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

FORM 10-K

For the fiscal year ended January 31, 2002

OR

For the Transition from                                      to                                     

Commission File Number: 0-22823

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

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

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

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

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ý    No o

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

        The aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant, based on the closing price for the registrant's common stock in the Nasdaq National Market on April 15, 2002, was approximately $55,150,000. This calculation does not reflect a determination that certain persons are affiliates of the registrant for any other purposes. The number of outstanding shares of the registrant's common stock as of the close of business on April 15, 2002, was 34,369,905.

DOCUMENTS INCORPORATED BY REFERENCE

        Items 10, 11, 12 and 13 of Part III incorporate information by reference from the definitive proxy statement for the registrant's Annual Meeting of Stockholders to be held on June 6, 2002.

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

FORWARD-LOOKING STATEMENTS

        In addition to historical information, this Annual Report on Form 10-K contains forward-looking statements. These statements typically are preceded or accompanied by words like "believe," "anticipate," "expect" and words of similar meaning. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those reflected in these forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in the sections entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Factors That May Affect Future Results and Market Price of Stock." Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's opinions only as of the date hereof. We undertake no obligation to revise or update or publicly release the results of any revision or update to these forward-looking statements. Readers should carefully review the risk factors described in other documents we file from time to time with the Securities and Exchange Commission, including the Quarterly Reports on Form 10-Q to be filed by QAD in fiscal year 2003.

PART I

ITEM 1.    BUSINESS

ABOUT QAD

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

        QAD has built a solid customer base of global Fortune 1000 manufacturers who are excellent prospects for QAD's next generation collaborative commerce solutions. With a proven track record of over 20 years of industry leadership, and more than 5,300 installations of our software around the world, QAD is ideally qualified to meet the business and technology requirements of global manufacturing enterprises worldwide. QAD focuses its efforts in select industry segments: automotive, consumer products, electronics, food and beverage, industrial and medical industries. We develop our products with constant and direct input from leading global manufacturers within the vertical markets we serve.

        Global service and support are an important component of our solutions. QAD offers service and support capabilities that are truly global in scope, and we are one of a few select organizations with the capability to implement our solutions across the globe and support them in multiple languages and currencies. Our geographic management structure ensures that our global practices meet local requirements and that our services are delivered effectively within each region around the globe. We support our customers' global operations through our network of regional support centers and online support, accessible 24 hours a day, seven days a week, anywhere in the world.

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        QAD solutions include:

•

QAD MFG/PRO eB, our flagship ERP product.



•

QAD eQ, our private trading exchange (PTX) applications suite.



•

MFGx.net, our hosted exchange.



•

QAD Interoperability Solutions, a link from enterprise and legacy applications to QAD applications.

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

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

CUSTOMERS

        As of January 31, 2002, our software was licensed to more than 225,000 users at more than 5,300 sites in over 80 countries. No single customer accounted for more than 10 percent of total revenue during any of our last three fiscal years. The following are among companies and/or subsidiaries of those companies that have each generated more than $1.0 million in software license, maintenance and service billings over the last three fiscal years:

        Automotive

Anritsu, Arvin Meritor, Delco Remy, Delphi, Eaton, Federal Mogul, GKN, Ford Motor Company, Geveke, Guide, Johnson Controls, LDM Technologies, Lear, Mascotech, Merkel Freudenberg, Schefenaker, Textron, Visteon, Webasto

        Consumer Products

American Greetings, Avery Dennison, Avon Products, Colgate-Palmolive, Cussons, Fairchild, Firmenich, Friesland, Gillette, Royal Doulton, Spalding, Unilever

        Electronics

Akzo Nobel, Celestica, De La Rue, Fairchild, Framatome Connectors International, General Electric, Jabil Circuit, Lucent Technologies, Marconi Communications, Matsushita, NEC Corporation, Philips, Rockwell International/Allen Bradley, Tyco International, Xerox

        Food and Beverage

Bakkersland, Cargill, Coca-Cola, Goodman Fielder, HJ Heinz, Hormel Foods, Kraft Foods, Lion Breweries, Mars, National Foods, PepsiCo, Rich Products, Sara Lee, SunMaid Growers

        Industrial

Advanced Elastomer Systems, Albany International, Amcor, Black & Decker, Caterpillar, Ingersoll-Rand, Koninklijke Econosto NV, Mitsui, RHI AG, Saint-Gobain, Schlumberger, Solvay, Smiths Group PLC, Thales SA, Uponor

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        Medical

Allegiance, C.R. Bard, Datex-Ohmeda, Invacare, Johnson & Johnson, Maxxim Medical, Medtronic, Rexall-Sundown, UCB Pharma

INDUSTRY BACKGROUND

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

        Using the Internet as the foundation for electronic communication, interaction and transaction, the first wave of e-business revolutionized traditional business processes and practices, increasing and accelerating the flow of information between employees, partners, suppliers and the marketplace as a whole.

        With the advancement of enabling technologies, organizations leveraged the Internet to create a new sales and marketing tool—e-commerce—where buying and selling over the Internet via Web storefronts and public e-market exchanges gained popularity.

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

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

        Companies need to rethink their business models and implement solutions that can keep pace with the increased rate of change. We believe that collaborative commerce will impact each segment of the enterprise software market including corporate, plant and distribution/operations-level, and supply chain. We also believe that those who adopt a new type of enterprise software—collaborative solutions—will realize enormous competitive advantages over those who do not.

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

Today's Enterprise, Manufacturing and Supply Chain Software

        Traditional ERP software enables the integration and management of critical data within an enterprise and supports internal business processes such as sales order management, procurement, inventory management, manufacturing planning and control, service and support, project management, distribution and finance. QAD MFG/PRO eB software is an ERP application designed specifically to handle these internal business processes for manufacturing companies.

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        Collaborative commerce solutions help manage and optimize the supply chain by enhancing the flow of information to and from customers, suppliers, digital marketplaces and other business partners outside the enterprise. These solutions rely largely on the Internet as a vehicle for achieving collaboration. MFG/PRO eB, QAD eQ and MFGx.net, QAD's hosted exchange, are collaborative solutions for manufacturers.

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

        Collaborative Solutions.    Collaborative solutions provide companies with an information systems framework which works with an established ERP backbone and is integrated with other enterprise applications. Collaborative solutions enable manufacturers and distributors to integrate and extend their enterprise and corporate operations, interacting with customers and suppliers, engaging in e-business, collaborating, and expanding their markets through online communities. Collaborative solutions enable companies to deliver individualized customer service as easily as they once delivered mass customer service, thereby increasing their market opportunities. We believe that the complexities of today's enterprise operations require that collaborative commerce solutions be designed using open architecture, open messaging standards, and advanced Internet technologies, with the ability to deliver interoperability to multiple enterprise applications.

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

        Supply Chain Management Solutions.    Supply chain management applications have expanded to include collaborative functions thereby turning the supply chain into what is termed today, a value chain. Traditional providers of supply chain optimization software typically offer decision support applications that rely on transaction systems such as ERP to hold transaction information. Supply chain planning and optimization applications will increasingly be used for facility location and layout decisions while collaborative solutions will process actual supply demand based on "what is" rather than "what if."

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

THE QAD STRATEGY

        Our objective is to be the leading provider of collaborative commerce software solutions for manufacturing, and specifically, for multi-national, large and mid-range manufacturing and distribution companies within our targeted markets. Our strategy is to expand our leadership position at the plant and operations level by providing software applications that not only run

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

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

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Leverage Best-in-Class Enterprise Applications. As of January 31, 2002, QAD software was licensed at over 5,300 sites in more than 80 countries. This is a substantial customer base from which we can leverage future software product and service sales. We continue to migrate our current installed base of MFG/PRO software customers to our new Internet-based version, MFG/PRO eB, and hope to fuel an increasing trend to replace legacy ERP applications with MFG/PRO eB as well. Our installed base of satisfied customers are excellent prospects for our new collaborative commerce solutions and we plan to leverage our favorable reputation and proven track record to capitalize on this opportunity to build additional business for our QAD eQ private trading exchange application suite and our MFGx.net service offerings. Our plan is to further penetrate the market by gaining new customers within our target vertical markets for all of these solutions.



•

Become the Private Trading Exchange (PTX) Applications Leader. We believe that supply chain management within and outside of the enterprise represents one of the greatest opportunities for manufacturing companies to reduce costs and enhance trading partner relationships. As complex supply chains develop a greater need for collaboration, a new type of software application—the private trading exchange—will become an important component in every company's information architecture. Operating as an integrated, collaborative business-to-business (B2B) system, QAD eQ is a private trading exchange suite of applications that enables customers to lower supply chain costs, open new global markets and improve customer satisfaction through personalization of business commerce relationships. Our goal is to become the leader in delivering private trading exchange applications to global manufacturers in the markets we serve.



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Leverage Global Network of Alliances. Strategic alliances with partners such as IBM, Deloitte & Touche, Atos Origin and others, expand our sales reach, improve our marketing impact, and strengthen our strategic position in the markets that we serve. We leverage the expertise of distribution, software, services, and technology partners to meet the diverse needs of our customers. We augment our direct sales organization with a global network of over 30 distributors and sales agents, as well as numerous service organizations that offer consulting and implementation services to expand our reach. We plan to leverage our network of distributors, sales agents and services alliances to further penetrate our vertical markets.



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Maintain Technology Leadership. Our technology strategy is focused on delivering collaborative solutions based on open architecture and designed for compliance with Internet communication standards. We believe that business component, message-based interoperability will remain an important requirement for software applications as organizations seek to move toward a collaborative commerce business model. Interoperability enables companies to cost-effectively integrate applications across the enterprise, establishing a solid foundation for this new way of doing business. We are also committed to delivering collaborative solutions that utilize the most advanced technologies, such as Web-Services, Java and XML, to meet the demands of today's business environment.

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THE VALUE OF QAD SOLUTIONS

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

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

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

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

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

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

        Quick Time-to-Benefit.    Our proven implementation methodology, together with our expertise in key vertical markets and impressive track record of rapid installations, provides a quick time-to-benefit for our customers compared to our larger competitors whose software often takes longer and is much more complex to implement for manufacturing customers.

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

        Increased Velocity and Efficiency of the Supply Chain.    QAD's collaborative commerce solutions streamline business processes and enable diverse and sophisticated interactions between partners, suppliers and customers. By enabling global manufacturers to efficiently manage

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resources within and beyond the enterprise, QAD solutions can improve customer delivery performance and reduce purchasing and inventory costs.

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

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

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

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

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

QAD SOLUTIONS

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

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QAD MFG/PRO eB, an enterprise application suite offering a Web-enabled ERP foundation for manufacturers that helps increase inventory turns, improve productivity and

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profitability, as well as offering a total cost of ownership that is one of the lowest in the industry.

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QAD eQ, a private trading exchange (PTX) suite of Sell-Side, Buy-Side, and Replenishment order management applications built on a Commerce Management Foundation. QAD eQ extends the usefulness of existing information systems enabling collaboration with customers, suppliers, partners and digital marketplaces to deliver competitive advantages.


•

MFGx.net, a hosted exchange, through which we deliver Internet-based solutions to our customers and the manufacturing community. MFGx.net includes QAD Supply Visualization, a Web-Service, which provides real-time inventory visibility to authorized suppliers via the Internet.


•

QAD Interoperability Solutions, which provide effective interoperability across the enterprise, linking financials, human resources, customer relationship management (CRM), and other enterprise and legacy applications seamlessly to QAD applications. QAD Interoperability Solutions include the QAD/Connects A2A suite of connectivity adapters and tools, and QAD EDI ECommerce.

MFG/PRO eB: The QAD Enterprise Application

        Our flagship product, MFG/PRO eB, is a best-in-class manufacturing solution designed for the demands of today's business environment. A foundation for collaborative commerce, MFG/PRO eB software includes an integrated set of manufacturing, distribution, financial and customer service applications designed to address the needs of customers in our targeted vertical markets.

        MFG/PRO eB consists of a core ERP application and a number of key extensions. The core ERP application consists of three areas of functionality—manufacturing, distribution and financials—while the extensions provide additional business functionality.

        QAD's deep industry experience has allowed it to develop MFG/PRO eB with unique, industry-specific features. Additional industry-specific functionality is developed in conjunction with our customers through our Industry Development Groups. MFG/PRO eB software supports multiple currencies and global tax management and is tailored to financial practices and requirements in many of our major geographic markets. Because of our open systems approach, MFG/PRO eB is able to interoperate with legacy systems and other leading enterprise applications to give companies best-in-class functionality.

        MFG/PRO eB software supports single or multiple sites, as well as multiple production and operational processes. These capabilities enable manufacturers to manage multiple hybrid production methods within a single organization or production site and provide the flexibility to adapt to additional sites and processes as an organization's business evolves. Accessible through a Web browser, MFG/PRO eB includes an easily deployable Java platform interface that minimizes internal system traffic and provides low-cost system access for end users.

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

QAD eQ: The QAD Private Trading Exchange Application

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

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

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

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

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

        QAD eQ Commerce Management Foundation

The QAD eQ Commerce Management Foundation (CMF) module is a framework which defines a company's community trading partners. Using QAD eQ Commerce Management Foundation, a company captures information from its entire supply chain, encompassing the roles, policies and processes that define the company's personality and it uses this information to process and manage transactions intelligently throughout the enterprise.

        QAD eQ Sell-Side

QAD eQ Sell-Side is a full-featured order management system for collaborative commerce, which provides multiple ways to capture an order and process that order all the way through to back-office systems. It is designed to help manufacturers extend their global reach by facilitating the sale of products and services via the Internet and other electronic channels. QAD eQ Sell-Side provides a single point-of-contact for customer interactions across multiple sales channels—Web storefronts, public e-market exchanges, private trading

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exchanges and EDI connections. Each customer profile and personalization of information unique to that customer can be managed in a single location and used to power all customer interactions globally. By automating the order process, QAD eQ Sell-Side enables companies to reduce errors, lower transaction costs, and improve productivity. QAD eQ Sell-Side can increase revenue by expanding a company's market reach through access to new sales channels and can improve customer satisfaction by enabling customer self-service via the Internet.

        QAD eQ Buy-Side

QAD eQ Buy-Side is an advanced purchase order management system designed to increase procurement process efficiencies and reduce the direct and indirect material costs of large, multi-national companies through centralized procurement functions while allowing for autonomy and flexibility for local purchasing. It helps manage the entire life cycle of a purchase from initial request through receipt and payment. Automating the purchasing process improves productivity while also accelerating information throughout the supply chain. QAD eQ Buy-Side also provides an on-ramp to e-market exchanges, providing manufacturers with many more sources from which they may competitively source and procure materials and supplies.

        QAD eQ Replenishment

QAD eQ Replenishment enables manufacturers to apply lean manufacturing concepts to their supply chains to make them more efficient with the potential of huge cost savings. We call this the lean manufacturing supply chain. QAD eQ enables a lean manufacturing supply chain with its automated "pull" inventory capability, which provides automatic, unattended replenishment based on point-of-use or point-of-sale information. QAD eQ Replenishment can significantly help reduce supply chain costs and replenishment times by applying vendor-managed inventory and kanban processes while at the same time increasing service levels.

QAD eQ in Summary

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

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QAD eQ is able to function as a private enterprise exchange—a pivotal component for today's collaborative commerce requirements



•

QAD eQ Commerce Management Foundation module provides the "many-to-many" relationship management that is essential for management of complex business relationships and transactions



•

QAD eQ provides for consistent image and transaction processing to customers and suppliers through its Sell-Side and Buy-Side modules



•

QAD eQ is able to significantly reduce supply chain costs via its automated replenishment capabilities



•

QAD eQ is able to function as an on-ramp to e-market exchanges



•

QAD eQ is able to integrate easily with other disparate enterprise applications

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

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

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

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

MFGx.net: The QAD Hosted Exchange

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

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

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

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

MFGx.net Service Offering: QAD Supply Visualization

        A significant number of manufacturers, especially in the automotive and electronics industries, use items that are provided under contract by a single supplier. In those cases, the manufacturer requires the supplier to restock the item on an as-needed basis when the inventory of the item falls below a certain threshold. This is referred to as vendor-managed inventory.

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

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

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

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

QAD Interoperability Solutions

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

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

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

        QAD/Connects A2A

Our framework of integration adapters, messaging system and supporting services is entitled QAD/Connects A2A (Applications to Applications). This integration solution framework is very effective in delivering successful integration solutions linking QAD applications to other enterprise solutions such as financials, human resources, CRM and other ERP or legacy systems.

QAD/Connects A2A provides industry standard interoperability between QAD applications and a variety of other industry applications, reducing or eliminating the need for hard-coded interfaces, providing flexibility and adaptability to change, minimizing ongoing maintenance costs, and maximizing overall applications productivity.

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

Included in the QAD/Connects A2A interoperability solution suite are:

Q/LinQ Messaging System

Q/LinQ provides a robust and flexible messaging system for information exchange between QAD and other ERP/legacy applications, delivering effective message and error handling, registry functions, publishing, processing, mapping and communications.

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Standardized MFG/PRO Gateways and API's

Standardized MFG/PRO Gateways include a range of standard business models and supporting application program interfaces (API's) for all major application areas—Accounts Receivable, Accounts Payable, Sales Orders, Inventory and General Ledger.

QAD EDI ECommerce

Another QAD Interoperability Solution offering, QAD EDI ECommerce, provides a streamlined method of managing EDI communication between MFG/PRO and trading partners. It is a globally deployable product that imports and exports EDI sales and distribution data between MFG/PRO and third party electronic commerce subsystems.

CUSTOMER SERVICE AND SUPPORT

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

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

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

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

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Technical Services. Our technical services organization addresses critical areas in the life cycle of our customers' product implementation from the pre-installation audit that helps ensure a correct fit, to installation services that quickly get our customers' systems operational. The technical services group also provides conversion services that help customers smoothly migrate to the latest software release, integration services that address customers' complex integration needs and performance optimization services that help maximize system productivity and efficiency.



•

Implementation Services. Our implementation services organization utilizes Q-Advantage, our proven implementation framework, to ensure rapid implementation, consistency in delivery and maximum use of resources. Our implementation services team empowers customers through efficient knowledge transfer from our in-depth product knowledge and our business process and vertical market expertise.

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•

Support Services. Our customer service organization has attended and automated support systems around the world, including a global call tracking and escalation system based on our MFG/PRO Service/Support Management module. In addition, our solution-centered support provides customers with online access to customer service solutions 24 hours a day, seven days a week. Our solution-centered support database contains the most frequently requested customer solutions, all search-enabled through an easy to use online knowledge base.

Our Support Services offerings generate maintenance revenue from our installed base of more than 5,300 sites approximating 50% of QAD's annual revenue over the past two fiscal years.

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Learning Services. We offer comprehensive education and training services to our customers, end-users and service providers. Fully equipped training centers around the globe feature experienced and certified instructors along with a broad and substantial curriculum. Learning services is currently working to enhance its educational offerings via a growing computer-based training curriculum.

QAD PRODUCT ALLIANCES

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

TECHNOLOGY

QAD MFG/PRO eB Technology

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

QAD eQ Technology

        The business components of QAD eQ are built in Java, taking advantage of advanced techniques in object-oriented software design. QAD eQ is based on IBM's WebSphere development environment and Business Components framework. The solution's thin-client architecture requires only a standard Web browser to display user information. Components of QAD eQ architecture consist of Java, JSPs, DHTML, HTML, Java Scripts, Java Servlets and XML. QAD eQ leverages a Web server and Apache-Tomcat combination that has features and functionality required for the demands of secure, scalable collaborative commerce. QAD eQ is designed to run on a variety of hardware platforms, such as IBM pSeries, HP-UX Solaris, NT, MS2000 and IBM iSeries. It is designed to support major databases such as Oracle and DB2.

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MFGx.net and QAD Supply Visualization Technology

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

RESEARCH AND DEVELOPMENT

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

        We maintain three separate technology development organizations, MFG/PRO eB, QAD eQ, and MFGx.net, each specifically focused on developing its portion of QAD's end-to-end manufacturing solutions.

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

SALES AND MARKETING

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

        Our direct sales organization is composed of approximately 200 staff members. We continue to strengthen our sales force and our sales regions in order to improve our ability to deliver localized industry-specific solutions throughout the world. Within each territory, a focus on our vertical industries is maintained through marketing, local product development and sales training.

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

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

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COMPETITION

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

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

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Vendors, such as IFS, Intentia, and JD Edwards that market software focused on the specific needs of manufacturing plants and distribution sites of multi-national manufacturing companies



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Larger corporate enterprise solutions providers, such as Oracle, Peoplesoft, SAP and other business application software vendors



•

Internal development efforts by corporate information technology departments

        In the supply chain management market, we compete primarily with companies such as i2 Technologies, Manugistics and SAP, that have developed or are attempting to develop supply chain management software that complements ERP solutions.

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

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Traditional ERP vendors expanding their offerings into e-business



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Traditional supply chain optimization vendors, such as i2 Technologies



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Start-up companies in any of the following categories: electronic storefronts, online procurement, auctions/reverse auctions and business intelligence



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Public trading exchange providers such as Ariba and Commerce One



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Public trading exchanges and industry consortia trading exchanges

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

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

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

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competitive, we can make no assurance that we will be able to compete successfully with existing or new competitors or that competition will not adversely affect us.

PROPRIETARY RIGHTS AND LICENSING

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

        The pricing policy under each license is based on a standard price list and may vary based on a number of parameters including the number of end-users, number of sites, number of modules, number of languages, the country in which the license is granted and level of ongoing support, training and services to be provided by QAD.

        To facilitate our customers ability to customize, we generally license our MFG/PRO software to end-users in both object code (machine-readable) and source code (human-readable) format. While this practice facilitates customization, making software available in source code also makes it easier for third-parties to copy or modify our software for impermissable purposes. Distributors or other persons may independently develop a modified version of our software. Our license agreements generally allow the use of our software solely by the customer for internal purposes without the right to sublicense or transfer the software to third-parties. We have no patents, but have one pending patent application.

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

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

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also initiate claims or litigation against third-parties for infringement of our proprietary rights or to establish the validity of our proprietary rights, which could result in significant expense to us and divert the efforts of our technical and management personnel from productive tasks, whether or not such litigation were determined in our favor.

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

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

EMPLOYEES

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

BUSINESS SUMMARY

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

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

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

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

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QAD has developed and delivered an integrated application suite, MFG/PRO eB, QAD eQ and MFGx.net based on proven technology and deep manufacturing experience.



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QAD solutions can help manufacturers realize new efficiencies and achieve significant performance improvements in virtually every area of the manufacturing enterprise.



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QAD industry-specific solutions provide our customers with significant competitive advantage and impressive ROI.



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QAD solutions implement quickly and have a low total cost of ownership compared to other solutions.



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QAD solutions, service, and support are truly global in nature and are available in as many as 26 languages, incorporating global tax management and multi-currency capabilities tailored to local financial practices.



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QAD solutions' open architecture allows customers to integrate with other ERP or legacy systems, protecting and extending their existing IT investments.



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QAD has a passion for manufacturing excellence and for helping our customers achieve competitive advantages.

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

EXECUTIVE OFFICERS OF THE REGISTRANT

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

        Pamela M. Lopker founded QAD in 1979 and has been our Chairman of the Board and President since incorporation in 1981. Prior to founding QAD, Ms. Lopker served as Senior Systems Analyst for Comtek Research from 1977 to 1979. Ms. Lopker is certified in Production and Inventory Management by the American Production and Inventory Control Society.

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Ms. Lopker earned a Bachelor of Arts degree in Mathematics from the University of California at Santa Barbara. Ms. Lopker is married to Karl F. Lopker.

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

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

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

        Murray W. Ray is Executive Vice President, Global Services and Human Resources. Mr. Ray joined QAD in August 1996 and was appointed Vice President of Global Services and Human Resources in October 1998 and February 2001, respectively. Prior to joining QAD, he served 11 years at Compaq Computer Corporation, formerly Digital, as Industrial Marketing Manager and then Director of Professional Services. He also served as Director of Professional Services at AT&T. Mr. Ray earned a Bachelor of Science Degree in Mathematics and Statistics from the University of Western Australia and he has graduated from the advanced management programs at the Australian Management College and the University of Hawaii.

        Roland B. Desilets is Executive Vice President, General Counsel and Secretary. He rejoined QAD in April 2001, after spending one year as Vice President and General Counsel of Atlas Commerce, Inc., a Safeguard Scientifics company. Prior to this, he served as Corporate General Counsel and Regional General Counsel at QAD since 1998 and 1993, respectively. Before joining QAD in 1993, Mr. Desilets served as intellectual property counsel for Unisys Corporation. He holds a Juris Doctor degree from Widener University School of Law, a Master of Science degree in Computer Science from Villanova University, and a Bachelor of Science degree in Physics from Ursinus College.

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

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SEGMENT REPORTING

        Segment financial information for fiscal years 2002, 2001 and 2000 is presented in footnote 9 of our financial statements included in Item 14 of this Annual Report on Form 10-K.

ITEM 2. PROPERTIES

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

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

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

ITEM 3. LEGAL PROCEEDINGS

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

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

        None.

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PART II

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

        QAD common stock has been traded on the Nasdaq National Market since our initial public offering in August 1997 (under the symbol QADI). According to records of our transfer agent, we had approximately 400 stockholders of record as of April 15, 2002. The following table sets forth the high and low closing prices for QAD's common stock as reported by Nasdaq in each quarter of the last two fiscal years.

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

ITEM 6.    SELECTED FINANCIAL DATA

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

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

INTRODUCTION

        The following discussion should be read in conjunction with our financial statements and notes thereto included in Item 14 of this Annual Report on Form 10-K.

OVERVIEW

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

        QAD has built a solid customer base of global Fortune 1000 manufacturers who are excellent prospects for QAD's next generation collaborative commerce solutions. With a proven track record of over 20 years of industry leadership, and more than 5,300 installations of our software around the world, QAD is ideally qualified to meet the business and technology requirements of global manufacturing enterprises worldwide. QAD focuses its efforts in select industry segments: automotive, consumer products, electronics, food and beverage, industrial and medical industries. We develop our products with constant and direct input from leading global manufacturers within the vertical markets we serve.

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

CRITICAL ACCOUNTING POLICIES

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

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Revenue Recognition. QAD licenses its software under non-cancelable license agreements including third-party software sold in conjunction with QAD software, provides customer support and provides services including technical, implementation and training. Revenue is recognized in accordance with 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. 101, "Revenue Recognition in Financial Statements." 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 and determinable, and collection is probable. We use the residual

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method to recognize revenue when a license agreement includes one or more elements to be delivered at a future date if evidence of the fair value of all undelivered elements exists. If evidence of the fair value of the undelivered elements does not exist, revenue is deferred and recognized when delivery occurs. 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 for 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 the services are performed for the time-and-materials contracts. Revenue from training services is recognized as the services are performed.

We believe that we are currently in compliance with SOP No. 97-2, SOP No. 98-9 and SAB No. 101. However, the accounting profession continues 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.

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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's 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.



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Impairment of Long-Lived Assets and Valuation of Deferred Tax Assets. Our long-lived assets include goodwill, intangibles, deferred taxes and other assets. At January 31, 2002, we had $10.1 million of goodwill and other intangible assets, and $0.3 million of net deferred tax assets, current and non-current, which when combined account for approximately 7% of our total assets. In assessing the recoverability of our goodwill and intangibles 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 charges for these assets not previously recorded. During the year ended January 31, 2002, we recorded a $2.1 million impairment loss related to goodwill and other intangible assets. For fiscal year 2003, we will adopt Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS 142) and will be required to analyze goodwill for impairment issues during the first six months of fiscal year 2003, and then on a periodic basis thereafter. For a further discussion of SFAS 142, see "RECENT ACCOUNTING STANDARDS" in this Item 7.

Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes", requires that the carrying value of our net deferred tax assets reflect an amount that is more likely than not to be realized. In assessing the likelihood of realizing tax benefits

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associated with deferred tax assets and the need for a valuation allowance, we consider future taxable income and tax planning strategies that are both prudent and feasible. Should we determine that we would be able to realize deferred tax assets in the future in excess of the net recorded amount, an adjustment to deferred tax assets would decrease tax expense in the period such determination was made. Likewise, 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.

RESULTS OF OPERATIONS

        The following table sets forth for the periods indicated the percentage of total revenue represented by certain items reflected in our statements of operations:

        Total revenue.    Total revenue for fiscal year 2002 was $204.0 million, a decrease of $10.1 million or 5% from fiscal year 2001. License revenue decreased by $6.4 million due to the slowdown in corporate IT spending within our core customer base of manufacturers prompted by current economic conditions. During the year, there were four orders for our private trading exchange application suite, QAD eQ, with one order of approximately $1 million. Maintenance and other revenue increased $5.3 million due to growth in our installed base, partially offset by a decline in hardware sales. Services revenue declined $9.0 million due to a reduction in the number of large license sales that lead to large systems implementation projects.

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        Total revenue for fiscal year 2001 was $214.1 million, a decrease of $25.2 million or 11% from fiscal year 2000. This decrease was primarily due to declines in license fees and services revenue, partially offset by continued growth in maintenance revenue. During fiscal year 2001, our customers shifted their focus from dealing with the Y2K problem to planning and developing coherent e-business strategies. This shift caused an "e-business pause" and delayed purchasing decisions on both the traditional enterprise systems and the advanced e-business solutions we offer, negatively impacting our license revenue. The decrease in services revenue relates to decreased utilization of our service consultants in conjunction with lower license sales. Maintenance and other revenue continued to grow due to expansion of our installed base.

        As a result of these factors, revenue mix has shifted toward maintenance revenue, growing from 38% of total revenue in fiscal year 2000 to 46% and 51% in fiscal years 2001 and 2002, respectively. License revenue was 40% of total revenue in fiscal year 2000, declining to 32% in fiscal year 2001 and 31% in fiscal year 2002. Services revenue has declined from 22% of total revenue in fiscal year 2000 and 2001 to 18% in fiscal year 2002.

        No single customer has accounted for more than 10% of our total revenue in any of the last three fiscal years. However, it is not uncommon to obtain a multi-million dollar contract with a single customer.

        Total Cost of Revenue.    Total cost of revenue (combined cost of license fees and other cost of revenue) as a percentage of total revenue was 42%, 47% and 45% in fiscal years 2002, 2001 and 2000, respectively. The five percentage point decrease from fiscal year 2001 to fiscal year 2002 was due primarily to improvements in our maintenance margin due to lower personnel and related costs in line with our continued cost containment measures. The two percentage point increase from fiscal year 2000 to fiscal year 2001 was primarily due to lower service margins from decreased utilization of service consultants in conjunction with the lower license sales.

        Sales and Marketing.    Sales and marketing expense was $59.4 million, $66.5 million and $80.1 million for fiscal years 2002, 2001, and 2000, respectively. These declines were due primarily to lower personnel and related costs resulting from our continued cost containment efforts. Fiscal year 2002 also included a reduction in partner fees that are paid to distributors and sales agents, primarily in connection with the sale of QAD licenses and first year maintenance.

        Research and Development.    Research and development expense was $31.7 million, $34.5 million and $34.1 million in fiscal years 2002, 2001 and 2000, respectively. The fiscal year 2002 decline primarily related to decreased personnel and related expenses due to our continued cost containment efforts. This decline was partially offset by lower capitalized expenses for translations and localizations of our products. It should be noted that we have successfully contained research and development expenses while increasing our investment in the development of our new technologies, QAD eQ and MFGx.net, as well as adding functionality to MFG/PRO eB.

        General and Administrative.    General and administrative expense remained relatively flat at $22.9 million for fiscal year 2002 compared to $22.5 million for fiscal year 2001. General and administrative expense decreased from $23.2 million for fiscal year 2000 to $22.5 million for fiscal year 2001 due to cost controls related to restructuring activities.

        Amortization of Intangibles from Acquisitions.    Amortization of intangibles from acquisitions totaled $3.5 million, $4.6 million and $4.4 million in fiscal years 2002, 2001 and 2000, respectively.

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The decline from fiscal year 2001 to 2002 was related to certain intangible assets that became fully amortized during fiscal year 2002.

        Impairment Loss.    In accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", we periodically review long-lived assets for impairment in value based upon undiscounted future operating cash flows from those assets. Appropriate losses are recognized whenever the carrying amount of an asset may not be recovered. As of January 31, 2002, we determined that the technology related to Enterprise Engines, Inc. (EEI) was impaired, and deemed to have no fair value due to our shift from the use of the EEI toolset to the IBM WebSphere toolset underlying our QAD eQ product. Accordingly, an impairment loss of $2.1 million was recorded to the fiscal year 2002 statement of operations related to the remaining book value of EEI goodwill and other intangible assets.

        Restructuring Charge.    During the past three years, we have implemented restructuring programs designed to strengthen operations and financial performance. Accordingly, restructuring charges (including adjustments) of $0.1 million, $5.1 million and $1.2 million were recorded for fiscal year 2002, 2001 and 2000, respectively. Below is a discussion of the respective restructuring programs.

        During fiscal year 2000, we continued our fiscal year 1999 initiative which more closely aligned costs with sales expectations in response to changes in customers' manufacturing capital software spending patterns. The fiscal year 2000 program resulted in a $1.2 million charge that primarily related to employee termination costs and included an adjustment to the fiscal year 1999 restructuring charge. At January 31, 2001, the entire fiscal year 2000 restructuring charge was utilized.

        During fiscal year 2001, we undertook several initiatives to strengthen operating and financial performance by sharpening the focus of our e-business and business intelligence solutions for multi-national customers. The related actions resulted in a $5.1 million charge taken in the third quarter of fiscal year 2001, and included facility consolidations ($1.0 million), a reduction of approximately 150 employees, contractors and consultants across most regions and functions ($2.2 million) and associated asset write-downs ($1.9 million). As of January 31, 2002, $3.9 million of this charge was utilized and $1.0 million was adjusted downwards because final amounts required were lower than originally estimated. We expect to pay the remaining balance of $0.2 million, primarily consisting of lease obligations, by the end of fiscal year 2007.

        In fiscal year 2002, we continued our fiscal year 2001 initiative resulting in additional charges of $1.1 million. This expense primarily related to the reduction of office space in three of our North American locations. In addition, during fiscal year 2002, we recorded adjustments of $1.0 million to the fiscal year 2001 restructuring accrual, primarily related to employee termination costs that were lower than originally anticipated. As of January 31, 2002, of the $1.1 million fiscal year 2002 restructuring charges, $0.3 million had been utilized. The remaining balance of $0.8 million, related to lease obligations, is expected to be paid through fiscal year 2007.

        Total Other (Income) Expense.    Total other (income) expense was $1.6 million, $0.7 million and $1.5 million in fiscal years 2002, 2001 and 2000, respectively. The increase in expense from fiscal year 2001 to 2002 was primarily due to an unfavorable change in foreign currency transaction and remeasurement losses. The decrease in expense from fiscal year 2000 to 2001 was due to an increase in interest income related to higher cash and equivalents and short-term investment

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balances and a favorable change in foreign currency transaction and remeasurement gains and losses. This improvement was partially offset by an increase in interest expense due to higher debt throughout fiscal year 2001.

        Income Tax Expense.    We recorded income tax expense of $2.9 million, $5.7 million and $5.1 million in the years ended January 31, 2002, 2001 and 2000, respectively. Fiscal year 2002 income tax expense represented taxes in profitable jurisdictions. Fiscal year 2001 income tax expense included $2.5 million for taxes in the jurisdictions that were profitable and a $3.2 million valuation allowance on deferred tax assets. Fiscal year 2000 income tax expense included $3.8 million for taxes in profitable jurisdictions and $1.3 million in tax charges related to a valuation allowance and an IRS audit of the years 1995 and 1996. We have not provided tax benefits for the jurisdictions in loss positions due to management's determination regarding the uncertainty of the realization of these tax benefits.

PRO FORMA FINANCIAL RESULTS

        Pro forma information is provided below to assist in evaluating our performance on a more consistent year-to-year basis. Pro forma amounts have been adjusted to exclude amortization of intangibles from acquisitions, a goodwill impairment loss, restructuring charges and significant deferred tax asset valuation allowances. Pro forma adjustments are detailed below in a reconciliation from net loss calculated in accordance with accounting principles generally accepted in the United States to pro forma net income (loss).