##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended October 31, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 For the transition period from to
 Commission file number 0-22823
 QAD Inc.
  Delaware
    
    77-0105228(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 6450 Via Real, Carpinteria, California 93013
 (805) 684-6614
 þ o
 
 o þ o
 o þ




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##### 



QAD INC.
INDEX
  
 PagePART I  FINANCIAL INFORMATIONITEM 1 Financial Statements (unaudited)Condensed Consolidated Balance Sheets as of
October 31, 2006 and January 31, 2006
    
    
    1Condensed Consolidated Statements of Operations
for the Three and Nine Months Ended October 31, 2006 and 2005
    
    
    2Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended October 31, 2006 and 2005
    
    
    3Notes to Condensed Consolidated Financial
Statements
    
    
    4ITEM 2 Managements Discussion and Analysis of
Financial Condition and Results of Operations
    
    
    15ITEM 3 Quantitative and Qualitative Disclosures
About Market Risk
    
    
    24ITEM 4 Controls and Procedures
    
    
    24PART II  OTHER INFORMATIONITEM 1 Legal Proceedings
    
    
    25ITEM 1A Risk Factors
    
    
    25ITEM 2 Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    25ITEM 3 Defaults Upon Senior Securities
    
    
    25ITEM 4 Submission of Matters to a Vote of Security Holders
    
    
    25ITEM 5 Other Information
    
    
    25ITEM 6 Exhibits
    
    
    25SIGNATURES
    
    
    26EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2




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##### Table of Contents



PART I
 
 ITEM 1  FINANCIAL STATEMENTS
 QAD INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
 October 31,
    
    
    January 31,2006
    
    
    2006AssetsCurrent assets:Cash and equivalents
    
    $
    50,368
    
    
    $
    59,971Restricted cash
    
    
    2,612
    
    
    
    Accounts receivable, net
    
    
    42,432
    
    
    
    61,819Other current assets
    
    
    14,452
    
    
    
    14,406Total current assets
    
    
    109,864
    
    
    
    136,196Property and equipment, net
    
    
    43,884
    
    
    
    40,825Capitalized software costs, net
    
    
    7,943
    
    
    
    5,251Goodwill
    
    
    11,903
    
    
    
    10,640Other assets, net
    
    
    15,093
    
    
    
    14,146Total assets
    
    $
    188,687
    
    
    $
    207,058Liabilities and stockholders equityCurrent liabilities:Current portion of long-term debt
    
    $
    271
    
    
    $
    243Accounts payable
    
    
    8,469
    
    
    
    9,136Deferred revenue
    
    
    56,938
    
    
    
    75,314Other current liabilities
    
    
    31,435
    
    
    
    30,809Total current liabilities
    
    
    97,113
    
    
    
    115,502Long-term debt
    
    
    17,334
    
    
    
    17,546Other liabilities
    
    
    1,641
    
    
    
    820Minority interest
    
    
    663
    
    
    
    665Commitments and contingenciesStockholders equity:Preferred stock, $0.001 par value. Authorized 5,000,000
shares; none issued and outstanding
    
    
    35
    
    
    
    35Common stock, $0.001 par value. Authorized 150,000,000
shares; issued 35,351,806 and 35,350,084 shares at
October 31, 2006 and January 31, 2006, respectively
    
    
    127,186
    
    
    
    123,376Additional paid-in capitalTreasury stock, at cost (3,086,112 and 2,813,739 shares at
October 31, 2006 and January 31, 2006, respectively)
    
    
    (22,989
    )
    
    
    (20,752
    )Accumulated deficit
    
    
    (24,630
    )
    
    
    (23,551
    )Unearned compensation  restricted stock
    
    
    (229
    )
    
    
    (330
    )Accumulated other comprehensive loss
    
    
    (7,437
    )
    
    
    (6,253
    )Total stockholders equity
    
    
    71,936
    
    
    
    72,525Total liabilities and stockholders equity
    
    $
    188,687
    
    
    $
    207,058
  1




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##### Table of Contents



QAD INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
 Three Months Ended
    
    
    Nine Months EndedOctober 31,
    
    
    October 31,2006
    
    
    2005
    
    
    2006
    
    
    2005License fees
    
    $
    10,974
    
    
    $
    10,066
    
    
    $
    34,736
    
    
    $
    40,233Maintenance and other
    
    
    30,949
    
    
    
    29,297
    
    
    
    91,847
    
    
    
    87,400Services
    
    
    15,401
    
    
    
    12,049
    
    
    
    42,515
    
    
    
    37,805Total revenue
    
    
    57,324
    
    
    
    51,412
    
    
    
    169,098
    
    
    
    165,438Costs and expenses:Cost of license fees
    
    
    1,852
    
    
    
    1,604
    
    
    
    5,367
    
    
    
    5,852Cost of maintenance, service and other revenue
    
    
    21,311
    
    
    
    19,425
    
    
    
    62,346
    
    
    
    60,093Sales and marketing
    
    
    15,566
    
    
    
    13,818
    
    
    
    47,114
    
    
    
    45,636Research and development
    
    
    9,835
    
    
    
    7,302
    
    
    
    30,092
    
    
    
    23,644General and administrative
    
    
    7,389
    
    
    
    6,315
    
    
    
    21,138
    
    
    
    19,573Amortization of intangibles from acquisitions
    
    
    107
    
    
    
    51
    
    
    
    148
    
    
    
    237Total costs and expenses
    
    
    56,060
    
    
    
    48,515
    
    
    
    166,205
    
    
    
    155,035Operating income
    
    
    1,264
    
    
    
    2,897
    
    
    
    2,893
    
    
    
    10,403Other (income) expense:Interest income
    
    
    (617
    )
    
    
    (334
    )
    
    
    (2,008
    )
    
    
    (993
    )Interest expense
    
    
    320
    
    
    
    336
    
    
    
    859
    
    
    
    1,240Other (income) expense, net
    
    
    99
    
    
    
    (350
    )
    
    
    (1,533
    )
    
    
    (1,345
    )Total other (income) expense
    
    
    (198
    )
    
    
    (348
    )
    
    
    (2,682
    )
    
    
    (1,098
    )Income before income taxes
    
    
    1,462
    
    
    
    3,245
    
    
    
    5,575
    
    
    
    11,501Income tax expense
    
    
    515
    
    
    
    557
    
    
    
    2,099
    
    
    
    2,463Net income
    
    $
    947
    
    
    $
    2,688
    
    
    $
    3,476
    
    
    $
    9,038Basic net income per share
    
    $
    0.03
    
    
    $
    0.08
    
    
    $
    0.11
    
    
    $
    0.28Diluted net income per share
    
    $
    0.03
    
    
    $
    0.08
    
    
    $
    0.10
    
    
    $
    0.27
  2




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QAD INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 Nine Months EndedOctober 31,2006
    
    
    2005Cash flows from operating activities:Net income
    
    $
    3,476
    
    
    $
    9,038Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation and amortization
    
    
    5,654
    
    
    
    5,585Provision for doubtful accounts and sales adjustments
    
    
    67
    
    
    
    39(Gain) loss on disposal of property and equipment
    
    
    10
    
    
    
    (12
    )Tax benefit from reversal of tax allowances and reserves
    
    
    
    
    
    
    (793
    )Exit costs
    
    
    524
    
    
    
    1,075Stock compensation expense
    
    
    3,887
    
    
    
    83Other, net
    
    
    (82
    )
    
    
    (154
    )Changes in assets and liabilities, net of effects from acquisitions:Accounts receivable
    
    
    22,200
    
    
    
    23,664Other assets
    
    
    721
    
    
    
    2,267Accounts payable
    
    
    (1,957
    )
    
    
    (3,861
    )Deferred revenue
    
    
    (19,751
    )
    
    
    (14,666
    )Other liabilities
    
    
    (3,806
    )
    
    
    (3,179
    )Net cash provided by operating activities
    
    
    10,943
    
    
    
    19,086Cash flows from investing activities:Purchase of property and equipment
    
    
    (3,714
    )
    
    
    (5,912
    )Capitalized software costs
    
    
    (1,044
    )
    
    
    (2,845
    )Acquisition of businesses, net of cash acquired
    
    
    (6,973
    )
    
    
    Restricted cash
    
    
    (2,612
    )
    
    
    Proceeds from sale of intangible assets
    
    
    906
    
    
    
    Proceeds from sale of marketable securities
    
    
    
    
    
    
    13,000Proceeds from sale of property and equipment
    
    
    177
    
    
    
    43Net cash (used in) provided by investing activities
    
    
    (13,260
    )
    
    
    4,286Cash flows from financing activities:Repayments of debt
    
    
    (244
    )
    
    
    (7,794
    )Proceeds from issuance of common stock
    
    
    1,384
    
    
    
    2,236Changes in cash overdraft
    
    
    950
    
    
    
    (1,057
    )Dividends paid
    
    
    (2,441
    )
    
    
    (2,450
    )Minority shareholder payment
    
    
    (389
    )
    
    
    Repurchase of common stock
    
    
    (5,567
    )
    
    
    (14,800
    )Net cash used in financing activities
    
    
    (6,307
    )
    
    
    (23,865
    )Effect of exchange rates on cash and equivalents
    
    
    (979
    )
    
    
    (1,999
    )Net decrease in cash and equivalents
    
    
    (9,603
    )
    
    
    (2,492
    )Cash and equivalents at beginning of period
    
    
    59,971
    
    
    
    55,289Cash and equivalents at end of period
    
    $
    50,368
    
    
    $
    52,797
  3




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##### Table of Contents



QAD INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 1. BASIS OF PRESENTATION
  RECLASSIFICATIONS
  2. RECENT ACCOUNTING PRONOUNCEMENTS
 Taxes Collected From Customers
 .
 Uncertainty in Income Taxes
  Fair Value Measurements
  Effects of Prior Year Misstatements
  4




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##### Table of Contents



QAD INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 3. COMPUTATION OF NET INCOME PER SHARE
  Three Months Ended
    
    
    Nine Months EndedOctober 31,
    
    
    October 31,2006
    
    
    2005
    
    
    2006
    
    
    2005(in thousands, except per share data)Net income
    
    $
    947
    
    
    $
    2,688
    
    
    $
    3,476
    
    
    $
    9,038Weighted average shares of common
stock outstanding  basic
    
    
    32,238
    
    
    
    32,236
    
    
    
    32,465
    
    
    
    32,798Weighted average shares of common
stock equivalents issued using the
treasury stock method
    
    
    673
    
    
    
    842
    
    
    
    727
    
    
    
    882Weighted average shares of common
stock and common stock equivalents
outstanding  diluted
    
    
    32,911
    
    
    
    33,078
    
    
    
    33,192
    
    
    
    33,680Basic net income per share
    
    $
    0.03
    
    
    $
    0.08
    
    
    $
    0.11
    
    
    $
    0.28Diluted net income per share
    
    $
    0.03
    
    
    $
    0.08
    
    
    $
    0.10
    
    
    $
    0.27
  4. COMPREHENSIVE INCOME
  Three Months Ended
    
    
    Nine Months EndedOctober 31,
    
    
    October 31,2006
    
    
    2005
    
    
    2006
    
    
    2005(in thousands)Net income
    
    $
    947
    
    
    $
    2,688
    
    
    $
    3,476
    
    
    $
    9,038Foreign currency translation adjustments
    
    
    337
    
    
    
    22
    
    
    
    (1,184
    )
    
    
    (1,586
    )Comprehensive income
    
    $
    1,284
    
    
    $
    2,710
    
    
    $
    2,292
    
    
    $
    7,452
 5. BUSINESS COMBINATIONS
  Precision Software Limited
  5




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QAD INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
   Bisgen Ltd.
   Soft Cell N.V.
     6




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QAD INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 6. CAPITALIZED SOFTWARE COSTS
  October 31,
    
    
    January 31,2006
    
    
    2006(in thousands)Capitalized software costs:Acquired software technology
    
    $
    8,120
    
    
    $
    6,197Capitalized software development costs
    
    
    2,203
    
    
    
    1,52010,323
    
    
    
    7,717Accumulated amortization
    
    
    (2,380
    )
    
    
    (2,466
    )Capitalized software costs, net
    
    $
    7,943
    
    
    $
    5,251
     7. GOODWILL AND INTANGIBLE ASSETS
 Goodwill
  North
    
    
    
    
    
    
    AsiaAmerica
    
    
    EMEA
    
    
    Pacific
    
    
    Latin America
    
    
    Total(in thousands)Balances, January 31, 2006
    
    $
    
    
    
    $
    9,511
    
    
    $
    282
    
    
    $
    847
    
    
    $
    10,640Additions
    
    
    260
    
    
    
    260
    
    
    
    
    
    
    
    
    
    
    
    520Impact of foreign currency
translation
    
    
    
    
    
    
    751
    
    
    
    17
    
    
    
    (25
    )
    
    
    743Balances, October 31, 2006
    
    $
    260
    
    
    $
    10,522
    
    
    $
    299
    
    
    $
    822
    
    
    $
    11,903
 7




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##### Table of Contents



QAD INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
   Intangible Assets
 October 31,
    
    
    January 31,2006
    
    
    2006(in thousands)Amortizable intangible assets
    
    $
    1,584
    
    
    $
    152Less: accumulated amortization
    
    
    (260
    )
    
    
    (105
    )Net amortizable intangible assets
    
    $
    1,324
    
    
    $
    47
     8. LONG-TERM DEBT
 October 31,
    
    
    January 31,2006
    
    
    2006(in thousands)Total debtNotes payable
    
    $
    17,533
    
    
    $
    17,715Capital lease obligations
    
    
    72
    
    
    
    7417,605
    
    
    
    17,789Less current maturities
    
    
    271
    
    
    
    243Long-term debt
    
    $
    17,334
    
    
    $
    17,546
 Notes Payable
  8




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##### Table of Contents



QAD INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 Credit Facility
    9. STOCKHOLDERS EQUITY
 Stock Based Compensation
   9




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##### Table of Contents



QAD INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
       Three Months Ended
    
    
    Nine Months EndedOctober 31, 2005
    
    
    October 31, 2005(unaudited)Net income, as reported
    
    $
    2,688
    
    
    $
    9,038Add: Stock-based employee
compensation expense included in
reported net income, net of related
tax effects
    
    
    17
    
    
    
    52Deduct: Stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax
effects
    
    
    923
    
    
    
    2,376Pro forma net income
    
    $
    1,782
    
    
    $
    6,714Basic and diluted earnings per share:As reportedBasic
    
    $
    0.08
    
    
    $
    0.28Diluted
    
    $
    0.08
    
    
    $
    0.27Pro formaBasic
    
    $
    0.06
    
    
    $
    0.20Diluted
    
    $
    0.05
    
    
    $
    0.20
 10




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##### Table of Contents



QAD INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
  Nine Months Ended October 31,2006
    
    2005StockOptions/
    
    
    
    
    
    StockSARs
    
    ESPP
    
    Options
    
    ESPPExpected life in years
(1)
    
    
    3.14
    
    
    
    
    
    
    
    5.0
    
    
    
    0.25Risk free interest rate (2)
    
    
    4.83
    %
    
    
    
    
    
    
    4.15
    %
    
    
    3.44
    %Volatility (3)
    
    
    49
    %
    
    
    
    
    
    
    84
    %
    
    
    34
    %Dividend rate (4)
    
    
    1.29
    %
    
    
    
    
    
    
    1.29
    %
    
    
    1.29
    %
 
 (1)
    
    The expected life of stock options granted under the stock plans is based on historical
exercise
 patterns, which the Company believes are representative of future behavior.(2)
    
    The risk-free interest rate is based on the U.S. Treasury yield for a term consistent
with the expected life of the awards in effect at the time of grant.(3)
    
    The Company estimates the volatility of its common stock at the date of grant based on
the historical volatility of the Companys common stock, which it believes is
representative of the expected volatility over the expected life of the option.(4)
    
    The Company expects to continue paying quarterly dividends at the same rate it has over
the last year. Stock Plans
     11




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##### Table of Contents



QAD INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
   Weighted AverageWeighted Average
    
    Remaining
    
    AggregateEquity Awards
    
    Exercise Price per
    
    Contractual Life
    
    Intrinsic Value(in thousands)
    
    Share
    
    (in years)
    
    (in thousands)Outstanding at January 31, 2006
    
    
    5,141
    
    
    $
    7.17Granted
    
    
    1,575
    
    
    
    7.16Exercised
    
    
    (514
    )
    
    
    3.39Cancelled/forfeited/expired
    
    
    (375
    )
    
    
    9.43Outstanding at October 31, 2006
    
    
    5,827
    
    
    $
    7.36
    
    
    
    5.69
    
    
    $
    8,724Vested and expected to vest as of
October 31, 2006 (1)
    
    
    5,179
    
    
    $
    7.32
    
    
    
    5.51
    
    
    $
    8,213Exercisable at October 31, 2006
    
    
    2,334
    
    
    $
    6.71
    
    
    
    4.02
    
    
    $
    5,747
 
 (1)
    
    The expected to vest equity awards are the result of applying the
pre-vesting forfeiture rate assumptions to total outstanding
equity awards.    Stock Repurchase
  12




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##### Table of Contents



QAD INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 10. COMMITMENTS AND CONTINGENCIES
 Indemnifications
   Legal Actions
  11. BUSINESS SEGMENT INFORMATION
    13




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QAD INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 Three Months Ended
    
    
    Nine Months EndedOctober 31,
    
    
    October 31,2006
    
    
    2005
    
    
    2006
    
    
    2005(in thousands)Revenue:North America
    
    $
    24,514
    
    
    $
    21,606
    
    
    $
    72,508
    
    
    $
    68,003EMEA
    
    
    19,660
    
    
    
    16,351
    
    
    
    56,792
    
    
    
    55,567Asia Pacific
    
    
    9,116
    
    
    
    9,304
    
    
    
    28,235
    
    
    
    30,748Latin America
    
    
    4,034
    
    
    
    4,151
    
    
    
    11,563
    
    
    
    11,120$
    57,324
    
    
    $
    51,412
    
    
    $
    169,098
    
    
    $
    165,438Operating income (loss):North America
    
    $
    4,932
    
    
    $
    3,373
    
    
    $
    13,503
    
    
    $
    11,549EMEA
    
    
    526
    
    
    
    (277
    )
    
    
    856
    
    
    
    288Asia Pacific
    
    
    639
    
    
    
    404
    
    
    
    1,706
    
    
    
    2,727Latin America
    
    
    (75
    )
    
    
    201
    
    
    
    (545
    )
    
    
    (189
    )Corporate
    
    
    (4,758
    )
    
    
    (804
    )
    
    
    (12,627
    )
    
    
    (3,972
    )$
    1,264
    
    
    $
    2,897
    
    
    $
    2,893
    
    
    $
    10,403
 October 31,
    
    
    January 31,2006
    
    
    2006Identifiable assets:North America
    
    $
    106,539
    
    
    $
    125,187EMEA
    
    
    56,007
    
    
    
    51,851Asia Pacific
    
    
    18,357
    
    
    
    21,955Latin America
    
    
    7,784
    
    
    
    8,065$
    188,687
    
    
    $
    207,058
 12. EXIT COSTS
  13. SUBSEQUENT EVENT
  14




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##### Table of Contents



ITEM 2 
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 FORWARD-LOOKING STATEMENTS
  INTRODUCTION
  BUSINESS OVERVIEW
  CRITICAL ACCOUNTING POLICIES
  
    
    Revenue Recognition.We generally license our software under non-cancelable license
agreements including third-party software sold in conjunction with customer support and
services. The types of services we sell typically consist of implementation, training or
technical services. Revenue is recognized in accordance with the American Institute of
Certified Public Accountants Statement of Position (SOP) No. 97-2, Software Revenue
Recognition, as modified by SOP No. 98-9, Modification of SOP No. 97-2, Software Revenue
Recognition with Respect to Certain Transactions and Staff Accounting Bulletin (SAB) No.
104, Revenue Recognition. Our revenue recognition policy is as follows:License Revenue.We recognize revenue from license contracts when a non-cancelable,
non-contingent license agreement has been signed, the software product has been delivered, no
uncertainties exist surrounding product acceptance, fees from the agreement are fixed or
determinable and collection is probable. Our typical payment terms vary by region. While
most of our arrangements are within our normal payment terms, we have provided extended terms
on occasion. Terms granted are typically less than one year and we have established a
positive history of collection without concessions on those receivables. Provided all other
revenue recognition criteria have been met, we recognize license revenue for these
arrangements on delivery.
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For license arrangements with multiple elements to be delivered, we use the residual method
to recognize revenue. When a license agreement includes one or more elements to be delivered
at a future date, and vendor-specific, objective evidence of the fair value of all
undelivered elements exists, then the revenue for the undelivered elements are deferred. The
fair value of the undelivered elements is determined based on the historical evidence of
stand-alone sales of these elements to customers and the remaining portion of the arrangement
fee is recognized as revenue. If evidence of the fair value of the undelivered elements does
not exist, revenue is deferred and recognized when we have vendor-specific, objective
evidence for undelivered elements or when delivery of all elements occurs. Subscription
license revenue from our hosted product offerings is recognized ratably over the contract
period.Our standard products do not require significant production, modification or customization of
software or services that are essential to the functionality of the software. Certain
judgments affect the application of our license revenue recognition policy, such as the
assessment of collectibility which is based on our review of a customers credit worthiness
and our historical experience with that customer, if applicable.Maintenance Revenue.Revenue from ongoing customer support and product updates is recognized
ratably over the term of the maintenance period, which in most instances is one year.Services Revenue.Revenue from technical and implementation services is recognized as
services are performed for time-and-materials contracts. Although infrequent, we do at times
enter into fixed-price services contracts for which we recognize the services revenue on the
percentage-of-completion method as prescribed by Accounting Research Bulletin No. 45,
Long-term Construction-Type Contracts, and in SOP No. 81-1, Accounting for Performance of
Construction-Type and Certain Production-Type Contracts. Revenue from training services is
recognized as the services are performed.We believe that we are currently in compliance with the applicable accounting standards
governing revenue recognition. However, the accounting standard setting bodies continue to
discuss various provisions of these guidelines with the objective of providing additional
guidance on their future application. These discussions and the issuance of new
interpretations, once finalized, could lead to unanticipated changes in recognized revenue.
They could also drive significant adjustments to our business practices that could result in
increased administrative costs, lengthened sales cycles and other changes that could affect
our results of operations.
    
    Accounts Receivable Allowances.We review the collectibility of our accounts
receivable each period by analyzing balances based on age and record specific allowances
for any balances that we determine may not be fully collectible. We also provide an
additional reserve based on historical data including analysis of credit memo data and
other known factors. These determinations require management judgment. Actual collection
of these balances may differ due to global or regional economic factors, challenges faced
by customers within our targeted vertical markets or specific financial difficulties of
individual customers.
    
    Impairment of Goodwill and Intangible Assets.Goodwill and other intangible assets at
October 31, 2006, were $11.9 million and $1.3 million, respectively, accounting for 7% of
our total assets. In assessing the recoverability of our intangibles, excluding goodwill,
we must make assumptions regarding estimated future cash flows to determine the fair value
of the respective assets. If these estimates or their related assumptions change in the
future, we may be required to record impairment losses for these assets. Statement of
Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets (SFAS
142) requires us to analyze goodwill for impairment on at least an annual basis. These
periodic analyses are performed by an independent valuation consulting firm. In estimating
the fair value of our individual reporting units, the enterprise fair value was considered
based upon the income approach, which utilizes a discounted cash flow method to determine
the fair value of the business based on the present value of future benefits the business
is expected to generate. If the assumptions underlying these estimated future benefits
change, we may be required to record impairment losses for these assets. For a further
discussion of goodwill, see note 7 Goodwill within the Notes to Condensed Consolidated
Financial Statements.
    
    Capitalized Software Costs.We capitalize software development costs incurred in
connection with the localization and translation of our products once technological
feasibility has been achieved based on a working model. We also capitalize software
purchased from third parties or through business combinations
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as acquired software technology if such software has reached technological feasibility. 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. Capitalized software costs are amortized
on a straight-line basis over three years and charged to Cost of license fees. We periodically compare
the unamortized capitalized software development 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 exceeds 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 be required to
recognize losses for these assets.
    
    Valuation of Deferred Tax Assets and Tax Contingency Reserves. Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes (SFAS 109), requires that the
carrying value of our deferred tax assets reflects an amount that is more likely than not
to be realized. 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. As part of our assessment of the recoverability of our net
deferred tax assets, we determined that certain tax benefits associated with previously reserved
net deferred tax assets were more likely than not realizable through future taxable income and future
reversals of existing taxable temporary differences. As a result, we recorded a tax benefit of $0.4
million at April 30, 2005, resulting from the reduction of previously recorded valuation allowances.
There was no reduction of valuation allowances recorded in the first nine months of fiscal 2007.
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 record tax contingency reserves based on the probable tax treatment of tax positions.
Management uses judgment in determining the probability of an outcome related to a tax exposure
area or controversy (e.g., audit by tax authorities), considering all available information.
Should we in the future determine that additional reserves are required or that some portion of
our existing reserves are no longer required, the adjustment to tax contingency reserves would
impact tax expense in the period such determination was made.
    
    Stock-based Compensation Expense. Effective February 1, 2006, we adopted SFAS 123R using
the modified prospective method and therefore have not restated prior periods results.
Under the fair value recognition provisions of SFAS 123R, we recognize stock-based compensation
net of an estimated forfeiture rate and therefore only recognize compensation cost for those awards
expected to vest over the service period of the award. Prior to SFAS 123R adoption, we accounted for
share-based payments under APB 25 and accordingly, generally recognized compensation expense related to
restricted stock awards that were granted in connection with acquisitions and stock options with intrinsic
value. Forfeitures were accounted for  as they occurred.Calculating stock-based compensation expense requires the use of highly subjective assumptions,
including the expected term of the stock-based awards, stock price volatility, and pre-vesting
option forfeitures. We estimate the expected life of options granted based on historical exercise
patterns, which we believe are representative of future behavior. We estimate the volatility of our
common stock at the date of grant based on the historical volatility of our common stock, which we believe
is representative of future behavior. The assumptions used in calculating the fair value of stock-based
awards represent our best estimates, but these estimates involve inherent uncertainties and the application
of management judgment. As a result, if factors change and we use different assumptions, our stock-based
compensation expense could be materially different in the future. In addition, we are required to estimate
the expected forfeiture rate and only recognize expense for those shares expected to vest. We estimate the
forfeiture rate based on the historical experience of our stock-based awards that are granted, exercised and
cancelled. If our actual forfeiture rate is materially different from our estimate, the stock-based compensation
expense could be significantly different from what we have recorded in the current period. See note 9
Stockholders Equity within Notes to Condensed Consolidated Financial Statements for additional information.
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RESULTS OF OPERATIONS
  Three Months Ended
    
    Nine Months EndedOctober 31,
    
    October 31,2006
    
    2005
    
    2006
    
    2005Revenue:License fees
    
    
    19
    %
    
    
    20
    %
    
    
    21
    %
    
    
    24
    %Maintenance and other
    
    
    54
    
    
    
    57
    
    
    
    54
    
    
    
    53Services
    
    
    27
    
    
    
    23
    
    
    
    25
    
    
    
    23Total revenue
    
    
    100
    
    
    
    100
    
    
    
    100
    
    
    
    100Costs and expenses:Cost of license fees
    
    
    3
    
    
    
    3
    
    
    
    3
    
    
    
    4Cost of maintenance, service and other revenue
    
    
    37
    
    
    
    38
    
    
    
    37
    
    
    
    36Sales and marketing
    
    
    27
    
    
    
    27
    
    
    
    28
    
    
    
    28Research and development
    
    
    17
    
    
    
    14
    
    
    
    18
    
    
    
    14General and administrative
    
    
    13
    
    
    
    12
    
    
    
    12
    
    
    
    12Amortization of intangibles from acquisitions
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    Total costs and expenses
    
    
    98
    
    
    
    94
    
    
    
    98
    
    
    
    94Operating income
    
    
    2
    
    
    
    6
    
    
    
    2
    
    
    
    6Other (income) expense
    
    
    (1
    )
    
    
    
    
    
    
    (1
    )
    
    
    (1
    )Income before income taxes
    
    
    3
    
    
    
    6
    
    
    
    3
    
    
    
    7Income tax expense
    
    
    1
    
    
    
    1
    
    
    
    1
    
    
    
    2Net income
    
    
    2
    %
    
    
    5
    %
    
    
    2
    %
    
    
    5
    %
 Total Revenue
  License Revenue
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Maintenance and Other Revenue
  Services Revenue.
  19




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(in thousands, unaudited)
 Three Months Ended
    
    
    Nine Months EndedOctober 31,
    
    
    October 31,2006
    
    
    2005
    
    
    2006
    
    
    2005Stock-based compensation expense by function:Cost of maintenance, service and other revenue
    
    $
    240
    
    
    $
    28
    
    
    $
    701
    
    
    $
    83Sales and marketing
    
    
    315
    
    
    
    
    
    
    
    940
    
    
    
    Research and development
    
    
    214
    
    
    
    
    
    
    
    639
    
    
    
    General and administrative
    
    
    522
    
    
    
    
    
    
    
    1,607
    
    
    
    Total stock-based compensation expense
    
    
    1,291
    
    
    
    28
    
    
    
    3,887
    
    
    
    83Income tax benefit
    
    
    (447
    )
    
    
    (11
    )
    
    
    (1,420
    )
    
    
    (31
    )Stock-based compensation, net of tax
    
    $
    844
    
    
    $
    17
    
    
    $
    2,467
    
    
    $
    52
 Total Cost of Revenue.
   Sales and Marketing.
  Research and Development.
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General and Administrative.
  Other (Income) Expense
  Income Tax Expense.
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LIQUIDITY AND CAPITAL RESOURCES
  Working Capital
   billed
 earned
 Cash Flows
  Operating Activities
   Investing Activities
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Financing Activities
      CONTRACTUAL OBLIGATIONS
 Notes Payable
  Credit Facility
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ITEM 3  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Foreign Exchange
  Interest Rates.
  
 ITEM 4  CONTROLS AND PROCEDURES
 Evaluation of disclosure controls and procedures.
 Changes in internal control over financial reporting.
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PART II
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 1A. RISK FACTORS
  
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  Total Numberof Shares
    
    Maximum Number ofTotal Number
    
    Average
    
    Purchased as Part
    
    Shares that May Yet Beof Shares
    
    Price Paid
    
    of Publicly Announced
    
    Purchased Under the PlansPeriod
    
    Purchased
    
    per Share
    
    Plans or Programs
    
    or Programs (1)8/1/06  8/31/06
    
    
    36,400
    
    
    $
    7.56
    
    
    
    36,400
    
    
    
    420,7009/1/06  9/30/06
    
    
    139,600
    
    
    $
    7.56
    
    
    
    139,600
    
    
    
    281,10010/1/06  10/31/06
    
    
    20,100
    
    
    $
    7.96
    
    
    
    20,100
    
    
    
    261,000
 
 (1)
    
    In May 2006, the Board of Directors authorized an open market repurchase program for one year to buy up to one
million shares of QAD common stock. As of October 31, 2006, 739,000 shares had been repurchased under the program.
 
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 ITEM 5. OTHER INFORMATION
  
 ITEM 6. EXHIBITS
 Exhibits
 31.1
    
    Certification by the Chief Executive Officer pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 200231.2
    
    Certification by the Chief Financial Officer pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 200232.1
    
    Certification by the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    Certification by the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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Date: December 8, 2006
    
    By:
    
    /s/ DANIEL LENDERDaniel LenderExecutive Vice President, Chief Financial Officer(on behalf of the Registrant)By:
    
    /s/ VALERIE J. MILLERValerie J. MillerVice President, Corporate Controller(Chief Accounting Officer)
 26