x

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

For the quarterly period ended March 31, 2003 

OR

o

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

For the transition period from __________ to __________

COMMISSION FILE NO. 000-26937

QUEST SOFTWARE, INC.

(Exact name of registrant as specified in its charter)

California

33-0231678

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

8001 Irvine Center Drive
Irvine, California

92618

(Address of principal executive offices)

(Zip code)

Yes   x

No   o

Yes   x

No   o

Page
Number

PART I.

FINANCIAL INFORMATION

Item 1.

Financial Statements

Condensed Consolidated Balance Sheets as of December 31, 2002 and March 31, 2003 (unaudited)

2

Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2002 and 2003 (unaudited)

3

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2002 and 2003 (unaudited)

4

Condensed Consolidated Statements of Comprehensive Operations for the Three Months Ended March 31, 2002 and 2003 (unaudited)

5

Notes to Condensed Consolidated Financial Statements (unaudited)

6

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

11

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

22

Item 4.

Controls and Procedures

22

PART II.

OTHER INFORMATION

Item 1.

Legal Proceedings

24

Item 6.

Exhibits and Reports on Form 8-K

24

SIGNATURES

25

CERTIFICATIONS

26

December 31,
2002

March 31,
2003

ASSETS

Current assets:

Cash and cash equivalents

$

64,283

$

65,407

Short-term marketable securities

27,841

44,831

Accounts receivable, net

40,330

29,464

Prepaid expenses and other current assets

9,653

8,659

Deferred income taxes

9,563

9,471

Total current assets

151,670

157,832

Property and equipment, net

44,616

43,539

Long-term marketable securities

115,422

118,164

Goodwill

231,717

231,717

Amortizing intangible assets, net

31,116

28,096

Deferred income taxes

14,960

14,975

Other assets

2,341

1,496

Total assets

$

591,842

$

595,819

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:

Accounts payable

$

5,308

$

5,502

Accrued compensation

13,900

12,880

Other accrued expenses

23,703

18,326

Income taxes payable

1,323

1,662

Deferred revenue

63,128

65,966

Total current liabilities

107,362

104,336

Long-term liabilities and other

5,941

5,797

Commitments and contingencies (Notes 11 and 12)

Shareholders’ equity:

Preferred stock, no par value, 10,000 shares authorized; no shares issued or outstanding

—  

—  

Common stock, no par value, 150,000 shares authorized; 90,715 and 91,127 issued and outstanding at December 31, 2002 and March 31, 2003, respectively

562,517

566,948

Accumulated deficit

(68,073

)

(65,187

)

Accumulated other comprehensive income

1,309

1,139

Notes receivable from sale of common stock

(17,214

)

(17,214

)

Net shareholders’ equity

478,539

485,686

Total liabilities and shareholders’ equity

$

591,842

$

595,819

Three Months Ended
March 31,

2002

2003

Revenues:

Licenses

$

37,490

$

42,970

Services

21,903

28,991

Total revenues

59,393

71,961

Cost of revenues:

Licenses

724

686

Services

4,371

5,195

Amortization of purchased intangible assets

1,402

2,130

Total cost of revenues

6,497

8,011

Gross profit

52,896

63,950

Operating expenses:

Sales and marketing

30,151

36,221

Research and development

15,168

17,185

General and administrative

5,926

6,655

Intangible asset amortization

385

867

Total operating expenses

51,630

60,928

Income from operations

1,266

3,022

Other income, net

1,617

1,613

Income before income tax provision

2,883

4,635

Income tax provision

1,162

1,748

Net income

$

1,721

$

2,887

Net income per share:

Basic and Diluted

$

0.02

$

0.03

Weighted average shares:

Basic

89,748

90,974

Diluted

93,808

92,922

Three Months Ended
March 31,

2002

2003

Cash flows from operating activities:

Net income

$

1,721

$

2,887

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization

5,302

6,871

Compensation expense associated with stock option grants

925

495

Accrued interest receivable from shareholders

(275

)

—  

Deferred income taxes

1,097

94

Provision for bad debts

146

138

Changes in operating assets and liabilities, net of effects of acquisitions:

Accounts receivable

8,432

10,673

Prepaid expenses and other current assets

52

991

Other assets

(67

)

948

Accounts payable

(510

)

89

Accrued compensation

(618

)

(1,101

)

Other accrued expenses

(4,057

)

(5,274

)

Income taxes payable

744

1,866

Deferred revenue

4,796

2,681

Other liabilities

(59

)

(145

)

Net cash provided by operating activities

17,629

21,213

Cash flows from investing activities:

Purchases of property and equipment

(3,051

)

(2,867

)

Cash paid for acquisition, net of cash acquired

(4,063

)

—  

Purchases of marketable securities

(21,823

)

(42,375

)

Sales and maturities of marketable securities

9,455

22,475

Net cash used in investing activities

(19,482

)

(22,767

)

Cash flows from financing activities:

Repayment of notes payable

(191

)

—  

Repayment of capital lease obligations

(27

)

(91

)

Proceeds from the exercise of stock options

615

195

Proceeds from employee stock purchase plan

2,522

2,286

Net cash provided by financing activities

2,919

2,390

Effect of exchange rate changes on cash and cash equivalents

(350

)

288

Net increase in cash and cash equivalents

716

1,124

Cash and cash equivalents, beginning of period

30,279

64,283