<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 OR 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) JANUARY 7, 2000
-----------------
QUEST SOFTWARE, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in charter)
CALIFORNIA 333-80543 33-0231678
- ---------------------------- ------------ --------------------
(State or other jurisdiction (Commission (IRS Employer
or incorporation) File Number) (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
--------------
N/A
- --------------------------------------------------------------------------------
(Former name or former address, if changed since last report)
<PAGE> 2
AMENDMENT
The undersigned Registrant hereby amends the following items, financial
statements, exhibits or other portions of its Current Report on Form 8-K,
originally filed with the Securities Exchange Commission on January 21, 2000,
as set forth in the pages attached hereto:
Item 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS:
The following financial statements and pro forma financial information
are filed as a part of this report.
<TABLE>
<CAPTION>
Page
----
<S> <C>
(a) Financial Statements of Business Acquired. Foglight Software, Inc.
Independent Auditors' Report (Deloitte & Touche, LLP)
(Exhibit 99.1) 1
Balance Sheet as of December 31, 1999 (Exhibit 99.1) 2
Statement of Operations for the year ended December 31,
1999 (Exhibit 99.1) 3
Statement of Capital Deficiency for the year ended December 31,
1999 (Exhibit 99.1) 4
Statement of Cash Flows for the year ended December 31,
1999 (Exhibit 99.1) 5
Notes to Financial Statements (Exhibit 99.1) 6
(b) Pro Forma Financial Information. Quest Software, Inc., MBR
Technologies, Inc. and Foglight Software, Inc. (on a
consolidated basis)
Unaudited Pro Forma Information 16
Unaudited Pro Forma Balance Sheet as of December 31, 1999
(Exhibit 99.2) 17
Unaudited Pro Forma Statement of Operations for the Year
Ended December 31, 1999 (Exhibit 99.2) 18
Notes to the Unaudited Pro Forma Condensed Financial Statements
(Exhibit 99.2) 19
</TABLE>
2
<PAGE> 3
(c) Exhibits.
* Agreement and Plan of Merger dated as of November 10, 1999 by and
among Quest Software, Inc., Quest Acquisition Corporation II,
Inc., and Foglight Software, Inc., as amended by that certain
Amendment No. 1 to Agreement and Plan of Merger dated as of
December 7, 1999 (Exhibit 2.1)
Consent of Deloitte & Touche, LLP (Exhibit 23.1).
* Incorporated by reference to the same Exhibit number of the
Company's Current Report on Form 8-K dated January 7, 2000.
3
<PAGE> 4
SIGNATURE
Pursuant to the requirements 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.
Date: February 23, 2000 By: /s/ JOHN J. LASKEY
----------------------------
John J. Laskey
Chief Financial Officer
4
<PAGE> 5
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
2.1* Agreement and Plan of Merger dated as of November 10,
1999 by and among Quest Software, Inc., Quest Acquisition
Corporation, II, Inc., and Foglight Software, Inc., as
amended by that certain Amendment No. 1 to Agreement and
Plan of Merger dated as of December 7, 1999
23.1 Independent Auditors' Consent
99.1 Financial Statements of Business Acquired
99.2 Pro Forma Financial Information
- ----------------
* Incorporated by reference to the same Exhibit number of the Company's Current
Report on Form 8-K dated January 7, 2000.
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements No.
333-91429 and 333-96183 on Form S-8 of Quest Software, Inc. of our report dated
February 22, 2000, relating to the financial statements of Foglight Software,
Inc. as of December 31, 1999 and for the year then ended appearing in this
Current Report on Form 8-K/A of Quest Software, Inc.
/S/ DELOITTE & TOUCHE LLP
Costa Mesa, California
February 22, 2000
<PAGE> 1
EXHIBIT 99.1
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Directors
Foglight Software, Inc.
We have audited the accompanying balance sheet of Foglight Software, Inc.
(the Company) as of December 31, 1999, and the related statements of operations,
capital deficiency, and cash flows for the year then ended. 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 audit.
We conducted our audit 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 audit provides a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Foglight Software, Inc. at December 31,
1999, and the results of its operations and its cash flows for the year then
ended, in conformity with accounting principles generally accepted in the United
States of America.
/s/ DELOITTE & TOUCHE LLP
Costa Mesa, California
February 22, 2000
1
<PAGE> 2
FOGLIGHT SOFTWARE, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
1999
------------
<S> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 32,589
Restricted cash........................................... 50,655
Accounts receivable, net of allowance for doubtful
accounts of $1,070..................................... 106,514
Prepaid expenses and other current assets................. 200,058
------------
Total current assets................................. 389,816
Property and equipment, net................................. 865,539
Other assets................................................ 34,344
------------
$ 1,289,699
============
LIABILITIES AND CAPITAL DEFICIENCY
Current liabilities:
Notes payable, current portion............................ $ 4,747,196
Accounts payable.......................................... 79,669
Accrued liabilities....................................... 752,012
Deferred revenue.......................................... 236,641
Capital lease obligations, current portion................ 309,871
------------
Total current liabilities............................ 6,125,389
Notes payable, net of current portion..................... 1,279,205
Capital lease obligations, net of current portion......... 497,595
Commitments and contingencies (Note 6)
Capital deficiency:
Series A convertible preferred stock, $0.001 par value,
710,029 shares authorized; 618,680 shares issued and
outstanding............................................ 612
Series B convertible preferred stock, $0.001 par value,
1,700,000 shares authorized; 1,238,390 shares issued
and outstanding........................................ 1,238
Series C convertible preferred stock, $0.001 par value,
4,789,250 shares authorized; 2,500,000 shares issued
and outstanding........................................ 2,500
Common stock, $0.001 par value, 16,600,000 shares
authorized; 5,510,592 shares issued and outstanding.... 5,510
Warrants to purchase Series C convertible preferred
stock.................................................. 1,292,188
Additional paid-in capital................................ 7,886,243
Unearned compensation expense............................. (1,388,251)
Accumulated deficit....................................... (14,412,530)
------------
Net capital deficiency............................... (6,612,490)
------------
$ 1,289,699
============
</TABLE>
See accompanying notes to financial statements.
2
<PAGE> 3
FOGLIGHT SOFTWARE, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the Year
Ended
December 31,
1999
------------
<S> <C>
Revenue:
Licenses.................................................. $ 2,433,107
Services.................................................. 382,879
-----------
Total revenue.......................................... 2,815,986
Cost of revenue:
Licenses.................................................. 108,458
Services.................................................. 207,430
-----------
Total cost of revenue....................................... 315,888
-----------
Gross profit................................................ 2,500,098
Operating expenses:
Sales and marketing....................................... 3,733,771
Research and development.................................. 3,680,185
General and administrative................................ 1,233,377
Other compensation expense................................ 409,053
-----------
Total operating expenses............................. 9,056,386
-----------
Loss from operations........................................ (6,556,288)
Other expense, net.......................................... (865,267)
-----------
Loss before income tax provision............................ (7,421,555)
Income tax provision........................................ 900
-----------
Net loss.................................................... (7,422,455)
Value of beneficial conversion feature...................... (660,000)
Accretion on preferred stock................................ (19,103)
-----------
Net loss applicable to common stockholders.................. $(8,101,558)
===========
</TABLE>
See accompanying notes to financial statements.
3
<PAGE> 4
FOGLIGHT SOFTWARE, INC.
STATEMENT OF CAPITAL DEFICIENCY
<TABLE>
<CAPTION>
WARRANTS
TO PURCHASE
CONVERTIBLE SERIES C
PREFERRED STOCK COMMON STOCK CONVERTIBLE ADDITIONAL
------------------ ------------------ PREFERRED PAID-IN UNEARNED ACCUMULATED
SHARES AMOUNT SHARES AMOUNT STOCK CAPITAL COMPENSATION DEFICIT
--------- ------ --------- ------ ----------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, January 1, 1999..... 1,857,070 $1,850 5,244,274 $5,244 $ 282,188 $1,121,848 $ (271,780) $ (6,310,972)
Issuance of Series C
preferred stock and
warrants, net.............. 1,000,000 1,000 -- -- 660,000 1,980,897 -- (660,000)
Issuance of Series C
preferred stock warrants in
conjunction with a
financing.................. -- -- -- -- 350,000 -- -- --
Accretion on preferred
stock...................... -- -- -- -- -- 19,103 -- (19,103)
Conversion of debt to
equity..................... 1,500,000 1,500 -- -- -- 3,116,100 -- --
Exercise of stock options.... -- -- 701,440 701 -- 127,257 -- --
Repurchase of common stock... -- -- (435,122) (435) -- (4,486) -- --
Unearned compensation........ -- -- -- -- -- 1,525,524 (1,525,524) --
Amortization of unearned
compensation............... -- -- -- -- -- -- 409,053 --
Net loss..................... -- -- -- -- -- -- -- (7,422,455)
--------- ------ --------- ------ ---------- ---------- ----------- ------------
BALANCE, December 31, 1999... 4,357,070 $4,350 5,510,592 $5,510 $1,292,188 $7,886,243 $(1,388,251) $(14,412,530)
========= ====== ========= ====== ========== ========== =========== ============
<CAPTION>
NET CAPITAL
DEFICIENCY
-----------
<S> <C>
BALANCE, January 1, 1999..... $(5,171,662)
Issuance of Series C
preferred stock and
warrants, net.............. 1,981,897
Issuance of Series C
preferred stock warrants in
conjunction with a
financing.................. 350,000
Accretion on preferred
stock......................
Conversion of debt to
equity..................... 3,117,600
Exercise of stock options.... 127,958
Repurchase of common stock... (4,921)
Unearned compensation........ --
Amortization of unearned
compensation............... 409,053
Net loss..................... (7,422,455)
-----------
BALANCE, December 31, 1999... $(6,612,490)
===========
</TABLE>
See accompanying notes to financial statements.
4
<PAGE> 5
FOGLIGHT SOFTWARE, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1999
------------
<S> <C>
Cash flows from operating activities:
Net loss.................................................. $(7,422,455)
Adjustments to reconcile net loss to net cash used in
operating activities:
Amortization of debt discount........................ 214,277
Depreciation......................................... 483,595
Amortization of unearned compensation expense........ 409,053
Changes in current assets and liabilities:
Accounts receivable............................... (106,514)
Prepaid expenses and other current assets......... (10,426)
Accounts payable.................................. (150,302)
Accrued liabilities............................... 516,798
Deferred revenue.................................. 110,507
-----------
Net cash used in operating activities........... (5,955,467)
Cash flows from investing activities:
Purchases of property and equipment....................... (105,927)
Cash flows from financing activities:
Proceeds from issuance of common stock.................... 127,958
Proceeds from issuance of Series C preferred stock........ 1,981,897
Repurchase of common stock................................ (4,921)
Principal payments on capital lease obligations and notes
payable................................................ (612,626)
Proceeds from notes payable............................... 2,411,166
Decrease in restricted cash............................... 25,768
-----------
Net cash provided by financing activities....... 3,929,242
-----------
Net decrease in cash and cash equivalents................... (2,132,152)
Cash and cash equivalents, beginning of period.............. 2,164,741
-----------
Cash and cash equivalents, end of period.................... $ 32,589
===========
Supplemental cash flow information -- cash paid for:
Income taxes.............................................. $ 900
===========
Interest.................................................. $ 457,498
===========
Supplemental noncash investing and financing activities:
Property and equipment acquired under capital leases...... $ 227,083
===========
Conversion of notes payable to Series C preferred stock... $ 3,117,600
===========
Value of beneficial conversion feature.................... $ 660,000
===========
Accretion on preferred stock.............................. $ 19,103
===========
</TABLE>
See accompanying notes to financial statements.
5
<PAGE> 6
FOGLIGHT SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations -- Foglight Software, Inc. (the Company) was
incorporated in November 1997 in the State of Delaware to develop, market and
sell software tools that are used by network professionals to diagram, document,
and manage network environments. Products are sold directly to end users in
North America, primarily through its sales organization. In March 1999, the
Company changed its name from Resolute Software to Foglight Software, Inc.
In January 2000, the Company was purchased by Quest Software, Inc. (Quest)
in exchange for 1,187,719 shares of Quest common stock valued at $104,167,628,
cash payments estimated to be $424,000, the assumption of unvested Foglight
stock options valued at $2,088,003 and the assumption of net liabilities of
$5,112,490.
Fair Value of Financial Instruments -- The carrying amounts of certain of
the Company's financial instruments, including cash and cash equivalents,
accounts payable, and other accrued liabilities, approximate fair value due to
their short maturities. Based on borrowing rates currently available to the
Company for leases and notes payable with similar terms, the carrying value of
its lease and notes payable obligations approximates fair value.
Cash, Cash Equivalents and Restricted Cash -- The Company considers all
highly liquid investments purchased with an original maturity of three months or
less to be cash equivalents. The restricted cash consists of cash required to be
maintained in connection with the Company's lease of its operating facility.
Property and Equipment -- Property and equipment are stated at cost less
accumulated depreciation. Depreciation is computed using the straight-line
method over the estimated useful lives of the assets, which range from three to
seven years. Repair and maintenance costs are expensed as incurred.
Revenue Recognition -- Under Statement of Position (SOP) No. 97-2, Software
Revenue Recognition, license revenue is recognized upon shipment, if a signed
contract exists, the fee is fixed and determinable, collection of resulting
receivable is probable, and product returns are reasonably estimable. If the
provisions of SOP No. 97-2 are not met, the revenue is deferred.
Service revenue consists primarily of maintenance, training, and consulting
services. Maintenance revenues are recognized ratably over the maintenance
period, which is generally one year. Revenue for training and consulting
services are recognized as the services are performed.
Research and Development -- Research and development costs are expensed as
incurred. Software development costs are capitalized, beginning when a product's
technological feasibility has been established and ending when a product is
available for general release to customers. Because the Company believes that
its current process for developing software is essentially completed
concurrently with the establishment of technological feasibility, no software
development costs have been capitalized as of December 31, 1999.
6
<PAGE> 7
FOGLIGHT SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Income Taxes -- The Company accounts for its income taxes under the
provisions of Statement of Financial Accounting Standards (SFAS) No. 109,
Accounting for Income Taxes. Deferred taxes on income result from temporary
differences between the reporting of income for financial statements and tax
reporting purposes. Measurement of the deferred items is based on enacted tax
laws. In the event the future consequences of differences between financial
reporting bases and tax bases of the Company's assets and liabilities result in
a deferred tax asset, SFAS No. 109 requires an evaluation of the probability of
being able to realize the future benefits indicated by such asset. A valuation
allowance related to a deferred tax asset is recorded when it is more likely
than not that some portion or all of the deferred tax asset will not be
realized.
Stock-Based Compensation -- The Company accounts for stock-based employee
compensation arrangements in accordance with provisions of Accounting Principles
Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and
complies with the disclosure provisions of SFAS No. 123, Accounting for
Stock-Based Compensation.
Comprehensive Income -- There was no difference between the net loss and
the comprehensive net loss for the year ended December 31, 1999.
Certain Risks and Concentrations -- Financial instruments that potentially
subject the Company to a concentration of credit risk consist of cash, cash
equivalents, and accounts receivable. The Company performs limited credit
evaluations of its customers' financial conditions and, generally, requires no
collateral from its customers.
For the year ended December 31, 1999, three customers accounted for 23%,
12%, and 10%, respectively, of the Company's revenues. The loss of, or a
reduction in sales to, any of these customers could have a material adverse
effect on the Company's business, operating results and financial condition.
The Company's products are concentrated in a single segment in the software
industry, which is characterized by rapid technological advances, changes in
customer requirements and evolving industry standards. The success of the
Company depends on management's ability to anticipate and respond quickly and
adequately to technological developments in the industry, changes in customer
requirements or changes in industry standards. Any significant delays in the
development or introduction of products or services could have a material
adverse effect on the Company's business and operating results.
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Recent Accounting Pronouncements -- In June 1998, the FASB issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities, which the
Company is required to adopt effective in its fiscal year 2001. SFAS No. 133
will require the Company to record all derivatives on the balance sheet at fair
value. The Company does not currently engage in hedging activities, but will
continue to evaluate the effects of adopting SFAS No. 133.
7
<PAGE> 8
FOGLIGHT SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. PROPERTY AND EQUIPMENT, NET
Property and equipment consist of the following:
<TABLE>
<S> <C>
Computer equipment.......................................... $1,410,883
Furniture and fixtures...................................... 181,720
----------
1,592,603
Less accumulated depreciation............................... (727,064)
----------
$ 865,539
==========
</TABLE>
Property and equipment includes $1,100,018 of computer equipment and
software under capital leases at December 31, 1999. Accumulated depreciation of
assets under capital leases totaled $517,499 at December 31, 1999.
3. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<S> <C>
Payroll and related costs................................... $388,423
Accrued interest............................................ 290,480
Other....................................................... 73,109
--------
$752,012
========
</TABLE>
4. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<S> <C>
Current:
State and local........................................... $ 900
Deferred:
Federal................................................... 2,419,811
State..................................................... 753,457
-----------
Net deferred taxes.......................................... 3,173,268
Valuation allowance......................................... (3,173,268)
-----------
$ 900
===========
</TABLE>
8
<PAGE> 9
FOGLIGHT SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Deferred tax assets and liabilities consist of the following:
<TABLE>
<S> <C>
Deferred tax assets:
Net operating loss carryforwards.......................... $ 4,694,000
Accruals and reserves..................................... 237,000
Capitalized start-up costs................................ 216,000
Depreciation and amortization............................. (18,000)
Tax credits............................................... 309,000
-----------
Net deferred tax assets..................................... 5,438,000
Valuation allowance......................................... (5,438,000)
-----------
$ --
===========
</TABLE>
The Company evaluates a variety of factors in determining the amount of
deferred income assets to be recognized pursuant to SFAS No. 109, Accounting for
Income Taxes. During 1999, the Company determined that a valuation allowance for
the entire net deferred tax asset is required.
As of December 31, 1999, the Company has approximately $11,900,000 and
$12,000,000 of federal and state domestic net operating loss carryforwards,
respectively, which begin expiring on an annual basis in 2018 and 2006,
respectively.
5. BORROWINGS
Equipment Lease Line -- At December 31, 1999, the Company had $807,466
outstanding and due under equipment lease financing lines with the leasing
companies, Phoenix Leasing and Comdisco Inc. (Comdisco). The equipment lease
lines provide for borrowings of up to $1,250,552 which are collateralized by the
leased equipment. The financing lines expire in September 2001 and December
2002, respectively.
In conjunction with the Comdisco lease line, the Company issued warrants in
1998 to purchase 1,750 shares of Series C preferred stock at a price of $2.00
per share, exercisable until September 2008 or five years after an initial
public offering by the Company, whichever is earlier. The fair value of these
warrants was determined to be insignificant using the Black-Scholes
option-pricing model and no value was ascribed to these warrants. All of the
warrants were outstanding at December 31, 1999.
In April 1999, in connection with the issuance of 1,000,000 shares of
Series C convertible preferred stock (Note 7), $3,000,000 in previously
outstanding convertible notes were converted into 1,500,000 shares of Series C
convertible preferred stock.
9
<PAGE> 10
FOGLIGHT SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Notes Payable -- Notes payable consists of the following:
<TABLE>
<S> <C>
5.32% Convertible Subordinated Promissory Notes, payable on
demand by the holders at any time one year after date of
issuance.................................................. $ 764,065
10.5% Captech note; matures March 16, 2008.................. 1,500,000
11.5% Comdisco Inc. note; matures September 30, 2001........ 2,462,336
7.0% Quest Software, Inc. notes............................. 1,300,000
-----------
6,026,401
Less current portion........................................ (4,747,196)
-----------
$ 1,279,205
===========
</TABLE>
Convertible Subordinated Promissory Notes -- During April and October of
1999, the Company issued $1,000,000 of Convertible Subordinated Promissory Notes
(Promissory Notes), which are payable, plus interest at 5.32%, on demand by the
holders at any time one year from the date of issuance. The Promissory Notes are
convertible upon any one of the following events:
- Upon the close of an equity financing yielding gross proceeds of at least
$3.0 million to the Company, the Promissory Notes will be converted into
similar equity securities issued in conjunction with the financing
- Upon the acquisition of the Company, the Promissory Notes will be
converted into shares of the Company's Series C convertible preferred
stock at a price of $2.00 per share
- Upon a public offering of the Company's common stock under the Securities
Act of 1933, the Promissory notes will be converted into shares of common
stock at a price of $2.00 per share
In conjunction with the acquisition of the Company by Quest in January
2000, the Promissory Notes were converted into Series C convertible preferred
stock.
In connection with the issuance of the Promissory Notes, the Company issued
warrants to purchase 249,994 shares of Series C convertible preferred stock at a
price of $2.00 per share. The Company has determined the relative fair value of
the notes and warrants to be $650,000 and $350,000, respectively. The fair value
of the warrants has been recorded as a discount on the debt and is being
amortized over the one-year term of the notes.
Captech Note -- Under an agreement signed with Capital Technologies
Integration, Inc. (Captech) on March 16, 1998, the $1,500,000 promissory note
shall terminate, and the obligation of the Company to make payment on the unpaid
principal and accrued interest due shall be forgiven in full, on the date of the
earlier to occur of (i) the consummation of the Company's initial sale of its
common stock in a bona fide commitment underwriting pursuant to a Registration
Statement on Form S-1 (or successor form) under the Securities Act (other than a
Registration Statement relating either to the sale of securities to the
Company's employees pursuant to a stock option, stock purchase or similar plan
or a SEC Rule 145 transaction) provided that such public offering establishes a
valuation for the Company of at least $75 million or (ii) upon a change of
control, provided such a change of control establishes a valuation for the
Company of at least $75 million. For purposes of this note, a "change of
control" means to sell, convey, or otherwise dispose of or encumber all or
substantially all of its property or business, or
10
<PAGE> 11
FOGLIGHT SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
consolidate with any other corporation or effect any transactions or series of
related transactions which dispose of more than 50% of the voting power of the
Company.
Included in accrued expenses, in the accompanying financial statements, is
interest in arrears of $282,187 associated with the Captech note.
The Captech note and related interest was forgiven by the holder in
conjunction with the acquisition of the Company by Quest in January 2000.
Comdisco Note -- In conjunction with the issuance of the Comdisco note in
1998, the Company issued warrants to purchase 187,500 shares of Series C
convertible preferred stock at a price of $2.00 per share, exercisable until
September 2008 or five years after an initial public offering by the Company,
whichever is earlier. The warrants issued have a fair value of $1.55 per
warrant, at the time of issuance, using the Black-Scholes pricing model. The
aggregate fair value of these warrants of approximately $282,188 has been
recorded as a discount on the debt and will be amortized to interest expense
over the life of the note which is three years. The amortization expense for the
year ended December 31, 1999, was $117,948.
The loan is collateralized by substantially all the assets of the Company
not collateralized by the lease lines.
Quest Notes -- In connection with certain provisions of a merger agreement
signed between the Company and Quest during November 1999, the Company received
advances totaling $1.3 million. The advances bore interest at 7%, and all
principal and interest was due upon termination of the merger agreement or upon
failure of the Company to satisfy certain conditions under the terms of the
merger agreement. Upon completion of the acquisition of the Company by Quest in
January 2000, the notes and accrued interest were assumed by Quest.
Remaining principal payments under notes payable are as follows:
<TABLE>
<S> <C>
Year ending December 31:
2000................................................. $4,747,196
2001................................................. 1,279,205
----------
$6,026,401
==========
</TABLE>
6. COMMITMENTS
Purchase Commitments -- At December 31, 1999, the Company had approximately
$72,000 in noncancelable purchase commitments with suppliers. The Company
expects to sell all products which it has committed to purchase from suppliers.
Leases -- The Company leases office space and equipment under noncancelable
operating and capital leases with various expiration dates through 2002. Rent
expense for the year ended December 31, 1999, was $314,107. The Company
recognizes rent expense on a straight-line basis over the lease period.
11
<PAGE> 12
FOGLIGHT SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Future minimum lease payments under noncancelable operating and capital
leases, including lease commitments entered into subsequent to December 31,
1999, are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
--------- ---------
<S> <C> <C>
Year ending December 31:
2000................................................. $ 416,608 $310,116
2001................................................. 431,533 313,722
2002................................................. 125,998 158,664
--------- --------
Total minimum lease payments................................ 974,139 $782,502
========
Less amount representing interest........................... (166,673)
---------
Present value of capital lease obligations.................. 807,466
Less current portion........................................ (309,871)
---------
Long-term portion of capital lease obligations.............. $ 497,595
=========
</TABLE>
7. CONVERTIBLE PREFERRED STOCK
In April 1999, the Company raised $1,980,897, net of offering costs, from
the sale of 1,000,000 shares of Series C convertible preferred stock at $2.00
per share. In connection with this issuance, the Company issued warrants to
purchase 499,995 shares of Series C convertible preferred stock for $2.00 per
share. The Company ascribed $660,000 to these warrants, based on the relative
fair value at the date of issuance. As a result of the Series C convertible
preferred stock being immediately convertible, the Company recorded the value of
the beneficial conversion feature because the issuance of such preferred stock
resulted in a conversion value to common stock at less than its fair value of
$660,000. Accretion on the Series C convertible preferred stock of $19,103 has
also been recorded. The value of the beneficial conversion feature and accretion
has been included as increases in the net loss applicable to common stockholders
in the accompanying financial statements.
In April 1999, the Company issued 1,500,000 shares of Series C convertible
preferred stock at $2.00 per share upon the conversion of $3,000,000 in
previously outstanding convertible notes (Note 5).
The holders of convertible preferred stock have various rights and
preferences as follows:
Voting -- Each holder of shares of preferred stock shall be entitled to the
number of votes equal to an equivalent number of shares of common stock into
which it is convertible, and votes together as one class with the common stock.
As long as at least 47,058 shares of convertible preferred stock remain
outstanding, the Company must obtain approval from a majority of the holders of
convertible preferred stock in order to alter the Articles of Incorporation as
related to convertible preferred stock, increase the authorized number of shares
of convertible preferred stock, authorize or issue any other equity security
senior to or on a parity with the Series A, B, or C preferred stock, repurchase
any shares of common stock, other than shares subject to the right of repurchase
by the Company, sell all or substantially all of the Company's assets in a
12
<PAGE> 13
FOGLIGHT SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
single transaction or series of related transactions, authorize a dividend for
any class or series other than convertible preferred stock, or effect a merger,
consolidation, or sale of assets where the existing shareholders retain less
than 50% of the voting stock of the surviving entity.
Dividends -- Holders of Series A, B and C convertible preferred stock are
entitled to receive noncumulative dividends at the per annum rate of $0.083215,
$0.19125 and $0.16 per share, respectively, when and if declared by the Board of
Directors. The holders of Series A, B, and C convertible preferred stock will
also be entitled to participate in dividends on common stock, when and if
declared by the Board of Directors, based on the number of shares of common
stock held on an as-if converted basis. No dividends on convertible preferred
stock or common stock have been declared by the Board from inception through
December 31, 1999.
Liquidation -- In the event of any liquidation, dissolution, or winding up
of the Company, including a merger, or acquisition that results in the transfer
of 50% or more of the outstanding voting power of the Company or a sale of
substantially all of the assets of the Company, the holders of Series A, B, and
C convertible preferred stock are entitled to receive an amount per share equal
to (i) the applicable original issue price for such series of convertible
preferred stock, plus (ii) all declared but unpaid dividends thereon, plus (iii)
for the Series B convertible preferred stock only, an additional amount per
share equal to $0.8075 (as adjusted for any stock splits, stock dividends,
recapitalizations or the like), and (iv) for the Series C convertible preferred
stock only, an additional amount per share equal to $0.6667 (as adjusted for any
stock splits, stock dividends, recapitalizations or the like). The remaining
assets, if any, shall be distributed among the holders of the then outstanding
common stock pro rata, according to the number of shares of common stock held by
each holder thereof. Should the Company's legally available assets be
insufficient to satisfy the liquidation preferences, the funds will be
distributed ratably among holders of the Series A, B, and C convertible
preferred stock preferences, so that each holder receives the same percentage of
the applicable preferential amount.
Conversion -- Each share of Series A, B, and C convertible preferred stock
is convertible, at the option of the holder, according to a conversion ratio,
subject to adjustment for dilution. Each share of Series A, B, and C convertible
preferred stock automatically converts into the number of shares of common stock
into which such shares are convertible at the then effective conversion ratio
upon: (1) immediately prior to the closing of a public offering of common stock
with the aggregate public offering price of at least $8.00 per share and with
gross proceeds of at least $10,000,000, and (2) upon the Company's receipt of
the written consent of the holders of not less than a majority of outstanding
convertible preferred stock.
Warrants for Convertible Preferred Stock -- In 1998, the Company made a
commitment to issue 11,763 shares of Series A Convertible Preferred Stock for no
consideration per share upon the exercise of a warrant to purchase stock of
Capital Technologies Integration, Inc., which shares are issuable as dividend on
the Capital Technologies Integration, Inc. stock underlying the warrant. The
warrant was outstanding at December 31, 1999 and converted in connection with
the acquisition of the Company by Quest in January 2000.
13
<PAGE> 14
FOGLIGHT SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. COMMON STOCK
The Company's Articles of Incorporation, as amended, authorize the Company
to issue 16,600,000 shares of $0.01 par value common stock. A portion of the
shares sold are subject to a right of repurchase by the Company subject to
vesting, which is generally over a four-year period from the earlier of grant
date or employee hire date, as applicable, until vesting is complete. At
December 31, 1999, there were 1,142,142 shares subject to repurchase.
9. STOCK OPTION PLANS
On March 13, 1998, the Company adopted the 1998 stock option plan (the
Plan). The Plan provides for the granting of stock options to employees and
consultants of the Company. Options granted under the Plan may be either
incentive stock options or nonqualified stock options. Incentive stock options
(ISO) may be granted only to Company employees (including officers and directors
who are also employees). Nonqualified stock options (NSO) may be granted to
Company employees and consultants. The Company has reserved 2,500,000 shares of
common stock for issuance under the Plan.
Options under the Plan may be granted for periods of up to ten years and at
prices no less than 85% of the estimated fair value of the shares on the date of
grant as determined by the Board of Directors, provided, however, that (i) the
exercise price of an ISO and NSO shall not be less than 100% and 85% of the
estimated fair value of the shares on the date of grant, respectively, and (ii)
the exercise price of an ISO and NSO granted to a 10% shareholder shall not be
less than 110% of the estimated fair value of the shares on the date of grant.
Options are exercisable immediately subject to repurchase options held by the
Company, which lapse over a maximum period of four years at such times and under
such conditions as determined by the Board of Directors. To date, options
granted generally vest over four years.
In February 1999, the Company instituted a change of control agreement,
whereby, in the event of a change of control, unvested employee stock options
vest and repurchase rights lapse by 25%. If after a change of control the
individual is involuntarily terminated, the stock options vest and repurchase
rights lapse by an additional 25%.
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED
OPTIONS AVERAGE
OUTSTANDING PRICE
----------- --------
<S> <C> <C>
Balance, January 1, 1999.................................... 204,424 $0.12
Options granted........................................... 934,511 $1.03
Options exercised......................................... (701,440) $0.18
Options canceled.......................................... (157,662) $0.20
--------
Balance, December 31, 1999.................................. 279,833 $2.95
========
</TABLE>
The weighted average fair value of the options granted for the year ended
December 31, 1999, was $1.89.
The Company has adopted the disclosure-only provisions of SFAS No. 123,
Accounting for Stock-Based Compensation. The Company, however, continues to
apply APB Opinion No. 25, Accounting for Stock Issued to Employees and related
interpretations in accounting for the Plan. Accordingly, no compensation cost
has been recognized for the Plan.
14
<PAGE> 15
FOGLIGHT SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For purposes of estimating the compensation cost of the Company's option
grants in accordance with SFAS No. 123, the fair value of each option grant is
estimated on the date of grant using the Black-Scholes option-pricing model,
with the following weighted average assumptions: expected volatility of zero;
risk-free interest rates of 6%; and expected lives of five years. Had
compensation cost been determined using the provisions of SFAS No. 123, the
Company's net loss attributable to common shareholders would have been
$8,275,898.
In connection with certain stock option grants during the years ended
December 31, 1998 and 1999, below the then fair market value of the underlying
common stock, the Company recorded deferred compensation expense of $455,861 and
$1,525,524, respectively, which is amortized over the vesting periods of the
related options, which is generally four years. Compensation expense
amortization recognized during the year ended December 31, 1999, totaled
$409,053.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING AT
DECEMBER 31, 1999 OPTIONS EXERCISABLE AT
-------------------------------------- DECEMBER 31, 1999
WEIGHTED -----------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICE OUTSTANDING LIFE PRICE OUTSTANDING PRICE
- ------------------------------------ ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.01.............................. 28,818 8.35 $0.01 28,818 $0.01
$0.20 128,126 9.65 $0.20 128,126 $0.20
$6.50.............................. 122,889 9.90 $6.50 122,889 $6.50
------- -------
279,833 279,833
======= =======
</TABLE>
10. EMPLOYEE RETIREMENT SAVINGS PLAN
The Company has an employee retirement savings plan (the Plan) which
qualifies under Section 401(k) of the Internal Revenue Code and provides for
discretionary matching contributions (as defined) by the Company. The Company
made no matching contributions during the year ended December 31, 1999.
15
<PAGE> 1
EXHIBIT 99.2
QUEST SOFTWARE, INC.
UNAUDITED PRO FORMA INFORMATION
On December 17, 1999 the Company, through a wholly owned subsidiary,
acquired all of the outstanding common stock and stock options of MBR
Technologies, Inc. (MBR) in exchange for 93,471 shares of Quest Common Stock
valued at $9,323,732, a cash payment of $1,313,583 and the assumption of net
liabilities of $340,000. The acquisition was accounted for as a purchase and the
results of MBR's operations were included in the Company's statement of
operations from the date of acquisition.
On January 7, 2000 the Company, through a wholly owned subsidiary, acquired
all of the outstanding common stock of Foglight Software, Inc. (Foglight) in
exchange for 1,187,603 shares of Quest Common Stock valued at $104,167,628,
estimated cash payments of $424,182, the assumption of unvested Foglight stock
options valued at $2,088,000 and the assumption of net liabilities estimated to
be $5,112,000. The acquisition will be accounted for as a purchase.
The following unaudited pro forma balance sheet as of December 31, 1999
assumes that the acquisition of Foglight had occurred on December 31, 1999. The
unaudited statement of operations includes the unaudited statement of operations
of MBR for the period from January 1, 1999 to December 17, 1999 and the
unaudited statement of operations of Foglight for the year ended December 31,
1999 and assumes that the acquisitions of MBR and Foglight had occurred on
January 1, 1999. The pro forma combined results of operations is presented for
information purposes only, is based on historical information, and does not
necessarily reflect the actual results that would have occurred nor is it
necessarily indicative of future results of the combined enterprise.
16
<PAGE> 2
QUEST SOFTWARE, INC.
UNAUDITED PRO FORMA BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
QUEST FOGLIGHT COMBINED
SOFTWARE SOFTWARE TOTAL PRO FORMA
DECEMBER 31, DECEMBER 31, DECEMBER 31, PRO FORMA DECEMBER 31,
1999 1999 1999 ADJUSTMENTS 1999
------------ ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................. $ 39,643 $ 32 $ 39,675 $ (424)(1) $ 39,251
Restricted cash............................ -- 51 51 -- 51
Short-term marketable securities........... 11,000 -- 11,000 -- 11,000
Accounts receivable, net................... 18,771 107 18,878 -- 18,878
Prepaid expenses and other current
assets................................... 5,333 200 5,533 (1,308)(3) 4,225
-------- -------- -------- -------- --------
Total current assets................... 74,747 390 75,137 (1,732) 73,405
Property and equipment, net................ 7,179 866 8,045 -- 8,045
Long-term marketable securities............ 4,484 -- 4,484 -- 4,484
Purchased technology and software licenses,
net...................................... 441 -- 441 4,700(1) 5,141
Goodwill and other intangibles............. 11,452 -- 11,452 103,734(1) 115,186
Deferred income taxes...................... 415 -- 415 3,358(1) 3,773
Other assets............................... 431 34 465 -- 465
-------- -------- -------- -------- --------
Total assets........................... $ 99,149 $ 1,290 $100,439 $110,060 $210,499
======== ======== ======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable, current portion............. $ -- $ 4,747 $ 4,747 $ (2,808)(3) $ 1,939
Accounts payable........................... 3,436 80 3,516 -- 3,516
Accrued compensation....................... 4,966 -- 4,966 -- 4,966
Other accrued expenses..................... 7,062 752 7,814 -- 7,814
Income taxes payable....................... 2,030 -- 2,030 -- 2,030
Deferred support revenue................... 13,932 236 14,168 -- 14,168
Deferred license revenue................... 4,651 -- 4,651 -- 4,651
Capital lease obligations, current
portion.................................. -- 310 310 -- 310
-------- -------- -------- -------- --------
Total current liabilities.............. 36,077 6,125 42,202 (2,808) 39,394
-------- -------- -------- -------- --------
Notes payable, net of current portion...... -- 1,279 1,279 -- 1,279
Long-term liabilities...................... 403 498 901 -- 901
Shareholders' equity:
Preferred stock............................ -- 4 4 (4)(2) --
Common stock and additional paid in
capital.................................. 94,010 7,892 101,902 98,364(1)(2)(3) 200,266
Warrants to purchase Series C convertible
preferred stock.......................... -- 1,292 1,292 (1,292)(2) --
Retained earnings (deficit)................ 1,864 (14,412) (12,548) 14,412(1) 1,864
Accumulated other comprehensive income
(loss)................................... (26) -- (26) -- (26)
Unearned compensation costs................ -- (1,388) (1,388) 1,388(1) --
Notes receivable from sale of common
stock.................................... (3,115) -- (3,115) -- (3,115)
Capital distribution in excess of basis in
common stock............................. (30,064) -- (30,064) -- (30,064)
-------- -------- -------- -------- --------
Total shareholders' equity (deficit)... 62,669 (6,612) 56,057 112,868 168,925
-------- -------- -------- -------- --------
Total liabilities and shareholders'
equity.............................. $ 99,149 $ 1,290 $100,439 $110,060 $210,499
======== ======== ======== ======== ========
</TABLE>
17
<PAGE> 3
QUEST SOFTWARE, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MBR
TECHNOLOGIES
FOR THE
QUEST PERIOD FOGLIGHT COMBINED
SOFTWARE JANUARY 1, SOFTWARE TOTAL PRO FORMA
YEAR ENDED 1999 TO YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 17, DECEMBER 31, DECEMBER 31, PRO FORMA DECEMBER 31,
1999 1999 1999 1999 ADJUSTMENTS 1999
------------ ------------ ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Licenses............... $54,269 $ 380 $ 2,433 $57,082 $ -- $ 57,082
Services............... 16,599 190 383 17,172 -- 17,172
------- ----- ------- ------- -------- --------
Total revenues.... 70,868 570 2,816 74,254 -- 74,254
Cost of Revenues:
Licenses............... 2,998 346 109 3,453 1,567(4) 5,020
Services............... 4,195 195 207 4,597 -- 4,597
------- ----- ------- ------- -------- --------
Total cost of
revenues....... 7,193 541 316 8,050 1,567 9,617
------- ----- ------- ------- -------- --------
Gross profit............. 63,675 29 2,500 66,204 (1,567) 64,637
Operating expenses:
Sales and marketing.... 32,078 149 3,734 35,961 -- 35,961
Research and
development......... 15,980 209 3,680 19,869 -- 19,869
General and
administrative...... 9,906 524 1,233 11,663 -- 11,663
Other compensation
costs and goodwill
amortization........ 1,243 -- 409 1,652 23,038(4) 24,690
------- ----- ------- ------- -------- --------
Total operating
expenses....... 59,207 882 9,056 69,145 23,038 92,183
------- ----- ------- ------- -------- --------
Income (loss) from
operations............. 4,468 (853) (6,556) (2,941) (24,605) (27,546)
Other income (expense),
net.................... 1,202 (31) (865) 306 (87)(5) 219
------- ----- ------- ------- -------- --------
Income (loss) before
income tax provision... 5,670 (884) (7,421) (2,635) (24,692) (27,327)
Income tax provision
(benefit).............. 2,273 1 1 2,275 (3,397)(6) (1,122)
------- ----- ------- ------- -------- --------
Net income (loss)........ 3,397 (885) (7,422) (4,910) (21,295) (26,205)
Preferred stock
dividends, value of
beneficial conversion
feature, and accretion
on preferred stock..... 590 -- 679 1,269 -- 1,269
------- ----- ------- ------- -------- --------
Net income (loss)
applicable to common
shareholders........... $ 2,807 $(885) $(8,101) $(6,179) $(21,295) $(27,474)
======= ===== ======= ======= ======== ========
Basic and diluted net
income (loss) per
share.................. $ 0.07 $ (0.71)
======= ========
Weighted average shares:
Basic.................. 37,677 1,281(7) 38,958
Diluted................ 41,800 (2,847)(7) 38,958
</TABLE>
18
<PAGE> 4
NOTES TO PRO FORMA FINANCIAL STATEMENTS
(1) To reflect the elimination of Foglight's equity accounts and the allocation
of the purchase price of $111,791,810 as follows:
<TABLE>
<S> <C>
Goodwill................................................... $103,233,810
Deferred tax asset, net.................................... 3,358,000
Purchased technology....................................... 4,700,000
Workforce.................................................. 500,000
</TABLE>
The allocation may change once the audit of Foglight's closing balance sheet
is completed and other valuation information is received.
(2) To reflect the conversion of all outstanding shares of preferred stock to
common stock and exercise and conversion of Series C preferred stock
warrants prior to the close of the Foglight acquisition.
(3) To eliminate the note payable to Quest of $1,308,000 and the forgiveness of
the Cap Tech note payable of $1,500,000.
(4) To reflect the amortization of goodwill over five years on a straight-line
basis, and workforce over three years on a straight-line basis ($20,813,429)
and the amortization of purchased technology over three years on a
straight-line basis ($1,566,667)for the Foglight transaction. Also includes
the amortization of goodwill related to the MBR purchase for the period
January 1, 1999 to December 17, 1999 of $2,225,000.
(5) To reflect the decrease in interest income due to the use of cash in the
acquisitions at a 5% annual yield.
(6) To reflect the establishment of a deferred tax asset anticipated from the
utilization of the operating loss of Foglight for the year and to adjust the
income tax provision to reflect the estimated income tax benefit on a
combined basis.
(7) To adjust for the 1,187,719 and 93,471 shares of Quest common stock issued
in the acquisitions of Foglight and MBR, respectively, in the basic net
income per share calculation and reduce the number of weighted average
shares for the diluted net loss per share calculation.
19
