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| QADI > SEC Filings for QADI > Form 10-K on 14-Apr-2009 | All Recent SEC Filings |
14-Apr-2009
Annual Report
CRITICAL ACCOUNTING POLICIES
We consider certain accounting policies related to revenue recognition, accounts
receivable allowances, goodwill and intangible assets, capitalized software
development costs, valuation of deferred tax assets and tax contingency reserves
and stock-based compensation expense to be critical policies due to the
significance of these items to our operating results and the estimation
processes and management judgment involved in each. Historically, estimates
described in our critical accounting policies that have required significant
judgment and estimation on the part of management have been reasonably accurate.
Revenue Recognition. We derive our revenues from the sale or the license of our
software products and of support services, subscriptions, consulting,
development, training, and other professional services. The majority of our
software is sold or licensed in multiple-element arrangements that include
support services and often professional services or other elements. We therefore
license our software generally in multiple-element arrangements. For software
license arrangements that do not require significant modification or
customization of the underlying software, we recognize revenue pursuant to the
requirements of the American Institute of Certified Public Accountants ("AICPA")
Statement of Position 97-2, Software Revenue Recognition ("SOP 97-2"), as
amended, when persuasive evidence of an arrangement exists, delivery has
occurred, the fee is fixed or determinable, and collectibility is probable. A
majority of our license revenue is recognized in this manner. Revenue is
presented net of sales, use and value-added taxes collected on behalf of our
customers.
Our typical payment terms vary by region. Occasionally, payment terms of up to
one year may be granted for software license fees to customers with an
established history of collections without concessions.
Provided all other revenue recognition criteria have been met, we recognize
license revenue on delivery using the residual method when company-specific
objective evidence of fair value exists for all of the undelivered elements (for
example, support services, consulting, or other services) in the arrangement,
but does not exist for one or more delivered elements. We allocate revenue to
each undelivered element based on vendor-specific objective evidence of fair
value ("VSOE"), which is the price charged when that element is sold separately
or, for elements not yet sold separately, the price established by our
management if it is probable that the price will not change before the element
is sold separately. We allocate revenue to undelivered support services based on
rates charged to renew the support services annually after an initial period. We
allocate revenue to undelivered services based on time and materials rates of
stand-alone services engagements by role and by country. We review our VSOE at
least annually. If we are unable to establish or maintain VSOE for one or more
undelivered elements within a multiple-element arrangement, it could adversely
impact our revenues, results of operations and financial position because we may
have to defer all or a portion of the revenue or recognize revenue ratably from
multiple-element arrangements.
Multiple element arrangements for which VSOE does not exist for all undelivered
elements typically occur when we introduce a new product or product bundles for
which we have not established VSOE for maintenance or services under our VSOE
policy. In these instances, revenue is deferred and recognized ratably over the
longer of the maintenance term or services engagement or when delivery of all
elements occurs. In the instances in which it has been determined that revenues
on these bundled arrangements will not be recognized until VSOE has been
established, at the time of recognition, we allocate these bundled arrangement
fees to all of the non-license revenue categories based on VSOE of similar
maintenance or consulting services. The remaining arrangement fees are then
allocated to software license fee revenues using the residual method. The
associated costs primarily consist of payroll and related costs to perform both
the services work and provide support and royalty expense related to the license
and maintenance revenue. These costs are included in cost of maintenance,
services and other and cost of license based on the allocated revenue
categories.
Revenue from product support and product updates, referred to as maintenance
revenue, is recognized ratably over the term of the maintenance period, which in
most instances is one year. Software license updates provide customers with
rights to unspecified software product upgrades, maintenance releases and
patches released during the term of the support period on a when-and-if
available basis. Product support includes Internet access to technical content,
as well as Internet and telephone access to technical support personnel. A
majority of our customers purchase both product support and license updates when
they acquire new software licenses. In addition, a majority of our customers
renew their product support contracts annually.
Revenues from consulting services are comprised of implementation, development,
training and other consulting services. Consulting services are generally sold
on a time-and-materials basis and can include services ranging from software
installation to data conversion and building non-complex interfaces to allow the
software to operate in integrated environments. Consulting engagements can range
anywhere from one day to several months and are based strictly on the customer's
requirements and complexities and are independent of the functionality of our
software. QAD software, as delivered, can generally be used by the customer for
the customer's purpose upon installation. Further, implementation and
integration services provided are generally not essential to the functionality
of the software, as delivered, and do not result in any material changes to the
underlying software code. On occasion, we enter into fixed fee arrangements or
arrangements in which customer payments are tied to achievement of specific
milestones. In fixed fee arrangements, revenue is recognized as services are
performed as measured by hours incurred to date, as compared to total estimated
hours to be incurred to complete the work. In milestone achievement
arrangements, we recognize revenue as the respective milestones are achieved.
Revenue from our subscription product offerings, including our On Demand
products, is recognized ratably over the contract period when the customer does
not have the right to take possession of the software. For subscription
arrangements where the customer has the right and ability to take possession of
the software, revenue is recognized in accordance with SOP No. 97-2 using the
residual method.
Although infrequent, when an arrangement does not qualify for separate
accounting of the software license and consulting transactions, the software
license revenue is recognized together with the consulting services based on
contract accounting using either the percentage-of-completion or
completed-contract method. Arrangements that do not qualify for separate
accounting of the software license fee and consulting services typically occur
when we are requested to customize software or where we view the installation of
our software as high risk in the customer's environment. This requires us to
make estimates about the total cost to complete the project and the stage of
completion. The assumptions, estimates, and uncertainties inherent in
determining the stage of completion affect the timing and amounts of revenues
and expenses reported. Changes in estimates of progress toward completion and of
contract revenues and contract costs are accounted for as cumulative catch-up
adjustments to the reported revenues. If we do not have a sufficient basis to
measure the progress of completion or to estimate the total contract revenues
and costs, revenue is recognized when the project is complete and, if
applicable, final acceptance is received from the customer. We allocate these
bundled arrangement fees to support and services revenues based on VSOE. The
remaining arrangement fees are then allocated to software license fee revenues.
The associated costs primarily consist of payroll and related costs to perform
the services and royalty expense and are included in cost of maintenance,
services and other and cost of license based on the allocated revenue
categories.
We execute arrangements through indirect sales channels via sales agents and
distributors in which the indirect sales channels are authorized to market our
software products to end users. In arrangements with sales agents, revenue is
recognized on a sell-through basis once an order is received from the end user,
collectibility from the end user is probable, a signed license agreement from
the end user has been received by us, delivery has been made to the end user and
all other revenue recognition criteria have been satisfied in accordance with
SOP 97-2. Sales agents are compensated on a commission basis. Distributor
arrangements are those in which the resellers are authorized to market and
distribute our software products to end users in specified territories and the
distributor bears the risk of collection from the end user customer. We
recognize revenue from transactions with distributors when the distributor
submits a written purchase commitment, collectibility from the distributor is
probable, a signed license agreement is received from the distributor and
delivery has occurred to the distributor, provided that all other revenue
recognition criteria have been satisfied in accordance with SOP 97-2. Revenue
for distributor transactions is recorded on a net basis (the amount actually
received by us from the distributor). We do not offer rights of return, product
rotation or price protection to any of our distributors.
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 due
to the inability of the customer to pay. We also provide an additional reserve
based on historical data including analysis of write-offs and other known
factors. The allowance for sales adjustments primarily relates to reserves
required to adjust revenue to the amount that will actually be realized.
Provisions to the allowance for doubtful accounts are included in bad debt
expense in general and administrative expenses and provisions for sales
adjustments are recorded against revenue. If the financial condition of any
customer were to deteriorate, resulting in an impairment of its ability to make
payments, additional allowances could be required. Actual results may differ
from our estimates for a variety of reasons.
Goodwill and Intangible Assets. Goodwill and other intangible assets at
January 31, 2009 were $6.2 million and $0.5 million, respectively, and accounted
for 3% of our total assets. All of our goodwill and intangible assets have been
accounted for under the provisions of Statement of Financial Accounting
Standards (SFAS) 142, "Goodwill and Other Intangible Assets" (SFAS 142). The
excess cost of the acquisition over the fair value of the net assets acquired is
recorded as goodwill. SFAS 142 requires that goodwill and intangible assets
deemed to have indefinite lives not be amortized, but rather be tested for
impairment on an annual basis, or more frequently if events or changes in
circumstances indicate potential impairment. Finite-lived intangible assets are
required to be amortized over their useful lives and are subject to impairment
evaluation under the provisions of SFAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" (SFAS 144).
Goodwill is tested for impairment at least annually utilizing an "income
approach" methodology, which utilizes a discounted cash flow method to determine
the fair value of the reporting unit based on the present value of future
benefits the reporting unit is expected to generate, and the "publicly-traded
guideline company method" or the "market approach," which utilizes financial and
valuation ratios of publicly traded companies that are considered comparable to
QAD to determine if our valuation ratios are a fair measure of QAD's enterprise
value. Significant management judgment is required in the forecasts of future
operating results that are used in the discounted cash flow method of valuation.
The estimates we have used are consistent with the plans and estimates that we
use to manage our business. It is possible, however, that the plans may change
and estimates used may prove to be inaccurate. If our actual results, or the
plans and estimates used in future impairment analyses, are lower than the
original estimates used to assess the recoverability of these assets, we could
incur additional impairment charges. For further discussion of goodwill, see
note 5 within the Notes to Consolidated Financial Statements included in Item 15
of this Annual Report on Form 10-K.
Other intangible assets are tested for impairment when, in our judgment, events
or changes in circumstances suggest that the carrying value of an asset may not
be fully recoverable in accordance with SFAS 144. Other intangible assets arise
from business combinations and consist of customer relationships, restrictive
covenants related to employment agreements and trade names that are amortized,
on a straight-line basis, over periods of up to five years. For further
discussion of other intangible assets, see note 5 within the Notes to
Consolidated Financial Statements included in Item 15 of this Annual Report on
Form 10-K.
Capitalized Software Development Costs. We capitalize software development costs
incurred once technological feasibility has been achieved in the form of a
working model. These costs are primarily related to the localization and
translation of our products. A working model is defined as an operative version
of the computer software product that is completed in the same software language
as the product to be ultimately marketed, performs all the major functions
planned for the product and is ready for initial customer testing. We also
capitalize software purchased from third parties or through business
combinations as acquired software technology if such software has reached
technological feasibility. Capitalized software costs are amortized on a
product-by-product basis and charged to "Cost of license fees". The amortization
is the greater of straight-line basis over three years, the expected useful
life, or computed using a ratio of current revenue for a product compared to the
estimated total of current and future revenues for that product. We periodically
compare the unamortized capitalized software development costs to the estimated
net realizable value of the associated product. The amount by which the
unamortized capitalized software costs of a particular software product exceed
the estimated net realizable value of that asset is reported as a charge to the
statement of income. This review requires management judgment regarding future
cash flows. If these estimates or their related assumptions require updating in
the future, we may be required to recognize write-offs for these assets.
Valuation of Deferred Tax Assets and Tax Contingency Reserves. SFAS 109,
"Accounting for Income Taxes" (SFAS 109), requires that the carrying value of
our deferred tax assets reflects an amount that is more likely than not to be
realized. At January 31, 2009, we had $26.8 million of deferred tax assets, net
of valuation allowances, consisting of $37.4 million of gross deferred tax
assets offset by valuation allowances of $10.6 million. In the ordinary course
of our business, there are many transactions and calculations where the tax law
and ultimate tax determination is uncertain. As part of the process of preparing
our Consolidated Financial Statements, we are required to estimate our income
taxes in each of the jurisdictions in which we operate prior to the completion
and filing of tax returns for such periods. This process requires estimating
both our geographic mix of income and our uncertain tax positions in each
jurisdiction where we operate. These estimates involve complex issues and
require us to make judgments, such as anticipating the positions that we will
take on tax returns prior to actually preparing the returns and the outcomes of
disputes with tax authorities. The ultimate resolution of these issues may take
extended periods of time due to examinations by tax authorities. We are also
required to make determinations of the need to record deferred tax liabilities
and the recoverability of deferred tax assets. A valuation allowance is
established to the extent that it is more likely than not that certain deferred
tax assets will not be realized based on our estimation of future taxable income
in each jurisdiction. There was a net decrease of valuation allowances recorded
in fiscal 2009 of $3.2 million. Should we determine that we would not be able to
realize all or part of the net deferred tax asset in the future, an adjustment
to deferred tax assets would increase tax expense in the period such
determination was made.
Effective February 1, 2007, we adopted Financial Accounting Standards Board
(FASB) Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
Interpretation of FASB Statement No. 109" (FIN 48). Under FIN 48, we recognize a
tax position when we determine that it is more likely than not that the position
will be sustained upon examination, including resolution of any related appeals
or litigation processes, based on the technical merits of the position. For tax
positions that are more likely than not to be sustained, we measure the tax
position at the largest amount of benefit that has a greater than 50% likelihood
of being realized when it is ultimately settled. FIN 48 also provides guidance
on derecognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition with respect to tax positions. We reflect
interest and penalties related to income tax liabilities as income tax expense.
We have reserves for taxes to address potential exposures involving tax
positions that could be challenged by taxing authorities, even though we believe
that the positions taken on previously filed tax returns are appropriate. The
tax reserves are reviewed as circumstances warrant and adjusted as events occur
that affect our potential liability for additional taxes. We are subject to
income taxes in the U.S. and in numerous foreign jurisdictions, and in the
ordinary course of business, there are many transactions and calculations where
the ultimate tax determination is uncertain. We historically have considered
undistributed earnings of our foreign subsidiaries to be indefinitely reinvested
outside of the United States and accordingly, no U.S. taxes have been provided
thereon.
Stock-based Compensation Expense. We are required to estimate the fair value of
share-based payment awards on the date of grant. The estimated fair value of
stock appreciation rights and other equity instruments is determined using the
Black-Scholes valuation model, which requires us to make certain assumptions
about the future. Determining the estimated fair value is affected by our stock
price as well as assumptions regarding subjective and complex variables, such as
expected employee exercise behavior and our expected stock price volatility over
the term of the award. Determining the estimated fair value of our stock-based
awards at the grant date requires judgment, including estimating volatility and
the expected life of the award. Additionally, in recognizing the resultant
expense, we must estimate the percentage of awards that will be forfeited and
other inputs. If actual forfeitures differ significantly from the estimates,
stock-based compensation expense and our results of operations could be
materially impacted.
Equity instruments issued to non-employees in exchange for services are recorded
in accordance with the provisions of Emerging Issues Task Force Issue No. 96-18,
"Accounting for Equity Instruments that are Issued to Other than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services" (EITF 96-18).
Under this guidance, the fair value of the equity instruments is re-measured
each period until the instruments vest. The incremental change is recorded as an
expense in the period in which the change occurred.
RECENT ACCOUNTING STANDARDS
Determination of the Useful Life of Intangible Assets
In April 2008, the Financial Accounting Standards Board (FASB) issued FASB Staff
Position (FSP) FAS 142-3, "Determination of the Useful Life of Intangible
Assets." This FSP amends the factors that should be considered in developing
renewal or extension assumptions used to determine the useful life of a
recognized intangible asset under Statement of Financial Accounting Standards
(SFAS) No. 142, "Goodwill and Other Intangible Assets" (SFAS 142). The intent of
this FSP is to improve the consistency between the useful life of a recognized
intangible asset under SFAS 142 and the period of expected cash flows used to
measure the fair value of the asset under SFAS 141 (Revised 2007), "Business
Combinations," and other U.S. generally accepted accounting principles (GAAP).
This FSP is effective for financial statements issued for fiscal years beginning
after December 15, 2008 and interim periods within those fiscal years. We do not
expect the adoption of this FSP to have a material effect on our financial
position, results of operations or cash flows.
Business Combinations
In December 2007, the FASB issued SFAS 141 (revised 2007), "Business
Combinations" (SFAS 141R). The objective of the Statement is to improve the
relevance, representational faithfulness, and comparability of the information
that a reporting entity provides in its financial reports about a business
combination and its effects. SFAS 141R requires that all business combinations
be accounted for by applying the acquisition method (previously referred to as
the purchase method), and most identifiable assets, liabilities, noncontrolling
interests, and goodwill acquired in business combinations to be recorded at
"full fair value". SFAS 141R also broadens the definition of a business and
changes the treatment of direct acquisition-related costs from being included in
the purchase price to instead being generally expensed if they are not costs
associated with issuing debt or equity securities. SFAS 141R is effective
beginning February 1, 2009, and will be applied prospectively to any new
business combination.
Minority Interests
In December 2007, the FASB issued SFAS 160, "Accounting and Reporting of
Noncontrolling Interest in Consolidated Financial Statements, amendment of ARB
51" (SFAS 160). The objective of the Statement is to improve the relevance,
comparability, and transparency of the financial information that a reporting
entity provides in its consolidated financial statements by establishing
accounting and reporting standards for noncontrolling interests in a subsidiary
and for the deconsolidation of a subsidiary. SFAS 160 specifies that
noncontrolling interests (previously referred to as minority interests) be
reported as a separate component of equity, not as a liability or other item
outside of equity, which changes the accounting for transactions with
noncontrolling interest holders. SFAS 160 is effective beginning February 1,
2009, and will be applied prospectively to all noncontrolling interests,
including any that arose before that date, except for the presentation and
disclosure requirements. The presentation and disclosure requirements will be
. . .
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