UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2004
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 incorporation or organization) |
(I.R.S. Employer 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
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 whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act) Yes x No ¨
The number of shares outstanding of the Registrant’s Common Stock, no par value, as of November 2, 2004, was 94,985,332.
FORM 10-Q
TABLE OF CONTENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
| December 31, 2003 |
September 30, 2004 |
|||||||
| ASSETS |
||||||||
| Current assets: |
||||||||
| Cash and cash equivalents |
$ | 67,470 | $ | 89,384 | ||||
| Short-term marketable securities |
26,736 | 56,163 | ||||||
| Accounts receivable, net |
58,535 | 66,610 | ||||||
| Prepaid expenses and other current assets |
6,846 | 11,097 | ||||||
| Deferred income taxes |
15,074 | 3,994 | ||||||
| Total current assets |
174,661 | 227,248 | ||||||
| Property and equipment, net |
31,950 | 51,003 | ||||||
| Long-term marketable securities |
184,160 | 126,544 | ||||||
| Goodwill |
239,840 | 326,324 | ||||||
| Amortizing intangible assets, net |
25,159 | 44,881 | ||||||
| Deferred income taxes |
10,126 | 11,219 | ||||||
| Other assets |
1,915 | 2,511 | ||||||
| Total assets |
$ | 667,811 | $ | 789,730 | ||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY |
||||||||
| Current liabilities: |
||||||||
| Accounts payable |
$ | 4,180 | $ | 5,533 | ||||
| Obligation under repurchase agreement |
— | 27,492 | ||||||
| Accrued compensation |
17,384 | 21,325 | ||||||
| Other accrued expenses |
27,939 | 30,445 | ||||||
| Income taxes payable |
9,082 | 18,929 | ||||||
| Current portion of deferred revenue |
73,957 | 87,630 | ||||||
| Total current liabilities |
132,542 | 191,354 | ||||||
| Long-term liabilities: |
||||||||
| Long-term portion of deferred revenue |
9,416 | 13,696 | ||||||
| Other long-term liabilities |
1,677 | 1,984 | ||||||
| Total long-term liabilities |
11,093 | 15,680 | ||||||
| Commitments and contingencies (Notes 3, 5 and 10) |
||||||||
| Shareholders’ equity: |
||||||||
| Preferred stock, no par value, 10,000 shares authorized; no shares issued or outstanding |
— | — | ||||||
| Common stock, no par value, 150,000 shares authorized; 93,309 and 94,990 shares issued and outstanding at December 31, 2003 and September 30, 2004, respectively |
588,203 | 617,407 | ||||||
| Accumulated deficit |
(47,073 | ) | (13,129 | ) | ||||
| Accumulated other comprehensive (loss) income |
260 | (431 | ) | |||||
| Unearned compensation |
— | (3,937 | ) | |||||
| Note receivable from sale of common stock |
(17,214 | ) | (17,214 | ) | ||||
| Net shareholders’ equity |
524,176 | 582,696 | ||||||
| Total liabilities and shareholders’ equity |
$ | 667,811 | $ | 789,730 | ||||
See accompanying notes to condensed consolidated financial statements.
2
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
| Three Months Ended September 30, |
Nine Months Ended September 30, | |||||||||||
| 2003 |
2004 |
2003 |
2004 | |||||||||
| Revenues: |
||||||||||||
| Licenses |
$ | 41,423 | $ | 53,539 | $ | 125,310 | $ | 151,762 | ||||
| Services |
31,841 | 43,200 | 89,988 | 119,651 | ||||||||
| Total revenues |
73,264 | 96,739 | 215,298 | 271,413 | ||||||||
| Cost of revenues: |
||||||||||||
| Licenses |
1,026 | 764 | 3,098 | 2,835 | ||||||||
| Services |
5,267 | 7,973 | 15,805 | 21,739 | ||||||||
| Amortization of purchased technology |
1,899 | 2,269 | 6,391 | 5,980 | ||||||||
| Total cost of revenues |
8,192 | 11,006 | 25,294 | 30,554 | ||||||||
| Gross profit |
65,072 | 85,733 | 190,004 | 240,859 | ||||||||
| Operating expenses: |
||||||||||||
| Sales and marketing |
34,418 | 42,876 | 106,457 | 120,193 | ||||||||
| Research and development |
16,415 | 19,868 | 50,589 | 58,381 | ||||||||
| General and administrative |
7,438 | 8,876 | 21,285 | 25,661 | ||||||||
| Amortization of other purchased intangible assets |
889 | 1,568 | 2,643 | 3,861 | ||||||||
| In-process research and development |
— | — | — | 6,980 | ||||||||
| Litigation loss provision |
— | — | — | 5,000 | ||||||||
| Total operating expenses |
59,160 | 73,188 | 180,974 | 220,076 | ||||||||
| Gain on sale of Vista Plus product suite |
— | 29,574 | — | 29,574 | ||||||||
| Income from operations |
5,912 | 42,119 | 9,030 | 50,357 | ||||||||
| Other income, net |
1,308 | 2,723 | 7,156 | 2,884 | ||||||||
| Income before income tax provision |
7,220 | 44,842 | 16,186 | 53,241 | ||||||||
| Income tax provision |
2,782 | 13,901 | 6,148 | 19,285 | ||||||||
| Net income |
$ | 4,438 | $ | 30,941 | $ | 10,038 | $ | 33,956 | ||||
| Net income per share: |
||||||||||||
| Basic |
$ | 0.05 | $ | 0.33 | $ | 0.11 | $ | 0.36 | ||||
| Diluted |
$ | 0.05 | $ | 0.32 | $ | 0.11 | $ | 0.35 | ||||
| Weighted average shares: |
||||||||||||
| Basic |
92,550 | 94,737 | 91,737 | 94,306 | ||||||||
| Diluted |
94,213 | 96,608 | 93,571 | 97,691 | ||||||||
See accompanying notes to condensed consolidated financial statements.
3
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
| Nine Months Ended September 30, |
||||||||
| 2003 |
2004 |
|||||||
| Cash flows from operating activities: |
||||||||
| Net income |
$ | 10,038 | $ | 33,956 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
| Depreciation and amortization |
20,654 | 20,560 | ||||||
| Compensation expense associated with stock options |
796 | 1,266 | ||||||
| Deferred income taxes |
(459 | ) | 612 | |||||
| Gain on sale of Vista Plus product suite |
— | (29,574 | ) | |||||
| Provision for bad debts |
23 | 112 | ||||||
| In-process research and development |
— | 6,980 | ||||||
| Litigation loss provision |
— | 5,000 | ||||||
| Changes in operating assets and liabilities, net of effects of acquisitions: |
||||||||
| Accounts receivable |
3,204 | (6,070 | ) | |||||
| Prepaid expenses and other current assets |
2,653 | (276 | ) | |||||
| Other assets |
(99 | ) | (376 | ) | ||||
| Accounts payable |
(44 | ) | 702 | |||||
| Accrued compensation |
1,003 | 2,041 | ||||||
| Other accrued expenses |
(3,379 | ) | (5,633 | ) | ||||
| Income taxes payable |
8,634 | 12,760 | ||||||
| Deferred revenue |
4,200 | 15,754 | ||||||
| Other liabilities |
(277 | ) | 307 | |||||
| Net cash provided by operating activities |
46,947 | 58,121 | ||||||
| Cash flows from investing activities: |
||||||||
| Purchases of property and equipment |
(5,387 | ) | (28,010 | ) | ||||
| Cash paid for acquisitions, net of cash acquired |
(4,746 | ) | (96,364 | ) | ||||
| Proceeds from sale of Vista Plus product suite |
— | 22,515 | ||||||
| Purchases of marketable securities |
(107,491 | ) | (7 | ) | ||||
| Sales and maturities of marketable securities |
93,460 | 27,498 | ||||||
| Net cash used in investing activities |
(24,164 | ) | (74,368 | ) | ||||
| Cash flows from financing activities: |
||||||||
| Repayment of notes payable |
(1,336 | ) | (769 | ) | ||||
| Proceeds from repurchase agreement |
— | 67,581 | ||||||
| Repayment of repurchase agreement |
— | (40,512 | ) | |||||
| Repayment of capital lease obligations |
(255 | ) | (275 | ) | ||||
| Proceeds from the exercise of stock options |
5,388 | 7,028 | ||||||
| Proceeds from employee stock purchase plan |
4,631 | 4,797 | ||||||
| Net cash provided by financing activities |
8,428 | 37,850 | ||||||
| Effect of exchange rate changes on cash and cash equivalents |
||||||||