, collaborative commerce solution that provides manufacturers with significant competitive advantages, synchronized

18


processes across the enterprise, increased supply chain efficiency, and the ability to open new markets via collaborative commerce.

        We believe our collaborative commerce solutions are well positioned to succeed in the collaborative commerce segment for the following reasons:

        QAD's existing customer base of more than 5,300 sites, our Global Service and Support operations, our internal and extended sales operations, our marketing organization and our strategic partnerships with select partners provide significant resources with which to build our position in the market place.

EXECUTIVE OFFICERS OF THE REGISTRANT

        Set forth below is certain information concerning our executive officers. All ages are as of March 31, 2002.

Name
   Age
   Position(s)
Pamela M. Lopker   47   Chairman of the Board and President
Karl F. Lopker   50   Chief Executive Officer
Kathleen M. Fisher   47   Executive Vice President and Chief Financial Officer
Vincent P. Niedzielski   48   Executive Vice President, Research and Development
Murray W. Ray   54   Executive Vice President, Global Services and Human
    Resources
Roland B. Desilets   40   Executive Vice President, General Counsel and Secretary
Valerie J. Miller   38   Vice President, Corporate Controller

        Pamela M. Lopker founded QAD in 1979 and has been our Chairman of the Board and President since incorporation in 1981. 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.

19


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 Borland Corporation, formerly 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.

        Murray W. Ray is Executive Vice President, Global Services and Human Resources. Mr. Ray joined QAD in August 1996 and 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 Compaq Computer Corporation, formerly 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 is Executive Vice President, General Counsel and Secretary. He rejoined QAD in April 2001, after spending one year as Vice President 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. Before joining QAD in 1993, Mr. Desilets served as intellectual property counsel for Unisys Corporation. 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.

        Valerie J. Miller is Vice President, Corporate Controller. She joined QAD as Assistant Corporate Controller in May 1999 and was appointed Vice President, Corporate Controller and Chief Accounting Officer in June 2001. Prior to joining QAD, Ms. Miller served eight years with Allergan, a specialty pharmaceutical company, in various financial positions. She began her career at the public accounting firm of Ernst & Young. Ms. Miller is a Certified Public Accountant and received her Bachelor of Arts degree in Business Economics/Accounting from the University of California at Santa Barbara.

20


SEGMENT REPORTING

        Segment financial information for fiscal years 2002, 2001 and 2000 is presented 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 91,000 square feet of leased space in three facilities with lease commitments ranging from 2004 to 2011. QAD owns 28 acres with approximately 54,000 square feet of existing office space in Summerland, California, a neighboring community. This property carries an entitlement for the construction of a company headquarters. QAD is currently taking steps to preserve these entitlements and investigating the possibility of further construction. In addition, QAD owns a 34-acre parcel in Carpinteria, California, and there are no immediate plans to develop this property.

        The company has over 30 additional offices located across our four geographic regions with an aggregate square footage of approximately 250,000 square feet and lease commitments ranging from 2002 until 2019. This includes major offices located in the United States, the Netherlands, Australia, the United Kingdom, Mexico, Poland, Thailand, China, France and Japan.

        Although we may seek new or expanded facilities in the future, 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.

21

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 (under the symbol QADI). According to records of our transfer agent, we had approximately 400 stockholders of record as of April 15, 2002. 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 Price
   High Price
Fiscal year 2002:            
  Fourth quarter   $ 2.16   $ 3.45
  Third quarter     1.62     3.50
  Second quarter     2.51     3.99
  First quarter     2.06     3.88

Fiscal year 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

        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.

ITEM 6.    SELECTED FINANCIAL DATA

 
   Years Ended January 31,
 
   2002
   2001
   2000
   1999
   1998
 
   (in thousands, except per share data)
STATEMENTS OF OPERATIONS DATA:                              
Total revenue   $ 204,009   $ 214,075   $ 239,262   $ 193,344   $ 170,770
Operating income (loss)     (832 )   (19,011 )   (9,780 )   (34,806 )   14,695
Net income (loss)     (5,313 )   (25,406 )   (16,336 )   (35,921 )   9,856
Basic and diluted net income (loss) per share     (0.16 )   (0.76 )   (0.54 )   (1.22 )   0.38

BALANCE SHEET DATA:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets     158,009     181,462     214,371     200,055     190,506
Long-term debt     15,345     19,460     21,890     6,526     39

        We have made eight acquisitions since the third quarter of fiscal year 1999. Results of operations of the acquired entities have been included in the financial statements since the respective dates of acquisition. 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.

22


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 in Item 14 of this Annual Report on Form 10-K.

OVERVIEW

        Founded in 1979, QAD has been recognized as a leading provider of enterprise resource planning (ERP) software applications for manufacturers. With the advent of the Internet, we advanced our manufacturing solutions to include e-business capabilities. With the development of enabling technologies, our solutions have advanced even further to include collaborative commerce for manufacturers. Today's QAD solutions build on our core competency in multi-site manufacturing and distribution operations and help global manufacturers efficiently manage resources within and beyond the enterprise. QAD solutions empower manufacturers to collaborate with their customers, suppliers and partners to make and deliver the right product, at the right costs and at the right time.

        QAD has built a solid customer base of global Fortune 1000 manufacturers who are excellent prospects for QAD's next generation collaborative commerce solutions. With a proven track record of over 20 years of industry leadership, and more than 5,300 installations of our software around the world, QAD is ideally qualified to meet the business and technology requirements of global manufacturing enterprises worldwide. QAD focuses its efforts in select industry segments: automotive, consumer products, electronics, food and beverage, 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 has earned a reputation for on-time implementations and rapid time-to-benefit for our solutions.

CRITICAL ACCOUNTING POLICIES

        We consider certain accounting policies related to revenue recognition, accounts receivable allowances, impairment of long-lived assets and valuation of deferred tax assets to be critical policies due to the estimation processes and management's judgment involved in each.

23