##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended July 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
    
    (I.R.S. Employer Identification No.)organization)
 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 July 31, 2006 and January 31, 2006
    
    
    1Condensed Consolidated Statements of Operations for the Three and Six Months Ended July 31, 2006 and 2005
    
    
    2Condensed Consolidated Statements of Cash Flows for the Six Months Ended July 31, 2006 and 2005
    
    
    3Notes to Condensed Consolidated Financial Statements
    
    
    4ITEM 2 Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    16ITEM 3 Quantitative and Qualitative Disclosures About Market Risk
    
    
    25ITEM 4 Controls and Procedures
    
    
    25PART II  OTHER INFORMATIONITEM 1 Legal Proceedings
    
    
    26ITEM 1A Risk Factors
    
    
    26ITEM 2 Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    26ITEM 3 Defaults Upon Senior Securities
    
    
    26ITEM 4 Submission of Matters to a Vote of Security Holders
    
    
    26ITEM 5 Other Information
    
    
    27ITEM 6 Exhibits
    
    
    27SIGNATURES
    
    
    28EXHIBIT 3.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2




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PART I
 
 ITEM 1
 FINANCIAL STATEMENTS
 QAD INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (in thousands, except share data)
 (unaudited)
 July 31,
    
    
    January 31,2006
    
    
    2006AssetsCurrent assets:Cash and equivalents
    
    $
    60,526
    
    
    $
    59,971Accounts receivable, net
    
    
    41,936
    
    
    
    61,819Other current assets
    
    
    13,972
    
    
    
    14,406Total current assets
    
    
    116,434
    
    
    
    136,196Property and equipment, net
    
    
    40,025
    
    
    
    40,825Capitalized software costs, net
    
    
    5,467
    
    
    
    5,251Goodwill
    
    
    11,614
    
    
    
    10,640Other assets, net
    
    
    14,631
    
    
    
    14,146Total assets
    
    $
    188,171
    
    
    $
    207,058Liabilities and stockholders equityCurrent liabilities:Current portion of long-term debt
    
    $
    253
    
    
    $
    243Accounts payable
    
    
    6,495
    
    
    
    9,136Deferred revenue
    
    
    63,279
    
    
    
    75,314Other current liabilities
    
    
    27,379
    
    
    
    30,809Total current liabilities
    
    
    97,406
    
    
    
    115,502Long-term debt
    
    
    17,399
    
    
    
    17,546Other liabilities
    
    
    1,210
    
    
    
    820Minority interest
    
    
    820
    
    
    
    665Commitments and contingenciesStockholders equity:Preferred stock, $0.001 par value. Authorized 5,000,000
shares; none issued and outstandingCommon stock, $0.001 par value. Authorized 150,000,000
shares; issued 35,351,806 and 35,350,084 shares at
July 31, 2006 and January 31, 2006, respectively
    
    
    35
    
    
    
    35Additional paid-in capital
    
    
    125,923
    
    
    
    123,376Treasury stock, at cost (3,032,193 and 2,813,739 shares at
July 31, 2006 and January 31, 2006, respectively)
    
    
    (22,567
    )
    
    
    (20,752
    )Accumulated deficit
    
    
    (24,052
    )
    
    
    (23,551
    )Unearned compensation  restricted stock
    
    
    (229
    )
    
    
    (330
    )Accumulated other comprehensive loss
    
    
    (7,774
    )
    
    
    (6,253
    )Total stockholders equity
    
    
    71,336
    
    
    
    72,525Total liabilities and stockholders equity
    
    $
    188,171
    
    
    $
    207,058
  1




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QAD INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (in thousands, except per share data)
 (unaudited)
 Three Months Ended
    
    
    Six Months EndedJuly 31,
    
    
    July 31,2006
    
    
    2005
    
    
    2006
    
    
    2005License fees
    
    $
    13,471
    
    
    $
    16,288
    
    
    $
    23,762
    
    
    $
    30,167Maintenance and other
    
    
    30,708
    
    
    
    29,493
    
    
    
    60,898
    
    
    
    58,103Services
    
    
    14,188
    
    
    
    12,261
    
    
    
    27,114
    
    
    
    25,756Total revenue
    
    
    58,367
    
    
    
    58,042
    
    
    
    111,774
    
    
    
    114,026Costs and expenses:Cost of license fees
    
    
    1,854
    
    
    
    2,179
    
    
    
    3,515
    
    
    
    4,248Cost of maintenance, service and other revenue
    
    
    21,091
    
    
    
    20,135
    
    
    
    41,035
    
    
    
    40,668Sales and marketing
    
    
    15,917
    
    
    
    16,766
    
    
    
    31,548
    
    
    
    31,818Research and development
    
    
    10,884
    
    
    
    8,082
    
    
    
    20,257
    
    
    
    16,342General and administrative
    
    
    7,350
    
    
    
    6,547
    
    
    
    13,749
    
    
    
    13,258Amortization of intangibles from acquisitions
    
    
    31
    
    
    
    92
    
    
    
    41
    
    
    
    186Total costs and expenses
    
    
    57,127
    
    
    
    53,801
    
    
    
    110,145
    
    
    
    106,520Operating income
    
    
    1,240
    
    
    
    4,241
    
    
    
    1,629
    
    
    
    7,506Other (income) expense:Interest income
    
    
    (732
    )
    
    
    (324
    )
    
    
    (1,391
    )
    
    
    (659
    )Interest expense
    
    
    229
    
    
    
    354
    
    
    
    539
    
    
    
    904Other (income) expense, net
    
    
    (248
    )
    
    
    (973
    )
    
    
    (1,632
    )
    
    
    (995
    )Total other (income) expense
    
    
    (751
    )
    
    
    (943
    )
    
    
    (2,484
    )
    
    
    (750
    )Income before income taxes
    
    
    1,991
    
    
    
    5,184
    
    
    
    4,113
    
    
    
    8,256Income tax expense
    
    
    871
    
    
    
    1,337
    
    
    
    1,584
    
    
    
    1,906Net income
    
    $
    1,120
    
    
    $
    3,847
    
    
    $
    2,529
    
    
    $
    6,350Basic and diluted net income per share
    
    $
    0.03
    
    
    $
    0.12
    
    
    $
    0.08
    
    
    $
    0.19
  2




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QAD INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (in thousands)
 (unaudited)
 Six Months EndedJuly 31,2006
    
    
    2005Cash flows from operating activities:Net income
    
    $
    2,529
    
    
    $
    6,350Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation and amortization
    
    
    3,598
    
    
    
    3,802Provision for doubtful accounts and sales adjustments
    
    
    189
    
    
    
    (168
    )(Gain) loss on disposal of property and equipment
    
    
    9
    
    
    
    (20
    )Tax benefit from reversal of tax allowances and reserves
    
    
    
    
    
    
    (373
    )Exit costs
    
    
    355
    
    
    
    940Stock compensation expense
    
    
    2,596
    
    
    
    55Other, net
    
    
    (39
    )
    
    
    (107
    )Changes in assets and liabilities, net of effects from acquisitions:Accounts receivable
    
    
    20,024
    
    
    
    17,680Other assets
    
    
    517
    
    
    
    1,973Accounts payable
    
    
    (2,657
    )
    
    
    (2,633
    )Deferred revenue
    
    
    (12,788
    )
    
    
    (11,934
    )Other liabilities
    
    
    (4,098
    )
    
    
    (2,884
    )Net cash provided by operating activities
    
    
    10,235
    
    
    
    12,681Cash flows from investing activities:Purchase of property and equipment
    
    
    (2,211
    )
    
    
    (4,477
    )Capitalized software costs
    
    
    (669
    )
    
    
    (1,697
    )Acquisition of businesses, net of cash acquired
    
    
    (1,488
    )
    
    
    Proceeds from sale of intangible assets
    
    
    906
    
    
    
    Proceeds from sale of marketable securities
    
    
    
    
    
    
    13,000Proceeds from sale of property and equipment
    
    
    177
    
    
    
    39Net cash (used in) provided by investing activities
    
    
    (3,285
    )
    
    
    6,865Cash flows from financing activities:Repayments of debt
    
    
    (181
    )
    
    
    (7,747
    )Proceeds from issuance of common stock
    
    
    877
    
    
    
    1,226Changes in cash overdraft
    
    
    (83
    )
    
    
    173Dividends paid
    
    
    (1,632
    )
    
    
    (1,646
    )Repurchase of common stock
    
    
    (4,076
    )
    
    
    (14,800
    )Net cash used in financing activities
    
    
    (5,095
    )
    
    
    (22,794
    )Effect of exchange rates on cash and equivalents
    
    
    (1,300
    )
    
    
    (1,788
    )Net increase (decrease) in cash and equivalents
    
    
    555
    
    
    
    (5,036
    )Cash and equivalents at beginning of period
    
    
    59,971
    
    
    
    55,289Cash and equivalents at end of period
    
    $
    60,526
    
    
    $
    50,253
  3




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QAD INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited)
 1. BASIS OF PRESENTATION
  RECLASSIFICATIONS
  2. RECENT ACCOUNTING PRONOUNCEMENTS
 Share-Based Payment
    Taxes Collected From Customers
 .
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QAD INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 Uncertainty in Income Taxes
  3. COMPUTATION OF NET INCOME PER SHARE
  Three Months Ended
    
    
    Six Months EndedJuly 31,
    
    
    July 31,2006
    
    
    2005
    
    
    2006
    
    
    2005(in thousands, except per share data)Net income
    
    $
    1,120
    
    
    $
    3,847
    
    
    $
    2,529
    
    
    $
    6,350Weighted average shares of common
stock outstanding  basic
    
    
    32,542
    
    
    
    32,340
    
    
    
    32,581
    
    
    
    33,083Weighted average shares of common
stock equivalents issued using the
treasury stock method
    
    
    687
    
    
    
    856
    
    
    
    752
    
    
    
    909Weighted average shares of common
stock and common stock equivalents
outstanding  diluted
    
    
    33,229
    
    
    
    33,196
    
    
    
    33,333
    
    
    
    33,992Basic and diluted net income per share
    
    $
    0.03
    
    
    $
    0.12
    
    
    $
    0.08
    
    
    $
    0.19
  4. COMPREHENSIVE INCOME
  Three Months Ended
    
    
    Six Months EndedJuly 31,
    
    
    July 31,2006
    
    
    2005
    
    
    2006
    
    
    2005(in thousands)Net income
    
    $
    1,120
    
    
    $
    3,847
    
    
    $
    2,529
    
    
    $
    6,350Foreign currency translation adjustments
    
    
    (430
    )
    
    
    (1,421
    )
    
    
    (1,521
    )
    
    
    (1,608
    )Comprehensive income
    
    $
    690
    
    
    $
    2,426
    
    
    $
    1,008
    
    
    $
    4,742
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QAD INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 5. BUSINESS COMBINATIONS
 Bisgen Ltd.
   Soft Cell N.V.
    (in thousands)Purchase price components:Tangible assetsFixed assets
    
    $
    158VAT
    
    
    53Total tangible assets
    
    
    211Identified intangible assetsCustomer contracts
    
    
    800Intellectual property
    
    
    184Tradename
    
    
    25Total identified intangible assets
    
    
    1,009Goodwill
    
    
    158Total purchase price
    
    $
    1,378
 6




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QAD INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
   6. CAPITALIZED SOFTWARE COSTS
  July 31,
    
    
    January 31,2006
    
    
    2006(in thousands)Capitalized software costs:Acquired software technology
    
    $
    6,384
    
    
    $
    6,197Capitalized software development costs
    
    
    1,987
    
    
    
    1,5208,371
    
    
    
    7,717Accumulated amortization
    
    
    (2,904
    )
    
    
    (2,466
    )Capitalized software costs, net
    
    $
    5,467
    
    
    $
    5,251
   7




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QAD INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 7. GOODWILL
  North
    
    
    
    
    
    
    AsiaAmerica
    
    
    EMEA
    
    
    Pacific
    
    
    Latin America
    
    
    Total(in thousands)Balances, January 31, 2006
    
    $
    
    
    
    $
    9,511
    
    
    $
    282
    
    
    $
    847
    
    
    $
    10,640Additions
    
    
    187
    
    
    
    187
    
    
    
    
    
    
    
    
    
    
    
    374Impact of foreign currency translation
    
    
    
    
    
    
    632
    
    
    
    8
    
    
    
    (40
    )
    
    
    600Balances, July 31, 2006
    
    $
    187
    
    
    $
    10,330
    
    
    $
    290
    
    
    $
    807
    
    
    $
    11,614
   8. LONG-TERM DEBT
 July 31,
    
    
    January 31,2006
    
    
    2006(in thousands)Total debtNotes payable
    
    $
    17,588
    
    
    $
    17,715Capital lease obligations
    
    
    64
    
    
    
    7417,652
    
    
    
    17,789Less current maturities
    
    
    253
    
    
    
    243Long-term debt
    
    $
    17,399
    
    
    $
    17,546
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QAD INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 Notes Payable
  Credit Facility
     9. STOCKHOLDERS EQUITY
 Stock Based Compensation
  9




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QAD INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
       10




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QAD INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
  Three Months Ended
    
    
    Six Months EndedJuly 31, 2005
    
    
    July 31, 2005(unaudited)Net income, as reported
    
    $
    3,847
    
    
    $
    6,350Add: Stock-based employee
compensation expense included in
reported net income, net of related
tax effects
    
    
    18
    
    
    
    35Deduct: Stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax
effects
    
    
    773
    
    
    
    1,453Pro forma net income
    
    $
    3,092
    
    
    $
    4,932Basic and diluted earnings per share:As reportedBasic
    
    $
    0.12
    
    
    $
    0.19Diluted
    
    $
    0.12
    
    
    $
    0.19Pro formaBasic
    
    $
    0.10
    
    
    $
    0.15Diluted
    
    $
    0.09
    
    
    $
    0.14
  Six Months Ended July 31,2006
    
    2005StockOptions/
    
    
    
    
    
    StockSARs
    
    ESPP
    
    Options
    
    ESPPExpected life in years (1)
    
    
    3.11
    
    
    
    
    
    
    
    5.0
    
    
    
    0.25Risk free interest rate (2)
    
    
    4.93
    %
    
    
    
    
    
    
    4.21
    %
    
    
    3.59
    %Volatility (3)
    
    
    50
    %
    
    
    
    
    
    
    83
    %
    
    
    37
    %Dividend rate (4)
    
    
    1.34
    %
    
    
    
    
    
    
    1.40
    %
    
    
    1.40
    %
 
 (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.
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QAD INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 (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
      12




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QAD INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
  Weighted AverageEquity
    
    
    Weighted Average
    
    
    Remaining
    
    
    AggregateAwards
    
    
    Exercise Price per
    
    
    Contractual Life
    
    
    Intrinsic Value(in thousands)
    
    
    Share
    
    
    (in years)
    
    
    (in thousands)Outstanding at January 31, 2006
    
    
    5,141
    
    
    $
    7.17Granted
    
    
    1,156
    
    
    
    7.02Exercised
    
    
    (372
    )
    
    
    3.32Cancelled/forfeited/expired
    
    
    (222
    )
    
    
    10.63Outstanding at July 31, 2006
    
    
    5,703
    
    
    $
    7.26
    
    
    
    5.7
    
    
    $
    6,806Vested and expected to vest as of
July 31, 2006 (1)
    
    
    5,059
    
    
    $
    7.20
    
    
    
    5.5
    
    
    $
    6,594Exercisable at July 31, 2006
    
    
    2,518
    
    
    $
    6.55
    
    
    
    4.2
    
    
    $
    5,437
 
 (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
  10. COMMITMENTS AND CONTINGENCIES
 Indemnifications
  13




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QAD INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
   Legal Actions
  11. BUSINESS SEGMENT INFORMATION
    Three Months Ended
    
    
    Six Months EndedJuly 31,
    
    
    July 31,2006
    
    
    2005
    
    
    2006
    
    
    2005(in thousands)Revenue:North America
    
    $
    24,493
    
    
    $
    23,198
    
    
    $
    47,994
    
    
    $
    46,397EMEA
    
    
    19,486
    
    
    
    18,800
    
    
    
    37,132
    
    
    
    39,216Asia Pacific
    
    
    10,364
    
    
    
    12,469
    
    
    
    19,119
    
    
    
    21,444Latin America
    
    
    4,024
    
    
    
    3,575
    
    
    
    7,529
    
    
    
    6,969$
    58,367
    
    
    $
    58,042
    
    
    $
    111,774
    
    
    $
    114,026Operating income (loss):North America
    
    $
    4,596
    
    
    $
    4,196
    
    
    $
    8,571
    
    
    $
    8,176EMEA
    
    
    356
    
    
    
    (463
    )
    
    
    330
    
    
    
    565Asia Pacific
    
    
    767
    
    
    
    2,275
    
    
    
    1,067
    
    
    
    2,323Latin America
    
    
    (127
    )
    
    
    (187
    )
    
    
    (470
    )
    
    
    (390
    )Corporate
    
    
    (4,352
    )
    
    
    (1,580
    )
    
    
    (7,869
    )
    
    
    (3,168
    )$
    1,240
    
    
    $
    4,241
    
    
    $
    1,629
    
    
    $
    7,506
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QAD INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 July 31,
    
    
    January 31,2006
    
    
    2006Identifiable assets:North America
    
    $
    115,398
    
    
    $
    125,187EMEA
    
    
    42,404
    
    
    
    51,851Asia Pacific
    
    
    22,097
    
    
    
    21,955Latin America
    
    
    8,272
    
    
    
    8,065$
    188,171
    
    
    $
    207,058
 12. EXIT COSTS
  15




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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. We use the residual method to recognize revenue. When a license
agreement
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includes one or more elements to be delivered at a future date, if 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 for which we review 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
July 31, 2006, were $11.6 million and $0.3 million, respectively, accounting for 6% 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 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
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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 half 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.SFAS No. 5, Accounting for Contingencies, requires us to record tax contingency
reserves for items that are probable and estimable. Management uses judgment in
determining the probability of an unfavorable 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 and accounted for
forfeitures 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 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
    
    
    Six Months EndedJuly 31,
    
    
    July 31,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenue:License fees
    
    
    23
    %
    
    
    28
    %
    
    
    21
    %
    
    
    26
    %Maintenance and other
    
    
    53
    
    
    
    51
    
    
    
    55
    
    
    
    51Services
    
    
    24
    
    
    
    21
    
    
    
    24
    
    
    
    23Total revenue
    
    
    100
    
    
    
    100
    
    
    
    100
    
    
    
    100Costs and expenses:Cost of license fees
    
    
    3
    
    
    
    4
    
    
    
    3
    
    
    
    4Cost of maintenance, service and other revenue
    
    
    36
    
    
    
    34
    
    
    
    37
    
    
    
    35Sales and marketing
    
    
    27
    
    
    
    29
    
    
    
    28
    
    
    
    28Research and development
    
    
    19
    
    
    
    14
    
    
    
    18
    
    
    
    14General and administrative
    
    
    13
    
    
    
    12
    
    
    
    13
    
    
    
    12Amortization of intangibles from acquisitions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total costs and expenses
    
    
    98
    
    
    
    93
    
    
    
    99
    
    
    
    93Operating income
    
    
    2
    
    
    
    7
    
    
    
    1
    
    
    
    7Other (income) expense
    
    
    (1
    )
    
    
    (2
    )
    
    
    (2
    )
    
    
    Income before income taxes
    
    
    3
    
    
    
    9
    
    
    
    3
    
    
    
    7Income tax expense
    
    
    1
    
    
    
    2
    
    
    
    1
    
    
    
    1Net income
    
    
    2
    %
    
    
    7
    %
    
    
    2
    %
    
    
    6
    %
 Total Revenue
  License Revenue
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Maintenance and Other Revenue
  Services Revenue.
  20




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(in thousands, unaudited)
 Three Months Ended
    
    
    Six Months EndedJuly 31,
    
    
    July 31,2006
    
    
    2005
    
    
    2006
    
    
    2005Stock-based compensation expense by function:Cost of maintenance, service and other revenue
    
    $
    217
    
    
    $
    27
    
    
    $
    461
    
    
    $
    55Sales and marketing
    
    
    316
    
    
    
    
    
    
    
    625
    
    
    
    Research and development
    
    
    221
    
    
    
    
    
    
    
    425
    
    
    
    General and administrative
    
    
    559
    
    
    
    
    
    
    
    1,085
    
    
    
    Total stock-based compensation expense
    
    
    1,313
    
    
    
    27
    
    
    
    2,596
    
    
    
    55Income tax benefit
    
    
    (492
    )
    
    
    (9
    )
    
    
    (973
    )
    
    
    (20
    )Stock-based compensation, net of tax
    
    $
    821
    
    
    $
    18
    
    
    $
    1,623
    
    
    $
    35
 Total Cost of Revenue.
   Sales and Marketing.
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Research and Development.
  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)5/1/06  5/31/06
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    1,000,0006/1/06  6/30/06
    
    
    333,400
    
    
    $
    7.24
    
    
    
    333,400
    
    
    
    666,6007/1/06  7/31/06
    
    
    209,500
    
    
    $
    7.93
    
    
    
    209,500
    
    
    
    457,100
 
 (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 July 31, 2006, 542,900 shares had been repurchased under the program. 
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  (1)
    
    To elect five directors, as nominated:
 Votes For
    
    Votes WithheldKarl F. Lopker
    
    
    28,592,720
    
    
    
    2,477,387Pamela M. Lopker
    
    
    28,609,190
    
    
    
    2,460,917Peter R. van Cuylenburg
    
    
    30,335,011
    
    
    
    735,096A. Barry Patmore
    
    
    30,332,706
    
    
    
    737,401Scott J. Adelson
    
    
    30,801,275
    
    
    
    268,832
 (2)
    
    To approve the QAD Inc. 2006 Stock Incentive program:
 Votes For
    
    Votes Against
    
    Abstentions21,851,954
    
    1,166,806
    
    1,444,441
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ITEM 5. OTHER INFORMATION
  
 ITEM 6. EXHIBITS
 Exhibits
 3.1
    
    Certificate of Amendment to Certificate of Incorporation of the Registrant,
filed with the Delaware Secretary of State on July 29, 200531.1
    
    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: September 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) 28