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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
________________
 
FORM 10-K

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

For the fiscal year ended January 31, 2011

OR

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

Commission File Number: 0-22823

________________

QAD Inc.
(Exact name of Registrant as specified in its charter)

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

100 Innovation Place
Santa Barbara, California 93108
(Address of principal executive offices and zip code)

Registrant’s telephone number, including area code (805) 566-6000

Securities registered pursuant to Section 12(g) of the Act:

Title of Each Security
Class A Common Stock, $.001 par value
Class B Common Stock, $.001 par value
Name of Each Exchange on Which Registered
The NASDAQ Stock Market LLC
(NASDAQ Global Select Market)

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

________________

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. £ YES R NO

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. £ YES R NO

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. R YES £ 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. £

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. (See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act). (Check one):

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). £ YES R NO

As of July 31, 2010, the last business day of the Registrant’s most recently completed second fiscal quarter, there were 31,526,729 shares of the Registrant’s common stock outstanding, and the aggregate market value of such shares held by non-affiliates of the Registrant (based on the closing sale price of such shares on the NASDAQ Global Market on July 31, 2010) was approximately $51.9 million. Shares of the Registrant’s common stock held by each executive officer and director and by each entity that owns 5% or more of the Registrant’s outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

As of March 31, 2011, there were 12,795,848 shares of the Registrant’s Class A common stock outstanding and 3,184,076 shares of the Registrant’s Class B common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Items 10 through 14 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, 2011.
 


 
 

 

FISCAL YEAR 2011 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS

 
Page
PART I
 
3
11
21
21
21
21
PART II
 
22
25
26
41
41
41
41
44
PART III
 
44
45
45
45
45
PART IV
 
46
77


FORWARD-LOOKING STATEMENTS

In addition to historical information, this Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995. Any statements contained herein that are not statements of historical fact should be construed as forward looking statements, including statements that are preceded or accompanied by such words as “may,” “believe,” “could,” “anticipate,” “would,” “might,” “plan,” “expect,” “intend” and words of similar meaning or the negative of these terms or other comparable terminology. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in Item 1A entitled “Risk Factors” which are incorporated herein by reference, and as may be updated in filings we make from time to time with the Securities and Exchange Commission. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s opinions, expectations and projections only as of the date of this Annual Report on Form 10-K and are subject to risks, uncertainties and assumptions about our business. We undertake no obligation to revise or update or publicly release the results of any revision or update to these forward-looking statements except as required by applicable securities laws. Readers should carefully review the risk factors and other information described in this Annual Report on Form 10-K and the 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 2012.

PART I


ABOUT QAD

QAD Inc. (“QAD”, the “Company”, “we” or “us”) is a global provider of enterprise software applications, and related services and support. QAD provides enterprise software applications to global manufacturing companies primarily in the automotive, consumer products, food and beverage, high technology, industrial products and life sciences industries. QAD software is used by over 2,500 global manufacturing companies and we employ approximately 1,350 people worldwide. QAD was founded in 1979, incorporated in California in 1986 and reincorporated in Delaware in 1997.

QAD’s enterprise resource planning (“ERP”) suite is called QAD Enterprise Applications and was formerly marketed as MFG/PRO. QAD Enterprise Applications supports our global manufacturing customers’ core business needs and enables their most common business processes.

QAD typically sells licenses to its software under a perpetual licensing model.  Customers who purchase perpetual licenses typically deploy the application using an on premise model on their own servers.  Customers under the perpetual licensing model may purchase separately, contracts for maintenance and additional services.  QAD also offers an on demand deployment option in which QAD hosts the application and provides support and management of the environment, and where the customers pay a subscription fee that grants them access to the environment.

Industries we serve:

Automotive: QAD solutions address the needs of global automotive parts manufacturers. QAD solutions are developed with specific capabilities to support industry initiatives, such as the Materials Management Operational Guidelines/Logistics Evaluation. Our solutions support the collaboration requirements of “Tier 1” suppliers (the companies who deal directly with Original Equipment Manufacturers) and suppliers at lower tiers of the supply chain. QAD actively participates in key industry associations and supports customers in the main automotive markets around the world.

Consumer Products: QAD delivers solutions for consumer products companies worldwide. Our customers manufacture a broad range of consumer products from consumer electronics to durable goods. QAD solutions address the complex demand management and replenishment requirements of companies supplying a retail supply chain, including promotional pricing, cold chain and quality compliance.
 

Food and Beverage: QAD solutions address many sectors of the food and beverage industry. We address the needs of customers in the daily fresh and fresh-baking industries, who plan and deliver their production within hours instead of days. Additionally, we support regulatory and quality initiatives throughout the Cold Chain and Hazard Analysis and Critical Control Point Analysis. QAD solutions are used to control the entire supply chain and manufacturing process from the primary produce end of the value chain to the supermarket shelf.

High Technology (Electronics): QAD solutions are used by many high technology companies whose products include semi-conductors, smart cards, telecommunications equipment, and test and measurement equipment. QAD solutions are used to control their entire businesses, including after sales service and support and the management of field engineers harnessing QAD’s mobile technology.

Industrial Products: QAD solutions address the needs of companies who make industrial products for a diverse range of market segments. Our customers include companies that manufacture components for the aerospace industry and sophisticated ceramics used in defense products. These companies benefit from QAD’s knowledge in supporting product configuration and engineering control.

Life Sciences: QAD solutions support life sciences manufacturers, particularly those developing medical devices and bio-technology products. Our solutions support regulatory compliance requirements in Current Good Manufacturing Practices.

THE QAD STRATEGY

QAD’s vision for its customers is called the Effective Enterprise. As an Effective Enterprise, a company operates at peak efficiency by executing in the most efficient manner, without wasted effort or resources. QAD is helping companies achieve this vision by aligning their systems and processes with their business goals and strategies. We do this by delivering solutions that promote efficient operations, deployment technologies that make applications simpler to support and easier to use and learn, and implementation methods that simplify and reduce risk and effort. Moreover, we develop our methods and products to support this vision and align with industry requirements.

Our Effective Enterprise vision is the foundation for our strategies as follows:

Enhance Customer Engagement to Deliver Continuous Value. QAD engages closely with customers at every stage in the sales and services lifecycles. We have developed several consultative engagement processes designed to assess our customers’ business and manufacturing needs, and provide counsel and solutions to help achieve them. We review their business processes to help refine their existing systems and/or deploy new tools. We advise how best to deploy and use QAD Enterprise Applications and engage with QAD Global Services, or our partners, to achieve maximum value. We have experienced services personnel located throughout the world to provide global deployment consistency and standards. Our services organization combines deep industry expertise with tools developed specifically to meet our customers’ needs.

Leverage QAD Expertise in Key Industries. QAD employs staff with specific knowledge and experience in the industries in which our customers operate. We actively participate in leading industry associations and are seen by our customers as experts in their field. Our knowledge is often guided and enhanced by regular customer interaction. This collective experience and industry interaction allows QAD to develop solutions with specific capabilities that address our customers’ needs.

Leverage the QAD Brand in Emerging Markets. Many QAD customers operate as global manufacturing companies. They rely on us to deliver products and services when and where they need them. These customers often establish operations in countries with emerging economies. They want to benefit from lower cost of operations and growing market opportunities. To support our customers’ strategies, we too have established operations in emerging markets. We leverage our local market presence, our extensive global partner network, and develop products that support local languages, business practices and regulatory requirements to cumulatively provide QAD customers with the support and expertise they need to capitalize on emerging market opportunities.

Invest in Research and Development. QAD continues to commit significant investment in research and development (“R&D”). We have expanded the capabilities of QAD Enterprise Applications to enhance its value to customers and improve our competitive position. In fiscal year 2011, we delivered significant product features and functionality enhancements to both our Standard Edition and Enterprise Edition of QAD Enterprise Applications. We enhanced both products in areas of business intelligence, enterprise asset management, manufacturing workbenches and overall usability. To support our R&D strategy, we also acquire businesses and technologies that complement our capabilities. Additionally, we address customers’ requirements through joint development initiatives. These efforts have yielded capabilities from which all QAD customers have benefitted.


Continue to Embrace Evolving Technologies. QAD continues to embrace new technologies that deliver value to our customers and support their ever-changing technological, financial and business requirements. Currently, one of these evolving technologies is cloud ERP. Cloud ERP, which consists of delivering software as a service (“SaaS”), or On Demand products, data storage and access, computing and communications, along with other services through the Internet versus on a company’s on-site servers, networks and infrastructure,  is rapidly growing in popularity.  As businesses look at new ways to reduce the cost of managing and maintaining their information technology (“IT”) systems, while remaining current with rapidly evolving technology trends in an increasingly global economy, cloud ERP can offer businesses the ability to securely provide data and applications to their employees, partners and customers, anywhere in the world through Internet-accessible servers that are managed and maintained by third parties.  Increased market acceptance of cloud ERP is driving adoption of more mission critical cloud-based services.  Businesses are viewing cloud ERP, or SaaS, as a smart investment because it offers many benefits, including low initial and predictable ongoing costs, reduced cost of ownership, high reliability and reduced IT complexity.

Leverage Customer Relationships. QAD continues to cultivate strong customer loyalty and lasting relationships based on trust, responsiveness, and quality. QAD provides capabilities that enable our customers to manage and grow their organizations. We also offer many value-added tools as part of our customers’ maintenance and support agreements. These include a wide range of online learning material and upgrades to our latest user interface at no additional charge.

Leverage Our Global Partner Network. QAD’s network of strategic partnerships, alliances and consultants extends the functionality of QAD solutions and supports our customers’ needs around the world. Our network ensures QAD customers receive a consistent level of high quality sales, support, solutions and services delivery, across the globe, from major territories to remote geographies. This QAD “ecosystem” allows us to augment our direct sales organization with distributors and sales agents, and our services organizations with additional consulting and implementation services.

QAD SOLUTIONS

QAD products and services support the common business processes used by global manufacturing customers. We continuously monitor emerging business requirements and practices and incorporate them into our product and solutions strategies. Our ERP suite, QAD Enterprise Applications incorporates pre-defined business processes that reflect common best practices for customers in our target markets. This supports our solutions which are easy to implement, simple to use and deliver value to our customers’ business.

In support of our focus on business process efficiency, we have integrated process maps for all common business processes into our software and developed QAD Process Editor. This tool simplifies implementation, maps all common business processes and facilitates navigation throughout the entire product suite. QAD process maps are integrated into the software user interface and serve several functions. They allow users to visualize how their company’s business processes are configured and help understand the context of their role in a particular process. They launch application functionality and visually demonstrate how information and material flows throughout the business. QAD process maps greatly reduce the challenges of training users in broad application functionality.

In fiscal year 2011, we also incorporated the foundation for a new methodology that we call ‘Easy On Boarding’. This set of tools integrates with the QAD Process Editor to simplify our solutions implementations. The Easy On Boarding concept is used during implementation when customers map their specific business processes to predefined process maps and attach operating procedures and other relevant information to each process step to assist in training users and to provide further documentation for the process. This information is easily accessed when the system is in production which reduces the need to document business processes and operating procedures, and accelerates implementation. We will continue to invest in the development of Easy On Boarding.

QAD customers often integrate QAD solutions with other systems they use within their organizations. QAD solutions have been developed to facilitate integration. For example, we enable seamless integration with all desktop applications. QAD solutions can support operations on many relational database platforms and connect to different data sources. QAD solutions also integrate easily with other software applications and Web services. Using our QXtend toolset, customers can connect to different software, even when remote, and use industry standard middleware products such as the MQ™ series or the Sonic™ Enterprise Service Bus.

QAD products have been designed to be simple to learn and use, and have a user-friendly interface design. We have invested significant research and development in the areas of usability to enhance the user experience.


QAD Enterprise Applications

QAD Enterprise Applications is an integrated suite of software applications which supports the core business processes of global manufacturing companies. The suite provides specific functionality for global manufacturing companies in targeted industries. QAD Enterprise Applications allows customers to monitor, control and support their operations, whether operating a single plant or multiple sites, wherever they are located in the world.

QAD Enterprise Applications has evolved over time to address a broader range of business processes. It is available in two editions, Standard Edition and Enterprise Edition. The Enterprise Edition provides supplementary capabilities to the Standard Edition, primarily related to an advanced Enterprise Financials suite, which has additional capabilities to assist companies with global complexities in their business models.

QAD Enterprise Applications supports multiple deployment methods, including: On Premise (the system is installed on a customer’s computer), On Appliance (the system is delivered on a machine that QAD remotely supports and administers), On Demand (the system is delivered in a SaaS/cloud application model and is accessible remotely via the Internet), or as a hybrid of these options. Blended deployment allows customers to choose how they deploy their business solutions based on their unique business needs.

QAD Enterprise Applications is comprised of the software suites detailed below.

QAD Financials

QAD Financials provides advanced capabilities to manage and control fiscal business processes at a local, regional and global level. It supports multi-company, multi-currency, multi-language and multi-tax jurisdictions, as well as robust consolidated reporting and budgeting controls. These capabilities give cross-functional stakeholders instant access to their company’s entire financial position enabling faster, more informed decision-making. QAD Financials covers both transactional accounts and corporate finance requirements.

QAD Customer Management

QAD Customer Management (“CM”) enables global manufacturers to acquire new customers efficiently, grow revenue through multiple channels and retain customers through superior service and support. QAD CM helps customers measure marketing campaigns, manage the sales opportunity lifecycle, and optimize order and fulfillment processes. Additionally, QAD CM helps customers anticipate their customer demand and ensure retention though multiple service channels and the customer self-service module.

QAD Manufacturing

QAD Manufacturing delivers complete capabilities in the areas of planning and scheduling, cost management, material control, shop floor control and reporting in various mixed-mode manufacturing environments. This includes Discrete, Repetitive, Kanban (token-based visual control), Flow, Batch/Formula, Process and Co-products/By-products manufacturing environments.

QAD Manufacturing enables companies to deploy business processes in line with their industry’s best practices. The integration between scheduling, planning, execution and materials allows tight control and simple management of processes.

QAD Supply Chain

QAD Supply Chain is a comprehensive group of applications that fulfills the diverse materials planning and movement requirements of global companies. This solution set delivers functionality and capabilities that help manufacturers drive margin and cost improvements, enhance customer satisfaction and meet industry compliance requirements. Manufacturers can align supply and demand to support the delivery of the right product, to the right place, at the right time, at the most efficient cost.

QAD Supply Chain addresses simple or complex networks with enhanced functionality available as the enterprise grows. Collaborative portals are available for both demand and supply side needs.

QAD Service and Support

QAD Service and Support enables exceptional customer service and support after the sale, providing a key opportunity for businesses to differentiate themselves from competitors. QAD Service and Support handles service calls, manages service queues and organizes mobile field resources to promote customer satisfaction. It also provides extensive project management support, helping organizations track materials and labor against warranty and service work, compare actual costs to budget, and generate appropriate invoicing.

 
QAD Enterprise Asset Management

QAD Enterprise Asset Management is an integrated plant operation solution. It enables companies to operate global manufacturing plants smoothly and keep equipment running at the lowest cost. The QAD Enterprise Asset Management suite manages assets from inception through operations and replacement. This suite is a critical component of many global manufacturers’ systems today.

QAD Transportation Management

QAD Transportation Management streamlines transportation processes, reduces costs and ensures global compliance. QAD Transportation Management addresses the needs of distributors and manufacturers in the key areas of global trade management, freight management and trade compliance. QAD markets QAD Transportation Management directly to existing manufacturing customers and to companies outside of our installed base, under the Precision brand.

QAD Analytics

QAD Enterprise Applications provides decision makers and company stakeholders with key data right at their desktop. QAD Analytics helps customers perform complex analyses, make more informed decisions, and improve performance management overall. Our extended capabilities called Operational Metrics enables users to establish key performance indicators and visualize exceptions and conditions against them. It also helps to measure the efficiency and effectiveness of an operation or process.

In fiscal year 2011, QAD launched its next generation release of QAD Business Intelligence (“BI”). This QAD Enterprise Applications module is comprised of three key application components: QAD BI Data Warehouse, BI Module(s) and QAD BI Portal. Combined, these components can provide organizations with easy access to consolidated performance-based data from multiple sources across the enterprise. QAD Business Intelligence can also provide a complete solution that enables C-level executives and key decision makers to access, analyze and share critical information dynamically.

QAD Interoperability

QAD Enterprise Applications is built on a service-oriented architecture (“SOA”). This allows customers to integrate QAD Enterprise Applications with other non-QAD core business applications. Through our QAD QXtend toolset, we promote open interoperability and offer QAD customers a choice of technologies in their software environments. This ease of integration lowers the total cost of ownership for our customers.

QAD On Demand and Other Products offered on a Subscription Basis

QAD products sold on a subscription basis include QAD On Demand, QAD Supply Chain Portal and QAD Transportation Management System Content (“TMS Content”).

QAD On Demand

QAD delivers the capabilities of QAD Enterprise Applications in a SaaS model with its QAD On Demand offering.  Customers pay a monthly subscription fee for use of QAD software, support and management of their system through the Internet versus on a company’s own server.

QAD Supply Chain Portal

Supply Chain Portal is a hosted Internet application that provides a customer’s authorized suppliers real-time visibility into their inventory, schedule and order data.  The application improves supplier efficiency and reduces operating and inventory costs through real-time supply chain collaboration.

QAD TMS Content

TMS Content is a hosted Internet application which obtains real time parcel carrier routing information and rates and ensures that content data is both accurate and compliant.  This subscription service includes automatic carrier updates for routes, published rates, surcharges, and changes to service offerings.


Our subscription offerings provide our customers flexibility in how they manage their IT environments.  These products provide many benefits, including low initial and predictable ongoing costs, reduced cost of ownership, high reliability and reduced IT complexity.  Subscription revenues represented less than 5% of total revenues in each of fiscal 2011, 2010 and 2009.

QAD Customer Support and License Updates

We offer customer support services and product enhancements and upgrades. QAD Customer Support includes Internet and telephone access to technical support personnel located in our global support centers.  Through our support offering, QAD provides the resources, tools and expertise needed to maximize the use of QAD Enterprise Applications. We offer access to an extensive knowledge base, online training materials, a virtual training environment, remote diagnostics, a software download center and live chat. Our global support professionals focus on quickly resolving customers’ issues, maintaining optimal system performance, and providing uninterrupted service for complete customer satisfaction.

License updates provide customers with rights to unspecified software product upgrades during the term of the support period. Customer support services and license updates are provided as part of our maintenance contracts. Substantially all of our customers purchase maintenance when they acquire new licenses and greater than 90% of our customers renew their maintenance contracts annually. Our maintenance and other revenue represented 60%, 61% and 51% of our total revenues in fiscal 2011, 2010 and 2009, respectively.

QAD Global Services

QAD Global Services comprises over 350 consultants in more than 20 countries. We augment our global services organization with a vast, global network of strategic partners, alliances and consultants. Global Services provides global coverage and local expertise which helps customers get the best value from their QAD investment. QAD Global Services employs Easy On Boarding implementation methodology, based on best practice templates and global standards.
 
QAD Global Services offers the following:
 
•       Implementation Services: Includes implementations, core model development and rollout, customization development, training, installations and reporting services;
 
•       On Demand and Application Management Services: Includes service delivery management, application life cycle management, help desk support, systems management and infrastructure management services;
 
•       Migration and Upgrade Services: Includes technical conversions, service pack upgrades, customization upgrades, migrations to current releases of QAD Enterprise Applications and upgrade assessments; and
 
•       Business Process Management Services: Includes business process optimization services, business metrics improvement, health checks and return on investment tools.
 
QAD Education

QAD Education delivers an extensive course curriculum in a variety of convenient formats. We allow QAD customers to fully leverage the capabilities of QAD Enterprise Applications. QAD Education includes instructor-led training (either in classroom or live via distance learning). We offer independent, online learning modules and self-study training guides. We offer direct access to the software for hands-on practice. QAD also offers customized courses taught on-site to meet specific company needs.

QAD Enterprise Applications course offerings are available to end users, IT professionals and department managers, partners and consultants. QAD Education also provides industry recognized certification for most courses.

QAD GLOBAL PARTNER NETWORK

QAD’s Global Partner Network is an “ecosystem” of strategic partnerships and alliances with solution sellers, consultants, software and database developers, independent software vendors, system integrators and service organizations worldwide. QAD has more than 150 alliances of varying size and complexity. From major territories to remote geographies, this network seamlessly delivers sales, support, solutions and services as one unified QAD organization. QAD cultivates long-term relationships with alliances we deem the industry’s best and who can deliver value to our customers.

 
The QAD network extends the functionality of QAD solutions and the value-chain to our customers. We deliver specific applications that meet customer requirements and support varying hardware platforms. Periodically, QAD jointly develops technology with our partners and provides third-party functionality embedded into or integrated with QAD products.

COMPETITION

QAD Enterprise Applications are sold to global manufacturing companies in the automotive, consumer products, food and beverage, high technology (electronics), industrial products and life sciences markets. Within these manufacturing industries, QAD competes against ERP vendors who are regarded as generalist, specialist, or smaller or local market providers with niche offerings. QAD considers the key competitive factors in each of the categories we serve to be total cost of ownership, scalability, reliability, security, functionality, usability, quality, ease of management, service and support.

SAP, Oracle, Infor and Microsoft Dynamics hold the largest market share of the broad ERP marketplace. These companies have broad market footprints developing applications targeted at many industries. Specialist ERP providers include Epicor, Lawson and several others. These vendors typically focus on point solutions and/or niche offerings, focused on a specific functionality, product area or industry.

QAD also competes in the emerging space of cloud ERP delivered in a SaaS model with its QAD On Demand offering. In this space, QAD primarily competes with existing ERP players who are focused on developing or delivering cloud ERP solutions delivered in a SaaS model. Additionally, some smaller companies have developed basic solutions.

From a competitive perspective, ERP providers of all sizes often compete for the same business in a given market. The scalability of QAD Enterprise Applications allows companies with as few as five users and as many as thousands of users to use the same applications. This scalability enables local companies to deploy the same applications as global companies.

TECHNOLOGY AND PRODUCT DEVELOPMENT

QAD Enterprise Applications was designed to adapt to customer requirements and integrate with other systems. We embrace open components which allow customers to utilize different operating systems, hardware platforms and underlying databases when deploying their software applications. Recently, we transitioned to a services-oriented architecture for our applications to allow QAD Enterprise Applications components to communicate with one another through industry-standard messaging techniques. We also allow our customers to harness other Web services to deliver the full benefit to their businesses.

QAD Enterprise Applications utilizes a variety of commonly available and widely supported development environments. The most significant technologies we use are the Progress Open Edge platform, Microsoft's .NET framework, and Java, originally created by Sun Microsystems. QAD Enterprise Applications supports most commercial operating systems, including most LINUX-derived operating systems, Windows Server System 2003/2008 and most proprietary versions of UNIX. Where practical, QAD uses open industry standards to collaborate and integrate QAD Enterprise Applications with other systems.

QAD’s domain architecture provides the foundation for QAD Enterprise Applications. This architecture gives global customers greater flexibility in their choices for system deployment. Customers can select centralized, decentralized or hybrid computing architectures with parts of their enterprise running from both central resources and local resources. QAD customers also can configure their systems to support dynamic business models and customers can easily reconfigure their systems to reflect business structure modifications, such as divestments or acquisitions.

In recent years, QAD has invested heavily on developing software that is simple and intuitive to users, requires minimal training and delivers high functionality. QAD has created a single interface for most of its software applications. This user interface enables users to harness common functions such as reporting and inquires, regardless of which part of the software application they use. Additionally, customers benefit from simple navigation and the ability to visualize their roles in the context of a business process. QAD continues to focus on developing QAD Enterprise Applications to be simple and intuitive to use to maximize productivity.

RESEARCH AND DEVELOPMENT

QAD primarily develops and enhances its products through its own internal network of QAD research and development personnel. This autonomy enables QAD to maintain design and technical control of its software and technology to meet the distinct and evolving needs of our customers.


QAD’s R&D organization develops new products and enhances existing products that are focused on the underlying functional areas of our application suite including financials, supply chain, manufacturing, customer management and analytics. We also focus on the foundation and technology of our applications, such as user interface and usability.

QAD develops new or enhanced product features based on extensive customer feedback. Periodically, QAD R&D teams will work jointly with customers to develop functionality that meets precise industry needs and introduces innovative capabilities to our product suite. This customer-driven development validates market requirements and accelerates product development. Our goal is to bring the right products to market at the right time to meet our customers’ needs. QAD makes new product releases generally available each year in March and September.

Additionally, QAD supplements its R&D organization with a number of technology partners that support our underlying architecture or embedded technologies. We may purchase or license intellectual property as necessary. These agreements extend QAD’s R&D capabilities to deliver rich, broad functionality and allow QAD and its partners to focus on their respective core competencies.

QAD operates as a global R&D organization, comprising of approximately 310 R&D employees located in QAD offices in the United States, India, China, Ireland, Australia and Belgium. Our R&D expenses totaled $34.6 million, $37.3 million and $43.1 million in fiscal years 2011, 2010 and 2009, respectively.

SALES AND MARKETING

QAD sells its products and services through direct and indirect sales channels located throughout the regions of North America, Latin America, Europe, Middle East and Africa (“EMEA”), and Asia Pacific. Each region leverages global standards and systems to enhance consistency when interacting with global customers. Additionally, we have a global strategic accounts team which is responsible for the management of QAD’s largest global customers.

Our direct sales organization includes approximately 70 commissioned sales people. We continually align our sales organization and business strategies with market conditions to maintain an effective sales process. We cultivate the industries we serve within each territory through marketing, local product development and sales training.

Our indirect sales channel consists of over 40 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. We also identify global sales opportunities through our relationships with implementation service providers, hardware vendors and other third parties.

Our marketing strategy is to build the QAD brand and develop demand for our products. Our main objectives are to shape and strengthen our valuable business relationships and increase awareness and revenue-driving leads. We do this by openly and consistently communicating with QAD customers, prospects, partners, investors and other key audiences. We reach these audiences through many channels, including globally integrated marketing campaigns, which are frequently executed at the regional and local levels; media and analyst relations; customer events; Web-based communications; and sales tool development and field support.

EMPLOYEES

As of January 31, 2011, we had approximately 1,350 full-time employees, including approximately 570 in support and services, 310 in research and development, 250 in sales and marketing and 220 in administration. Generally, our employees are not represented by collective bargaining agreements. However, certain employees of our Netherlands and French subsidiaries are represented by statutory works councils as required under local law. Employees of our Brazilian subsidiary are represented by a collective bargaining agreement with the Data Processing Union.

RECAPITALIZATION

On December 14, 2010, QAD shareholders approved a Recapitalization plan (the “Recapitalization”) pursuant to which the Company (i) established two classes of common stock, consisting of a new class of common stock with one-twentieth (1/20th) of a vote per share, designated as Class A common stock $0.001 par value per share (the "Class A Common Stock") and a new class of common stock with one vote per share, designated as Class B common stock $0.001 par value per share (the "Class B Common Stock"); (ii) reclassified each issued and outstanding whole share of the Company's existing $0.001 par value per share common stock (the "Existing Stock") as 0.1 shares of Class B Common Stock; and (iii) issued a dividend of four shares of Class A Common Stock for each share of Class B Common Stock outstanding after giving effect to the foregoing reclassification.  The Recapitalization has the effect of a two-to-one reverse stock split.

 
SEGMENT REPORTING

We operate in a single reporting segment. Geographical financial information for fiscal years 2011, 2010 and 2009 is presented in Note 13 within the Notes to Consolidated Financial Statements included in Item 15 of this Annual Report on Form 10-K.

AVAILABLE INFORMATION

Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge on our website at www.qad.com, as soon as reasonably practicable after such reports have been electronically filed or otherwise furnished to the Securities and Exchange Commission. We are not including the information contained on our website as part of, or incorporating it by reference into, this annual report on Form 10-K.


Our operations and financial results are subject to various risks and uncertainties, including those described below, which could adversely affect our business, financial condition, results of operations, cash flows, and the trading price of our Class A or Class B common stock.

THE ECONOMY WILL IMPACT OUR BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION

The Company’s operations and performance are impacted by worldwide economic conditions, which are themselves impacted by other events, such as natural disasters and political turmoil. For example, recent incidents in Japan have disrupted the global supply chain and political unrest in the Middle East has increased the volatility of oil prices. Such events, as well as continued US military interventions, demonstrate that our customers’ ability to find markets and purchase our products is subject to events outside our control. Ongoing uncertainty about current global economic conditions may negatively affect our business, operating results and financial condition as consumers and businesses may continue to postpone spending in response to tighter credit, high unemployment, natural disasters, political unrest and negative financial news. Uncertainty about current global economic conditions could also increase the volatility of the Company’s stock price.

RISK OF FLUCTUATIONS IN REVENUE AND EXPENSE

Because of significant fluctuations in our revenue, period-to-period comparisons of our revenue or profit may not be meaningful. Our quarterly and annual operating results have fluctuated in the past and may do so in the future. Such fluctuations have resulted from the seasonality of our customers’ manufacturing businesses and budget cycles and other factors. As a result, period-to-period comparisons should not be relied upon as indications of future performance. Moreover, there can be no assurance that our revenue will grow in future periods or that we will be profitable on a quarterly or annual basis.

A significant portion of our revenue in any quarter may be derived from a limited number of large, non-recurring license sales. We may experience large individual license sales, which may cause significant variations in license fees. We also believe that the purchase of our products is discretionary and generally involves a significant commitment of a customer’s capital resources. Therefore, a downturn in any significant customer’s business could have a significant adverse impact on our revenue and profit.

The services business may fluctuate. Services revenue is dependent upon the timing and size of customer orders to provide the services, as well as upon our related license sales. In addition, continuous engagement services, such as Application Management Services offerings, may involve fixed price arrangements, fixed costs and significant staffing which require us to make estimates and assumptions at the time we enter into these contracts. Variances between these estimates and assumptions and actual results could have an adverse affect on our profit margin and/or generate negative cash flow. To the extent that we are not successful in securing orders from customers to provide services, or to the extent we are not successful in achieving the expected margin on such services, our results may be negatively affected.

A significant portion of our revenue is derived from maintenance renewals with our existing installed base of customers. Significant portions of our maintenance revenues are generated from the Company’s installed base of customers. Maintenance and support agreements with these customers are traditionally renewed on an annual basis at the customer’s discretion, and there is normally no requirement that a customer renew or that a customer pay new license or service fees to QAD following the initial purchase. If our existing customers do not renew their maintenance agreements or fail to purchase new user licenses or product enhancements or additional services at historical levels, our revenues and results of operations could be materially impacted.

 
Our maintenance renewal rate is dependent upon a number of factors such as our ability to continue to develop and maintain our products, our ability to continue to recruit and retain qualified personnel to assist our customers, and our ability to promote the value of maintenance for our products to our customers. Maintenance renewals are also dependent upon factors beyond our control such as technology changes and their adoption by our customers, budgeting decisions by our customers, changes in our customers’ strategy or ownership and plans by our customers to replace our products with competing products. If our maintenance renewal rate were to fall, our revenue would be adversely affected.

Fixed expense level is based on expected revenues. Our expense level is relatively fixed and is based, in significant part, on expectations of future revenue. If revenue levels fall below expectations, expenses could be disproportionately high as a percentage of total revenue, which would adversely affect our operating results.

Health care reform in the United States could increase the costs of maintaining our health benefit programs. Legislation addressing health care reform could have a significant ongoing impact on the costs of maintaining our employee health benefit programs and our tax liabilities, which would significantly impact our annual net income and cash flows.

We may have exposure to additional tax liabilities. As a multinational organization, we are subject to income taxes as well as non-income taxes in the United States and in various foreign jurisdictions. Significant judgment is required in determining our worldwide income tax provision and other tax liabilities. In the ordinary course of a global business, there are many intercompany transactions and calculations where the ultimate tax determination is uncertain. Although we believe that our tax estimates are reasonable, the final determination of tax audits or tax disputes may differ from what is reflected in our historical income tax provisions and accruals.

We report our results of operations based on our determinations of the amount of taxes owed in the various tax jurisdictions in which we operate. Periodically, we may receive notices that a tax authority to which we are subject has determined that we owe a greater amount of tax than we have reported to such authority, in which case, we may engage in discussions or possible disputes with these tax authorities. If the ultimate determination of our taxes owed in any of these jurisdictions is for an amount in excess of the tax provision we have recorded or reserved for, our operating results, cash flows, and financial condition could be adversely affected. We are also subject to non-income taxes, such as payroll, sales, use, value-added, net worth, property and goods and services taxes, in the United States and in various foreign jurisdictions.  Audits or disputes relating to non-income taxes may result in additional liabilities that could negatively affect our operating results, cash flows and financial condition.

Our tax rate may increase, which could increase our income tax expense and reduce our net income. Our tax rate could be adversely affected by several factors, many of which are outside of our control, including:

 
Changes in the relative proportions of revenues and income before taxes in various jurisdictions;

 
Changing tax laws, regulations and interpretations thereof;

 
Changes in tax rates;

 
Tax effects of purchase accounting for acquisitions and restructuring charges that may cause fluctuations between reporting periods;

 
Changes to the valuation allowance on net deferred tax assets;

 
Assessments and any related tax interest or penalties; and

 
Discrete items which are not related to income.

 
RISKS ASSOCIATED WITH SALES CYCLE
 
Our products involve a long sales cycle and the timing of sales is difficult to predict. Because the licensing of our primary products generally involves a significant commitment of capital or a long-term commitment by our customers, the sales cycle associated with a customer’s purchase of our products is generally lengthy. This cycle varies from customer to customer and is subject to a number of significant risks over which we have little or no control. The evaluation process that our customers follow generally involves many of their personnel and requires complex demonstrations and presentations to satisfy their needs. Significant effort is required from QAD to support this approach, whether we are ultimately successful or not. If sales forecasted for a particular quarter are not realized in that quarter, then we are unlikely to be able to generate revenue from alternative sources in time to compensate for the shortfall. As a result, a lost or delayed sale could have an adverse effect on our quarterly and/or annual operating results.

In some cases, we provide a portion of a customer solution that also depends on third parties. While we believe we have established a robust global support and services organization, we continue to rely on third parties for a portion of our implementation and systems support services. We also occasionally cooperate with third party software providers of point solutions as part of an overall proposal. In some situations, such as when these third parties are the primary contractor or otherwise an essential party to a larger arrangement, this reliance on third parties may cause sales cycles to be lengthened and/or may result in the loss of sales.

We have historically recognized a substantial portion of our revenue from sales booked and shipped in the last month of a quarter. As a result, the magnitude of quarterly fluctuations in license fees may not become evident until the end of a particular quarter. Our revenue from license fees in any quarter is substantially dependent on orders booked and shipped in that quarter. We are unlikely to be able to generate revenue from alternative sources if we discover a shortfall near the end of a quarter.

We must hire and retain highly skilled sales and marketing personnel to be successful in the sales cycle. We cannot ensure that we will be successful in hiring and retaining appropriate sales and marketing personnel in accordance with our plans. Neither can there be assurance that our recent and planned strategies in sales and marketing will ultimately prove to be successful. In addition, our sales and marketing organization may not be able to compete successfully against the significantly more extensive and better funded sales and marketing operations of many of our current and potential competitors.

DEPENDENCE ON THIRD-PARTY SUPPLIERS

We are dependent on Progress Software Corporation. The majority of QAD Enterprise Applications are written in a programming language that is proprietary to Progress Software Corporation (“Progress”). These QAD Enterprise Applications do not run within programming environments other than Progress and therefore our customers must acquire rights to Progress software in order to use these QAD Enterprise Applications. We have an agreement with Progress under which Progress licenses us to distribute and use Progress software related to our products. This agreement remains in effect unless terminated either by a written three-year advance notice or due to a material breach that is not remedied.

Our success is dependent upon our continuing relationship with Progress. It is also dependent upon Progress continuing to develop, support and enhance its programming language, its toolset and its database, as well as the continued market acceptance of Progress as a standard database program. We have in the past, and may in the future, experience product release delays because of delays in the release of Progress products or product enhancements. Any of these delays could have an adverse effect on our business.

We are dependent on other third-party suppliers. We resell certain software which we license from third parties other than Progress. 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 our proprietary rights or are commercially favorable to us.

Certain QAD Enterprise Applications are developed using embedded programming tools from Microsoft and Sun Microsystems (owned by our competitor Oracle) for the Microsoft.NET framework and Java Programming environments, respectively. We rely on these environments’ continued compatibility with customers’ desktop and server operating systems. In the event that this compatibility is limited, some of our customers may not be able to easily upgrade their QAD software. If the present method of licensing the .NET framework as part of Microsoft’s Desktop Operating systems is changed and a separate price were applied to the .NET framework, our expenses could increase substantially. Similarly, if Oracle decided to charge fees or otherwise change the historical licensing terms for Java technology, our expenses could increase substantially. For both of the .Net and Java elements, we rely on market acceptance and maintenance of these environments and we may be adversely affected if these were withdrawn or superseded in the market.

We also maintain development, product, and supplier services alliances with third-parties. These alliances include software developed to be sold in conjunction with QAD Enterprise Applications, technology developed to be included in or encapsulated within QAD Enterprise Applications, joint development efforts with partners or customers, and third-party software programs that generally are not sold with QAD Enterprise Applications, but interoperate directly with QAD Enterprise Applications. We also have a service provider agreement for the provision of certain infrastructure related to our On Demand offerings. Our strategy may include additional investment in research and development efforts involving third parties, as well as a greater focus on potential acquisitions to aid in expanding the breadth of the product line.

 
Our partner agreements, including development, product acquisition and reseller agreements, contain appropriate confidentiality, indemnity and non-disclosure provisions for the third-party and end-user. Failure to establish or maintain successful relationships with these third parties or failure of these parties to develop and support their software, provide appropriate services and fulfill confidentiality, indemnity and non-disclosure obligations could have an adverse effect on us. 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.

RAPID TECHNOLOGICAL CHANGE

The market for QAD Enterprise Applications is characterized by rapid technological change. Customer requirements for products can change rapidly as a result of innovation or change within the computer hardware and software industries, the introduction of new products and technologies and the emergence of, adoption of, or changes to, industry standards. Our future success will depend upon our ability to continue to enhance our current product line and to develop and introduce new products that keep pace with technological developments, satisfy increasingly sophisticated customer requirements, keep pace with industry and compliance standards and achieve market acceptance. Our failure to successfully develop or acquire and market product enhancements or new products could have an adverse effect on us.

New software releases and enhancements may adversely affect our software sales. The actual or anticipated introduction of new products, technologies and industry standards can render existing products obsolete or unmarketable or result in delays in the purchase of those products. Significant delays in launching new products may also jeopardize our ability to compete. Failure by us to anticipate or respond to developments in technology or customer requirements, significant delays in the introduction of new products or failure by us to maintain overall customer satisfaction could have an adverse effect.

PROPRIETARY RIGHTS AND CUSTOMER CONTRACTS

Our success is dependent upon our proprietary technology and other intellectual property. We rely on a combination of protections provided by applicable copyright, trademark, patent 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 licensing agreements with each of our customers and these agreements provide for the non-exclusive use of QAD Enterprise Applications. Our license contracts contain confidentiality and non-disclosure provisions, a limited warranty covering our applications and indemnification for the customer from infringement actions related to our applications.

We license our source code to our customers, which makes it possible for others to copy or modify our software for impermissible purposes. We generally license our software to end-users in both object code (machine-readable) and source code (human-readable) formats. While this practice facilitates customization, making software available in source code also makes it possible for others to copy or modify our software for impermissible purposes. Our license agreements generally allow the use and customization 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 intellectual property afford only limited protection. Despite our efforts, it may be possible for others to copy portions of our products, reverse engineer them or obtain and use information that we regard as proprietary, all of which could adversely affect our competitive position. Furthermore, there can be no assurance that our competitors will not independently develop technology similar to ours. In addition, the laws of certain countries do not protect our proprietary rights to the same extent as the laws of the United States.

The success of our business is highly dependent on maintenance of intellectual property rights. The unauthorized use of our intellectual property rights may increase the cost of protecting these rights or reduce our revenues. We may initiate, or be subject to, claims or litigation for infringement of proprietary rights or to establish the validity of our proprietary rights, which could result in significant expense to us, cause product shipment delays, require us to enter royalty or licensing agreements and divert the efforts of our technical and management personnel from productive tasks, whether or not such litigation were determined in our favor.

We may be exposed to product liability claims and other liability. While our customer agreements typically contain provisions designed to limit our exposure to product liability claims and other liability, it is possible that such provisions may not be effective under all circumstances.

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. We may be subject to product liability claims or errors or omissions claims that 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.

 
ENTERPRISE APPLICATION SOLUTIONS

The market for enterprise applications is uncertain and we are substantially dependent on our core product suite, QAD Enterprise Applications. A significant element of our strategy is the acceptance of QAD Enterprise Applications, including modules formerly marketed under the MFG/PRO brand. We derive a significant portion of our revenue from software license and maintenance revenue attributable to this product suite and from other complimentary products that are generally licensed only in conjunction with this suite. The failure of QAD Enterprise Applications and related products to continue to have market acceptance would adversely affect our business. In addition, we have invested, and expect to continue to invest, substantial resources developing and enhancing the various product suites that make up QAD Enterprise Applications. If QAD Enterprise Applications fails to maintain acceptance in the marketplace, it may not yield the return on investment we expect.

We may not retain or attract customers if we do not develop new products and enhance our current products in response to technological changes and competing products. The ERP market is faced with rapid technological change, evolving standards in computer hardware, software development and communications infrastructure, as well as changing customer needs. Building new products requires significant development investment. A substantial portion of our research and development resources are devoted to product upgrades that address new technology and regulatory and maintenance requirements, thereby putting constraints on our resources available for new product development. In addition, part of our strategy is to acquire certain products to extend and enhance our product offering. The continued success of QAD Enterprise Applications will depend on our ability to successfully develop, enhance and globalize our offerings and distribute, service and support them internationally. We also face uncertainty when we develop or acquire new products because there is no assurance that a sufficient market will develop for those products.

QAD Enterprise Applications are often deployed in complex systems and may contain defects or security flaws. Because our products are often deployed in complex systems, they can only be fully tested for reliability when deployed in such systems and may require long periods of time for such testing. Our customers may discover defects in our products, experience corruption of their data or encounter performance or scaling problems only after our software programs have been deployed. In addition, our products are combined with products from other vendors which may make it difficult to identify the source of problems, should they occur. Software and data security are becoming increasingly important because of regulatory restrictions on data privacy and the significant legal exposure and business disruption stemming from computer viruses and other unauthorized entry or use of computer systems. Product defects and security flaws could expose us to product liability and warranty claims and harm our reputation, which could impact our future sales of products and services.

ON DEMAND OFFERINGS

Our revenue and profitability could suffer if we do not properly manage the risks associated with our On Demand offerings. The risks that accompany our On Demand offerings differ from those of our other offerings and include the following:

 
The pricing and other terms of some of our On Demand agreements require us to make estimates and assumptions at the time we enter into these contracts that could differ from actual results. Early termination, increased costs or unanticipated delays could have an adverse affect on our profit margin and/or generate negative cash flow.

 
We rely on third-party hosting and other service providers. These services may not continue to be available at reasonable prices or on commercially reasonable terms, or at all. Any loss or interruption of these services could significantly increase our expenses and/or result in errors or a failure of our service which could harm our business.

 
We manage critical customer applications, data and other confidential information through our On Demand offerings. Accordingly, we face increased exposure to significant damage claims and risk to our reputation and future business prospects in the event of system failures, inadequate disaster recovery or loss or misappropriation of customer confidential information. We may also face regulatory exposure in certain areas such as data privacy, data security and export compliance.

 
The laws and regulations applicable to hosted service providers are unsettled, particularly in the areas of privacy and security and use of global resources. Changes in these laws could affect our ability to provide services from or to some locations and could increase both the costs and risks associated with providing the services.

 
The market for enterprise cloud computing application services is not as mature as the market for traditional enterprise software, and it is uncertain whether these services will achieve and sustain high levels of demand and market acceptance. Our success will depend on the willingness of customers to increase their use of enterprise cloud computing application services in general, and for ERP applications in particular. Many customers have invested substantial resources to integrate traditional enterprise software into their businesses and therefore may be unwilling to migrate to an enterprise cloud computing application service. Furthermore, some enterprises may be unwilling to use enterprise cloud computing application services because they have concerns regarding security risks, international transfers of data, government or other third-party access to data, and/or use of outsourced services providers.


 
·
We have significantly redirected the focus of our sales force, management team and other personnel toward growing our On Demand business. This redirection of resources could potentially result in the loss of sales opportunities in our traditional license, maintenance and services businesses. If our On Demand business does not grow in accordance with our expectations and we are not able to cover the shortfall with other sales opportunities, then our business could be harmed.

If any of these events were to occur, our business could be harmed. For example, customers may lose confidence in our On Demand offerings and be induced not to purchase our On Demand services, and/or our profit margin may be adversely affected, and/or we may incur liability.

MARKET CONCENTRATION

We are dependent upon achieving success in certain concentrated markets. We have made a strategic decision to concentrate our product development, as well as our sales and marketing efforts, in certain vertical manufacturing industry segments: automotive, consumer products, high technology, food and beverage, industrial products and life sciences. An important element of our strategy is the achievement of technological and market leadership recognition for our software products in these segments. The failure of our products to achieve or maintain substantial market acceptance in one or more of these segments could have an adverse effect on us. If any of these targeted industry segments experience a material slowdown or reduced growth, that could adversely affect the demand for our products.

DEPENDENCE UPON THIRD-PARTY RELATIONSHIPS TO PROVIDE SALES, SERVICES AND MARKETING FUNCTIONS

We are dependent upon the development and maintenance of sales, services and marketing channels. We sell and support our products through direct and indirect sales, services and support organizations throughout the world. We also maintain relationships with a number of consulting and systems integration organizations that we believe are important to our worldwide sales, marketing, service and support activities and to the implementation of our products. We believe this strategy allows for additional flexibility in ensuring our customers’ needs for services are met in a cost effective, timely and high quality manner. Our services providers generally do not receive fees for the sale of our software products unless they participate actively in a sale as a sales agent or a distributor. We are aware that these third-party relationships do not work exclusively with our products and in many instances these firms have similar, and often more established, relationships with our principal competitors. If these third-parties exclusively pursue products or technology other than QAD software products or technology, or if these third-parties reduce their support of QAD software products and technology or increase support for competitive products or technology, we could be adversely affected.

ACQUISITIONS AND INTEGRATION OF ACQUIRED BUSINESS AND INTELLECTUAL PROPERTY

We may make acquisitions or investments in new businesses, products or technologies that involve additional risks. As part of our business strategy, we have made, and expect to continue to make, acquisitions of businesses or investments in companies that offer complementary products, services and technologies. Such acquisitions or investments involve a number of risks, including the risks in assimilating the operations and personnel of acquired companies, realizing the value of the acquired assets relative to the price paid, distraction of management from our ongoing businesses and potential disruptions associated with the sale of the acquired companies’ products. These factors could have a material adverse effect on our business, financial condition and operating results. Consideration paid for any future acquisitions could include our stock. As a result, future acquisitions could cause dilution to existing shareholders and to earnings per share, though the likelihood of voting dilution is limited by the ability of the Company to use low-vote Class A common stock. Furthermore, we may incur significant debt to pay for future acquisitions or investments.

CREDIT RISK

The global financial crisis resulted in a tightening in the credit markets. The recent global credit and banking crisis caused lower levels of liquidity, increases in the rates of default and bankruptcy and extreme volatility in credit, equity and fixed income markets. Our current or potential customers may be unable to fund software purchases, which could cause them to delay, decrease or cancel purchases of our products and services or not pay us or delay paying us for previously purchased products and services.


We might require additional capital to support business growth, and this capital might not be available. We intend to continue to make investments to support our business growth and may require additional funds to respond to business challenges or opportunities, including the need to develop new offerings or enhance our existing offerings, enhance our operating infrastructure or acquire complementary businesses and technologies. Accordingly, we may need to engage in equity or debt financings to secure additional funds. If we raise additional funds through further issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock. Any debt financing secured by us in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. In addition, we may not be able to obtain additional financing on terms favorable to us, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us, when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly limited.

RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS

Our operations are international in scope, exposing us to additional risk. We derive over half of our total revenue from sales outside the United States. A significant aspect of our strategy is to focus on developing business in emerging markets. Our operating results could be negatively impacted by a variety of factors affecting our foreign operations, many of which are beyond our control. These factors include currency fluctuations, economic, political or regulatory conditions in a specific country or region, trade protection measures and other regulatory requirements. Additional risks inherent in international business activities generally include, among others:

 
Longer accounts receivable collection cycles;

 
Costs and difficulties of managing international operations and alliances;

 
Greater difficulty enforcing intellectual property rights;

 
Import or export requirements;

 
Natural disasters;

 
Changes in political or economic conditions; and

 
Changes in regulatory requirements or tax law.

We may experience foreign currency gains and losses. We conduct a portion of our business in currencies other than the United States dollar. Our revenues and operating results may be negatively affected by fluctuations in foreign currency exchange rates. Changes in the value of major foreign currencies, including the Euro, Australian dollar, British pound, Japanese yen, Mexican peso, Canadian dollar, Brazilian real and the South Africa rand relative to the United States dollar can significantly affect our revenues and operating results.

RISKS DUE TO BUSINESS INTERRUPTIONS

If a business interruption occurs, our business could be seriously harmed. A substantial portion of our facilities, including our corporate headquarters and other critical business operations, are located near major earthquake faults. We also employ third parties to supply certain infrastructure related to our On Demand offerings. Although the facilities, in which we host our computer systems, and those of our infrastructure suppliers, are designed to be fault tolerant and disaster recovery procedures are in place, the systems are susceptible to damage from fire, floods, earthquakes, power loss, telecommunications failures, the effect of software viruses, terrorist acts, acts of war and similar events. In addition, an occurrence of any of these events may cause damage or disruption to us and our employees, facilities, suppliers, distributors and customers, which could have a material adverse effect on our operations and financial results.

MARKET CONDITIONS

Economic, political and market conditions can adversely affect our revenue growth and profitability. Our business is influenced by a range of factors that are beyond our control and for which we have no comparative advantage in forecasting. These include: (i) the overall demand for enterprise application software and services; (ii) conditions in the high technology and manufacturing industry sectors; (iii) general economic and business conditions; and (iv) general political developments and conflicts. A generally weak global economy could delay and/or decrease customer purchases. In addition, ongoing conflicts and the potential for other hostilities in various parts of the world continue to contribute to a climate of economic and political uncertainty that could adversely affect our revenue growth and results of operations.


The enterprise application market has experienced significant consolidation and increased competition. This consolidation has included numerous mergers and acquisitions and, as a result, some prospective buyers are reluctant to purchase applications that, due to a potential acquisition, could have a shortened lifespan. QAD’s controlled company status makes it highly unlikely that a hostile takeover of the company would occur. However, increased competition and consolidation in these markets is likely to result in price reductions, reduced operating margins and changes in market share, any of which could adversely affect us. Several of our potential competitors enjoy substantial competitive advantages, such as greater name recognition and greater technological and financial resources.

THE MARKET FOR OUR STOCK IS VOLATILE

Our stock price could become more volatile and investments could lose value. The market price of our common stock and the number of shares traded each day has experienced significant fluctuations and may continue to fluctuate significantly. The market price for our common stock may be affected by a number of factors, including, but not limited to:

 
Shortfalls in our expected net revenue, earnings or key performance metrics;

 
Changes in recommendations or estimates by securities analysts;

 
The announcement of new products by us or our competitors;

 
Quarterly variations in our or our competitors’ results of operations;

 
A change in our dividend or stock repurchase activities;

 
Developments in our industry or changes in the market for technology stocks;

 
A change in our dividend or stock repurchase activities;

 
Changes in rules or regulations applicable to our business; and

 
Other factors, including economic instability and changes in political or market conditions.

A significant drop in our stock price could expose us to costly and time consuming litigation, which could result in substantial costs and divert management’s attention and resources, resulting in an adverse affect on our business.

Our dual-class stock structure could adversely impact the market for our stock. The liquidity of the Company’s common stock may be adversely impacted by our dual-class structure because the total number of shares outstanding immediately after the Recapitalization was reduced by approximately half. In addition, there are fewer Class B shares than Class A shares and Class B shares may be less desirable to the public due to the 20% higher dividend on Class A shares. Additionally, the holding of lower voting Class A common stock may not be permitted by the investment policies of certain institutional investors or may be less attractive to managers of certain institutional investors.

FINANCIAL REPORTING

Failure to maintain effective internal controls could adversely affect our ability to meet our reporting requirements. Effective internal controls are necessary for us to provide reasonable assurance with respect to our financial reports and to effectively prevent fraud. Pursuant to the Sarbanes-Oxley Act of 2002, we are required to furnish a report by management on internal control over financial reporting, including management’s assessment of the effectiveness of such control. Internal controls over financial reporting may not prevent or detect misstatements because of inherent limitations, including the possibility of human error, the circumvention or overriding of controls or fraud. Therefore, even effective internal controls can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements. If we cannot provide reasonable assurance with respect to our financial reports and effectively prevent fraud, our operating results could be harmed. In addition, projections of the effectiveness of internal control over financial reporting to future periods are subject to the risks that the control may become inadequate because of changes in conditions or the degree of compliance with the policies or procedures may deteriorate. If we fail to maintain the effectiveness of our internal controls, including any failure to implement, or difficulty in the implementation of, required new or improved controls, our business and operating results could be harmed, we could fail to meet our reporting obligations and there could be a material adverse effect on our stock price.

 
We are required to delay revenue recognition into future periods for portions of our license fee activity. Our entire worldwide business is subject to United States generally accepted accounting principles, commonly referred to as “U.S. GAAP.” Under those rules, we are required to defer revenue recognition for license fees in certain situations. Factors that are considered in revenue recognition include, for example, whether we have vendor specific objective evidence of fair value (VSOE) for all undelivered elements in the arrangement, products under development to be delivered at a future date, other services included in the arrangement and payment terms with contingencies.

We expect that we will continue to defer portions of our license fee activity because of these factors. The amount of license fees deferred may be significant and will vary each quarter depending on the mix of products sold in each market and geography, as well as the actual contract terms.

Impairment of intangible assets may result in charges that negatively impact our results. Under generally accepted accounting principles (“U.S. GAAP”), we review our goodwill annually and intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Factors that may be considered a change in circumstances, indicating that the carrying value of our goodwill or amortizable intangible assets may not be recoverable, include a decline in stock price and market capitalization, reduced future cash flow estimates, and slower growth rates in our industry. We may be required to record a significant charge in our financial statements during the period in which any impairment of our goodwill or other intangible assets is determined, negatively impacting our results of operations.

OWNERSHIP OF OUR COMMON STOCK AND DEPENDENCE UPON KEY PERSONNEL

We are controlled by our principal stockholder. As a result of a Recapitalization effective December 15, 2010, the Company established two classes of common stock.  The holder of a share of Class B Common Stock is entitled to one vote on each matter presented to stockholders, whereas the holder of a share of Class A Common Stock has one-twentieth (1/20th) of one vote on each such matter. As of March 31, 2011, Karl Lopker and Pamela Lopker jointly and beneficially owned approximately 60% of the voting power of our outstanding Class A and Class B common stock. They could increase their collective voting power by purchasing additional shares of Class B Common Stock. Currently they have sufficient voting control to determine the outcome of a stockholder vote concerning:

 
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The election and removal of all members of our board of directors, who determine our management and policies;
 
·
The merger, consolidation or sale of the Company or all of its assets; and
 
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All other matters requiring stockholder approval, regardless of how our other stockholders vote their shares.

This concentrated control limits the ability of our other stockholders to influence corporate matters.  Karl Lopker’s and Pamela Lopker’s concentrated control could discourage others from initiating potential merger, takeover or other change of control transactions and transactions could be pursued that our other stockholders do not view as beneficial. As a result, the market price of our Class A and Class B common stock could be adversely affected.

Provisions in the Company's charter documents or Delaware law could discourage a takeover that stockholders may consider favorable. The Company's Certificate of Incorporation contains certain other provisions that may have an "anti-takeover" effect. The Certificate of Incorporation contains authority for the Board to issue up to 5,000,000 shares of preferred stock without stockholder approval. Although the Company has no present intention to issue any such shares, the Company could issue such shares in a manner that deters or seeks to prevent an unsolicited bid for the Company. The Certificate of Incorporation also does not provide for cumulative voting and, accordingly, a significant minority stockholder could not necessarily elect any designee to the Board of Directors. In addition, Section 203 of the Delaware Corporation Law may discourage, delay, or prevent a change in control of the Company by imposing certain restrictions on various business combinations.  As a result of these provisions in the Company's Certificate of Incorporation and Delaware law, stockholders of the Company may be deprived of an opportunity to sell their shares at a premium over prevailing market prices and it would be more difficult to replace the directors and management of the Company.

We are a “controlled company”. Karl Lopker and Pamela Lopker, as husband and wife, own a majority of our common stock and we are a “controlled company” within the meaning of NASDAQ rules. Therefore, we are not required to comply with certain corporate governance rules of NASDAQ that would otherwise apply to us as a company listed on NASDAQ.


Specifically, we are not required to have a majority of independent directors on our board of directors and we are not required to have nominating and compensation committees composed of independent directors. Should the interests of Karl Lopker and Pamela Lopker differ from those of other shareholders, the other shareholders may not be afforded the protections of having a majority of directors on the board who are independent from our principal shareholders or our management.

We are dependent upon key personnel. Our future operating results depend in significant part upon the continued service of a relatively small number of key technical and senior management personnel, including Chairman of the Board and President, Pamela Lopker, and Chief Executive Officer, Karl Lopker, neither of whom is bound by an employment agreement.

Our future success also depends on our continuing ability to attract and retain other highly qualified technical and managerial personnel. The loss of any member of our key technical and senior management personnel or the inability to attract and retain additional qualified personnel could have an adverse effect on us. We do not currently have key-person insurance covering any of our employees.

Our periodic workforce restructurings can be disruptive. We have in the past restructured or made other adjustments to our workforce in response to changes in the economy, management and products as well as our financial results, acquisitions and other considerations. Past restructurings have caused a temporary disruption, which can reduce employee productivity. Such disruption could occur in connection with future restructurings and our results could be negatively affected.

IMPACT OF REGULATION

Our business is subject to changing regulations regarding corporate governance and public disclosure that have increased both our costs and the risk of noncompliance. We are subject to rules and regulations by various governing bodies, including the Securities and Exchange Commission, NASDAQ and the Public Company Accounting Oversight Board, which are charged with the protection of investors and the oversight of companies whose securities are publicly traded.

These laws, regulations and standards are subject to varying interpretations and their application in practice may evolve over time as new guidance becomes available. This evolution may result in continuing uncertainty regarding compliance matters and additional costs necessitated by ongoing revisions to our disclosure and governance practices. If we fail to address and comply with these regulations and any subsequent changes, our business may be harmed.



None.


QAD’s corporate headquarters are located in Santa Barbara, California. The corporate headquarters are owned by QAD and consist of approximately 120,000 square feet situated on 28 acres of land.

In addition to the corporate headquarters, QAD owns a facility in Dublin, Ireland and leases over 30 offices throughout the world with lease commitment expirations occurring on various dates through fiscal year 2020. QAD’s leased properties include offices in the United States, Belgium, France, Germany, Ireland, Italy, Poland, South Africa, Spain, The Netherlands, United Kingdom, Australia, China, India, Japan, Singapore, Thailand, Brazil and Mexico. QAD will seek to review lease commitments in the future as may be required. QAD anticipates that its current domestic and international facilities are substantially sufficient to meet its needs for at least the next twelve months.


We are not party to any material legal proceedings. We are from time to time party, either as plaintiff or defendant, subject 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 financial position or results of operations.

ITEM 4.      RESERVED


PART II


QAD common stock has been traded on the NASDAQ Global Market (“NASDAQ”) since our initial public offering in August 1997 (under the symbol QADI through December 14, 2010).

On December 14, 2010, QAD shareholders approved a Recapitalization plan (the “Recapitalization”) pursuant to which the Company (i) established two classes of common stock, consisting of a new class of common stock with one-twentieth (1/20th) of a vote per share, designated as Class A common stock $0.001 par value per share (the "Class A Common Stock") and a new class of common stock with one vote per share, designated as Class B common stock $0.001 par value per share (the "Class B Common Stock"); (ii) reclassified each issued and outstanding whole share of the Company's existing $0.001 par value per share common stock (the "Existing Stock") as 0.1 shares of Class B Common Stock; and (iii) issued a dividend of four shares of Class A Common Stock for each share of Class B Common Stock outstanding after giving effect to the foregoing reclassification.  The reclassification of Existing Stock into Class A Common Stock and Class B Common Stock, together, reflects the effect of a two-to-one reverse stock split.

Our Class A Common Stock and Class B Common Stock are traded on the Nasdaq Stock Market National Market System under the symbol “QADA” and “QADB”, respectively. Prior to December 15, 2010, our Common Stock was traded under the symbol “QADI.” The following table reflects the range of high and low sale prices of our Common Stock as reported by Nasdaq. QADI share prices have been restated to reflect the effect of the two-to-one reverse stock split for all periods presented:

   
QADA
   
QADB
 
Fiscal 2011:
 
Low Price
   
High Price
   
Low Price
   
High Price
 
Fourth Quarter
  $ 8.44     $ 12.00     $ 8.44     $ 11.16  
                   
     
QADI
 
Fiscal year 2011:
   
Low Price
   
High Price
 
Third quarter
    $ 7.92     $ 9.14  
Second quarter
      8.12       11.42  
First quarter
      9.90       11.60  
                   
Fiscal year 2010:
                 
Fourth quarter
    $ 8.70     $ 12.62  
Third quarter
      7.32       10.26  
Second quarter
      5.64       7.74  
First quarter
      4.30       6.40  

Holders

As of April 8, 2011, there were approximately 300 shareholders of record of our Class A common stock and approximately 250 shareholders of record of our Class B common stock. Because many of our shares of common stock are held by brokers or other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by the record holders.

Dividends

In fiscal 2011, we declared quarterly dividends of $0.05 per share of QADI common stock (as restated for the impact of the Recapitalization) for the first through third quarter, and $0.06 and $0.05 per share of Class A and Class B stock, respectively, for the fourth quarter. Our dividend program gives investors the choice of receiving a stock dividend or electing a cash dividend payment. Continuing quarterly cash dividends are subject to profitability measures, liquidity requirements of QAD and Board discretion.

Recent Sales of Unregistered Securities

None.

 
Issuer Purchases of Equity Securities
 
There was no stock repurchase activity during the three or twelve months ended January 31, 2011.

 
STOCKHOLDER RETURN PERFORMANCE GRAPH

The line graph below compares the annual percentage change in the cumulative total stockholder return on QAD’s common stock with the cumulative total return of the NASDAQ Composite Total Return Index and the NASDAQ Computer Index, on an annual basis, for the period beginning January 31, 2006 and ending January 31, 2011.

The graph assumes that $100 was invested in QAD common stock on January 31, 2006 and that all dividends were reinvested. Historic stock price performance has been restated to reflect the effect of the Recapitalization for all periods presented. Historic stock price performance should not be considered indicative of future stock price performance.

     The following Share Performance Graph shall not be deemed to be “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filings under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that the Company specifically incorporates it by reference into such filing.

COMPARISON OF CUMULATIVE TOTAL RETURN
AMONG QAD INC., THE NASDAQ COMPOSITE TOTAL RETURN INDEX,
AND THE NASDAQ COMPUTER INDEX
 
 
Measurement Periods
(Annually from Fiscal
Year 2007 through
Fiscal Year 2011)
 
 
 
QADA
   
 
 
QADB
   
 
NASDAQ Composite
Total Return Index
   
 
 
NASDAQ Computer Index
 
01/31/06(a)
    100.00       100.00       100.00       100.00  
01/31/07(a)
    102.06       102.06       106.86       104.19  
01/31/08(a)
    113.00       113.00       103.64       105.28  
01/31/09(a)
    33.16       33.16       64.03       63.45  
01/31/10(a)
    72.87       72.87       93.13       103.63  
01/31/11
    58.33       59.93       113.50       131.70  

 
(a)
Stock price performance has been restated to reflect the effect of the Recapitalization.



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

(1)
Historical results of operations are not necessarily indicative of future results. Refer to Item 1A entitled “Risk Factors” for discussion of factors that may impact future results.

(2)
Fiscal year 2009 includes a goodwill impairment charge of $14.4 million.
 


FORWARD LOOKING STATEMENTS

In addition to historical information, this Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995. Any statements contained herein that are not statements of historical fact should be construed as forward looking statements, including statements that are preceded or accompanied by such words as “may,” “believe,” “could,” “anticipate,” “would,” “might,” “plan,” “expect,” “intend” and words of similar meaning or the negative of these terms or other comparable terminology. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in Item 1A entitled “Risk Factors” which are incorporated herein by reference, and as may be updated in filings we make from time to time with the Securities and Exchange Commission. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s opinions, expectations and projections only as of the date of this Annual Report on Form 10-K and are subject to risks, uncertainties and assumptions about our business. We undertake no obligation to revise or update or publicly release the results of any revision or update to these forward-looking statements except as required by applicable securities laws. Readers should carefully review the risk factors and other information described in this Annual Report on Form 10-K and the 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 2012.

INTRODUCTION

The following discussion should be read in conjunction with our Consolidated Financial Statements and Notes to Consolidated Financial Statements included in Item 15 of this Annual Report on Form 10-K.

OVERVIEW

QAD Inc. is a global provider of enterprise software applications, and related services and support. QAD provides enterprise software applications to global manufacturing companies primarily in the automotive, consumer products, food and beverage, high technology, industrial products and life sciences industries. QAD software is used by over 2,500 global manufacturing companies and we employ approximately 1,350 people worldwide. QAD was founded in 1979, incorporated in California in 1986 and reincorporated in Delaware in 1997.

QAD’s enterprise resource planning (“ERP”) suite is called QAD Enterprise Applications and was formerly marketed as MFG/PRO. QAD Enterprise Applications supports our global manufacturing customers’ core business needs and enable their most common business processes.

QAD typically sells licenses to its software under a perpetual licensing model.  Customers who purchase perpetual licenses typically deploy the application using an on premise model on their own servers.  Customers under the perpetual licensing model may separately purchase contracts for maintenance and additional services.  QAD also offers an on demand deployment option in which QAD hosts the application and provides support and management of the environment, and where the customers pay a subscription fee that grants them access to the environment.
 
Total revenue was $220.0 million in fiscal 2011, up from $215.2 million in fiscal 2010. We experienced an increase of 14% in license revenue while services revenue and maintenance and other revenue remained relatively flat. Cost of revenue as a percentage of total revenue was consistent year over year at 43% for both fiscal 2011 and fiscal 2010.

Cash flows from operations were $25.9 million for fiscal 2011, compared to $17.7 million in fiscal 2010. The increase in cash flows from operations was primarily due to lower payments for severance and higher accruals for bonuses and commissions, payroll taxes and vacation.

Toward the end of fiscal 2011, we began to see improvement in the willingness of companies to spend on enterprise application software in the markets we target as reflected in higher fourth quarter software license revenues when compared to the prior year. While there are increasing signs of economic recovery throughout the world, we continue to monitor the economic situation and business environment.  We have focused on maintaining financial strength by preserving a strong balance sheet including increasing our cash balance and managing our costs. Our strategy remains focused on the development and delivery of best-in-class software applications for the manufacturing industry in our six key industry segments.


On December 14, 2010, QAD shareholders approved a Recapitalization plan (the “Recapitalization”) pursuant to which the Company (i) established two classes of common stock, consisting of a new class of common stock with one-twentieth (1/20th) of a vote per share, designated as Class A common stock $0.001 par value per share (the "Class A Common Stock") and a new class of common stock with one vote per share, designated as Class B common stock $0.001 par value per share (the "Class B Common Stock"); (ii) reclassified each issued and outstanding whole share of the Company's existing $0.001 par value per share common stock (the "Existing Stock") as 0.1 shares of Class B Common Stock; and (iii) issued a dividend of four shares of Class A Common Stock for each share of Class B Common Stock outstanding after giving effect to the foregoing reclassification.  The reclassification of Existing Stock into Class A Common Stock and Class B Common Stock, together, reflects the effect of a two-to-one reverse stock split.
 
CRITICAL ACCOUNTING POLICIES

We consider certain accounting policies related to revenue recognition, accounts receivable allowances for doubtful accounts, long-lived assets, goodwill, capitalized software development costs, valuation of deferred tax assets, tax contingency reserves and stock-based compensation to be critical policies due to the significance of these items to our operating results and the estimation processes and management judgment involved in each. Historically, estimates described in our critical accounting policies that have required significant judgment and estimation on the part of management have been reasonably accurate.

Revenue Recognition. We derive our revenues from the sale or the license of our software products and from support services, subscriptions, consulting, development, training, and other professional services. The majority of our software is sold or licensed in multiple-element arrangements that include support services and often consulting services or other elements. As a result, we exercise judgment and use estimates in connection with the amount and timing of revenue recognition. For software license arrangements that do not require significant modification or customization of the underlying software, we recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectibility is probable. A majority of our license revenue is recognized in this manner. Revenue is presented net of sales, use and value-added taxes collected from our customers.

Our typical payment terms vary by region. Occasionally, payment terms of up to one year may be granted for software license fees to customers with an established history of collections without concessions. Should we grant payment terms greater than one year or terms that are not in accordance with our established history for similar arrangements, we would recognize revenue as payments become due and payable assuming all other criteria for software revenue recognition requirements have been met.

Provided all other revenue recognition criteria have been met, we recognize license revenue on delivery using the residual method when vendor-specific objective evidence of fair value (“VSOE”) exists for all of the undelivered elements (for example, support services, consulting, or other services) in the arrangement. We allocate revenue to each undelivered element based on VSOE, which is the price charged when that element is sold separately or, for elements not yet sold separately, the price established by our management if it is probable that the price will not change before the element is sold separately. We allocate revenue to undelivered support services based on rates charged to renew the support services annually after an initial period. We allocate revenue to undelivered consulting services based on time and materials rates of stand-alone services engagements by role and by country. We review our VSOE at least annually. If we were to be unable to establish or maintain VSOE for one or more undelivered elements within a multiple-element arrangement, it could adversely impact our revenues, results of operations and financial position because we may have to defer all or a portion of the revenue or recognize revenue ratably from multiple-element arrangements.

Multiple element arrangements for which VSOE does not exist for all undelivered elements typically occur when we introduce a new product or product bundles for which we have not established VSOE for support services or consulting or other services under our VSOE policy. In these instances, revenue is deferred and recognized ratably over the longer of the support services (maintenance period) or consulting services engagement, assuming there are no specified future deliverables. In the instances in which it has been determined that revenue on these bundled arrangements will be recognized ratably due to lack of VSOE, at the time of recognition, we allocate revenue from these bundled arrangement fees to all of the non-license revenue categories based on VSOE of similar support services or consulting services. The remaining arrangement fees, if any, are then allocated to software license fee revenue. The associated costs primarily consist of payroll and related costs to perform both the consulting services and provide support services and royalty expense related to the license and maintenance revenue. These costs are expensed as incurred and included in cost of maintenance, services and other and cost of license based on the allocated revenue categories.


Revenue from support services and product updates, referred to as maintenance revenue, is recognized ratably over the term of the maintenance period, which in most instances is one year. Software license updates provide customers with rights to unspecified software product upgrades, maintenance releases and patches released during the term of the support period on a when-and-if available basis. Product support includes Internet access to technical content, as well as Internet and telephone access to technical support personnel. A majority of our customers purchase both product support and license updates when they acquire new software licenses. In addition, a majority of our customers renew their product support services contracts annually.

Revenues from consulting services are typically comprised of implementation, development, training or other consulting services. Consulting services are generally sold on a time-and-materials basis and can include services ranging from software installation to data conversion and building non-complex interfaces to allow the software to operate in integrated environments. Consulting engagements can range anywhere from one day to several months and are based strictly on the customer’s requirements and complexities and are independent of the functionality of our software. Our software, as delivered, can generally be used by the customer for the customer’s purpose upon installation. Further, implementation and integration services provided are generally not essential to the functionality of the software, as delivered, and do not result in any material changes to the underlying software code. On occasion, we enter into fixed fee arrangements in which customer payments are tied to achievement of specific milestones. In fixed fee arrangements, revenue is recognized as services are performed as measured by hours incurred to date, as compared to total estimated hours to be incurred to complete the work. In milestone achievement arrangements, we recognize revenue as the respective milestones are achieved.

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

Occasionally we resell third party systems as part of an end-to-end solution requested by our customers. Hardware revenue is recognized on a gross basis when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and collection is considered probable.  We consider delivery to occur when the product is shipped and title and risk of loss have passed to the customer.

Although infrequent, when an arrangement does not qualify for separate accounting of the software license and consulting transactions, the software license revenue is recognized together with the consulting services. Arrangements that do not qualify for separate accounting of the software license fee and consulting services typically occur when we are requested to customize software or where we view the installation of our software as high risk in the customer’s environment. This requires us to make estimates about the total cost to complete the project and the stage of completion. The assumptions, estimates, and uncertainties inherent in determining the stage of completion affect the timing and amounts of revenues and expenses reported. Changes in estimates of progress toward completion and of contract revenues and contract costs are accounted for using the cumulative catch up approach. In these arrangements, we do not have a sufficient basis to estimate the costs of providing support services. As a result, revenue is typically recognized on a percent completion basis up to the amount of costs incurred (zero margin). Once the consulting services are complete and support services are the only undelivered item, the remaining revenue is recognized evenly over the remaining support period. If we do not have a sufficient basis to measure the progress of completion or to estimate the total contract revenues and costs, revenue is recognized when the project is complete and, if applicable, final acceptance is received from the customer. We allocate these bundled arrangement fees to support services and consulting services revenues based on VSOE. The remaining arrangement fees are then allocated to software license fee revenues. The associated costs primarily consist of payroll and related costs to perform the consulting and support services and royalty expense and are included in cost of license, maintenance, services and other based on the allocation of the related revenues.

We execute arrangements through indirect sales channels via sales agents and distributors in which the indirect sales channels are authorized to market our software products to end users. In arrangements with sales agents, revenue is recognized on a sell-through basis once an order is received from the end user, collectability from the end user is probable, a signed license agreement from the end user has been received by us, delivery has been made to the end user and all other revenue recognition criteria have been satisfied. Sales agents are compensated on a commission basis. Distributor arrangements are those in which the resellers are authorized to market and distribute our software products to end users in specified territories and the distributor bears the risk of collection from the end user customer. We recognize revenue from transactions with distributors when the distributor submits a written purchase commitment, collectability from the distributor is probable, a signed license agreement is received from the distributor and delivery has occurred to the distributor, provided that all other revenue recognition criteria have been satisfied. Revenue for distributor transactions is recorded on a net basis (the amount actually received by us from the distributor). We do not offer rights of return, product rotation or price protection to any of our distributors.


Allowance for Bad Debt. Trade accounts receivable are recorded at the invoiced amount and do not bear interest. We review the collectability of our accounts receivable each period by analyzing balances based on age and record specific allowances for any balances that we determine may not be fully collectible due to inability of the customers to pay. We also provide for a general reserve based on historical data including analysis of write-offs and other known factors. Provisions to the allowance for bad debt are included as bad debt expense in general and administrative expense. Significant judgment is required in adjusting our receivables to amounts we believe are realizable, especially when a customer is experiencing financial difficulty or is in bankruptcy. Although we use the best information available in making our estimates, we may incur additional bad debt expense in future periods which could have a material effect on earnings in any given quarter should additional allowances for doubtful accounts be necessary.  The determination to write-off specific accounts receivable balances is made based on likelihood of collection and past due status.  Past due status is based on invoice date and terms specific to each customer.

 Allowances forSales Returns. We do not generally provide a contractual right of return; however, in the course of business we have allowed sales returns and allowances.  We record a provision against revenue for estimated sales returns and allowances in the same period the related revenues are recorded or when current information indicates additional amounts are required.  These estimates are based on historical experience, specifically identified customers and other known factors. Although we use the best information available in making our estimates, we may incur additional provisions against revenue in future periods which could have a material effect on earnings in any given quarter should additional allowances for sales returns be necessary.
 
The accounts receivable allowance for doubtful accounts is comprised of both the allowance for bad debts and the allowance for sales returns.

Long-Lived Assets. Our long-lived assets generally consist of property and equipment and intangible assets, other than goodwill. Other intangible assets arise from business combinations and generally consist of customer relationships, restrictive covenants related to employment agreements, trade names and intellectual property that are amortized, on a straight-line basis, generally over periods of up to five years. Finite-lived intangible assets are required to be amortized over their useful lives and are subject to impairment evaluation. We assess the realizability of our long-lived assets whenever events or changes in circumstances indicate the carrying values of such assets may not be recoverable. We consider the following factors important in determining when to perform an impairment review: significant under-performance of a product relative to budget; shifts in business strategies which affect the continued uses of the assets; significant negative industry or economic trends; and the results of past impairment reviews.

In assessing the recoverability of these long-lived assets, we first compare undiscounted cash flows expected to be generated by that asset or asset group to its carrying value. If the carrying value of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value of the assets or asset groups is determined through various valuation techniques including discounted cash flow models, quoted market values and independent third party appraisals, as considered necessary. In addition to our recoverability assessments, we routinely review the remaining estimated useful lives of our long-lived assets. Any reduction in the useful life assumption will result in increased depreciation and amortization expense in the quarter when such determinations are made, as well as in subsequent quarters.

We will continue to evaluate the values of our long-lived assets in accordance with applicable accounting rules. As changes in business conditions and our assumptions occur, we may be required to record impairment charges.

Goodwill. We test goodwill for impairment annually in our fourth fiscal quarter or sooner should events or changes in circumstances indicate potential impairment.

We review the carrying value of goodwill using the methodology prescribed in FASB Accounting Standards Codification (ASC) 350 “Intangibles—Goodwill and Other”. ASC 350 requires that we not amortize goodwill, but instead subject it to impairment tests on at least an annual basis and whenever circumstances suggest that it may be impaired. These impairment tests are also dependent on management’s forecasts, which are subject to change. A change in our forecasts may result in impairment charges. We perform a two-step impairment test. Under the first step of the goodwill impairment test, we are required to compare the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered impaired and we do not perform the second step. If the results of the first step impairment test indicate that the fair value of a reporting unit does not exceed its carrying amount, then the second step of the goodwill impairment test is required. The second step of the goodwill impairment test compares the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. The impairment loss is measured by the excess of the carrying amount of the reporting unit goodwill over the implied fair value of that goodwill.

Management evaluates the Company as a single reporting unit for business and operating purposes as almost all of QAD’s revenue streams are generated by the same underlying technology whether acquired, purchased or developed. In addition, the majority of QAD’s costs are, by their nature, shared costs that are not specifically identifiable to a geography or product line but relate to almost all products. As a result, there is a high degree of interdependency among QAD’s revenues and cash flows for levels below the consolidated entity and identifiable cash flows for a reporting unit separate from the consolidated entity are not meaningful. Therefore, our impairment test considered the consolidated entity as a single reporting unit.


During the fourth quarter of fiscal 2011 and 2010, an impairment analysis was performed at the enterprise level which compared the Company’s market capitalization to its net assets as of the test date, November 30th. As the market capitalization substantially exceeded the Company’s net assets, there was no indication of goodwill impairment for fiscal 2011 and 2010.

Capitalized Software Development Costs. We capitalize software development costs incurred once technological feasibility has been achieved in the form of a working model. These costs are primarily related to the localization and translation of our products. A working model is defined as an operative version of the computer software product that is completed in the same software language as the product to be ultimately marketed, performs all the major functions planned for the product and is ready for initial customer testing. We also capitalize software purchased from third parties or through business combinations as acquired software technology if such software has reached technological feasibility. Capitalized software costs are amortized on a product-by-product basis and charged to “Cost of license fees”. The amortization of capitalized software costs is the greater of the straight-line basis over three years, the expected useful life, or computed using a ratio of current revenue for a product compared to the estimated total of current and future revenues for that product.  We periodically compare the unamortized capitalized software costs to the estimated net realizable value of the associated product. The amount by which the unamortized capitalized software costs of a particular software product exceed the estimated net realizable value of that asset is reported as a charge to the statement of operations. This review requires management judgment regarding future cash flows. If these estimates or their related assumptions require updating in the future, we may incur substantial losses due to the write-down or write-off of these assets.

Valuation of Deferred Tax Assets and Tax Contingency Reserves. The carrying value of our deferred tax assets reflects an amount that is more likely than not to be realized. At January 31, 2011, QAD had $27.9 million of deferred tax assets, net of valuation allowances, consisting of $38.5 million of gross deferred tax assets offset by valuation allowances of $10.6 million. In assessing the likelihood of realizing tax benefits associated with deferred tax assets and the need for a valuation allowance, we consider the weight of all available evidence, both positive and negative, including expected future taxable income and tax planning strategies that are both prudent and feasible. There was a net increase of valuation allowances recorded in fiscal 2011 of $1.0 million. Should we determine that we would not be able to realize all or part of the net deferred tax asset in the future, an adjustment to deferred tax assets would increase tax expense in the period such determination was made.

We are subject to income taxes in the U.S. and in various foreign jurisdictions, and in the ordinary course of business, there are many transactions and calculations where the ultimate tax determination is uncertain. We recognize a tax position when we determine that it is more likely than not that the position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. For tax positions that are more likely than not to be sustained, we measure the tax position as the largest amount of benefit that has a greater than 50% likelihood of being realized when it is ultimately settled. We reflect interest and penalties related to income tax liabilities as income tax expense.

We have reserves for taxes to address potential exposures involving tax positions that could be challenged by taxing authorities, even though we believe that the positions taken are appropriate. The tax reserves are reviewed on a quarterly basis and adjusted as events occur that affect our potential liability for additional taxes.

Stock-Based Compensation. We account for share-based payments (“equity awards”) to employees in accordance with ASC 718, Compensation—Stock Compensation (“ASC 718”), which requires that share-based payments (to the extent they are compensatory) be recognized in our consolidated statements of operations based on their fair values as measured at the grant date.  The fair value of an equity award is recognized as stock-based compensation expense ratably over the vesting period of the equity award.   Determining the fair value of stock-based awards at the grant date requires judgment and the fair value per share of historical grants of equity awards may not be indicative of the fair value per share for future grants of equity awards.

Fair Value of SARs

The fair value of stock-settled stock appreciation rights (“SARs”) is determined on the grant date of the award using the Black-Scholes-Merton valuation model.   One of the inputs to the Black-Scholes-Merton valuation model is the fair market value on the date of the grant.  As our stock price fluctuates, so does the fair value of our future SAR grants.  Judgment is required in determining the remaining inputs to the Black-Scholes-Merton valuation model.  Furthermore, the values underlying these inputs fluctuate which impacts the fair value of our future SAR grants.  These inputs include the expected life, volatility, the risk free interest rate and the dividend rate.  The following describes our policies with respect to determining these valuation inputs:


Expected Life
The expected life valuation input includes a computation that is based on historical vested option and SAR exercise and post-vest expiration patterns and an estimate of the expected life for options and SARs that were fully vested and outstanding. Furthermore, based on our historical pattern of option and SAR exercises and post-vest expiration patterns we determined that there are two discernable populations which include QAD’s directors and officers (“D&O”) and all other QAD employees. The estimate of the expected life for options and SARs that were fully vested and outstanding was determined as the midpoint of a range as follows: the low end of the range assumes the fully vested and outstanding options and SARs are exercised or expire unexercised on the evaluation date and the high end of the range assumes that these options and SARs are exercised or expire unexercised upon contractual term.

Volatility
The volatility valuation input is based on the historical volatility of our common stock, which we believe is representative of the expected volatility over the expected life of SARs.

Risk Free Interest Rate
The risk free interest rate is based on the U.S. Treasury constant maturities in effect at the time of grant for the expected term of the option or share.

Dividend Rate
The dividend rate based on our historical dividend payments per share.  Historically, the Company paid quarterly dividends at a rate of $0.05 per common share.

Fair Value of RSUs

The fair value of restricted stock units (“RSUs”) is determined on the grant date of the award as the market price of the Company’s common stock on the date of grant, reduced by the present value of estimated dividends foregone during the vesting period.   As our stock price fluctuates, so does the fair value of our future RSU grants.  Judgment is required in determining the present value of estimated dividends foregone during the vesting period.  We estimate the dividends for purposes of this calculation based on our historical dividend payments per share.  Historically, the Company paid quarterly dividends at a rate of $0.05 per common share.

While we recognize as stock-based compensation expense the entire amount of the fair value of a vested equity award once it has vested, during the periods in which our equity awards are vesting, we are required to estimate equity awards that we expect will cancel prior to vesting (“forfeitures”) and reduce the stock-based compensation expense recognized in a given period for the effects of estimated forfeitures over the expense recognition period (“forfeiture rate”).  To determine the forfeiture rate, we examine the historical pattern of forfeitures which we believe is indicative of future forfeitures in an effort to determine if there were any discernable forfeiture patterns based on certain employee populations.  From this analysis, we identified two employee populations that have different historical forfeiture rates.  One population includes QAD directors and officers (“D&O”) and the other population includes all other QAD employees.  The impact of actual forfeitures if significantly different than our estimated forfeitures could materially affect our operating results.  We evaluate the forfeiture rate annually or more frequently when there have been any significant changes in forfeiture activity.

We record deferred tax assets for equity awards that result in deductions on our income tax returns, based on the amount of stock-based compensation recognized and the fair values attributable to the vested portion of those equity awards.  Because the deferred tax assets we record are based upon the stock-based compensation expenses in a particular jurisdiction, the aforementioned inputs that affect the fair values of our equity awards may also indirectly affect our income tax expense. In addition, differences between the deferred tax assets recognized for financial reporting purposes and the actual tax deduction reported on our income tax returns are recorded in additional paid-in capital. If the tax deduction is less than the deferred tax asset, the calculated shortfall reduces our pool of excess tax benefits. If the pool of excess tax benefits is reduced to zero, then subsequent shortfalls would increase our income tax expense. Our pool of excess tax benefits is computed in accordance with the alternative transition method pursuant to ASC 718.

To the extent we change the terms of our employee stock-based compensation programs, experience fluctuations in the underlying criteria used to determine our equity award valuations and experience fluctuations in our patterns of forfeitures that differ from our current estimates, amongst other potential impacts, the stock-based compensation expense that we record in future periods and the tax benefits that we realize may differ significantly from what we have recorded in previous reporting periods.

 
RECENTLY ISSUED ACCOUNTING STANDARDS

For a full description of recent accounting pronouncements, including the expected dates of adoption and estimated effects on results of operations and financial condition, see Note 1 “Summary of Business and Significant Accounting Policies” within the Notes to Consolidated Financial Statements included in Item 15 of this Annual Report on Form 10-K.

RESULTS OF OPERATIONS

We operate in several geographical regions as described in Note 13 “Business Segment Information” within the Notes to Consolidated Financial Statements. In order to present our results of operations without the effects of changes in foreign currency, we provide certain financial information on a “constant currency basis”, which is in addition to the actual financial information presented in the following tables. In order to calculate our constant currency results, we apply the foreign currency exchange rates that were in effect during the prior year to the current year results.

Revenue

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

Comparison of fiscal 2011 revenue to fiscal 2010

Total revenue for fiscal 2011 was $220.0 million, representing an increase of $4.8 million, or 2%, from $215.2 million in fiscal 2010. Most of the increase in total revenue during fiscal 2011 compared to fiscal 2010 occurred in the fourth quarter of fiscal 2011.  Our customers are widely dispersed and no single customer accounted for more than 10% of total revenue in any of the last three fiscal years. Holding foreign currency exchange rates constant to those prevailing in fiscal 2010, total revenue for the current year would have been approximately $218.3 million, representing an increase of $3.1 million, or 1%, when compared to last year. When comparing categories within total revenue at constant rates, our current results included an increase in the license revenue category, a slight decrease in the maintenance and other revenue category and no change to our services revenue category. Revenue outside the North America region as a percentage of total revenue was consistent at 57% for fiscal 2011 and fiscal 2010. Total revenue increased in our North America, Latin America and Asia Pacific regions, and was offset by a slight decrease in our EMEA region in fiscal 2011 when compared to fiscal 2010. Our products are sold to manufacturing companies that operate mainly in the following six industries: automotive, consumer products, food and beverage, high technology, industrial products and life sciences. Given the similarities between food and beverage and consumer products as well as between high technology and industrial products, we aggregate them for management review. Our fiscal 2011 revenue by industry was approximately 24% in automotive, 23% in consumer products and food and beverage, 39% in high technology and industrial products and 14% in life sciences. This compares to revenue by industry in fiscal 2010 of 26% in automotive, 24% in consumer products and food and beverage, 37% in high technology and industrial products and 13% in life sciences.

License revenue was $32.4 million for fiscal 2011, representing an increase of $3.9 million, or 14%, from $28.5 million in fiscal 2010. We believe that the increase in license revenue can be attributed to our customers experiencing an increase in demand for their products and as a result our customers are increasing production and using additional licenses. Holding foreign currency exchange rates constant to those prevailing in fiscal 2010, license revenue for fiscal 2011 would have remained consistent at approximately $32.4 million, representing a $3.9 million, or 14%, increase from last year. We experienced increases in our North America, Latin America and EMEA regions, and a slight decrease in our Asia Pacific region. One of the metrics that management uses to measure license revenue performance is the number of customers that have placed sizable license orders in the period. During fiscal 2011, 12 customers placed license orders totaling more than $0.3 million, two of which exceeded $1.0 million. In comparison, during fiscal 2010, 13 customers placed license orders totaling more than $0.3 million, two of which exceeded $1.0 million.  Although there were a relatively consistent number of orders totaling more than $0.3 million during fiscal 2011 and 2010, our total license revenue increased year over year due to higher revenue deferrals in fiscal 2010 on orders greater than $0.3 million.  In addition, we generated more license revenue from orders less than $0.3 million in fiscal 2011 than in fiscal 2010.


Products are generally shipped as orders are received or within a short period thereafter and, accordingly, we have historically operated with little or no license backlog. Because of the generally short cycle between order and shipment, we believe that our backlog as of any particular date is not significant or meaningful. Our total short-term deferred revenue as of January 31, 2011 was $94.5 million, of which $81.2 million was related to deferred maintenance and other and will be recognized over the period of the maintenance support. Of the remaining short-term deferred revenue balance as of January 31, 2011, $4.7 million was related to deferred services, $3.2 million was related to deferred research and development funding, $3.1 million was related to deferred licenses and $2.3 million was related to deferred subscriptions. All of these balances, with the exception of deferred subscriptions, relate to products already shipped or services already provided but were deferred primarily due to software revenue recognition rules and will generally be recognized within the next twelve months. Deferred subscription primarily relates to hosting and On Demand services we will provide over periods up to the next twelve months.

Maintenance and other revenue was $131.2 million for fiscal 2011, relatively unchanged from last year. Holding foreign currency exchange rates constant to those prevailing in fiscal 2010, maintenance and other revenue for fiscal 2011 would have been approximately $130.1 million, representing a decrease of $1.0 million, or 1%, from last year. When comparing fiscal 2011 to fiscal 2010, maintenance and other revenue decreased in our North America, EMEA and Latin America regions offset by an increase in our Asia Pacific region. We track our rate of contract renewals by determining the number of customer sites with active contracts as of the end of the previous reporting period and compare this to the number of customers that renewed, or are in the process of renewing, their maintenance contract as of the current period end. Our maintenance contract renewal rate has remained consistent, in excess of 90% for fiscal years 2011, 2010 and 2009.

Services revenue was $56.4 million for fiscal 2011, representing an increase of $0.8 million, or 1%, when compared to services revenue of $55.6 million earned in the same period last year. Holding exchange rates constant to those prevailing during the prior year period, services revenue for fiscal 2011 would have been approximately $55.8 million, relatively unchanged from last year. When comparing fiscal 2011 to fiscal 2010, we experienced increases in our Asia Pacific and Latin America regions offset by decreases in our North America and EMEA regions.

Comparison of fiscal 2010 revenue to fiscal 2009

Total revenue for fiscal 2010 was $215.2 million, a decrease of $47.5 million, or 18%, from $262.7 million in fiscal 2009. Holding foreign currency exchange rates constant to those prevailing in fiscal 2009, total revenue for fiscal 2010 would have been approximately $219.9 million, or $42.8 million lower when compared to fiscal 2009. When comparing categories within total revenue at constant rates, our fiscal 2010 results included a decrease in the license and services revenue categories partially offset by an increase in the maintenance and other revenue category. Revenue outside the North America region as a percentage of total revenue was relatively consistent at 57% and 56% for fiscal 2010 and fiscal 2009, respectively. Total revenue decreased across all our geographic regions in fiscal 2010 compared to fiscal 2009. Our fiscal 2010 revenue by industry was approximately 26% in automotive, 24% in consumer products and food and beverage, 37% in high technology and industrial products and 13% in life sciences. This compares to revenue by industry in fiscal 2009 of 31% in automotive, 23% in consumer products and food and beverage, 35% in high technology and industrial products and 11% in life sciences. The decrease in the automotive vertical can be attributed primarily to a decline in revenue from the U.S. automotive suppliers during fiscal 2010.

License revenue was $28.5 million for fiscal 2010, down $18.2 million, or 39%, from $46.7 million in fiscal 2009. We believe significant declines in demand for our customers’ products generally resulted in a preservation of capital as well as delays in license purchasing decisions by our customers. This was especially true in the automotive sector, which represents approximately a quarter of our business. Holding foreign currency exchange rates constant to those prevailing in fiscal 2009, license revenue for fiscal 2010 would have been approximately $28.7 million, representing an $18.0 million, or 39%, decrease from fiscal 2009. We experienced decreases in license revenue in all of our geographic regions. During fiscal 2010, 13 customers placed license orders totaling more than $0.3 million, two of which exceeded $1.0 million. In comparison, during fiscal 2009, 33 customers placed license orders totaling more than $0.3 million, five of which exceeded $1.0 million.

Our total short-term deferred revenue as of January 31, 2010 was $85.7 million, of which $76.3 million was related to deferred maintenance and was recognized over the period of the maintenance support. Of the remaining short-term deferred revenue balance as of January 31, 2010, $3.1 million was related to deferred research and development funding, $2.9 million was related to deferred licenses, $1.8 million was related to deferred services and $1.5 million was related to deferred subscriptions. All of these balances, with the exception of deferred subscriptions, related to products already shipped or services already provided but were deferred primarily due to software revenue recognition rules and were recognized within the following twelve months. Deferred subscription primarily related  to hosting and On Demand services that we provided over periods up to the following twelve months.

 
Maintenance and other revenue was $131.1 million for fiscal 2010, representing a decrease of $1.9 million, or 1%, from $133.1 million in fiscal 2009. Holding foreign currency exchange rates constant to those prevailing in fiscal 2009, maintenance and other revenue for fiscal 2010 would have been approximately $133.4 million, representing an increase of $0.3 million, or less than 1%, from the preceding year. When comparing fiscal 2010 to fiscal 2009, maintenance and other revenue decreased across all our geographic regions except for the Asia Pacific region.

Services revenue was $55.6 million for fiscal 2010, representing a decrease of $27.4 million, or 33%, when compared to services revenue of $83.0 million earned in fiscal 2009. Holding exchange rates constant to those prevailing during fiscal 2009, services revenue for fiscal 2010 would have been approximately $57.8 million, reflecting a $25.2 million, or 30%, decrease from the preceding year. When comparing fiscal 2010 to fiscal 2009, services revenue decreased across all our geographic regions. The decrease in services revenue year over year was primarily attributed to a large engagement in the automotive sector that was scaled back in the fourth quarter of fiscal 2009 as well as engagements in which we were recognizing a lower amount of services revenue per customer per quarter, which we believe was a result of lower license revenue over the recent quarters and customer decisions to extend or delay their implementations, upgrades or other ongoing services projects.

Comparison of costs and expenses—fiscal 2011, 2010, and 2009

Restructuring

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

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

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

Restructuring Accruals

The activity in the restructuring accrual for the fiscal years ended January 31, 2011, 2010 and 2009 is summarized as follows:
 
   
Q4 Fiscal 2009 Restructuring Plan
   
Q2 Fiscal 2010 Restructuring Plan
   
Q3 Fiscal 2010 Restructuring Plan
   
Total
 
   
(in thousands)
 
Balance as of January 31, 2008
  $ -     $ -     $ -     $ -  
Employee severance pay and related expenses
    3,351       -       -       3,351  
Cash paid
    (479 )     -       -       (479 )
Balance as of January 31, 2009
  $ 2,872     $ -     $ -     $ 2,872  
Employee severance pay and related expenses
    819       1,496       927       3,242  
Cash paid
    (3,526 )     (1,456 )     (930 )     (5,912 )
(Reversal of) adjustment to previous charges
    (92 )     (43 )     9       (126 )
Impact of foreign currency translation
    24       3       -       27  
Balance as of January 31, 2010
  $ 97     $ -     $ 6     $ 103  
Cash paid
    (93 )     -       (6 )     (99 )
Impact of foreign currency translation
    (4 )     -       -       (4 )
Balance as of January 31, 2011
  $ -     $ -     $ -     $ -  
 
 
Total Cost of Revenue

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

Cost of license fees includes license royalties, amortization of software technology and direct material. Cost of maintenance, services and other includes personnel costs of fulfilling service contracts, support contracts and order fulfillment, including stock based compensation for those employees, third party contractor expense, travel expense for support and services employees, direct material, professional fees, support royalties, and information technology and facilities allocated costs. Direct material charges include the cost of hardware sold, costs associated with transferring our software to electronic media, printing of user manuals and packaging materials, and shipping and handling costs.

Total cost of revenue (combined cost of license fees and cost of maintenance, services and other revenue) was $93.9 million for fiscal 2011, $91.6 million for fiscal 2010 and $121.6 million for fiscal 2009, and as a percentage of total revenue was 43% for fiscal 2011, 43% for fiscal 2010 and 46% for fiscal 2009. Holding exchange rates constant to those prevailing in fiscal 2010, total cost of revenue for fiscal 2011 would have been approximately $93.3 million and as a percentage of total revenue would have been unchanged at 43%.

The non-currency related increase in cost of maintenance, services and other revenue was $3.0 million in fiscal 2011 compared to fiscal 2010.  The increase was primarily due to higher services costs of $2.7 million related to higher third party contractor costs of $1.8 million, higher services bonuses of $1.5 million, higher travel of $0.7 million and higher hosting costs of $0.6 million partially offset by lower information technology and facilities allocated costs of $1.0 million, lower severance of $0.5 million, lower services personnel costs of $0.2 million and lower professional fees of $0.2 million.  We expect our services personnel costs will increase in future periods as headcount increased during the fourth quarter of fiscal 2011 and as of January 31, 2011 we had approximately 400 full-time services employees as compared to approximately 350 at January 31, 2010. The combination of personnel and third party contractor costs typically fluctuate in accordance with increases or decreases in services revenue.

The non-currency related decrease in cost of license fees was $1.3 million in fiscal 2011 compared to fiscal 2010.  The decrease was primarily a result of lower amortization of acquired software.

Total cost of revenue (combined cost of license fees and cost of maintenance, services and other revenue) was $91.6 million for fiscal 2010 and $121.6 million for fiscal 2009, and as a percentage of total revenue was 43% for fiscal 2010 and 46% for fiscal 2009. Holding exchange rates constant to those prevailing in fiscal 2009, total cost of revenue for fiscal 2010 would have been approximately $94.5 million and as a percentage of total revenue would have been unchanged at 43%. Changes in the cost of revenue as a percentage of total revenue were primarily due to lower services revenue in the overall revenue mix. Services revenue has higher associated direct costs, such as personnel costs, than the other revenue categories.

The non-currency related decrease in cost of revenue of $27.1 million in fiscal 2010 compared to fiscal 2009 was primarily due to lower services personnel costs of $9.7 million primarily as a result of lower headcount of approximately 120 people, lower third party contractor expense of $7.6 million and lower travel expense of $5.2 million. In addition, the cost of license fees decreased by $2.7 million in fiscal 2010 compared to fiscal 2009 primarily as a result of lower royalty expense due to lower license revenue.


Sales and Marketing

   
Year Ended
   
Increase (Decrease) Compared to Prior Period
   
Year Ended
   
Increase (Decrease) Compared to Prior Period
   
Year Ended
 
(in thousands)
 
January 31, 2011
    $       %    
January 31, 2010
    $       %    
January 31, 2009
 
Sales and marketing
  $ 54,206     $ 2,227       4 %   $ 51,979     $ (21,046 )     -29 %   $ 73,025  
Percentage of revenue
    25 %                     24 %                     28 %

Sales and marketing expense includes salaries, benefits, bonuses, stock-based compensation and travel expense for our sales and marketing employees in addition to costs of programs aimed at increasing revenue, such as trade shows, user group events, advertising and various sales and promotional programs. Sales and marketing expense also includes personnel costs of order processing, sales agent commissions and information technology and facilities allocated costs.

Sales and marketing expense was $54.2 million, $52.0 million and $73.0 million for fiscal years 2011, 2010 and 2009, respectively. Holding foreign currency exchange rates constant to fiscal 2010, fiscal 2011 sales and marketing expense would have been approximately $53.7 million, representing an increase of $1.7 million, or 3%. The non-currency related increase in sales and marketing expense of $1.7 million in fiscal 2011 compared to fiscal 2010 was primarily due to higher bonuses of $1.1 million, higher travel of $0.6 million, higher commissions of $0.5 million and higher marketing expense of $0.3 million. These increases in sales and marketing expense were partially offset by lower severance of $0.9 million.

Holding foreign currency exchange rates constant to fiscal 2009, fiscal 2010 sales and marketing expense would have been approximately $53.5 million, representing a decrease of $19.5 million, or 27%. The non-currency related decrease in sales and marketing expense of $19.5 million in fiscal 2010 compared to fiscal 2009 was primarily due to lower personnel costs of $10.7 million primarily related to lower salaries, bonuses and commissions as a result of approximately 80 fewer employees, lower travel expense of $2.4 million, lower marketing expense of $1.1 million, lower professional fees of $0.7 million, lower stock compensation expense of $0.5 million, lower expenses associated with our internal sales workshop event of $0.3 million and lower sales agent fees of $0.3 million. In addition, in fiscal 2010 we did not hold our annual Explore customer event. This resulted in $1.7 million of cost savings when compared to fiscal 2009.

Research and Development

   
Year Ended
   
Increase (Decrease) Compared to Prior Period
   
Year Ended
   
Increase (Decrease) Compared to Prior Period
   
Year Ended
 
(in thousands)
 
January 31, 2011
    $       %    
January 31, 2010
    $     $ %    
January 31, 2009
 
Research and development
  $ 34,575     $ (2,728 )     -7 %   $ 37,303     $ (5,804 )     -13 %   $ 43,107  
Percentage of revenue
    16 %                     17 %                     17 %

Research and development expense is expensed as incurred and managed on a global basis. It consists primarily of salaries, benefits, bonuses, stock-based compensation and travel expense for research and development employees, professional services such as fees paid to software development firms and independent contractors, and training for such personnel. Research and development expense also includes information technology and facilities allocated costs, and is reduced by income from joint development projects.

Research and development expense was $34.6 million, $37.3 million and $43.1 million for fiscal years 2011, 2010 and 2009, respectively. Holding foreign currency exchange rates constant to fiscal 2010, fiscal 2011 research and development expense would have been approximately $34.4 million, representing a decrease of $2.9 million, or 8%. The non-currency related decrease in research and development expense of $2.9 million in fiscal 2011 compared to fiscal 2010 was primarily due to higher joint development income of $2.0 million related to two ongoing projects, lower research and development consulting fees of $0.7 million, lower information technology and facilities allocated costs of $0.6 million and lower severance of $0.5 million. These decreases in research and development expense were partially offset by higher bonuses of $0.6 million.
 
Holding foreign currency exchange rates constant to fiscal 2009, fiscal 2010 research and development expense would have been approximately $38.0 million, representing a decrease of $5.1 million, or 12%. The non-currency related decrease in research and development expense of $5.1 million in fiscal 2010 compared to fiscal 2009 was primarily due to a decrease in personnel costs of $4.0 million related to lower salaries and bonuses as a result of 25 fewer employees and lower travel expense of $0.9 million. These decreases in research and development expense were partially offset by lower joint development income of $0.6 million.

 
General and Administrative

   
Year Ended
   
Increase (Decrease) Compared to Prior Period
   
Year Ended
   
Increase (Decrease) Compared to Prior Period
   
Year Ended
 
(in thousands)
 
January 31, 2011
    $       %    
January 31, 2010
    $       %    
January 31, 2009
 
General and administrative
  $ 30,637     $ (332 )     -1 %   $ 30,969     $ (2,794 )     -8 %   $ 33,763  
Percentage of revenue
    14 %                     14 %                     13 %

General and administrative expense includes salaries, benefits, bonuses, stock-based compensation and travel expense for our finance, human resources, legal and executive personnel, as well as professional fees for accounting and legal services, bad debt expense and information technology and facilities allocated costs.

General and administrative expense was $30.6 million, $31.0 million and $33.8 million for fiscal years 2011, 2010 and 2009, respectively. Holding foreign currency exchange rates constant to fiscal 2010, fiscal 2011 general and administrative expense would have been approximately $30.4 million, representing a decrease of $0.6 million, or 2%. The non-currency related decrease in general and administrative expense of $0.6 million in fiscal 2011 compared to fiscal 2010 was primarily due to lower bad debt of $1.5 million partially offset by higher bonuses of $0.9 million.

Holding foreign currency exchange rates constant to fiscal 2009, fiscal 2010 general and administrative expense would have been approximately $31.7 million, representing a decrease of $2.1 million, or 6%. The non-currency related decrease in general and administrative expense of $2.1 million in fiscal 2010 compared to fiscal 2009 was primarily due to lower personnel costs of $1.1 million as a result of lower headcount of approximately 10 people and lower travel expense of $0.7 million. These decreases in general and administrative expense were partially offset by higher bad debt expense of $0.6 million.

Amortization of Intangibles from Acquisitions

Amortization of intangibles from acquisitions totaled $0.1 million, $0.5 million and $0.7 million for fiscal years 2011, 2010 and 2009, respectively. Amortization expense in each of the three years was due to the intangible assets acquired in fiscal 2009 from our FullTilt acquisition and in fiscal 2007 from our acquisitions of Precision, FBOS and Bisgen Ltd. (“Bisgen”). Amortization decreased in fiscal 2011 compared to fiscal 2010 and 2009 due to the majority of our acquired intangibles being fully amortized by the end of the fiscal 2010 third quarter.

Goodwill Impairment Charge

We assess goodwill for impairment at least annually, or more frequently if indicators of impairment exist. Our annual impairment review is conducted during the fourth quarter of each fiscal year. No impairment was determined in fiscal 2011 or 2010. As a result of our fiscal 2009 annual impairment review, we recorded a goodwill impairment charge of $14.4 million, related to the former EMEA reporting unit, due to declines in revenue and cash flow projections.

Total Other (Income) Expense

 
 
Year Ended
   
Increase (Decrease) Compared to Prior Period
   
Year Ended
   
Increase (Decrease) Compared to Prior Period
   
Year Ended
 
(in thousands)
 
January 31, 2011
    $       %    
January 31, 2010
    $       %    
January 31, 2009
 
Other (income) expense
                                             
Interest income
  $ (515 )   $ 55       10 %   $ (570 )   $ 863       60 %   $ (1,433 )
Interest expense
    1,248       (25 )     -2 %     1,273       28       2 %     1,245  
Other (income) expense, net
    304       593       205 %     (289 )     (45 )     -18 %     (244 )
Total other (income) expense
  $ 1,037     $ 623       150 %   $ 414     $ 846       196 %   $ (432 )
Percentage of revenue
    0 %                     0 %                     0 %

Total other (income) expense was $1.0 million, $0.4 million and $(0.4) million for fiscal years 2011, 2010 and 2009, respectively. The $0.6 million unfavorable change in fiscal 2011 compared to fiscal 2010 was related to lower exchange gains and higher miscellaneous expenses due primarily to the dissolution of an inactive entity. The $0.8 million unfavorable change in fiscal 2010 compared to fiscal 2009 was primarily due to lower interest income due to both lower interest rates and lower average balances in our investment accounts.

 
Income Tax Expense

 
 
Year Ended
   
Increase (Decrease) Compared to Prior Period
 
Year Ended
   
Increase (Decrease) Compared to Prior Period
   
Year Ended
 
(in thousands)
 
January 31, 2011
    $       %  
January 31, 2010
    $       %    
January 31, 2009
 
Income tax expense
  $ 2,843     $ 1,735       157 %   $ 1,108     $ 819       283 %   $ 289  
Percentage of revenue
    1 %                     1 %                     0 %
Effective tax rate
    51 %                     45 %                     -1 %

We recorded income tax expense of $2.8 million, $1.1 million, and $0.3 million for fiscal years 2011, 2010 and 2009, respectively. QAD’s effective tax rate was 51%, 45%, and (1)% for fiscal years 2011, 2010 and 2009, respectively.  Our effective tax rate increased in fiscal 2011 compared to fiscal 2010. The difference was primarily due to the benefit recognized in fiscal 2010 from the release of a tax contingency reserve after the conclusion of a foreign tax audit.  Our income tax expense increased in fiscal 2011 when compared to fiscal 2010 primarily due to an increase in income before taxes.  Our income tax expense and effective tax rate increased in fiscal 2010 when compared to fiscal 2009 primarily due to an increase in income before taxes, a dividend from a foreign subsidiary and a shortfall in our stock option deduction (i.e. the tax benefit realized is less than the amount previously recognized through stock-based compensation expense).

For further information regarding income taxes, see Note 7 “Income Taxes” within the Notes to Consolidated Financial Statements included in Item 15 of this Annual Report on Form 10-K.

LIQUIDITY AND CAPITAL RESOURCES

Our primary source of cash is from the sale of licenses, maintenance and services to our customers. Our primary use of cash is payment of our operating costs which consist primarily of employee-related expenses, such as compensation and benefits, as well as general operating expenses for facilities and overhead costs. In addition to operating expenses, we also use cash for capital expenditures and to invest in our growth initiatives, which could include acquisitions of products, technology and businesses and payments of dividends or stock repurchases.

Since the economic downturn, we have continued to contain costs and conserve cash. Our headcount remained consistent when comparing January 31, 2011 to January 31, 2010, and we made only critical capital expenditures during fiscal 2011 and 2010. Our dividend program gives investors the choice of payment in stock or cash. Our focus on reducing expenses and conserving cash throughout fiscal 2011 and 2010, combined with strong accounts receivable collection activities, contributed to our cash balance increasing from $44.7 million as of January 31, 2010 to $67.3 million as of January 31, 2011.

At January 31, 2011, our principal sources of liquidity were cash and equivalents totaling $67.3 million and net accounts receivable of $65.6 million. At January 31, 2011, our cash and equivalents consisted of current bank accounts, money market funds and time delineated deposits. Approximately 80% and 70% of our cash and equivalents were held in U.S. dollar denominated accounts as of January 31, 2011 and 2010, respectively. We have a U.S. line of credit facility that permits unsecured short-term borrowings of up to $20 million. Our line of credit agreement contains customary covenants that could restrict our ability to incur additional indebtedness or make dispositions of assets if we fail to comply with them. Our line of credit is available for working capital or other business needs. We have not drawn down on the line of credit during any of the last three fiscal years nor do we expect to draw down on the line of credit during fiscal 2012. Although the facility was originally scheduled to expire on April 10, 2011, we have agreed to a 60-day extension with Bank of America to June 9, 2011. We are currently negotiating the further extension or replacement of the expiring line of credit with a credit agreement with materially similar terms. Although this is our current expectation, extension or renewal of the credit agreement is not solely within our control, so we cannot assure that the credit agreement will be renewed on similar terms, if at all.

Our primary commercial banking relationship is with Bank of America and its global affiliates. Our cash and equivalents are held by diversified financial institutions globally, and as of January 31, 2011, the portion of our cash and equivalents held by Bank of America was approximately 90%.

The following table summarizes our cash flows for the fiscal years ended January 31, 2011, 2010 and 2009, respectively.

 
(in thousands)
 
Year Ended
January 31, 2011
   
Year Ended
January 31, 2010
   
Year Ended
January 31, 2009
 
Net cash provided by operating activities
  $ 25,902     $ 17,696     $ 7,253  
Net cash used in investing activities
    (1,922 )     (1,357 )     (14,016 )
Net cash used in financing activities
    (2,131 )     (4,507 )     (4,448 )
Effect of foreign exchange rates on cash and equivalents
    749       1,379       (2,935 )
Net increase (decrease) in cash and equivalents
  $ 22,598     $ 13,211     $ (14,146 )
 
 
Net cash flows provided by operating activities increased to $25.9 million in fiscal 2011 from $17.7 million in fiscal 2010.  The $8.2 million increase in net cash flows provided by operating activities was primarily comprised of an increase in our net income of $1.4 million and the positive effect of changes in other liabilities relating to lower payments for severance of $5.8 million, higher accruals for bonuses and commissions of $5.5 million and higher accruals for payroll taxes and vacation of $2.8 million.  Our non-cash expenses were lower by $3.4 million when comparing fiscal 2011 to fiscal 2010.  Other changes to net cash provided by operating activities included a decrease in cash flow of $15.2 million due to the effect of changes in accounts receivable year over year which was offset by an increase in cash flow of $11.9 million due to the effect of changes in deferred revenue, accounts payable and other assets.

Capital expenditures were $1.4 million and $1.0 million in fiscal 2011 and 2010, respectively. For fiscal 2012 we expect capital expenditures in the range of $2 million to $3 million.  We continue to closely monitor our capital spending. We do not believe we are delaying critical capital expenditures required to run our business.

Dividend related payments for fiscal 2011 totaled $2.2 million compared to $1.9 million in fiscal 2010. In fiscal 2010, we modified our dividend program to allow shareholders the choice of stock or cash, which has enabled us to conserve cash. The shares issued as a stock dividend are based on the fair value of QAD Class A common stock as of the record date. The Board of Directors evaluates our ability to continue to pay dividends and the structure of any dividends on a quarterly basis.

There were no stock repurchase related payments during fiscal 2011 or 2010. We do not currently have a stock repurchase program in place, however the Board of Directors evaluates our position relating to future potential repurchases on a regular basis.

We have historically calculated accounts receivable days’ sales outstanding (“DSO”), using the countback, or last-in first-out, method. This method calculates the number of days of billed revenue represented by the accounts receivable balance as of period end. When reviewing the performance of our entities, DSO under the countback method is used by management. It is management’s belief that the countback method best reflects the relative health of our accounts receivable as of a given quarter-end or year-end because of the cyclical nature of our billings. Our billing cycle includes high annual maintenance renewal billings at year-end that will not be recognized as earned revenue until future periods.

DSO under the countback method was 52 days at January 31, 2011, compared to 54 days at January 31, 2010. DSO using the average method, which is calculated utilizing the accounts receivable balance and earned revenue for the most recent quarter, was 95 days and 104 days at January 31, 2011 and 2010, respectively. The decrease in DSO using the average method was primarily related to higher earned revenue in the fourth quarter of fiscal 2011 compared to the same period last year. We believe our reserve methodology is adequate and our reserves are properly stated as of January 31, 2011. We will continue to monitor our receivables closely given the economic environment.

There have been no material changes in our contractual obligations or commercial commitments. Cash requirements for items other than normal operating expenses are anticipated for capital expenditures and dividend payments. We may require cash for acquisitions of new businesses, software products or technologies complementary to our business.

We believe that the cash on hand, net cash provided by operating activities and the available borrowings under our existing credit facility will provide us with sufficient resources to meet our current and long-term working capital requirements, debt service, dividend payments and other cash needs for at least the next twelve months.

CONTRACTUAL OBLIGATIONS

The following table summarizes our significant contractual obligations at January 31, 2011 and the effect these contractual obligations are expected to have on our liquidity and cash flows in future periods.

   
Year Ended January 31,
             
   
2012
   
2013
   
2014
   
2015
   
2016
   
Thereafter
   
Total
 
   
(In millions)
       
Notes payable
  $ 0.3     $ 0.3     $ 0.3     $ 15.5     $ ¾     $ ¾     $ 16.4  
Notes payable interest payments
    1.1       1.1       1.0       0.5       ¾       ¾       3.7  
Lease obligations
    6.6       3.9       1.6       0.8       0.6       1.0       14.5  
Purchase obligations
    1.1       0.8       0.2       ¾       ¾       ¾       2.1  
Total
  $ 9.1     $ 6.1     $ 3.1     $ 16.8     $ 0.6     $ 1.0     $ 36.7  
 
 
Purchase obligations are contractual obligations for purchase of goods or services. They are defined as agreements that are enforceable and legally binding on QAD and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Purchase obligations relate primarily to information technology infrastructure costs and hosting services agreements.

We have omitted unrecognized tax benefits from this table due to the inherent uncertainty regarding the timing of potential issue resolution. Specifically, either (a) the underlying positions have not been fully enough developed under audit to quantify at this time, or (b) the years relating to the issues for certain jurisdictions are not currently under audit. As of January 31, 2011, we had $2.5 million of unrecognized tax benefits. For further information regarding the unrecognized tax benefits see note 7 “Income Taxes” within Notes to Consolidated Financial Statements.

Purchase orders or contracts for the purchase of supplies and other goods and services are not included in the table above. We are not able to determine the aggregate amount of such purchase orders that represent contractual obligations, as purchase orders may represent authorizations to purchase rather than binding agreements. Our purchase orders are based on our current procurement or development needs and are fulfilled by our vendors within short time frames. We do not have significant agreements for the purchase of supplies or other goods specifying minimum quantities or set prices that exceed our expected requirements for three months. In addition, we have certain royalty commitments associated with the shipment and licensing of certain products. Royalty expense is generally based on the number of units shipped or a percentage of the underlying revenue. Royalty expense, included in cost of license fees, maintenance, service and other revenue, was $15.0 million, $14.3 million and $17.0 million in fiscal 2011, 2010 and 2009, respectively.

Credit Facility

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

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

Effective April 10, 2009, we executed an amendment to the Facility to amend the 12-month trailing EBITDA and fixed charge ratio covenants for future reporting periods. For the reporting period beginning February 1, 2009 through the expiration of the Facility, the minimum 12-month trailing EBITDA was reduced to $5 million with the definition of EBITDA amended to exclude goodwill impairment charges. The minimum fixed charge ratio was amended to 1.3 to 1.0 for the period February 1, 2009 through October 31, 2009 and thereafter 1.5 to 1.0. Although the Facility was originally scheduled to expire on April 10, 2011, we have agreed to a 60-day extension with Bank of America to June 9, 2011. We are currently negotiating the extension or replacement of the expiring line of credit with a credit agreement with materially similar terms. Although this is our current expectation, extension or renewal of the credit agreement is not solely within our control, so we cannot assure that the credit agreement will be renewed on similar terms, if at all.

As of January 31, 2011, there were no borrowings under the Facility and we were in compliance with the financial covenants of the Facility, as amended.

Notes Payable

In July 2004, we entered into a loan agreement with Mid-State Bank & Trust, a bank which was subsequently purchased by Rabobank, N.A. The loan had an original principal amount of $18.0 million and bears interest at a fixed rate of 6.5%. This loan is secured by our headquarters located in Santa Barbara, California. The terms of the loan provide that we will make 119 monthly payments of $115,000 consisting of principal and interest and one final principal payment of $15.4 million. The loan matures in July 2014. The balance of the note payable at January 31, 2011 was $16.4 million.


Lease Obligations

We lease certain office facilities, office equipment and automobiles under operating lease agreements. Future minimum rental payments under non-cancelable operating lease commitments with terms of more than one year are included in the above table of contractual obligations. For further discussion of our leased office facilities, see Item 2 entitled “Properties” included elsewhere in this Annual Report on Form 10-K.

Off-Balance Sheet Arrangements

As of January 31, 2011, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.


Foreign Exchange Rates. For fiscal 2011, approximately 40% of our revenue was denominated in foreign currencies compared to 35% for fiscal years 2010 and 2009. We also incurred a significant part of our expenses in currencies other than the U.S. dollar, approximately 45% for fiscal 2011, 2010 and 2009. As a result, fluctuations in the values of the respective currencies relative to the currencies in which we generate revenue could adversely affect us.

Fluctuations in currencies relative to the U.S. dollar have affected, and will continue to affect, period-to-period comparisons of our reported results of operations. For fiscal 2011, 2010 and 2009, foreign currency transaction and remeasurement (gains) losses totaled $0.1 million, $(0.1) million and $(0.1) million, respectively, and are included in “Other (income) expense, net” in our Consolidated Statements of Operations. Due to constantly changing currency exposures and the volatility of currency exchange rates, we may experience currency losses in the future and we cannot predict the effect of exchange rate fluctuations upon future operating results. Although we do not currently undertake hedging transactions, we may choose to hedge a portion of our currency exposure in the future, as we deem appropriate.

Interest Rates. We invest our surplus cash in a variety of financial instruments, consisting principally of short-term marketable securities with maturities of less than 90 days at the date of purchase. Our investment securities are held for purposes other than trading. Cash balances held by subsidiaries are invested primarily in registered money market funds with local operating banks. Our debt is comprised of a loan agreement, secured by real property, which bears interest at a fixed rate of 6.5%. Additionally we have an unsecured loan agreement which bears interest at variable rates. As of January 31, 2011, there were no borrowings under our unsecured loan agreement.

We prepared sensitivity analyses of our interest rate exposure and our exposure from anticipated investment and borrowing levels for fiscal 2011 to assess the impact of hypothetical changes in interest rates. Based upon the results of these analyses, a 10% adverse change in interest rates from the 2011 fiscal year-end rates would not have a material adverse effect on the fair value of investments and would not materially impact our results of operations or financial condition for the next fiscal year.


The response to this item is included in Item 15 of this Annual Report on Form 10-K.


None.


(a) Evaluation of Disclosure Controls and Procedures

QAD maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in reports that it files or submits under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to management to allow timely decisions regarding required disclosure. QAD’s management, with the participation of the Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of QAD’s disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K. Based on this evaluation, QAD’s principal executive officer and principal financial officer have concluded that QAD’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were effective.


(b) Management’s Report on Internal Control Over Financial Reporting

QAD’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. QAD’s system of internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles. QAD’s internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of QAD’s assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that QAD’s receipts and expenditures are being made only in accordance with authorizations of QAD’s management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of QAD’s assets that could have a material effect on the financial statements.

Management has assessed the effectiveness of QAD’s internal control over financial reporting as of January 31, 2011 based on the criteria described in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on management’s assessment, management has concluded that QAD’s internal control over financial reporting was effective as of January 31, 2011.

Our independent registered public accounting firm, KPMG LLP, has audited our internal control over financial reporting as of January 31, 2011, as stated in their report included in this Annual Report on Form 10-K.

(c) Changes in Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.

(d) Limitations on the Effectiveness of Controls

QAD’s management does not expect that its disclosure controls and procedures or its internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within QAD have been detected. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate.
 
 
Report of Independent Registered Public Accounting Firm


The Board of Directors and Stockholders of QAD Inc.:

We have audited the internal control over financial reporting of QAD Inc. as of January 31, 2011, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). The management of QAD Inc. is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying report entitled Management’s Report on Internal Control Over Financial Reporting included in Item 9A.(b). Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
 
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, QAD Inc. maintained, in all material respects, effective internal control over financial reporting as of January 31, 2011, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of QAD Inc. and subsidiaries as of January 31, 2011 and 2010, and the related consolidated statements of operations, stockholders’ equity and comprehensive income (loss), and cash flows for each of the years in the three-year period ended January 31, 2011, and our report dated April 15, 2011 expressed an unqualified opinion on those consolidated financial statements.

/s/ KPMG LLP

Los Angeles, California
April 15, 2011
 


None.

PART III


Information regarding QAD directors is set forth in the section entitled “Election of Directors” appearing in our Definitive Proxy Statement for the Annual Meeting of Stockholders (“Proxy Statement”) to be filed with the Securities and Exchange Commission within 120 days after the end of our fiscal year ended January 31, 2011, which information is incorporated herein by reference.

In addition, the other information required by Item 10 is incorporated by reference from the Proxy Statement.

EXECUTIVE OFFICERS OF THE REGISTRANT

Set forth below is certain information concerning our executive officers. All ages are as of March 31, 2011.

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

Pamela M. Lopker founded QAD in 1979 and has been Chairman of the Board and President since QAD’s incorporation in 1981. Previously, Ms. Lopker served as Senior Systems Analyst for Comtek Research from 1977 to 1979. She 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, Santa Barbara. She is married to Karl F. Lopker, Chief Executive Officer of QAD.

Karl F. Lopker has served as Chief Executive Officer and a Director of QAD since joining QAD in 1981. Previously, he was President of Deckers Outdoor Corporation, a company that he founded in 1973. Mr. Lopker is certified in production and inventory management by the American Production and Inventory Control Society. He received a bachelor of science degree in electrical engineering from the University of California, Santa Barbara. Mr. Lopker is married to Pamela M. Lopker, Chairman of the Board and President of QAD.

Daniel Lender was first appointed Executive Vice President and Chief Financial Officer in July 2003. Previously, he served as QAD’s Vice President of Global Sales Operations and Vice President of Latin America. Mr. Lender joined QAD in 1998 as Treasurer following a nine-year tenure with the former Republic National Bank of New York, last serving as Vice President and Treasurer of the Bank’s Delaware subsidiary. He earned a master of business administration degree from the Wharton School of the University of Pennsylvania and a bachelor of science degree in applied economics and business management from Cornell University.

Gordon Fleming has served as Executive Vice President and Chief Marketing Officer since December 2006. Previously he served in a number of roles including Vice President of Vertical Marketing and Managing Director of QAD Australia Pty. Ltd. Mr. Fleming joined QAD as a Sales Manager in July 1995, working in the Australian subsidiary. Mr. Fleming began his career as a telecommunications engineer working in both the United Kingdom and Nigeria. Later Mr. Fleming moved into corporate finance holding sales and marketing roles with Barclays plc and Schroders plc. Mr. Fleming is a Member of the Institute of Electrical and Electronic Engineers (IEEE) and studied at Worthing College of Technology, UK.

Kara Bellamy has served as Senior Vice President, Corporate Controller and Chief Accounting Officer since January 2008. Previously, she served as QAD’s Corporate Controller beginning December 2006. She joined QAD as Assistant Corporate Controller in July 2004 after working for Somera Communications, Inc. as its Corporate Controller from 2002 through 2004. Ms. Bellamy worked at the public accounting firm of Ernst & Young from 1997 to 2002. She is a Certified Public Accountant and received a bachelor of arts degree in business economics with an accounting emphasis from the University of California, Santa Barbara.



Information regarding executive compensation is set forth under the caption “Executive Compensation” in the Proxy Statement, which information is incorporated herein by reference.


Information regarding security ownership of certain beneficial owners and management is set forth under the caption “Stock Ownership of Directors, Executive Officers and Certain Beneficial Owners” in the Proxy Statement, which information is incorporated herein by reference.


Information regarding certain relationships and related transactions is set forth under the caption “Certain Transactions with Related Persons” in the Proxy Statement, which information is incorporated herein by reference.


Information regarding services performed by, and fees paid to, our independent auditors is set forth under the caption “Principal Accountant Fees and Services” in the Proxy Statement, which information is incorporated herein by reference.


PART IV


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

2. INDEX TO FINANCIAL STATEMENT SCHEDULES

The following financial statement schedule is filed as a part of this Annual Report on Form 10-K:
 
 
Page
SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS
76

All other schedules are omitted because they are not required or the required information is presented in the financial statements or notes thereto.

3. INDEX TO EXHIBITS

See the Index of Exhibits at page 79.


Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
QAD Inc.:

We have audited the accompanying consolidated balance sheets of QAD Inc. and subsidiaries as of January 31, 2011 and 2010, and the related consolidated statements of operations, stockholders’ equity and comprehensive income (loss), and cash flows for each of the years in the three-year period ended January 31, 2011. In connection with our audits of the consolidated financial statements, we also have audited the related financial statement Schedule II. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of QAD Inc. and subsidiaries as of January 31, 2011 and 2010, and the results of their operations and their cash flows for each of the years in the three-year period ended January 31, 2011, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), QAD Inc.’s internal control over financial reporting as of January 31, 2011, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO"), and our report dated April 15, 2011 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

/s/ KPMG LLP

Los Angeles, California
April 15, 2011


QAD INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

 
 
January 31,
 
 
 
2011
   
2010
 
Assets
           
Current assets:
           
Cash and equivalents
  $ 67,276     $ 44,678  
Accounts receivable, net of allowances of $2,661 and $3,442 at January 31, 2011 and 2010, respectively
    65,620       61,089  
Deferred tax assets, net
    3,954       3,548  
Other current assets
    12,553       13,680  
Total current assets
    149,403       122,995  
Property and equipment, net
    33,795       37,219  
Capitalized software costs, net
    841       2,446  
Goodwill
    6,457       6,348  
Deferred tax assets, net
    20,080       19,411  
Other assets, net
    2,518       2,755  
Total assets
  $ 213,094     $ 191,174  
Liabilities and Stockholders’ Equity
               
Current liabilities:
               
Current portion of long-term debt
  $ 304     $ 285  
Accounts payable
    10,003       7,952  
Deferred revenue
    94,453       85,745  
Other current liabilities
    30,891       24,835  
Total current liabilities
    135,651       118,817  
Long-term debt
    16,138       16,443  
Other liabilities
    5,214       6,363  
Commitments and contingencies
               
Stockholders’ equity:
               
Preferred stock, $0.001 par value. Authorized 5,000,000 shares; none issued or outstanding
           
Common stock:
               
Class A, $0.001 par value. Authorized 71,000,000 shares; issued 14,146,416 shares and 14,145,564 shares at January 31, 2011 and 2010, respectively
    14       14  
Class B, $0.001 par value. Authorized 4,000,000 shares; issued 3,536,604 shares and 3,536,391 shares at January 31, 2011 and 2010, respectively
    4       4  
Additional paid-in capital
    146,898       143,138  
Treasury stock, at cost (1,721,601 shares and 2,005,763 shares at January 31, 2011 and 2010, respectively)
    (28,070 )     (32,275 )
Accumulated deficit
    (54,438 )     (52,480 )
Accumulated other comprehensive loss
    (8,317 )     (8,850 )
Total stockholders’ equity
    56,091       49,551  
Total liabilities and stockholders’ equity
  $ 213,094     $ 191,174  

See accompanying notes to consolidated financial statements.


QAD INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

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

See accompanying notes to consolidated financial statements.


QAD INC.

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

(in thousands)

   
Number of Shares
   
Amount
   
Additional Paid-
   
 
   
 
   
Accumulated Other
   
Total
   
Comprehensive
 
   
Class
A
   
Class
B
   
Treasury
   
Class
A
   
Class
B
   
in
Capital
   
Treasury
Stock
   
Accumulated
Deficit
   
Comprehensive
Loss
   
Stockholders’
Equity
   
Income
(Loss)
 
Balance, January 31, 2008
    14,144       3,536       (2,299 )   $ 14     $ 4     $ 135,379     $ (36,336 )   $ (21,596 )   $ (4,870 )   $ 72,595        
Comprehensive loss: