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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
[ ] 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 (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
8001 IRVINE CENTER DRIVE
IRVINE, CALIFORNIA 92618
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (949) 754-8000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK
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 [X] No [ ]
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 any amendment to this
Form 10-K. [ ]
As of March 19, 2001, 87,199,236 shares of the Registrant's Common Stock
were outstanding. The aggregate market value of the common stock held by
nonaffiliates of the Registrant as of March 19, 2001 was approximately $668.2
million.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive proxy statement, to be delivered to
shareholders in connection with the Registrant's 2001 Annual Meeting of
Shareholders, are incorporated by reference into Part III of this Report.
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TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 9
Item 3. Legal Proceedings........................................... 9
Item 4. Submission of Matters to a Vote of Security Holders......... 9
PART II
Item 5. Market for the Registrant's Common Equity and Related
Shareholder Matters......................................... 10
Item 6. Selected Financial Data..................................... 11
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 12
Item 7a. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 23
Item 8. Financial Statements and Supplementary Data................. 25
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosures................................... 25
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 26
Item 11. Executive Compensation...................................... 26
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 26
Item 13. Certain Relationships and Related Transactions.............. 26
PART IV
Item 14. Exhibits, Financial Statement Schedule, and Reports on Form
8-K......................................................... 26
SIGNATURES............................................................ 28
FINANCIAL STATEMENTS.................................................. F-1
FINANCIAL STATEMENT SCHEDULE
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FORWARD-LOOKING INFORMATION
Some of the matters discussed under the captions "Business," "Risk
Factors," and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" include or may include forward-looking statements within
the meaning of the federal securities laws. We have based these forward-looking
statements on currently available information and our current beliefs,
expectations and projections about future events. All forward-looking statements
contained herein are subject to numerous risks and uncertainties. Our actual
results and the timing of certain events could differ materially from those
projected in the forward looking statements due to a number of factors discussed
under the heading "Risk Factors" in this Report and in our other filings with
the Securities and Exchange Commission. Should one or more of these risks or
uncertainties materialize, or should the underlying estimates or assumptions
prove incorrect, actual results or outcomes may vary significantly from those
suggested by forward looking information.
PART I
ITEM 1. BUSINESS
OVERVIEW
Quest Software provides application and database management software
solutions that enhance our customers' return on their information technology
("IT") investments by maximizing availability, improving performance, maximizing
the effectiveness of IT personnel and improving the quality of business critical
applications. Our product families are designed to meet the availability and
performance requirements of our customers' most critical applications. Each
product family consists of an integrated suite of software tools that enable IT
organizations to manage and administer packaged and internally developed
business applications and the databases on which they run. The types of
applications Quest supports with its products include: financial reporting
systems, ERP (enterprise resource planning) systems, CRM (customer relationship
management) systems, B2B (business to business) e-commerce systems, human
resources systems, supply chain management systems and corporate messaging
systems. These applications all run on large, complex and constantly expanding
databases, primarily Oracle, Microsoft SQL Server and IBM's DB2 systems.
Over the course of the last five years, Quest has evolved its leadership
position in the Oracle tools and utilities market into leadership in providing a
wide range of application and information availability solutions. Quest now
provides a broad portfolio of products that are grouped into five solution
categories: High Availability, Application Monitoring, Database Management, SQL
Development, and Report Management. Quest has expanded its product portfolio
significantly through both internal development efforts and strategic
acquisitions. Key developments in 2000 included:
- Our entry into the IBM DB2 market by introducing Quest Central for DB2, a
suite of database management solutions with functionality focused on the
performance monitoring, tuning, space management and administration
elements of database management.
- Our entry into the Windows systems management market by introducing
monitoring and tuning solutions for Microsoft Exchange and SQL Server. In
September 2000, we augmented our internal development efforts for the
Microsoft platforms by acquiring FastLane Technologies, Inc., a provider
of directory management software with solutions for Windows 2000
migration, deployment and management. We believe FastLane's position in
the directory management solutions market will serve as a foundation for
our entry into the Microsoft solutions and systems management market.
- Our introduction of LiveReorg, a unique software solution that provides
users with the ability to perform non-intrusive, downtime-free
maintenance of Oracle databases, and SQLab Vision(TM), a tuning solution
designed to quickly identify and resolve performance problems in
mission-critical, Oracle-based applications.
- Our entry into the market for management and monitoring of heterogeneous,
multi-platform customer environments by acquiring Foglight Software,
Inc., a developer of application monitoring solutions. We
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have significantly added or enhanced the core Foglight solutions by
adding diagnostic, tuning and load testing capabilities. In addition, we
have dedicated significant development resources to creating versions of
Foglight for a variety of applications and database platforms.
- Our strengthening and expansion of our performance and information
availability solutions for leading ERP and CRM applications, e-commerce
and Web applications and the underlying databases that support these
applications.
INDUSTRY BACKGROUND
Organizations are constantly seeking ways to use information and technology
to gain competitive advantages. To compete more effectively, organizations must
deliver relevant information and provide increasingly sophisticated and
time-sensitive services to a rapidly expanding audience, including employees,
customers, suppliers and partners both inside and outside of the traditional
enterprise. Today, a growing number of organizations are using the Internet to
conduct business electronically. In embracing this e-business model, enterprises
are attempting to maximize the value of and extend their IT infrastructure to
directly reach a large number of geographically dispersed end-users. The
fundamental changes brought on by the increasing reliance on information
technology, including today's rapidly expanding e-business initiatives, are
introducing new complexities and transforming business practices:
- Decisions need to be made in real-time by personnel at all levels both
within and outside the enterprise;
- Internal end-users and customers demand relevant information immediately
and without interruption, and have increasingly high expectations
regarding response time;
- New software applications must be developed, and existing applications
need to be modified frequently to cope with changes in the business
environment; and
- Organizations must deploy new applications and technologies at an
increasingly rapid pace.
Underlying each of these requirements is the importance of effective
management and distribution of information. While raising the strategic
importance of real-time, dynamic information, today's e-business initiatives
have heightened the challenges of developing and managing the systems to deliver
it. For example, if an electronic commerce application fails, the relationship
between the organization and the customer is jeopardized, giving new meaning to
the term "mission critical." As a result, organizations must assure that their
systems provide:
- Application availability -- uninterrupted and high performance access to
applications under widely varying conditions; and
- Information availability -- broad distribution of critical business
information from underlying applications to decision makers throughout
the entire enterprise.
Application Availability
The challenge of today's competitive environment is to provide users with
the ability to immediately execute transactions and access information, without
regard to the underlying complexities inherent in the disparate systems that run
business applications. Since the emergence of e-business has allowed consumers
to directly communicate with an organization's systems, it is more important
than ever before to maximize application performance and minimize downtime.
Furthermore, as e-business, ERP, CRM and other applications are deployed to a
wider audience, rapid and unpredictable spikes in the number of users can
dramatically increase the likelihood of performance degradation and system
failure. Not only must organizations have adequate back-up systems in place, but
they also need solutions that will enable them to proactively monitor, identify
and resolve issues that can adversely affect application performance. Finally,
to ensure true application availability, organizations need solutions that will
enable them to quickly and accurately develop and deploy new applications and
modifications to existing applications.
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Information Availability
In addition to assuring the availability of applications, the imperatives
of e-business require organizations to make the strategic information within
these applications readily available to the users who need it. The Internet has
created a platform for distributing critical, dynamic business information, such
as inventory levels, requisitions, billing statements, manufacturing data and
sales reports to a broad range of employees, partners and suppliers, many of
whom may be located in geographically remote locations and connected through
multiple, non-integrated systems. Organizations must be able to leverage this
platform to reach customers and provide continuous access to valuable
information, including customer support and current account information. The
challenge, however, is effectively extracting, publishing and disseminating
large volumes of information to thousands of employees, customers, partners and
suppliers over the Internet without massive amounts of application
reengineering.
Need for a Comprehensive Solution
The effectiveness of an organization's information delivery system is
dependent on the reliability and constant availability of its applications. An
application is useless if it is not available to end-users. This criticality
becomes increasingly acute as networked computing, fueled by the Internet,
proliferates. Customers and employees require and expect full time access to a
company's IT systems. A user's ability to access information is linked to the
performance and reliability of the underlying application. Historically,
organizations have relied on a combination of manual processes and a
heterogeneous assortment of software tools to manage the performance and
reliability of their application infrastructure and to enable the distribution
of information throughout the enterprise. However, the requirements of today's
e-business initiatives have stretched the capabilities of these traditional
solutions. This dynamic environment has created the need for a comprehensive
solution that will address the breadth of these application and information
availability requirements:
- Deliver data from multiple, heterogeneous sources, scale to thousands of
users and deliver information across all environments, quickly and
cost-effectively;
- Provide high performance and reliability for 24 X 7 X 365 access, and
minimize the strain on existing systems and personnel;
- Enable organizations to support an increasing number of business
applications without adding significant new technical staff;
- Be easy to use and deploy without requiring in-depth technical expertise;
- Adapt to accommodate rapidly changing business needs;
- Provide an architecture to realize immediate value for Web-based
applications; and
- Address these requirements across the entire Web, packaged application
and database environments.
THE QUEST SOLUTION
Quest Software is a leading provider of application management solutions
designed to maintain the integrity of mission-critical business transactions and
maximize the performance of enterprise applications. Our solutions address the
needs of today's around-the-clock businesses where demands on the information
technology infrastructure are high and tolerance for downtime is low. The
Internet has propagated the expectation of instant access to information, and
Quest delivers the solutions necessary to meet this demand.
One of the most significant benefits afforded by Quest solutions is derived
from their ease of use and implementation. Software that is difficult to
implement or use often does not deliver the value promised. A primary design
goal for Quest products is to provide a quick return on investment. We believe
our products
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can, in many cases, allow for more efficient and productive use of employee and
IT resources. Key elements of our solution include:
Application Availability
We offer a family of products that enhance the reliability and performance
of software applications. Our application availability products enable the
development of efficient and reliable Internet-enabled applications; accurately
deploy database and application changes; provide replication solutions for
fail-over capability, data distribution and distributing load across multiple
systems; and proactively monitor, diagnose and resolve database and system
performance issues before they are noticed by the end-user. Our products are
designed to maintain the continuous availability of applications to the
enterprise, not only in terms of uptime, but also in terms of providing adequate
performance under a wide range of operating conditions. As a result, information
technology personnel are able to efficiently and proactively enhance the
performance and reliability of critical business applications.
Extend the Reach of Information
We enable enterprises to deliver information internally and externally via
the Internet to reach employees, customers and partners throughout large and
geographically dispersed organizations. Our Web-based information availability
solutions enable access to a greater number of users, minimize the delay in
publishing information and reduce manual printing and delivery costs associated
with paper-based report distribution. For example, these solutions can integrate
with corporate portals to allow for delivery of personalized information to a
user's desktop through a Web browser. We optimize the storage and distribution
of information by publishing information once from disparate applications to a
centralized repository. This repository serves as a common platform to capture
and distribute information without taxing the application systems or the
network. Our solution is designed to empower decision-makers by providing
relevant, dynamic information, more quickly and more cost-effectively than
previously possible.
Leverage the Web
Our products allow organizations to leverage the functionality and
flexibility of the Internet to address the high-performance demands of
e-business environments. Specifically, our products are designed to adapt to the
varying bandwidth and response times encountered on the Internet with efficient
and fault-tolerant architectures; employ Java-based interfaces to deliver
transparent Web access to business information; and ensure the security and
integrity of Web-based access to applications.
Maximize Investment in Existing Technology
We enable organizations to enhance the capabilities and extend the benefits
of their existing information technology infrastructure. Our products enable
existing enterprise and custom applications to reach throughout and beyond the
enterprise without requiring re-engineering. Additionally, we enable our
customers to improve the reliability and performance of existing information
technology infrastructure to cost-effectively and predictability support the
increasing number of users and large volumes of transactions required by today's
e-business applications.
Easy to Deploy and Use
Our products are easy to deploy and use, thereby minimizing implementation,
training and support costs. We designed our products to be installed quickly by
the customer, typically without the need for on-site assistance. Our products
contain specific integration modules for SAP R/3, PeopleSoft and Oracle
Financials, enabling rapid deployment in these environments, minimizing the need
for customization and reducing ongoing maintenance requirements.
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Architected to Scale
Our products are well-suited for large, enterprise-wide deployments. We
designed our products to effectively scale when implemented in large and rapidly
expanding environments without compromising system performance. Our products
support heterogeneous networks, manage large quantities of information and
support thousands of users while at the same time minimizing the consumption of
network and computing resources. Our Java user interfaces significantly reduce
the need for client-side software management, effectively leveraging today's
wide deployment of Internet browser technology.
SALES, MARKETING AND DISTRIBUTION
We market and sell our products and services worldwide to end users
primarily through our direct sales organization. At December 31, 2000, we had
333 direct sales representatives. Our direct sales force is multi-tiered,
ranging from named account enterprise sales representatives to a large telesales
organization that concentrates on lower price point products. We invested
significantly in our direct sales organization in 2000, both in headcount and in
expansion of offices. We opened six new field offices domestically in 2000 as
well as international offices in France, Spain, Sweden, Denmark, Norway, Brazil,
Mexico, Calgary, Nova Scotia and Ottawa. We are now actively supplementing this
direct sales organization with indirect sales channels such as resellers, value
added resellers, and systems integrators and are investing significantly in
building out this channel in 2001. We also market products through independent
distributors in international territories not covered by our direct sales
organization.
Our domestic sales organization is headquartered in Irvine, California. We
have additional sales offices located in the metropolitan areas of Atlanta,
Boston, Chicago, Dallas, New York, San Francisco and Washington D.C. We also
have international sales offices in the metropolitan areas of Frankfurt, Munich,
Paris, Stockholm, Amsterdam, London and Melbourne. We are continuing to expand
our sales organization and establish additional sales offices domestically and
internationally. We also sell certain of our products through our Web site,
which allows our customers to conveniently download our products for evaluation
and direct purchase.
Our sales and marketing approach is designed to help customers understand
both the business and technical benefits of our products. Much of our sales
activity involves cost-free product trials for a limited period, typically 30
days, during which a customer can experience the benefits of our products. We
complement the efforts of our sales organization with a pre-sale customer
support organization that is responsible for addressing technical questions
related to our products. The sales team for each customer is responsible for
maintaining appropriate contacts with key information technology personnel who
have planning and purchasing responsibility within the customer's organization.
Since a number of our products affect systems and employees throughout the
enterprise, our sales effort typically involves technology presentations and
pilot implementations, and many times involve numerous decision makers. As a
result, a key feature of our sales efforts is to establish relationships at all
appropriate levels in our customers' organizations. While the sales cycle varies
substantially from customer to customer, the typical sales cycle for our Vista
Plus and SharePlex products has ranged from three to nine months.
Focusing on our target markets, our marketing efforts are designed to
create awareness for our products and generate sales leads. To achieve these
goals, we promote our technical leadership, participate in industry trade shows,
technical conferences and technology seminars, publish technical and educational
articles in industry journals and engage in a variety of other marketing
activities, including direct mailings and print and Web-based advertising.
Our professional services organization complements our direct sales
organization by providing customers with a full range of support services,
including pre-sales demonstrations, evaluations, implementations, consulting
services, training and ongoing technical support. We believe that professional
services are becoming important to customer satisfaction and the development of
customer relationships.
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CUSTOMER SERVICE AND SUPPORT
A high level of customer service and support is critical to the successful
marketing and sale of our products and the development of long-term customer
relationships. We have a reputation for providing the highest level of customer
support and believe this is a competitive differentiator. Our customer support
group provides ongoing technical support to our customers after implementation
of the product under support agreements entered into at the time of the initial
sale. Our base level of e-mail-, Internet-, fax-, and telephone-based support
includes ongoing support during normal business hours; and software maintenance
and upgrade releases. For an additional fee, we provide support on a 24 X 7
basis as well as training and other services.
Customer support is provided domestically through our offices in Irvine and
internationally through our offices in Europe and Australia. In 2000 we
implemented a packaged CRM application to help maintain our high quality of
service as we continue to grow. We plan to hire additional support personnel
and, as needed, establish additional support sites domestically and
internationally to meet our customers' needs.
Our services contracts are generally of 12 months' duration and are
renewable at the customer's option. Service contracts are generally priced at
approximately 20% of the amount of licenses and the customer is invoiced
annually in advance.
RESEARCH AND DEVELOPMENT
We believe that strong research and product development capabilities are
essential to enhancing our core technologies and developing additional products
that combine ease of use and enhance return on IT infrastructure investments.
Highly innovative product design and strong product engineering are Quest
hallmarks. Our commitment to ongoing product development is reflected in our
level of investment in research and development, which we believe is at the high
end of the range for our peer companies. Research and development expenditures
were $8.0 million, $16.0 million and $39.7 million for the years ended December
31, 1998, 1999 and 2000, respectively. We have actively recruited key software
engineers and developers with expertise in the areas of Oracle technologies,
Java, Microsoft development technologies, ERP and CRM systems, IBM database
technologies and document management. Our engineers include several of the
industry's leading database management authorities. Complementing these
individuals, our senior management has extensive background in the database,
network infrastructure and enterprise and system software industries.
Our research and development efforts focus on designing and developing
reliable products that solve application and information availability problems
for our customers. Since our inception in 1987, we have made substantial
investments in research and development through both internal development and
technology acquisitions. Our products utilize a number of advanced technologies
including the log analysis component of SharePlex that allows quick and accurate
determination of the database structural and data changes with minimal overhead.
Another example is our Vista Plus product line which contains highly
sophisticated postscript and PCL parsing technology that allows these products
to understand complex output data streams, enabling search, transformation and
extraction from graphics-intensive output.
COMPETITION
The market for application and information availability solutions is
emerging rapidly, and, as a result, is intensely competitive and characterized
by rapidly changing technology and evolving standards. We expect competition to
continue to increase both from existing competitors and new market entrants. We
believe that our ability to effectively compete depends on many factors,
including:
- the ease of use, performance, features, price and reliability of our
products as compared to those of our competitors;
- the timing and market acceptance of new products and enhancements to
existing products developed by us and our competitors;
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- the quality of our customer support; and
- the effectiveness of our sales and marketing efforts.
Companies currently offering competitive products vary in the scope and
breadth of the products and services offered and include:
- providers of enterprise report management products such as Computer
Associates, Hewlett-Packard, IBM and Mobius;
- providers of hardware and software replication tools such as EMC and
Veritas;
- providers of database and database management products such as BMC,
Compuware, Oracle, Computer Associates, Embarcadero and Precise; and
- providers of Windows NT management and migration tools, such as NetIQ and
BindView.
Some of our competitors and potential competitors have greater name
recognition, a larger installed customer base company-wide and significantly
greater financial, technical, marketing, and other resources than we do. Our
competitors may be able to respond more quickly to new or emerging technologies
and changes in customer requirements or devote greater resources to the
development, promotion and sale of their products than we can. In addition,
because there are relatively low barriers to entry in the software market, we
may encounter additional competition as other established and emerging companies
enter our field and introduce new products and technologies.
In addition, providers of database platforms such as Oracle, Microsoft and
IBM currently produce database management tools and may in the future enhance
their products to include functionality that is currently provided by our
products. The inclusion of the functionality of our software as standard
features of the underlying database solution or application supported by our
products could render our products obsolete and unmarketable, particularly if
the quality of such functionality were comparable to that of our products. Even
if the functionality provided as standard features by these system providers is
more limited than that of our software, there can be no assurance that a
significant number of customers would not elect to accept more limited
functionality in lieu of purchasing additional software. Moreover, there is
substantial risk that the mere announcements of competing products by large
competitors such as Oracle could result in the delay or cancellation of customer
orders for our products in anticipation of the introduction of such new
products.
In addition to the competition that we may face because of the internal
development efforts of our competitors, current and potential competitors may
make strategic acquisitions or establish cooperative relationships among
themselves or with third parties, thereby increasing their ability to address
the needs of our current or prospective customers. Accordingly, it is possible
that new competitors or alliances among current and new competitors may emerge
and rapidly gain significant market share. Such competition could also
materially adversely affect our ability to sell our products or to obtain
maintenance and support renewals for existing licenses on terms favorable to us.
There can be no assurance that we will be able to compete successfully
against current and future competitors. Increased competition could result in
price reductions, fewer customer orders, reduced gross margins and loss of
market share, any of which could materially affect our business, operating
results or financial condition.
PROPRIETARY RIGHTS
Our success and ability to compete are dependent on our ability to develop
and maintain the proprietary aspects of our technology. We rely on a combination
of trademark, trade secret, copyright law and contractual restrictions to
protect the proprietary aspects of our technology. We currently hold several
trademark registrations and have numerous trademark applications in the United
States and certain foreign countries. We seek to protect our source code for our
software, documentation and other written materials under trade secret and
copyright laws. We license our software pursuant to signed or shrink-wrap
license agreements, which impose restrictions on the licensee's ability to
utilize the software. Finally, we seek to avoid disclosure of our
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intellectual property by requiring employees and consultants with access to our
proprietary information to execute confidentiality agreements with us and by
restricting access to our source code.
EMPLOYEES
As of December 31, 2000, we employed 1,431 full-time employees, including
658 in sales and marketing, 492 in research and development, 104 in customer
service and support and 177 in general and administrative. We believe that our
future success will depend in large part upon our continuing ability to attract
and retain highly skilled managerial, sales, marketing, customer support and
research and development personnel. Like other software companies, we face
intense competition for such personnel, and we have at times experienced and
continue to experience difficulty in recruiting qualified personnel. There can
be no assurance that we will be successful in attracting, assimilating and
retaining other qualified personnel in the future. We are not subject to any
collective bargaining agreement and we believe that our relationships with our
employees are good.
EXECUTIVE OFFICERS OF THE REGISTRANT
The names of our executive officers and other information about them are
shown below.
NAME AGE POSITION
---- --- --------
Vincent C. Smith............ 37 Chief Executive Officer and Chairman of the Board
David M. Doyle.............. 40 President, Secretary and Director
M. Brinkley Morse........... 43 Vice President, Finance and Operations
Eyal M. Aronoff............. 37 Chief Technical Officer, DB Tools
Douglas F. Garn............. 42 Vice President, Worldwide Sales
Marshall I. Senk............ 37 Vice President, Marketing
Set forth below is certain information regarding the business experience
during the past five years of each of the above-named persons.
Vincent C. Smith has served as our Chief Executive Officer since 1997 and a
director since 1995. Mr. Smith became Chairman of the Board in 1998. In 1994,
Mr. Smith was Director of Open Systems at BMC Software, where he managed its
sales operations. From 1992 to 1994, Mr. Smith co-founded Patrol Software North
America and served as its Vice President of Worldwide Sales and Marketing.
Patrol Software merged with BMC in 1994. Mr. Smith worked at Oracle Corporation
from 1987 to 1992 in a variety of sales management positions. Mr. Smith is a
director of Emergent Information Technologies Inc.
David M. Doyle is our President, Secretary, founder and a director. Mr.
Doyle has been President and a director since the formation of Quest in 1987 and
has been our Secretary since June 1999. Mr. Doyle was the primary designer and
developer of our products during the initial four years after the founding of
Quest. Prior to the founding of Quest, Mr. Doyle served as a consultant to a
variety of industries, specializing in the areas of system design and
application performance, and co-founded American Data Industries.
M. Brinkley Morse is our Vice President, Finance and Operations. Mr. Morse
has held this position since January 2001. Before joining Quest, Mr. Morse
served as Senior Vice President, Corporate Development and Secretary of BMC
Software from September 1998 to August 2000, and he served as General Counsel
and Secretary of BMC from November 1988 to September 1998.
Eyal M. Aronoff is our Chief Technical Officer, DB Tools, and has held this
position since September 2000. From March 1996 to September 2000, Mr. Aronoff
was our Vice President of Technology and Engineering. Mr. Aronoff founded R*Tech
Systems, a database management company, in 1992 and served as its President from
1992 to 1996, when we acquired this company. Prior to this, Mr. Aronoff worked
for John Bryce Ltd., an Oracle distributor in Israel, and served in the Israeli
Defense Force.
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Douglas F. Garn is the Vice President of Worldwide Sales. Mr. Garn has held
this position since January 1998. From March 1996 to January 1998, Mr. Garn was
Vice President of North American Sales for Peregrine Systems, Inc. From July
1995 until April 1996, Mr. Garn was Vice President of Sales with Syntax, Inc., a
networking software company. From November 1993 until July 1995, Mr. Garn was
Regional Sales Manager with BMC.
Marshall I. Senk is our Vice President of Marketing. Prior to joining Quest
Software in August 2000, Mr. Senk spent five years as managing director and
senior research analyst covering the e-business software sector for Robertson
Stephens. Previous to Robertson Stephens, Mr. Senk held a number of positions at
Oracle Corporation over the span of six years, most recently director of product
management for the desktop product line as well as positions in corporate
marketing and application development.
ITEM 2. PROPERTIES
Our principal administrative, sales, marketing, support and research and
development facilities are currently located in approximately 132,500 square
feet of space in Irvine, California. One of these facilities is under a six-year
lease which includes an option to renew this lease for an additional five-year
term. The other facility is under a 3 1/2 year lease.
We also lease sales offices in several major metropolitan areas of the
U.S., including Atlanta, Boston, Chicago, Dallas, New York, San Francisco and
Washington, D.C. Our Canadian subsidiaries currently operate from three leased
facilities in Calgary, Alberta; Ottawa, Ontario and Halifax, Nova Scotia. Our
German subsidiary currently operates from two facilities in Frankfurt and
Dusseldorf. Our Australian subsidiary operates from two leased facilities in
Melbourne which total approximately 10,000 square feet. Our UK subsidiary leases
a 5,300 square-foot office in the London metropolitan area.
ITEM 3. LEGAL PROCEEDINGS
We are involved from time to time in a variety of legal and administrative
proceedings and claims which arise in the ordinary course of business. While the
outcome of these claims can not be predicted with certainty, we do not believe
that the outcome of any currently pending legal matters will have a material
adverse effect on Quest.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 2000.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
Our common stock has been listed on the Nasdaq National Market since August
13, 1999 under the symbol "QSFT." The following table sets forth the high and
low sale prices on the Nasdaq National Market for our common stock for the
periods indicated. All prices are adjusted to reflect our two-for-one stock
split effected in March 2000.
PRICE RANGE
OF COMMON STOCK
----------------
HIGH LOW
------ ------
1999:
Third Quarter (from August 13)........................... $26.19 $16.28
Fourth Quarter........................................... 58.25 27.94
2000:
First Quarter............................................ $98.13 $36.50
Second Quarter........................................... 60.63 23.63
Third Quarter............................................ 69.56 43.50
Fourth Quarter........................................... 64.38 25.63
On March 19, 2001, the closing price of our common stock on the Nasdaq
National Market was $20.06 per share. As of March 19, 2001, there were 355
holders of record of our common stock (not including beneficial holders of
shares held in "street name").
Prior to our conversion to a C corporation for tax purposes in January
1997, we paid distributions to our S corporation shareholders in amounts
generally consistent with their tax liabilities arising from their allocable
share of S corporation earnings. Since becoming a C corporation, we have not
declared or paid any cash dividends on our common stock and do not expect to do
so in the foreseeable future. We currently intend to retain all available funds
for use in the operation and expansion of our business. Any future determination
to pay dividends will be at the discretion of our board of directors and will
depend on our results of operations, financial conditions, contractual and legal
restrictions and other factors the board deems relevant.
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ITEM 6. SELECTED FINANCIAL DATA
You should read the following selected consolidated financial data in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our consolidated financial statements and the
related notes thereto appearing elsewhere in this Report. The following selected
consolidated statement of operations data for the years ended December 31, 1998,
1999 and 2000, and the consolidated balance sheet data at December 31, 1999 and
2000, have been derived from audited consolidated financial statements included
elsewhere in this Report. The consolidated data presented below for the years
ended December 31, 1996 and 1997, and at December 31, 1996, 1997 and 1998, are
derived from audited consolidated financial statements that are not included in
this Report. The data presented below do not include pro forma adjustments to
reflect the income tax provision as if we were a C corporation in fiscal year
1996.
YEARS ENDED DECEMBER 31,
------------------------------------------------
1996 1997 1998 1999 2000
------- ------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
Licenses................................................ $ 9,316 $12,158 $24,901 $54,269 $126,767
Services................................................ 3,546 6,157 9,889 16,599 38,820
------- ------- ------- ------- --------
Total revenues................................... 12,862 18,315 34,790 70,868 165,587
Cost of revenues:
Licenses................................................ 950 1,307 3,433 2,998 3,571
Services................................................ 1,467 1,972 2,507 4,195 10,695
Amortization of purchased intangible assets............. -- -- -- -- 5,038
------- ------- ------- ------- --------
Total cost of revenues........................... 2,417 3,279 5,940 7,193 19,304
Gross profit.............................................. 10,445 15,036 28,850 63,675 146,283
Operating expenses:
Sales and marketing..................................... 4,328 5,845 11,836 32,078 77,641
Research and development................................ 2,995 4,293 8,047 15,980 39,747
General and administrative.............................. 3,494 3,450 5,278 9,906 17,679
Other compensation costs and goodwill amortization...... -- -- -- 1,243 41,092
------- ------- ------- ------- --------
Total operating expenses......................... 10,817 13,588 25,161 59,207 176,159
------- ------- ------- ------- --------
Income (loss) from operations............................. (372) 1,448 3,689 4,468 (29,876)
Interest income........................................... 17 72 372 1,501 13,535
Other income (expense), net............................... 372 (209) (36) (299) (1,932)
------- ------- ------- ------- --------
Income (loss) before income tax provision................. 17 1,311 4,025 5,670 (18,273)
Income tax provision...................................... 1 1,022 1,679 2,273 6,805
------- ------- ------- ------- --------
Net income (loss)......................................... 16 289 2,346 3,397 (25,078)
Preferred stock dividends(1).............................. -- -- -- 590 --
------- ------- ------- ------- --------
Net income (loss) applicable to common shareholders....... $ 16 $ 289 $ 2,346 $ 2,807 $(25,078)
======= ======= ======= ======= ========
Basic net income (loss) per common share.................. $ 0.00 $ 0.00 $ 0.03 $ 0.04 $ (0.29)
Diluted net income (loss) per common share................ $ 0.00 $ 0.00 $ 0.03 $ 0.03 $ (0.29)
Weighted-average common shares outstanding:
Basic................................................... 76,700 80,746 88,522 75,354 85,332
Diluted................................................. 76,700 81,234 88,918 83,600 85,332
- ---------------
(1) Represents cash dividends paid in 1999 to holders of shares of Series B
Redeemable Preferred Stock, all of which were redeemed in connection with
our initial public offering in August 1999.
DECEMBER 31,
------------------------------------------------
1996 1997 1998 1999 2000
------- ------- ------- ------- --------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................. $ -- $ 2,096 $ 8,981 $39,643 $ 25,155
Short-term marketable securities.......................... -- -- -- 11,000 8,587
Working capital........................................... 553 374 2,771 38,670 29,887
Total assets.............................................. 6,408 9,713 19,645 99,149 534,172
Long-term obligations..................................... -- -- -- 403 6,422
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of our financial condition and results of
operations should be read in conjunction with the consolidated financial
statements and notes to those statements included elsewhere in this Report.
OVERVIEW
We provide application management software solutions that enhance our
customers' return on IT investment dollars by maximizing availability, improving
performance, maximizing the effectiveness of IT personnel and improving the
quality of business critical applications. Our product families are designed to
meet the availability and performance requirements of our customers' most
critical applications. Each product family consists of an integrated suite of
software tools that enable personnel to manage and administer complex database
systems and business applications, both packaged and custom developed. These
applications can include ERP (enterprise resource planning) systems, CRM
(customer relationship management) systems, B2B (business to business)
e-commerce systems, corporate messaging and Internet and web-based applications.
We enable organizations to leverage IT infrastructure investments by maximizing
the performance and availability of enterprise applications with solutions for
High Availability, Application Monitoring, Database Management, SQL Development,
and Report Management.
Our acquisitions of Foglight Software, Inc. (Foglight) and FastLane
Technologies, Inc. (FastLane) were highlights of 2000, a year in which we
experienced significant growth in our sales, support, professional services and
research and development headcount and expanded our executive management and
administrative team to meet the needs of our customers and employees worldwide.
Our integration activities relative to these acquisitions during 2000 has been
primarily dedicated to modifying, enhancing, testing, documenting and otherwise
integrating acquired technologies into our product offerings. We have dedicated
significant development resources to create versions of Foglight for a variety
of applications and database platforms, and have used FastLane's position in the
directory management solutions market as a platform on which to promote our
entry into the Microsoft solutions and systems management market. We believe
these integration activities, together with our internal research and
development efforts, will help us position Quest as the leading provider of
application management solutions, with a comprehensive set of software solutions
supporting the leading database platform vendors with specific solutions for
leading business-critical applications.
All of our acquisitions in 2000 were accounted for under the purchase
method of accounting, and our operating results reflect the activities of
acquired business only from their respective acquisition dates. As a result of
our acquisitions in 2000, we recorded goodwill and purchased intangible assets
of approximately $285.4 million in total. These assets are being amortized over
their estimated useful lives, and will result in charges to operations of at
least $15.0 million per quarter through the second quarter of 2003. For the year
ended December 31, 2000, we incurred a net loss due to the amortization of
goodwill and purchased intangible assets related to these acquisitions. These
acquisitions also contributed to increases in all operating expense categories,
and the impact of acquisitions on operating expenses may be greater in 2001,
which will reflect a full year of operations. Due to the integration that has
taken place to date, it is not possible to quantify the portion of increases in
revenues or operating expenses attributable to these acquisitions.
We derive our revenues primarily from the sale of software licenses and
related annual maintenance fees. Our total revenues have increased over each of
the past five fiscal years, from $12.9 million in 1996 to $165.6 million in
2000. Pricing of our software licenses is based on the number of servers,
workstations and/or users of our products. Services consist primarily of annual
maintenance contracts for technical support and product enhancements, and
consulting services.
We recognize software license revenues when a non-cancelable license
agreement has been signed with a customer, delivery of the software has
occurred, the fees are fixed and determinable, no significant post-delivery
vendor obligations remain and collection is deemed probable. Maintenance
revenues are recognized ratably over the contract term, which is typically one
year. Revenues for consulting services are recognized as such services are
performed. See Note 1 of the notes to our consolidated financial statements.
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International revenues from licenses and services sold to customers outside
of North America were $2.7 million in 1998, $15.3 million in 1999 and $28.7
million in 2000. We intend to expand our international sales activities as part
of our business strategy. All of our current international revenues are derived
from the operations of our wholly owned international subsidiaries, which
consist of both direct sales and sales through distributors. Our international
subsidiaries conduct business in the currency of the country in which they
operate (with the exception of Mexico and Brazil where the U.S. Dollar is used),
exposing us to currency fluctuations and currency transaction losses or gains
which are outside of our control. Historically, fluctuations in foreign currency
exchange rates have not had a material effect on our business. We have not, to
date, conducted any hedging transactions to reduce our risk to currency
fluctuations.
In the development of new products and enhancements of existing products,
the technological feasibility of the software is not established until
substantially all product development is complete. Historically, our software
development costs eligible for capitalization have been insignificant, and all
costs related to internal research and development have been expensed as
incurred.
RESULTS OF OPERATIONS
The following table sets forth certain consolidated statement of operations
data as a percentage of total revenues for the periods indicated:
YEARS ENDED DECEMBER 31,
--------------------------
1998 1999 2000
------ ------ ------
Revenues:
Licenses.................................................. 71.6% 76.6% 76.6%
Services.................................................. 28.4 23.4 23.4
----- ----- -----
Total revenues.................................... 100.0 100.0 100.0
----- ----- -----
Cost of revenues:
Licenses.................................................. 9.9 4.2 2.2
Services.................................................. 7.2 5.9 6.5
Amortization of purchased intangible assets............... -- -- 3.0
----- ----- -----
Total cost of revenues............................ 17.1 10.1 11.7
----- ----- -----
Gross profit................................................ 82.9 89.9 88.3
Operating expenses:
Sales and marketing....................................... 34.0 45.3 46.9
Research and development.................................. 23.1 22.6 24.0
General and administrative................................ 15.2 14.0 10.7
Other compensation costs and goodwill amortization........ -- 1.8 24.8
----- ----- -----
Total operating expenses.......................... 72.3 83.7 106.4
----- ----- -----
Income (loss) from operations............................... 10.6 6.2 (18.1)
Interest income............................................. 0.9 2.1 8.2
Other expense, net.......................................... (0.0) (0.4) (1.2)
----- ----- -----
Income (loss) before income tax provision................... 11.5 7.9 (11.1)
Income tax provision........................................ 4.8 3.2 4.1
----- ----- -----
Net income (loss)........................................... 6.7% 4.7% (15.2)%
===== ===== =====
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
REVENUES
Revenues were $34.8 million, $70.9 million and $165.6 million in 1998, 1999
and 2000, respectively, representing increases of $36.1 million, or 103.7%, from
1998 to 1999, and $94.7 million, or 134%, from 1999 to 2000. International
revenues accounted for 7.8%, 21.6% and 17.4% of total revenues for 1998, 1999
and 2000, respectively. No single customer accounted for more than 10% of total
revenues in 1998, 1999 or 2000.
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Licenses -- Licenses were $24.9 million, $54.3 million and $126.8 million
in 1998, 1999 and 2000, respectively, representing increases of $29.4 million,
or 118.1%, from 1998 to 1999, and $72.5 million, or 134%, from 1999 to 2000.
Licenses represented 71.6%, 76.6% and 76.6% of total revenues in 1998, 1999 and
2000, respectively. International licenses accounted for 5.8%, 23.4% and 19.0%
of total licenses in 1998, 1999 and 2000, respectively. The increase in licenses
from 1998 to 1999 was due to expansion of our worldwide sales force, as well as
the introduction of new products in 1999. The increase in licenses from 1999 to
2000 was due to continued expansion of our worldwide sales force, as well as
increased market acceptance of our software products and introduction of new
products.
Services -- Services were $9.9 million, $16.6 million and $38.8 million in
1998, 1999 and 2000, respectively, representing increases of $6.7 million, or
67.7%, from 1998 to 1999, and $22.2 million, or 134% from 1999 to 2000. Services
represented 28.4%, 23.4% and 23.4% of total revenues in 1998, 1999 and 2000,
respectively. The increases in services reflect an increase in the number of
software licenses sold with maintenance agreements and renewals of maintenance
agreements on existing licenses, as well as increased consulting and training
revenues. International services accounted for 12.7%, 16.0% and 12.0% of total
services in 1998, 1999 and 2000, respectively.
COST OF REVENUES
Cost of Licenses -- Cost of licenses was $3.4 million, $3.0 million and
$3.6 million in 1998, 1999 and 2000, respectively, representing a decrease of
$0.4 million, or 11.8%, from 1998 to 1999, and an increase of $0.6 million, or
20%, from 1999 to 2000. Cost of licenses as a percentage of license revenue was
13.8%, 5.5% and 2.8% for 1998, 1999 and 2000, respectively. The decrease in cost
of licenses from 1998 to 1999 was due to decreases for both royalties and
amortization as a result of reaching several royalty maximums and completion of
amortization of certain purchased technology. The increase in cost of licenses
from 1999 to 2000 was principally a result of an increase in product media,
duplication and printing costs. The decreases in cost of licenses as a
percentage of license revenues in 2000 resulted from increased license revenues
without a corresponding increase in amortization of acquired software licenses,
which does not vary by the number of licenses sold.
Cost of Services -- Cost of services was $2.5 million, $4.2 million and
$10.7 million in 1998, 1999 and 2000, respectively, representing increases of
$1.7 million, or 68.0%, from 1998 and 1999, and $6.5 million, or 155%, from 1999
to 2000. Cost of services as a percentage of service revenues was 25.4%, 25.3%
and 27.6% for 1998, 1999 and 2000, respectively. The increases in cost of
services in these periods are primarily due to the increase in the number of
technical support personnel required to manage and support our growing customer
base as well as increased product offerings. We also formed a professional
services consulting organization during the first half of 2000, which did not
exist in 1998 or 1999. Our gross margins on services revenues could fluctuate in
the future, reflecting the timing differences between increasing our
organization investments and the corresponding revenue growth that we expect as
a result. We expect the cost of services to increase in absolute dollars for the
foreseeable future as additional customer support and consulting personnel are
hired.
Amortization of Purchased Intangible Assets -- Amortization of purchased
intangible assets was $5.0 million in 2000, which includes amortization of the
fair value of acquired technology, workforce and customer lists associated with
the acquisitions made during 2000. There were no similar costs during 1998 and
1999.
OPERATING EXPENSES
Sales and Marketing -- Sales and marketing expenses were $11.8 million,
$32.1 million and $77.6 million in 1998, 1999 and 2000, respectively,
representing increases of $20.3 million, or 172.0%, from 1998 to 1999, and $45.5
million, or 142%, from 1999 to 2000. The increases reflect our increasing
investment in our sales and marketing organization, which from 1998 to 1999
included an increase in salaries and related expenses of $8.9 million, a $4.3
million increase in commissions and a $0.6 million increase in marketing
communications expenses. The increases from 1999 to 2000 included an increase in
salaries and related expenses of $20.3 million, a $8.9 million increase in
commissions, $5.3 million increase in travel and related costs, and a
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$1.6 million increase in promotional, conference and tradeshow expenses. We
intend to continue to expand our sales and marketing infrastructure in 2001 and,
as a result, expect sales and marketing expenses to increase in absolute
dollars.
Research and Development -- Research and development expenses were $8.0
million, $16.0 million and $39.7 million in 1998, 1999 and 2000, respectively,
representing increases of $8.0 million, or 100.0%, from 1998 to 1999, and $23.7
million, or 148%, from 1999 to 2000. The increases for these periods were
primarily related to a 138-person increase from 1998 to 1999, and a 268-person
increase from 1999 to 2000 in the number of software developers and quality
assurance personnel. We believe significant investments in research and
development are required to remain competitive, and expect these expenses to
continue to increase in absolute dollars in 2001.
General and Administrative -- General and administrative expenses were $5.3
million, $9.9 million and $17.7 million in 1998, 1999 and 2000, respectively,
representing an increase of $4.6 million, or 86.8%, from 1998 to 1999, and $7.8
million, or 78%, from 1999 to 2000. The most significant expense increases
during both periods were for salaries and related expenses, rent and
depreciation, which were the result of increased number of related personnel. We
expect general and administrative expenses to increase in absolute dollars as we
continue to enhance our infrastructure and support expansion of our operations.
Other Compensation Costs and Goodwill Amortization -- Other compensation
costs and goodwill amortization was $1.2 million in 1999 and $41.1 million in
2000. Included in 1999 was $0.7 million related to the severance package
provided to one of our founders and a director, which will be paid out over a
three-year period, $0.4 million of compensation costs related to the grant of
stock options at less than fair market value and $0.1 million of goodwill
amortization related to acquisitions. In 2000, these costs consisted of $36.0
million of goodwill amortization related to the various acquisitions primarily
made during 2000, and $5.1 million in compensation costs primarily related to
the grant of stock options at less than fair market value. The majority of the
option grants at less than fair market value were made in 1999.
Interest Income -- Interest income was $0.4 million, $1.5 million and $13.5
million in 1998, 1999 and 2000, respectively. The increases in 1999 and 2000
reflected higher cash and short-term investments, which accelerated after the
receipt of the net proceeds of our initial public offering in August 1999 and
our secondary offering in March 2000.
Other Expense, Net -- Other expense, net was ($36,000) in 1998, $(0.3)
million in 1999 and $(1.9) million. Increases in other expense, net are
primarily the result of increased interest expense and foreign currency
translation losses.
Provision for Income Taxes -- Provision for income taxes was $1.7 million,
$2.3 million and $6.8 million in 1998, 1999 and 2000, respectively, representing
increases of $0.6 million, or 35.3%, from 1998 to 1999, and $4.5 million, or
199%, from 1999 to 2000. The effective income tax rate was 41.7%, 40.1% and
(37.2)% in 1998, 1999 and 2000, respectively. Excluding amortization of
purchased intangible assets and other compensation costs and goodwill
amortization, the effective income tax rate for 2000 was 40%. See Note 6 of the
notes to our consolidated financial statements.
INFLATION
Inflation has not had a significant effect on our results of operations or
financial position for the years ended December 31, 1998, 1999 and 2000.
LIQUIDITY AND CAPITAL RESOURCES
We have funded our business, to date, primarily from cash generated by our
operations, net proceeds of $64.9 million from our initial public offering in
August 1999 and net proceeds of $253.5 million from our secondary offering in
March 2000. Our sources of liquidity as of December 31, 2000 consisted
principally of cash and cash equivalents of $25.2 million, and $126.7 million in
both short-and long-term high grade corporate and government marketable
securities.
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Net cash provided by operating activities was $8.2 million, $11.4 million
and $25.9 million in 1998, 1999 and 2000, respectively. The increases were
primarily due to increases in net income after excluding non-cash depreciation
and amortization expense and increases in income taxes payable and deferred
revenue, offset by increases in accounts receivable and deferred income taxes.
Net cash used in investing activities was $1.3 million, $24.1 million and
$241.8 million in 1998, 1999, and 2000, respectively. The increase in cash used
in investing activities in 2000 was primarily related to net purchases of
marketable securities of $111.0 million, acquisitions of $82.1 million and
capital expenditures of $39.2 million. See note 2 to the consolidated financial
statements for discussion on acquisitions. Capital expenditures primarily
consisted of equipment and related purchases to support our worldwide expansion
and related infrastructure needs.
Financing activities used $8,000 in 1998, and generated $43.6 million and
$201.1 million in 1999 and 2000, respectively. In April 1999, we raised $25.0
million through the sale of preferred stock and an additional $10.0 million in
term debt from a commercial bank in order to purchase shares of common stock
from a shareholder and founder for $35.0 million. See Note 4 of the notes to our
consolidated financial statements. In August 1999, we raised net proceeds of
$64.9 million from our initial public offering. A portion of the proceeds was
utilized to retire debt of $10.9 million and redeem the outstanding Series B
Preferred Stock for $10.0 million. In March 2000, we raised net proceeds of
$253.6 million from a secondary public offering of 8.4 million shares of our
common stock at a price of $70.00 per share. Of the shares sold in the offering
3.8 million shares were sold by the Company and 4.6 million shares were sold by
existing shareholders. The Company did not receive any proceeds from the shares
sold by the selling shareholders.
In December 2000, the Board of Directors authorized a stock repurchase
program under which the Company may purchase up to two million shares of its
common stock. Under the repurchase program, the Company may purchase shares from
time to time at varying prices in open market or private transactions. As of
December 31, 2000, the Company had repurchased 1.7 million shares for $57.4
million under the plan.
We believe that our existing cash, cash equivalents and investment balances
and cash flows from operations will be sufficient to finance our working capital
and capital expenditure requirements through at least the next 12 months. We may
require additional funds to support our working capital requirements, or for
other purposes, and may seek to raise additional funds through public or private
equity or debt financing or from other sources. If additional financing is
needed, we cannot assure you that such financing will be available to us on
commercially reasonable terms or at all.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In September 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS No. 133, as amended, is
effective for all fiscal years beginning after June 15, 2000, and establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities.
Under SFAS No. 133, certain contracts that were not formerly considered
derivatives may now meet the definition of a derivative which would be required
to be reported as assets or liabilities and carried at fair value. The Company
adopted SFAS No. 133 effective January 1, 2001. The adoption of SFAS No. 133 did
not have a significant impact on the financial position, results of operations,
or cash flows of the Company.
On December 6, 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements.
SAB No. 101 summarizes the staff's views in applying generally accepted
accounting principles to revenue recognition in financial statements. SAB No.
101 is effective for the fourth quarter in fiscal year 2000. The adoption of SAB
No. 101 did not have a material impact on the Company's financial statements, as
the Company believes its revenue recognition policies comply with SAB No. 101.
In March 2000, the FASB issued Interpretation No. 44 (FIN 44), Accounting
for Certain Transactions Involving Stock Compensation -- an interpretation of
APB Opinion No. 25. FIN 44 clarifies the definition of
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an employee for purposes of applying Accounting Principles Board Opinion (APB)
No. 25, Accounting for Stock Issued to Employees, the criteria for determining
whether a plan qualifies as a noncompensatory plan, the accounting consequence
of various modifications to the terms of a previously fixed stock option or
award, and the accounting for an exchange of stock compensation awards in a
business combination. This Interpretation is effective July 1, 2000, but certain
conclusions in this Interpretation cover specific events that occur after either
December 15, 1998 or January 12, 2000. The provisions of FIN 44 change the
accounting for an exchange of unvested employee stock options and restricted
stock awards in a purchase business combination. The new rules require the
intrinsic value of the unvested awards be allocated to deferred compensation and
recognized as non-cash compensation expense over the remaining future vesting
period. The adoption of FIN 44 did not have a material impact on the Company's
financial statements, other than the effect of the application of FIN 44 as it
relates to the Company's acquisitions as described in Note 2.
RISK FACTORS
An investment in our shares involves risks and uncertainties. You should
carefully consider the factors described below before making an investment
decision in our securities. The risks described below are the risks that we
currently believe are material risks of business and the industry in which we
compete.
Our business, financial condition and results of operations could be
adversely affected by any of the following risks. If we are adversely affected
by such risks, then the trading price of our common stock could decline, and you
could lose all or part of your investment.
RISKS RELATED TO OUR BUSINESS
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE IN FUTURE PERIODS AND, AS A
RESULT, WE MAY FAIL TO MEET EXPECTATIONS OF INVESTORS AND ANALYSTS, CAUSING OUR
STOCK PRICE TO FLUCTUATE OR DECLINE
Our revenues and operating results may vary significantly from quarter to
quarter due to a number of factors. These factors include the following:
- the size and timing of customer orders. See "-- The size and timing of
our customer orders may vary significantly from quarter to quarter which
could cause fluctuations in our revenues."
- the unpredictability of the timing and level of sales through our
indirect sales channel;
- the timing of revenue recognition for sales of software products and
services;
- the extent to which our customers renew their maintenance contracts with
us;
- the possibility that our customers may cancel or defer purchases as a
result of reduced IT budgets or in anticipation of new products or
product updates by us or by our competitors;
- the possibility of an economic slowdown generally;
- the amount and timing of expenditures related to expansion of our
operations;
- our ability to attain market acceptance of new products and services and
enhancements to our existing products;
- lack of order backlog;
- changes in our pricing policies or the pricing policies of our
competitors;
- the relative growth rates of the Windows NT and UNIX markets, as well as
the rate of adoption of Microsoft's release of Windows 2000 by users;
- costs related to acquisitions of technologies or businesses, including
amortization of goodwill and purchased intangible assets; and
- the timing of releases of new versions of third-party software products
that our products support.
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Fluctuations in our results of operations are likely to affect the market
price of our common stock that may not be related to our long-term performance.
THE SIZE AND TIMING OF OUR CUSTOMER ORDERS MAY VARY SIGNIFICANTLY FROM QUARTER
TO QUARTER WHICH COULD CAUSE FLUCTUATIONS IN OUR REVENUES
In any given quarter, sales of some of our products have involved large
financial commitments from a relatively small number of customers, and
cancellation or deferral of these large contracts would reduce our revenues. In
addition, the sales cycles for certain of our software products, such as Vista
Plus and SharePlex, can last from three to nine months and often require
pre-purchase evaluation periods and customer education. These relatively long
sales cycles may cause significant periodic variation in our license revenues.
Also, we have often booked a large amount of our sales in the last month or
weeks of each quarter and delays in the closing of sales near the end of a
quarter could cause quarterly revenue to fall short of anticipated levels.
Finally, while a portion of our revenues each quarter is recognized from
previously deferred revenue, our quarterly performance will depend primarily
upon entering into new contracts to generate revenues for that quarter.
MANY OF OUR PRODUCTS ARE DEPENDENT ON ORACLE'S TECHNOLOGIES; IF ORACLE'S
TECHNOLOGIES LOSE MARKET SHARE OR BECOME INCOMPATIBLE WITH OUR PRODUCTS, THE
DEMAND FOR OUR PRODUCTS COULD SUFFER
We believe that our success has depended in part, and will continue to
depend in part for the foreseeable future, upon our relationship with Oracle and
our status as a complementary software provider for Oracle's database and
application products. Many versions of our products, including SharePlex, SQLab
Vision, and SQL Navigator, are specifically designed to be used with Oracle
databases. Although a number of our products work with other environments, our
competitive advantage consists in substantial part on the integration between
our products and Oracle's products, and our extensive knowledge of Oracle's
technology. Currently, a significant portion of our total revenues are derived
from products that specifically support Oracle-based products. If Oracle for any
reason decides to promote technologies and standards that are not compatible
with our technology, or if Oracle loses market share for its database products,
our business, operating results and financial condition would be materially
adversely affected.
MANY OF OUR PRODUCTS ARE VULNERABLE TO DIRECT COMPETITION FROM ORACLE
We currently compete with Oracle in the market for database management
solutions. We expect that Oracle's commitment to and presence in the database
management product market will increase in the future and therefore
substantially increase competitive pressures. We believe that Oracle will
continue to incorporate database management technology into its server software
offerings, possibly at no additional cost to its users. We believe that Oracle
will also continue to enhance its database management technology. Furthermore,
Oracle could attempt to increase its presence in this market by acquiring or
forming strategic alliances with our competitors, and Oracle may be in better
position to withstand and respond to the current factors impacting this
industry. Oracle has a longer operating history, a larger installed base of
customers and substantially greater financial, distribution, marketing and
technical resources than we do. In addition, Oracle has well-established
relationships with many of our present and potential customers. As a result, we
may not be able to compete effectively with Oracle in the future, which could
materially adversely affect our business, operating results and financial
condition.
OUR SUCCESS DEPENDS ON OUR ABILITY TO DEVELOP NEW AND ENHANCED PRODUCTS THAT
ACHIEVE WIDESPREAD MARKET ACCEPTANCE
Our future success depends on our ability to address the rapidly changing
needs of our customers by developing and introducing new products, product
updates and services on a timely basis, by extending the operation of our
products on new platforms and by keeping pace with technological developments
and emerging industry standards. In order to grow our business, we are
committing substantial resources to developing software products and services
for the applications management market. If this markets does not continue to
develop as anticipated, or demand for our products in these markets does not
materialize or occurs
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more slowly that we expect, or if our development efforts are delayed or
unsuccessful, we will have expended substantial resources and capital without
realizing sufficient revenue, and our business and operating results could be
adversely affected.
ACQUISITIONS OF COMPANIES OR TECHNOLOGIES MAY RESULT IN DISRUPTIONS TO OUR
BUSINESS AND DIVERSION OF MANAGEMENT ATTENTION
We have in the past made and we expect to continue to make acquisitions of
complementary companies, products or technologies. If we make any additional
acquisitions, we will be required to assimilate the operations, products and
personnel of the acquired businesses and train, retain and motivate key
personnel from the acquired businesses. We may be unable to maintain uniform
standards, controls, procedures and policies if we fail in these efforts.
Similarly, acquisitions may subject us to liabilities and risks that are not
known or identifiable at the time of the acquisition or may cause disruptions in
our operations and divert management's attention from day-to-day operations,
which could impair our relationships with our current employees, customers and
strategic partners. We may have to incur debt or issue equity securities to pay
for any future acquisitions. The issuance of equity securities for any
acquisition could be substantially dilutive to our shareholders. In addition,
our profitability may suffer because of acquisition-related costs or
amortization costs for acquired goodwill and other intangible assets. In
consummating acquisitions, we are also subject to risks of entering geographic
and business markets in which we have no or limited prior experience. If we are
unable to fully integrate acquired businesses, products or technologies with our
existing operations, we may not receive the intended benefits of acquisition.
OUR ABILITY TO INCREASE OUR REVENUES DEPENDS ON OUR ABILITY TO EXPAND OUR
INDIRECT SALES CHANNELS
We intend to aggressively pursue expansion of our indirect sales channels
through arrangements with resellers, systems integrators and distributors. In
certain domestic and international markets we may miss sales opportunities if we
are unable to enter into successful relationships with locally based resellers.
We may become more dependent on these type of relationships. There can be no
assurance that we will successfully develop these relationships or that the
expansion of indirect sales distribution methods will increase revenues.
OUR PAST AND FUTURE GROWTH MAY STRAIN OUR MANAGEMENT, ADMINISTRATIVE,
OPERATIONAL AND FINANCIAL INFRASTRUCTURE
We have recently experienced a period of rapid growth in our operations
that has placed and will continue to place a strain on our management,
administrative, operational and financial infrastructure. During this period, we
have experienced an increase in the number of our employees, increasing demands
on our operating and financial systems and personnel, and an expansion in the
geographic coverage of our operations. The number of our full-time employees
increased from 123 as of December 31, 1997 to 257 as of December 31, 1998, to
654 as of December 31, 1999 and to 1,431 as of December 31, 2000. Our ability to
manage our operations and growth requires us to continue to improve our
operational, financial and management controls, and reporting systems and
procedures. We may need to expand our facilities or relocate some or all of our
employees or operations from time to time to support growth. These relocations
could result in temporary disruptions of our operations or a diversion of
management's attention and resources. In addition, we will be required to hire
additional management, financial and sales and marketing personnel to manage our
expanding operations. If we are unable to manage this growth effectively, our
business, operating results and financial condition may be materially adversely
affected.
WE MAY NOT GENERATE INCREASED BUSINESS FROM OUR CURRENT CUSTOMERS, WHICH COULD
SLOW OUR REVENUE GROWTH IN THE FUTURE
Most of our customers initially make a purchase of our products for a
single department or location. Many of these customers may choose not to expand
their use of our products. If we fail to generate expanded business from our
current customers, our business, operating results and financial condition could
be materially adversely affected. In addition, as we deploy new modules and
features for our existing products or introduce new products, our current
customers may choose not to purchase this new functionality or these new
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products. Moreover, if customers elect not to renew their maintenance
agreements, our service revenues would be materially adversely affected.
WE EXPECT TO INCUR SIGNIFICANT INCREASES IN OUR OPERATING EXPENSES IN THE
FORESEEABLE FUTURE, WHICH MAY AFFECT OUR FUTURE PROFITABILITY
We intend to substantially increase our operating expenses for the
foreseeable future as we continue to:
- increase our sales and marketing activities, including expanding our
direct sales and telesales forces;
- increase our research and development activities;
- expand our general and administrative activities; and
- expand our customer support organizations.
Accordingly, we will be required to significantly increase our revenues in order
to maintain profitability. These expenses will be incurred before we generate
any revenues by this increased spending. If we do not significantly increase
revenues from these efforts, our business and operating results would be
negatively impacted.
OUR INTERNATIONAL OPERATIONS AND OUR PLANNED EXPANSION OF OUR INTERNATIONAL
OPERATIONS EXPOSES US TO CERTAIN RISKS
Substantially all of our current international revenues are derived from
the operations of three of our wholly-owned subsidiaries in Australia, the
United Kingdom and Germany. Revenues from licenses and services to customers
outside of North America were $5.8 million in 1998, representing 16.7% of total
revenues, $15.3 million in 1999, representing 21.6% of total revenues, and $28.7
million in 2000, representing 17.3% of total revenues. As a result, we face
increasing risks from doing business on an international basis, including, among
others:
- difficulties in staffing and managing foreign operations;
- longer payment cycles;
- seasonal reductions in business activity in Europe;
- increased financial accounting and reporting burdens and complexities;
- potentially adverse tax consequences;
- potential loss of proprietary information due to piracy, misappropriation
or weaker laws regarding intellectual property protection;
- delays in localizing our products;
- compliance with a wide variety of complex foreign laws and treaties; and
- licenses, tariffs and other trade barriers.
In addition, because our international subsidiaries conduct business in the
currency of the country in which they operate, we are subject to currency
fluctuations and currency transaction losses or gains which are outside of our
control.
We plan to expand our international operations as part of our business
strategy. The expansion of our existing international operations and entry into
additional international markets will require significant management attention
and financial resources and will place additional burdens on our management,
administrative, operational and financial infrastructure. We cannot be certain
that our investments in establishing facilities in other countries will produce
desired levels of revenue or profitability. In addition, we have sold our
products internationally for only a few years and we have limited experience in
developing localized versions of our products and marketing and distributing
them internationally. As our international operations expand, our exposure to
exchange rate fluctuations will increase as we use an increasing number of
foreign currencies. We have not yet entered into any hedging transactions to
date to mitigate our expense to currency fluctuations.
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OUR RECENTLY-IMPLEMENTED STRATEGY OF INVESTING IN DEVELOPMENT STAGE COMPANIES
INVOLVES A NUMBER OF RISKS AND UNCERTAINTIES
We have and may continue to make investments in development-stage companies
that we believe provide strategic opportunities for Quest. Each of these
investments involves a number of risks and uncertainties, including diversion of
management attention, inability to identify strategic opportunities, inability
to value investments appropriately, inability to manage investments effectively
and loss of cash invested. We intend that these investments will complement our
own research and development efforts, provide access to new technologies and
emerging markets, and create opportunities for additional sales of our products
and services. However, we cannot assure you that this initiative will have the
above mentioned desired results, or even that we will not lose all or any part
of these investments.
FAILURE TO DEVELOP STRATEGIC RELATIONSHIPS COULD HARM OUR BUSINESS BY DENYING US
SELLING OPPORTUNITIES AND OTHER BENEFITS
Our current collaborative relationships may not prove to be beneficial to
us, and they may not be sustained. We also may not be able to enter into
successful new strategic relationships in the future, which could have a
material adverse effect on our business, operating results and financial
condition. From time to time, we have collaborated with other companies,
including Hewlett-Packard and Oracle and certain of the national accounting
firms that provide system integration services, in areas such as product
development, marketing, distribution and implementation. We could lose sales
opportunities if we fail to work effectively with these parties. Moreover, we
expect that maintaining and enhancing these and other relationships will become
a more meaningful part of our business strategy in the future. However, many of
our current partners are either actual or potential competitors with us. In
addition, many of these third parties also work with competing software
companies and we may not be able to maintain these existing relationships, due
to the fact that these relationships are informal or, if written, are terminable
with little or no notice.
OUR PROPRIETARY RIGHTS MAY BE INADEQUATELY PROTECTED, AND THERE IS RISK OF
INFRINGEMENT CLAIMS OR INDEPENDENT DEVELOPMENT OF COMPETING TECHNOLOGY THAT
COULD HARM OUR COMPETITIVE POSITION
Our success and ability to compete are dependent on our ability to develop
and maintain the proprietary aspects of our technology. We rely on a combination
of trademark, trade secret, copyright law and contractual restrictions to
protect the proprietary aspects of our technology.
Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or to obtain and use information
that we regard as proprietary. Litigation may be necessary in the future to
enforce our intellectual property rights, to protect our trade secrets, and to
determine the validity and scope of the proprietary rights of others. Any such
resulting litigation could result in substantial costs and diversion of
resources.
Our means of protecting our proprietary rights may prove to be inadequate
and competitors may independently develop similar or superior technology.
Policing unauthorized use of our products is difficult, and we cannot be certain
that the steps we have taken will prevent misappropriation of our technology,
particularly in foreign countries where the laws may not protect our proprietary
rights as fully as in the United States. We also believe that, because of the
rapid rate of technological change in the software industry, trade secret and
copyright protection are less significant than factors such as the knowledge,
ability and experience of our employees, frequent product enhancements and the
timeliness and quality of customer support services.
Our success and ability to compete are also dependent on our ability to
operate without infringing upon the proprietary rights of others. Third parties
may claim infringement by us of their intellectual property rights. In the event
of a successful claim of product infringement against us and our failure or
inability to either license the infringed or similar technology or develop
alternative technology on a timely basis, we may incur substantial licensing
fees, be liable for infringement damage, or be unable to market our products.
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OUR BUSINESS WILL SUFFER IF OUR SOFTWARE CONTAINS ERRORS
The software products we offer are inherently complex. Despite testing and
quality control, we cannot be certain that errors will not be found in current
versions, new versions or enhancements of our products after commencement of
commercial shipments. Significant technical challenges also arise with our
products because our customers purchase and deploy our products across a variety
of computer platforms and integrate it with a number of third-party software
applications and databases. If new or existing customers have difficulty
deploying our products or require significant amounts of customer support, our
operating margins could be harmed. Moreover, we could face possible claims and
higher development costs if our software contains undetected errors or if we
fail to meet our customers' expectations. As a result of the foregoing, we could
experience:
- loss of or delay in revenues and loss of market share;
- loss of customers;
- damage to our reputation;
- failure to achieve market acceptance;
- diversion of development resources;
- increased service and warranty costs;
- legal actions by customers against us which could, whether or not
successful, increase costs and distract our management; and
- increased insurance costs.
In addition, a product liability claim, whether or not successful, could
harm our business by increasing our costs and distracting our management.
WE INCORPORATE SOFTWARE LICENSED FROM THIRD PARTIES INTO SOME OF OUR PRODUCTS
AND ANY SIGNIFICANT INTERRUPTION IN THE AVAILABILITY OF THESE THIRD-PARTY
SOFTWARE PRODUCTS OR DEFECTS IN THESE PRODUCTS COULD REDUCE THE DEMAND FOR, OR
PREVENT THE SHIPPING OF, OUR PRODUCTS
Certain of our software products contain components developed and
maintained by third-party software vendors. We expect that we may have to
incorporate software from third-party vendors in our future products. We may not
be able to replace the functionality provided by the third-party software
currently offered with our products if that software becomes obsolete, defective
or incompatible with future versions of our products or is not adequately
maintained or updated. Any significant interruption in the availability of these
third-party software products or defects in these products could harm our sales
unless and until we can secure an alternative source. Although we believe there
are adequate alternate sources for the technology licensed to us, such alternate
sources may not provide us with the same functionality as that currently
provided to us.
NATURAL DISASTERS OR POWER OUTAGES COULD DISRUPT OUR BUSINESS
A substantial portion of our operations are located in California, and we
are subject to risks of damage and business disruptions resulting from
earthquakes, floods and similar events, as well as from power outages. We have
recently experienced limited and temporary power losses in our California
facilities due to power shortages, and we expect in the future to experience
additional power losses. While the impact to our business and operating results
has not been material, we cannot assure you that power losses will not adversely
affect our business in the future, or that the cost of acquiring sufficient
power to run our business will not increase significantly. Since we do not have
sufficient redundancy in our networking infrastructure, a natural disaster or
other unanticipated problem could have an adverse effect on our business,
including both our internal operations and our ability to communicate with our
customers or sell and deliver our products.
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RISKS RELATED TO OUR INDUSTRY
THE DEMAND FOR OUR PRODUCTS WILL DEPEND ON OUR ABILITY TO ADAPT TO RAPID
TECHNOLOGICAL CHANGE
Our future success will depend on our ability to continue to enhance our
current products and to develop and introduce new products on a timely basis
that keep pace with technological developments and satisfy increasingly
sophisticated customer requirements. Rapid technological change, frequent new
product introductions and enhancements, uncertain product life cycles, changes
in customer demands and evolving industry standards characterize the market for
our products. The introduction of products embodying new technologies and the
emergence of new industry standards can render our existing products obsolete
and unmarketable. As a result of the complexities inherent in today's computing
environments and the performance demanded by customers for embedded databases
and Web-based products, new products and product enhancements can require long
development and testing periods. As a result, significant delays in the general
availability of such new releases or significant problems in the installation or
implementation of such new releases could have a material adverse effect on our
business, operating results and financial condition. We may not be successful
in:
- developing and marketing, on a timely and cost-effective basis, new
products or new product enhancements that respond to technological
change, evolving industry standards or customer requirements;
- avoiding difficulties that could delay or prevent the successful
development, introduction or marketing of these products; or
- achieving market acceptance for our new products and product
enhancements.
WE MAY NOT BE ABLE TO ATTRACT AND RETAIN PERSONNEL
Our future success depends on the continued service of our executive
officers and other key administrative, sales and marketing and support
personnel, many of whom have recently joined our company. In addition, the
success of our business is substantially dependent on the services of our Chief
Executive Officer and our President and Chief Technical Officer. We intend to
hire a significant number of additional sales, support, marketing,
administrative and research and development personnel over at least the next 12
months. There has in the past been and there may in the future be a shortage of
personnel that possess the technical background necessary to sell, support and
develop our products effectively. Competition for skilled personnel is intense,
and we may not be able to attract, assimilate or retain highly qualified
personnel in the future. Our business may not be able to grow if we cannot
attract qualified personnel. Hiring qualified sales, marketing, administrative,
research and development and customer support personnel, is very competitive in
our industry, particularly in Southern California, where Quest is headquartered.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN CURRENCY HEDGING INSTRUMENTS
We transact business in various foreign currencies. Accordingly, we are
subject to exposure from adverse movements in foreign currency exchange rates.
This exposure is primarily related to revenues and operating expenses in
Australia, the United Kingdom and Germany denominated in the respective local
currency. To date, we have not used hedging contracts to hedge our
foreign-currency fluctuation risks. We will assess the need to utilize financial
instruments to hedge currency exposures on an ongoing basis. We also do not use
derivative financial instruments for speculative trading purposes.
INTEREST RATE RISK
Our exposure to market rate risk for changes in interest rates relates
primarily to our investment portfolio. We have not used derivative financial
instruments in our investment portfolio. We place our investments with
high-quality issuers and, by policy, limit the amount of credit exposure to any
one issuer. Our investments in marketable securities consist primarily of
high-grade corporate and government securities with maturities of
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less than two years. Investments purchased with an original maturity of three
months or less are considered to be cash equivalents. We classify all of our
investments as available-for-sale. Available-for-sale securities are carried at
fair value, with unrealized gains and losses, net of tax, reported in a separate
component of shareholders' equity. At December 31, 2000, the net gain on
available-for-sale securities of $132,000 comprises 48 positions, of which 41
positions have unrealized gains and seven positions have unrealized losses.
The following table provides information about our investment portfolio at
December 31, 2000. For investment securities, the table presents principal cash
flows and related weighted average interest rates by expected maturity dates
(dollars in thousands).
Cash and cash equivalents................................... $ 25,155
Average interest rate....................................... 4.63%
Short-term marketable securities, available-for-sale........ $ 8,587
Average interest rate....................................... 6.72%
Long-term marketable securities, available-for-sale
(maturing in 2001)........................................ $118,084
Average interest rate....................................... 6.97%
Total portfolio............................................. $151,826
Average interest rate....................................... 6.57%
We consider the carrying value of our investment securities to approximate
their fair value due to the relatively short period of time between origination
of the investments and their expected realization. Accordingly, changes in the
market interest rate would not have a material effect on the fair value of such
investments.
EUROPEAN MONETARY UNION
Within Europe, the European Economic and Monetary Union introduced a new
currency, the euro, on January 1, 1999. The new currency is in response to the
European Union's policy of economic convergence to harmonize trade policy,
eliminate business costs associated with currency exchange, and to promote the
free flow of capital, goods and services.
On January 1, 1999, the participating countries adopted the euro as their
local currency, initially available for currency trading on currency exchanges
and non-cash transactions such as banking. The existing local currencies, or
legacy currencies, will remain legal tender through January 1, 2002. Beginning
on January 1, 2002, euro-denominated bills and coins will be issued for cash
transactions. For a period of up to six months from this date, both legacy
currencies and the euro will be legal tender. On or before July 1, 2002, the
participating countries will withdraw all legacy currencies and exclusively use
the euro.
Our transactions are recorded in both U.S. dollars and foreign currencies.
Future transactions may be recorded in the euro. We have not incurred and do not
expect to incur any significant costs from the continued implementation of the
euro. However, the currency risk of the euro could harm our business.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this item are included in Part IV,
Item 14 of this Form 10-K and are presented beginning on page F-1.
The following table sets forth certain unaudited quarterly financial data
for the fiscal years ended December 31, 1999 and 2000. This information has been
prepared on the same basis as the Consolidated Financial Statements and all
necessary adjustments have been included in the amounts stated below to present
fairly the selected quarterly information when read in conjunction with the
Consolidated Financial Statements and Notes thereto. Historical quarterly
financial results and trends may not be indicative of future results.
QUARTERS ENDED
-----------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1999 1999 1999 1999 2000 2000 2000 2000
--------- -------- --------- -------- --------- -------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues.............................. $12,839 $15,450 $18,308 $24,271 $28,725 $36,654 $44,122 $56,085
Gross profit.......................... 11,251 13,896 16,420 22,108 25,563 32,431 39,093 49,197
Income (loss) before income tax
provision........................... 1,632 641 902 2,495 (5,213) (1,868) (4,434) (6,757)
Net income (loss)..................... 943 31 272 1,561 (5,685) (4,409) (6,259) (8,724)
======= ======= ======= ======= ======= ======= ======= =======
Basic and diluted net income (loss)
per share........................... $ 0.01 $ 0.00 $ 0.00 $ 0.02 $ (0.07) $ (0.05) $ (0.07) $ (0.10)
======= ======= ======= ======= ======= ======= ======= =======
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Not applicable.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the Company's directors as required by this item will
be included in the Company's definitive proxy statement, to be delivered to
shareholders in connection with the Company's 2001 annual meeting. Such
information is incorporated herein by reference.
Information with respect to executive officers may be found in Part I, Item
1, under the heading "Executive Officers of the Registrant."
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item will be included in the section captioned
"Executive Compensation" appearing in the Company's definitive proxy statement,
to be delivered to shareholders in connection with the Company's 2001 annual
meeting of shareholders. Such information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item will be included in the section captioned
"Security Ownership of Certain Beneficial Owners and Management" appearing in
the Company's definitive proxy statement, to be delivered to shareholders in
connection with the Company's 2001 annual meeting of shareholders. Such
information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item will be included in the section captioned
"Related Party Transactions" appearing in the Company's definitive proxy
statement, to be delivered to shareholders in connection with the Company's 2001
annual meeting of shareholders. Such information is incorporated herein by
reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Form 10-K.
1. Financial Statements
PAGE
----
Independent Auditors' Report................................ F-1
Consolidated Balance Sheets as of December 31, 1999 and
2000...................................................... F-2
Consolidated Statements of Operations for the Years Ended
December 31, 1998, 1999 and 2000.......................... F-3
Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 1998, 1999 and 2000.............. F-4
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1999 and 2000.......................... F-5
Notes to Consolidated Financial Statements.................. F-6
2. Financial Statement Schedules
The following financial statement schedule should be read in conjunction
with the consolidated financial statements of Quest Software, Inc. filed as part
of this Report:
- Schedule II -- Valuation and Qualifying Accounts
Schedules other than that listed above have been omitted since they are
either not required or not applicable or because the information required is
included in the consolidated financial statements included elsewhere herein or
the notes thereto.
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3. Exhibits
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
3.1* Second Amended and Restated Articles of Incorporation.
3.2** Second Amended and Restated Bylaws, as amended.
3.3*** Certificate of Amendment of Second Amended and Restated
Articles of Incorporation.
4.1* Form of Registrant's Specimen Common Stock Certificate.
10.1*++ Registrant's 1998 Stock Option/Stock Issuance Plan.
10.2*++ Registrant's 1999 Stock Incentive Plan.
10.3*++ Registrant's 1999 Employee Stock Purchase Plan.
10.4* Form of Directors' and Officers' Indemnification Agreement.
10.5*+ Agreement, dated February 19, 1999, between Quest Software,
Inc. and INSO Chicago Corporation, dba INSO Corporation.
10.6*+ OEM Agreement, dated March 3, 1998, by and between Quest
Software, Inc. and Artifex Software Inc.
10.7* Office Space Lease dated as of June 17, 1999 between The
Irvine Company and Quest Software, Inc.
10.8** Office Lease between The Northwestern Mutual Life Insurance
Company (Landlord) and Quest Software, Inc. (Tenant) dated
as of September 30, 1999.
10.9***+ Inxight/Resolute Software: Software Distribution and License
Agreement -- Inxight Technology dated September 30, 1998
between Resolute Software, Inc. and Inxight Software, Inc.
10.10 Office lease, dated June 2000, between Fund VIII and Fund IX
Associates and Quest Software, Inc.
21.1 Subsidiaries of the Company.
23.1 Consent of Deloitte & Touche LLP.
- ---------------
* Incorporated herein by reference to the Company's Registration Statement on
Form S-1 and all amendments thereto (File No. 333-80543).
** Incorporated herein by reference to the Company's Registration Statement on
Form S-1 and all amendments thereto (File No. 333-30816).
*** Incorporated herein by reference to the Company's Quarterly Report on Form
10-Q for the period ended June 30, 2000.
+ Confidential treatment requested and received as to certain portions of
this agreement.
++ Indicates a management contract or compensatory arrangement.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by Quest Software, Inc. during the
quarter ended December 31, 2000.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
QUEST SOFTWARE, INC.
Dated: March 30, 2001 By: /s/ DAVID M. DOYLE
------------------------------------
David M. Doyle
President and Secretary
Pursuant to the requirements of the Securities Act of 1934, this Report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ VINCENT C. SMITH Chief Executive Officer March 30, 2001
- ----------------------------------------------------- (principal executive officer)
Vincent C. Smith and Chairman of the Board
/s/ DAVID M. DOYLE President, Secretary and March 30, 2001
- ----------------------------------------------------- Director
David M. Doyle
/s/ M. BRINKLEY MORSE Vice President, Finance and March 30, 2001
- ----------------------------------------------------- Operations
M. Brinkley Morse (principal financial officer)
/s/ KEVIN E. BROOKS Corporate Controller March 30, 2001
- ----------------------------------------------------- (principal accounting officer)
Kevin E. Brooks
/s/ DORAN G. MACHIN Director March 30, 2001
- -----------------------------------------------------
Doran G. Machin
/s/ JERRY MURDOCK, JR Director March 30, 2001
- -----------------------------------------------------
Jerry Murdock, Jr.
/s/ RAYMOND J. LANE Director March 30, 2001
- -----------------------------------------------------
Raymond J. Lane
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INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Directors
Quest Software, Inc.
We have audited the accompanying consolidated balance sheets of Quest
Software, Inc. and subsidiaries (the Company) as of December 31, 1999 and 2000,
and the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the three years in the period ended December 31, 2000.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Quest Software, Inc. and its
subsidiaries at December 31, 1999 and 2000, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2000, in conformity with accounting principles generally accepted in the
United States of America.
/s/ DELOITTE & TOUCHE LLP
Costa Mesa, California
January 30, 2001
F-1
32
QUEST SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
DECEMBER 31, DECEMBER 31,