<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 22, 2000
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
QUEST SOFTWARE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
CALIFORNIA 7372 33-0231678
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
8001 IRVINE CENTER DRIVE
IRVINE, CA 92618
(949) 754-8000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF THE REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
MR. VINCENT C. SMITH
CHIEF EXECUTIVE OFFICER
QUEST SOFTWARE, INC.
8001 IRVINE CENTER DRIVE
IRVINE, CA 92618
(949) 754-8000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
LAURA B. HUNTER, ESQ. ALAN K. AUSTIN, ESQ.
CHRISTINE P. LE, ESQ. BRIAN C. ERB, ESQ.
BROBECK, PHLEGER & HARRISON LLP BRIAN M. MCDANIEL, ESQ.
38 TECHNOLOGY DRIVE WILSON SONSINI GOODRICH & ROSATI
IRVINE, CALIFORNIA 92618 PROFESSIONAL CORPORATION
(949) 790-6300 650 PAGE MILL ROAD
PALO ALTO, CALIFORNIA 94304
(650) 493-9300
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
------------------------
If the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED AGGREGATE OFFERING PRICE(1) REGISTRATION FEE(2)
<S> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
Common stock, no par value.................................. $224,000,000 $59,136
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes 420,000 shares which the Underwriters have the option to purchase
from certain selling shareholders and/or the Company to cover
over-allotments, if any.
(2) Estimated solely for the purpose of computing the registration fee pursuant
to Rule 457(c) of the Securities Act of 1933, as amended, and based upon the
average high and low prices on February 14, 2000, as reported on the Nasdaq
National Market.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY CHANGE. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN
OFFER TO SELL THESE SECURITIES, AND IT IS NOT SOLICITING AN OFFER TO BUY
THESE SECURITIES, IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED FEBRUARY 22, 2000
[QUEST SOFTWARE LOGO]
2,800,000 SHARES
COMMON STOCK
----------------------------------
Quest Software, Inc. is offering 1,000,000 shares of common stock. The
selling shareholders identified in this prospectus are offering an additional
1,800,000 shares. We will not receive any proceeds from the shares of common
stock sold by the selling shareholders.
Our common stock is traded on the Nasdaq National Market under the symbol
"QSFT." On February 16, 2000, the last reported sale price for our common stock
on the Nasdaq National Market was $83.00 per share.
----------------------------------
INVESTING IN OUR COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 7.
----------------------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- ------------
<S> <C> <C>
Public Offering Price....................................... $83.00 $232,400,000
Underwriting Discounts and Commissions...................... $ 3.74 $ 10,472,000
Proceeds to Quest Software, Inc............................. $79.26 $ 79,260,000
Proceeds to selling shareholders............................ $79.26 $142,668,000
</TABLE>
----------------------------------
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE
NOT APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS
TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
We have granted the underwriters a 30-day option to purchase from certain
selling shareholders and/or us up to an additional 420,000 shares of common
stock to cover any over-allotments. FleetBoston Robertson Stephens Inc. expects
to deliver the shares of common stock to purchasers on .
----------------------------------
ROBERTSON STEPHENS
DONALDSON, LUFKIN & JENRETTE
CIBC WORLD MARKETS
FAC/EQUITIES
CHASE H&Q
WIT SOUNDVIEW
THE DATE OF THIS PROSPECTUS IS FEBRUARY , 2000.
<PAGE> 3
Inside Front Cover
[QUEST SOFTWARE LOGO]
The Quest Solution.
Quest offers both application and information availability solutions that
enhance the performance and reliability of e-business, enterprise and custom
applications and facilitate the delivery of information across the entire
enterprise.
[Schematic depiction of enterprise software environment showing the
functionality of and relationships among Quest's products and this underlying
environment.]
[Three columns of text at the bottom of the page. The first column is entitled
"Development -- Deployment" and reads, "Integrated products that aid in the
rapid development, testing and automated deployment of Internet software
applications in quickly changing, mission-critical environments." The second
column is entitled "Production Management" and reads, "Software solutions
designed to maintain high performance and provide constant access to critical
business applications, as well as monitoring these systems to detect and correct
problems before they impact users." The third column is entitled "Information
Delivery" and reads, "An output management system that captures and delivers
reports and data from nearly any software application for immediate and secure
distribution to information consumers within an organization or over the
Internet."]
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<PAGE> 4
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO
BUY, SHARES OF COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE
PERMITTED.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary..................................................... 4
Risk Factors................................................ 7
Information Regarding Forward-Looking Statements............ 15
Use of Proceeds............................................. 16
Dividend Policy............................................. 16
Price Range of Common Stock................................. 16
Capitalization.............................................. 17
Selected Consolidated Financial Data........................ 18
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 19
Business.................................................... 28
Management.................................................. 42
Certain Transactions........................................ 51
Principal and Selling Shareholders.......................... 53
Description of Capital Stock................................ 56
Shares Eligible for Future Sale............................. 58
Underwriting................................................ 60
Legal Matters............................................... 62
Experts..................................................... 62
Additional Information...................................... 62
Index to Financial Statements............................... F-1
</TABLE>
3
<PAGE> 5
SUMMARY
You should read the following summary together with the more detailed
information and consolidated financial statements and the notes to those
statements appearing elsewhere in this prospectus. This prospectus contains
forward looking statements that involve risks and uncertainties. Our actual
results could differ materially from the results anticipated in these
forward-looking statements as a result of the factors set forth under "Risk
Factors" and elsewhere in this prospectus.
QUEST SOFTWARE, INC.
We provide application and information availability software solutions that
enhance the performance and reliability of an organization's e-business,
enterprise and custom applications and enable the delivery of information across
the entire enterprise.
Organizations are constantly seeking ways to use information and technology
to compete more effectively. Today, 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 the traditional enterprise. Many organizations
are beginning to extend their business over the Internet to directly reach a
large number of geographically dispersed end-users. These initiatives, commonly
referred to as e-business, are raising the strategic importance of real-time
information and are increasing the challenges of building and maintaining the
systems to effectively manage and distribute information. 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.
We offer a family of products that provide both application and information
availability solutions. Our products are designed to work individually and
together to provide immediate and continuous availability of applications and
information. Our application availability products are designed to help ensure
uninterrupted and high performance access to software systems by utilizing a
number of integrated products that tune the performance and monitor the
operation of applications and the underlying database which stores an
enterprise's critical information. Other primary components of our application
availability solution include our database products that maintain a real-time
copy of a database for offloading critical systems and assuring high
availability, as well as our products that manage the complex and error-prone
process of development and deployment of rapidly changing applications. Our
information availability products deliver an enterprise, report-based
information management solution that captures, stores, indexes, prints and
archives report data or electronic documents from virtually any application for
instant distribution over intranets or the Internet.
The key elements of our strategy include extending our product leadership,
continuing our focus on the e-business applications market, leveraging our
significant installed base, expanding our sales force and international
distribution channels and extending our existing strategic relationships and
developing new partnerships with leading global systems integrators.
We have thousands of customers across a range of industries including
technology, financial services, manufacturing, healthcare, energy, insurance and
telecommunications. We market and sell our software and services worldwide
through a combination of direct sales and telesales in the United States,
Canada, Australia, the United Kingdom and Germany, as well as through resellers
and distributors.
In August 1999, we completed an initial public offering of our common
stock, raising net proceeds of approximately $64.9 million. In December 1999, we
acquired MBR Technologies, Inc. In January 2000, we acquired Foglight Software,
Inc. and in February 2000, we acquired QMaster Software Solutions, Inc.
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<PAGE> 6
THE OFFERING
Common stock offered by Quest......... 1,000,000 shares
Common stock offered by selling
shareholders.......................... 1,800,000 shares
Common stock to be outstanding after
this offering......................... 39,905,344 shares
Use of proceeds....................... We intend to use the net proceeds for
general corporate purposes, including
working capital, expanding our sales
and marketing efforts, product
development, expanding our customer
support organization, possible
acquisitions and capital
expenditures.
Nasdaq National Market symbol......... QSFT
The number of shares of common stock to be outstanding after this offering
is based on the actual number of shares outstanding as of December 31, 1999
which excludes:
- 5,085,935 shares of common stock issuable upon exercise of stock options
outstanding as of February 16, 2000, at a weighted average exercise price
of $6.81 per share;
- 190,974 shares of common stock issued upon the exercise of options in
between January 1, 2000 and February 16, 2000;
- 2,214,820 shares of common stock reserved for future issuance under our
stock incentive plans;
- 600,000 shares of common stock reserved for issuance under our employee
stock purchase plan, of which 119,097 shares were issued in February
2000. See "Capitalization," "Management -- 1999 Stock Incentive Plan,"
"-- 1999 Employee Stock Purchase Plan" and Note 8 of the notes to our
consolidated financial statements; and
- 1,187,603 shares of common stock issued in connection with an acquisition
in January 2000.
CORPORATE INFORMATION
We were incorporated in California in April 1987. Our principal executive
offices are located at 8001 Irvine Center Drive, Irvine, CA 92618 and our
telephone number is (949) 754-8000. Our Web site is located at www.quest.com.
Information contained on our Web site does not constitute part of this
prospectus.
Except as otherwise noted, all information in this prospectus assumes that
the underwriters' over-allotment option is not exercised.
5
<PAGE> 7
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table should be read with the consolidated financial
statements and notes thereto appearing elsewhere in this prospectus. The as
adjusted information reflects our receipt of the estimated net proceeds from the
sale of 1,000,000 shares of our common stock offered by us hereby at a public
offering price of $83.00 per share and the application of the estimated proceeds
described in "Use of Proceeds."
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1995 1996 1997 1998 1999
------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF INCOME DATA:
Total revenues................................ $9,524 $12,862 $18,315 $34,790 $70,868
Gross profit.................................. 8,284 10,445 15,036 28,850 63,675
Income (loss) from operations................. 2,335 (372) 1,448 3,689 4,468
Net income.................................... 2,358 16 289 2,346 3,397
Net income applicable to common
shareholders................................ 2,807
Basic and diluted net income per share:....... $ 0.12 $ -- $ 0.01 $ 0.05 $ 0.07
Weighted average common shares outstanding:
Basic....................................... 19,500 38,350 40,373 44,261 37,677
Diluted..................................... 19,500 38,350 40,617 44,459 41,800
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1999
---------------------
ACTUAL AS ADJUSTED
------- -----------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $39,643 $118,353
Short-term marketable securities............................ 11,000 11,000
Working capital............................................. 38,670 117,380
Total assets................................................ 99,149 177,859
Retained earnings........................................... 1,864 1,864
Total shareholders' equity.................................. 62,669 141,379
</TABLE>
6
<PAGE> 8
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, the industry in which we
compete and this offering.
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."
- increased expenses, whether related to sales and marketing, product
development or administration;
- our ability to attain market acceptance of new products and services and
enhancements to our existing products;
- delays in introducing new products;
- new product introductions by competitors;
- lack of order backlog;
- changes in our pricing policies or the pricing policies of our
competitors;
- costs related to acquisitions of technologies or businesses;
- the timing of releases of new versions of third-party software products
that our products support, including, without limitation, product
releases by Oracle; and
- the amount and timing of expenditures related to expansion of our
operations.
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 Vista Plus and SharePlex have been up to six
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 AND 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 principal products, including
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<PAGE> 9
SharePlex, SQLab Xpert, and SQL Navigator, are designed specifically 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. See "Business -- Competition."
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. In this regard, we recently
acquired MBR Technologies, Inc., Foglight Software, Inc., and QMaster Software
Solutions, Inc. 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
Our ability to increase revenues in the future substantially depends on our
ability to expand our indirect sales channel.
In certain domestic and international markets we may miss sales
opportunities if we are unable to enter into successful relationships with
locally based resellers. In the future, we intend to augment our current limited
indirect sales distribution methods through additional third-party distribution
arrangements and, therefore, we will likely become more dependent on these type
of relationships. There can be no
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assurance that we will successfully augment these arrangements 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 66 as of December 31, 1996 to 123 as of December 31, 1997, to 257
as of December 31, 1998, and to 654 as of December 31, 1999. 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. 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
products. Moreover, if customers elect not to renew their maintenance
agreements, our service revenues would be materially adversely affected.
BECAUSE THE MARKET FOR E-BUSINESS SOLUTIONS IS NEW AND EVOLVING, WE CANNOT
ACCURATELY PREDICT THE FUTURE GROWTH RATE OF THIS MARKET OR ITS ULTIMATE SIZE
We are increasingly focusing our selling efforts on providing application
and information availability solutions for e-business applications and we expect
such sales to constitute an increasing portion of our future revenue growth. We
believe that most companies currently are not yet aware of our products and
capabilities within this evolving market, and, as a result, such companies have
not deployed our solutions. While we have devoted significant resources to
promoting awareness of our products and the problems these products address for
this evolving market, these efforts may not be sufficient to build market
awareness of the need for our products. Failure of a significant market for
e-business application and information availability products to develop, or
failure of our products to achieve broad market acceptance, could have a
material adverse effect on our business, operating results and financial
condition.
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:
- 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
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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 our three 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,
and $15.3 million in the year ended December 31, 1999, representing 21.6% 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;
- delays in localizing our products;
- compliance with a wide variety of complex foreign laws and treaties;
- reduced protection for intellectual property rights in some countries;
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.
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 regional offices of a number 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
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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.
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.
11
<PAGE> 13
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
Our SQL Navigator, TOAD, Vista Plus and Foglight products contain
components developed and maintained by third-party software vendors. For
example, we incorporate software licensed from Inso Corporation and Artifex
Software into add-on options for our Vista Plus products. Similarly, our
Foglight product incorporates software licensed from Inxight. 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 by Inso, Artifex and Inxight, such alternate sources may not
provide us with the same functionality as that currently provided to us.
Further, we may experience a delay in obtaining an alternate source for the file
viewing technology licensed to us by Inso if our license with Inso becomes
unavailable for any reason.
RISKS RELATED TO OUR INDUSTRY
YEAR 2000 ISSUES PRESENT TECHNOLOGICAL RISKS AND COULD CAUSE DISRUPTION TO OUR
BUSINESS
Although we have not experienced any Year 2000 problems, it is possible
that, even after January 1, 2000, Year 2000-related issues may cause problems or
disruptions. While we believe that all of our systems are Year 2000 compliant,
we cannot assure you that we will not discover a problem during 2000 that needs
to be upgraded, modified or replaced. In addition, we depend on a number of
third-party vendors to provide both information and non-information technology
systems and services. While we believe that our material third-party systems and
services are Year 2000 compliant, we cannot be sure that we will not experience
any problems during 2000. We also cannot provide any assurance that governmental
agencies, utility companies, Internet access companies and others outside of our
control will not experience any future Year 2000 problems.
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.
12
<PAGE> 14
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.
RISKS RELATED TO THIS OFFERING
OUR OFFICERS AND DIRECTORS WILL BE ABLE TO EXERT SIGNIFICANT CONTROL ON QUEST
AFTER THIS OFFERING
Executive officers, directors and persons and entities affiliated with them
will, in the aggregate, own approximately 73.9% of our outstanding common stock
following this offering. These shareholders, if acting together, would be able
to determine all matters requiring approval by our shareholders, including the
election of directors and the approval of mergers or other business combination
transactions.
WE EXPECT THE PRICE OF OUR COMMON STOCK TO BE VOLATILE
The market price of the common stock may fluctuate significantly in
response to a number of factors, some of which are beyond our control,
including:
- quarterly variations in our operating results;
- changes in financial estimates by securities analysts;
- changes in market valuation of software and Internet companies;
- announcements by us of significant contracts, acquisitions or capital
commitments;
- failure to complete significant license transactions;
- additions or departures of key personnel;
- any shortfall in revenue or net income or any increase in losses from
levels expected by securities analysts;
- future sales of common stock; and
- stock market price and volume fluctuations, which are particularly common
among highly volatile securities of Internet and software companies.
YOU WILL INCUR IMMEDIATE AND SUBSTANTIAL DILUTION
The public offering price is substantially higher than the net tangible
book value per share of the outstanding common stock after this offering.
Accordingly, if you purchase common stock in this offering at the offering price
of $83.00 per share, you will incur immediate and substantial dilution of $79.76
in the net tangible book value per share of the common stock from the price you
pay for the common stock in this offering.
A LARGE NUMBER OF SHARES OF OUR COMMON STOCK WILL BE ELIGIBLE FOR SALE SHORTLY
AFTER THE OFFERING, WHICH COULD RESULT IN A DECLINE IN OUR STOCK PRICE
Sales in the market of a substantial number of shares of common stock after
the offering could adversely affect the market price of our common stock and
could impair our ability to raise capital through the sale of additional equity
securities. Based on the shares of common stock outstanding as of December 31,
1999, on completion of this offering, we will have 39,905,344 shares of common
stock
13
<PAGE> 15
outstanding (based on the assumptions on page 5), and up to 40,325,344 shares if
the underwriters' option to purchase additional shares is exercised from
existing shareholders and/or the Company in full. The 2,800,000 shares sold in
this offering, which would be 3,220,000 shares if the underwriters' option to
purchase additional shares is exercised in full, will be freely tradable without
restriction or further registration under the Federal securities laws unless
purchased by our "affiliates" as that term is defined in Rule 144. 32,104,783 of
the remaining shares of common stock outstanding on completion of this offering
will be "restricted securities" as that term is defined in Rule 144.
Some of our stock and substantially all of our option holders are subject
to agreements that limit their ability to sell common stock. These holders
cannot sell or otherwise dispose of any shares of common stock for a period of
at least 90 days after the date of this prospectus without the prior written
approval of FleetBoston Robertson Stephens. When these agreements expire, these
shares and the shares underlying the options will become eligible for sale, in
some cases only pursuant to the volume, manner of sale and notice requirements
of Rule 144. See "Shares Eligible for Future Sale" and "Underwriting."
14
<PAGE> 16
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
Some of the matters discussed under the captions "Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and elsewhere in this prospectus include forward-looking
statements. We have based these forward-looking statements on currently
available information and our current beliefs, expectations and projections
about future events, including, among other things,
- successfully implementing our business strategy;
- maintaining and expanding market acceptance of the products we offer; and
- our ability to successfully compete in our marketplace.
In some cases, you can identify forward-looking statements by terminology
such as "may," "will," "should," "potential," "continue," "expects,"
"anticipates," "intends," "plans," "believes," "estimates" and similar
expressions. All forward-looking statements contained herein are subject to
numerous risks and uncertainties. Our actual results and events may vary
significantly from those discussed in the forward-looking statements. In light
of these assumptions, risks and uncertainties, the forward-looking events
discussed in this prospectus might not occur.
15
<PAGE> 17
USE OF PROCEEDS
The net proceeds to us from the sale of the 2,800,000 shares of common
stock offered hereby will be approximately $78,710,000 million to the Company
and $142,668,000 to the selling shareholders based upon an estimated offering
price per share of $83.00 and after conducting estimated underwriting discounts
and commissions and estimated offering expenses payable by us. We will not
receive any of the proceeds from the sale of the shares of our common stock
being offered by the selling shareholders in this prospectus.
We intend to use the net proceeds of this offering to the Company for
general corporate purposes, including working capital, expanding our sales and
marketing efforts, product development, expanding our customer support
organization, possible acquisitions and capital expenditures. The other
principal purposes of this offering are to increase our financial flexibility,
facilitate our future access to public equity markets and increase our
visibility in the marketplace.
As of the date of this prospectus, we cannot specify with certainty the
particular uses for the net proceeds to be received upon the closing of this
offering. Pending other uses, the net proceeds of this offering will be invested
in short-term, interest-bearing investment-grade instruments.
From time to time, in the ordinary course of business, we evaluate possible
acquisitions of, or investments in, businesses, products and technologies that
are complementary to our business. A portion of the net proceeds may be used to
fund acquisitions or investments. In January and February of 2000, we signed
letters of intent to acquire two companies for a total purchase price in cash
and stock of $25 million, plus in one instance, certain earnouts. Neither of the
proposed acquisitions is a material transaction either individually or in the
aggregate to us. There can be no assurance that we will close either or both
acquisitions.
DIVIDEND POLICY
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.
PRICE RANGE OF OUR COMMON STOCK
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 closing sale prices on the Nasdaq National Market for our common stock for
the calendar periods indicated.
<TABLE>
<CAPTION>
PRICE RANGE
OF COMMON STOCK
---------------------
HIGH LOW
--------- --------
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1999:
Third Quarter (from August 13)...................... $ 52.3750 $32.5625
Fourth Quarter...................................... 116.5000 45.8750
YEAR ENDING DECEMBER 31, 2000:
First Quarter (through February 16)................. $ 118.00 $ 74.50
</TABLE>
On February 16, 2000, the last reported sale price of our common stock on
the Nasdaq National Market was $83.00 per share. As of December 31, 1999, there
were 59 holders of record of our common stock.
16
<PAGE> 18
CAPITALIZATION
The Actual column in the following table sets forth our actual
capitalization as of December 31, 1999. The As Adjusted column in the following
table gives effect to the sale of 1,000,000 shares of common stock in this
offering by the Company at an estimated public offering price of $83.00 per
share and the application of the estimated net proceeds therefrom.
See "Use of Proceeds" and the notes to our consolidated financial
statements. The As Adjusted information set forth below should be read in
conjunction with our consolidated financial statements and the notes thereto.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-----------------------
ACTUAL AS ADJUSTED
-------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Shareholders' equity:
Preferred stock, no par value; 5,000,000 shares authorized;
no shares issued or outstanding, actual and as adjusted... $ -- $ --
Common stock, no par value; 75,000,000 shares authorized;
38,905,344 and shares issued and outstanding,
actual and as adjusted.................................... 94,010 172,720
Retained earnings........................................... 1,864 1,864
Accumulated other comprehensive income (loss)............... (26) (26)
Notes receivable from sale of common stock.................. (3,115) (3,115)
Capital distribution in excess of basis in common stock..... (30,064) (30,064)
-------- ---------
Total shareholders' equity................................ 62,669 141,379
-------- ---------
Total capitalization...................................... $ 62,669 $ 141,379
======== =========
</TABLE>
The information in the table above excludes:
- - 5,085,935 shares of common stock issuable upon exercise of stock options
outstanding as of February 16, 2000, at a weighted average exercise price of
$6.81 per share;
- - 190,974 shares of common stock issued upon the exercise of options between
January 1, 2000 and February 16, 2000;
- - 2,214,820 shares of common stock reserved for future issuance under our stock
incentive plans;
- - 600,000 shares of common stock reserved for issuance under our employee stock
purchase plan, of which 119,097 shares were issued in February 2000. See
"Capitalization," "Management -- 1999 Stock Incentive Plan," "-- 1999 Employee
Stock Purchase Plan" and Note 8 of the notes to our consolidated financial
statements; and
- - 1,187,603 shares of common stock issued in connection with an acquisition in
January 2000.
17
<PAGE> 19
SELECTED CONSOLIDATED 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 prospectus. The following
selected consolidated statement of income data for the years ended December 31,
1997, 1998 and 1999, and the consolidated balance sheet data at December 31,
1998 and 1999, have been derived from audited consolidated financial statements
included elsewhere in this prospectus. The consolidated data presented below for
the years ended December 31, 1995 and 1996, and at December 31, 1995, 1996 and
1997, are derived from audited consolidated financial statements that are not
included in this prospectus. 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 years 1995 and 1996.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1995 1996 1997 1998 1999
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF INCOME DATA:
Revenues:
Licenses.................................. $ 7,219 $ 9,316 $12,158 $24,901 $54,269
Services.................................. 2,305 3,546 6,157 9,889 16,599
------- ------- ------- ------- -------
Total revenues.................... 9,524 12,862 18,315 34,790 70,868
------- ------- ------- ------- -------
Cost of revenues:
Licenses.................................. 260 950 1,307 3,433 2,998
Services.................................. 980 1,467 1,972 2,507 4,195
------- ------- ------- ------- -------
Total cost of revenues............ 1,240 2,417 3,279 5,940 7,193
------- ------- ------- ------- -------
Gross profit................................ 8,284 10,445 15,036 28,850 63,675
Operating expenses:
Sales and marketing....................... 2,179 4,328 5,845 11,836 32,078
Research and development.................. 1,134 2,995 4,293 8,047 15,980
General and administrative................ 2,636 3,494 3,450 5,278 9,906
Other compensation costs and goodwill
amortization........................... -- -- -- -- 1,243
------- ------- ------- ------- -------
Total operating expenses.......... 5,949 10,817 13,588 25,161 59,207
------- ------- ------- ------- -------
Income (loss) from operations............... 2,335 (372) 1,448 3,689 4,468
Other income (expense), net................. 51 389 (137) 336 1,202
------- ------- ------- ------- -------
Income before income tax provision.......... 2,386 17 1,311 4,025 5,670
Income tax provision........................ 28 1 1,022 1,679 2,273
------- ------- ------- ------- -------
Net income.................................. $ 2,358 $ 16 $ 289 $ 2,346 3,397
======= ======= ======= ======= -------
Preferred stock dividends................... 590
-------
Net income applicable to common
shareholders.............................. $ 2,807
=======
Basic and diluted net income per share...... $ 0.12 $ -- $ 0.01 $ 0.05 $ 0.07
Weighted average shares outstanding:
Basic..................................... 19,500 38,350 40,373 44,261 37,677
Diluted................................... 19,500 38,350 40,617 44,459 41,800
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------
1995 1996 1997 1998 1999
------ ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.................... $2,709 $ -- $ 2,096 $ 8,981 $39,643
Short-term marketable securities............. -- -- -- -- 11,000
Working capital.............................. 2,594 553 374 2,771 38,670
Total assets................................. 6,171 6,408 9,713 19,645 99,149
Total shareholders' equity................... 2,996 2,429 2,836 5,074 62,669
</TABLE>
18
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of
operations also should be read in conjunction with the consolidated financial
statements and notes to those statements included elsewhere in this prospectus.
OVERVIEW
We provide application and information availability software solutions that
enhance the performance and reliability of an organization's e-business,
packaged and custom applications, and enable the delivery of information across
the entire enterprise.
We were incorporated in 1987. At our inception, we focused on developing
and marketing software which supported developers and users of Hewlett Packard's
HP 3000 proprietary operating system known as MPE. In 1995, Vincent C. Smith
joined us as a director and in 1997, he became our chief executive officer. In
1995, we began to transition our focus from proprietary MPE technology to open
system technology. Additionally, commencing in 1995, we began extending our
Vista Plus product to open system architectures, and in 1998, we extended Vista
Plus to support the Internet. In 1996, we acquired R*Tech which developed SQLab,
our first product series for Oracle databases. In 1997, we made a number of
additional acquisitions which augmented the product line for managing Oracle
databases including our SQL Navigator, I/Watch and Schema Manager products.
Beginning in late 1997, we also began a major expansion of our research and
development, sales and marketing, and customer support organizations by adding
personnel in all departments, and through an acquisition, the establishment of
operations in Australia and the United Kingdom. Commencing in the second half of
1998, we also introduced several additional products including SharePlex and
SQLab Xpert. In 1998, we also established a direct sales operation in Germany.
In 1999, we introduced Instance Monitor and Data Manager.
In December 1999, we acquired MBR Technologies, Inc. and its Stat! product
for consideration consisting of 93,471 shares of our common stock valued at $9.3
million and a cash payment of $1.3 million, and the assumption of net
liabilities of $340,000. Of the total purchase price, which included direct
acquisition costs, $11.5 million was allocated to goodwill, which will be
amortized over a five-year period, and $784,000 was allocated to assumed
liabilities.
In January 2000, we acquired Foglight Software, Inc. and its Foglight
product for consideration consisting of 1,187,603 shares of our common stock
valued at $104.2 million, cash payment of $0.4 million, the assumption of
unvested Foglight stock options valued at $2.1 million and the assumption of net
liabilities of $5.1 million. The total purchase price, which included direct
acquisition costs, is estimated to be allocated primarily to goodwill and other
intangible assets, which will be amortized primarily over a five-year period.
In February 2000, we acquired QMaster Software Solutions, Inc. and the
QMaster Output product for $15 million in cash. The total purchase price, which
will include direct costs of the acquisition estimated to be $75,000, is
estimated to be allocated primarily to goodwill, which will be amortized over a
five-year period.
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 $9.5 million in 1995 to $70.9 million in 1999.
Pricing of our software licenses is based on the number of servers, workstations
and/or users of our products. Annual maintenance contracts may be purchased
separately by customers at their discretion.
We recognize software license revenues when a non-cancellable license
agreement has been signed with a customer, the software is shipped, 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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<PAGE> 21
We market our software and services primarily through our direct sales
organization in the United States, Australia, the United Kingdom and Germany.
International revenues from licenses and services sold to customers outside of
North America were $1.4 million in 1997, $5.8 million in 1998, and $15.3 million
in 1999. 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 three wholly owned subsidiaries in Australia, the United
Kingdom and Germany. Our international subsidiaries conduct business in the
currency of the country in which they operate, 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.
At the time of our incorporation, we elected to be treated as an S
corporation under Subchapter S of the Internal Revenue Code. As an S
corporation, our shareholders were liable for federal income tax liabilities
resulting from our operations. Effective January 1, 1997, we terminated our
status as an S corporation and for all periods thereafter, we have been liable
for federal income taxes. Prior to the termination of our S corporation status,
we declared distributions as dividends to shareholders payable in cash in an
amount generally equal to the tax consequence created by our earnings up to the
date of such termination.
20
<PAGE> 22
RESULTS OF OPERATIONS
The following table sets forth certain consolidated statement of income
data as a percentage of total revenues for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
Revenues:
Licenses.................................................. 66.4% 71.6% 76.6%
Services.................................................. 33.6 28.4 23.4
----- ----- -----
Total revenues.................................... 100.0 100.0 100.0
----- ----- -----
Cost of revenues:
Licenses.................................................. 7.1 9.9 4.2
Services.................................................. 10.8 7.2 5.9
----- ----- -----
Total cost of revenues............................ 17.9 17.1 10.1
----- ----- -----
Gross profit................................................ 82.1 82.9 89.9
Operating expenses:
Sales and marketing....................................... 31.9 34.0 45.3
Research and development.................................. 23.5 23.1 22.6
General and administrative................................ 18.8 15.2 14.0
Other compensation costs and goodwill amortization........ -- -- 1.8
----- ----- -----
Total operating expenses.......................... 74.2 72.3 83.7
----- ----- -----
Income from operations...................................... 7.9 10.6 6.2
Other (expense) income, net................................. (0.7) 0.9 1.7
----- ----- -----
Income before income tax provision.......................... 7.2 11.5 7.9
Income tax provision........................................ 5.6 4.8 3.2
----- ----- -----
Net income.................................................. 1.6% 6.7% 4.7%
===== ===== =====
</TABLE>
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
REVENUES
Revenues were $18.3 million, $34.8 million and $70.9 million for 1997, 1998
and 1999, respectively, representing increases of $16.5 million, or 90.2%, from
1997 to 1998, and $36.1 million, or 103.7% from 1998 to 1999. International
revenues accounted for 7.4%, 16.7% and 21.6% of total revenues for 1997, 1998
and 1999, respectively. No customer accounted for more than 10.0% of total
revenues in 1997, 1998 or 1999.
Licenses -- Licenses were $12.2 million, $24.9 million and $54.3 million in
1997, 1998 and 1999, respectively, representing increases of $12.7 million, or
104.1%, from 1997 to 1998, and $29.4 million or 118.1% from 1998 to 1999.
Licenses represented 66.4%, 71.6% and 76.6% of total revenues in 1997, 1998 and
1999, respectively. International licenses accounted for 8.2%, 18.6% and 23.4%
of total licenses in 1997, 1998 and 1999, respectively. The increase in licenses
from 1997 to 1998 was due to the expansion of our domestic sales organization of
67 people, a $3.6 million increase in international license revenue, greater
market acceptance of our products for Oracle database market and the success of
our Vista Plus product for the UNIX environment. The increase in licenses from
1998 to 1999 was due to both an increase in our worldwide sales force of 176
people, as well as the availability of new products for all of 1999 including
Schema Manager, I/Watch and TOAD.
Services -- Services were $6.2 million, $9.9 million and $16.6 million in
1997, 1998 and 1999, respectively, representing increases of $3.7 million, or
60.6%, from 1997 to 1998, and $6.7 million or 67.7% from 1998 to 1999. Services
represented 33.6%, 28.4% and 23.4% of total revenues in 1997, 1998 and 1999,
21
<PAGE> 23
respectively. The increases in services reflects the increase in the number of
software licenses sold with maintenance agreements. International services
accounted for 5.7%, 11.9% and 15.9% of total services in 1997, 1998 and 1999,
respectively.
COST OF REVENUES
Cost of Licenses -- Cost of licenses was $1.3 million, $3.4 million and
$3.0 million in 1997, 1998 and 1999, respectively, representing an increase of
$2.1 million, or 161.5%, from 1997 to 1998, and a decrease of $.4 million or
11.8% from 1998 to 1999. Cost of licenses as a percentage of license revenue was
10.8%, 13.8% and 5.5% for 1997, 1998 and 1999, respectively. The increase in
cost of licenses as a percentage of license revenue from 1997 to 1998 was
attributable primarily to a $1.8 million increase in royalties and a $551,000
increase in amortization of purchased technology and software licenses. 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.
Cost of Services -- Cost of services was $2.0 million, $2.5 million and
$4.2 million in 1997, 1998 and 1999, respectively, representing increases of
$500,000, or 25.0%, from 1997 to 1998 and $1.7 million or 68.0% from 1998 and
1999. The increases over these periods were primarily due to an increase in the
number of customer support personnel to service our growing customer and product
base. Cost of services as a percentage of service revenues was 32.0%, 25.4% and
25.3% for 1997, 1998 and 1999, respectively. The decreases in cost of services
as a percentage of services over these periods were primarily due to economies
of scale realized as a result of our increasing service revenues.
OPERATING EXPENSES
Sales and Marketing -- Sales and marketing expenses were $5.8 million,
$11.8 million and $32.1 million in 1997, 1998 and 1999, respectively,
representing increases of $6.0 million, or 103.4%, from 1997 to 1998, and $20.3
million or 172.0% from 1998 to 1999. The increases reflect our increasing
investment in our sales and marketing organization, which from 1997 to 1998
included a $3.6 million increase in salaries and related expenses, a $1.1
million increase in additional commissions, and a $353,000 increase in marketing
communications expenses such as trade shows and advertising. The increases from
1998 to 1999 reflect an increase in salaries and related expenses of $8.9
million, a $4.3 million increase in commissions and a $627,000 increase in
marketing communications expenses. Travel and entertainment expenses, and
related costs of hiring sales and marketing management also increased for both
periods.
Research and Development -- Research and development expenses were $4.3
million, $8.0 million and $16.0 million in 1997, 1998 and 1999, respectively,
representing increases of $3.7 million, or 86.0%, from 1997 to 1998, and $8.0
million or 100.0% from 1998 to 1999. The increases for these periods were
primarily related to a 63 person increase from 1997 to 1998, and a 138 person
increase from 1998 to 1999 in the number of software developers and quality
assurance personnel and, to a lesser extent, an increase in the cost of hiring
outside contractors to support product development activities.
General and Administrative -- General and administrative expenses were $3.5
million, $5.3 million and $9.9 million in 1997, 1998 and 1999, respectively,
representing an increase of $1.8 million, or 51.4%, from 1997 to 1998, and an
increase of $4.6 million or 86.8% from 1998 to 1999. The most significant
expense increases during both periods were for salaries and related expenses and
rent.
Other compensation costs and goodwill amortization -- Compensation costs
and goodwill amortization was $1.2 million in 1999 and includes $715,000 related
to the severance package provided to Doran Machin, one of our founders and a
director, which will be paid out over a three-year period, $432,000 of
compensation costs related to the grant of stock options at less than fair
market value and $97,000 of goodwill amortization related to acquisitions.
Other Income (Expense), net -- Other income (expense), net was $(137,000)
in 1997, $336,000 in 1998, and $1.2 million in 1999, representing an increase of
$473,000 from 1997 to 1998, and $864,000
22
<PAGE> 24
from 1998 to 1999. The increases reflect increased interest income from higher
cash and short-term investments which accelerated in 1999 after the receipt of
the IPO proceeds.
Provision for Income Taxes -- Provision for income taxes was $1.0 million,
$1.7 million and $2.3 million in 1997, 1998 and 1999, respectively, representing
increases of $700,000, or 70.0%, from 1997 to 1998, and an increase of $600,000
or 35.3% from 1998 to 1999. The effective income tax rate was 78.0%, 41.7% and
40.1% in 1997, 1998 and 1999, respectively. The high effective tax rate in 1997
is attributable to our election, effective January 1, 1997, to terminate our
status as an S corporation under federal tax regulations which resulted in the
establishment of deferred taxes. 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, 1997, 1998 and 1999.
23
<PAGE> 25
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth unaudited consolidated statement of
operations data for the ten quarters in the period ended December 31, 1999, as
well as such data expressed as a percentage of total revenues for the periods
indicated. This data has been derived from our unaudited consolidated financial
statements that have been prepared on the same basis as the audited consolidated
financial statements included in this prospectus and, in the opinion of our
management, include all adjustments, consisting of normal recurring adjustments,
necessary for a fair presentation of the information when read in conjunction
with the consolidated financial statements and the notes thereto included in
this prospectus. These quarterly results have been in the past and may in the
future be subject to significant fluctuations. As a result, we believe that
results of operations for interim periods should not be relied upon as any
indication of the results to be expected in any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------------------------------
SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1997 1997 1998 1998 1998 1998 1999 1999
--------- -------- -------- -------- --------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Licenses............................ $3,066 $3,887 $4,840 $4,740 $6,190 $ 9,131 $ 9,540 $11,825
Services............................ 1,405 1,665 2,203 2,252 2,544 2,890 3,299 3,625
------ ------ ------ ------ ------ ------- ------- -------
Total revenues.................... 4,471 5,552 7,043 6,992 8,734 12,021 12,839 15,450
------ ------ ------ ------ ------ ------- ------- -------
Cost of revenues:
Licenses............................ 179 730 557 947 1,081 848 684 720
Services............................ 500 578 521 523 609 854 904 834
------ ------ ------ ------ ------ ------- ------- -------
Total cost of revenues............ 679 1,308 1,078 1,470 1,690 1,702 1,588 1,554
------ ------ ------ ------ ------ ------- ------- -------
Gross profit.......................... 3,792 4,244 5,965 5,522 7,044 10,319 11,251 13,896
Operating expenses:
Sales and marketing................. 1,461 1,874 1,923 2,448 3,169 4,296 5,036 7,122
Research and development............ 1,087 1,120 1,766 1,863 1,928 2,490 2,758 3,276
General and administrative.......... 900 978 841 1,229 980 2,228 1,938 2,051
Other compensation costs and
goodwill amortization............. -- -- -- -- -- -- -- 775
------ ------ ------ ------ ------ ------- ------- -------
Total operating expenses.......... 3,448 3,972 4,530 5,540 6,077 9,014 9,732 13,224
------ ------ ------ ------ ------ ------- ------- -------
Income (loss) from operations......... 344 272 1,435 (18) 967 1,305 1,519 672
Other (expense) income, net........... (9) 18 48 71 106 111 113 (31)
------ ------ ------ ------ ------ ------- ------- -------
Income before income tax provision.... 335 290 1,483 53 1,073 1,416 1,632 641
Income tax provision.................. 262 227 615 22 446 596 689 270
------ ------ ------ ------ ------ ------- ------- -------
Net income............................ $ 73 $ 63 $ 868 $ 31 $ 627 $ 820 $ 943 $ 371
====== ====== ====== ====== ====== ======= ======= =======
Preferred stock dividends............. -- -- -- -- -- -- -- 340
------ ------ ------ ------ ------ ------- ------- -------
Net income applicable to common
shareholders........................ $ 73 $ 63 $ 868 $ 31 $ 627 $ 820 $ 943 $ 31
====== ====== ====== ====== ====== ======= ======= =======
AS A PERCENTAGE OF TOTAL REVENUES
Revenues:
Licenses............................ 68.6% 70.0% 68.7% 67.8% 70.9% 76.0% 74.3% 76.5%
Services............................ 31.4 30.0 31.3 32.2 29.1 24.0 25.7 23.5
------ ------ ------ ------ ------ ------- ------- -------
Total revenues.................... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
------ ------ ------ ------ ------ ------- ------- -------
Cost of revenues:
Licenses............................ 4.0 13.2 7.9 13.5 12.3 7.1 5.3 4.7
Services............................ 11.2 10.4 7.4 7.5 7.0 7.1 7.1 5.4
------ ------ ------ ------ ------ ------- ------- -------
Total cost of revenues............ 15.2 23.6 15.3 21.0 19.3 14.2 12.4 10.1
------ ------ ------ ------ ------ ------- ------- -------
Gross profit.......................... 84.8 76.4 84.7 79.0 80.7 85.8 87.6 89.9
Operating expenses:
Sales and marketing................. 32.7 33.8 27.3 35.1 36.3 35.8 39.2 46.1
Research and development............ 24.3 20.2 25.1 26.6 22.1 20.7 21.5 21.2
General and administrative.......... 20.1 17.5 11.9 17.6 11.2 18.5 15.1 13.3
Other compensation costs and
goodwill amortization............. -- -- -- -- -- -- -- 5.0
------ ------ ------ ------ ------ ------- ------- -------
Total operating expenses.......... 77.1 71.5 64.3 79.3 69.6 75.0 75.8 85.6
------ ------ ------ ------ ------ ------- ------- -------
Income (loss) from operations......... 7.7 4.9 20.4 (0.3) 11.1 10.8 11.8 4.3
Other (expense) income, net........... (0.2) 0.3 0.6 1.0 1.2 0.9 0.9 (0.2)
------ ------ ------ ------ ------ ------- ------- -------
Income before for income tax
provision........................... 7.5 5.2 21.0 0.7 12.3 11.7 12.7 4.1
Income tax provision.................. 5.9 4.1 8.7 0.3 5.1 5.0 5.4 1.7
------ ------ ------ ------ ------ ------- ------- -------
Net income............................ 1.6% 1.1% 12.3% 0.4% 7.2% 6.7% 7.3% 2.4%
====== ====== ====== ====== ====== ======= ======= =======
Preferred stock dividends............. -- -- -- -- -- -- -- 2.2
------ ------ ------ ------ ------ ------- ------- -------
Net income applicable to common
shareholders........................ 1.6% 1.1% 12.3% 0.4% 7.2% 6.7% 7.3% 0.2%
====== ====== ====== ====== ====== ======= ======= =======
<CAPTION>
THREE MONTHS ENDED
--------------------
SEPT. 30, DEC. 31,
1999 1999
--------- --------
(IN THOUSANDS)
<S> <C> <C>
Revenues:
Licenses............................ $13,995 $18,909
Services............................ 4,313 5,362
------- -------
Total revenues.................... 18,308 24,271
------- -------
Cost of revenues:
Licenses............................ 734 860
Services............................ 1,154 1,303
------- -------
Total cost of revenues............ 1,888 2,163
------- -------
Gross profit.......................... 16,420 22,108
Operating expenses:
Sales and marketing................. 8,321 11,599
Research and development............ 4,502 5,444
General and administrative.......... 2,787 3,130
Other compensation costs and
goodwill amortization............. 186 282
------- -------
Total operating expenses.......... 15,796 20,455
------- -------
Income (loss) from operations......... 624 1,653
Other (expense) income, net........... 278 842
------- -------
Income before income tax provision.... 902 2,495
Income tax provision.................. 380 934
------- -------
Net income............................ $ 522 $ 1,561
======= =======
Preferred stock dividends............. 250 --
------- -------
Net income applicable to common
shareholders........................ $ 272 $ 1,561
======= =======
AS A PERCENTAGE OF TOTAL REVENUES
Revenues:
Licenses............................ 76.4% 77.9%
Services............................ 23.6 22.1
------- -------
Total revenues.................... 100.0 100.0
------- -------
Cost of revenues:
Licenses............................ 4.0 3.5
Services............................ 6.3 5.4
------- -------
Total cost of revenues............ 10.3 8.9
------- -------
Gross profit.......................... 89.7 91.1
Operating expenses:
Sales and marketing................. 45.5 47.8
Research and development............ 24.6 22.4
General and administrative.......... 15.2 12.9
Other compensation costs and
goodwill amortization............. 1.0 1.2
------- -------
Total operating expenses.......... 86.3 84.3
------- -------
Income (loss) from operations......... 3.4 6.8
Other (expense) income, net........... 1.5 3.5
------- -------
Income before for income tax
provision........................... 4.9 10.3
Income tax provision.................. 2.0 3.9
------- -------
Net income............................ 2.9% 6.4%
======= =======
Preferred stock dividends............. 1.4 --
------- -------
Net income applicable to common
shareholders........................ 1.5% 6.4%
======= =======
</TABLE>
24
<PAGE> 26
Our total revenues have increased in each period presented, with the
exception of the three months ended June 30, 1998. These increases have been
generally due to increased acceptance of our products and the expansion of our
sales force and increased service revenues as the installed customer base has
grown. Total cost of revenues have also generally increased in absolute dollars
over these periods presented due to increased amortization of purchased
technology and software licenses, royalty costs, and an increase in the number
of customer support personnel. Total operating expenses have increased in
absolute dollars in each period presented as we have grown our infrastructure to
support our expanding operations.
While we have not experienced a significant amount of seasonality in the
past, we expect that we will begin to experience seasonal customer buying
patterns in the foreseeable future. Specifically, we would expect to experience
relatively stronger demand for our products during the quarters ending December
31 and June 30, and relatively weaker demand in the quarters ending March 31 and
September 30. In addition, to the extent international operations constitute a
greater percentage of our revenues in future periods, we anticipate that demand
for our products in Europe will decline during the summer vacation season.
LIQUIDITY AND CAPITAL RESOURCES
We have funded our business, to date, primarily from cash generated by our
operations and net proceeds of $64.9 million from our initial public offering in
August 1999. Our sources of liquidity as of December 31, 1999, consisted
principally of cash and cash equivalents of $39.6 million and marketable
securities of $15.5 million.
Net cash provided by operating activities was $3.6 million, $8.2 million
and $11.4 million in 1997, 1998 and 1999, respectively. The increases in 1997,
1998 and 1999, were primarily due to increases in net income, depreciation and
amortization, deferred revenue resulting from additional service contracts and
accrued expenses, offset by increases in accounts receivable resulting from
increased sales.
Net cash used in investing activities was $1.3 million, $1.3 million, and
$24.1 million in 1997, 1998, and 1999, respectively. The increase in cash used
in investing activities in 1999 was primarily related to capital expenditures of
$7.1 million associated with company growth and net purchases of marketable
securities totalling $15.5 million.
Financing activities used $270,000 and $8,000 in 1997 and 1998,
respectively, and generated $43.6 million in 1999. 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 "Certain
Transactions" and Note 4 of the notes to our consolidated financial statements.
In August of 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.
We believe that the net proceeds from this offering, our existing cash and
investment balances and cash from operations will be sufficient to finance our
operations through at least the next 12 months. If additional financing is
needed, there can be no assurance that such financing will be available to us on
commercially reasonable terms or at all.
25
<PAGE> 27
YEAR 2000
Prior to January 1, 2000, there was a great deal of concern regarding the
ability of computers to adequately distinguish 21st century dates from 20th
century dates due to the two-digit date fields used by many systems. Most
reports to date, however, are that computer systems are functioning normally and
the compliance and remediation work accomplished leading up to the Year 2000 was
effective to prevent any problems. Computer experts have warned that there may
still be residual consequences of the change in centuries and any such
difficulties could result in a decrease in sales of our products, an increase in
allocation of resources to address Year 2000 problems of our customers without
additional revenue commensurate with such dedication of resources, or an
increase in litigation costs relating to losses suffered by our customers due to
such Year 2000 problems.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard , or SFAS, No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes methods for
derivative financial instruments and hedging activities related to those
instruments, as well as other hedging activities. Because we do not currently
hold any derivative instruments and do not currently engage in hedging
activities, we expect that the adoption of SFAS No. 133 will not have a material
impact on our financial position or results of operations. We will be required
to implement SFAS No. 133 for the year ending December 31, 2001.
In December 1998, the AICPA issued SOP 98-9, Modification of SOP 97-2,
Software Revenue Recognition, with respect to Certain Transactions. SOP 98-9
amends SOP 97-2 and SOP 98-4, extending the deferral of the application of
certain provisions of SOP 97-2 amended by SOP 98-4 through fiscal years
beginning on or before March 15, 1999. All other provisions of SOP 98-9 are
effective for transactions entered into in fiscal years beginning after March
15, 1999. We do not expect the adoption of SOP 98-9 to have a material effect on
our results of operations or financial condition.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK DERIVATIVES AND
FINANCIAL INSTRUMENTS
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
The Company's exposure to market rate risk for changes in interest rates
relates primarily to the Company's investment portfolio. The Company has not
used derivative financial instruments in its investment portfolio. The Company
places its investments with high-quality issuers and, by policy, limits the
amount of credit exposure to any one issuer. The Company's investments in
marketable securities consist primarily of high-grade corporate and government
securities with maturities of less than two years. Investments purchased with an
original maturity of three months or less are considered to be cash equivalents.
The Company classifies all of its 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 stockholders'
equity. At December 31, 1999, the net loss on available-for-sale securities of
$26 is comprised of five positions, all with unrealized losses.
26
<PAGE> 28
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.
27
<PAGE> 29
BUSINESS
This prospectus contains certain forward looking statements within the
meaning of the federal securities laws. 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, including those set forth under "Risk
Factors" and elsewhere in this prospectus.
OVERVIEW
We provide application and information availability software solutions that
enhance the performance and reliability of an organization's e-business,
enterprise and custom applications and enable the delivery of information across
the entire enterprise. Our application availability products are designed to
help ensure uninterrupted and high performance access to software systems by
utilizing a number of integrated products that enhance the performance of
applications and the underlying database which stores an enterprise's critical
information. Other primary components of our application availability solution
include our database products that maintain a real-time copy of a database for
offloading critical systems and assuring high availability, as well as our
products that manage the complex and error-prone process of development and
deployment of rapidly changing applications. Our information availability
products deliver an enterprise, report-based information management solution
that captures, manages and distributes report data or electronic documents from
virtually any application for instant distribution over intranets or the
Internet.
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 their information technology
infrastructure as they extend their business over the Internet 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
inside and outside the enterprise;
- Users 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 extended over the Internet; 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.
28
<PAGE> 30
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, enterprise resource planning 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.
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 24x7x365 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 its application availability environment. 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 24x7x365 access, and
minimize the strain on existing systems and personnel;
- 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, application and
database environments.
29
<PAGE> 31
THE QUEST SOLUTION
Quest offers application and information availability software solutions
that enhance the performance and reliability of e-business, enterprise and
custom applications and enable the delivery of information across the entire
enterprise. Key elements of our solution include:
Assure 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.
30
<PAGE> 32
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.
STRATEGY
Our objective is to become the leading provider of application and
information availability solutions to enable organizations to deliver relevant
information and provide sophisticated services to employees, customers,
suppliers and partners both inside and outside of the traditional enterprise.
Key elements of our strategy include:
Extend Product Leadership
We offer a family of products that work together to provide application and
information availability solutions capable of meeting today's performance
requirements. We believe our family of application availability products
provides the most thorough and efficient approach to optimizing the performance
and availability of e-business, enterprise and custom applications. We also
believe that we offer the leading Web-based information availability software
solutions in terms of functionality and innovation. We intend to advance this
product leadership by investing significantly in research and development and by
acquiring and integrating complementary products and technologies. We intend to
strengthen and expand our offerings of integration software for leading
enterprise resource planning (ERP) applications. Our flexible and open
architecture allows for the integration of new modules that enhance our current
solutions and add new e-business functionality, such as electronic bill
presentment. We plan to augment our existing application availability solutions
with capabilities to monitor and maintain the underlying infrastructure of
e-business applications. For example, we plan to introduce a product that
manages and optimizes the performance of Web application servers.
Focus on e-Business Applications Market
We believe that both recent and expected growth in e-business applications
have created strong demand for our application and information availability
products. We intend to capitalize on this opportunity by actively marketing our
products to companies with strong e-business initiatives. In addition to
developing new e-business applications, organizations are attempting to improve
the e-business functionality of their existing enterprise applications by
extending them over the Internet. As a result, we believe a significant market
opportunity exists to help organizations leverage these investments by
incorporating new e-business functionality into these systems. We believe that
our products will be used as a key component of the infrastructure for emerging
e-business applications.
Leverage our Significant Installed Base of Customers
We have an installed base of thousands of customers that we believe
provides us with a significant opportunity for additional sales of current and
future products, as well as ongoing maintenance revenues. A majority of our
customers have purchased only one or a few of our products or use our products
in specific business-units or locations. We believe that we can sell more deeply
into our installed customer base by expanding these departmental deployments
into enterprise-wide implementations as well as by cross-selling additional
products and services.
Expand our Sales Force and Distribution Channels
We market and sell our products worldwide primarily though a direct sales
and telesales force. We believe that our direct sales approach allows us to
achieve better control of the sales process and respond
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more quickly to customer needs while maintaining an efficient sales model. We
are continuing to expand our direct sales efforts both domestically and
internationally. Sales outside of North America represented approximately 17% of
total revenue in 1998 and 22% in 1999, and we believe that there is significant
untapped demand for our software products internationally. We intend to continue
to expand our direct sales staff and increase the number of sales offices
internationally, and, to a lesser extent, develop alliances with international
distributors.
Extend Strategic Integrator Relationships
We intend to increase the value of our solutions to customers by offering
additional and improved consulting and implementation services for our
enterprise-level software solutions. Specifically, we plan to extend our
existing strategic relationships and develop new partnerships with leading
global systems integrators who specialize in implementing software solutions
that support e-business and enterprise application software. We believe that
these relationships will both facilitate the successful enterprise deployment of
our products and generate additional product sales opportunities.
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PRODUCTS
Our products are designed to work individually and together to provide
immediate and continuous availability of applications and information, both of
which are critical as enterprises rapidly extend their information technology
infrastructure. Our products and their functionality are summarized below:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
<C> <S> <C>
INFORMATION AVAILABILITY
- ------------------------------------------------------------------------------------------------------------
VISTA PLUS Captures, manages and distributes report-based information
through an enterprise report and document repository.
- ------------------------------------------------------------------------------------------------------------
VISTA PLUS E-PURPOSING MODULE Extends information delivery across the Internet by
providing global delivery of time-sensitive documents,
electronic bill and statement presentment without requiring
application changes.
- ------------------------------------------------------------------------------------------------------------
VISTA PLUS INTERFACE MODULES FOR SAP Provides rapid installation and continuous synchronization
R/3, PEOPLESOFT, AND ORACLE of users, groups, authorization profiles and report
APPLICATIONS information from ERP systems to Vista Plus.
- ------------------------------------------------------------------------------------------------------------
QMASTER* A web-based, enterprise-wide solution for delivering,
managing, and monitoring nearly all printed, faxed or
emailed output throughout an organization.
- ------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
<C> <S> <C>
APPLICATION AVAILABILITY
- ------------------------------------------------------------------------------------------------------------
DATABASE REPLICATION
- ------------------------------------------------------------------------------------------------------------
SHAREPLEX(R) REPLICATION Replicates high volumes of data from Oracle databases to
improve performance and manage future growth.
- ------------------------------------------------------------------------------------------------------------
ENTERPRISE MONITORING
- ------------------------------------------------------------------------------------------------------------
FOGLIGHT* Monitors and resolves problems across the hardware and
software components that comprise modern applications,
including the network, application servers, database servers
and web servers, from a Java-based centralized console.
- ------------------------------------------------------------------------------------------------------------
I/WATCH Offers a centralized console for monitoring, alerting,
diagnosing and resolving problems in Oracle-based
applications.
- ------------------------------------------------------------------------------------------------------------
DATABASE AND APPLICATION PERFORMANCE
- ------------------------------------------------------------------------------------------------------------
INSTANCE MONITOR A real-time monitoring and diagnostic tool featuring visual
representation of database process flows.
- ------------------------------------------------------------------------------------------------------------
SQLAB XPERT Identifies and resolves database resource consumption
problems caused by poorly performing application code by
recommending optimal tuning scenarios.
- ------------------------------------------------------------------------------------------------------------
SPACE MANAGER Reorganizes database objects and performs capacity planning
to improve performance and manage future growth.
- ------------------------------------------------------------------------------------------------------------
APPLICATION CHANGE MANAGEMENT
- ------------------------------------------------------------------------------------------------------------
SCHEMA MANAGER Manages database change and migration from development
through production by providing comprehensive version
control, auditing and rollback capabilities.
- ------------------------------------------------------------------------------------------------------------
DATA MANAGER Builds test databases, deploys reference data to production
during software rollouts, extracts data for data warehouses
or reporting databases, and purges or archives production
data that is not needed on-line.
- ------------------------------------------------------------------------------------------------------------
SQL IMPACT Manages interdependencies between database objects and
application source code, providing detailed impact analysis,
documentation and auditing.
- ------------------------------------------------------------------------------------------------------------
SQL NAVIGATOR AND TOAD Server-side database development and management solutions
with optional add-on modules available for debugging, SQL
tuning with expert advice and integrated code libraries for
rapid development.
- ------------------------------------------------------------------------------------------------------------
STAT! Tracks and manages all customizations made by an
organization to their PeopleSoft implementations. Changes
can be unapplied or reapplied to new versions of PeopleSoft
automatically, an otherwise highly complex and error prone
process.
- ------------------------------------------------------------------------------------------------------------
</TABLE>
- -------------------------
* Products acquired after December 31, 1999
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INFORMATION AVAILABILITY
Vista Plus. Our Vista Plus products deliver the benefits of enabling
Web-based access to existing information and applications without a complex
development or deployment effort. Vista Plus is an enterprise, report-based
information management solution that captures, stores, indexes, prints and
archives report data or electronic documents from virtually any application.
Vista Plus maintains a repository of this output for instant distribution over a
heterogeneous, widely distributed network, including the Internet, with our
sophisticated Java or Windows clients. By storing output from applications in
its repository, Vista Plus also eliminates the processing needed to rerun
reports, and its report mining capabilities provide users access to information
without burdening the primary systems.
Vista Plus enables real-time access to business-critical information at any
time, even if the source application is not accessible. Vista Plus provides the
ability to quickly navigate from summary to detailed information, data
extraction, hyperlinks to navigate between related information and numerous
print and electronic distribution functions with no application changes,
delivering immediate benefits throughout the enterprise. The robust security
model built into Vista ensures that only authorized users gain access to data.
Vista Plus further extends information availability by transforming production
reports into a series of personalized emails, PDF files or HTML pages for
Internet distribution of statements such as invoices, purchase orders and
financial statements. As a result, the data that is delivered to end users
contains relevant information in a familiar and highly usable format.
QMaster provides a scalable, open architecture solution which automates
Output Delivery to printers, faxes, email, electronic documents and the
scheduling and execution of Batch Processes in a heterogeneous environment of NT
and UNIX platforms. QMaster supports a wide variety of incompatible operating
systems and devices. Nearly any form of output can automatically be routed
across a variety of high and low speed printers, securely, in order to optimize
use of resources and ensure information is successfully delivered even if a
device becomes unavailable. The web-based user interface allows the control of
delivery of documents from anywhere over the Internet.
APPLICATION AVAILABILITY
We provide a broad range of products that together provide a comprehensive
application availability solution. Our products provide a wide range of services
that work together to maintain the high level of performance and continuous
access required by today's demanding e-business environment. Integration between
these components significantly enhances the value of each solution by increasing
user productivity and delivering otherwise unavailable functionality.
Database Replication
SharePlex. SharePlex replicates high volumes of data from an Oracle
database to one or more other databases. Replication is accomplished in
real-time with very little overhead to critical application servers. Secondary
systems can then be used for offloading non-critical processing, thus preserving
desired user response times and Web server performance, as well as providing a
back-up system for reporting and fail-over. SharePlex also supports wide-area
networks without the need for expensive high bandwidth data links.
Enterprise Monitoring
Foglight. Foglight is a new generation Enterprise Monitoring solution that
monitors all components of a modern application system, including web servers,
application servers, and database servers. Applications being deployed today
offer increasing complexity involving multiple systems and software packages
that are interdependent. Understanding the relationship between these software
and hardware components and how they interact and affect each other is often
difficult. Foglight's correlation technology allows system administrators to
determine where performance bottlenecks are occurring for rapid resolution.
Foglight provides an extensible and scalable platform which can be used for
end-to-end monitoring in the most demanding and dynamic environments.
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<PAGE> 36
I/Watch. I/Watch offers a central console for Oracle-based applications
and alerts the operations staff of problems as they develop. I/Watch is easy to
deploy and consumes relatively few system resources. I/Watch detects system and
application failures, and allows operations staff to watch for developing
problems over a large network of systems. I/Watch can alert and automatically
respond with appropriate measures to resource problems. I/Watch provides an
intuitive, graphical interface that clearly shows where problems are occurring
and supports the ability to quickly navigate from summary to detailed
information for diagnosing and resolving issues. I/Watch allows for the mining
of previously monitored time periods to help pinpoint the root cause of
problems.
Database and Application Performance
Instance Monitor. Instance Monitor is a real-time monitoring and
diagnostic tool featuring visual representations of process flows within the
database. Instance Monitor's unique user-interface design displays a
comprehensive diagram of a database's internal workings and the flow of
information within the database. Instance Monitor tracks database performance in
real-time, identifies potential bottlenecks and provides detailed expert advice
to help resolve problems as they occur.
SQLab Xpert. SQLab Xpert automatically locates and highlights poorly
written database application code. It provides expert advice to help both novice
and seasoned developers and administrators quickly find solutions to difficult
performance problems.
Space Manager. Space Manager addresses the complex issues of physical data
management to help keep application performance at peak levels. As database
structures are modified to accommodate application changes and growth,
performance begins to degrade due to poor physical organization of information
within the database. Space Manager is designed to perform this necessary
maintenance as well as assist in planning for future growth in storage
requirements.
Application Change Management
SQL Impact. SQL Impact scans application code and stores it in its
repository. If a change is needed to any object in a database, SQL Impact
determines which programs and specific lines of code will be affected, reducing
the likelihood of overlooking required application changes.
Schema Manager. Schema Manager automatically determines the differences
between a development and production database and can synchronize the databases
automatically. Schema Manager packages all of the changes needed for a new
application deployment, checks to make sure the changes will not fail in the
production environment, and implements the changes. Its auditing capability
documents all database changes, allowing the immediate rollback of a change if
required.
Data Manager. Data Manager deploys and transforms data when new
applications are rolled out, for example, storing or changing reference data
such as sales tax tables and control information. Data Manager also creates test
databases for developers, eliminating the need to use a full copy of a
production database which can be impractical due to its large size.
Stat! Stat! provides users of the PeopleSoft ERP and Human Resources
software with a method to track and preserve all changes and customizations made
to a PeopleSoft implementation. Since modification of standard packaged software
like PeopleSoft is often necessary, managing these changes becomes critical to
preserving the customized software environment. With integrated workflow, Stat!
is a centralized repository for documenting, tracking, migrating, supporting and
delivering PeopleSoft application changes. Customizations are safeguarded and
preserved without risk of losing them. By using Stat!, organizations can greatly
reduce the effort required to implement upgraded versions of PeopleSoft's
applications, a process that is otherwise highly resource intensive, time
consuming and expensive.
Database Programming
SQL Navigator and TOAD enable development of server side code for
databases, a key component of Internet-enabled application development. SQL
Navigator and TOAD allow developers to rapidly and
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<PAGE> 37
accurately develop and enhance the performance of applications. Providing
similar functionality, these two products incorporate different user interfaces
that increase their appeal to a broader spectrum of developers and database
administrators. They integrate with our other application availability products,
enabling developers to check and correct the performance of their code before it
is put into production.
CUSTOMERS AND CASE STUDIES
Our software products are licensed to customers worldwide to provide a wide
range of application and availability solutions. Our products have been sold to
thousands of corporations, governmental agencies and other organizations
worldwide. In 1997, 1998 and 1999, no customer accounted for more than 10% of
our total revenues.
A representative sampling of customers who have purchased at least $100,000
of software licenses and support services includes:
<TABLE>
<S> <C> <C>
TECHNOLOGY FINANCIAL SERVICES MANUFACTURING
Akamai ADP 3M
Applied Materials AIG Marketing American Cyanamid
Dell Computer American National Bank Avery Dennisson
Earthlink Ceridian Tax Service Boeing
Hewlett-Packard Chase Manhattan Mortgage Eaton Corp.
Intuit Citibank General Electric Plastics
Mail.com Credit Suisse/First Boston Honeywell
Merisel Cyber Cash Imation
Micro Warehouse DLJ Direct Johnson Controls
Micron Electronics Fidelity Investments Koch Industries
Motorola First National Bank Chicago Lockheed Martin
Oracle FleetBoston Robertson Stephens Monsanto
Priceline.com GE Capital Sara Lee Hosiery
Sony Mercury Insurance Group Smuckers
Sun Microsystems Nations Bank Toyota Motors
Yahoo Wellington Management Weyerhaeuser
HEALTHCARE/PHARMACEUTICAL Wells Fargo OTHER
TELECOMMUNICATIONS
3M Health Information Systems American Home Shield
Acuson Air Touch Communications Andersen Consulting
Blue Cross-Blue Shield (FL) AT&T Aramark
Bristol Meyers British Telecom Bausch & Lomb Worldwide
Cardinal Health Lucent Technologies Carlson Companies
GE Medical Systems MCI System House Circuit City
Harvard Pilgrim Health Care Nextel ConAgra
Hoechst Marion Roussel Southwestern Bell Mobile Dun & Bradstreet Info. Systems
Hoffman LaRoche Communications Earth Tech
Kaiser Permanente TCI Communications Hertz
Merck Williams Information Services JC Penney
US Surgical Musicland
ENERGY Pepsi-Cola
PriceWaterhouseCoopers
Detroit Edison Purdue University
FirstEnergy Corp. State of Georgia
Pennsylvania Power & Light Time Inc.
PG&E Texas Management United Space Alliance
Shell Services International University of Michigan
Sun Chemical Yamaha
Valero Energy
Wisconsin Power & Light
</TABLE>
The following case studies illustrate how a selected group of
representative customers are using a variety of Quest products to ensure high
application and information availability across their increasingly
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heterogeneous and distributed networks. We compiled this information in
consultation with the companies listed below.
Applied Materials
Applied Materials is a leading semiconductor equipment manufacturer. To
improve efficiency in its global operations, Applied Materials needed a
Web-based enterprise-wide report management solution that could seamlessly
integrate with their existing applications, automate their processes and provide
instant access to corporate reports to thousands of employees worldwide. Such a
solution would eliminate the need to prepare, compile and distribute thousands
of corporate reports manually. Applied Materials selected and implemented Vista
Plus as an enterprise-wide report warehouse and distribution solution for
automated electronic delivery and archiving of application reports. We believe
that Applied Materials was able to realize cost savings and productivity
benefits immediately. Administrative overhead was reduced through lower paper
and printing costs and reduced human resource expenses. Moreover, Applied
Materials deployed Vista Plus without having to reconfigure its existing
applications. After experiencing the benefits of Vista Plus, Applied Materials
purchased I/Watch, for enterprise monitoring and SQLab Xpert for application
turning, to improve the availability and performance of their Oracle database
environment.
EarthLink
EarthLink is a leading Internet service provider, with a full range of
innovative access and hosting solutions used by approximately 1.15 million
individuals and businesses every day. Using Oracle databases, EarthLink needed a
better way to diagnose and address day-to-day application availability and
management issues. Due to the size and the dynamic nature of its business,
downtime would be catastrophic. EarthLink selected our products to satisfy its
requirements in this area. To manage its applications, EarthLink uses I/Watch
and Instance Monitor for database monitoring, diagnostics and resolution. Based
on our discussions with EarthLink, we believe that they particularly liked the
user interfaces and integration of the products they purchased. We also believe
that these products, along with SQLab Xpert, enable their database
administrators to perform "targeted tuning" with intelligent tuning
recommendations that improve the performance of the databases. Space Manager
provides EarthLink with a comprehensive solution for database reorganization and
capacity planning for application availability through preventive maintenance,
problem detection and resolution across all databases.
NCR
NCR provides integrated software, consulting services and hardware
solutions for businesses. NCR runs Oracle in a multi-platform environment with a
combination of applications, including Oracle Financials, PeopleSoft and other
internally developed solutions. NCR employs over 300 servers worldwide and
executes mission-critical data transfers. This complexity required a controlled
application development and deployment environment. Our change management
products allow NCR to facilitate the identification, migration and deployment of
critical database changes required to ensure that all databases have the same
structure across the entire enterprise. NCR uses SQL Impact to identify the
interdependencies between application source code and the database objects. NCR
uses Schema Manager to synchronize and migrate database structural changes
between development and production databases. In addition, they use SQLab Tuner
to tune complex queries and SQL Navigator for server-side development and
debugging. As a result of implementing our products, we believe that NCR was
able to realize a reduction in processing time by improving code integrity and
reducing development time.
Priceline.com
On April 6, 1998, priceline.com opened its virtual doors to pioneer a new
level of service that allows online consumers to "name your price and save" on
an array of goods and services from airline tickets to home mortgages. Because
priceline.com's customers can only purchase product via the Internet, the Web
site is the business and therefore depends on continuous availability. To ensure
this availability, priceline.com turned to our SharePlex replication solution.
SharePlex protects priceline.com from downtime by providing live,
up-to-the-minute copies of their production databases to not only balance the
workload of thousands of consumers, but also provide a backup in the event of a
failure. SharePlex
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was the only solution available that met the requirements of priceline.com's
demanding environment. Creating the environment required for around the clock
access poses one of the greatest challenges Internet companies face today.
SharePlex not only solved this problem but also provided geographical redundancy
to both priceline.com sites, located in Connecticut and New Jersey.
SALES, MARKETING AND DISTRIBUTION
We market and sell our products and services worldwide through a
combination of direct sales and telesales forces and, to a lesser extent,
resellers and distributors. Our domestic sales organization is headquartered in
Irvine, California. We have additional sales offices located in the metropolitan
areas of Atlanta, Boston, Chicago, Dallas, Detroit, New York, Raleigh, San
Francisco and Washington D.C. We also have international sales offices in the
metropolitan areas of Frankfurt, 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. Accordingly, 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 involve 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 six 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 engage in a variety of marketing activities, including seminars, trade
shows, direct mailings and print and Web-based advertising. In addition, we have
recently expanded our marketing staff and intend to commence an ongoing public
relations program that will include establishing and maintaining relationships
with key trade press, business press and industry analysts. We also intend to
initiate a customer advisory council which will provide a communication channel
for regular feedback from key customers to facilitate the design of products to
meet the expanding requirements of our target market.
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. Our customer support group provides technical support to our
customers 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
assistance with installation, configuration and initial set-up of our products;
ongoing support during normal business hours; and software maintenance and
upgrade releases. For an additional fee, we provide support on a 24x7x365 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. We plan to hire
additional support personnel and, as needed, establish additional support sites
domestically and internationally to meet our customers' needs. Furthermore, we
plan to extend our existing strategic partnerships and develop new partnerships
with leading systems integrators to provide implementation guidance, assistance
with configuration and initial set-up of applications.
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.
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RESEARCH AND DEVELOPMENT
We believe that strong research and product development capabilities are
essential to enhancing our core technologies and developing additional products
that offer maximum value and ease of use. We have invested significant time and
resources in creating a structured process for undertaking product development
projects. This process is designed to provide the proper framework for defining
and addressing the steps, tasks and activities required to bring product
concepts and development projects to market successfully. A significant portion
of our development effort is conducted in Melbourne, Australia. We have actively
recruited key software engineers and developers with expertise in the areas of
Oracle technologies, SQL Server, Java, Microsoft development technologies, ERP
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, easy to install and use 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;
- 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, Mobius, Hewlett Packard and IBM;
- providers of hardware and software replication tools such as EMC and
Veritas; and
- providers of database and database management products such as BMC,
Compuware, Oracle, and Computer Associates.
Many 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.
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In addition, providers of database solutions 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 presently have no patents
on our products. We currently hold several trademark registrations and have
numerous trademark applications in the United States and certain foreign
countries. Our trademark applications might not result in the issuance of any
valid trademarks. 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 shrinkwrap license agreements,
which impose restrictions on the licensee's ability to utilize the software.
Finally, we seek to avoid disclosure of our 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.
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. In addition, we sell our products
internationally. The laws of many countries do not protect our proprietary
rights to as great an extent as do the laws of the United States. 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 and would materially adversely
affect our business, operating results and financial condition.
We cannot assure you that our means of protecting our proprietary rights
will be adequate or that competition will not independently develop similar or
superior technology. 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. We are not
aware that we are infringing any proprietary rights of third parties. There can
be no assurance, however, that third parties will not claim we infringe their
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intellectual property rights. We expect that software product developers will
increasingly be subject to infringement claims as the number of products and
competitors in our industry segment grows and the functionality of products in
different industry segments overlaps. Any such claims, with or without merit,
could be time consuming to defend, result in costly litigation, divert
management's attention and resources, cause product shipment delays or require
us to enter into royalty or licensing agreements. Such royalty or licensing
agreements, if required, may not be available on terms acceptable to us, if at
all. 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, our business, operating
results and financial condition could be materially adversely affected.
We incorporate technology from third parties into our SQL Navigator, TOAD,
Vista Plus and Foglight products. We currently have a material license agreement
with Inso for the use of file viewing technology which is incorporated into an
add-on module for our Vista Plus products. We currently pay Inso royalty fees
based on sales of our Vista Plus product. This license agreement terminates on
February 10, 2002. In addition, we currently have a material license agreement
with Artifex for the use of technology which is incorporated into an add-on
module for our Vista Plus products. We currently pay Artifex royalty fees based
on sales of Vista Plus products incorporating the licensed software. The license
for the technology from Artifex remains in effect for so long as any proprietary
rights in the licensed technology are enforceable under the laws of any
jurisdiction, unless earlier terminated by us upon 30 days written notice or by
Artifex upon a material breach by us. We also have a material license agreement
with Inxight which is incorporated into the Foglight product. We currently pay
Inxight a license fee per year plus royalty fees equal to a percentage of the
license fee. The license agreement terminates September 30, 2002. As we continue
to introduce new products, we may be required to license additional technology
from others. There can be no assurance that these third-party technology
licenses will continue to be available to us on commercially reasonable terms,
if at all.
SharePlex is a registered trademark owned by us. This prospectus also makes
reference to the other trademarks that we own, some of which we are seeking
registration for, and to trademarks of other companies.
EMPLOYEES
As of December 31, 1999, we employed 654 full-time employees, including 299
in sales and marketing, 226 in research and development, 52 in customer service
and support and 77 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.
FACILITIES
Our principal administrative, sales, marketing, support and research and
development facility is currently located in approximately 67,500 square feet of
space in Irvine, California. This facility is under a six-year lease and we have
an option to renew this lease for an additional five-year term.
We also lease sales offices in the metropolitan areas of Atlanta, Boston,
Calgary, Chicago, Dallas, Detroit, New York, Raleigh, San Francisco, and
Washington, D.C. Our Chicago office is currently located in approximately 30,000
square feet in Warrenville, Illinois. This facility is under a 7-year lease. 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.
LEGAL PROCEEDINGS
We are not currently a party to any material legal proceeding.
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<PAGE> 43
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information regarding our executive
officers and directors as of February 1, 2000:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Vincent C. Smith.............. 36 Chief Executive Officer and Chairman of the Board
David M. Doyle(2)............. 39 President, Secretary and Director
John J. Laskey................ 50 Chief Financial Officer and Vice President, Finance
Eyal M. Aronoff............... 36 Vice President, Technology and Engineering
Douglas F. Garn............... 41 Vice President, Worldwide Sales
Doran G. Machin(1)(2)......... 45 Director
Jerry Murdock, Jr.(1)(2)...... 41 Director
</TABLE>
- -------------------------
(1) Member of Compensation Committee
(2) Member of Audit Committee
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 received
his B.S. degree in Computer Science with a minor in Economics from University of
Delaware.
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. Mr. Doyle
studied Information and Computer Sciences at University of California, Irvine.
John J. Laskey is our Chief Financial Officer and Vice President, Finance.
Mr. Laskey has held these positions since October 1998. From June 1995 to
October 1998, Mr. Laskey served as the Chief Financial Officer and Vice
President, Finance of Continuus Software Corporation, a provider of software
change management solutions. From April to June 1995, Mr. Laskey was the Chief
Financial Officer and Vice President, Finance of StarBase Corporation. From
September 1986 to April 1995, Mr. Laskey worked at FileNet Corporation as Vice
President, Finance and Principal Accounting Officer. Mr. Laskey received his
B.S. degree in Electrical Engineering from University of Illinois and his M.B.A.
from Loyola University of Chicago.
Eyal M. Aronoff has been our Vice President of Technology and Engineering
since March 1996, when we acquired R*Tech Systems, Inc., a database management
company. Mr. Aronoff founded R*Tech Systems in 1992 and served as its President
from 1992 to 1996. Prior to this, Mr. Aronoff worked for John Bryce Ltd., an
Oracle distributor in Israel, attended school and served in the Israeli Defense
Force. Mr. Aronoff received a B.A. degree in computer science and chemistry from
Bar-Ilan University Ramat-Gan, Israel.
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
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<PAGE> 44
Syntax, Inc., a networking software company. From November 1993 until July 1995,
Mr. Garn was Regional Sales Manager with BMC. Mr. Garn holds a B.S. in Marketing
from University of Southern California.
Doran G. Machin has served as a director since 1987. Mr. Machin was also
our Secretary and Executive Vice President from 1987 through April, 1999. Prior
to 1987, Mr. Machin was employed as an independent computer consultant, worked
for Hewlett-Packard and American Data Industries. Mr. Machin attended Cerritos
College and California State University, Fullerton.
Jerry Murdock, Jr. has served as a member of our board since April 1999.
Since 1995, Mr. Murdock has been employed by InSight Capital Partners, an
investment firm which he co-founded in that year. From 1987 to 1995, Mr. Murdock
was President of Aspen Technology Group, a consulting firm which he founded in
1987. Mr. Murdock has a degree in Political Science from San Diego State
University. Mr. Murdock is a member of the boards of directors of several
private technology companies.
KEY EMPLOYEES
Kimberly A. Kinnison has been our Vice President of Technical Support since
January 1999. As such, Ms. Kinnison oversees our management information systems
department and our worldwide technical support staff. From January 1998 to
January 1999, Ms. Kinnison was our Director of Technical Support and from June
1995 to December 1997, she was our Support Manager. Ms. Kinnison joined Quest in
November 1991 as a technical support engineer. Prior to joining Quest, Ms.
Kinnison held positions as a systems programmer at Hughes Aircraft and
instructor/consultant at Hewlett Packard. Ms. Kinnison received her B.S. in
Computer Information Systems from California State Polytechnic University,
Pomona.
Terence J. Mullin has been our Vice President of the Output Management
Business Unit since April 1998. From November 1997 to April 1998, Mr. Mullin was
the Vice President of Marketing and Business Development of Clarion Corporation
of America's Advanced Technology Division. From April 1997 to November 1997, Mr.
Mullin was the Vice President of Marketing and Business Development for
NetSoft/NetManage. From April 1995 to April 1997, Mr. Mullin held the position
of Strategic Planner of Internet Strategy and Marketing at FileNet Corporation.
Mr. Mullin studied Computer Science at California State University, Fullerton
and completed the Advanced Management Development in Business Administration
program offered by the University of Southern California.
Charles C. Ramsey has been our Vice President of International Sales since
January 1999. In this position, Mr. Ramsey heads up the expansion of our
international direct-sales and support teams and will complete the development
of a worldwide channel organization. From April 1998 to January 1999, Mr. Ramsey
was a Regional Field Sales Manager. From May 1989 to April 1998, Mr. Ramsey was
employed with Ziff Davis Market Intelligence, where he was most recently the
Vice President of Sales. Prior to working at Ziff Davis, Mr. Ramsey worked for
IBM Corporation for five years. Mr. Ramsey received a B.S. in Communications
from University of California, San Diego and an M.I.M. from American Graduate
School of International Management.
BOARD OF DIRECTORS AND COMMITTEES
We have established an audit committee composed of Messrs. Doyle, Machin
and Murdock. Messrs. Machin and Murdock are independent directors. This
committee reviews and supervises our financial controls, including the selection
of our auditors, reviews the books and accounts, meets with our officers
regarding our financial controls, acts upon recommendations of auditors and
takes further actions as the audit committee deems necessary to complete an
audit of our books and accounts, as well as other matters which may come before
it or as directed by the board.
We have established a compensation committee, which reviews and approves
the compensation and benefits for our executive officers, administers our stock
plans and performs other duties as may from time
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<PAGE> 45
to time be determined by the board. The compensation committee is currently
comprised of Messrs. Murdock and Machin.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
We did not have a Compensation Committee for 1998. In 1998, all decisions
regarding executive compensation were made by our board of directors. We created
our compensation committee in June 1999.
In October 1997, we sold to Mr. Smith, our Chief Executive Officer and
Chairman of the Board, 3,900,000 shares of common stock for aggregate
consideration of $2.2 million. Mr. Smith executed a promissory note for the
purchase price. This note is due and payable on April 1, 2002 and bears interest
at a rate of 6.2%. The accrued interest on this note at 1999 fiscal year end was
$326,251. As of the date of this prospectus, the entire principal amount of this
note is outstanding. This note is also secured in part by the 3,900,000 shares
of common stock.
In April 1999, we purchased an aggregate of 14,820,000 shares of our common
stock for a total purchase price of $35.0 million from trusts established by Mr.
Machin, one of the founders and a director of Quest. In addition, we entered
into a severance agreement with Mr. Machin pursuant to which we agreed to pay
him an annual fee of $200,000 per year from 1999 to 2001, pay him medical
benefits and provide for his use of a company car and related car expenses. Mr.
Machin currently owns no shares of our capital stock.
In April 1999, we sold an aggregate of 1,688,889 shares of our Series A
Preferred Stock at a price of $5.625 per share to investors affiliated with
InSight Capital Partners. The shares of Series A Preferred Stock converted into
2,533,333 shares of common stock immediately after our initial public offering.
Mr. Murdock, a director of Quest, is a General Partner of InSight Capital
Partners. Mr. Murdock has not been an officer or employee of ours at any time
since our formation.
No interlocking relationship exists between any of our executive officers
or any member of our compensation committee and any member of any other
company's board of directors or compensation committee.
DIRECTOR COMPENSATION AND OTHER ARRANGEMENTS
Directors receive no cash remuneration for serving on the board of
directors or any committee thereof. Non-employee directors are reimbursed for
reasonable expenses incurred by them in attending board and committee meetings.
Non-employee board members are also eligible for option grants pursuant to the
provisions of the automatic option grant program under our 1999 Stock Incentive
Plan. See "-- 1999 Stock Incentive Plan."
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SUMMARY COMPENSATION TABLE
The following table sets forth for the year ended December 31, 1997, 1998
and 1999, all compensation received for services rendered to Quest in all
capacities by our chief executive officer and each of the other four most highly
compensated executive officers whose salary and bonus exceeded $100,000 in 1999.
These officers are referred to in this prospectus as the "Named Executive
Officers." Does not include those individuals who would otherwise have been
includable in such table on the basis of salary and bonus earned during 1997,
1998 and 1999 who have resigned or otherwise terminated his employment during
1997, 1998 and 1999. The compensation table excludes other compensation in the
form of perquisites and other personal benefits that constitutes the lesser of
$50,000 or 10% of the total annual salary and bonus earned by each of the Named
Executive Officers in 1997, 1998 and 1999. The amount set forth in the "All
Other Compensation" column includes matching contributions under our 401(k) Plan
and expenses paid by us for car and the automobile insurance thereon.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION ------------------
--------------------- SECURITIES ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) UNDERLYING OPTIONS COMPENSATION($)
- --------------------------- ---- --------- -------- ------------------ ---------------
<S> <C> <C> <C> <C> <C>
Vincent C. Smith................. 1999 $246,875 -- -- --
Chief Executive Officer 1998 191,666 $175,000 -- --
1997 275,000 -- -- --
David M. Doyle................... 1999 246,875 -- -- $25,700
President 1998 200,000 175,000 -- --
1997 273,854 -- -- --
John J. Laskey................... 1999 155,000 15,000 22,500 --
Chief Financial Officer 1998 -- -- 180,000 --
1997 -- -- -- --
Eyal M. Aronoff.................. 1999 212,946 -- -- --
Vice President, Technology 1998 195,445 -- 39,000 --
and Engineering 1997 176,322 39,518 -- 44,137
Douglas F. Garn.................. 1999 194,500 125,000 -- --
Vice President, Worldwide Sales 1998 184,510 125,000 576,000 --
1997 -- -- -- --
</TABLE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information with respect to stock
options granted to each of the Named Executive Officers in 1999, including the
potential realizable value over the ten-year term of the options, based on
assumed rates of stock appreciation of 5% and 10%, compounded annually. These
assumed rates of appreciation comply with the rules of the Commission and do not
represent our estimate of future stock price. Actual gains, if any, on stock
option exercises will be dependent on the future performance of our common
stock. No stock appreciation rights were granted to the Named Executive Officers
during 1999.
<TABLE>
<CAPTION>
OPTIONS GRANTS IN 1999
----------------------------------------------------- POTENTIAL REALIZABLE
PERCENT OF VALUE AT ASSUMED ANNUAL
NUMBER OF TOTAL RATES OF STOCK PRICE
SECURITIES OPTIONS EXERCISE APPRECIATION FOR
UNDERLYING GRANTED TO PRICE OPTION TERM($)
OPTIONS EMPLOYEES IN PER-SHARE EXPIRATION -------------------------
NAME GRANTED(#) 1999(%) ($) DATE 5% 10%
---- ---------- ------------ --------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
John J. Laskey....... 22,500 * $80.50 12/01/09 $1,884,238 $ 4,049,358
</TABLE>
- -------------------------
* Less than one percent.
The option listed in the table was granted under our 1999 Stock Incentive
Plan, and represents the right to purchase one share of common stock. Except for
902 of Mr. Laskey's options, the options shown in this table are all
nonqualified stock options. These options vest in full upon the one year
anniversary of the grant date.
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<PAGE> 47
To the extent not already exercisable, all of these options will become
exercisable in the event of a merger in which more than 50% of our outstanding
securities are transferred to persons different from those persons who are our
shareholders prior to the merger or upon the sale of substantially all our
assets in complete liquidation or dissolution. This acceleration feature does
not apply in the event that the options are assumed by the successor corporation
in the merger or are replaced with a cash incentive program.
During 1999 we granted options to purchase up to an aggregate of 2,391,125
shares of common stock. All options were granted at an exercise price equal to
the fair market value of our common stock on the date of grant, as determined by
our board of directors.
The potential realizable value is calculated based on the ten year term of
the option at its time of grant. It is calculated based on the assumption that
the public offering price of $ per share appreciates at the indicated
annual rate compounded annually for the entire term of the option and that the
option is exercised and sold on the last day of its term for the appreciated
stock price. Actual gains, if any, on stock option exercises are dependent on
the future performance of the common stock and overall stock market conditions.
The amounts reflected in the table may not necessarily be achieved.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR-END OPTION VALUES
The following table sets forth the number and value of shares of common
stock underlying the unexercised options held by the Named Executive Officers.
No options were exercised during 1999.
<TABLE>
<CAPTION>
NUMBER OF VALUE OF UNEXERCISED
SECURITIES UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS AT OPTIONS AT
DECEMBER 31, 1999 DECEMBER 31, 1999
---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Vincent C. Smith........................ -- -- -- --
David M. Doyle.......................... -- -- -- --
John J. Laskey.......................... 36,000 166,500 $ 3,629,880 $15,003,270
Eyal M. Aronoff......................... 10,920 28,080 $ 1,102,410 $ 2,834,040
Douglas F. Garn......................... 173,700 402,300 $17,543,700 $40,632,300
</TABLE>
These values have been calculated on the basis of the fair market value of
our common stock on December 31, 1999, less the applicable exercise price per
share, multiplied by the number of shares underlying such options.
1999 STOCK INCENTIVE PLAN
Introduction. Our 1999 Stock Incentive Plan is intended to serve as the
successor equity incentive program to our 1998 Stock Option/Stock Issuance Plan.
The 1999 Stock Incentive Plan was adopted by the board and subsequently approved
by the shareholders in June 1999. The 1999 Stock Incentive Plan became effective
upon its adoption by the board. On August 12, 1999, all outstanding options
under our predecessor plan were incorporated into the 1999 Stock Incentive Plan,
and no further option grants were made under the predecessor plan. The
incorporated options will continue to be governed by their existing terms,
unless the plan administrator elects to extend one or more features of the 1999
Incentive Plan to those options. Except as otherwise noted below, the
incorporated options have substantially the same terms as will be in effect for
grants made under the Discretionary Option Grant Program of the 1999 Stock
Incentive Plan.
Share Reserve. 7,493,400 shares of common stock have been authorized for
issuance under the 1999 Stock Incentive Plan. This share reserve which was
2,214,820 at December 31, 1999 consists of the number of shares that remain
available for issuance under the predecessor plan and shares of common stock
subject to outstanding options thereunder. No participant in the 1999 Stock
Incentive Plan may be granted stock options, separately exercisable stock
appreciation rights and direct stock issuances for more than 500,000 shares of
common stock in total per calendar year.
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<PAGE> 48
Programs. The 1999 Stock Incentive Plan is divided into five separate
programs:
- the discretionary option grant program under which eligible individuals
in Quest's employ may be granted options to purchase shares of common
stock at an exercise price determined by the plan administrator;
- the stock issuance program under which such individuals may be issued
shares of common stock directly, through the purchase of such shares at a
price determined by the plan administrator or as a bonus tied to the
performance of services;
- the salary investment option grant program which may, at the plan
administrator's discretion, be activated for one or more calendar years
and, if so activated, will allow executive officers and other highly
compensated employees the opportunity to apply a portion of their base
salary to the acquisition of special below-market stock option grants;
- the automatic option grant program under which option grants will
automatically be made at periodic intervals to eligible non-employee
board members to purchase shares of common stock at an exercise price
equal to 100% of the fair market value of those shares on the grant date;
and
- the director fee option grant program which may, in the plan
administrator's discretion, be activated for one or more calendar years
and, if so activated, will allow non-employee board members the
opportunity to apply a portion of the annual retainer fee otherwise
payable to them in cash each year to the acquisition of special
below-market option grants.
Administration. The discretionary option grant program and the stock
issuance program will be administered by the compensation committee of the board
of directors. This committee will determine which eligible individuals are to
receive option grants or stock issuances under those programs, the time or times
when such option grants or stock issuances are to be made, the number of shares
subject to each such grant or issuance, the status of any granted option as
either an incentive stock option or a non-statutory stock option under the
Federal tax laws, the vesting schedule to be in effect for the option grant or
stock issuance and the maximum term for which any granted option is to remain
outstanding. The compensation committee will also have the authority to select
the executive officers and other highly compensated employees who may
participate in the salary investment option grant program in the event that
program is activated for one or more calendar years.
Plan Features. Our 1999 Stock Incentive Plan includes the following
features:
- The exercise price for any options granted under the plan may be paid in
cash or in shares of common stock valued at fair market value on the
exercise date. The option may also be exercised through a same-day sale
program without any cash outlay by the optionee.
- The compensation committee will have the authority to cancel outstanding
options under the discretionary option grant program in return for the
grant of new options for the same or different number of option shares
with an exercise price per share based upon the fair market value of our
common stock on the new grant date.
- Stock appreciation rights may be issued under the discretionary option
grant program. Such rights will provide the holders with the election to
surrender their outstanding options for an appreciation distribution from
us equal to the fair market value of the vested shares of common stock
subject to the surrendered option less the exercise price payable for
those shares. We may make the payment in cash or in shares of common
stock.
Change in Control. The 1999 Stock Incentive Plan includes the following
change in control provisions which may result in the accelerated vesting of
outstanding option grants and stock issuances:
- In the event that Quest is acquired by merger or asset sale or a
board-approved sale of more than fifty percent of the outstanding stock
by our shareholders, each outstanding option under the discretionary
option grant program which is not assumed or continued by the successor
corporation will immediately become exercisable for all the option
shares, and all unvested shares will
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<PAGE> 49
immediately vest, except to the extent we repurchase rights with respect
to those shares are to be assigned to the successor corporation.
- The plan administrator will have complete discretion to grant one or more
options which will become exercisable for all the option shares in the
event those options are assumed in the acquisition but the optionee's
service with us or the acquiring entity is subsequently terminated. The
vesting of outstanding shares under the 1999 Stock Incentive Plan may be
accelerated upon similar terms and conditions.
- The plan administrator may also grant options which will immediately vest
upon our acquisition by another entity, whether or not those options are
assumed by the successor corporation.
- The plan administrator may grant options and structure repurchase rights
so that the shares subject to those options or repurchase rights will
immediately vest in connection with a successful tender offer for more
than fifty percent (50%) of the outstanding voting stock or a change in
the majority of our board of directors through one or more contested
elections. Such accelerated vesting may occur either at the time of such
transaction or upon the subsequent termination of the individual's
service.
Salary Investment Option Grant Program. In the event the compensation
committee decides to put this program into effect for one or more calendar
years, each of our executive officers and other highly compensated employees
selected for participation may elect to reduce his or her base salary for that
calendar year by a specified dollar amount not less than $10,000 nor more than
$75,000. Each selected individual who makes such an election will automatically
be granted, on the first trading day in January of the calendar year for which
that salary reduction is to be in effect, an option to purchase that number of
shares of common stock determined by dividing the salary reduction amount by
two-thirds of the fair market value per share of common stock on the grant date.
The option will be exercisable at a price per share equal to one-third of the
fair market value of the option shares on the grant date. A compensation expense
will be recorded for the amount of the salary reduction. As a result, the total
spread on the option shares at the time of grant will be equal to the amount of
salary invested in that option. The option will vest and become exercisable in a
series of twelve (12) equal monthly installments over the calendar year for
which the salary reduction is to be in effect and will be subject to full and
immediate vesting upon certain changes in the ownership or control of Quest.
Automatic Option Grant Program. Each individual who first becomes a
non-employee board member at any time after the completion of this offering will
automatically receive an option grant for 25,000 shares on the date such
individual joins the board, provided such individual has not been in the prior
employ of Quest. In addition, on the date of each annual shareholders meeting
beginning with the 2001 annual shareholders meeting, each non-employee board
member who has served as a non-employee board member since the date of the last
annual shareholders meeting will automatically be granted an option to purchase
7,500 shares of common stock.
Each automatic grant will have a term of ten years, subject to earlier
termination following the optionee's cessation of board service. The initial
25,000 share option will be immediately exercisable for all of the option
shares; however, any unvested shares purchased under the option will be subject
to repurchase by us, at the exercise price paid per share, should the optionee
cease board service prior to vesting in those shares. The shares subject to each
25,000 share automatic option grant will vest over a four (4) year period in
successive equal annual installments upon the individual's completion of each
year of board service over the four (4) year period measured from the option
grant date. However, the shares subject to each such automatic grant will
immediately vest in full upon certain changes in control or ownership of Quest
or upon the optionee's death or disability while a board member. Each 7,500
share automatic option grant will be immediately exercisable and fully vested on
the option grant date.
Director Fee Option Grant Program. If this program is put into effect in
the future, then each non-employee board member may elect to apply all or a
portion of any annual retainer fee otherwise payable in cash to the acquisition
of a below-market option grant. The option grant will automatically be
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<PAGE> 50
made on the first trading day in January in the year for which the retainer fee
would otherwise be payable in cash. The option will have an exercise price per
share equal to one-third of the fair market value of the option shares on the
grant date, and the number of shares subject to the option will be determined by
dividing the amount of the retainer fee applied to the program by two-thirds of
the fair market value per share of common stock on the grant date. As a result,
the option will be structured so that the fair market value of the option shares
on the grant date less the aggregate exercise price payable for those shares
will be equal to the portion of the retainer fee invested in that option. The
option will become exercisable in a series of twelve (12) equal monthly
installments over the calendar year for which the election is to be in effect.
However, the option will become immediately exercisable for all the option
shares upon certain changes in the ownership or control of Quest or the death or
disability of the optionee while serving as a board member.
Limited Stock Appreciation Rights. Limited stock appreciation rights will
automatically be included as part of each grant made under the automatic option
grant, salary investment option grant and director fee option grant programs and
may be granted to one or more of our officers as part of their option grants
under the discretionary option grant program. Options with such a limited stock
appreciation right may be surrendered to Quest upon the successful completion of
a hostile tender offer for more than 50% of the Quest outstanding voting stock.
In return for the surrendered option, the optionee will be entitled to a cash
distribution from us in an amount per surrendered option share based on the
highest price per share of common stock paid in connection with the tender
offer.
Amendment. The board may amend or modify the 1999 Stock Incentive Plan at
any time, subject to any required shareholder approval. The 1999 Stock Incentive
Plan will terminate no later than June 8, 2009.
1999 EMPLOYEE STOCK PURCHASE PLAN
Introduction. The 1999 Employee Stock Purchase Plan was adopted by the
board and approved by the shareholders in June 1999 and became effective on
August 12, 1999. The 1999 Employee Stock Purchase Plan is designed to allow our
eligible employees and the employees of our participating subsidiaries to
purchase shares of common stock, at semi-annual intervals, through their
periodic payroll deductions under the 1999 Employee Stock Purchase Plan.
Share Reserve. 600,000 shares of common stock have been reserved for
issuance, of which 119,097 shares have been issued as of February 2, 2000.
Purchase Periods. The plan has a series of successive purchase periods,
each with a maximum duration of six months. The initial purchase period began on
August 12, 1999 and ended on the last business day in January 2000. Thereafter,
purchase periods run from the first business day in February to the last
business day in July each year, and from the first business day in August to the
last business day in January of the following year.
Eligible Employees. Individuals who are scheduled to work more than 20
hours per week for more than 5 calendar months per year on the start date of any
purchase period may join the plan on such start date.
Payroll Deductions. A participant may contribute up to 15% of his or her
cash earnings, and the accumulated payroll deductions will be applied to the
purchase of shares on each semi-annual purchase date. The purchase price per
share will be equal to 85% of the fair market value of the common stock on the
start date of the purchase period or, if lower, the fair market value on the
semi-annual purchase date. Semi-annual purchase dates will occur on the last
business day of January and July each year. In no event, however, may any
participant purchase more than 600 shares on any semi-annual purchase date.
Change in Control. In the event Quest is acquired by merger or asset sale,
all outstanding purchase rights will automatically be exercised immediately
prior to the effective date of the acquisition. The purchase price will be equal
to 85% of the fair market value per share of common stock on the
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<PAGE> 51
participant's entry date into the offering period in which such acquisition
occurs or, if lower, the fair market value per share of common stock immediately
prior to such acquisition.
Termination/Amendment. The 1999 Employee Stock Purchase Plan will
terminate on the last business day of July 2009. The board may at any time
alter, suspend or discontinue the plan. However, certain amendments to the plan
may require shareholder approval.
Registration Statement on Form S-8. On November 22, 1999, we filed a
registration statement on Form S-8 with the Commission pursuant to which we
registered 7,493,400 shares of common stock issued or issuable upon exercise of
options granted under the 1999 Stock Incentive Plan, 500,000 shares of common
stock issuable under the 1999 Employee Stock Purchase Plan and 100,000 shares of
common stock issuable under the International Employee Stock Purchase Plan. This
registration statement became effective immediately upon filing. The possible
sale of a significant number of such shares by the holders thereof may have an
adverse effect on the price of our common stock.
FOGLIGHT SOFTWARE, INC. 1998 STOCK OPTION PLAN
In connection with the Foglight merger, we assumed the outstanding options
issued under the Foglight Software, Inc. 1998 Stock Option Plan and reserved
25,602 shares of our common stock for issuance upon exercise of these assumed
options. On February 4, 2000, we filed a registration statement on Form S-8 with
the Commission pursuant to which we registered 25,602 shares of common stock
issuable upon exercise of these assumed options. This registration statement
became effective immediately upon filing.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Our Amended and Restated Articles of Incorporation limit the personal
liability of our directors for monetary damages to the fullest extent permitted
by the California General Corporation Law. Under California law, a director's
liability to a company or its shareholders may not be limited:
- for acts or omissions that involve intentional misconduct or a knowing
and culpable violation of law;
- for acts or omissions that a director believes to be contrary to the best
interests of the company or its shareholders or that involve the absence
of good faith on the part of the director;
- for any transaction from which a director derived an improper personal
benefit;
- for acts or omissions that show a reckless disregard for the director's
duty to the company or its shareholders in circumstances in which the
director was aware, or should have been aware, in the ordinary course of
performing the director's duties, of a risk of serious injury to the
company or its shareholders;
- for acts or omissions that constitute an unexcused pattern of inattention
that amounts to an abdication of the director's duty to the company or
its shareholders;
- under Section 310 of the California General Corporation Law concerning
contacts or transactions between the company and a director; or
- under Section 316 of the California General Corporation Law concerning
directors' liability for improper dividends, loans and guarantees.
The limitation of liability does not affect the availability of injunctions and
other equitable remedies available to our shareholders for any violation by a
director of the director's fiduciary duty to us or our shareholders.
Our Articles of Incorporation also include an authorization for us to
indemnify our "agents," as defined in Section 317 of the California General
Corporation Law, through bylaw provisions, by agreement or otherwise, to the
fullest extent permitted by law. Pursuant to this provision, our Amended and
Restated Bylaws provide for indemnification of our directors, officers and
employees. In addition, we may, at our
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<PAGE> 52
discretion, provide indemnification to persons whom we are not obligated to
indemnify. The Amended and Restated Bylaws also allow us to enter into indemnity
agreements with individual directors, officers, employees and other agents.
Indemnity agreements have been entered into with all directors and certain
executive officers and provide the maximum indemnification permitted by law. We
also currently maintain directors' and officers' liability insurance. These
agreements, together with our Amended and Restated Bylaws and Amended and
Restated Articles of Incorporation, may require us, among other things, to
indemnify our directors and executive officers, other than for liability
resulting from willful misconduct of a culpable nature, and to advance expenses
to them as they are incurred, provided that they undertake to repay the amount
advanced if it is ultimately determined by a court that they are not entitled to
indemnification. Section 317 of the California General Corporation Law and our
Amended and Restated Bylaws and our indemnification agreements make provision
for the indemnification of officers, directors and other corporate agents in
terms sufficiently broad to indemnify such persons, under certain circumstances,
for liabilities, including reimbursement of expenses incurred, arising under the
Securities Act. We are not currently aware of any pending litigation or
proceeding involving any of our directors, officers, employees or agents in
which indemnification will be required or permitted. Moreover, we are not
currently aware of any threatened litigation or proceeding that might result in
a claim for such indemnification. We believe that the foregoing indemnification
provisions and agreements are necessary to attract and retain qualified persons
as directors and executive officers.
CERTAIN TRANSACTIONS
SALES OF PREFERRED STOCK
In April 1999, we sold an aggregate of 1,688,889 shares of our Series A
Preferred Stock at a price of $5.625 per share to investors affiliated with
InSight Capital Partners. Mr. Murdock, a director of Quest, is a General Partner
of InSight Capital Partners. In April 1999 we also sold 977,778 shares of Series
A Preferred Stock and 1,777,778 shares of our Series B Redeemable Preferred
Stock to UBS Capital LLC at a price of $5.625 per share. The proceeds from the
issuance of the Series A and Series B Preferred Stock was used to repurchase
shares of our common stock held by Mr. Machin, one of our co-founders and
directors. See "-- Repurchase of Shares from and Severance Arrangement with
Director."
Immediately after our initial public offering, all of the 2,666,667 shares
of Series A Preferred Stock were converted into 4,000,000 shares of common
stock. Such holders of shares of common stock issued upon the conversion of the
Series A Preferred Stock are entitled to certain registration rights with
respect to the common stock issued upon conversion thereof. See "Description of
Capital Stock -- Registration Rights."
We used approximately $10.6 million of the net proceeds of our initial
public offering to redeem the Series B Redeemable Preferred Stock, including all
accrued, cumulative dividends thereon.
The following table summarizes the shares of preferred stock purchased by
our executive officers, directors and five percent shareholders and persons
associated with them since January 1996. The number of total shares on an
as-converted basis reflects the 1-for-1.5 conversion ratio for each share of
Series A Preferred Stock. The entities affiliated with InSight Capital Partners
consist of InSight Capital Partners II, L.P., InSight Capital Partners (Cayman)
II, L.P. and WI Software Investors LLC.
<TABLE>
<CAPTION>
SERIES B
SERIES A REDEEMABLE TOTAL SHARES ON AN
PREFERRED PREFERRED AS-CONVERTED AGGREGATE
INVESTOR STOCK STOCK BASIS CONSIDERATION
- -------- --------- ---------- ------------------ -------------
<S> <C> <C> <C> <C>
Entities affiliated with InSight
Capital Partners.................... 1,688,889 -- 2,533,333 $ 9,500,000
UBS Capital LLC....................... 977,778 1,777,778 1,466,667 15,500,000
</TABLE>
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<PAGE> 53
REPURCHASE OF SHARES FROM AND SEVERANCE ARRANGEMENT WITH DIRECTOR
In April 1999 we purchased an aggregate of 14,820,000 shares of our common
stock for a total purchase price of $35.0 million from trusts established by Mr.
Machin, one of the founders and a director of Quest. During late 1998, Mr.
Machin sought to sell his stock and liquidate his position in Quest. Mr. Machin
and the Company negotiated at arms-length to determine the pricing of the
repurchase and Mr. Machin ultimately agreed upon a price based on the fact that
he could obtain cash immediately. In addition, we entered into a severance
agreement with Mr. Machin to pay him an annual fee of $200,000 per year from
1999 to 2001 and to provide for his use of a company car, related car expenses
and medical benefits. There was no prior agreement that obligated us to
consummate the repurchase transaction with Mr. Machin. Currently, Mr. Machin
does not own any shares of our capital stock.
ACQUISITION OF R*TECH SYSTEMS, INC. AND SALE OF STOCK TO OFFICER
In March 1996, we acquired R*Tech Systems, Inc., the sole shareholder of
which was Mr. Aronoff, our current Vice President, Engineering and Technology,
through a merger of R*Tech with and into Quest. In the merger Quest issued
1,950,000 shares of common stock to Mr. Aronoff. Mr. Aronoff also entered into
an employment agreement with us for a term of 24 months, under which he received
an annual salary of $85,000, the right to receive commissions on the sale of
certain products, the right to receive bonus payments of up to $400,000 upon the
achievement of specified performance milestones, and an option to purchase up to
2.5% of our outstanding capital stock.
In April 1998, Mr. Aronoff purchased 975,000 shares of common stock under
the option for a per share purchase price of $.769 and a total purchase price of
$750,000, for which Mr. Aronoff executed a promissory note. The note has a term
of four years, bears interest at the rate of 5.7% per annum, and up to 25% of
the original principal amount of the note may be prepaid in each year of the
four-year term. The entire amount due under the note may be prepaid upon a sale
or merger of Quest or at any time Mr. Smith no longer serves as our chief
executive officer. During the year ended December 31, 1999, Mr. Aronoff made
principal payments on the note of $230,000. The accrued interest on this note at
1999 fiscal year end was $68,984.
Mr. Aronoff's two-year employment agreement expired in March 1998.
SALE OF COMMON STOCK TO MR. SMITH
In October 1997, we sold to Mr. Smith, our Chief Executive Officer,
3,900,000 shares of common stock for aggregate consideration of $2.2 million.
Mr. Smith executed a promissory note for the purchase price. See
"Management -- Compensation Committee Interlocks and Insider Participation."
TRANSACTIONS WITH DIRECTORS AND OFFICERS
In June 1998, we granted options to two of our officers, Eyal Aronoff and
Douglas Garn, to purchase 24,000 and 450,000 shares of our common stock,
respectively, at an exercise price of $1.00 per share. In July 1998, we granted
options to Mr. Garn and Terence Mullin and Charles Ramsey, officers, to purchase
126,000, 75,000 and 150,000 shares of our common stock, respectively, at an
exercise price of $1.00. In September 1998, we granted options to Mr. Aronoff
and to John Laskey, an officer, to purchase 15,000 and 180,000 shares of our
common stock, respectively, at an exercise price of $1.17 per share. In January
1999, we granted options to purchase 120,000 shares of our common stock at an
exercise price of $2.37 per share to Carla Fitzgerald, an officer.
In January 1999, we granted options to purchase 30,000 and 15,000 shares of
our common stock at an exercise price of $2.37 per share to Mr. Mullin and Mr.
Ramsey, respectively. In December 1999, we granted options to purchase 22,500
shares of our common stock at an exercise price of $80.50 per share to Mr.
Laskey.
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<PAGE> 54
OTHER RELATED PARTY TRANSACTIONS
We have entered into an indemnification agreement with certain of our
executive officers and our directors containing provisions that may require us,
among other things, to indemnify our officers and our directors against certain
liabilities that may arise by reason of their status or service as officers or
directors, other than liabilities arising from willful misconduct of a culpable
nature, and to advance expenses incurred as a result of any proceeding against
them as to which they could be indemnified. See "Management -- Limitation of
Liability and Indemnification."
We believe that all of the transactions set forth above were made on terms
no less favorable to us than could have been otherwise obtained from
unaffiliated third parties. All future transactions, including loans, if any,
between us and our officers, directors and principal shareholders and their
affiliates and any transactions between us and any entity with which our
officers, directors or principal shareholders are affiliated will be approved by
a majority of the board of directors, including a majority of the independent
and disinterested outside directors of the board of directors and will be on
terms no less favorable to us than could be obtained from unaffiliated third
parties.
PRINCIPAL AND SELLING SHAREHOLDERS
The table below sets forth information regarding the beneficial ownership
of our common stock as of February 16, 2000 by the following individuals or
groups:
- each person or entity who is known by Quest to own beneficially more than
five percent of our outstanding common stock;
- each of the Named Executive Officers;
- each director;
- all directors and executive officers as a group, which for us is seven
persons; and
- the selling shareholders.
Applicable percentage ownership in the following table is based on the
number of shares of common stock outstanding as of February 16, 2000.
In addition, information presented in the table below assumes no exercise of the
underwriters' over-allotment option.
Beneficial ownership is determined in accordance with the rules of the
Commission and generally includes voting or investment power with respect to
securities. The number of shares beneficially owned and the percentage of shares
beneficially owned are based on 40,283,920 shares of common stock outstanding as
of February 16, 2000 and 41,407,720 shares of common stock outstanding upon
consummation of this offering. Shares of common stock subject to options
currently exercisable or exercisable within 60 days of February 16, 2000 are
deemed to be outstanding and to be beneficially owned by the person holding
these options for the purpose of computing the number of shares beneficially
owned and the percentage of the person or entity holding these securities, but
are not deemed outstanding for the purpose of computing the percentage ownership
of any other person or entity. Unless otherwise indicated, the principal address
of each of the shareholders below is c/o Quest Software, Inc., 8001 Irvine
Center Drive, Irvine, California 92618.
<TABLE>
<CAPTION>
NUMBER OF SHARES NUMBER OF SHARES
BENEFICIALLY OWNED BENEFICIALLY OWNED
PRIOR TO THIS OFFERING AFTER THIS OFFERING
----------------------- SHARES TO ------------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENTAGE BE SOLD NUMBER PERCENTAGE
------------------------ ---------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Vincent C. Smith(1)................. 18,084,174 44.9% 0 18,084,174 43.7%
David M. Doyle...................... 7,250,657 18.0 250,000 7,000,657 16.9
Eyal M. Aronoff(2).................. 2,940,990 7.3 250,000 2,690,990 6.5
Jerry Murdock(3).................... 2,785,201 6.9 0 2,785,201 6.7
John J. Laskey(4)................... 59,400 * 18,000 41,400 *
</TABLE>
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<PAGE> 55
<TABLE>
<CAPTION>
NUMBER OF SHARES NUMBER OF SHARES
BENEFICIALLY OWNED BENEFICIALLY OWNED
PRIOR TO THIS OFFERING AFTER THIS OFFERING
----------------------- SHARES TO ------------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENTAGE BE SOLD NUMBER PERCENTAGE
------------------------ ---------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Douglas F. Garn(5).................. 248,580 * 20,000 228,580 *
Doran G. Machin.....................
InSight Capital Partners(7)......... 2,520,001 6.3 0 2,520,001 6.1
UBS Capital LLC(8).................. 1,466,667 3.6 170,000 1,296,667 3.1
WI Software Investors, LLC.......... 1,200,000 3.0 600,000 600,000 1.4
Mohr Davidow Ventures IV, L.P....... 253,728 * 126,864 126,864 *
Daniel Benveniste(9)................ 155,168 * 3,800 151,368 *
Gal Bar-Or.......................... 145,471 * 2,900 142,571 *
Robert Fanini....................... 143,762 * 43,129 100,633 *
James Jordan........................ 104,539 * 41,816 62,723 *
Daniel Callahan..................... 88,274 * 17,655 70,619 *
Weiss Peck & Greer Venture 38,546
Associates IV, L.L.C.............. 77,091 * 38,545 *
WPG Enterprise Fund III, L.L.C...... 68,195 * 34,097 34,098 *
Westpool Investment Trust........... 44,540 * 22,270 22,270 *
Lion Investments Limited............ 44,094 * 22,047 22,047 *
Dennis Blay(10)..................... 16,942 * 930 16,012 *
MDV IV Entrepreneurs' Network Fund, 6,675
L.P............................... 13,350 * 6,675 *
Weiss Peck & Greer Venture 4,920
Associates IV, Cayman, L.P........ 9,839 * 4,919 *
Roger Tharp(11)..................... 7,636 * 500 7,136 *
WPG Information Sciences 1,531
Enterpreneur Fund, L.P............ 3,062 * 1,531 *
Joseph Hnilo(12).................... 1,504 * 300 1,204 *
Weber Family Trust.................. 445 * 223 223 *
All other selling shareholders
together beneficially own less
than 1% of the total outstanding
shares prior to this offering
( persons)(13)................... 123,800
All executive officers and directors 30,831,002
as a group (7 persons)(6)......... 31,369,002 77.5 538,000 73.9
</TABLE>
- -------------------------
* Less than 1%.
(1) Includes 38,100 shares held in the name of McNair Smith and 38,100 shares
held in the name of McKenzie Smith, Mr. Smith's minor children.
(2) Includes 4,224 shares held in the name of Aely Sollie Aronoff and 17,223
shares held in the name of Leya Jullie Aronoff, Mr. Aronoff's minor
children. Also includes 15,990 shares issuable upon the exercise of stock
options that are exercisable within 60 days of February 16, 2000.
(3) Includes 265,200 shares of common stock owned directly by Mr. Murdock. Also
includes 1,188,000 shares of common stock held by InSight Capital Partners
II, L.P., 132,001 shares of common stock held by InSight Capital Partners
(Cayman) II, L.P., and 1,200,000 shares of common stock held by WI Software
Investors LLC. Mr. Murdock is a General Partner of InSight Capital Partners
and a director of Quest. Mr. Murdock disclaims beneficial ownership of the
shares held by InSight Capital Partners II, L.P., InSight Capital Partners
(Cayman) II, L.P., and WI Software Investors LLC, except to the extent of
his indirect pecuniary interests therein.
(4) Consists of 59,400 shares issuable upon the exercise of stock options that
are exercisable within 60 days of February 16, 2000.
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<PAGE> 56
(5) Consists of 248,580 shares issuable upon the exercise of stock options that
are exercisable within 60 days of February 16, 2000.
(6) Consists of 323,970 shares issuable upon the exercise of stock options that
are exercisable within 60 days of February 16, 2000. See Notes 2, 4 and 5.
See also Notes 1 and 3.
(7) Includes 132,001 shares of common stock held by InSight Capital Partners
(Cayman) II, L.P., 1,188,000 shares of common stock held by InSight Capital
Partners II, L.P., and 1,200,000 shares of common stock held by WI Software
Investors LLC. InSight Capital Partners II, L.P. is a limited partnership
controlled by its general partner, InSight Venture Associates II, LLC,
which has voting and dispositive powers over its shares of Series A
Preferred Stock. InSight Capital Partners (Cayman) II, L.P. is a limited
partnership controlled by its general partner, InSight Venture Associates
(Cayman) II, a Cayman Island company, which has voting and dispositive
powers over its shares of Series A Preferred Stock. The managing members of
InSight Venture Associates II, LLC and InSight Venture Associates (Cayman)
II are Jeff Horing, Jerry Murdock and Ramanan Raghavendran.
(8) UBS is a limited liability company controlled by a board of managers who
have voting and dispositive powers over UBS' shares of common stock. The
board of managers consists of Justin Maccarone, Michael Green and Marc
Unger.
(9) Includes 1,071 shares of common stock which are subject to our right of
repurchase which lapses on April 28, 2003. Also includes 15,517 shares of
common stock which are subject to an escrow which expires of October 7,
2000.
(10) Includes 7,875 shares of common stock which are subject to our right of
repurchase which lapses on June 24, 2003. Also includes 1,694 shares of
common stock which are subject to an escrow which expires on October 7,
2000.
(11) Includes 3,056 shares of common stock which are subject to our right of
repurchase which lapses on April 28, 2003. Also includes 764 shares of
common stock which are subject to an escrow which expires on October 7,
2000.
(12) Includes 11,282 shares of common stock which are subject to our right of
repurchase which lapses on May 13, 2003. Also includes 1,504 shares of
common stock which are subject to an escrow which expires on October 7,
2000.
(13) We will sell any shares not sold by this group of selling shareholders.
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<PAGE> 57
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 75,000,000 shares of common stock
and 5,000,000 shares of undesignated preferred stock. The following description
of our capital stock is subject to and qualified by our Amended and Restated
Articles of Incorporation and Bylaws and by the provisions of applicable
California law.
COMMON STOCK
As of December 31, 1999, there were 38,905,344 shares of common stock
outstanding held of record by 59 shareholders, and options to purchase an
aggregate of 5,251,307 shares of common stock were also outstanding. There will
be 39,905,344 shares of common stock outstanding, assuming no exercise of the
underwriters' option to purchase additional shares, additional issuances of
shares of common stock in connection with acquisitions after December 31, 1999,
exercise of outstanding options under the stock plans after December 31, 1999 or
exercise of warrants outstanding after the closing of this offering, after
giving effect to the sale of the shares of common stock to the public offered in
this prospectus.
The holders of common stock are entitled to one vote per share on all
matters to be voted upon by the shareholders. Subject to preferences that may be
applicable to any outstanding preferred stock that may come into existence, the
holders of common stock are entitled to receive ratably those dividends, if any,
as may be declared from time to time by the board of directors out of funds
legally available for dividends. See "Dividend Policy." In the event of our
liquidation, dissolution or winding up, the holders of common stock are entitled
to share ratably in all assets remaining after payment of liabilities, subject
to prior distribution rights of preferred stock then outstanding, if any. The
common stock has no preemptive or conversion rights or other subscription
rights. There are no redemption or sinking fund provisions applicable to the
common stock. All outstanding shares of common stock are fully paid and
nonassessable, and the shares of common stock to be outstanding upon completion
of this offering will be fully paid and nonassessable.
PREFERRED STOCK
Our board of directors is authorized, without further shareholder approval,
to issue from time to time up to an aggregate of 5,000,000 shares of preferred
stock in one or more series and to fix or alter the designations, preferences,
rights and any qualifications, limitations or restrictions of the shares of each
such series thereof, including the dividend rights, dividend rates, conversion
rights, voting rights, terms of redemption, redemption price or prices,
liquidation preferences and the number of shares constituting any series or
designations of such series. We have no present plans to issue any shares of
preferred stock. The rights of the holders of common stock will be subject to,
and may be adversely affected by, the rights of the holders of any preferred
stock that may be issued in the future. Any series of preferred stock may
possess voting, dividend, liquidation and redemption rights superior to that of
the common stock. Issuance of a new series of preferred stock, while providing
desirable flexibility in connection with possible acquisitions and other
corporate purposes, could have the effect of entrenching our board of directors
and making it more difficult for a third party to acquire, or discourage a third
party from acquiring, a majority of our outstanding voting stock. We have no
present plans to issue any shares of or designate any series of preferred stock.
We believe that the ability to issue preferred stock without the expense
and delay of a special shareholders' meeting will provide us with increased
flexibility in structuring possible future financings and acquisitions, and in
meeting other corporate needs that might arise. This also permits the board of
directors to issue preferred stock containing terms which could impede the
completion of a takeover attempt, subject to certain limitations imposed by the
securities laws. The board of directors will make any determination to issue
such shares based on its judgment as to the best interests of Quest and our
shareholders at the time of issuance. This could discourage an acquisition
attempt or other transaction which shareholders might believe to be in their
best interests or in which they might receive a premium for their stock over the
then market price of the stock.
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<PAGE> 58
REGISTRATION RIGHTS
The holders of an aggregate of 4,000,000 shares of common stock are
entitled to certain rights with respect to the registration of such shares under
the Securities Act. Under the terms of the registration rights agreements, if we
propose to register any of our securities under the Securities Act, either for
our own account or for the account of other security holders exercising
registration rights, these holders are entitled to notice of such registration
and are entitled to include shares of common stock in the registration. The
rights are subject to conditions and limitations, among them the right of the
underwriters of an offering subject to the registration to limit the number of
shares included in such registration. Holders of these rights may also require
us to file a registration statement under the Securities Act at our expense with
respect to their shares of common stock, and we are required to use our best
efforts to effect such registration, subject to certain conditions and
limitations. Furthermore, shareholders with registration rights may require us
to file additional registration statements on Form S-3, subject to conditions
and limitations.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is U.S. Stock
Transfer Corporation.
LISTING
Our common stock is quoted on the Nasdaq National Market under the trading
symbol "QSFT."
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<PAGE> 59
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of substantial amounts of common stock, including shares
issued upon exercise of outstanding options or warrants, in the public market
could adversely affect prevailing market prices from time to time. Furthermore,
since only a limited number of shares will be available for sale shortly after
this offering because of certain contractual and legal restrictions on resale,
as described below, sales of substantial amount of common stock in the public
market after the restrictions lapse could adversely affect the prevailing market
price and our ability to raise equity capital in the future.
Upon completion of this offering, we will have 39,905,344 shares of common
stock outstanding assuming the issuance of 1,000,000 shares of common stock
offered, no exercise of the underwriters' over-allotment option, no exercise of
outstanding stock options after December 31, 1999 and no issuances of additional
shares of common stock in connection with acquisitions after December 31, 1999.
Of the total outstanding shares of common stock, the 2,800,000 shares sold in
this offering will be freely tradable without restriction or further
registration under the Securities Act, except that any shares purchased by our
"affiliates," as that term is defined in Rule 144 under the Securities Act, may
generally only be sold pursuant to an effective registration statement under the
Securities Act or in compliance with the limitations of Rule 144 as described
below. In addition, the 5,060,000 shares of common stock that we sold in our
initial public offering are freely tradeable.
32,104,783 shares of common stock are "restricted securities" as that term
is defined in Rule 144, 54,900 shares are freely tradeable under Rule 144(k)
5,085,935 shares may be freely sold pursuant to Registration Statements on Form
S-8, and 27,810 shares may be sold pursuant to Rule 701. All of these restricted
securities, 144(k) shares, S-8 shares and Rule 701 shares will be available for
sale in the public market following the expiration of the 90 day lock-up
agreement further described below. If the underwriter elects to waive the
lock-up period for any reason, these shares will be available for sale under
Rule 144, Rule 144(k), Rule 701 or pursuant to Form S-8 prior to that time.
The holders of 4,000,000 restricted shares are entitled to certain rights
with respect to registration of these shares for sale in the public market.
Registration of such shares under the Securities Act would result in such shares
becoming freely tradeable without restriction under the Securities Act, except
for shares purchased by our affiliates. If these holders sell in the public
market these sales would have a material adverse effect on the market price of
the common stock. Certain of these shares will be sold in this offering.
Quest, our officers, directors, shareholders, and most of our optionholders
have entered into contractual "lock-up" agreements generally providing that,
subject to certain limited exceptions, they will not offer, pledge, sell, offer
to sell, contract to sell, sell any option or contract to purchase, purchase any
option to sell, grant any option, right or warrant to purchase, or otherwise
transfer or dispose of, directly or indirectly, any of the shares of common
stock or any securities convertible into, or exercisable or exchangeable for,
common stock owned by them, or enter into any swap or other arrangement that
transfers to another, in whole or in part, any of the economic consequences of
ownership of the common stock, for a period of 90 days after the date of this
prospectus, without the prior written consent of FleetBoston Robertson Stephens,
except that we may, without such consent, grant options and sell shares pursuant
to our stock plans. FleetBoston Robertson Stephens may, in its sole discretion
and at any time without notice, release all or any portion of the securities
subject to lock-up agreements. FleetBoston Robertson Stephens currently has no
plans to release any portion of the securities subject to lock-up agreements.
When determining whether or not to release shares from the lock-up agreements,
FleetBoston Robertson Stephens will consider, among other factors, the
shareholder's reasons for requesting the release, the number of shares for which
the release is being requested and market conditions at the time. Following the
expiration of the 90-day lock-up period, the restricted securities will be
available for sale in the public market subject to compliance with Rule 144 or
Rule 701.
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<PAGE> 60
In general, under Rule 144 as currently in effect, any affiliate of ours or
a person, or persons whose shares are aggregated, who has beneficially owned
restricted shares for at least one year, including the holding period of any
prior owner other than a person who may be deemed an affiliate of ours, is
entitled to sell within any three-month period a number of shares of common
stock that does not exceed the greater of:
- one percent of the then-outstanding shares of common stock (approximately
399,053 shares after giving effect to this offering); and
- the average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
Form 144 notice with respect to this sale.
Sales under Rule 144 of the Securities Act are subject to certain
restrictions relating to manner of sale, notice and the availability of current
public information about us. Under Rule 144(k), a person who is not an affiliate
of ours at any time during the 90 days preceding a sale, and who has
beneficially owned shares for at least two years, including the holding period
of any prior owner other than a person who may be deemed an affiliate of ours,
would be entitled to sell these shares immediately following this offering
without regard to the volume limitations, manner of sale provisions or notice or
other requirements of Rule 144 of the Securities Act. However, the transfer
agent may require an opinion of counsel that a proposed sale of shares comes
within the terms of Rule 144 of the Securities Act prior to effecting a transfer
of these shares.
We are unable to estimate the number of shares that will be sold under Rule
144, as this will depend on the market price for our common stock, the personal
circumstances of the sellers and other factors. There can be no assurance that a
significant public market for our common stock will develop or be sustained
after this offering. Any future sale of substantial amounts of common stock in
the open market may adversely affect the market price of the common stock
offered hereby.
On November 22, 1999, we filed a Form S-8 registration statement under the
Securities Act registering all shares of common stock issuable under the 1999
Stock Incentive Plan and the Employee Stock Purchase Plan. On February 4, 2000,
we filed a Form S-8 registration statement registering all shares of common
stock issuable upon exercise of outstanding options which we assumed in
connection with the Foglight merger. Such registration statements became
effective immediately upon filing, and shares covered by the registration
statements are eligible for sale in the public markets, subject to any lock-up
agreements applicable thereto and Rule 144 limitations applicable to affiliates.
See "Management -- 1999 Employee Stock Purchase Plan," "Management -- Foglight
Software, Inc. 1998 Stock Option Plan," "Description of Capital
Stock -- Registration Rights" and "Underwriting."
59
<PAGE> 61
UNDERWRITING
The underwriters named below, acting through their representatives,
FleetBoston Robertson Stephens Inc., Donaldson, Lufkin & Jenrette Securities
Corporation, CIBC World Markets Corp., FAC/Equities, a division of First Albany
Corporation, Chase Securities Inc. and SoundView Technology Group, Inc. (the
"Representatives"), have severally agreed with us, subject to the terms and
conditions set forth in the underwriting agreement, to purchase from us the
number of shares of common stock set forth opposite their names below. The
underwriters are committed to purchase and pay for all such shares if any are
purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ----------- ---------
<S> <C>
FleetBoston Robertson Stephens Inc. ........................
Donaldson, Lufkin & Jenrette Securities Corporation ........
CIBC World Markets Corp. ...................................
First Albany Corporation....................................
Chase Securities, Inc.......................................
SoundView Technology Group, Inc. ...........................
---------
Total............................................. 2,800,000
=========
</TABLE>
We have been advised by the Representatives that the underwriters propose
to offer the shares of common stock to the public at the initial public offering
price set forth on the cover page of this prospectus and to certain dealers at
such price less a concession of not in excess of $ per share, of which
$ may be reallowed to other dealers. After the initial public offering, the
initial public offering price, concession and reallowance to dealers may be
reduced by the Representatives. No such reduction shall change the amount of
proceeds to be received by us as set forth on the cover page of this prospectus.
The common stock is offered by the underwriters as stated herein, subject to
receipt and acceptance by them and subject to their right to reject any order in
whole or in part.
The underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.
Over-Allotment Option
Certain selling shareholders and/or we have granted to the underwriters an
option, exercisable during the 30-day period after the date of this prospectus,
to purchase up to 420,000 additional shares of common stock at the same price
per share as we will receive for the 2,800,000 shares that the underwriters have
agreed to purchase. To the extent that the underwriters exercise this option,
each of the underwriters will have a firm commitment to purchase approximately
the same percentage of such additional shares that the number of shares of
common stock to be purchased by it shown in the above table represents as a
percentage of the 2,800,000 shares offered hereby. If purchased, such additional
shares will be sold by the underwriters on the same terms as those on which the
2,800,000 shares are being sold. We will be obligated, pursuant to the option,
to sell shares to the extent the option is exercised. The underwriters may
exercise such option only to cover over-allotments made in connection with the
sale of the shares of common stock offered hereby. If such option is exercised
in full, the total public offering price, underwriting discounts and commissions
and proceeds to us will be $267,260,000, $12,042,800 and $79,260,000,
respectively.
Indemnity
The underwriting agreement contains covenants of indemnity among the
underwriters and us against certain civil liabilities, including liabilities
under the Securities Act and liabilities arising from breaches of
representations and warranties contained in the underwriting agreement.
60
<PAGE> 62
Lock-Up Agreements
Each of our executive officers, directors and shareholders and
substantially all of our optionholders have agreed with the Representatives, for
a period of 90 days after the date of this prospectus, subject to certain
exceptions, not to offer to sell, contract to sell, or otherwise sell, dispose
of, loan, pledge or grant any rights with respect to any shares of common stock,
any options or warrants to purchase any shares of common stock, or any
securities convertible into or exchangeable for shares of common stock owned as
of the date of this prospectus or, with certain exceptions, thereafter acquired
directly by such holders or with respect to which they have or hereafter acquire
the power of disposition, without the prior written consent of FleetBoston
Robertson Stephens. However, FleetBoston Robertson Stephens may, in its sole
discretion and at any time without notice, release all or any portion of the
securities subject to the lock-up agreements. There are no agreements between
the Representatives and any of our shareholders providing consent by the
Representatives to the sale of shares prior to the expiration of the period of
90 days after this prospectus.
Future Sales
In addition, we have agreed that during the period of 90 days after this
prospectus, we will not, subject to certain exceptions, without the prior
written consent of FleetBoston Robertson Stephens:
- Consent to the disposition of any shares held by shareholders prior to
the expiration of the period of 90 days after this prospectus; or
- Issue, sell, contract to sell or otherwise dispose of, any shares of
common stock, any options or warrants to purchase any shares of common
stock or any securities convertible into, exercisable for or exchangeable
for shares of common stock.
Electronic Prospectus
A prospectus in electronic format is being made available on an Internet
web site maintained by Wit Capital Corporation, an affiliate of SoundView
Technology Group, Inc. Other than the prospectus in electronic format, the
information on Wit Capital Corporation's web site and any information contained
on any other web site maintained by any dealer is not part of this prospectus or
the registration statement of which this prospectus forms a part, has not been
approved and/or endorsed by us or any underwriter in its capacity as underwriter
and should not be relied upon by investors.
Stabilization
The Representatives have advised us that, pursuant to Regulation M under
the Securities Act, certain persons participating in this offering may engage in
transactions, including stabilizing bids, syndicate covering transactions or the
imposition of penalty bids, that may have the effect of stabilizing or
maintaining the market price of the common stock at a level above that which
might otherwise prevail in the open market. A "stabilizing bid" is a bid for or
the purchase of the common stock on behalf of the underwriters for the purpose
of fixing or maintaining the price of the common stock. A "syndicate covering
transaction" is the bid for or the purchase of the common stock on behalf of the
underwriters to reduce a short position incurred by the underwriters in
connection with this offering. A "penalty bid" is an arrangement permitting the
Representatives to reclaim the selling concession otherwise accruing to an
underwriter or syndicate member in connection with this offering if the common
stock originally sold by such underwriter or syndicate member is purchased by
the Representatives in a syndicate covering transaction and has therefore not
been effectively placed by such underwriter or syndicate member. The
Representatives have advised us that such transactions may be effected on the
Nasdaq National Market or otherwise and, if commenced, may be discontinued at
any time.
61
<PAGE> 63
LEGAL MATTERS
The validity of the common stock offered will be passed upon for us by
Brobeck, Phleger & Harrison LLP, Irvine, California. Certain legal matters in
connection with the offering will be passed upon for the underwriters by Wilson
Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California.
EXPERTS
The Consolidated Financial Statements of Quest Software, Inc. as of
December 31, 1998 and 1999 and for each of the three years in the period ended
December 31, 1999 included in this prospectus and the related financial
statement schedule included elsewhere in the registration statement have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
reports appearing herein and elsewhere in the registration statement, and have
been so included in reliance upon the reports of such firm given upon their
authority as experts in accounting and auditing.
The financial statements of MBR Technologies, Inc. as of March 31, 1999 and
for the period from April 23, 1998 (inception) to March 31, 1999 included in
this prospectus and registration statement have been audited by Swenson
Advisors, LLP, independent auditors, as stated in their report, which we have
included in this prospectus and registration statement and is given upon the
authority of Swenson Advisors, LLP, as experts in accounting and auditing.
The financial statements of Foglight Software, Inc. as of December 31, 1998
and for the period from November 10, 1997 (inception) to December 31, 1998
included in this prospectus and registration statement have been audited by
PriceWaterhouseCoopers LLP, independent auditors, as stated in their report,
which we have included in this prospectus and registration statement and is
given upon the authority of PriceWaterhouseCoopers LLP, as experts in accounting
and auditing.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission, Washington, D.C.
20549 (the "Commission"), under the Securities Act, as amended, a registration
statement on Form S-1 relating to the common stock offered. This prospectus does
not contain all of the information set forth in the registration statement and
its exhibits and schedules. For further information with respect to us and the
shares we are offering pursuant to this prospectus you should refer to the
registration statement, including its exhibits and schedules. Statements
contained in this prospectus as to the contents of any contract, agreement or
other document referred to are materially complete, and you should refer to the
copy of that contract or other document filed as an exhibit to the registration
statement or any other document. You may inspect a copy of the registration
statement without charge at the Public Reference Section of the Commission at
Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 or at the Commission's
regional offices at 5670 Wilshire Boulevard, 11th Floor, Los Angeles, California
90036. The Commission maintains an Internet site that contains reports, proxy
information statements and other information regarding registrants that file
electronically with the Commission. The Commission's World Wide Web address is
www.sec.gov.
We intend to furnish holders of our common stock with annual reports
containing, among other information, audited consolidated financial statements
certified by an independent public accounting firm and quarterly reports
containing unaudited condensed financial information for the first three
quarters of each fiscal year. We intend to furnish these other reports as we may
determine or as may be required by law.
62
<PAGE> 64
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
QUEST SOFTWARE, INC.
Independent Auditors' Report.............................. F-2
Consolidated Balance Sheets as of December 31, 1998 and
1999................................................... F-3
Consolidated Statements of Income for the Years Ended
December 31, 1997, 1998 and 1999....................... F-4
Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 1997, 1998 and 1999........... F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1998 and 1999....................... F-6
Notes to Consolidated Financial Statements................ F-7
MBR TECHNOLOGIES, INC.
Report of Independent Auditors............................ F-24
Balance Sheets as of March 31, 1999 and December 17, 1999
(Unaudited)............................................ F-25
Statements of Operations From Inception (April 23, 1998)
Through March 31, 1999 and for the Period From January
1, 1999 to December 17, 1999 (Unaudited)............... F-26
Statements of Shareholders' Equity From Inception (April
23, 1998) Through March 31, 1999 and the Period From
April 1, 1999 to December 17, 1999 (Unaudited)......... F-27
Statements of Cash Flows From Inception (April 23, 1998)
Through March 31, 1999 and the Period From January 1,
1999 to December 17, 1999 (Unaudited).................. F-28
Notes to Financial Statements............................. F-29
FOGLIGHT SOFTWARE, INC.
Report of Independent Accountants......................... F-32
Balance Sheet as of December 31, 1998..................... F-33
Statement of Operations for the Period November 10, 1997
(Date of Inception) to
December 31, 1998...................................... F-34
Statement of Stockholders' Deficit for the Period November
10, 1997 (Date of Inception) to December 31, 1998...... F-35
Statement of Cash Flows for the Period November 10, 1997
(Date of Inception) to December 31, 1998............... F-36
Notes to Financial Statements............................. F-37
Balance Sheet as of September 30, 1999 (Unaudited)........ F-47
Statements of Operations for the Nine Months Ended
September 30, 1998 and 1999 (Unaudited)................ F-48
Statements of Cash Flows for the Nine Months Ended
September 30, 1998 and 1999 (Unaudited)................ F-49
Notes to Unaudited Financial Statements................... F-50
UNAUDITED PRO FORMA INFORMATION
Unaudited Pro Forma Information........................... F-52
Balance Sheet as of December 31, 1999..................... F-53
Statements of Operations for the Year Ended December 31,
1999................................................... F-54
Notes to Pro Forma Financial Statements................... F-55
</TABLE>
F-1
<PAGE> 65
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, 1998 and 1999,
and the related consolidated statements of income, shareholders' equity, and
cash flows for each of the three years in the period ended December 31, 1999.
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 consolidated financial position of Quest Software,
Inc. and its subsidiaries at December 31, 1998 and 1999, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP
Costa Mesa, California
February 1, 2000 (except for Note 12
as to which the date is February 11, 2000)
F-2
<PAGE> 66
QUEST SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 8,981 $ 39,643
Short-term marketable securities, available for sale...... -- 11,000
Accounts receivable, net of allowance for doubtful
accounts and sales returns of $1,052 (1998) and $3,239
(1999)................................................. 7,443 18,771
Prepaid expenses and other current assets................. 720 3,244
Deferred income taxes..................................... 198 2,089
------- --------
Total current assets................................. 17,342 74,747
Property and equipment, net................................. 1,388 7,179
Long-term marketable securities, available for sale......... -- 4,484
Purchased technology and software licenses, net............. 527 441
Goodwill, net............................................... -- 11,452
Deferred income taxes....................................... 267 415
Other assets................................................ 121 431
------- --------
$19,645 $ 99,149
======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 1,468 $ 3,436
Accrued compensation...................................... 1,937 4,966
Other accrued expenses.................................... 2,243 7,062
Income taxes payable...................................... -- 2,030
Deferred support revenue.................................. 7,298 13,932
Deferred license revenue.................................. 1,625 4,651
------- --------
Total current liabilities............................ 14,571 36,077
Long-term liabilities....................................... -- 403
Commitments and contingencies (Note 9)
Shareholders' equity:
Preferred stock, no par value, 5,000 shares authorized; no
shares issued or outstanding........................... -- --
Common stock, no par value, 75,000 shares authorized;
44,538 and 38,905 shares issued and outstanding at
December 31, 1998 and 1999............................. 4,241 94,010
Retained earnings........................................... 3,991 1,864
Accumulated other comprehensive income (loss)............... -- (26)
Notes receivable from sale of common stock.................. (3,158) (3,115)
Capital distribution in excess of basis in common stock..... -- (30,064)
------- --------
Total shareholders' equity........................... 5,074 62,669
------- --------
$19,645 $ 99,149
======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 67
QUEST SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1997 1998 1999
----------- ----------- -----------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Revenues:
Licenses.................................................. $12,158 $24,901 $54,269
Services.................................................. 6,157 9,889 16,599
------- ------- -------
Total revenues....................................... 18,315 34,790 70,868
Cost of revenues:
Licenses.................................................. 1,307 3,433 2,998
Services.................................................. 1,972 2,507 4,195
------- ------- -------
Total cost of revenues............................... 3,279 5,940 7,193
------- ------- -------
Gross profit................................................ 15,036 28,850 63,675
Operating expenses:
Sales and marketing....................................... 5,845 11,836 32,078
Research and development.................................. 4,293 8,047 15,980
General and administrative................................ 3,450 5,278 9,906
Other compensation costs and goodwill amortization........ -- -- 1,243
------- ------- -------
Total operating expenses............................. 13,588 25,161 59,207
------- ------- -------
Income from operations...................................... 1,448 3,689 4,468
Other (expense) income, net................................. (137) 336 1,202
------- ------- -------
Income before income tax provision.......................... 1,311 4,025 5,670
Income tax provision........................................ 1,022 1,679 2,273
------- ------- -------
Net income.................................................. $ 289 $ 2,346 3,397
======= =======
Preferred stock dividends................................... 590
-------
Net income applicable to common shareholders................ $ 2,807
=======
Basic and diluted net income per share...................... $ 0.01 $ 0.05 $ 0.07
Weighted average shares:
Basic..................................................... 40,373 44,261 37,677
Diluted................................................... 40,617 44,459 41,800
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 68
QUEST SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
CAPITAL
DISTRIBUTION
ACCUMULATED NOTES IN EXCESS OF
COMMON STOCK OTHER RECEIVABLE BASIS IN TOTAL
------------------ RETAINED COMPREHENSIVE FROM COMMON SHAREHOLDERS'
SHARES AMOUNT EARNINGS INCOME (LOSS) SHAREHOLDERS STOCK EQUITY
-------- ------- -------- ------------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, January 1, 1997..... 39,000 $ 812 $ 1,617 $ -- $ -- $ -- $ 2,429
Issuance of common stock..... 597 413 -- -- -- -- 413
Note receivable from
shareholder for purchase of
common stock............... 3,900 2,200 -- -- (2,200) -- --
Accrued interest receivable
from shareholder........... -- -- -- -- (34) -- (34)
Net income................... -- -- 289 -- -- -- 289
Distributions paid........... -- -- (261) -- -- -- (261)
-------- ------- ------- ---- ------- -------- --------
BALANCE, December 31, 1997... 43,497 3,425 1,645 -- (2,234) -- 2,836
Issuance of common stock..... 66 66 -- -- -- -- 66
Note receivable from
shareholder for purchase of
common stock............... 975 750 -- -- (750) -- --
Accrued interest receivable
from shareholders.......... -- -- -- -- (174) -- (174)
Net income................... -- -- 2,346 -- -- -- 2,346
-------- ------- ------- ---- ------- -------- --------
BALANCE, December 31, 1998... 44,538 4,241 3,991 -- (3,158) -- 5,074
-------- ------- ------- ---- ------- -------- --------
Exercise of stock options,
including tax benefit...... 34 201 -- -- -- -- 201
Payment on notes receivable
from shareholders for
purchase of common stock... -- -- -- -- 230 -- 230
Accrued interest receivable
from shareholders.......... -- -- -- -- (187) -- (187)
Repurchase of common stock... (14,820) (2) (4,934) -- -- (30,064) (35,000)
Conversion of Series A
Redeemable Preferred Stock
to common stock............ 4,000 15,000 -- -- -- -- 15,000
Issuance of common stock in
the initial public
offering, net.............. 5,060 64,856 -- -- -- -- 64,856
Compensation expense
associated with stock
option grants.............. -- 432 -- -- -- -- 432
Common stock issued for an
acquisition, net (Note
2)......................... 93 9,282 -- -- -- -- 9,282
Dividends on Series B
Redeemable Preferred
Stock...................... -- -- (590) -- -- -- (590)
Unrealized loss on
available-for-sale
securities................. -- -- -- (26) -- -- (26)
Net income................... -- -- 3,397 -- -- -- 3,397
--------
Comprehensive income......... -- -- -- -- -- -- 3,371
-------- ------- ------- ---- ------- -------- --------
BALANCE, December 31, 1999... 38,905 $94,010 $ 1,864 $(26) $(3,115) $(30,064) $ 62,669
======== ======= ======= ==== ======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 69
QUEST SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1998 1999
------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 289 $ 2,346 $ 3,397
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization......................... 964 1,893 2,107
Compensation expense associated with stock option
grants............................................... -- -- 432
Loss from disposal of property and equipment.......... 52 -- --
Accrued interest receivable from shareholders......... (34) (174) (187)
Deferred income taxes................................. 178 (643) (1,667)
Changes in assets and liabilities, net of effects of
acquisitions:
Accounts receivable................................ (683) (2,628) (11,441)
Income taxes receivable............................ (122) 122 --
Prepaid expenses and other current assets.......... 282 (620) (2,527)
Other assets....................................... 38 5 (288)
Accounts payable................................... 113 941 1,974
Bank overdraft..................................... (393) -- --
Accrued compensation............................... 108 1,162 2,544
Other accrued expenses............................. 881 1,141 5,366
Income taxes payable............................... -- -- 2,218
Deferred revenue................................... 1,960 4,636 9,449
------- -------- --------
Net cash provided by operating activities.......... 3,633 8,181 11,377
Cash flows from investing activities:
Purchases of property and equipment....................... (536) (1,231) (7,143)
Purchases of software licenses............................ (831) (57) (350)
Cash received (paid) for acquisitions, net of cash
acquired................................................ 100 -- (1,094)
Purchases of marketable securities........................ -- -- (15,510)
Sales and maturities of marketable securities............. -- -- --
------- -------- --------
Net cash used in investing activities.............. (1,267) (1,288) (24,097)
Cash flows from financing activities:
Distributions to shareholders............................. (261) -- --
Proceeds from note payable................................ -- -- 10,000
Repayment of notes payable................................ -- -- (10,918)
Repayment of capital lease obligations.................... -- -- (36)
Proceeds from issuance of preferred stock................. -- -- 25,000
Redemption of Series B Preferred Stock.................... -- -- (10,000)
Repurchase of common stock................................ -- -- (35,000)
Net proceeds from the sale of common stock................ -- -- 64,856
Proceeds from the exercise of stock options............... -- -- 33
Repayment of note payable to related party................ (9) (8) (8)
Payment on notes receivable from shareholders for purchase
of common stock......................................... -- -- 230
Cash dividends paid on Series B Redeemable Preferred
Stock................................................... -- -- (590)
------- -------- --------
Net cash (used in) provided by financing
activities........................................ (270) (8) 43,567
Effect of exchange rate changes on cash and cash
equivalents............................................... -- -- (185)
------- -------- --------
Net increase in cash and cash equivalents................... $ 2,096 $ 6,885 $ 30,662
Cash and cash equivalents, beginning of period.............. -- 2,096 8,981
------- -------- --------
Cash and cash equivalents, end of period.................... $ 2,096 $ 8,981 $ 39,643
======= ======== ========
Supplemental disclosures of consolidated cash flow
information:
Cash paid during the year for:
Interest................................................ $ 8 $ 5 $ 240
======= ======== ========
Income taxes............................................ $ 938 $ 2,054 $ 1,874
======= ======== ========
Supplemental schedule of noncash investing and financing
activities:
Note receivable from shareholders for purchase of common
stock................................................... $ 2,200 $ 750
======= ========
Conversion of Series A Redeemable Preferred Stock to
Common Stock............................................ $ 15,000
========
Tax benefit related to stock option exercises............. $ 168
========
Unrealized loss on available-for-sale securities.......... $ 26
========
</TABLE>
See Note 2 for details of assets acquired and liabilities assumed in purchase
transactions.
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 70
QUEST SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations -- Quest Software, Inc., a California corporation,
(the Parent) and its subsidiaries (collectively the Company) provide application
and information availability software solutions that enhance the performance and
reliability of an organization's e-business, packaged and custom applications,
and enable the delivery of information across the entire enterprise. The Company
also provides consulting, training, and support services to its customers. The
accompanying consolidated financial statements include the accounts of the
Parent and its wholly owned subsidiaries in Australia, the United Kingdom,
Germany, Israel, and Ireland. All significant intercompany transactions and
balances have been eliminated in consolidation.
Stock Split -- On June 23, 1998, the Company's Board of Directors approved
and effected a 1,300-for-1 stock split of the Company's common stock, and on
March 10, 1999, the Company's Board of Directors approved and effected a 2-for-1
stock split. On June 4, 1999, in connection with the public offering of the
Company's common stock, the Company's Board of Directors approved and effected a
3-for-2 stock split of the Company's common stock. All share, per share and
conversion amounts relating to common stock, preferred stock, and stock options
included in the accompanying consolidated financial statements and footnotes
have been restated to reflect the stock splits and for all periods presented.
Foreign Currency Translation -- In accordance with Statement of Financial
Accounting Standards (SFAS) No. 52, Foreign Currency Translation, the United
States dollar is considered to be the functional currency for the Company's
foreign subsidiaries, as such subsidiaries act as sales offices for the Parent.
Therefore, gains or losses from translation adjustments are included in other
income in the Company's consolidated statements of operations. Translation
adjustments were not material for the years ended December 31, 1997, 1998 and
1999. However, due to the increase in international operations, the Company's
results of operations could be impacted in the future.
Fair Value of Financial Instruments -- The Company's consolidated balance
sheets include the following financial instruments: cash, accounts receivable,
notes receivable, accounts payable, and accrued liabilities. The Company
considers the carrying value of cash, accounts receivable, accounts payable, and
accrued liabilities in the consolidated financial statements to approximate fair
value for these financial instruments because of the relatively short period of
time between origination of the instruments and their expected realization.
Based on borrowing rates currently available, the fair value of the notes
receivable from the sale of common stock at December 31, 1999, was approximately
$3,669.
Cash and Cash Equivalents -- Cash equivalents include short-term, highly
liquid investments with original maturities of three months or less. Interest
income, included in other income (expense) in the accompanying consolidated
statements of operations, was, $72, $372, and $1,514 for the years ended
December 31, 1997, 1998 and 1999, respectively.
Accounts Receivable -- The Company sells and/or licenses its products and
services to various companies across several industries. The Company performs
ongoing credit evaluations of its customers and generally does not require
collateral. The Company maintains reserves for potential credit losses and sales
returns.
Investments -- The Company has classified all debt securities with original
maturities of greater than three months as available-for-sale.
Available-for-sale securities are carried at fair value, with unrealized gains
and losses reported as a separate component of stockholders' equity net of
applicable income taxes. Realized gains and losses and declines in value judged
to be other-than-temporary on available-for-sale securities are included in
other income. The cost basis for realized gains and losses on available-for-sale
securities is determined on a specific identification basis. The Company has
classified available-for-sale securities as current or long-term based primarily
on the maturity date of the related securities.
F-7
<PAGE> 71
QUEST SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 1999, the Company had available-for-sale debt securities
with a fair market value of $15,484 and a cost basis of $15,510. The unrealized
loss of $26 has been recorded as a separate component of stockholders' equity,
and consisted of five positions, all with unrealized losses.
Property and Equipment -- Property and equipment are stated at cost.
Depreciation and amortization are provided using the straight-line method over
the estimated useful lives ranging from three to seven years. Leasehold
improvements are amortized over the shorter of the estimated useful lives of the
improvements or the term of the related lease. Repair and maintenance costs are
expensed as incurred.
Long-Lived Assets -- The Company accounts for the impairment and
disposition of long-lived assets in accordance with SFAS No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.
In accordance with SFAS No. 121, long-lived assets to be held are reviewed for
events or changes in circumstances which indicate that their carrying value may
not be recoverable. The Company periodically reviews the carrying value of
long-lived assets to determine whether or not an impairment to such value has
occurred. At December 31, 1998 and 1999, there was no impairment of long-lived
assets.
Purchased Technology and Software Licenses -- Purchased technology is
recorded either at cost or, for amounts related to acquisitions, at appraised
value and amortized using the straight-line method over estimated useful lives
of three years to five years. Accumulated amortization was $1,483, $1,638 and
$1,777 at December 31, 1997, 1998, and 1999, respectively. Software licenses are
recorded at cost and are amortized over the shorter of the estimated useful
lives of the related products or the term of the license. Accumulated
amortization was $644, $871 and $1,027 at December 31, 1997, 1998 and 1999,
respectively. The net carrying amount of purchased technology and software
licenses was considered recoverable at December 31, 1998 and 1999, based on the
undiscounted future cash flows expected to be realized from continued sales of
the related software products.
Other Assets -- Other assets include amounts receivable related to a
settlement agreement the Company entered into with a former employee. Under the
terms of the settlement agreement, the Company received a lump-sum payment
totaling $220 in January 1997, and a promissory note providing for 40 monthly
payments of $4 each commencing March 1, 1997. Approximately $63 and $25 of the
settlement receivable is recorded in other current assets in the accompanying
consolidated financial statements at December 31, 1998 and 1999, respectively.
Goodwill -- Goodwill arising from acquisitions (Note 2) is amortized on a
straight-line basis over five years. The Company will annually evaluate the
carrying value of goodwill for impairment of value based on undiscounted future
cash flows.
Capital Distribution in Excess of Basis in Common Stock -- In connection
with the repurchase of common stock in April 1999 from a major stockholder (Note
4) the excess of the repurchase price over the original cost of the shares has
been recorded as a capital distribution in excess of the basis of the common
stock in the accompanying consolidated financial statements.
Revenue Recognition -- During October 1997, the Financial Accounting
Standards Board (FASB) issued Statement of Position (SOP) 97-2, Software Revenue
Recognition, which provides guidance in recognizing revenue on software
transactions. SOP 97-2 is effective for transactions entered into in fiscal
years beginning after December 15, 1997, and supersedes SOP 91-1. The Company
adopted this statement, as amended, for the year ended December 31, 1998, and
such adoption did not have any impact on the Company's results of operations.
Software Licenses, Services, and Post-Contract Customer Support -- Revenues
from sales of software licenses, which generally do not contain multiple
elements, are recognized upon shipment of the related product if the
requirements of SOP 97-2, as amended, are met. If the requirements of SOP 97-2,
F-8
<PAGE> 72
QUEST SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
including evidence of an arrangement, customer acceptance, a fixed or
determinable fee, collectibility or vendor-specific objective evidence about the
value of an element are not met at the date of shipment, revenue recognition is
deferred until such items are known or resolved. Amounts recorded at December
31, 1998 and 1999 for deferred license revenue represent sales in which the
Company has received some payments, but all of the requirements of SOP 97-2 have
not been met. Revenue from service and post-contract customer support is
deferred and recognized ratably over the term of the contract.
Software Development Costs -- Costs incurred in the research and
development of new software products and enhancements to existing software
products are expensed as incurred until technological feasibility has been
established. After technological feasibility is established, any additional
costs are capitalized in accordance with SFAS No. 86, Accounting for the Costs
of Computer Software to Be Sold, Leased or Otherwise Marketed. Because the
Company believes that its current process for developing software is essentially
completed concurrently with the establishment of technical feasibility, no
software development costs have been capitalized as of December 31, 1998 and
1999.
Advertising Expenses -- Advertising expenses were $300, $594 and $998 for
the years ended December 31, 1997, 1998 and 1999, respectively.
Income Taxes -- The Company accounts for its income taxes under the
provisions of 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 awards to
employees, using the intrinsic value method in accordance with Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees.
Net Income Per Share -- The Company computes net income per share in
accordance with SFAS No. 128, Earnings per Share. Basic earnings per share is
computed by dividing net income available to common shareholders by the weighted
average number of common shares outstanding for the period. Diluted earnings per
share reflects the potential dilution of securities by including other common
stock equivalents, including stock options, in the weighted average number of
common shares outstanding for a period, if dilutive.
For the year ended December 31, 1999, net income applicable to common
shareholders was $2,807 representing net income for the year of $3,397 less
Preferred Stock dividends of $590 associated with the Series B Redeemable
Preferred Stock (Note 7).
The table below sets forth the reconciliation of the denominator of the
earnings per share calculation:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Shares used in computing basic net income per share..... 40,373 44,261 37,677
Conversion of Series A Preferred Stock.................. -- -- 1,238
Dilutive effect of stock options........................ 244 198 2,885
------- ------- -------
Shares used in computing diluted net income per share... 40,617 44,459 41,800
======= ======= =======
</TABLE>
The conversion of the Series A Preferred Stock into common stock reflects
the weighted average of such shares per SFAS No. 128.
F-9
<PAGE> 73
QUEST SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Comprehensive Income -- For the year ended December 31, 1998, the Company
adopted SFAS No. 130, Reporting Comprehensive Income. There was no difference
between the net income and the comprehensive net income for the years ended
December 31, 1997 and 1998. For the year ended December 31, 1999, the difference
between net income and comprehensive net income was an unrealized loss for
available-for-sale securities of $26.
Use of Estimates -- The preparation of the consolidated 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 the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Risks and Uncertainties -- The Company is subject to risks and
uncertainties in the normal course of business, including customer acceptance of
its products, rapid technological changes, delays in introducing and market
acceptance of new products, competition, e-business developments, the impact of
the Year 2000, international expansion, ability to attract and retain qualified
personnel, ability to protect its intellectual property, and other matters
inherent in the software industry.
NEW ACCOUNTING PRONOUNCEMENTS:
The Company has adopted SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information. In accordance with SFAS No. 131, the Company
has disclosed in Note 10 certain information about operating segments and
certain information about the Company's revenue types, geographic areas to which
the Company sells its products, and major customers.
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.
2. ACQUISITIONS
On April 12, 1996, through a majority-owned subsidiary in the United
Kingdom, the Company acquired certain net assets of System Software
International Limited (SSI). The acquisition was accounted for under the
purchase method of accounting, and the purchase price of approximately $119 was
allocated to net assets of $30 and goodwill of $89. At December 31, 1996,
expected future undiscounted cash flows from SSI did not support the
recoverability of the goodwill resulting in the write-off of the remaining
unamortized balance. In March 1997, the Company elected to discontinue funding
the subsidiary, and in July 1997 commenced liquidation proceedings. During the
year ended December 31, 1999, the liquidation was completed without a material
loss to the Company.
On May 1, 1997, the Company entered into an agreement to acquire the net
assets of Common Sense Computing Pty. Ltd. (CSC) for 663 shares of the Company's
common stock. At the closing date, 597 shares valued at $413 were issued to the
seller, with the remaining 66 shares to be issued in June 1998, provided that
the seller performed certain obligations under the indemnification provisions in
the agreement. The acquisition was accounted for under the purchase method of
accounting and the purchase price was allocated $320 to technology rights based
upon the estimated fair value at the date of acquisition, $53 to property, plant
and equipment, $100 to cash, and $60 to liabilities assumed. CSC's operating
results have been included in the Company's financial statements from the date
of acquisition. On June 15, 1998, the remaining 66 shares of common stock were
issued resulting in an allocation of an additional $66 to technology rights,
based on the fair market value of the Company's common stock at the time of
issuance.
F-10
<PAGE> 74
QUEST SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On July 1, 1999, the Company, through its wholly owned subsidiaries in
Israel and Ireland, acquired certain assets of Neptune Software Ltd. for a cash
payment of $484. The acquisition was accounted for under the purchase method of
accounting and the purchase price was allocated to net assets of $474 and
goodwill of $10.
On December 17, 1999, the Company, through a majority owned subsidiary,
acquired all of the outstanding common stock and stock options of MBR
Technologies, Inc. (MBR) in exchange for 93 shares of the Company's common stock
valued at $9,324, a cash payment of $1,314, and the assumption of net
liabilities of $340, including a note payable to Quest of $507. The acquisition
was accounted for as a purchase and the purchase price of $10,750, which
included $112 of direct acquisition costs, was allocated as follows:
<TABLE>
<S> <C>
Current assets.............................................. $ 308
Deferred taxes.............................................. 339
Fixed assets................................................ 123
Goodwill.................................................... 11,534
Liabilities assumed......................................... (1,110)
Acquisition liabilities..................................... (444)
-------
Total purchase price................................... $10,750
=======
</TABLE>
The acquisition liabilities consist of $36 related to the buyout of an
operating lease and $408 related to the cost of an abandoned lease on MBR's
facility reduced by the monthly lease costs up to the date of abandonment. MBR's
operating results have been included in the Company's financial statements from
the date of acquisition. Goodwill will be amortized on a straight-line basis
over five years.
The following unaudited pro forma condensed consolidated results of
operations assumes that the MBR acquisition had occurred on the first day of the
Company's fiscal year ended December 31, 1998. The pro forma condensed
consolidated results of operations, 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.
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------------
1998 1999
------- -------
<S> <C> <C>
Net revenues................................................ $35,058 $71,438
Net loss.................................................... $ (512) $ (72)
Net loss per share:
Basic and diluted......................................... $ (0.01) $ (0.00)
</TABLE>
In connection with the employment agreements of certain of the MBR
shareholders by Quest, bonus payments of up to $6,000 could be earned over a
two-year period ending in 2002 if certain sales of MBR products, based on a
formula, exceed $4,000 and $8,000. Such bonus payments, if any, will be recorded
as compensation expense when and if such bonuses are earned.
On January 7, 2000, the Company, through a majority owned subsidiary,
acquired all of the outstanding common stock of Foglight Software, Inc. in
exchange for 1,188 shares of the Company's common stock valued at $104,168, cash
payments estimated to be $424, the assumption of unvested Foglight stock options
valued at $2,088 and the assumption of net liabilities estimated to be $5.1
million. The acquisition will be accounted for as a purchase and the purchase
price, including $193 of direct acquisition costs will be allocated primarily to
goodwill and intangible assets which will generally be amortized over five
years. Quest also had notes receivable from Foglight of $1,308 at December 31,
1999.
F-11
<PAGE> 75
QUEST SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On February 1, 2000, the Company, through a wholly owned subsidiary,
acquired all of the outstanding common stock of QMaster Software Solutions
(QMaster) for a cash payment of $15,000 including an estimated $75 in direct
acquisition costs. The acquisition was accounted for as a purchase and the
purchase price is expected to be allocated primarily to goodwill and other
intangible assets.
3. PROPERTY AND EQUIPMENT
Net property and equipment consist of the following at December 31:
<TABLE>
<CAPTION>
1998 1999
------- -------
<S> <C> <C>
Furniture and fixtures...................................... $ 596 $ 2,262
Machinery and equipment..................................... 270 758
Computer equipment.......................................... 1,711 5,311
Computer software........................................... 315 692
Leasehold improvements...................................... 109 407
------- -------
3,001 9,430
Less accumulated depreciation and amortization.............. (1,613) (2,251)
------- -------
Property and equipment, net................................. $ 1,388 $ 7,179
======= =======
</TABLE>
4. RELATED-PARTY TRANSACTIONS
In 1994, the Company borrowed $32 from a shareholder for the purchase of
certain fixed assets. The note payable bears interest at 8.5% per annum, payable
monthly, and requires monthly principal and interest payments of $1 through
December 31, 1999. Approximately $8 was included in other accrued expenses in
the accompanying consolidated financial statements representing the remaining
outstanding note payable balance at December 31, 1998. The remaining note
payable balance was repaid during 1999.
During 1997, the Company received a note receivable from an officer of the
Company for the purchase of 3,900 shares of the Company's common stock at $0.56
per share. The note receivable plus accrued interest is due April 2002 and bears
interest at 6.2%. The note receivable and accrued interest is secured by the
common stock.
During 1998, the Company received a note receivable from another officer of
the Company for the purchase of 975 shares of the Company's common stock at
$0.77 per share. The note receivable plus accrued interest is due April 2003 and
bears interest at 5.7%. Up to 25% of the unpaid principal and accrued interest
may be repaid in each year during the four-year term of the note. The Company
has the option to repurchase any shares at the original issuance price
associated with the unpaid principal balance if the officer ceases to be
employed by the Company. All of the outstanding unpaid principal and interest
may be prepaid at any time when the current Chief Executive Officer of the
Company ceases to be employed or immediately prior to a sale of substantially
all of the assets of the Company or a merger in which the Company is not the
surviving entity. The note receivable and accrued interest is secured by the
common stock.
In April 1999, the Company repurchased and cancelled 14,820 shares of
common stock from a shareholder of the Company at a price of $2.36 per share.
The Company also entered into a severance agreement with the shareholder whereby
the shareholder will receive $200 per year through 2001 and provides for use of
a company car and related expenses and medical benefits. The Company recorded
approximately $715 of expense related to the agreement in April 1999, which is
included in compensation and other costs in the accompanying consolidated
financial statements.
F-12
<PAGE> 76
QUEST SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. TERM NOTE
In connection with the repurchase of common stock from a shareholder in
April 1999 (Note 4), the Company borrowed $10,000 under a term note with a bank.
The borrowings under the term note were secured by substantially all assets of
the Company, bore interest, at the Company's option, at either the bank's prime
rate or at the LIBOR rate plus a maximum of 2.75% per annum, required monthly
interest payments commencing June 1, 1999, and the principal was payable in 24
monthly installments of $417 commencing June 1, 2000. All unpaid principal and
interest was due on May 1, 2002. The loan contained covenants relating to
certain financial statement amounts related to tangible net worth, cash flow
from operations, and a debt to cash flow from operations and quick ratios. The
Company repaid the note after its initial public offering in August, 1999.
6. INCOME TAXES
The provision for income taxes consists of the following for the years
ended December 31:
<TABLE>
<CAPTION>
1997 1998 1999
------ ------ -------
<S> <C> <C> <C>
Current:
Federal....................................... $1,359 $1,819 $ 2,763
State......................................... 102 425 402
Foreign....................................... -- 78 808
------ ------ -------
1,461 2,322 3,973
Deferred:
Federal....................................... (360) (568) (1,391)
State......................................... (79) (75) (309)
Foreign....................................... (85) (165) (122)
------ ------ -------
(524) (808) (1,822)
Change in valuation allowance................... 85 165 122
------ ------ -------
Total income tax provision............ $1,022 $1,679 $ 2,273
====== ====== =======
</TABLE>
The reconciliation of income tax expense computed at U.S. federal statutory
rates to income tax expense for the years ended December 31, 1997, 1998 and
1999, is as follows:
<TABLE>
<CAPTION>
1997 1998 1999
----- ---- ----
<S> <C> <C> <C>
Tax at U.S. federal statutory rates............... 35.0% 35.0% 35.0%
State taxes....................................... 2.0 5.7 1.1
Recording of deferred income tax liabilities in
connection with the conversion to a C
corporation..................................... 45.2 -- --
Foreign taxes..................................... 6.2 6.0 8.3
Research and development credits.................. (10.4) (4.6) (4.7)
Other............................................. -- (0.4) 0.4
----- ---- ----
78.0% 41.7% 40.1%
===== ==== ====
</TABLE>
F-13
<PAGE> 77
QUEST SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred taxes as of December 31, 1998 and 1999, are as follows:
<TABLE>
<CAPTION>
1998 1999
----- -------
<S> <C> <C>
Deferred tax assets:
Accounts receivable and sales returns reserves.......... $ 313 $ 871
Accrued liabilities..................................... 165 892
Foreign net operating loss carryforwards................ 250 127
U.S. net operating loss carryforwards................... -- 339
Intangible assets....................................... 264 453
Stock compensation...................................... -- 184
Other................................................... 56 --
----- -------
Total gross deferred assets............................... 1,048 2,866
Deferred tax liabilities:
Cash to accrual adjustment.............................. (301) (150)
State taxes............................................. (32) (47)
Fixed assets............................................ -- (38)
----- -------
Total gross deferred liabilities.......................... (333) (235)
Valuation allowance....................................... (250) (127)
----- -------
Net deferred income taxes................................. $ 465 $ 2,504
===== =======
Less current portion...................................... (198) (2,089)
----- -------
$ 267 $ 415
===== =======
</TABLE>
The Company has U.S. net operating loss carryforwards of $889 that are
subject to limitation by Internal Revenue Code Section 382 and begin to expire
in 2018. The Company has foreign net operating loss carryforwards of $425 that
can be carried forward indefinitely.
Effective January 1, 1997, the Company converted to a C corporation and
became subject to regular federal and state income taxes on an ongoing basis. As
a result, the Company recorded $617 of net deferred income tax liabilities on
January 1, 1997.
Total cash distributions charged against retained earnings include payments
of $261 in 1997, made to the Company's shareholders.
7. SHAREHOLDERS' EQUITY
In April 1999, the Company issued 2,667 shares of Series A Preferred Stock
(Series A) for $15,000 and 1,778 shares of Series B Redeemable Preferred stock
(Series B) for $10,000.
Series A shares were convertible at the holder's option into shares of
common stock, based on the conversion ratio defined in the agreement. The
conversion ratio could be adjusted, from time to time, in the event of certain
diluting events, as defined. Conversion was automatic in the event of a public
offering of the Company's common stock, that met certain specified criteria
initially at a rate of 1.5 shares of common stock for each share of preferred
stock. Additionally, the holders of not less than a majority of the Series A
shares had the right to redeem the Series A shares for cash in two equal
installments due on April 30, 2006 and 2007, respectively. The redemption price
would be determined on each date by the then applicable liquidation preference.
Upon the election of not less than a majority of the Series A holders to redeem
the Series A shares, all Series A shares would be redeemed. Dividends on Series
A
F-14
<PAGE> 78
QUEST SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
were cumulative on a "when and as if declared" basis at a rate of 8% per share
per annum. Series A shareholders had the right to elect one director and have
veto rights over certain management decisions. In the event of liquidation,
dissolution or winding up of the Company, each Series A shareholder had a
liquidation preference equal to $5.625 per share, plus an amount equal to all
accrued but unpaid dividends, with respect to such shares plus an amount equal
to a prorated dividend from the last dividend payment date to the date fixed for
liquidation, dissolution, or winding up. In connection with the Company's
initial public offering in August 1999, all outstanding shares of Series A
Preferred Stock were converted into 4,000 shares of common stock.
Series B shares were convertible into shares of Series A shares one year
after the issuance of the Series B shares at the holder's option based on the
ratio defined in the agreement. If the Series A shares were not converted into
common stock, Series B shares were convertible into shares of Series A preferred
stock at the Company's option prior to the one year anniversary of the date of
issuance of the Series B shares. The conversion ratio could be adjusted, from
time to time, in the event of certain diluting events, as defined. Dividends on
Series B were cumulative and could be declared at the discretion of the Board of
Directors. The dividend rate was 18% per share per annum. Series B shareholders
did not have voting rights with the exception of the redemption provisions
discussed below. In the event of liquidation, dissolution or winding up of the
Company, each Series B shareholder had a liquidation preference equal to $5.625
per share, plus an amount equal to all accrued but unpaid dividends, with
respect to such shares plus an amount equal to a prorated dividend from the last
dividend payment date to the date fixed for liquidation, dissolution, or winding
up. Additionally, the holders of the Series B shares and the Company had the
right to redeem the Series B shares for cash at any time one year following the
issuance of the Series B shares, or, if earlier, upon consummation of an initial
public offering. The redemption price was determined on the redemption date by
the then applicable liquidation preference. In connection with the Company's
initial public offering in August 1999, the Series B shares were redeemed for
$10,000 plus dividends of $590.
8. STOCK OPTION PLANS
In connection with a prior acquisition, the Company entered into an
employment agreement with the president of the acquired company under which
options to purchase up to 2.5% of the Company's outstanding common stock at
$0.77 per share were granted. The agreement provided for issuance of additional
common shares to the individual in the event the Company issued common shares to
employees, subject to limitations as defined in the agreement. In connection
with the issuance of 975 shares of common stock to this individual in 1998 (Note
4), the option was cancelled.
In May 1998, the Company adopted the 1998 Stock Option/Stock Issuance Plan
(the Plan). Under the terms of the Plan, options to purchase 7,500 shares of the
Company's common stock were reserved for issuance to employees, directors, and
consultants.
1999 STOCK INCENTIVE PLAN
The 1999 Stock Incentive Plan is intended to serve as the successor equity
incentive program to the 1998 Stock Option/Stock Issuance Plan. The 1999 Stock
Incentive Plan was adopted by the Board and subsequently approved by the
shareholders on June 9, 1999. The 1999 Stock Incentive Plan became effective
upon its adoption by the Board. On the date of the Company's initial public
offering, all outstanding options under the 1998 plan were incorporated into the
1999 Stock Incentive Plan, and no further option grants will thereafter be made
under the 1998 plan. The incorporated options will continue to be governed by
their existing terms, unless the plan administrator elects to extend one or more
features of the 1999 Incentive Plan to those options. Except as otherwise noted
below, the incorporated options
F-15
<PAGE> 79
QUEST SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
have substantially the same terms as will be in effect for grants made under the
Discretionary Option Grant Program of the 1999 Stock Incentive Plan.
Share Reserve -- At December 31, 1999, 7,493 shares of common stock have
been authorized for issuance under the 1999 Stock Incentive Plan of which 2,215
shares are available for issuance. The share reserve consists of the number of
shares that remain available for issuance under the 1998 plan and shares of
common stock subject to outstanding options thereunder. No participant in the
1999 Stock Incentive Plan may be granted stock options, separately exercisable
stock appreciation rights and direct stock issuances for more than 500 shares of
common stock in total per calendar year.
Programs -- The 1999 Stock Incentive Plan is divided into five separate
programs:
- The discretionary option grant program under which eligible individuals
may be granted options to purchase shares of common stock at an exercise
price determined by the plan administrator;
- The stock issuance program under which individuals may be issued shares
of common stock directly, through the purchase of such shares at a price
determined by the plan administrator or as a bonus tied to the
performance of services;
- The salary investment option grant program which may, at the plan
administrator's discretion, be activated for one or more calendar years
and, if so activated, will allow executive officers and other highly
compensated employees the opportunity to apply a portion of their base
salary to the acquisition of special below-market stock option grants;
- The automatic option grant program under which option grants will
automatically be made at periodic intervals to eligible non-employee
Board members to purchase shares of common stock at an exercise price
equal to 100% of the fair market value of those shares on the grant date;
and
- The director fee option grant program which may, in the plan
administrator's discretion, be activated for one or more calendar years
and, if so activated, will allow non-employee Board members the
opportunity to apply a portion of the annual retainer fee otherwise
payable to them in cash each year to the acquisition of special
below-market option grants.
Administration -- The discretionary option grant program and the stock
issuance program will be administered by the compensation committee of the Board
of Directors.
Plan Features -- The 1999 Stock Incentive Plan includes the following
features:
- The exercise price for any options granted under the plan may be paid in
cash or in shares of common stock valued at fair market value on the
exercise date. The option may also be exercised through a same-day sale
program without any cash outlay by the optionee.
- The compensation committee will have the authority to cancel outstanding
options under the discretionary option grant program in return for the
grant of new options for the same or different number of option shares
with an exercise price per share based upon the fair market value of our
common stock on the new grant date.
- Stock appreciation rights may be issued under the discretionary option
grant program. Such rights will provide the holders with the election to
surrender their outstanding options for an appreciation distribution from
the Company equal to the fair market value of the vested shares of common
stock subject to the surrendered option less the exercise price payable
for those shares. Payment can be made in cash or in shares of common
stock.
F-16
<PAGE> 80
QUEST SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Change in Control -- The 1999 Stock Incentive Plan includes the following
change in control provisions, which may result in the accelerated vesting of
outstanding option grants and stock issuances:
- In the event that the Company is acquired by merger or asset sale or a
Board-approved sale of more than fifty percent of the then outstanding
stock, each outstanding option under the discretionary option grant
program which is not assumed or continued by the successor corporation
will immediately become exercisable for all the option shares, and all
unvested shares will immediately vest, except to the extent the Company's
repurchase rights with respect to those shares are assigned to the
successor corporation.
- The plan administrator will have complete discretion to grant one or more
options which will become exercisable for all the option shares in the
event those options are assumed in an acquisition, but the optionee's
service with the Company or the acquiring entity is subsequently
terminated. The vesting of outstanding shares under the 1999 Stock
Incentive Plan may be accelerated upon similar terms and conditions.
- The plan administrator may also grant options which will immediately vest
upon our acquisition by another entity, whether or not those options are
assumed by the successor corporation.
- The plan administrator may grant options and structure repurchase rights
so that the shares subject to those options or repurchase rights will
immediately vest in connection with a successful tender offer for more
than 50% of the outstanding voting stock or a change in the majority of
our board of directors through one or more contested elections. Such
accelerated vesting may occur either at the time of such transaction or
upon the subsequent termination of the individual's service.
Salary Investment Option Grant Program -- In the event the compensation
committee decides to put this program into effect for one or more calendar
years, each of the Company's executive officers and other highly compensated
employees selected for participation may elect to reduce his or her base salary
for that calendar year by a specified dollar amount not less than $10 nor more
than $75. Each selected individual who makes such an election will automatically
be granted, on the first trading day in January of the calendar year for which
that salary reduction is to be in effect, an option to purchase that number of
shares of common stock determined by dividing the salary reduction amount by
two-thirds of the fair market value per share of common stock on the grant date.
Compensation expense will be recorded for the amount of the salary reduction.
The option will be exercisable at a price per share equal to one-third of the
fair market value of the option shares on the grant date. As a result, the total
spread on the option shares at the time of grant will be equal to the amount of
salary invested in that option. The option will vest and become exercisable in a
series of twelve equal monthly installments over the calendar year for which the
salary reduction is to be in effect and will be subject to full and immediate
vesting upon certain changes in the ownership or control.
Automatic Option Grant Program -- Each individual who first becomes a
non-employee Board member at any time after the completion of this offering will
automatically receive an option grant for 25 shares on the date such individual
joins the Board, provided such individual has not been in the prior employ of
the Company. In addition, on the date of each annual shareholders meeting,
beginning with the 2001 annual shareholders meeting, each non-employee board
member who has served as a non-employee Board member since the date of the last
annual shareholders meeting will automatically be granted an option to purchase
8 shares of common stock.
Each automatic grant will have a term of ten years, subject to earlier
termination following the optionee's cessation of Board service. The initial
25-shares option will be immediately exercisable for all of the option shares;
however, any unvested shares purchased under the option will be subject to
repurchase by us, at the exercise price paid per share, should the optionee
cease Board service prior to vesting in those shares. The shares subject to each
25 share automatic option grant will vest over a four-year period in
F-17
<PAGE> 81
QUEST SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
successive equal annual installments upon the individual's completion of each
year of board service over the four-year period measured from the option grant
date. However, the shares subject to each such automatic grant will immediately
vest in full upon certain changes in control or ownership of the Company or upon
the optionee's death or disability while a Board member. Each 8 share automatic
option grant will be immediately exercisable and fully vested on the option
grant date.
Director Fee Option Grant Program -- If this program is put into effect,
each non-employee Board member may elect to apply all or a portion of any annual
retainer fee otherwise payable in cash to the acquisition of a below-market
option grant. The option grant will automatically be made on the first trading
day in January in the year for which the retainer fee would otherwise be payable
in cash. The option will have an exercise price per share equal to one-third of
the fair market value of the option shares on the grant date, and the number of
shares subject to the option will be determined by dividing the amount of the
retainer fee applied to the program by two-thirds of the fair market value per
share of common stock on the grant date. As a result, the option will be
structured so that the fair market value of the option shares on the grant date
less the aggregate exercise price payable for those shares will be equal to the
portion of the retainer fee invested in that option. The option will become
exercisable in a series of twelve equal monthly installments over the calendar
year for which the election is to be in effect. However, the option will become
immediately exercisable for all the option shares upon certain changes in the
ownership or control or the death or disability of the optionee while serving as
a Board member.
Limited Stock Appreciation Rights -- Limited stock appreciation rights will
automatically be included as part of each grant made under the automatic option
grant, salary investment option grant and director fee option grant programs and
may be granted to one or more of the Company's officers as part of their option
grants under the discretionary option grant program. Options with such a limited
stock appreciation right may be surrendered to the Company upon the successful
completion of a hostile tender offer for more than 50% of the Company's
outstanding voting stock. In return for the surrendered option, the optionee
will be entitled to a cash distribution from the Company in an amount per
surrendered option share based on the highest price per share of common stock
paid in connection with the tender offer.
Amendment -- The board may amend or modify the 1999 Stock Incentive Plan at
any time, subject to any required shareholder approval. The 1999 Stock Incentive
Plan will terminate no later than June 8, 2009.
1999 EMPLOYEE STOCK PURCHASE PLAN
Introduction -- The 1999 Employee Stock Purchase Plan was adopted by the
Board and approved by the shareholders in June 1999 and will become effective
immediately upon the effective date of the Company's initial public offering.
The 1999 Employee Stock Purchase Plan is designed to allow eligible employees
and the employees of participating subsidiaries to purchase shares of common
stock, at semi-annual intervals, through their periodic payroll deductions.
Share Reserve -- At December 31, 1999, 600 shares of common stock were
reserved for issuance. In February, 2000, 119 shares of common stock were
purchased under the plan. At December 31, 1999, $1,269 was recorded in accrued
liabilities that employees had deposited for purchases of common stock under the
plan.
Purchase Periods -- The plan has a series of successive purchase periods,
each with a maximum duration of six months. The initial purchase period began on
August 12, 1999 and ended on the last business day in January 2000. Thereafter,
purchase periods run from the first business day in February to the last
business day in July of each year, and from the first business day in August to
the last business day in January of the following year.
F-18
<PAGE> 82
QUEST SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Eligible Employees -- Individuals who are scheduled to work more than 20
hours per week for more than five calendar months per year on the start date of
any purchase period may join the plan on such start date.
Payroll Deductions -- A participant may contribute up to 15% of their cash
earnings, and the accumulated payroll deductions will be applied to the purchase
of shares on each semi-annual purchase date. The purchase price per share will
be equal to 85% the fair market value of the common stock on the start date of
the purchase period or, if lower, the fair market value on the semi-annual
purchase date. Semi-annual purchase dates will occur on the last business day of
January and July each year. In no event, however, may any participant purchase
more than .6 shares on any semi-annual purchase date.
Change in Control -- In the event the Company is acquired by merger or
asset sale, all outstanding purchase rights will automatically be exercised
immediately prior to the effective date of the acquisition. The purchase price
will be equal to 85% of the fair market value per share of common stock on the
participant's entry date into the offering period in which such acquisition
occurs or, if lower, the fair market value per share of common stock immediately
prior to such acquisition.
Termination/Amendment -- The 1999 Employee Stock Purchase Plan will
terminate on the last business day of July 2009. The Board may at any time
alter, suspend or discontinue the plan. However, certain amendments to the plan
may require shareholder approval.
As permitted by SFAS No. 123, Accounting for Stock-Based Compensation, the
Company has chosen to continue to account for its stock-based compensation plans
under APB Opinion No. 25 and provide the expanded disclosures specified in SFAS
No. 123.
Compensation costs would not have significantly changed net income or net
income per share in fiscal 1997. Had compensation cost been determined using the
provisions of SFAS No. 123, the Company's net income available to common
shareholders would have been decreased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1999
------------ ------------
<S> <C> <C>
Net income available to common shareholders:
As reported............................................... $2,346 $2,807
====== ======
Pro forma................................................. $2,177 $ 204
====== ======
Basic net income per share:
As reported............................................... $ 0.05 $ 0.07
====== ======
Pro forma................................................. $ 0.05 $ 0.01
====== ======
Diluted net income per share:
As reported............................................... $ 0.05 $ 0.07
====== ======
Pro forma................................................. $ 0.05 $ 0.00
====== ======
</TABLE>
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 used for grants in the years
1997 and 1998, as a private company: expected volatility of zero; risk-free
interest rates of 6%; and expected lives of ten years. Weighted average
assumptions for 1999 were: expected volatility of 221%; risk-free interest rates
of 6%; and expected lives of five years.
F-19
<PAGE> 83
QUEST SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes activity under all of the Company's stock
option plans:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------
1997 1998 1999
----------------- ----------------- -----------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of period........ 1,531 $0.64 975 $0.77 3,367 $ 1.19
Granted................................. -- $ -- 3,383 $1.19 2,391 $14.05
Exercised............................... -- $ -- -- $ -- (34) $ 1.00
Canceled................................ (556) $0.40 (991) $0.77 (473) $ 3.25
----- ----- ----- ------
Balance, end of period.................. 975 $0.77 3,367 $1.19 5,251 $ 6.86
Weighted average fair value of options
granted during the year............... -- $0.53 $13.42
===== ===== ======
</TABLE>
The Company will record compensation expense of approximately $2,978
relating to options granted during the year ended December 31, 1999, to purchase
530 shares of common stock. The expense equals the difference between the fair
market value of the Company's common stock on the grant date and the exercise
price of the stock options and will be recognized ratably over the four-year
vesting period of the stock options. The Company recorded $432 of expense
associated with such option grants during the year ended December 31, 1999 which
is included in compensation and other costs in the accompanying consolidated
financial statements.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
--------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 1.00 -- 1.00......................... 2,161 8.49 $ 1.00 578 $1.00
$ 1.17 -- 3.77......................... 2,166 9.00 $ 2.33 125 $1.17
$ 6.00 -- 12.00......................... 468 9.53 $10.39 -- --
$37.00 -- 45.00......................... 192 9.74 $41.03 -- --
$50.75 -- 64.13......................... 198 9.90 $54.34 -- --
$80.50 -- 80.50......................... 66 9.92 $80.50 -- --
----- ---
5,251 703 $1.03
===== === =====
</TABLE>
Options to purchase 47 shares of common stock at exercise prices of $1.00
to $1.17 per share were exercised in January 2000.
9. COMMITMENTS AND CONTINGENCIES
The Company leases its office facilities and certain equipment under
various operating leases. The majority of these leases are non-cancelable and
obligate the Company to pay costs of maintenance, utilities, and applicable
taxes. The leases on most of the office facilities contain escalation clauses
and renewal options. Total rent expense was $732, $1,038 and $2,593, for the
years ended December 31, 1997, 1998, and 1999.
F-20
<PAGE> 84
QUEST SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Minimum lease commitments under noncancelable operating leases at December
31, 1999, are as follows:
<TABLE>
<S> <C>
Year ending December 31:
2000............................................. $ 3,457
2001............................................. 3,353
2002............................................. 3,245
2003............................................. 2,739
2004............................................. 2,656
Thereafter....................................... 4,652
-------
$20,102
=======
</TABLE>
As a result of the acquisition of MBR (Note 2), the Company is obligated
under capital lease agreements for certain property and equipment requiring
monthly installments of principal and interest (at 10%) through 2004. The
present value of the remaining capital lease payments is $114 at December 31,
1999.
The Company maintains a profit-sharing plan covering substantially all
employees. Quarterly contributions may be made by the Company based upon
employee salaries. Effective January 1, 1997, the Company amended and restated
the profit sharing plan to include a 401(k) plan. The Company contributed $134,
$466 and $929 to the amended plan for the years ended December 31, 1997, 1998
and 1999, respectively.
On May 25, 1999, Mobius Management Systems, Inc., filed a complaint in the
United States District Court for the District of New Jersey (Mobius Management
Systems, Inc. v. Quest Software, Inc., Case No. 99-2337). The complaint alleged
that the Company published three advertisements that were false and misleading
and, therefore, in violation of the Lanham Act and common law, and that the
Company misappropriated unspecified trade secrets belonging to Mobius. The
advertisements that Mobius alleged in its complaint are false and misleading
were two e-mails intended for internal use, a comparison chart believed to have
been prepared by a former Company employee in 1997 for internal purposes, and a
statement made regarding the Company's Vista Plus Java client which had been
posted on the Internet. The case was settled in late 1999, with both sides
agreeing to pay their own legal fees. No other expenses were incurred by the
Company in connection with this matter.
The Company is involved in various claims and legal actions arising in the
ordinary course of business. The litigation process is inherently uncertain, and
it is possible that the resolution of such claims and legal actions may
adversely affect the Company. However, it is the opinion of management that the
ultimate disposition of these matters will not materially affect the Company's
results of operations or financial position.
10. GEOGRAPHIC INFORMATION AND CONCENTRATION OF CREDIT RISK
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
Company's chief operating decision-maker, or decision-making group, in deciding
how to allocate resources and in assessing performance. The operating segments
of the Company are managed separately because each segment represents a
strategic business unit that offers different products or services.
The Company's reportable operating segments include Licenses and Services.
The Software Licenses operating segment develops and markets the Company's
software products. The Services segment provides after-sale support for software
products and fee-based training and consulting services related to the Company's
products.
F-21
<PAGE> 85
QUEST SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company does not separately allocate operating expenses to these
segments, nor does it allocate specific assets to these segments. Therefore,
segment information reported includes only revenues, cost of sales and gross
profit, as this information and the geographic information described below are
the only information provided to the chief operating decision-maker.
Operating segment data for the three years in the period ended December 31,
1999, was as follows:
<TABLE>
<CAPTION>
LICENSES SERVICES TOTAL
-------- -------- -------
<S> <C> <C> <C>
Year ended December 31, 1997:
Revenues.................................................. $12,158 $ 6,157 $18,315
Cost of revenues.......................................... 1,307 1,972 3,279
------- ------- -------
Gross profit........................................... $10,851 $ 4,185 $15,036
======= ======= =======
Year ended December 31, 1998:
Revenues.................................................. $24,901 $ 9,889 $34,790
Cost of revenues.......................................... 3,433 2,507 5,940
------- ------- -------
Gross profit........................................... $21,468 $ 7,382 $28,850
======= ======= =======
Year ended December 31, 1999:
Revenues.................................................. $54,269 $16,599 $70,868
Cost of revenues.......................................... 2,998 4,195 7,193
------- ------- -------
Gross profit........................................... $51,271 $12,404 $63,675
======= ======= =======
</TABLE>
Revenues are attributed to geographic areas based on the location of the
entity to which the products or services were sold. Revenues, gross profit,
income (loss) from operations and long-lived assets concerning principal
geographic areas in which the Company operates are as follows:
<TABLE>
<CAPTION>
UNITED
STATES INTERNATIONAL ELIMINATIONS TOTAL
------- ------------- ------------ -------
<S> <C> <C> <C> <C>
Year ended December 31, 1997:
Revenues..................................... $17,511 $ 1,261 $ (457) $18,315
Gross profit................................. 14,413 1,075 (452) 15,036
Income (loss) from operations................ 1,533 (339) 254 1,448
Long-lived assets............................ 2,336 118 -- 2,454
Year ended December 31, 1998:
Revenues..................................... $32,189 $ 4,172 $(1,571) $34,790
Gross profit................................. 26,594 3,840 (1,584) 28,850
Income (loss) from operations................ 3,839 (252) 102 3,689
Long-lived assets............................ 1,600 315 -- 1,915
Year ended December 31, 1999:
Revenues..................................... $55,532 $19,736 $(4,400) $70,868
Gross profit................................. 55,389 8,701 (415) 63,675
Income from operations....................... 3,270 693 505 4,468
Long-lived assets............................ 17,839 1,233 -- 19,072
</TABLE>
In fiscal 1997, 1998 and 1999, no single customer accounted for 10% or more
of total revenue. No single international location accounted for more than 5% of
total revenues for any of the periods indicated.
F-22
<PAGE> 86
QUEST SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH FISCAL
QUARTER QUARTER QUARTER QUARTER YEAR
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1999
Revenue.................................... $12,839 $15,450 $18,308 $24,271 $70,868
Gross profit............................... 11,251 13,896 16,420 22,108 63,675
Income before income taxes................. 1,632 641 902 2,495 5,670
Net income applicable to common
shareholders............................ 943 31 272 1,561 2,807
Basic earnings per share................... 0.02 0.00 0.01 0.04 0.07
Diluted earnings per share................. 0.02 0.00 0.01 0.04 0.07
YEAR ENDED DECEMBER 31, 1998
Revenue.................................... $ 7,043 $ 6,992 $ 8,734 $12,021 $34,790
Gross profit............................... 5,965 5,522 7,044 10,319 28,850
Income before income taxes................. 1,483 53 1,073 1,416 4,025
Net income applicable to common
shareholders............................ 868 31 627 820 2,346
Basic earnings per share................... 0.02 0.00 0.01 0.02 0.05
Diluted earnings per share................. 0.02 0.00 0.01 0.02 0.05
</TABLE>
12. SUBSEQUENT EVENTS
On January 31 and February 11, 2000, the Company entered into two
non-binding letters of intent to acquire two companies for an aggregate purchase
price of $25 million.
F-23
<PAGE> 87
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Directors of
MBR Technologies, Inc.
We have audited the accompanying balance sheet of MBR Technologies, Inc., a
California Corporation, as of March 31, 1999, the related statements of
operations, shareholders' equity and cash flows from inception (April 23, 1998)
through March 31, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based upon our audit.
We conducted our audit in accordance with generally accepted auditing
standards. 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, the financial statements referred to above present fairly,
in all material respects, the financial position of MBR Technologies Inc. as of
March 31, 1999, and the results of its operations and cash flows from inception
(April 23, 1998) through March 31, 1999, in conformity with generally accepted
accounting principles.
/s/ SWENSON ADVISORS, LLP
Temecula, California
September 29, 1999
F-24
<PAGE> 88
MBR TECHNOLOGIES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 17,
1999 1999
---------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 63,055 $ 229,011
Accounts receivable....................................... 94,918 94,785
Deposits and prepaid assets............................... 21,831 23,737
---------- -----------
Total current assets................................. 179,804 347,533
---------- -----------
Property, equipment and software:
Software.................................................. 262,722 13,548
Furniture and fixtures.................................... 55,722 79,235
Computers and equipment................................... 114,868 186,287
Leasehold improvements.................................... 9,772 9,772
---------- -----------
443,084 288,842
Less: accumulated depreciation.............................. (17,118) (63,131)
---------- -----------
Net property and equipment................................ 425,966 225,711
---------- -----------
Other assets.............................................. 4,044 3,458
---------- -----------
Total assets......................................... $ 609,814 $ 576,702
========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities.................. $ 45,553 30,204
Other current liabilities................................. 13,001 --
Notes payable to Quest Software........................... -- 506,454
Current portion of notes payable to related parties....... 299,136 411,020
Current portion of capital lease obligations.............. 30,342 42,585
Deferred revenue.......................................... 22,912 48,540
---------- -----------
Total current liabilities............................ 410,944 1,038,803
---------- -----------
Long term liabilities:
Capital lease obligations, net of current portion......... 52,443 70,872
---------- -----------
Total liabilities.................................... 463,387 1,109,675
---------- -----------
Shareholders' equity (deficit):
Common stock, no par value; authorized 10,000,000 shares;
Issued and outstanding 1,020,000 shares................ 1,020,000 1,020,000
Accumulated deficit....................................... (873,573) (1,552,973)
---------- -----------
Total shareholders' equity (deficit)................. 146,427 (532,973)
---------- -----------
Total liabilities and shareholders' equity........... $ 609,814 $ 576,702
========== ===========
</TABLE>
See Accompanying Notes to Financial Statements.
F-25
<PAGE> 89
MBR TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FROM INCEPTION PERIOD FROM
(APRIL 23, 1998) JANUARY 1, 1999
THROUGH TO
MARCH 31, 1999 DECEMBER 17, 1999
---------------- -----------------
(UNAUDITED)
<S> <C> <C>
Revenue..................................................... $ 267,825 $ 569,958
Operating expenses:
Salary expenses and related employee benefits............. 248,859 497,291
Research and development.................................. 300,873 208,660
Amortization of software costs............................ 337,278 346,452
Selling, general and administrative....................... 137,087 226,833
Professional fees and outside services.................... 92,710 87,657
Amortization and depreciation............................. 17,568 56,134
---------- ---------
Total operating expenses............................. 1,134,375 1,423,027
---------- ---------
Operating loss.............................................. (866,550) (853,069)
Interest income............................................. 278 467
---------- ---------
Loss before interest and taxes.............................. (866,272) (852,602)
Interest expense............................................ 6,501 31,007
Income tax provision........................................ 800 1,395
---------- ---------
Net loss.................................................... $ (873,573) $(885,004)
========== =========
</TABLE>
See Accompanying Notes to Financial Statements.
F-26
<PAGE> 90
MBR TECHNOLOGIES, INC.
STATEMENT OF SHAREHOLDERS' EQUITY
FROM INCEPTION (APRIL 23, 1998) THROUGH MARCH 31, 1999 AND THE PERIOD
FROM JANUARY 1, 1999 TO DECEMBER 17, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
COMMON RETAINED
STOCK DEFICIT
---------- ----------
<S> <C> <C>
BALANCE, April 23, 1998..................................... $ -- $ --
Net loss.................................................... -- (873,573)
Sale of common stock........................................ 1,020,000 --
---------- ----------
BALANCE, March 31, 1999..................................... 1,020,000 (873,573)
Unaudited:
Net loss.................................................... -- (679,400)
---------- ----------
BALANCE, December 17, 1999.................................. $1,020,000 $1,552,973
========== ==========
</TABLE>
See Accompanying Notes to Financial Statements.
F-27
<PAGE> 91
MBR TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FROM INCEPTION PERIOD FROM
(APRIL 23, 1998) JANUARY 1, 1999
THROUGH TO
MARCH 31, 1999 DECEMBER 17, 1999
---------------- -----------------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(873,573) $(885,004)
Adjustments used in operating activities:
Depreciation and amortization.......................... 17,568 56,234
Amortization of software costs......................... 337,278 346,452
Related party equity exchanges......................... 237,040 --
Change in notes payable to related parties............. 4,136 21,420
Changes in assets and liabilities:
Increase in accounts receivable...................... (94,918) 74,660
Increase in deposits and prepaid expenses............ (21,831) 2,374
Increase in organization costs....................... (4,494) --
Increase in accounts payable and accrued
liabilities....................................... 45,553 (11,127)
Increase in other current liabilities................ 13,001 7,071
Increase in deferred revenue......................... 22,912 (48,540)
--------- ---------
Net cash used in operating activities............. (317,328) (436,460)
Cash flows from investing activities:
Purchase of property and equipment........................ (82,472) (51,732)
--------- ---------
Net cash used in investing activities............. (82,472) (51,732)
Cash flows from financing activities:
Proceeds from common stock................................ 173,501 22,717
Borrowings from related parties........................... 295,000 155,000
Borrowings from Quest Software............................ -- 500,000
Payments on capital lease obligations..................... (5,646) (29,933)
--------- ---------
Net cash provided by financing activities......... 462,855 647,784
--------- ---------
Increase in cash............................................ 63,055 159,592
Cash, beginning of period................................... -- 69,419
--------- ---------
Cash, end of period......................................... $ 63,055 $ 229,011
========= =========
Supplemental Disclosure of Cash flow Information:
Cash paid for interest.................................... $ 2,364 $ 31,007
========= =========
</TABLE>
See Notes 4 and 6 for supplemental cash flow disclosures.
See Accompanying Notes to Financial Statements.
F-28
<PAGE> 92
MBR TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION
MBR Technologies, Inc. (the "Company") was incorporated in California on
April 23, 1998. The Company develops, publishes, markets, and distributes
middleware solutions for enterprise software platforms. The Company's products
are designed to reduce the cost of ownership and maintenance of the PeopleSoft
and CSS/Horizon (ADP) environments. In addition to product sales the Company
also provides annual maintenance for their software and related consulting
services. The Company markets its software through several channels, including:
direct sales, software showcase conferences, joint marketing relationships and
value added resellers (VARs).
Unaudited Information -- The accompanying statement of operations and cash
flows for the period January 1, 1999 to December 17, 1999, have been prepared by
the Company without audit in accordance with Generally Accepted Accounting
Principles for interim financial information and, in the opinion of management,
contain all adjustments consisting only of normal recurring accruals necessary
for a fair presentation of such information. Such information has been prepared
for use in the proforma financial statements required by Quest Software, Inc.
(Quest) in connection with its acquisition in December, 1999 by Quest.
NOTE 2 -- LIQUIDITY AND BUSINESS RISK
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. The Company has an accumulated deficit
of $873,573 and negative working capital of $231,140 as of March 31, 1999. The
Company's ability to continue business in its present form is subject to a
variety of factors, which include, among other things, the Company's ability to
raise working capital and to generate profitable operations. In the opinion of
management, the Company will be able to improve its profitability and raise
adequate capital to meet its current working capital requirements.
The Company is subject to a number of risks associated with companies at a
similar stage of development including; the need for funding its operations and
growth, marketplace acceptance, competition, technological obsolescence, and the
retention and reliance on key personnel.
On February 17, 1999, the Company was sold to Quest Software, Inc. for
$10,638 which consisted of 93,471 shares of Quest's common stock valued at
$9,323,732 and cash of $1,313,853.
NOTE 3 -- SIGNIFICANT ACCOUNTING POLICIES
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 the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents -- The Company considers all unrestricted highly
liquid investments purchased with maturity of three months or less to be cash
equivalents. The carrying value of cash equivalents approximates fair value.
Revenue Recognition -- Revenue from training and consulting fees is
recognized when earned. Revenues from product sales and support fees are
recognized in accordance with the provisions outlined in the AICPA SOP 97-2.
Deferred revenue represents certain post contract customer support recognized on
a monthly basis.
Property and Equipment -- Property and equipment is stated at cost, less
accumulated depreciation and amortization. Depreciation is determined using the
straight line method for all assets based on
F-29
<PAGE> 93
MBR TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
estimated useful lives of the assets, which range from three to seven years for
furniture and equipment, and fifteen years for leasehold improvements.
Software Costs -- Software costs related to the acquisition of the Stat!
software have been capitalized and amortized over the useful life of the
software, estimated to be twenty months. For the year ended March 31, 1999,
$337,278 of these costs have been amortized. For the period January 1, 1999 to
December 17, 1999, $346,452 of these costs have been amortized.
Income Taxes -- For the year ended March 31, 1999 and the period from
January 1, 1999 to December 17, 1999, there was no federal tax liability for
financial statement or tax bases. The minimum franchise tax of $800 has been
accrued.
NOTE 4 -- RELATED PARTIES
During the year ended March 31, 1999, the Secretary and Chief Financial
Officer of the Company loaned $195,000 and $100,000, respectively, to the
Company to be used for operating and investing activities. The loans are due and
payable no later than September 30, 1999, and interest accrues at a rate of 5%
per annum. The Company has obtained a waiver until December 31, 1999. For the
year ended March 31, 1999, $4,136 of interest was accrued on these notes.
During the year ended March 31, 1999, certain related parties received
stock in exchange for goods and services. The Chief Executive Officer and Chief
Operations Officer of the Company received 350,000 and 300,000 shares,
respectively, in exchange for rights to software and related consulting for the
product. The Chief Financial Officer received approximately 118,100 shares for
consulting and certain equipment.
NOTE 5 -- COMMON STOCK AND CAPITAL FUNDING
The Company has one class of common stock. There are no preferences related
to dividends, voting rights or dissolution. During the year ended March 31,
1999, $173,501 new cash was received for common stock sold to related and
unrelated parties. (See Note 4)
NOTE 6 -- COMMITMENTS AND CONTINGENCIES
Operating Leases -- The Company leases office space under an operating
lease agreement with monthly rent of $8,192; which increases to a maximum of
$9,558 in 2003. Rent expense under this lease totaled $24,685 for the year ended
March 31, 1999 and $81,511 for the period from January 1, 1999 to December 17,
1999.
The Company also entered into an operating equipment lease at March 31 that
expires in December 2001.
Future minimum lease payments under these operating leases are as follows:
<TABLE>
<S> <C>
2000...................................................... $104,294
2001...................................................... 108,390
2002...................................................... 112,487
2003...................................................... 116,583
--------
$441,754
========
</TABLE>
Capital Leases -- The Company has entered into certain capital leases.
Interest accrues on each of these leases at a rate of 10% annually. Lease terms
range from 36 to 48 months.
F-30
<PAGE> 94
MBR TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
Future lease payments under capital leases are as follows:
<TABLE>
<S> <C>
2000...................................................... $ 41,160
2001...................................................... 41,160
2002...................................................... 38,476
2003...................................................... 8,293
--------
$129,089
========
</TABLE>
NOTE 7 -- 401(K)PLAN
The Company provides a tax qualified section 401(k) plan for the benefit of
eligible employees. In accordance with Plan guidelines, contributions by the
employer are discretionary. During the year ended March 31, 1999, the Company
contributed $8,546 to the Plan. No contributions were payable at the end of the
fiscal year. The Company paid $1,700 in administrative costs for the Plan.
Contributions made by the Company vest based on the employee's years of
service. Vesting begins after two years of service in 20% annual increments
until the employee is 100% vested after six years.
NOTE 8 -- STOCK OPTION PLAN
In June 1999, the Company adopted the Fiscal Year 2000 Equity Incentive
Plan (2000 Plan.) Under the 1999 Plan, a maximum of 200,000 shares of Common
Stock have been reserved for issuance of options. Options under the 1999 Plan
may be granted at exercise prices determined by the Board of Directors, provided
that the exercise prices shall not be less than 85% of the fair market of the
common stock. The options vest over three years at 33.3% a year commencing on
the grant date. The term of the options are not to exceed 10 years. There were
no options granted under this Plan as of March 31, 1999. Approximately 11,500
options were granted after March 31, 1999 through September 29, 1999.
NOTE 9 -- YEAR 2000 ISSUE (UNAUDITED)
Like other organizations and individuals around the world, the Company
could be adversely affected if the computer systems it uses and those used by
the Company's major customers and vendors do not properly process and calculate
date-related information and data from and after January 1, 2000. This is
commonly known as the "Year 2000 Issue." Management is assessing its computer
systems and the systems compliance issues of its major service providers. Based
on information available to management, the Company's major customers and
vendors are taking steps that they believe are reasonably designed to address
the Year 2000 Issue with respect to computer systems that they use. At this
time, however, there can be no assurance that these steps will be sufficient,
and the failure of a timely completion of all necessary procedures could have a
material adverse effect on the Company's operations. Management will continue to
monitor the status of, and its exposure to, this issue.
NOTE 10 -- NOTES PAYABLE TO QUEST SOFTWARE (UNAUDITED)
Included in the accompanying financial statements at December 17, 1999 are
notes and accrued interest at 7% payable to Quest Software of $506,454, which
Quest Software assumed in the acquisition of the Company in December, 1999.
F-31
<PAGE> 95
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Foglight Software, Inc.
(a company in the development stage)
In our opinion, the accompanying balance sheet and the related statements
of operations, of stockholders' deficit and of cash flows present fairly, in all
material respects, the financial position of Foglight Software, Inc. at December
31, 1998 and the results of its operations and its cash flows for the period
from November 10, 1997 (date of inception) to December 31, 1998 in conformity
with generally accepted accounting principles. 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
audit of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has incurred losses and negative cash flows
from operations since inception that raise substantial doubt about its ability
to continue as a going concern. The Company's ability to continue as a going
concern is dependent, among other factors, on its ability to obtain sufficient
financing to complete the development and commercialization of its products and
to obtain adequate customers for its product. Management's plans with regard to
these matters are also discussed in Note 1. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
/s/ PRICEWATERHOUSECOOPERS LLP
September 13, 1999, except for Note 10,
for which it is October 29, 1999
F-32
<PAGE> 96
FOGLIGHT SOFTWARE, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
1998
------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 2,164,741
Restricted cash........................................... 76,423
Accounts receivable....................................... --
Inventory................................................. --
Prepaid expenses and other current assets................. 189,632
-----------
Total current assets................................. 2,430,796
Property and equipment, net................................. 1,016,124
Other assets................................................ 34,344
-----------
Total assets......................................... $ 3,481,264
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable, current portion............................ $ 3,303,137
Accounts payable.......................................... 229,971
Accrued liabilities....................................... 235,214
Deferred revenue.......................................... 126,134
Capital lease obligations, current portion................ 155,980
-----------
Total current liabilities............................ 4,050,436
Notes payable, net of current portion....................... 4,063,139
Capital lease obligations, net of current portion........... 539,311
-----------
8,652,886
-----------
Commitments (Note 6)
Stockholders' equity:
Series A Convertible Preferred Stock: $0.001 per 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;
2,500,000 shares authorized;
no shares issued and outstanding....................... --
Unearned compensation..................................... (271,780)
Common Stock: $0.001 par value; 15,000,000 shares
authorized; 5,244,274 shares issued and outstanding.... 5,244
Additional paid-in capital................................ 1,404,036
Deficit accumulated during the development stage.......... (6,310,972)
-----------
Total stockholders' deficit.......................... (5,171,622)
-----------
Total liabilities and stockholders' deficit.......... $ 3,481,264
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-33
<PAGE> 97
FOGLIGHT SOFTWARE, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 10, 1997
(DATE OF INCEPTION)
TO
DECEMBER 31, 1998
-------------------
<S> <C>
Net revenues................................................ $ 296,514
Cost of net revenues........................................ (16,501)
-----------
Gross profit................................................ 280,013
Operating expenses:
Research and development.................................. (3,116,105)
Sales and marketing....................................... (1,767,442)
General and administrative................................ (1,116,259)
-----------
Total operating expenses............................. (5,999,806)
-----------
Loss from operations........................................ (5,719,793)
Interest income............................................. 36,487
Interest expense............................................ (310,488)
Other income (expense), net................................. (316,378)
-----------
Loss before provision for income tax........................ (6,310,172)
Provision for income tax.................................... (800)
-----------
Net loss.................................................... $(6,310,972)
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-34
<PAGE> 98
FOGLIGHT SOFTWARE, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
STATEMENTS OF STOCKHOLDERS' DEFICIT
PERIOD FROM NOVEMBER 10, 1997 (DATE OF INCEPTION) TO DECEMBER 31, 1998
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK DEFICIT
------------------------------------- ACCUMULATED
SERIES A SERIES B COMMON STOCK ADDITIONAL DURING THE
---------------- ------------------ ------------------ PAID-IN UNEARNED DEVELOPMENT
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION STAGE
------- ------ --------- ------ --------- ------ ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of Series A
Preferred Stock,
Series B Preferred
Stock and Common
Stock in exchange
for assets in March
1998............... 691,205 $691 1,238,390 $1,238 3,745,153 $3,745 $ 731,005 $ -- $ --
Exercise of Common
Stock Options at
$0.01 per share
from March to July
1998............... -- -- -- -- 1,509,020 1,509 13,581 -- --
Repurchase of
Preferred in April
1998............... (79,585) (79) -- -- -- -- (90,948) -- --
Repurchase of common
stock at $0.01 per
share from August
to December 1998... -- -- -- -- (16,149) (16) (145) --
Unearned
compensation....... -- -- -- -- -- -- 455,861 (455,861) --
Amortization of
unearned
compensation....... -- -- -- -- -- -- -- 184,081 --
Issuance of Series C
Preferred Stock
warrants in
conjunction with
the Comdisco loan
(Note 5)........... -- -- -- -- -- -- 282,188 -- --
Exercise of Series A
warrants at $0.00
per share in
October 1998....... 7,060 -- -- -- -- -- -- -- --
Issuance of Common
Stock at $2.00 per
share in exchange
for consulting
services in
November 1998...... -- -- -- -- 6,250 6 12,494 -- --
Net loss............. -- -- -- -- -- -- -- -- (6,310,972)
------- ---- --------- ------ --------- ------ ---------- --------- -----------
Balance at December
31, 1998........... 618,680 $612 1,238,390 $1,238 5,244,274 $5,244 $1,404,036 $(271,780) $(6,310,972)
======= ==== ========= ====== ========= ====== ========== ========= ===========
<CAPTION>
TOTAL
SHAREHOLDERS'
DEFICIT
-------------
<S> <C>
Issuance of Series A
Preferred Stock,
Series B Preferred
Stock and Common
Stock in exchange
for assets in March
1998............... $ 736,679
Exercise of Common
Stock Options at
$0.01 per share
from March to July
1998............... 15,090
Repurchase of
Preferred in April
1998............... (91,027)
Repurchase of common
stock at $0.01 per
share from August
to December 1998... (161)
Unearned
compensation....... --
Amortization of
unearned
compensation....... 184,081
Issuance of Series C
Preferred Stock
warrants in
conjunction with
the Comdisco loan
(Note 5)........... 282,188
Exercise of Series A
warrants at $0.00
per share in
October 1998....... --
Issuance of Common
Stock at $2.00 per
share in exchange
for consulting
services in
November 1998...... 12,500
Net loss............. (6,310,972)
-----------
Balance at December
31, 1998........... $(5,171,622)
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-35
<PAGE> 99
FOGLIGHT SOFTWARE, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 10, 1997
(DATE OF INCEPTION)
TO
DECEMBER 31, 1998
-------------------
<S> <C>
Cash flows from operating activities:
Net loss.................................................. $(6,310,972)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Accretion on warrants................................ 23,777
Depreciation and amortization........................ 244,839
Amortization of stock-based compensation............. 184,081
Issuance of common stock for consulting services..... 12,500
Changes in current assets and liabilities:
Prepaid expenses and other current assets......... 68,948
Accounts payable.................................. 229,971
Accrued liabilities............................... 305,233
Deferred revenue.................................. 126,134
-----------
Net cash used in operating activities........... (5,115,489)
-----------
Cash flows from financing activities:
Proceeds from issuance of common stock.................... 15,090
Cost of repurchase of common stock........................ (91,188)
Principal payments on capital lease obligations........... (67,249)
Proceeds from notes payable............................... 7,500,000
Increase in restricted cash............................... (76,423)
-----------
Net cash provided by financing activities....... 7,280,230
-----------
Net increase in cash and cash equivalents................... 2,164,741
Cash and cash equivalents at beginning of period............ --
-----------
Cash and cash equivalents at end of period.................. $ 2,164,741
===========
Supplemental cash flow information:
Cash paid for income taxes................................ $ 800
===========
Cash paid for interest.................................... $ 81,786
===========
Supplemental non-cash investing and financing activity:
Property and equipment acquired under capital leases...... $ 755,802
===========
Issuance of common stock for consulting services.......... $ 12,500
===========
</TABLE>
Assets and liabilities transferred from Capital Technology, Inc. (see Note
2).
The accompanying notes are an integral part of these financial statements.
F-36
<PAGE> 100
FOGLIGHT SOFTWARE, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
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. Since its formation the Company has
been in the development stage with its principal activities consisting of
recruiting personnel, developing its initial technology and raising capital.
In March 1999, the Company changes its name from Resolute Software to
Foglight Software Inc.
BASIS OF PRESENTATION
The financial statements have been prepared assuming the Company will
continue as a going concern. The Company has sustained losses from operations
since the Company's inception in November 1997, related primarily to the
development of its products. In 1999, the Company's management plans to fund
working capital requirements through additional financing, which the Company is
seeking. The Company's continued existence is dependent on obtaining this
financing or achieving profitable operations. These factors raise substantial
doubt about the Company's ability to continue as a going concern. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
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 as the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
REVENUE RECOGNITION
Under SOP 97-2, product license revenue is recognized upon shipment, if a
signed contract exists, the fee if fixed and determinable, collection of
resulting receivable is probable and product returns are reasonably estimable.
For contracts with multiple elements (e.g. product licenses maintenance, and
other services), in which the Company does not have objective evidence of fair
value for each component, the Company must recognize revenue ratably over the
period of the contract for which services will be provided.
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.
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 condition and, generally, requires no collateral from its customers.
For the period from November 10, 1997 (date of inception) to December 31,
1998, two customers accounted for 61.7% and 11.8% respectively of the Company's
revenues.
F-37
<PAGE> 101
FOGLIGHT SOFTWARE, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS
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.
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 AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. The Company's
cash and cash equivalents are maintained in accounts with one U.S. financial
institution.
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.
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. The Company has not capitalized any software
development costs to date as such costs have not been material.
INCOME TAXES
Income taxes are recorded under the liability method, under which deferred
tax assets and liabilities are determined based on the difference between the
financial statement and tax bases of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to affect
taxable income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized.
COMPREHENSIVE INCOME
The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income." This statement requires the
disclosure of comprehensive income and its components in a full set of general
purpose financial statements or on the statement of operations. Comprehensive
income is defined as net income plus revenues, expenses, gains and losses that,
under generally accepted accounting principles, are excluded from net income.
For the period ended December 31, 1998, there are no material differences
between comprehensive income and net income.
F-38
<PAGE> 102
FOGLIGHT SOFTWARE, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS
STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," ("APB No. 25") and complies with the
disclosure provisions of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS No. 123").
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
No. 133"). The new standard requires companies to record derivatives on the
balance sheet as assets or liabilities, measured at fair value. Gains or losses
resulting from changes in the values of those derivatives should be reported in
the statement of operations or as a deferred item, depending on the use of
derivatives and whether they qualify for hedge accounting. The key criterion for
hedge accounting is that the derivative must be highly effective in achieving
offsetting changes in fair value of cash flows of the hedged items during the
term of the hedge. SFAS No. 133 will be effective for fiscal years beginning
after June 15, 2000. Currently, the Company does not hold derivative instruments
or engage in hedging activities.
2. INITIAL FUNDING FROM CAPITAL TECHNOLOGIES INTEGRATION, INC.
On March 16, 1998 the Company received certain assets and liabilities from
Capital Technologies Integration, Inc. in exchange for an issuance of stock to
Capital Technologies Integration, Inc. The exchange was recorded at historical
cost since there was no change in ownership. The historical cost of the net
assets received are as follows:
<TABLE>
<S> <C>
Accounts receivable......................................... $259,721
Other current assets........................................ 33,203
--------
292,924
Property and equipment...................................... 505,161
--------
Total assets......................................... 798,085
Accrued liabilities......................................... 61,406
--------
Net assets........................................... $736,679
========
</TABLE>
In addition, Capital Technologies Integration, Inc. loaned $1,500,000 to
the Company (see Note 5).
3. BALANCE SHEET COMPONENTS
<TABLE>
<CAPTION>
DECEMBER 31,
1998
------------
<S> <C>
Property and equipment, net:
Computer equipment........................................ $1,080,343
Furniture and fixtures.................................... 180,620
----------
1,260,963
Less: Accumulated depreciation and amortization........... (244,839)
----------
$1,016,124
==========
</TABLE>
F-39
<PAGE> 103
FOGLIGHT SOFTWARE, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS
Property and equipment includes $755,802 of computer equipment and
internal-use software under capital leases at December 31, 1998. Accumulated
depreciation and amortization of assets under capital leases totaled $94,660 at
December 31, 1998.
<TABLE>
<CAPTION>
DECEMBER 31,
1998
--------------
<S> <C>
Accrued liabilities:
Payroll and related expenses.............................. $122,379
Accrued interest expense.................................. 73,500
Other..................................................... 39,335
--------
$235,214
========
</TABLE>
4. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 10, 1997
(DATE OF INCEPTION)
TO
DECEMBER 31, 1998
-------------------
<S> <C>
Current:
State and local........................................... $800
----
$800
====
</TABLE>
Deferred tax assets and liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1998
------------
<S> <C>
Deferred tax assets:
Net operating loss carryforwards.......................... $ 2,118,855
Accruals and reserves..................................... 82,855
Capitalized start up costs................................ 199,905
Depreciation and amortization............................. 2,601
Deferred revenue.......................................... 33,859
-----------
2,438,075
-----------
Net deferred tax assets..................................... 2,438,075
Valuation allowance......................................... (2,438,075)
-----------
$ --
===========
</TABLE>
Management believes that, based on cumulative losses, it is more likely
than not that the deferred tax assets will not be utilized, such that a full
valuation allowance has been recorded.
At December 31, 1998, the Company had approximately $5,319,000 of federal
and state net operating loss carryforwards available to offset future taxable
income which expire in varying amounts beginning in 2018 and 2006, respectively.
The Company's net operating loss carryforwards may be subject to certain
limitations on annual utilization attributable to equity transactions that
result in changes in ownership, as defined by the Tax Reform Act of 1986.
F-40
<PAGE> 104
FOGLIGHT SOFTWARE, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS
5. BORROWINGS
EQUIPMENT LEASE LINE
At December 31, 1998, the Company had $695,291 outstanding and due under
equipment lease financing lines with the leasing companies Phoenix Leasing and
Comdisco Inc. 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, and charges interest
at rates of 18.13% and 18.59% per annum, respectively.
In conjunction with the Comdisco lease line, the Company issued warrants 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 leases contain various covenants which the Company has not fully
complied with but which have been waived by the leasing companies.
NOTES PAYABLE
Notes payable consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1998
------------
<S> <C>
5.88% Convertible notes:
matures July 24, 2008..................................... $ 3,000,000
10.50% Captech note:
matures March 16, 2008.................................... 1,624,687
11.50% Comdisco note;
matures September 30, 2001................................ 2,741,589
-----------
7,366,276
Less: Current portion....................................... (3,303,137)
-----------
$ 4,063,139
===========
</TABLE>
CONVERTIBLE NOTE
The entire principal and accrued interest on the convertible notes are
convertible into 1,500,000 shares of Series C preferred stock of the Company at
the option of the holder in a ten day period following the closing of the next
sale of the Company's equity.
The notes were converted into Series C preferred stock in May 1999.
There is interest in arrears on the notes of $73,500.
CAPTECH NOTE
Under an agreement signed with Capital Technologies Integration, Inc. 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 $75,000,000, or
F-41
<PAGE> 105
FOGLIGHT SOFTWARE, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS
(ii) upon a change of control, provided such a change of control establishes a
valuation for the Company of at least $75,000,000. For the 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 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.
There is interest in arrears of $124,687.
COMDISCO NOTE
In conjunction with the Comdisco note the Company issued warrants to
purchase 187,500 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 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 for the period from November 10, 1997 (date of
inception) to December 31, 1998 is $23,777.
The Loan is collateralized by substantially all the assets of the Company
not collateralized by the lease lines.
The notes are subject to certain covenants that the Company is not
currently in compliance with, however, the lender has currently waived its
covenants.
Principal payments under notes payable are as follows:
<TABLE>
<S> <C>
Year Ending December 31,
1999...................................................... $ 397,200
2000...................................................... 1,286,704
2001...................................................... 1,316,096
2002...................................................... --
2003...................................................... --
Thereafter................................................ 4,500,000
----------
$7,500,000
==========
</TABLE>
6. COMMITMENTS
PURCHASE COMMITMENTS
At December 31, 1998, 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 period from November 10, 1997 (date of inception) to December 31, 1998 was
$179,869. The Company recognizes rent expense on a straight-line basis over the
lease period, and has accrued for rent expense incurred but not paid.
F-42
<PAGE> 106
FOGLIGHT SOFTWARE, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS
Future minimum lease payments under noncancelable operating and capital
leases, including lease commitments entered into subsequent to December 31, 1998
are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- ----------
<S> <C> <C>
Year Ending December 31,
1999...................................................... $253,888 $ 306,510
2000...................................................... 284,430 310,116
2001...................................................... 297,745 313,722
2002...................................................... 52,013 158,664
-------- ----------
Total minimum lease payments................................ 888,076 $1,089,012
==========
Less: Amount representing interest.......................... 192,785
--------
Present value of capital lease obligations.................. 695,291
Less: Current portion....................................... 155,980
--------
Long-term portion of capital lease obligations......... $539,311
========
</TABLE>
7. CONVERTIBLE PREFERRED STOCK
Convertible Preferred Stock at December 31, 1998 consists of the following:
<TABLE>
<CAPTION>
SHARES
------------------------- PROCEEDS NET OF
SERIES AUTHORIZED OUTSTANDING ISSUANCE COSTS
------ ---------- ----------- ---------------
<S> <C> <C> <C>
A............................................. 710,029 618,680 $ 612
B............................................. 1,700,000 1,238,390 1,238
C............................................. 2,500,000 -- --
--------- --------- ------
4,910,029 1,857,070 $1,850
========= ========= ======
</TABLE>
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 the Company's assets in a 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
F-43
<PAGE> 107
FOGLIGHT SOFTWARE, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS
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, 1998.
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
There is a further 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.
8. COMMON STOCK
The Company's Articles of Incorporation, as amended, authorize the Company
to issue 15,000,000 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, 1998, there were 1,378,623 shares subject to repurchase.
F-44
<PAGE> 108
FOGLIGHT SOFTWARE, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS
9. STOCK OPTION PLANS
In 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 1,735,000
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,
respectively. 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.
<TABLE>
<CAPTION>
SHARES NUMBER WEIGHTED
AVAILABLE OF OPTIONS AVERAGE
FOR GRANT OUTSTANDING PRICE TOTAL
---------- ----------- -------- --------
<S> <C> <C> <C> <C>
Initial shares reserved........................ 1,735,000 -- $ -- $ --
Options granted.............................. (1,914,743) 1,914,743 0.02 43,182
Shares issued from option pool............... (6,250) -- -- --
Options exercised............................ -- (1,509,020) 0.01 (15,090)
Options canceled............................. 201,299 (201,299) 0.02 (4,008)
---------- ---------- --------
Balances at December 31, 1998.................. 15,306 204,424 $0.12 $ 24,084
========== ========== ========
</TABLE>
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation
("SFAS No. 123")." 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. Determination of compensation cost for the Plan based on the fair
value at the grant date for awards in 1998 consistent with the provisions of
SFAS No. 123, would not result in a significant difference from the reported net
loss for the period from November 10, 1997 (date of inception) to December 31,
1998.
The fair value of each option grant is estimated on the date of grant using
the minimum value method assuming an expected life of four years and a risk-free
interest rate of 4.62% to 5.89%. The weighted average expected life was
calculated based on the vesting period and the expected exercise behavior of
options granted. The risk-free interest rate was calculated in accordance with
the grant date and expected life calculated of options granted.
In connection with certain stock option grants during the year ended
December 31, 1998, the Company recorded stock-based compensation totaling
$455,861, which is being amortized in accordance with FASB Interpretation No. 28
over the vesting periods of the related options, which is generally four years.
Stock-based compensation amortization recognized during the year ended December
31, 1998 totaled $184,081.
F-45
<PAGE> 109
FOGLIGHT SOFTWARE, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS
The weighted average fair value of the options granted was $0.02 in the
period from November 10, 1997 (date of inception) to December 31, 1998.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICE OUTSTANDING LIFE PRICE OUTSTANDING PRICE
-------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.01 -- 0.20.................................... 204,424 9.6 $0.12 204,424 $0.12
</TABLE>
10. SUBSEQUENT EVENTS
On January 13, 1999, the Company increased the shares reserved under the
1998 plan to a total of 2,000,000 shares. On April 28, 1999 the Company
increased the shares reserved under the 1998 plan to a total of 2,500,000
shares.
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%.
On March 31, 1999, the Board authorized that shares of Series C Convertible
Preferred Stock increase to a total of 3,189,250. On April 28, 1999, the Board
authorized that the shares of Series C Convertible Preferred Stock and Common
Stock increase to a total of 4,789,250 and 16,600,000, respectively.
In April 1999, the Company issued 1,000,000 shares of Series C Convertible
Preferred Stock, along with warrants for 499,995 shares of Series C Convertible
Preferred Stock, for $2,000,000.
In July 1999 and October 1999, the Company issued an aggregate of
$1,000,000 of promissory notes convertible into shares of Series C Convertible
Preferred Stock along with warrants for 249,994 shares of Series C Convertible
Preferred Stock. The warrants terminate upon the earliest of September 30, 2004
or the sale of the business and have an exercise price of $2.00.
F-46
<PAGE> 110
FOGLIGHT SOFTWARE, INC.
UNAUDITED BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER 30,
1999
-------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 604,429
Restricted cash........................................... 50,207
Accounts receivable, net.................................. 1,004,988
Prepaid expenses and other current assets................. 222,217
------------
Total current assets................................. 1,881,841
Property and equipment, net................................. 945,265
Other assets................................................ 34,344
------------
Total assets......................................... $ 2,861,450
============
LIABILITIES AND CAPITAL DEFICIENCY
Current liabilities:
Notes payable, current portion............................ $ 1,760,310
Accounts payable.......................................... 242,854
Accrued liabilities....................................... 630,441
Deferred revenue.......................................... 344,612
Capital lease obligations, current portion................ 353,020
------------
Total current liabilities............................ 3,331,237
Notes payable, net of current portion..................... 3,094,384
Capital lease obligations, net of current portion......... 511,948
Commitments and contingencies (Note 6)
Stockholders' equity (deficiency):
Convertible Preferred Stock: $0.001 par value, 4,910,029
shares authorized; 4,357,070 shares issued and
outstanding............................................ 4,350
Unearned compensation..................................... (1,293,511)
Common stock: $0.001 par value; 15,000,000 shares
authorized;
4,997,123 shares issued and outstanding................ 4,997
Additional paid-in-capital................................ 8,787,451
Accumulated deficit....................................... (11,579,406)
------------
Total stockholders' deficiency....................... (4,076,119)
------------
Total liabilities and stockholders' deficit................. $ 2,861,450
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-47
<PAGE> 111
FOGLIGHT SOFTWARE, INC.
UNAUDITED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1998 1999
----------- -----------
<S> <C> <C>
Net revenues................................................ $ 237,037 $ 2,704,063
Cost of net revenues........................................ 13,425 105,752
----------- -----------
Gross profit................................................ 223,612 2,598,311
Operating expenses:
Research and development.................................. 1,941,436 2,897,829
Sales and marketing....................................... 1,254,168 2,839,268
General and administrative................................ 541,832 903,136
----------- -----------
Total operating expenses............................. 3,737,436 6,640,233
----------- -----------
Loss from operations........................................ (3,513,824) (4,041,922)
Other expense, net.......................................... (446,575) (566,012)
----------- -----------
Loss before provision for income taxes...................... (3,960,399) (4,607,934)
Provision for income taxes.................................. 800 500
----------- -----------
Net loss.................................................... (3,961,199) (4,608,434)
----------- -----------
Value of beneficial conversion feature...................... -- (660,000)
----------- -----------
Net loss applicable to common shareholders.................. $(3,961,199) $(5,268,434)
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-48
<PAGE> 112
FOGLIGHT SOFTWARE, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1998 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(3,961,199) $(4,608,434)
Adjustments to reconcile net loss to net cash used in
operating activities:
Amortization of debt discount........................ -- 106,669
Depreciation and amortization........................ 138,484 357,198
Amortization of stock-based compensation............. 92,986 280,295
Changes in current assets and liabilities:
Accounts receivable............................... 89,106 (1,004,988)
Prepaid expenses and other current assets......... (161,971) (32,585)
Other assets...................................... (26,444) --
Accounts payable.................................. 250,066 12,883
Accrued liabilities............................... 299,668 395,227
Deferred revenue.................................. 34,334 218,478
----------- -----------
Net cash used in operating activities........... (3,244,970) (4,275,257)
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment....................... (26,159) (53,290)
----------- -----------
Net cash used in investing activities (26,159) (53,290)
Cash flows from financing activities:
Proceeds from issuance of common stock.................... 15,090 6,019
Proceeds from issuance of preferred stock................. -- 1,981,897
Cost of repurchase of common stock........................ (161) (4,887)
Cost of repurchase of preferred stock..................... (91,027) --
Principal payments on capital lease obligations and notes
payable................................................ -- (274,176)
Proceeds from notes payable............................... 4,482,732 1,033,166
Decrease (increase) in restricted cash.................... (75,730) 26,216
----------- -----------
Net cash provided by financing activities....... 4,330,904 2,768,235
----------- -----------
Net increase (decrease) in cash and cash equivalents........ 1,059,775 (1,560,312)
Cash and cash equivalents at beginning of period............ -- 2,164,741
----------- -----------
Cash and cash equivalents at end of period.................. $ 1,059,775 $ 604,429
=========== ===========
Supplemental cash flow information:
Cash paid for income taxes................................ $ 800 $ 800
=========== ===========
Cash paid for interest.................................... $ 81,786 $ 316,634
=========== ===========
Supplemental non-cash investing and financing activity:
Property and equipment acquired under capital leases...... $ 471,603 $ 233,049
=========== ===========
Conversion of notes payable to preferred stock............ $ 3,117,600
===========
Recognition of beneficial conversion feature associated
with preferred stock issuance.......................... $ 660,000
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-49
<PAGE> 113
FOGLIGHT SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited interim financial statements at September 30,
1999 and, for the nine months ended September 30, 1998 and 1999, respectively,
reflect all adjustments (consisting of normal recurring accruals) which, in the
opinion of management, are necessary for a fair presentation of the results for
the periods presented and do not include all of the information and footnotes
required by generally accepted accounting principles for annual financial
statements.
These financial statements should be read in conjunction with the Company's
annual audited financial statements for the period from November 10, 1997 (date
of inception) to December 31, 1998.
The Company emerged from the development stage during the nine months ended
September 30, 1999. The Company's Independent accountants report for the period
from November 10, 1997 (date of inception) to December 31, 1998 contained an
explanatory paragraph regarding the Company's continuation as a going concern.
On January 7, 2000, the Company was purchased by Quest Software, Inc. (Quest) in
exchange for 1,187,603 shares of Quest's common stock valued at $104,167,628,
estimated cash payments of $424,182, the assumption of unvested stock option
valued at $2,088,000 and the assumption of the net liabilities at the date of
purchase estimated to be $5,106,000.
2. NEW 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.
3. NOTES PAYABLE
In April 1999, in connection with the issuance of 1,000,000 shares of
Series C Convertible Preferred stock (Series C) (Note 4), $3,000,000 in
previously outstanding convertible notes were converted into 1,500,000 shares of
Series C Stock.
In July 1999, the Company received $500,000 from a third party which is
payable, plus interest at 5.32%, in June 2000. In connection with this note, the
Company issued warrants to purchase 124,997 shares of Series C Stock at a price
of $2.00 per share. The Company has determined the relative fair value of the
note and warrants to be $325,000 and $175,000, respectively. The fair value of
the warrants has been recorded as a discount on the debt and will be amortized
over the one-year term of the note.
During August and September of 1999, the Company received approximately
$423,000 from the same third party noted above as an advance on an additional
financing arrangement completed in October 1999. The additional financing
provided for a loan of $500,000 under similar terms noted above, and included
the issuance of 124,997 warrants to purchase Series C Stock at a price of $2.00
per share. The warrants were not issued until subsequent to September 30, 1999.
However, shareholders received the right to the warrants when the funds were
advanced to the Company in August and September of 1999. Approximately $148,000
has been ascribed to these rights as of September 30, 1999.
During the nine-months ended September 30, 1999, the Company made principal
and interest payments totalling approximately $390,000 to Comdisco, Inc. under
the original terms of the note.
4. STOCKHOLDER'S EQUITY
In April 1999, the Company issued 1,500,000 of Series C Stock at $2.00 per
share upon the conversion of $3,000,000 in previously outstanding convertible
notes.
F-50
<PAGE> 114
FOGLIGHT SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS
In April 1999, the Company issued 1,000,000 shares of Series C Stock for
$2,000,000. In connection with this issuance, the Company issued warrants to
purchase 499,995 shares of Series C 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 and recorded the $660,000 as the value of the beneficial
conversion feature because of the Series C Stock being immediately convertible.
The beneficial conversion feature has been shown as an increase to the net loss
available to common shareholders in the accompanying financial statements.
5. STOCK OPTION PLANS
The following table summarizes information about stock options outstanding
as of September 30, 1999:
<TABLE>
<CAPTION>
NUMBER OF
OPTIONS
EXERCISABLE
AS OF
NUMBER OF SEPTEMBER 30,
SHARES PRICE PER SHARE 1999
--------- --------------- -------------
<S> <C> <C> <C>
Balance at January 1, 1999....................... 204,424 $0.01-$0.20
Granted........................................ 744,122 0.20- 0.20
Exercised...................................... (184,533) 0.01- 0.20
Canceled....................................... (131,565) 0.01- 0.20
---------
Balance at September 30, 1999.................... 632,448 $0.01-$0.20 632,448
=========
</TABLE>
In connection with certain stock option grants during the nine months ended
September 30, 1999, the Company recorded stock based compensation totalling $1.3
million, which is being amortized over the vesting periods of the related
options. Stock based compensation recognized during the nine months ended
September 30, 1999 totaled approximately $280,000.
6. INITIAL FUNDING FROM CAPITAL TECHNOLOGIES INTEGRATION, INC.
On March 16, 1998 the Company received certain assets and liabilities from
Capital Technologies Integration, Inc. in exchange for an issuance of stock to
Capital Technologies Integration, Inc. The exchange was recorded at historical
cost since there was no change in ownership. The historical cost of the net
assets received are as follows:
<TABLE>
<S> <C>
Accounts receivable......................................... $259,721
Other current assets........................................ 33,203
--------
292,924
Property and equipment...................................... 505,161
--------
Total assets......................................... 798,085
Accrued liabilities......................................... 61,406
--------
Net assets........................................... $736,679
========
</TABLE>
7. COMMITMENTS AND CONTINGENCIES
The Company is involved in various claims and legal actions arising in the
ordinary course of business. The litigation process is inherently uncertain, and
it is possible that the resolution of such claims and legal actions may
adversely affect the Company. However, it is the opinion of management that the
ultimate disposition of these matters will not materially affect the Company's
results of operations or financial position.
F-51
<PAGE> 115
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 $5,106,000. 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 acquisition 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.
F-52
<PAGE> 116
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................................... 5,333 196 5,529 (1,308)(3) 4,221
-------- -------- -------- -------- --------
Total current assets................... 74,747 386 75,133 (1,732) 73,401
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 -- 11,452 104,236(1) 115,688
Deferred income taxes...................... 415 -- 415 2,850(1) 3,265
Other assets............................... 431 34 465 -- 465
-------- -------- -------- -------- --------
Total assets........................... $ 99,149 $ 1,286 $100,435 $110,054 $210,489
======== ======== ======== ======== ========
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..................... 7,062 780 7,842 -- 7,842
Income taxes payable....................... 2,030 -- 2,030 -- 2,030
Deferred support revenue................... 13,932 226 14,158 -- 14,158
Deferred license revenue................... 4,651 -- 4,651 -- 4,651
Capital lease obligations, current
portion.................................. -- 361 361 -- 361
-------- -------- -------- -------- --------
Total current liabilities.............. 36,077 6,194 42,271 (2,808) 39,463
-------- -------- -------- -------- --------
Notes payable, net of current portion...... -- 1,279 1,279 -- 1,279
Long-term liabilities...................... 403 419 822 -- 822
Shareholders' equity:
Preferred stock............................ -- 5 5 (5)(2) --
Common stock and additional paid in
capital.................................. 94,010 9,164 103,174 97,092(1)(2)(3) 200,266
Retained earnings (deficit)................ 1,864 (14,381) (12,517) 14,381(1) 1,864
Accumulated other comprehensive income
(loss)................................... (26) -- (26) -- (26)
Unearned compensation costs................ -- (1,394) (1,394) 1,394(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 (6,606) 56,063 112,862 168,925
-------- -------- -------- -------- --------
Total liabilities and shareholders'
equity.............................. $ 99,149 $ 1,286 $100,435 $110,054 $210,489
======== ======== ======== ======== ========
</TABLE>
F-53
<PAGE> 117
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 $ 2,449 $57,098 $ -- $ 57,098
Services............... 16,599 190 377 17,166 -- 17,166
------- ----- ------- ------- -------- --------
Total revenues.... 70,868 570 2,826 74,264 -- 74,264
Cost of Revenues:
Licenses............... 2,998 346 133 3,477 1,567(4) 5,044
Services............... 4,195 195 187 4,577 -- 4,577
------- ----- ------- ------- -------- --------
Total cost of
revenues....... 7,193 541 320 8,054 1,567 9,621
------- ----- ------- ------- -------- --------
Gross profit............. 63,675 29 2,506 66,210 (1,567) 64,643
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 1,261 11,691 -- 11,691
Other compensation
costs and goodwill
amortization........ 1,243 -- 403 1,646 23,139(4) 24,785
------- ----- ------- ------- -------- --------
Total operating
expenses....... 59,207 882 9,078 69,167 23,139 92,306
------- ----- ------- ------- -------- --------
Income (loss) from
operations............. 4,468 (853) (6,572) (2,957) (24,706) (27,663)
Other income (expense),
net.................... 1,202 (31) (837) 334 (87)(5) 247
------- ----- ------- ------- -------- --------
Income (loss) before
income tax provision... 5,670 (884) (7,409) (2,623) (24,793) (27,416)
Income tax provision
(benefit).............. 2,273 1 1 2,275 (3,327)(6) (1,052)
------- ----- ------- ------- -------- --------
Net income (loss)........ 3,397 (885) (7,410) (4,898) (21,466) (26,364)
Preferred stock dividends
and value of beneficial
conversion feature..... 590 -- 660 1,250 -- 1,250
------- ----- ------- ------- -------- --------
Net income (loss)
applicable to common
shareholders........... $ 2,807 $(885) $(8,070) $(6,148) $(21,466) $(27,614)
======= ===== ======= ======= ======== ========
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>
F-54
<PAGE> 118
NOTES TO PRO FORMA FINANCIAL STATEMENTS
(1) To reflect the elimination of Foglight's equity accounts and the allocation
of the purchase price of $111,785,810 as follows:
<TABLE>
<S> <C>
Goodwill................................................... $103,785,810
Deferred tax asset, net.................................... 2,850,000
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 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 ($20,913,829)
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.
F-55
<PAGE> 119
Inside Back Cover
[QUEST SOFTWARE LOGO]
[Background consists of the names of certain Quest customers]
Quest Software products have been sold to thousands of corporations,
governmental agencies and other organizations worldwide. The companies listed
here are a representative sampling of customers who have purchased at least
$100,000 of software licenses since January 1996.
<PAGE> 120
[QUEST SOFTWARE LOGO]
<PAGE> 121
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable in connection with the sale and
distribution of the securities being registered. All amounts are estimates
except the SEC registration fee and the NASD filing fees.
<TABLE>
<S> <C>
SEC Registration Fee........................................ $ 59,136
NASD Filing Fee............................................. 25,760
Nasdaq National Market Listing Fee.......................... 0
Printing and Engraving Expenses............................. 100,000
Legal Fees and Expenses..................................... 100,000
Accounting Fees and Expenses................................ 225,000
Blue Sky Fees and Expenses.................................. 2,500
Transfer Agent Fees......................................... 10,000
Directors' & Officers' Liability Insurance.................. 0
Miscellaneous............................................... 27,604
--------
Total............................................. $550,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Registrant's Amended and Restated Articles of Incorporation limit the
personal liability of its directors for monetary damages to the fullest extent
permitted by the California General Corporation Law (the "California Law").
Under the California Law, a director's liability to a company or its
shareholders may not be limited (1) for acts or omissions that involve
intentional misconduct or a knowing and culpable violation of law, (2) for acts
or omissions that a director believes to be contrary to the best interest of the
Registrant or its shareholders or that involve the absence of good faith on the
part of the director, (3) for any transaction from which a director derived an
improper personal benefit, (4) for acts or omissions that show a reckless
disregard for the director's duty to the Registrant or its shareholders in
circumstances in which the director was aware, or should have been aware, in the
ordinary course of performing a director's duties, of a risk of a serious injury
to the Registrant or its shareholders, (5) for acts or omissions that constitute
an unexcused pattern of inattention that amounts to an abdication of the
director's duty to the Registrant or its shareholders, (6) under Section 310 of
the California Law concerning contacts or transactions between the Registrant
and a director, or (7) under Section 316 of the California Law concerning
directors' liability for improper dividends, loans and guarantees. The
limitation of liability does not affect the availability of injunctions and
other equitable remedies available to the Registrant's shareholders for any
violation by a director of the director's fiduciary duty to the Registrant or
its shareholders.
The Registrant's Articles of Incorporation also include an authorization
for the Registrant to indemnify its "agents" (as defined in Section 317 of the
California Law), through bylaw provisions, by agreement or otherwise, to the
fullest extent permitted by law. Pursuant to this provision, the Registrant's
Bylaws provide for indemnification of the Registrant's directors, officers and
employees. In addition, the Registrant, at its discretion, may provide
indemnification to persons whom the Registrant is not obligated to indemnify.
The Bylaws also allow the Registrant to enter into indemnity agreements with
individual directors, officers, employees and other agents. These indemnity
agreements have been entered into with all directors and executive officers and
provide the maximum indemnification permitted by law. These agreements, together
with the Registrant's Bylaws and Articles of Incorporation, may require the
Registrant, among other things, to indemnify these directors or executive
officers (other than for liability resulting from willful misconduct of a
culpable nature), to advance expenses to them as they are incurred, provided
that they undertake to repay the amount advanced if it is ultimately determined
by a court that they are not entitled to indemnification, and to obtain
directors' and officers' insurance if available on
II-1
<PAGE> 122
reasonable terms. Section 317 of the California Law and the Registrant's Bylaws
make provision for the indemnification of officers, directors and other
corporate agents in terms sufficiently broad to indemnify such persons, under
certain circumstances, for liabilities (including reimbursement of expense
incurred) arising under the Securities Act. The Registrant currently maintains
directors' and officers' liability insurance.
There is no pending litigation or proceeding involving any director,
officer, employee or agent of the Registrant in which indemnification will be
required or permitted. Moreover, the Registrant is not aware of any threatened
litigation or proceeding that might result in a claim for such indemnification.
The Registrant believes that the foregoing indemnification provisions and
agreements are necessary to attract and retain qualified persons as directors
and executive officers. The Underwriting Agreement (the form of which is filed
as Exhibit 1.1 hereto) provides for indemnification by the Underwriters of the
Registrant and its officers and directors, and by the Registrant of the
Underwriters, for certain liabilities arising under the Securities Act or
otherwise.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
During the past three years, the Registrant has issued unregistered
securities to a limited number of persons as described below:
1. In March 1996, the Registrant issued 1,950,000 shares of common stock
to Eyal M. Aronoff in connection with the Registrant's purchase of
R*Tech Systems, Inc.
2. In May 1997, the Registrant issued 663,000 shares of common stock to
the former shareholders of Common Sense Computing Pty. Ltd. in
connection with the Registrant's acquisition of Common Sense
Computing.
3. In October 1997, the Registrant sold to Vincent C. Smith, the
Registrant's Chief Executive Officer, 3,900,000 shares of common stock
for aggregate consideration of $2,200,000. Mr. Smith executed a
promissory note for the purchase price. This note has a term of five
years and bears interest at 6.2%. This note is also secured, in part,
by the 3,900,000 shares of common stock purchased from the Registrant.
4. In April 1998, the Registrant sold an aggregate of 975,000 shares of
common stock for an aggregate purchase price of $750,000, for which
Mr. Aronoff executed a promissory note and agreed to cancel an option
to purchase up to 2.5% of the outstanding capital stock of the
Registrant. The note has a term of four years, bears interest at the
rate of 5.7% per annum, and up to 25% of the original principal amount
of the note may be prepaid in each year of the four-year term.
5. In April 1999, the Registrant sold an aggregate of 888,889 shares of
its Series A Preferred Stock at a price of $5.625 per share to InSight
Capital Partners II, L.P. and InSight Capital Partners (Cayman) II,
L.P. Each share of Series A Preferred Stock will convert into one and
one-half shares of common stock upon the closing of this offering.
6. In April 1999, the Registrant sold an aggregate of 800,000 shares of
its Series A Preferred Stock at a price of $5.625 per share to WI
Software Investors LLC. Each share of Series A Preferred Stock will
convert into one and one-half shares of common stock upon the closing
of this offering.
7. In April 1999, the Registrant sold an aggregate of 977,778 shares of
its Series A Preferred Stock and 1,777,778 shares of its Series B
Redeemable Preferred Stock, each at a price of $5.625 per share, to
UBS Capital LLC. Each share of Series A Preferred Stock will convert
into one and one-half shares of common stock and each share of Series
B Preferred Stock will be redeemed upon the closing of this offering.
II-2
<PAGE> 123
8. Since June, 1998, the Registrant has granted stock options to purchase
common stock under individual stock option agreements and the 1998
Stock Option/Stock Issuance Plan to eligible officers, directors,
consultants and employees of the Registrant as described in the
prospectus.
9. Since June, 1999, the Registrant has granted stock options to purchase
common stock under the 1999 Stock Incentive Plan to eligible officers,
directors, consultants and employees of the Registrant as described in
the prospectus.
10. In December 1999, the Registrant issued an aggregate of 93,471 shares
of its common stock to the former shareholders of MBR Technologies,
Inc. in connection with the Registrant's acquisition of MBR
Technologies, Inc.
11. In January 2000, the Registrant issued an aggregate of 1,187,603
shares of its common stock to the former shareholders of Foglight
Software, Inc. in connection with the Registrant's acquisition of
Foglight Software, Inc.
None of the foregoing transactions involved any underwriters, underwriting
discounts or commissions, or any public offering, and the Registrant believes
that each transaction was exempt from the registration requirements of the
Securities Act by virtue of Sections 3(a)(10) or 4(2) thereof, Regulation D
promulgated thereunder or Rule 701 pursuant to compensatory benefit plans and
contracts relating to compensation as provided under such Rule 701. The
recipients in such transaction represented their intention to acquire the
securities for investment only and not with a view to or for sale in connection
with any distribution thereof, and appropriate legends were affixed to the share
certificates and instruments issued in such transactions. All recipients had
adequate access, through their relationships with the Registrant, to information
about the Registrant.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- -------- -------------
<C> <S>
1.1* Form of Underwriting Agreement.
2.1*** Agreement and Plan of Merger dated as of November 2, 1999,
as amended, by and among Quest, Quest Merger Corporation,
MBR Technologies, Inc., and certain shareholders of MBR
Technologies, Inc.
2.2**** Agreement and Plan of Merger dated as of November 10, 1999,
by and among Quest, Quest Acquisition Corporation II, Inc.,
and Foglight Software, Inc.
3.1** Second Amended and Restated Articles of Incorporation.
3.2 Second Amended and Restated Bylaws, as amended.
4.1** Form of Registrant's Specimen Common Stock Certificate.
5.1* Opinion of Brobeck, Phleger & Harrison LLP.
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** Securities Purchase Agreement, dated as of April 21, 1999,
by and among Quest Software, Inc. and InSight Capital
Partners II, L.P., InSight Capital Partners (Cayman) II,
L.P., UBS Capital LLC, and WI Software Investors LLC.
10.6** Investors' Rights Agreement dated as of April 21, 1999 among
Quest Software, Inc. and InSight Capital Partners II, L.P.,
InSight Capital Partners (Cayman) II, L.P., UBS Capital LLC,
and WI Software Investors LLC.
</TABLE>
II-3
<PAGE> 124
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- -------- -------------
<C> <S>
10.7+** Agreement, dated February 19, 1999, between Quest Software,
Inc. and INSO Chicago Corporation, dba INSO Corporation.
10.8+** OEM Agreement, dated March 3, 1998, by and between Quest
Software, Inc. and Artifex Software Inc.
10.9** Office Space Lease dated as of June 17, 1999 between The
Irvine Company and Quest Software, Inc.
10.10 Office Lease between The Northwestern Mutual Life Insurance
Company (Landlord) and Quest Software, Inc. (Tenant) dated
as of September 30, 1999.
10.11* Inxight/Resolute Software: Software Distribution and License
Agreement -- Inxight Technology dated September 30, 1998
between Resolute Software, Inc. and Inxight Software, Inc.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of Swenson Advisors LLP.
23.3 Consent of PricewaterhouseCoopers LLP.
23.4* Consent of Brobeck, Phleger & Harrison LLP (Included in
Exhibit 5.1 hereto).
24.1 Power of Attorney (Included on signature page hereto).
27.1 Financial Data Schedule (In EDGAR format only).
</TABLE>
- -------------------------
* To be filed by amendment.
** Incorporated by reference herein to the Registration Statement of Form S-1
and all amendments thereto filed with the Securities and Exchange
Commission on June 11, 1999 and declared effective August 12, 1999.
*** Incorporated by reference herein to the Form 8-K and all amendments thereto
filed with the Securities and Exchange Commission on December 29, 1999.
**** Incorporated by reference herein to the Form 8-K and all amendments thereto
filed with the Securities and Exchange Commission on January 21, 2000.
+ Confidential treatment requested and received as to certain portions of
this agreement.
II-4
<PAGE> 125
(B) FINANCIAL STATEMENT SCHEDULE
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNT
<TABLE>
<CAPTION>
BALANCE AT CHARGES, BALANCE AT
BEGINNING COSTS AND END OF
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS PERIOD
----------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Year ended December 31, 1997:
Allowance for doubtful accounts and sales
returns......................................... $ 546 $ 584 $ (347) $ 783
Year ended December 31, 1998:
Allowance for doubtful accounts and sales
returns......................................... $ 783 $1,116 $ (847) $1,052
Year ended December 31, 1999:
Allowance for doubtful accounts and sales
returns......................................... $1,052 $5,451 $(3,264) $3,239
</TABLE>
ITEM 17. UNDERTAKINGS
The Registrant hereby undertakes to provide to the underwriters at the
closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the California General Corporation Law, the Amended and
Restated Articles of Incorporation or the Amended and Restated Bylaws of the
Registrant, Indemnification Agreements entered into between the Registrant and
its officers and directors, the Underwriting Agreement, or otherwise, the
Registrant has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act, and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer, or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
The undersigned Registrant hereby undertakes:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective;
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-5
<PAGE> 126
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Irvine,
State of California, on this 18th day of February, 2000.
QUEST SOFTWARE, INC.
By: /s/ DAVID M. DOYLE
------------------------------------
David M. Doyle
President and Secretary
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints, jointly and severally, Vincent C. Smith,
David M. Doyle and John J. Laskey, and each one of them, his true and lawful
attorneys-in-fact and agents, each with full power of substitution, for him and
in his name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Registration Statement,
and to sign any registration statement for the same offering covered by this
Registration Statement that is to be effective upon filing pursuant to Rule
462(b) promulgated under the Securities Act of 1933, as amended, and all
post-effective amendments thereto, and to file the same, with all exhibits
thereto and all documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming that each of said attorneys-in-fact and agents or any of them, or his
or their substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, each of the undersigned has executed this Power of
Attorney as of the date indicated.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the persons whose signatures
appear below, which persons have signed such Registration Statement in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<C> <S> <C>
/s/ VINCENT C. SMITH Chief Executive Officer February 18, 2000
- --------------------------------------------------- (principal executive
Vincent C. Smith officer) and Chairman of the
Board
/s/ DAVID M. DOYLE President, Secretary and February 18, 2000
- --------------------------------------------------- Director
David M. Doyle
/s/ JOHN J. LASKEY Chief Financial Officer February 18, 2000
- --------------------------------------------------- (principal financial and
John J. Laskey accounting officer) and Vice
President, Finance
/s/ DORAN G. MACHIN Director February 18, 2000
- ---------------------------------------------------
Doran G. Machin
/s/ JERRY MURDOCK, JR. Director February 18, 2000
- ---------------------------------------------------
Jerry Murdock, Jr.
</TABLE>
II-6
<PAGE> 127
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- -------- -------------
<C> <S>
1.1* Form of Underwriting Agreement.
2.1*** Agreement and Plan of Merger dated as of November 2, 1999,
as amended, by and among Quest, Quest Merger Corporation,
MBR Technologies, Inc., and certain shareholders of MBR
Technologies, Inc.
2.2**** Agreement and Plan of Merger dated as of November 10, 1999,
by and among Quest, Quest Acquisition Corporation II, Inc.,
and Foglight Software, Inc.
3.1** Second Amended and Restated Articles of Incorporation.
3.2 Second Amended and Restated Bylaws, as amended.
4.1** Form of Registrant's Specimen Common Stock Certificate.
5.1* Opinion of Brobeck, Phleger & Harrison LLP.
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** Securities Purchase Agreement, dated as of April 21, 1999,
by and among Quest Software, Inc. and InSight Capital
Partners II, L.P., InSight Capital Partners (Cayman) II,
L.P., UBS Capital LLC, and WI Software Investors LLC.
10.6** Investors' Rights Agreement dated as of April 21, 1999 among
Quest Software, Inc. and InSight Capital Partners II, L.P.,
InSight Capital Partners (Cayman) II, L.P., UBS Capital LLC,
and WI Software Investors LLC.
10.7+** Agreement, dated February 19, 1999, between Quest Software,
Inc. and INSO Chicago Corporation, dba INSO Corporation.
10.8+** OEM Agreement, dated March 3, 1998, by and between Quest
Software, Inc. and Artifex Software Inc.
10.9** Office Space Lease dated as of June 17, 1999 between The
Irvine Company and Quest Software, Inc.
10.10 Office Lease between The Northwestern Mutual Life Insurance
Company (Landlord) and Quest Software, Inc. (Tenant) dated
as of September 30, 1999.
10.11* Inxight/Resolute Software: Software Distribution and License
Agreement -- Inxight Technology dated September 30, 1998
between Resolute Software, Inc. and Inxight Software, Inc.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of Swenson Advisors LLP.
23.3 Consent of PricewaterhouseCoopers LLP.
23.4* Consent of Brobeck, Phleger & Harrison LLP (Included in
Exhibit 5.1 hereto).
24.1 Power of Attorney (Included on signature page hereto).
27.1 Financial Data Schedule (In EDGAR format only).
</TABLE>
- -------------------------
* To be filed by amendment.
** Incorporated by reference herein to the Registration Statement of Form S-1
and all amendments thereto filed with the Securities and Exchange
Commission on June 11, 1999 and declared effective August 12, 1999.
*** Incorporated by reference herein to the Form 8-K and all amendments thereto
filed with the Securities and Exchange Commission on December 29, 1999.
**** Incorporated by reference herein to the Form 8-K and all amendments thereto
filed with the Securities and Exchange Commission on January 21, 2000.
+ Confidential treatment requested and received as to certain portions of
this agreement.
<PAGE> 1
EXHIBIT 3.2
SECOND AMENDED AND RESTATED BYLAWS OF
QUEST SOFTWARE, INC.
ARTICLE I
CORPORATE OFFICES
1.1 Principal Office. The Board of Directors shall fix the location
of the principal executive office of the corporation at any place within or
outside the State of California. If the principal executive office is located
outside California and the corporation has one or more business offices in
California, then the Board of Directors shall fix and designate a principal
business office in California.
1.2 Other Offices. The Board of Directors may at any time establish
branch or subordinate offices at any place or places.
ARTICLE II
MEETINGS OF SHAREHOLDERS
2.1 Place of Meetings. Meetings of shareholders shall be held at any
place within or outside the State of California designated by the Board of
Directors. In the absence of any such designation, shareholders' meetings shall
be held at the principal executive office of the corporation or any place
consented to in writing by all persons entitled to vote at such meeting, given
before or after the meeting and filed with the Secretary of the corporation.
2.2 Annual Meeting. An annual meeting of shareholders shall be held
each year on a date and at a time designated by the Board of Directors. At that
meeting, directors shall be elected. Any other proper business may be transacted
at the annual meeting of shareholders.
2.3 Special Meetings. Special meetings of the shareholders may be
called at any time, subject to the provisions of Sections 2.4 and 2.5 of these
Bylaws, by the Board of Directors, the Chairman of the Board, the President or
the holders of shares entitled to cast not less than twenty percent (20%) of the
votes at that meeting.
If a special meeting is called by anyone other than the Board of
Directors or the President or the Chairman of the Board, then the request shall
be in writing, specifying the time of such meeting and the general nature of the
business proposed to be transacted, and shall be delivered personally or sent by
registered mail or by other written communication to the Chairman of the Board,
the President, any Vice President or the Secretary of the corporation. The
officer receiving the request shall cause notice to be given to the shareholders
entitled to vote, in accordance with the provisions of Sections 2.4 and 2.5 of
these Bylaws, that a meeting will be held at the time requested by the person or
persons calling the meeting, so long as that time is not less than thirty-five
(35) nor more than sixty (60) days after the receipt of the request. If the
notice is not given within twenty (20) days after receipt of the request, then
the person or persons requesting the meeting may give the notice. Nothing
contained in this paragraph of this Section 2.3 shall be construed as limiting,
fixing or affecting the time when a meeting of shareholders called by action of
the Board of Directors may be held.
<PAGE> 2
2.4 Notice of Shareholders' meetings. All notices of meetings of
shareholders shall be sent or otherwise given in accordance with Section 2.5 of
these Bylaws not less than ten (10) (or, if sent by third-class mail pursuant to
Section 2.5 of these Bylaws, not less than thirty (30)) nor more than sixty (60)
days before the date of the meeting to each shareholder entitled to vote
thereat. Such notice shall state the place, date, and hour of the meeting and
(i) in the case of a special meeting, the general nature of the business to be
transacted, and no business other than that specified in the notice may be
transacted, or (ii) in the case of the annual meeting, those matters which the
Board of Directors, at the time of the mailing of the notice, intends to present
for action by the shareholders, but, subject to the provisions of the next
paragraph of this Section 2.4, any proper matter may be presented at the meeting
for such action. The notice of any meeting at which directors are to be elected
shall include the names of nominees intended at the time of the notice to be
presented by the Board for election.
If action is proposed to be taken at any meeting for approval of
(i) a contract or transaction in which a director has a direct or indirect
financial interest, pursuant to Section 310 of the California Corporations Code
(the "Code"), (ii) an amendment of the Articles of Incorporation, pursuant to
Section 902 of the Code, (iii) a reorganization of the corporation, pursuant to
Section 1201 of the Code, (iv) a voluntary dissolution of the corporation,
pursuant to Section 1900 of the Code, or (v) a distribution in dissolution other
than in accordance with the rights of any outstanding preferred shares, pursuant
to Section 2007 of the Code, then the notice shall also state the general nature
of that proposal.
2.5 Manner of Giving Notice; Affidavit of Notice. Notice of a
shareholders' meeting shall be given either personally or by first-class mail,
or, if the corporation has outstanding shares held of record by five hundred
(500) or more persons (determined as provided in Section 605 of the Code) on the
record date for the shareholders' meeting, notice may be sent by third-class
mail, or other means of written communication, addressed to the shareholder at
the address of the shareholder appearing on the books of the corporation or
given by the shareholder to the corporation for the purpose of notice; or if no
such address appears or is given, at the place where the principal executive
office of the corporation is located or by publication at least once in a
newspaper of general circulation in the county in which the principal executive
office is located. The notice shall be deemed to have been given at the time
when delivered personally or deposited in the mail or sent by other means of
written communication.
If any notice (or any report referenced in Article VII of these
Bylaws) addressed to a shareholder at the address of such shareholder appearing
on the books of the corporation is returned to the corporation by the United
States Postal Service marked to indicate that the United States Postal Service
is unable to deliver the notice to the shareholder at that address, all future
notices or reports shall be deemed to have been duly given without further
mailing if the same shall be available to the shareholder upon written demand of
the shareholder at the principal executive office of the corporation for a
period of one (1) year from the date of the giving of the notice.
An affidavit of mailing of any notice or report in accordance
with the provisions of this Section 2.5, executed by the Secretary, Assistant
Secretary or any transfer agent, shall be prima facie evidence of the giving of
the notice or report.
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<PAGE> 3
2.6 Quorum. Unless otherwise provided in the Articles of
Incorporation of the corporation, shares entitled to vote and holding a majority
of the voting power, represented in person or by proxy, shall constitute a
quorum at a meeting of shareholders. The shareholders present at a duly called
or held meeting at which a quorum is present may continue to transact business
until adjournment notwithstanding the withdrawal of enough shareholders to leave
less than a quorum, if any action taken (other than adjournment) is approved by
shares holding at least a majority of the voting power required to constitute a
quorum.
In the absence of a quorum, any meeting of shareholders may be
adjourned from time to time by the vote of a majority of the shares represented
either in person or by proxy, but no their business may be transacted, except as
provided in the last sentence of the preceding paragraph.
2.7 Adjourned Meeting Notice. Any shareholders' meeting, annual or
special, whether or not a quorum is present, may be adjourned from time to time
by the shares entitled to vote and holding a majority of the voting power,
represented in person or by proxy, at that meeting.
When any meeting of shareholders, either annual or special, is
adjourned to another time or place, notice need not be given of the adjourned
meeting if its time and place are announced at the meeting at which the
adjournment is taken. However, if the adjournment is for more than forty-five
(45) days from the date set for the original meeting or if a new record date for
the adjourned meeting is fixed, a notice of the adjourned meeting shall be given
to each shareholder of record entitled to vote at the adjourned meeting in
accordance with the provisions of Sections 2.4 and 2.5 of these Bylaws. At any
adjourned meeting the corporation may transact any business which might have
been transacted at the original meeting.
2.8 Voting. The shareholders entitled to vote at any meeting of
shareholders shall be determined in accordance with the provisions of Section
2.11 of these Bylaws, subject to the provisions of Sections 702 through 704 of
the Code (relating to voting shares held by a fiduciary, in the name of a
corporation, or in joint ownership).
Elections for directors and voting on any other matter at a
shareholders' meeting need not be by ballot unless a shareholder demands
election by ballot at the meeting and before the voting begins.
Except as provided in the last paragraph of this Section 2.8, or
as may be otherwise provided in the Articles of Incorporation, each outstanding
share, regardless of class, shall be entitled to one (1) vote on each matter
submitted to a vote of the shareholders. Any holder of shares entitled to vote
on any matter may vote part of the shares in favor of the proposal and refrain
from voting the remaining shares or may vote them against the proposal other
than elections to office, but, if the shareholder fails to specify the number of
shares such shareholder is voting affirmatively, it will be conclusively
presumed that the shareholder's approving vote is with respect to all shares
which the shareholder is entitled to vote.
The affirmative vote of shares holding a majority of the voting
power, represented and voting at a duly held meeting at which a quorum is
present (which shares voting
3
<PAGE> 4
affirmatively also constitute at least a majority of the voting power required
to constitute a quorum), shall be the act of the shareholders, unless the vote
of a greater number of voting by classes is required by the Code or by the
Articles of Incorporation.
At a shareholders' meeting at which directors are to be elected,
a shareholder shall be entitled to cumulate votes either (i) by giving one
candidate a number of votes equal to the number of directors to be elected
multiplied by the number of votes to which that shareholder's shares are
normally entitled or (ii) by distributing the shareholder's votes on the same
principle among as many candidates as the shareholder thinks fit, if the
candidate or candidates' names have been placed in nomination prior to the
voting and the shareholder has given notice prior to the voting of the
shareholder's intention to cumulate the shareholder's votes. If any one
shareholder has given such a notice, then every shareholder entitled to vote may
cumulate votes for candidates in nomination. The candidates receiving the
highest number of affirmative votes, up to the number of directors to be
elected, shall be elected; votes against any candidate and votes withheld shall
have no legal effect. Notwithstanding the foregoing, at such time as the
corporation becomes a listed corporation (as such term is defined in Section
301.5 of the California Corporations Code), shareholders shall no longer be
entitled to cumulate their votes for candidates in an election of directors.
2.9 Validation of Meetings; Waiver of Notice; Consent. The
transactions of any meeting of shareholders, either annual or special, however
called and noticed, and wherever held, are as valid as though they had been
taken at a meeting duly held after regular call and notice, if a quorum be
present either in person or by proxy, and if, either before or after the
meeting, each of the persons entitled to vote, not present in person or by
proxy, signs a written waiver of notice or a consent to the holding of the
meeting or an approval of the minutes thereof. Neither the business to be
transacted at nor the purpose of any annual or special meeting of shareholders
need be specified in any written waiver of notice or consent to the holding of
the meeting or approval of the minutes thereof, except that if action is taken
or proposed to be taken for approval of any of those matters specified in the
second paragraph of Section 2.4 of these Bylaws, the waiver of notice or consent
or approval shall state the general nature of the proposal. All such waivers,
consents, and approvals shall be filed with the corporate records or made a part
of the minutes of the meeting.
Attendance of a person at a meeting shall constitute a waiver of
notice of and presence at that meeting, except when the person objects, at the
beginning of the meeting, to the transaction of any business because the meeting
is not lawfully called or convened and except that attendance at a meeting is
not a waiver of any right to object to the consideration of matters required by
the Code to be included in the notice of such meeting but not so included, if
such objection is expressly made at the meeting.
2.10 Shareholder Action By Written Consent Without A Meeting. Any
action which may be taken at any annual or special meeting of shareholders may
be taken without a meeting and without prior notice, if a consent in writing,
setting forth the action so taken, shall be signed by the holders of outstanding
shares having not less than the minimum number of votes that would be necessary
to authorize or take such action at a meeting at which all shares entitled to
vote thereon were present and voted.
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<PAGE> 5
Directors may not be elected by written consent except by
unanimous written consent of all shares entitled to vote for the election of
directors.
However, a director may be elected at any time to fill any
vacancy on the Board of Directors (so long as such vacancy has not been filled
by the directors) by the written consent of shares holding a majority of the
voting power that are entitled to vote for the election of directors.
All such consents shall be maintained in the corporate records.
Any shareholder giving a written consent, or the shareholder's proxy holders, or
a transferee of the shares, or a personal representative of the shareholder, or
their respective proxy holders, may revoke the consent by a writing received by
the Secretary of the corporation before written consents of the number of shares
required to authorize the proposed action have been filed with the Secretary.
If the consents of all shareholders entitled to vote have not
been solicited in writing, the Secretary shall give prompt notice of any
corporate action approved by the shareholders without a meeting by less than
unanimous written consent to those shareholders entitled to vote who have not
consented in writing. Such notice shall be given in the manner specified in
Section 2.5 of these Bylaws. In the case of approval of (i) a contract or
transaction ins which a director has a direct or indirect financial interest,
pursuant to Section 310 of the Code, (ii) indemnification of a corporate
"agent," pursuant to Section 317 of the Code, (iii) a reorganization of the
corporation, pursuant to Section 1201 of the Code, and (iv) a distribution in
dissolution other than in accordance with the rights of outstanding preferred
shares, pursuant to Section 2007 of the Code, the notice shall be given at least
ten (10) days before the consummation of any action authorized by that approval,
unless the consents of all shareholders entitled to vote have been solicited in
writing.
2.11 Record Date For Shareholder Notice; Voting; Given Consents. In
order that the corporation may determine the shareholders entitled to notice of
any meeting or to vote, the Board of Directors may fix, in advance, a record
date, which shall not be more than sixty (60) days nor less than ten (10) days
prior to the date of such meeting nor more than sixty (60) days before any other
action. Shareholders at the close of business on the record date are entitled to
notice and to vote, as the case may be, notwithstanding any transfer of any
shares on the books of the corporation after the record date, except as
otherwise provided in the Articles of Incorporation or the Code.
A determination of shareholders of record entitled to notice of
or to vote at a meeting of shareholders shall apply to any adjournment of the
meeting unless the Board of Directors fixes a new record date for the adjourned
meeting, but the Board of Directors shall fix a new record date if the meeting
is adjourned for more than forty-five (45) days from the date set for the
original meeting.
If the Board of Directors does not so fix a record date:
(a) The record date for determining shareholders entitled to notice
of or to vote at a meeting of shareholders shall be at the close of business on
the business day next preceding the
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<PAGE> 6
day on which notice is given or, if notice is waived, at the close of business
on the business day next preceding the day on which the meeting is held.
(b) The record date for determining shareholders entitled to give
consent to corporate action in writing without a meeting, (i) when no prior
action by the Board of Directors has been taken, shall be the day on which the
first written consent is given, or (ii) when prior action by the Board of
Directors has been taken, shall be at the close of business on the day on which
the Board of Directors adopts the resolution relating thereto, or the sixtieth
(60th) day prior to the date of such other action, whichever is later.
The record date for any other purpose shall be as provided in
Section 8.1 of these Bylaws.
2.12 Proxies. Every person entitled to vote for directors, or on any
other matter, shall have the right to do so either in person or by one or more
agents authorized by a written proxy signed by the person and filed with the
Secretary of the corporation. A proxy shall be deemed signed if the
shareholder's name or other authorization is placed on the proxy (whether by
manual signature, typewriting, telegraphic or electronic transmission or
otherwise) by the shareholder or the shareholder's attorney-in-fact. A validly
executed proxy which does not state that it is irrevocable shall continue in
full force and effect unless (i) the person who executed the proxy revokes it
prior to the time of voting by delivering a writing to the corporation stating
that the proxy is revoked or by executing a subsequent proxy and presenting it
to the meeting or by attendance at such meeting and voting in person, or (ii)
written notice of the death or incapacity of the maker of that proxy is received
by the corporation before the vote pursuant to that proxy is counted; provided,
however, that no proxy shall be valid after the expiration of eleven (11) months
from the date thereof, unless otherwise provided in the proxy. The dates
contained on the forms of proxy presumptively determine the order of execution,
regardless of the postmark dates on the envelopes in which they are mailed. The
revocability of a proxy that states on its face that it is irrevocable shall be
governed by the provisions of Sections 705(e) and 705(f) of the Code.
2.13 Inspectors of Election. In advance of any meeting of
shareholders, the Board of Directors may appoint inspectors of election to act
at the meeting and any adjournment thereof. If inspectors of election are not so
appointed or designed or if any persons so appointed fail to appear or refuse to
act, then the Chairman of the meeting may, and on the request of any shareholder
or a shareholder's proxy shall, appoint inspectors of election (or persons to
replace those who so fail to appear) at the meeting. The number of inspectors
shall be either one (1) or three (3). If appointed at a meeting on the request
of one (1) or more shareholders or proxies, shares holding a majority of the
voting power, represented in person or by proxy, shall determine whether one (1)
or three (3) inspectors are to be appointed.
The inspectors of election shall (a) determine the number of
shares outstanding and the voting power of each, the shares represented at the
meeting, the existence of a quorum, and the authenticity, validity, and effect
of proxies, (b) receive totes, ballots or consents, (c) bear and determine all
challenges and questions in any way arising in connection with the right to
vote, (d) count and tabulate all votes or consents, (e) determine when the polls
shall close, (f)
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<PAGE> 7
determine the result and (g) do any other acts that may be proper to conduct the
election or vote with fairness to all shareholders.
ARTICLE III
DIRECTORS
3.1 Powers. Subject to the provisions of the Code, any limitations
in the Articles of Incorporation, and these Bylaws, relating to action required
to be approved by the shareholders or by the outstanding shares, the business
and affairs of the corporation shall be managed and all corporate powers shall
be exercised by or under the direction of the Board of Directors. The Board of
Directors may delegate the management of the day-to-day operation of the
business of the corporation to a management company or other person provided
that the business and affairs of the corporation shall be managed and all
corporate powers shall be exercised under the ultimate direction of the Board of
Directors.
3.2 Number of Directors. The authorized number of directors of the
corporation shall be not less than three (3) nor more than seven (7) and the
exact number of directors shall be set by a resolution duly adopted by the Board
of Directors or by the shareholders. The minimum and maximum number of directors
may be changed, or a definite number may be fixed without provision for an
indefinite number, by a duly adopted amendment to the Articles of Incorporation
or by an amendment to this Bylaw duly adopted by vote or written consent of
holders of a majority of the outstanding shares entitled to vote; provided,
however, that an amendment reducing the fixed number or minimum number of
directors to a number less than five (5) cannot be adopted if the votes cast
against its adoption at a meeting, or the shares not consenting in the case of
an action by written consent, are equal to more than sixteen and two-thirds
percent (16-2/3%) of the outstanding shares entitled to vote thereon.
No reduction of the authorized number of directors shall have
the effect of removing any director before that director's term of office
expires.
3.3 Election and Term of Office of Directors. At each annual meeting
of shareholders, directors shall be elected to hold office until the next annual
meeting. Each director, including a director elected to fill a vacancy, shall
hold office until the expiration of the term for which elected and until a
successor has been elected and qualified, except in the case of the death,
resignation, or removal of such a director.
3.4 Resignation and Vacancies. Any director may resign effective
upon giving oral or written notice to the Chairman of the Board, the President,
the Secretary, or the Board of Directors, unless the notice specifies a later
time for the effectiveness of such resignation. If the resignation of a director
is effective at a future time, the Board of Directors may elect a successor to
take office when the resignation becomes effective.
All vacancies on the Board of Directors, whether caused by
removal, resignation, death or otherwise, may be filled by a majority of the
remaining directors or, if the number of directors then in office is less than a
quorum, by (a) the unanimous written consent of the directors then in office,
(b) the affirmative vote of a majority of the directors then in office at a
meeting held pursuant to notice or waivers of notice complying with California
Corporations
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<PAGE> 8
Code Section 307, or (c) a sole remaining director. Each director so elected
shall hold office until his successor is elected at an annual, regular or
special meeting of the shareholders. The shareholders may elect a director at
any time to fill any vacancy not filled by the directors. Any such election by
written consent requires the consent of a majority of the outstanding shares
entitled to vote.
A vacancy or vacancies in the Board of Directors shall be deemed
to exist (i) in the event of the death, resignation or removal of any director,
(ii) if the Board of Directors resolution declares vacant the office of a
director who has been declared of unsound mind by an order of court or who has
been convicted of a felony, (iii) if the authorized number of directors is
increased, or (iv) if the shareholders fail, at any meeting of shareholders at
which any director or directors are elected, to elect the full number of
directors to be elected at that meeting.
The shareholders may elect a director or directors at any time
to fill any vacancy or vacancies not filled by the directors, but any such
election by written consent shall require the consent of shares holding a
majority of the voting power that are entitled to vote thereon.
3.5 Place of Meetings; Meetings By Telephone. Regular meetings of
the Board of Directors may be held at any place within or outside the State of
California that has been designated from time to time by resolution of the Board
of Directors. In the absence of such a designation, regular meetings shall be
held at the principal executive office of the corporation. Special meetings of
the Board of Directors may be held at any place within or outside the State of
California that has been designated in the notice of the meeting or, if not
stated in the notice or if there is no notice, at the principal executive office
of the corporation.
Members of the Board of Directors may participate in a meeting
through use of conference telephone, electronic video screen communication, or
other communications equipment. Participation in a meeting through use of
conference telephone constitutes presence in person at the meeting as long as
all members participating in such meeting can hear one another. Participation in
a meeting through the use of electronic video screen communication or other
communications equipment (other than conference telephone) constitutes presence
in person at that meeting if all of the following apply: (a) each member
participating in the meeting can communicate with all of the other members
concurrently, (b) each member is provided the means of participating in all
matters before the Board of Directors, including, without limitation, the
capacity to propose, or to interpose an objection to, a specific action to be
taken by the corporation, and (c) the corporation adopts and implements some
means of verifying that (i) a person participating in the meeting is a director
or other person entitled to participate in the Board of Directors' meeting, and
(ii) all actions of, or votes by, the Board of Directors are taken or cast only
by the directors and not by persons who are not directors.
3.6 Regular Meetings. Regular meetings of the Board of Directors may
be held without notice if the time and place of such meetings are fixed by the
Board of Directors.
3.7 Special Meetings; Notice. Subject to the provisions of the
following paragraph, special meetings of the Board of Directors for any purpose
or purposes may be called at any time by the Chairman of the Board, the
President, any Vice President, the Secretary or any two (2) directors.
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<PAGE> 9
Notice of the time and place of special meetings shall be
delivered personally or by telephone (including a voice messaging system or
other system or technology designed to record and communicate messages,
telegraph, facsimile, electronic mail or other electronic means) to each
director or sent by first class mail, addressed to each director at the
director's address as it is shown on the records of the corporation. If the
notice is mailed, it shall be deposited in the United States mail at least four
(4) days before the time of the holding of the meeting. If the notice is
delivered personally or by telephone, telecopier, telegram or any electronic
means, it shall be delivered at least forty-eight (48) hours before the time of
the holding of the meeting. An oral notice given personally or by telephone may
be communicated either to the director or to the person at the office of the
director who the person giving the notice has reason to believe will promptly
communicate it to the director. The notice need not specify the purpose of the
meeting.
3.8 Quorum. A majority of the authorized number of directors shall
constitute a quorum of the Board of Directors for the transaction of business,
except to adjourn as provided in Section 3.10 of these Bylaws. Every act or
decision done or made by a majority of the directors present at a meeting duly
held at which a quorum is present is the act of the Board of Directors, subject
to the provisions of Section 310 of the Code (as to the approval of contracts or
transactions in which a director has a direct or indirect material financial
interest), Section 311 of the Code (as to the appointment of committees),
Section 317(e) of the Code (as to the indemnification of directors), the
Articles of Incorporation, and other applicable law.
A meeting at which a quorum is initially present may continue to
transact business notwithstanding the withdrawal of directors, if any action
taken is approved by at least a majority of the required quorum for such
meeting.
3.9 Waiver of Notice. Notice of a meeting need not be given to any
director who signs a waiver of notice or a consent to holding the meeting or an
approval of the minutes thereof, whether before or after the meeting, or who
attends the meeting without protesting, prior thereto or at its commencement,
the lack of notice to such director. All such waivers, consents, and approvals
shall be filed with the corporate records or be made a part of the minutes of
the meeting. A waiver of notice need not specify the purpose of any regular or
special meeting of the Board of Directors.
3.10 Adjournment. A majority of the directors present, whether or not
a quorum is present, may adjourn any meeting to another time and place.
3.11 Notice of Adjournment. If the meeting is adjourned for more than
twenty-four (24) hours, notice of any adjournment to another time and place
shall be given prior to the time of the adjourned meeting to the directors who
were not present at the time of the adjournment.
3.12 Board Action By Written Consent Without A Meeting. Any action
required or permitted to be taken by the Board of Directors may be taken without
a meeting, if all members of the Board of Directors individually or collectively
consent in writing to such action. Such written consent or consents shall be
filed with the minutes of the proceedings of the Board of Directors. Such action
by written consent shall have the same force and effect as a unanimous vote of
the Board of Directors.
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3.13 Fees and Compensation of Directors. Directors and members of
committees may receive such compensation, if any, for their services and such
reimbursement of expenses as may be fixed or determined by resolution of the
Board of Directors. This Section 3.13 shall not be construed to preclude any
director from serving the corporation in any other capacity as an officer,
agent, employee, or otherwise, and receiving compensation for those services.
3.14 Approval of Loans to Officers. If these Bylaws have been
approved by the corporation's shareholders in accordance with the Code, the
corporation may, upon the approval of the Board of Directors alone, make loans
of money or property to, or guarantee the obligations of, any officer of the
corporation or of its parent, if any, whether or not a director, or adopt an
employee benefit plan or plans authorizing such loans or guaranties provided
that (i) the Board of Directors determines that such a loan or guaranty or plan
may reasonably be expected to benefit the corporation, (ii) the corporation has
outstanding shares held of record by 100 or more persons (determined as provided
in Section 605 of the Code) on the date of approval by the Board of Directors,
and (iii) the approval of the Board of Directors is by a vote sufficient without
counting the vote of any interested director or directors. Notwithstanding the
foregoing, the corporation shall have the power to make loans permitted by the
Code.
ARTICLE IV
COMMITTEES
4.1 Committees of Directors. The Board of Directors may, by
resolution adopted by a majority of the authorized number of directors,
designate one or more committees, each consisting of two (2) or more directors,
to serve at the pleasure of the Board of Directors. The Board of Directors may
designate one or more directors as alternate members of any committee, who may
replace any absent member at any meeting of the committee. The appointment of
members or alternate members of a committee requires the vote of a majority of
the authorized number of the directors. Any such committee shall have authority
to act in the manner and to the extent provided in the resolution of the Board
of Directors and may have all the authority of the Board of Directors, except
with respect to:
(a) The approval of any action which, under the Code, also requires
shareholders' approval or approval of the outstanding shares.
(b) The filling of vacancies on the Board of Directors or on any
committee.
(c) The fixing of compensation of the directors for serving on the
Board of Directors or on any committee.
(d) The amendment or repeal of these Bylaws or the adoption of new
Bylaws.
(e) The amendment or repeal of any resolution of the Board of
Directors which by its express terms is not so amendable or repealable.
(f) A distribution to the shareholders of the corporation, except at
a rate, in a periodic amount or within a price range set forth in the Articles
of Incorporation or determined by the Board of Directors.
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(g) The appointment of any other committee of the Board of Directors
or the members thereof.
4.2 Meetings and Actions of Committees. Meetings and actions of
committee shall be governed by, and held and taken in accordance with, the
provisions of Article III of these Bylaws, Section 3.5 (place of meetings),
Section 3.6 (regular meetings), Section 3.7 (special meetings and notice),
Section 3.8 (quorum), Section 3.9 (waiver of notice), Section 3.10
(adjournment), Section 3.11 (notice of adjournment), and Section 3.12 (action
without meeting), with such changes in the context of those Bylaws as are
necessary to substitute the committee and its members for the Board of Directors
and its members; provided, however, that the time of regular meetings of
committees may be determined either by resolution of the Board of Directors or
by resolution of the committee, that special meetings of the Committees may also
be called by resolution of the Board of Directors, and that notice of special
meetings of committees shall also be given to all alternate members, who shall
have the right to attend all meetings of the committee. The Board of Directors
may adopt rules for the government of any committee not inconsistent with the
provisions of these Bylaws.
ARTICLE V
OFFICERS
5.1 Officers. The officers of the corporation shall be a President,
a Secretary, and a Chief Financial Officer. The corporation may also have, at
the discretion of the Board of Directors, a Chairman of the Board, one or more
Vice Presidents, one or more Assistant Secretaries, one or more Assistant
Treasurers, and such other officers as may be appointed in accordance with the
provisions of Section 5.3 of these Bylaws. Any number of offices may be held by
the same person.
5.2 Appointment of Officers. The officers of the corporation, except
such officers as may be appointed in accordance with the provisions of Section
5.3 of these Bylaws, shall be chosen by the Board of Directors and serve at the
pleasure of the Board of Directors, subject to the rights, if any, of an officer
under any contract of employment.
5.3 Subordinate Officers. The Board of Directors may appoint, or may
empower the Chairman of the Board or the President to appoint, such other
officers as the business of the corporation may require, each of whom shall hold
office for such period, have such authority, and perform such duties as are
provided in these Bylaws or as the Board of Directors may from time to time
determine.
5.4 Removal or Resignation of Officers. Subject to the rights, if
any, of an officer under any contract of employment, all officers serve at the
pleasure of the Board of Directors and any officer may be removed, either with
or without cause, by the Board of Directors at any regular or special meeting of
the Board of Directors or, except in case of an officer chosen by the Board of
Directors, by any officer upon whom such power of removal may be conferred by
the Board of Directors.
Any officer may resign at any time by giving written notice to
the corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time
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specified in that notice; and, unless otherwise specified in that notice, the
acceptance of the resignation shall not be necessary to make it effective. Any
resignation is without prejudice to the rights, if any, of the corporation under
any contract to which the officer is a party.
5.5 Vacancy In Offices. A vacancy in any office because of death,
resignation, removal, disqualification or any other cause shall be filled in the
manner prescribed by these Bylaws for regular appointments to that office.
5.6 Chairman of the Board. The Chairman of the Board, if such an
officer be elected, shall, if present, preside at meetings of the Board of
Directors and exercise and perform such other powers and duties as may from time
to time be assigned by the Board of Directors or as may be prescribed by these
Bylaws. If there is no President, then the Chairman of the Board shall also be
the chief executive officer of the corporation and shall have the powers and
duties prescribed in Section 5.7 of these Bylaws.
5.7 President. The President shall be the general manager and chief
executive officer of the corporation unless such title is assigned to another
officer of the corporation; in the absence of a Chairman and Vice Chairman of
the Board, the President shall preside as the chairman of meetings of the
shareholders and the Board of Directors; and the President shall have general
and active management of the business of the corporation and shall see that all
orders and resolutions of the Board of Directors are carried into effect. The
President or any Vice President shall execute bonds, mortgages and other
contracts requiring a seal, under the seal of the corporation (if the
corporation has adopted a seal), except where required or permitted by law to be
otherwise signed and executed and except where the signing and execution thereof
shall be expressly delegated by the Board of Directors to some other officer or
agent of the corporation. The President shall perform all such other duties as
are incident to such office or are properly required by the Board of Directors.
5.8 Vice Presidents. In the absence or disability of the President,
the Vice Presidents, if any, in order of their rank as fixed by the Board of
Directors or, if not ranked, a Vice President designated by the Board of
Directors, shall perform all the duties of the President and when so acting
shall have all the powers of, and be subject to all the restrictions upon, the
President. The Vice Presidents shall have such other powers and perform such
other duties as from time to time may be prescribed for them respectively by the
Board of Directors, these Bylaws, the President or the Chairman of the Board.
5.9 Secretary. The Secretary shall keep or cause to be kept, at the
principal executive office of the corporation or other such place as the Board
of Directors may direct, a book of minutes of all meetings and actions of
directors, committees of directors and shareholders. The minutes shall show the
time and place of each meeting, whether regular or special (and, if special, how
authorized and the notice given), the names of those present at directors'
meetings or committee meetings, the number of shares present or represented at
shareholders' meetings, and the proceedings thereof.
The Secretary shall keep, or cause to be kept, at the principal
executive office of the corporation or at the office of the corporation's
transfer agent or registrar, as determined by resolution of the Board of
Directors, a share register, or a duplicate share register, showing the
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names of all shareholders and their addresses, the number and classes of shares
held by each, the number and dates of certificates evidencing such shares, and
the number and date of cancellation of every certificate surrendered for
cancellation.
The Secretary shall give, or cause to be given, notice of all
meetings of shareholders and of the Board of Directors required to be given by
law or by these Bylaws. The Secretary shall keep the seal of the corporation, if
one be adopted, in safe custody and shall have such other powers and perform
other such duties as may be prescribed by the Board of Directors or by these
Bylaws.
5.10 Chief Financial Officer. The Chief Financial Officer shall keep
and maintain, or cause to be kept and maintained, adequate and correct books and
records of accounts of the properties and business transactions of the
corporation, including accounts of its assets, liabilities, receipts,
disbursements, gains, losses, capital, retained earnings, and shares. The books
of account shall at all reasonable times be open to inspection by any director.
ARTICLE VI
INDEMNIFICATION OF DIRECTORS, OFFICERS,
EMPLOYEES AND OTHER AGENTS
6.1 Indemnification of Directors. The corporation shall, to the
maximum extent and in the manner permitted by the Code, indemnify each of its
directors against expenses (as defined in Section 317(a) of the Code), judgment,
fines, settlements, and other amounts actually and reasonably incurred in
connection with any proceeding (as defined in Section 317(a) of the Code),
arising by reason of the fact that such person is or was a director of the
corporation. For purposes of this Article VI, a "director" of the corporation
includes any person (i) who is or was a director of the corporation, (ii) who is
or was serving at the request of the corporation as a director of another
foreign or domestic corporation, partnership, joint venture, trust or other
enterprise, or (iii) who was a director of a corporation which was a predecessor
corporation of the corporation or of another enterprise at the request of such
predecessor corporation.
6.2 Indemnification of Others. The corporation shall have the power,
to the extent and in the manner permitted by the Code, to indemnify each of its
employees, officers, and agents (other than directors) against expenses (as
defined in Section 317(a) of the Code), judgments, fines, settlements and other
amounts actually and reasonably incurred in connection with any proceeding (as
defined in Section 317(a) of the Code), arising by reason of the fact that such
person is or was an employee, officer, or agent of the corporation. For purposes
of this Article VI, an "employee" or "officer" or "agent" of the corporation
(other than a director) includes any person (i) who is or was an employee,
officer, or agent of the corporation, (ii) who is or was serving at the request
of the corporation as an employee, officer, or agent of another foreign or
domestic corporation, partnership, joint venture, trust or other enterprise, or
(iii) who was an employee, officer, or agent of a corporation which was a
predecessor corporation of the corporation or of another enterprise at the
request of such predecessor corporation.
6.3 Payment of Expenses In Advance. Expenses and attorneys' fees
incurred in defending any civil or criminal action or other proceeding for which
indemnification is required pursuant to Section 6.1, or if otherwise authorized
by the Board of Directors, shall be paid by the
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corporation in advance of the final disposition of such action or proceeding
upon receipt of an undertaking by or on behalf of the indemnified party to repay
such an amount if it shall ultimately be determined that the indemnified party
is not entitled to be indemnified as authorized in this Article VI.
6.4 Indemnity Not Exclusive. The indemnification provided by this
Article VI shall not be deemed exclusive of any other rights to which those
seeking indemnification may be entitled under any Bylaw, agreement, vote of
shareholders or directors or otherwise, both as to action in an official
capacity and as to action in another capacity while holding such office. The
rights to indemnity hereunder shall continue as to a person who has ceased to be
a director, officer, employee or agent and shall inure to the benefit of the
heirs, executors, and administrators of the person.
6.5 Insurance Indemnification. The corporation shall have the power
to purchase and maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of the corporation against any liability
asserted against or incurred by such person in such capacity or arising out of
that person's status as such, whether or not the corporation would have the
power to indemnify that person against such liability under the provisions of
this Article VI.
6.6 Conflicts. No indemnification or advance shall be made under
this Article VI, except where such indemnification or advance is mandated by law
or the order, judgment or decree of any court of competent jurisdiction, in any
circumstance where it appears:
(1) that it would be inconsistent with the provisions of the
Articles of Incorporation, these Bylaws, a resolution of the shareholders or an
agreement in effect at the time of the accrual of the alleged cause of the
action asserted in the proceeding in which the expenses were incurred or other
amounts were paid, which prohibits or otherwise limits indemnification; or
(2) that it would be inconsistent with any condition expressly
imposed by a court in approving a settlement.
6.7 Right to Bring Suit. If a claim under this Article VI is not
paid in full by the corporation within ninety (90) days after a written claim
has been received by the corporation (either because the claim is denied or
because no determination is made), the claimant may at any time thereafter bring
suit against the corporation to recover the unpaid amount of the claim and, if
successful in whole or in part, the claimant shall also be entitled to be paid
the expenses of prosecuting such claim. The corporation shall be entitled to
raise as a defense to any such action that the claimant has not met the
standards of conduct that make it permissible under the Code for the corporation
to indemnify the claimant for the claim. Neither the failure of the corporation
(including its Board of Directors, independent legal counsel, or its
shareholders) to have made a determination prior to the commencement of such
action that indemnification of the claimant is permissible in the circumstances
because he or she has met the applicable standard of conduct, if any, nor an
actual determination by the corporation (including the Board of Directors,
independent legal counsel, or its shareholders) that the claimant has not met
the applicable standard of conduct, shall be a defense to such action or create
a presumption for the purposes of such action that the claimant has not met the
applicable standard of conduct.
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6.8 Indemnity Agreements. The Board of Directors is authorized to
enter into a contract with any director, officer, employee or agent of the
corporation, or any person who is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, including employee
benefit plans, or any person who was a director, officer, employee or agent of a
corporation which was a predecessor corporation of the corporation or of another
enterprise at the request of such predecessor corporation, providing for
indemnification rights equivalent to or, if the Board of Directors so determines
and to the extent permitted by applicable law, greater than, those provided for
in this Article VI.
6.9 Amendment, Repeal or Modification. Any amendment, repeal or
modification of any provision of this Article VI shall not adversely affect any
right or protection of a director, employee, officer or agent of the corporation
existing at the time of such amendment, repeal or modification.
ARTICLE VII
RECORDS AND REPORTS
7.1 Maintenance and Inspection of Share Register. The corporation
shall keep either at its principal executive office or at the office of its
transfer agent or registrar (if either be appointed), as determined by
resolution of the Board of Directors, a record of its shareholders listing the
names and addresses of all shareholders and the number and class of shares held
by each shareholder.
A shareholder or shareholders of the corporation holding at
least five percent (5%) in the aggregate of the outstanding voting shares of the
corporation who held at least one percent (1%) of such voting shares and have
filed a Schedule 14B with the United States Securities and Exchange Commission
relating to the election of directors, shall have an absolute right to do either
or both of the following (i) inspect and copy the record of shareholders' names,
addresses, and shareholdings during usual business hours upon five (5) days'
prior written demand upon the corporation, or (ii) obtain from the transfer
agent of the corporation, upon written demand and upon the tender of such
transfer agent's usual charges for such list (the amount of which charges shall
be stated to the shareholder by the transfer agent upon request), a list of the
shareholders' names and addresses who are entitled to vote for the election of
the directors, and their shareholdings, as of the most recent record date for
which it has been compiled or as of the date specified by the shareholder
subsequent to the date of demand. The list shall be made available on or before
the later of five (5) business days after the demand is received or the date
specified therein as the date as of which the list is to be compiled.
The record of shareholders shall also be open to inspection or
copying by any shareholder or holder of a voting trust certificate at any time
during usual business hours upon written demand on the corporation, for a
purpose reasonably related to the holder's interests as a shareholder or holder
of a voting trust certificate.
Any inspection and copying under this Section 7.1 may be made in
person or by an agent or attorney of the shareholder or holder of a voting trust
certificate making the demand.
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7.2 Maintenance and Inspection of Bylaws. The corporation shall keep
at its principal executive office or, if its principal executive office is not
in the State of California, at its principal business office in California, the
original or a copy of these Bylaws as amended to date, which shall be open to
inspection by the shareholders at all reasonable times during business hours. If
the principal executive office is outside the State of California and the
corporation has no principal business office in such state, then it shall, upon
the written request of any shareholder, furnish to such shareholder a copy of
these Bylaws as amended to date.
7.3 Maintenance and Inspection of Other Corporate Records. The
accounting books and records and the minutes of proceedings of the shareholders
and the Board of Directors, and committees of the Board of Directors shall be
kept at such place or places as are designated by the Board of Directors or, in
absence of such designation, at the principal executive office of the
corporation. The minutes shall be kept in written form or in any other form
capable of being converted into written form.
The minutes and accounting books and records shall be open to
inspection upon the written demand on the corporation of any shareholder or
holder of a voting trust certificate at any reasonable time during usual
business hours, for a purpose reasonably related to such holder's interests as a
shareholder or as a holder of a voting trust certificate. Such inspection by a
shareholder or a holder of a voting trust certificate may be made in person or
by an agent or attorney and the right of inspection includes the right to copy
and make extracts. Such rights of inspections shall extend to the records of
each subsidiary corporation of the corporation.
7.4 Inspection By Directors. Every director shall have the absolute
right at any reasonable time to inspect and copy all books, records, and
documents of every kind and to inspect the physical properties of the
corporation and each of its subsidiary corporations, domestic or foreign. Such
inspection by a director may be made in person or by an agent or attorney and
the right of inspection includes the right to copy and make extracts.
7.5 Annual Report to Shareholders; Waiver. The Board of Directors
shall cause an annual report to be sent to the shareholders not later than one
hundred twenty (120) days after the close of the fiscal year adopted by the
corporation. Such report shall be sent to the shareholders at least fifteen (15)
(or, if sent by third class mail, thirty-five (35)) days prior to the annual
meeting of shareholders to be held in the next fiscal year and in the manner
specified in Section 2.5 of these Bylaws for giving notice to shareholders of
the corporation.
The annual report shall contain a balance sheet as of the end of
the fiscal year and an income statement and statement of changes in financial
position for the fiscal year, accompanied by any report thereon of independent
accountants or, if there is no such report, the certificate of an authorized
officer of the corporation that the statements were prepared without audit from
the books and records of the corporation.
The foregoing requirement of an annual report shall be waived so
long as the shares of the corporation are held by fewer than one hundred (100)
holders of record.
7.6 Financial Statements. If no annual report for the fiscal year
has been sent to shareholders, then the corporation shall, upon the written
request of any shareholder made more
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than one hundred twenty (120) days after the close of such fiscal year, deliver
or mail to the person making the request, within thirty (30) days thereafter, a
copy of a balance sheet as of the end of such fiscal year and an income
statement and statement of changes in financial position for such fiscal year.
A shareholder or shareholders holding at least five percent (5%)
of the outstanding shares of any class of the corporation may make a written
request to the corporation for an income statement of the corporation for the
three-month, six-month or nine-month period of the current fiscal year ended
more than thirty (30) days prior to the date of the request and a balance sheet
of the corporation as of the end of that period. The statements shall be
delivered or mailed to the person making the request within thirty (30) days
thereafter. A copy of the statements shall be kept on file in the principal
office of the corporation for twelve (12) months and it shall be exhibited at
all reasonable times to any shareholder demanding an examination of the
statements or a copy shall be mailed to the shareholder. If the corporation has
not sent to the shareholders its annual report for the last fiscal year, the
statements referred to in the first paragraph of this Section 7.6 shall likewise
be delivered or mailed to the shareholder or shareholders within thirty (30)
days after the request.
The quarterly income statements and balance sheets referred to
in this section shall be accompanied by the report thereon, if any, of any
independent accountants engaged by the corporation or the certificate of an
authorized officer of the corporation that the financial statements were
prepared without audit from the books and records of the corporation.
7.7 Representation of Shares of Other Corporations. The Chairman of
the Board, the President, any Vice President, the Chief Financial Officer, the
Secretary or Assistant Secretary of this corporation, or any other person
authorized by the Board of Directors or the President or a Vice President, is
authorized to vote, represent, and exercise on behalf of this corporation all
rights incident to any and all shares of any other corporation or corporations
standing in the name of this corporation. The authority herein granted may be
exercised either by such person directly or by any other person authorized to do
so by proxy or by power of attorney duly executed by such person having the
authority.
ARTICLE VIII
GENERAL MATTERS
8.1 Record Date for Purpose Other Than Notice and Voting. For
purposes of determining the shareholders entitled to receive payment of any
dividend or other distribution or allotment of any rights or entitled to
exercise any rights in respect of any other lawful action (other than with
respect to notice or voting at a shareholders' meeting or action by shareholders
by written consent without a meeting), the Board of Directors may fix, in
advance, a record date, which shall not be more than sixty (60) days prior to
any such action. Only shareholders of record at the close of business on the
record date are entitled to receive the dividend, distribution or allotment of
rights, or to exercise the rights, as the case may be, notwithstanding any
transfer of any shares on the books of the corporation after the record date,
except as otherwise provided for in the Articles of Incorporation or the Code.
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If the Board of Directors does not so fix a record date, then
the record date for determining shareholders for any such purpose shall be at
the close of business on the day on which the Board adopts the resolution
relating thereto or the sixtieth (60th) day prior to the date of that action,
whichever is later.
8.2 Checks; Drafts; Evidence of Indebtedness. From time to time, the
Board of Directors shall determine by resolution which person or persons may
sign or endorse all checks, drafts, other orders for payment of money, notes or
other evidences of indebtedness that are issued in the name of or payable to the
corporation, and only the persons so authorized shall sign or endorse those
instruments.
8.3 Corporate Contracts and Instruments; How Executed. The Board of
Directors, except as otherwise provided in these Bylaws, may authorize any
officer or officers, or agent or agents, to enter into any contract or execute
any instrument in the name of or on behalf of the corporation; such authority
may be general or confined to specific instances. Unless so authorized or
ratified by the Board of Directors or within the agency power of an officer, no
officer, agent or employee shall have any power or authority to bind the
corporation by any contract or engagement or to pledge its credit or to render
it liable for any purpose or for any amount.
8.4 Certificate For Shares. A certificate or certificates for shares
of the corporation shall be issued to each shareholder when any such shares are
fully paid. The Board of Directors may authorize the issuance of certificates
for shares partly paid provided that these certificates shall state the total
amount of the consideration to be paid for them and the amount actually paid.
All certificates shall be signed in the name of the corporation by the Chairman
of the Board or the Vice Chairman of the Board or the President or a Vice
President and by the Chief Financial Officer or an Assistant Treasurer or the
Secretary or an Assistant Secretary, certifying the number of shares and the
class and series of shares owned by the shareholder. Any or all of the
signatures on the certificates may be by facsimile.
In case any officer, transfer agent or registrar has signed or
whose facsimile signature has been placed on a certificate has ceased to be such
officer, transfer agent or registrar before such certificate is issued, it may
be issued by the corporation with the same effect as if that person were an
officer, transfer agent or registrar at the date of issue.
8.5 Lost Certificates. Except as provided in this Section 8.5, no
new certificate for shares shall be issued to replace a previously issued
certificate unless the later is surrendered to the corporation or its transfer
agent or registrar and cancelled at the same time. The Board of Directors may,
in case any share certificate or certificate for any other security is lost,
stolen or destroyed (as evidenced by a written affidavit or affirmation of such
fact), authorize the issuance of replacement certificates on such terms and
conditions as the Board of Directors may require; the Board of Directors may
require indemnification of the corporation secured by a bond or other adequate
security sufficient to protect the corporation against any claim that may be
made against it, including any expense or liability, on account of the alleged
loss, theft or destruction of the certificate or the issuance of the replacement
certificate.
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8.6 Construction; Definitions. Unless the context requires
otherwise, the general provisions, rules of construction, and definitions in the
Code shall govern the construction of these Bylaws. Without limiting generality
of the provision, the singular number includes the plural, the plural number
includes the singular, and the term "person" includes both a corporation and a
natural person.
ARTICLE IX
AMENDMENTS
9.1 Amendment By Shareholders. New Bylaws may be adopted or these
Bylaws may be amended or repealed by the vote or written consent of holders of a
majority of outstanding shares entitled to vote; provided, however, that if the
Articles of Incorporation of the corporation set forth the number of authorized
directors of the corporation, then the authorized number of directors may be
changed only by an amendment of the Articles of Incorporation.
9.2 Amendment By Directors. Subject to the rights of the
shareholders as provided by Section 9.1 of these Bylaws, Bylaws, other than a
Bylaw or an amendment of a Bylaw changing the authorized number of directors
(except to fix the authorized number of directors pursuant to a Bylaw providing
for a variable number of directors), may be adopted, amended or repealed by the
Board of Directors.
9.3 Record of Amendments. Whenever an amendment or new Bylaw is
adopted, it shall be copied in the book of minutes with the original Bylaws. If
any Bylaw is repealed, the face of repeal, with the date of the meeting at which
the repeal was enacted or written consent was filed, shall be stated in said
book of minutes.
ARTICLE X
INTERPRETATION
Reference in the Bylaws to any provision of the California
Corporations Code shall be deemed to include all amendments thereof.
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FIRST AMENDMENT TO
SECOND AMENDED AND RESTATED BYLAWS
OF
QUEST SOFTWARE, INC.
a California corporation
Certificate of Secretary
The undersigned does hereby certify that:
I am the duly qualified and acting Secretary of Quest Software, Inc., a
duly organized and existing California corporation.
The following is a true copy of the resolutions duly adopted by the Board
of Directors by unanimous written consent effective December 20, 1999, which
appears in the minute book of Quest Software, Inc.
SPECIAL MEETINGS
NOW, THEREFORE, BE IT RESOLVED, that the first paragraph of Section 2.3 of
Article II of the Second Amended and Restated Bylaws of Quest Software, Inc. be,
and it hereby is, deleted in its entirety and replaced with the following in
lieu thereof, effective immediately:
Special Meetings. Special meetings of the shareholders may be called
at any time, subject to the provisions of Sections 2.4 and 2.5 of these
Bylaws, by the Board of Directors, the Chairman of the Board, the President
or the holders of shares entitled to cast not less than ten percent (10%)
of the votes at that meeting.
The foregoing resolution is in conformity with the Second Amended and
Restated Articles of Incorporation and Second Amended and Restated Bylaws of
Quest Software, Inc., has never been modified or repealed, and is now in full
force and effect.
IN WITNESS WHEREOF, I have executed this Amendment to Second Amended and
Restated Bylaws on the 20th day of December, 1999.
/s/ David M. Doyle
--------------------------------------
David M. Doyle
Secretary
<PAGE> 1
EXHIBIT 10.10
OFFICE LEASE
BETWEEN
THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY (LANDLORD) AND
QUEST SOFTWARE, INC. (TENANT)
CORNERSTONE AT CANTERA OFFICE BUILDING
4320 WINFIELD ROAD
WARRENVILLE, IL 60555
<PAGE> 2
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Article 1. BASIC LEASE INFORMATION............................................1
1.1 Basic Lease Information..................................1
1.2 Exhibits.................................................3
Article 2. AGREEMENT..........................................................3
2.1 Lease Grant, Term and Use................................3
2.2 Termination Right........................................3
Article 3. DELIVERY OF PREMISES...............................................4
3.1 Delivery of Possession...................................4
3.2 Early Entry..............................................4
3.3 Right of First Offer.....................................4
Article 4. MONTHLY RENT.......................................................6
4.1 Monthly Rent.............................................6
4.2 .........................................................6
Article 5. OPERATING EXPENSES..................................................7
5.1 General..................................................7
5.2 Estimated Payments.......................................8
5.3 Annual Settlement........................................8
5.4 Final Proration..........................................9
5.5 Occupancy Variance.......................................9
5.6 Other Taxes..............................................9
5.7 Additional Rent..........................................9
Article 6. INSURANCE ........................................................10
6.1 Landlord's Insurance....................................10
6.2 Tenant's Insurance......................................10
6.3 Forms of Policies.......................................10
6.4 Waiver of Subrogation...................................10
6.5 Adequacy of Coverage....................................10
6.6 Certain Insurance Risks.................................11
Article 7. USE...............................................................11
Article 8. COMPLIANCE WITH LAWS..............................................11
Article 9. HAZARDOUS MATERIALS...............................................11
Article 10. ASSIGNMENT AND SUBLETTING........................................12
10.1 General.................................................12
</TABLE>
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10.2 Recapture...............................................12
10.3 Submission of Information...............................13
10.4 Payments to Landlord....................................14
10.5 Prohibited Transfers....................................14
10.6 Permitted Transfer......................................14
10.7 Condition...............................................14
10.8 Remedies................................................14
Article 11. RULES AND REGULATIONS............................................14
Article 12. COMMON AREAS.....................................................15
Article 13. LANDLORD'S SERVICES..............................................15
13.1 Landlord's Repair and Maintenance.......................15
13.2 Landlord's Other Services...............................15
13.3 Tenant's Costs..........................................16
13.4 Limitation on Liability.................................16
Article 14. TENANT'S CARE OF THE PREMISES....................................17
Article 15. ALTERATIONS......................................................17
15.1 General.................................................17
15.2 Free-Standing Partitions................................17
15.3 Removal.................................................17
15.4 ADA Compliance..........................................18
Article 16. MECHANICS' LIENS.................................................18
Article 17. END OF TERM......................................................18
Article 18. EMINENT DOMAIN...................................................19
Article 19. DAMAGE AND DESTRUCTION...........................................19
Article 20. SUBORDINATION....................................................20
20.1 General.................................................20
20.2 Attornment..............................................20
Article 21. ENTRY BY LANDLORD................................................21
Article 22. INDEMNIFICATION, WAIVER AND RELEASE..............................21
22.1 Tenant's Indemnification ...............................21
22.2 Waiver and Release......................................21
Article 23. QUIET ENJOYMENT..................................................22
Article 24. EFFECT OF SALE...................................................22
Article 25. DEFAULT ........................................................22
25.1 Events of Default by Tenant.............................22
25.2 Landlord's Remedies.....................................23
25.3 Damages; no Termination.................................23
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Page
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25.4 Damages upon Termination................................23
25.5 Cumulative Remedies.....................................24
25.6 ........................................................24
Article 26. INTENTIONALLY OMITTED.............................................24
Article 27. PARKING ........................................................24
Article 28. MISCELLANEOUS.....................................................25
28.1 Intentionally Omitted...................................25
28.2 Security Deposit........................................25
28.3 Signs...................................................25
28.4 No Offer................................................25
28.5 Joint and Several Liability.............................25
28.6 No Construction Against Drafting Party..................26
28.7 Time of the Essence.....................................26
28.8 No Recordation..........................................26
28.9 No Waiver...............................................26
28.10 Limitation on Recourse..................................26
28.11 Estoppel Certificates...................................26
28.12 Waiver of Jury Trial....................................26
28.13 No Merger...............................................26
28.14 Holding Over............................................27
28.15 Notices.................................................27
28.16 Severability............................................27
28.17 Written Amendment Required..............................27
28.18 Captions................................................27
28.19 Authority...............................................27
28.20 Brokers.................................................27
28.21 Governing Law...........................................27
28.22 No Easements for Air or Light...........................27
28.23 Tax Credits.............................................28
28.24 Intentionally Omitted...................................28
28.25 Landlord's Fees.........................................28
28.26 Non-waiver..............................................28
28.27 Presumption.............................................28
28.28 Waiver of Technical Defects in Notices..................28
28.29 No Right to Terminate...................................28
28.30 No Liability for Crimes.................................28
28.31 Binding Effect..........................................28
28.32 Confidentiality.........................................28
28.33 Force Majeure...........................................29
28.34 Interest................................................29
28.35 Entire Agreement........................................29
EXHIBITS
Exhibit A -- Layout Of The Premises
Exhibit B -- Work Letter
Exhibit C -- Commencement Date Certificate
Exhibit D -- Rules and Regulations
Exhibit E -- Tenant Estoppel Certificate
Exhibit F -- Option to Renew
Exhibit G - Janitorial Specifications
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<PAGE> 5
OFFICE LEASE
BETWEEN
THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY ("LANDLORD") AND
QUEST SOFTWARE, INC. ("TENANT")
THIS OFFICE LEASE ("Lease") is entered into by Landlord and Tenant on
the date set forth in the following Basic Lease Information. Landlord and Tenant
hereby agree as follows:
ARTICLE 1. BASIC LEASE INFORMATION.
- ------------------------------------
1.1 BASIC LEASE INFORMATION. In addition to the Terms that are defined
elsewhere in this Lease, the following terms shall have the following meaning as
set forth in this Lease:
(a) LEASE DATE: September 30, 1999
(b) LANDLORD: The Northwestern Mutual Life Insurance
Company
TYPE OF LEGAL ENTITY AND STATE OF FORMATION:
a Wisconsin Corporation
(c) LANDLORD'S ADDRESS FOR RECEIPT OF NOTICE:
The Northwestern Mutual Life Insurance Company
c/o Northwestern Investment Management Company
10 South Wacker Drive, Suite 3400
Chicago, IL 60606
Attn: Regional Manager
(Fax: 312/559-0198)
with a copy to:
Northwestern Investment Management Company
720 East Wisconsin Avenue
Milwaukee, WI 53202
Attn: Managing Director-Asset Management
(Fax: 414/299-7016)
(d) TENANT: Quest Software, Inc.
TYPE OF LEGAL ENTITY AND STATE OF FORMATION:
a California corporation
(e) TENANT'S ADDRESS FOR RECEIPT OF NOTICE: at the
following address until the Commencement Date, and
thereafter at the Premises:
Quest Software, Inc.
610 Newport Center Drive; Suite 1400
Newport Beach, CA 92660
Attn: Susan Twellman
(Fax: 949-720-0426)
with a copy to: Pinto & Dubia, LLP
2 Park Plaza, Suite 300
Irvine, CA 92614-8513
Attn: Tracy D. Johnson
(Fax: 949-833-2067)
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(f) LAND: The parcel of land located at the Building
Address upon which the Building is situated.
(g) PROJECT: The development commonly known as
Cornerstone At Cantera consisting of the Land and all
Improvements built on the Land, including without
limitation, the Building, Common Areas, parking lot
or parking structure, if any, walkways, driveways,
fences and landscaping.
(h) BUILDING: The building located on the Land of which
the Premises are a part.
(i) BUILDING ADDRESS: 4320 Winfield Road, Warrenville,
Illinois 60555.
(j) PREMISES: The Premises located at Suite 500 on the
fifth floor of the Building, as further shown on
Exhibit A to this Lease.
(k) RENTABLE AREA OF THE PREMISES: 15,633 square feet,
which Landlord and Tenant hereby conclusively agree
shall be the Rentable Area of the Premises for all
purposes of this Lease.
(l) TERM: 84 months, beginning on the Commencement Date
and ending on the Expiration Date.
(m) COMMENCEMENT DATE: November 1, 1999 or as extended
pursuant to Article 3.1 of this Lease.
(n) EXPIRATION DATE: October 31, 2006, or as extended
pursuant to Article 3.1 of this Lease.
(o) SECURITY DEPOSIT: $32,347.50, subject to the
provisions of Article 28.2.
(p) MONTHLY RENT: [see Section 4]
($______________________________________)
(q) ADDITIONAL RENT: Any amounts that this Lease requires
Tenant to pay in addition to Monthly Rent.
(r) RENT: Collectively, the Monthly Rent and Additional
Rent.
(s) TENANT'S PROPORTIONATE SHARE: 10.4744%, which is the
ratio of the rentable square footage of the Premises
(15,633 square feet) to the rentable square footage
of the Building (149,250 rentable square feet).
(t) [Intentionally omitted.]
(u) [Intentionally omitted.]
(v) LANDLORD'S BROKER: Jones Lang LaSalle Americas
(Illinois), L.P.
(w) TENANT'S BROKER: CB RICHARD ELLIS
(x) PRIME RATE: The rate of interest from time to time
published in the "Money Rates" section of the Wall
Street Journal on the date such calculation is to be
made or if not published on such date, the date of
publication immediately preceding such calculation
date.
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(y) USE: The permitted use of the Premises shall be used
for general office use.
(z) LEASE YEAR: A period of twelve (12) consecutive
calendar months with the first full Lease Year
commencing on the Commencement Date (unless the
Commencement Date is not the first day of a calendar
month, in which case the first Lease Year will
commence on the first day of the calendar month
following the Commencement Date) and each succeeding
Lease Year commencing on the anniversary of the
commencement of the first Lease Year.
(aa) CALENDAR YEAR: Each year in which any part of the
Term falls through and including the year in which
the Term expires.
If any other provision of this Lease conflicts with anything set forth in this
Article 1.1, such other provision will prevail.
1.2 EXHIBITS. The following exhibits are attached to this Lease
and are made part hereof:
Exhibit A -- Layout Of The Premises
Exhibit B -- The Work Letter
Exhibit C -- Commencement Date Certificate
Exhibit D -- Rules and Regulations
Exhibit E -- Tenant Estoppel Certificate
Exhibit F -- Option to Renew
Exhibit G -- Janitorial Specifications
ARTICLE 2. AGREEMENT.
- ----------------------
2.1 LEASE GRANT, TERM AND USE. Landlord leases the Premises to Tenant,
and Tenant leases the Premises from Landlord, pursuant to the terms and
conditions of this Lease. The duration of this Lease shall be the Term. The Term
shall commence on the Commencement Date and shall expire on the Expiration Date,
except as may be otherwise set forth in this Lease.
Landlord also grants to Tenant the rights under this Lease to use in
common with Landlord and other tenants, occupants and visitors to the Building,
the common areas, as hereinafter defined, including the common walkways and
sidewalks of the Property, the Building lobby (but not for advertising or
promotional purposes), entrances, stairs and elevators, and, if the Premises
include less than an entire floor of the Building, the common lobbies, hallways
and toilets and other common facilities of such floor. Landlord reserves the
right to increase, reduce or change the size, layout or location of the Common
Areas and facilities (as long as access to the Premises is not materially
impaired). No easement, license or other right to light, air or view is created
by this Lease.
For the purpose of calculating the amounts due from Tenant as Rent and
other charges, the First Lease Year shall include the period of time beginning
on the Commencement Date to the first day of the calendar month following the
Commencement Date.
2.2 TERMINATION RIGHT. Provided no Event of Default exists, and no
condition exists which, with the giving of notice or the passing of time or both
would result in an Event of Default, Tenant will have the right to terminate
this Lease at the expiration of the fifth Lease Year. Tenant will exercise the
right granted herein by delivering written notice to Landlord on or prior to
February 1, 2004 exercising this termination right. Failure by Tenant to deliver
such written notice within the time period stipulated herein will constitute a
waiver of Tenant's right of termination.
If Tenant elects to terminate this Lease as provided herein, Tenant
must pay to Landlord an early termination fee in an amount equal to the sum of
the following (the "TERMINATION FEE"): (i) $251,835.00 (which was calculated as
the unamortized cost (as of the expiration of the fifth Lease Year) of the Work
described in the Work Letter and of leasing commissions paid by Landlord in
connection with this Lease, such costs being
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<PAGE> 8
amortized at 11% per annum over the period beginning on the Commencement Date
and ending on the scheduled expiration of the initial Lease Term as set forth in
Article 1.1(n)), plus any applicable sales tax, plus (ii) if Tenant has
exercised its right of first offer under Article 3.3, the unamortized cost of
any tenant improvement allowance or similar economic concession given to Tenant
with respect to the Additional Premises and of any leasing commissions paid by
Landlord in connection with the Additional Premises, such costs being amortized
at 11% per annum over the period beginning on the date of the commencement of
Tenant's lease of such Additional Premises and ending on the scheduled
expiration of the initial Lease Term as set forth in Article 1.1(n) (as the same
may have been extended under Article 3.1). Tenant must pay the entire
Termination Fee at the time Tenant delivers its notice exercising its right to
terminate. If the Termination Fee is not paid to Landlord when due, Tenant's
right to terminate under this Article 2.2 will be deemed void and inoperable.
If this Lease is terminated as provided herein, the parties agree
to execute an instrument which confirms and effects a release and surrender of
all right, title and interest in and to the Premises pursuant to the terms of
this Lease and otherwise.
ARTICLE 3. DELIVERY OF PREMISES.
- ---------------------------------
3.1 DELIVERY OF POSSESSION. Landlord shall construct or install in the
Premises any improvements to be constructed or installed by Landlord according
to the Work Letter attached to this Lease as Exhibit B (such improvements
described herein and in the Work Letter as the "Work" or "Tenant Improvements").
If Landlord is unable to deliver possession of the Premises or substantial
completion of the Work is delayed due to any circumstances besides a Tenant
Delay (as defined in the Work Letter), this Lease shall not be void or voidable
and Landlord shall not be liable to Tenant for any resultant loss or damage;
however, in such event the Commencement Date will be deferred until the Work is
substantially complete and Landlord is able to deliver possession of the
Premises to Tenant and the Expiration Date will be deferred for an equal amount
of time. Substantial completion of the Work will include a final inspection by
the City of Warrenville and the oral or written approval by such City for
occupancy of the Premises. However, if the Expiration Date, as so extended,
falls on other than the last day of a month, then the Expiration Date will be
further extended to fall on the last day of such month. If Landlord's delay in
delivering possession of the Premises or substantial completion of the Work is
the result of a Tenant Delay, this Lease and Tenant's obligations hereunder
shall be deemed to have become effective as of the scheduled Commencement Date,
and there will be no deferral of the Commencement Date or Expiration Date. The
Work shall be deemed substantially complete when the Work is completed except
for Punch List items, as that term is defined in the Work Letter. Tenant and
Landlord shall execute the Commencement Date Certificate attached to this Lease
as Exhibit C within fifteen (15) days of Landlord's request.
Tenant acknowledges that neither Landlord nor its agents or employees
have made any representations or warranties as to the suitability or fitness of
the Premises for the conduct of Tenant's business or for any other purpose, nor
has Landlord or its agents or employees agreed to undertake any alterations or
construct any tenant improvements to the Premises except as expressly provided
in this Lease and the Work Letter.
3.2 EARLY ENTRY. Tenant shall have the right to enter the Premises 5
days prior to the Commencement Date for the purpose of installing fixtures,
furniture, equipment and telephone systems permitted by Landlord and for any
other purpose permitted by Landlord. Such entry prior to the Commencement Date
shall be at Tenant's sole risk and subject to all the terms and provisions of
this Lease as though the Commencement Date had occurred, except for the payment
of Rent. Tenant, its agents or employees shall not interfere with or delay
Landlord's completion of construction of the Tenant Improvements set forth in
the Work Letter. All rights of Tenant under this Article 3.2 shall be subject to
the requirements of all applicable building codes, zoning requirements, and
federal, state, and local laws, rules, and regulations, so as not to interfere
with Landlord's compliance with all laws, including the obtaining of a
certificate of occupancy for the Premises. Landlord has the right to impose
additional conditions on Tenant's early entry that Landlord, in its reasonable
discretion, deems appropriate, including without limitation, an indemnification
of Landlord and proof of insurance, and Landlord shall further have the right to
require that Tenant execute an early entry agreement containing such conditions
prior to Tenant's early entry.
3.3 RIGHT OF FIRST OFFER. During the initial Term of this Lease (but
excluding the Renewal Term) and subject to the provisions set forth hereinafter
and provided Tenant has not exercised its right to terminate this Lease as set
forth in Article 2.2 herein, Tenant will have a continuing right of first offer
to lease from Landlord all or any of the remainder of the fifth floor of the
Building (the "ADDITIONAL PREMISES").
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<PAGE> 9
If Tenant's Exercise Notice (defined below) is received before the end
of the first Lease Year and the scheduled commencement of Tenant's lease of the
Additional Premises (or such portion) occurs during the first 15 full calendar
months of the Term, then Tenant's lease of such space will be on the same terms
as contained in this Lease for the initial Premises, excluding the Work Letter,
and except that (a) the Monthly Rent for the Additional Premises will be at a
rate equal to the Monthly Rent per rentable square foot per annum then
applicable to the Premises, increasing as and when the Monthly Rent increases
under this Lease; and (b) Landlord will cause such space to be improved at
Tenant's cost, in accordance with Landlord's then standard-form work letter for
"allowance" buildouts, except that Landlord will provide an allowance (which may
be applied to hard and soft construction costs only) calculated as follows:
$35.00 multiplied by the number of rentable square feet in the subject portion
of the Additional Premises to be leased by Tenant, divided by 84, and multiplied
by the number of full calendar months in the period beginning on the date of
commencement of the term of Tenant's lease of such portion of the Additional
Premises through the Expiration Date.
If Tenant's Exercise Notice (defined below) is received after the end
of the first Lease Year or the scheduled commencement of Tenant's lease of the
Additional Premises (or such portion) occurs after the first 15 full calendar
months of the Term, then Tenant's lease of such space will be on the same terms
as contained in this Lease for the initial Premises, excluding the Work Letter,
and except that (A) the Monthly Rent for the Additional Premises will be at a
rate equal to the then prevailing market rate as reasonably determined by
Landlord for fully credit worthy tenants for comparable space in the Building
and other first class office buildings which have comparable tenant improvements
in the vicinity of the Building, for a term equal or comparable to the
then-remaining initial Term of this Lease, with increases in fixed amounts based
on prevailing-market Monthly Rent increases; and (B) Tenant will lease the
Additional Premises in "as-is" condition, except that if in the prevailing
market, as reasonably determined by Landlord, the rental rate determined in
clause (A) above includes an allowance for leasehold improvements, then Landlord
will grant to Tenant such prevailing market allowance (which may be applied to
hard and soft construction costs only) to improve such space in accordance with
Landlord's then standard-form work letter for "allowance" buildouts.
The provisions of this Article will apply to all or any of the
Additional Premises as all or any of the Additional Premises may become
available for lease at any time from and after the date hereof, subject to any
expansion and renewal options of any current tenant or tenants, their successors
or assigns in the Building, and any extensions or renewals of existing leases
for the Additional Premises. While Tenant's right of first offer is in effect,
if Landlord sends to a prospective tenant a lease proposal for the Additional
Premises, Landlord will contemporaneously deliver to Tenant a written notice
stating that Landlord has delivered or is delivering such proposal to a
prospective tenant, identifying the Additional Premises or portion thereof that
is the subject of the proposal, and offering such space to Tenant on the terms
set forth in this Section 3.3. Tenant must exercise its right of first offer by
written notice to Landlord ("TENANT'S EXERCISE NOTICE") within 15 days following
receipt of any such notice from Landlord. If Tenant exercises the right granted
herein, Landlord and Tenant will enter into an amendment to this Lease to
incorporate the respective portion of the Additional Premises and to make
necessary adjustments to the Base Rental and similar provisions of this Lease.
If Tenant declines to exercise its right as above provided for, or fails to
deliver notice thereof within the time period stipulated above, or fails to
execute the requisite amendment to this Lease, this right of first offer will
lapse as to the subject proposal, and Landlord may lease the Additional Premises
to the prospective tenant named in such proposal, or such prospective tenant's
affiliates or designees, free of Tenant's rights under this Section but, after
Landlord enters into any such lease of the Additional Premises with a third
party(ies), if the subject portion of the Additional Premises again become
available for lease (subject to any expansion and renewal options of any tenant
or tenants at such time, their successors or assigns in the Building, and any
extensions or renewals of such lease to such third party(ies) for the Additional
Premises), Tenant will again have a right of first offer for the subject portion
of the Additional Premises as set forth in this Section 3.3. However, if
Landlord does not lease such space to such prospective tenant or its affiliates
or designees, Landlord will continue to deliver to notify Tenant of Landlord's
delivery of lease proposals to other prospective tenants of the Additional
Premises, and Tenant's rights under this Section 3.3 will continue.
The foregoing right of first offer may not be severed from this Lease
or separately sold, assigned or transferred and is subject to the following
additional conditions, namely: (a) that no less than 24 months remain on the
current Term; (b) that the Term for any Additional Premises will run
concurrently with this Lease; (c) that, at the time that Tenant exercises this
right of first offer for any Additional Premises, no Event of Default exists,
and no condition exists which, with the giving of notice or the passage of time,
or both, would constitute an Event of
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<PAGE> 10
Default; (d) that, at the time Tenant exercises this right of first offer,
Tenant occupies and is in possession of the Premises and has not assigned the
Lease or sublet the Premises; and (e) that Tenant enters into an amendment to
this Lease to incorporate the Additional Premises and make corresponding
modifications to the provisions of this Lease.
ARTICLE 4. MONTHLY RENT.
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4.1 MONTHLY RENT. Throughout the Term, and any renewal term which may
be duly exercised by Tenant, Tenant shall pay Monthly Rent to Landlord in the
amounts and for the time periods described as follows:
<TABLE>
<CAPTION>
PERIOD ANNUAL MONTHLY RENT MONTHLY INSTALLMENTS
------ ------------------- --------------------
<S> <C> <C>
Commencement Date through the last day $265,761.00 $22,146.75
of the first Lease Year ($17.00 x 15,633 rsf / 12)
First day of the second Lease Year $273,733.80 $22,811.15
through the last day of the second ($17.51 x 15,633 rsf / 12)
Lease Year
First day of the third Lease Year $282,019.32 $23,501.61
through the last day of the third ($18.04 x 15,633 rsf / 12)
Lease Year
First day of the fourth Lease Year $290,461.20 $24,205.10
through the last day of the fourth ($18.58 x 15,633 rsf / 12)
Lease Year
First day of the fifth Lease Year $299,059.32 $24,921.61
through the last day of the fifth ($19.13 x 15,633 rsf / 12)
Lease Year
First day of the sixth Lease Year $308,126.40 $25,677.20
through the last day of the sixth ($19.71 x 15,633 rsf / 12)
Lease Year
First day of the seventh Lease Year $317,349.96 $26,445.83
through the last day of the Lease Term ($20.30 x 15,633 rsf / 12)
</TABLE>
Monthly Rent shall be paid in advance on or before the first day of each
calendar month of the Term, and shall be accompanied by any applicable rent,
sales, use or other tax which is based on the amount and/or payment of Rent
payable pursuant to this Lease. If the Term commences on a day other than the
first day of a calendar month or ends on a day other than the last day of a
calendar month, then Monthly Rent will be appropriately prorated based on the
actual number of calendar days in such month. If the Term commences on a day
other than the first day of a calendar month, then the prorated Monthly Rent for
such month will be paid on or before the first day of the Term. Monthly Rent
shall be paid to Landlord, without written notice or demand and without
deduction or offset (except as may be otherwise expressly provided in this
Lease), as an independent covenant of Tenant, in lawful money of the United
States of America at Landlord's address set forth in Article 1.1 herein or to
such other address as Landlord may from time to time designate in writing. After
the service of more than one notice on Tenant for overdue Rent or if more than
one check is returned unpaid during any twelve month period during the Term,
then Rent for the remainder of the Term shall be paid by cashier's check.
4.2 If Tenant fails to pay any Rent when due, the unpaid amounts will
be subject to a late payment charge equal to three percent (3%) of the unpaid
amounts. This late payment charge is intended to compensate Landlord for its
additional administrative costs resulting from Tenant's failure, and has been
agreed upon by Landlord and Tenant as a reasonable estimate of the additional
administrative costs that will be incurred by Landlord as a result of Tenant's
failure. The actual cost in each instance is extremely difficult, if not
impossible, to determine. This late payment charge will constitute liquidated
damages and will be paid to Landlord together with such unpaid amounts and
interest pursuant to Article 28.34. The payment of this late payment charge will
not constitute a waiver by Landlord of any default by Tenant under this Lease.
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<PAGE> 11
ARTICLE 5. OPERATING EXPENSES.
- -------------------------------
5.1 GENERAL.
(a) In addition to Monthly Rent, beginning on the Commencement Date,
Tenant shall pay Tenant's Proportionate Share of the Operating Expenses of the
Project defined below, paid, payable or incurred by Landlord in each calendar
year or partial calendar year during the Term. If Operating Expenses are
calculated for a partial calendar year, an appropriate proration shall be made.
(b) As used in this Lease, the term "Operating Expenses" means:
(1) All costs of management, operation, and maintenance of the
Project, including without limitation real and personal property taxes and
assessments (and any tax levied in whole or in part in lieu of or in addition to
real property taxes); wages, salaries, and compensation of employees engaged in
the repair, operation, maintenance, leasing (but excluding third party leasing
commissions), or security of the Project; consulting, accounting, legal,
janitorial, maintenance, guard, and other services; management fees and costs
(charged by Landlord, any affiliate of Landlord, or any other entity managing
the Project and determined at a rate consistent with prevailing market rates for
comparable services and Projects); that part of office rent or rental value of
space in the Project used or furnished by Landlord to enhance, manage, operate,
and maintain the Project; electricity, water, waste disposal, and other
utilities; materials and supplies; maintenance and repairs; insurance obtained
with respect to the Project; depreciation on personal property and equipment,
except as set forth in Article 5.1(c), below, which is or should be capitalized
on the books of Landlord; and any other costs, charges, and expenses that under
generally accepted accounting principles would be regarded as management,
maintenance, and/or Operating Expenses; and
(2) The cost (amortized on a straight line basis over the
reasonable useful life as determined by Landlord) together with interest at the
lesser of the Prime Rate plus two percent (2%) or Landlord's borrowing rate for
such capital improvements (including the rental of equipment which would be a
substitute for a capital expense that the Landlord would otherwise incur), on
the unamortized balance of any capital improvements that are made to the Project
by Landlord (i) for the purpose of reducing Operating Expenses, or (ii) required
under any law or regulation that was not applicable to the Project at or prior
to the Commencement Date.
(c) The Operating Expenses will not include:
(1) depreciation on the Project (other than depreciation
on personal property, equipment, window coverings on
exterior windows provided by Landlord and carpeting
and wall covering in public corridors and Common
Areas);
(2) advertising costs, finders' fees and real estate
brokers' commissions;
(3) ground lease or mortgage payments;
(4) costs of replacements to personal property and
equipment for which depreciation costs are included
as an operating expense;
(5) the cost of repairs due to casualty or condemnation
that are reimbursed by third parties;
(6) any income, estate, inheritance, or other land
transfer or mortgage tax and any excess profit,
franchise, or similar taxes on Landlord's business
provided, however, that if a tax or excise on Rent or
other amounts payable by Tenant to Landlord is levied
or assessed against Landlord on account of Rent, such
tax shall not be excluded from Operating Expenses;
(7) The cost of correcting defects in construction of the
Building or in the Building systems or equipment (as
opposed to the cost of normal repair, materials and
equipment installed in the Building in light of their
specifications);
(8) All expenses for which Landlord has received any
reimbursement to the extent of such reimbursement
including, without limitation, reimbursements from
Tenant or other tenant (such as reimbursement for
repairs) or pursuant to contractor's or other
warranties or condemnation, but excluding matters
paid as additional rent or rent adjustment or other
tax or expense pass-through or escalation expressly
provided for in a tenant lease;
(9) Any interest or penalty charges or attorneys' fees
incurred by Landlord due to the violation of any law
or failure to pay obligations of the Landlord before
they become delinquent (whether or not the payment of
such obligations is reimbursed through Operating
Expenses);
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(10) Costs (including, without limitation, permit, license
and inspection fees) of any alterations, renovations
or improvements of, or decorating in, the Premises or
any other tenant's premises in the Building;
(11) Expenses incurred in connection with services
(including special service from Landlord's employees)
or other benefits of a type which are not available
or provided to Tenant (regardless of whether Landlord
is prepared to perform such services for Tenant) but
which are available to or provided to another tenant
or occupant of the Building;
(12) Attorneys' fees, costs and disbursements and other
expenses incurred in connection with any matters
related to Landlord which are not related to the
maintenance, operation or repairing of the Project
including, without limitation, any matter related to
(i) the formation and continued existence of
Landlord, (ii) any loans to Landlord relating to the
Building, (iii) tenant leases, including, without
limitation, negotiations with prospective tenants or
disputes with or enforcement actions against any
tenant, and (iv) the defense of Landlord's title to
or interest in the Building;
(13) The cost of any repairs, alterations, additions,
charges, replacements and other items not
specifically permitted to be included under this
Article 5 and which, under generally accepted
accounting principles, are properly classified as
capital expenditures;
(14) Any on-site management or other fees paid to an agent
which is related to Landlord to the extent such fees
are in excess of the then current market rate for
customary management fees for projects similar to the
Building;
(15) Payments in respect of profit to parties related to
Landlord for supplies or materials to the extent that
the cost of such supplies or materials exceeds the
cost that would have been paid had such supplies or
materials been provided by parties unaffiliated with
the Landlord on a competitive basis; and
(16) Costs incurred by Landlord in connection with the
removal, abatement, containment or remediation of
asbestos, asbestos containing material, volatile
organic compounds or other hazardous materials (if
and to the extent that such other hazardous materials
are classified as such under applicable hazardous
materials laws as in effect as of the date of this
Lease) from or with respect to the Project.
5.2 ESTIMATED PAYMENTS. During each calendar year or partial calendar
year in the Term beginning as of the Commencement Date, in addition to Monthly
Rent, Tenant shall pay to Landlord on the first day of each month an amount
equal to 1/12 of the product of Tenant's Proportionate Share multiplied by the
Estimated Operating Expenses, defined below, for such calendar year. Estimated
Operating Expenses for any calendar year means Landlord's reasonable estimate of
Operating Expenses for such calendar year and will be subject to revision
according to the further provisions of this Article 5.2 and Article 5.3. During
any partial calendar year during the Term, Estimated Operating Expenses will be
estimated on a full-year basis. During each December during the Term, or as soon
after each December as practicable, Landlord will give Tenant written notice of
Estimated Operating Expenses for the ensuing calendar year. On or before the
first day of each month during the ensuing calendar year (or each month of the
Term, if a partial calendar year), Tenant shall pay to Landlord 1/12 of the
product of Tenant's Proportionate Share multiplied by the Estimated Operating
Expenses for such calendar year; however, if such written notice is not given in
December, Tenant shall continue to make monthly payments on the basis of the
prior year's Estimated Operating Expenses until the month after such written
notice is given, at which time Tenant shall commence making monthly payments
based upon the revised Estimated Operating Expenses. In the month Tenant first
makes a payment based upon the revised Estimated Operating Expenses, Tenant
shall pay to Landlord for each month which has elapsed since December the
difference between the amount payable based upon the revised Estimated Operating
Expenses and the amount payable based upon the prior year's Estimated Operating
Expenses. If at any time or times it reasonably appears to Landlord that the
actual Operating Expenses for any calendar year will vary from the Estimated
Operating Expenses for such calendar year, Landlord may, by written notice to
Tenant, revise the Estimated Operating Expenses for such calendar year, and
subsequent payments by Tenant in such calendar year will be based upon such
revised Estimated Operating Expenses.
5.3 ANNUAL SETTLEMENT. Within one hundred twenty (120) days after the
end of each calendar year during the Term or as soon after such one hundred
twenty (120-day) period as practicable, Landlord shall deliver to Tenant a
statement of amounts payable under Article 5.1 for such calendar year prepared
and certified by Landlord
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or its agents. Such certified statement shall be final and binding upon Tenant
unless Tenant objects to it in writing to Landlord within thirty (30) days after
it is given to Tenant. If such statement shows an amount owing by Tenant that is
less than the estimated payments previously made by Tenant for such calendar
year, the excess shall be held by Landlord and credited against the next payment
of Rent; however, if the Term has ended and Tenant was not in default at its
end, Landlord shall refund the excess to Tenant. If such statement shows an
amount owing by Tenant that is more than the estimated payments previously made
by Tenant for such calendar year, Tenant shall pay the deficiency to Landlord
within thirty (30) days after the delivery of such statement. Provided no Event
of Default exists under this Lease, Tenant shall have ninety (90) days after
receipt of the statement to have an independent certified public accountant
which is either (i) a "big-six" accounting firm or (ii) is not working for
Tenant on a contingency fee basis, complete an audit of Landlord's books and
records on Operating Expenses, during normal business hours upon reasonable
advance written notice at Landlord's local office. Tenant shall deliver to
Landlord a copy of the results of such audit within ten (10) days of receipt by
Tenant. The cost of such audit will be borne solely by Tenant unless, in
connection with the audit, it is demonstrated that Landlord overstated Operating
Expenses by 5% or more in the aggregate (after netting any understated line
items against overstated line items), in which case Landlord will bear the
reasonable cost of such audit.
5.4 FINAL PRORATION. If the Term ends on a day other than the last day
of a calendar year, the amount of increase (if any) in the Operating Expenses
payable by Tenant applicable to the calendar year in which this Lease ends shall
be calculated on the basis of the number of days of the Term falling within such
calendar year, and Tenant's obligation to pay any increase, or Landlord's
obligation to refund any overage, shall survive the expiration or other
termination of this Lease.
5.5 OCCUPANCY VARIANCE. Operating Expenses which vary with occupancy
and are attributable to any part of the Term in which less than 95% of the
rentable area of the Building is occupied by tenants shall be adjusted by
Landlord proportionally to the amount that they would have been if 95% of the
rentable area of the Building had been occupied.
5.6 OTHER TAXES.
(a) Tenant shall reimburse Landlord within 30 days after demand for any
and all taxes payable by Landlord (other than as set forth in Article 5.6(b)
below), whether or not now customary or within the contemplation of Landlord and
Tenant:
(1) upon or measured by rent, including without limitation, any
gross revenue tax, excise tax, or value added tax levied by
the federal government or any other governmental body with
respect to the receipt of rent;
(2) upon this transaction or any document to which Tenant is a
party creating or transferring an interest or an estate in the
Premises; and
(3) upon a reassessment of the Project or Building by a taxing
authority having jurisdiction over the same.
(b) Tenant will not be obligated to pay any inheritance tax, gift tax,
transfer tax, franchise tax, income tax (based on net income), profit tax, or
capital levy imposed upon Landlord; provided, however, that Tenant shall pay any
tax or excise on Rent or other amounts payable by Tenant to Landlord levied or
assessed against Landlord on account of Rent.
(c) Tenant shall pay promptly when due all personal property taxes on
Tenant's personal property in the Premises and any other taxes payable by Tenant
that if not paid might give rise to a lien on the Premises or Tenant's interest
in the Premises.
5.7 ADDITIONAL RENT. Amounts payable by Tenant pursuant to this Article
5 shall be payable as Rent, without deduction or offset (except as may be
otherwise expressly provided in this Lease). If Tenant fails to pay any amounts
due according to this Article 5, Landlord shall have all the rights and remedies
available to it under this Lease and/or applicable law.
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ARTICLE 6. INSURANCE.
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6.1 LANDLORD'S INSURANCE. At all times during the Term, Landlord shall
procure and keep in full force and effect the following insurance:
(a) All-risk Property Insurance insuring the Building, its equipment,
common area furnishings, and the Tenant Improvements (as that term is defined in
the Work Letter) at full replacement cost (excluding foundations), with such
deductibles as Landlord considers appropriate;
(b) Commercial General Liability Insurance insuring its interest in the
Project in such amounts as Landlord deems reasonably appropriate for the Project
in the geographical area in which it is located;
(c) Such other insurance as Landlord reasonably determines from time to
time and is commercially reasonable and customary for the Project in the
geographical area in which it is located.
6.2 TENANT'S INSURANCE. Tenant shall, at its sole cost and expense,
keep in full force and effect the following insurance:
(i) All-Risk Property Insurance on "Tenant's Property" for the
full replacement value. Such policy shall contain an Agreed
Amount endorsement in lieu of a coinsurance clause. "Tenant's
Property" is defined to be all improvements, betterments and
personal property of Tenant located in or on the Premises,
Common Areas or Building, excluding that which is insured by
Landlord's all-risk Property Insurance, as set forth in
Article 6.1(a) herein.
(ii) Commercial General Liability Insurance insuring Tenant against
any liability arising out of its use, occupancy or maintenance
of the Premises or the business operated by Tenant pursuant to
the Lease. Such insurance shall be in the amount of at least
$2,000,000 per occurrence. Such policy shall name Landlord,
Landlord's wholly owned subsidiaries and agents and any
Mortgagees of Landlord as additional insureds.
(iii) Workers' Compensation insurance as required by state law.
(iv) Any other form or forms of insurance or increased amounts of
insurance as Landlord or any Mortgagees of Landlord may
reasonably require from time to time.
All such policies shall be written in a form and with an insurance
company satisfactory to Landlord and any mortgagees of Landlord, and
shall provide that Landlord, and any mortgagees of Landlord, receive
not less than thirty (30) days prior written notice of any
cancellation. Prior to or at the time that Tenant takes possession of
the Premises, Tenant shall deliver to Landlord copies of policies or
certificates evidencing the existence of the amounts and forms of
coverage satisfactory to Landlord. Tenant shall, within ten (10) days
prior to the expiration of such policies, furnish Landlord with
renewals or "binders" thereof, or Landlord may order such insurance and
charge the cost thereof to Tenant as Additional Rent.
6.3 FORMS OF POLICIES. All policies maintained by Tenant will provide
that they may not be terminated nor may coverage be reduced except after thirty
(30) days' prior written notice to Landlord. All Commercial General Liability
and All-Risk property policies maintained by Tenant shall be written as primary
policies, not contributing with and not supplemental to the coverage that
Landlord may carry.
6.4 WAIVER OF SUBROGATION. Notwithstanding that any loss or damage may
be due to or result from the negligence of either of the parties hereto,
Landlord and Tenant, for themselves and their respective insurers, each waive
any and all rights to recover against the other, against any subsidiary or joint
venture of such other party or against any other occupant of the Project, or
against the officers, directors, shareholders, partners, joint ventures,
employees, agents, customers, invitees, or business visitors of such other party
or of such other tenant or occupant of the Project, for any loss or damage to
the property of such such waiving party arising from any cause.
6.5 ADEQUACY OF COVERAGE. Landlord, its agents and employees make no
representation that the limits of liability specified to be carried by Tenant
pursuant to this Article 6, are adequate to protect Tenant. If Tenant believes
that any of such insurance coverage is inadequate, Tenant will obtain such
additional insurance coverage as Tenant deems adequate, at Tenant's sole
expense.
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6.6 CERTAIN INSURANCE RISKS. Tenant shall not do or permit to be done
any act or thing upon the Premises or the Project which would (a) jeopardize or
be in conflict with fire insurance policies covering the Project or fixtures and
property in the Project; (b) increase the rate of fire insurance applicable to
the Project to an amount higher than it otherwise would be for general office
use of the Project; or (c) subject Landlord to any liability or responsibility
for injury to any person or persons or to property by reason of any business or
operation being carried on upon the Premises.
ARTICLE 7. USE.
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The Premises shall be used only for the purposes designated in Article
1.1(y) and purposes incidental to that use, and for no other purpose without the
prior written consent of Landlord, which consent shall not be unreasonably
withheld or delayed. Tenant shall use the Premises in a careful, safe, and
proper manner. Tenant shall not use or permit the Premises to be used or
occupied for any purpose or in any manner prohibited by any applicable laws, for
the use or purposes of demonstrations or picketing, or for any improper,
immoral, unlawful, pornographic, sexually explicit, or objectionable use or
purpose. Tenant shall not cause, maintain, or permit any nuisance in, on, or
about the Premises. Tenant shall not commit waste or suffer or permit waste to
be committed in, on, or about the Premises. Tenant shall conduct its business
and control its employees, and agents in such a manner as not to create any
nuisance or interfere with, annoy, or disturb any other Tenant or occupant of
the Project or Landlord in its operation of the Project.
ARTICLE 8. COMPLIANCE WITH LAWS.
- ---------------------------------
Tenant, at its sole cost and expense, shall promptly comply with all
laws, including building and zoning laws, the ADA, statutes, ordinances, and
governmental rules and regulations with respect, related or applicable to
Tenant's use or occupancy of the Premises. Tenant shall also comply with the
requirements of any board of fire underwriters or other similar body constituted
after the Lease Date, with any direction or occupancy certificate issued
pursuant to any law by any public officer or officers, and with the provisions
of all recorded documents affecting the Premises, insofar as they relate to the
condition, use, or occupancy of the Premises, or improvements or alterations
made by or for the Tenant after the Lease Date, excluding requirements of
structural changes to the Premises or the Building, unless required by
negligence or willful acts of the Tenant or by the unique nature of Tenant's use
or occupancy of the Premises. Landlord represents and warrants to Tenant that as
of the date of this Lease, Landlord has received no written notice from any
governmental entity that the Project is in violation of any law applicable to
the Project, which violation has not been corrected to the satisfaction of the
governmental entity giving such notice.
ARTICLE 9. HAZARDOUS MATERIALS.
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(a) For purposes of this Lease, "hazardous materials" means any
explosives, radioactive materials, petroleum products, hazardous wastes, or
hazardous substances, including without limitation substances defined as
"hazardous substances" in the Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended, 42 U.S.C. Section 9601-9657; the
Hazardous Materials Transportation Act of 1975, 49 U.S.C. Section 1801-1812; the
Resource Conservation and Recovery Act of 1976, 42 U.S.C. Section 6901-6987; or
any other federal, state, or local statute, law, ordinance, code, rule,
regulation, order, or decree regulating, relating to, or imposing liability or
standards of conduct concerning hazardous materials, waste, or substances now or
at any time hereafter in effect (collectively, "hazardous materials laws").
(b) Tenant shall not cause or permit the storage, use, generation, or
disposition of any hazardous materials in, on, or about the Premises or the
Project by Tenant, its agents, employees, or contractors or invitees except to
use in the ordinary course of Tenant's business in customary quantities for
office tenants and in compliance with hazardous materials laws. Tenant shall not
permit the Premises to be used or operated in a manner that may cause the
Premises or the Project to be contaminated by any hazardous materials in
violation of any hazardous materials laws or result in the diminution of the
value of the Building or Project or degradation of structural materials of the
Premises. Tenant shall immediately advise Landlord in writing of (1) any and all
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enforcement, cleanup, remedial, removal, or other governmental or regulatory
actions instituted, completed, or threatened pursuant to any hazardous materials
laws relating to any hazardous materials affecting the Premises; and (2) all
claims made or threatened by any third party against Tenant, Landlord, or the
Premises relating to damage, contribution, cost recovery, compensation, loss, or
injury resulting from any hazardous materials on or about the Premises. Without
Landlord's prior written consent, Tenant shall not take any remedial action or
enter into any agreements or settlements in response to the presence of any
hazardous materials in, on, or about the Premises.
(c) Tenant shall be solely responsible for and will defend, indemnify
and hold Landlord, its agents, and employees harmless from and against all
claims, costs, and liabilities, including attorneys' fees and costs, arising out
of or in connection with Tenant's breach of its obligations in this Article 9.
Tenant will be solely responsible for and will defend, indemnify, and hold
Landlord, its agents, and employees harmless from and against any and all
claims, costs, and liabilities, including attorneys' fees and costs, arising out
of or in connection with the removal, cleanup, and restoration work and
materials necessary to return the Premises and any other property of whatever
nature located on the Project to their condition existing prior to the default.
Tenant's obligations under this Article 9 will survive the expiration or other
termination of this Lease.
ARTICLE 10. ASSIGNMENT AND SUBLETTING.
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10.1 GENERAL. Tenant, for itself, its heirs, distributees, executors,
administrators, legal representatives, successors, and assigns, covenants that
it shall not assign, mortgage, or encumber this Lease, nor sublease, nor permit
the Premises or any part of the Premises to be used or occupied by others,
without the prior written consent of Landlord in each instance, which consent
shall not be unreasonably withheld or delayed. Any assignment or sublease in
violation of this Article 10 will be void. If this Lease is assigned, or if the
Premises or any part of the Premises are subleased or occupied by anyone other
than Tenant, Landlord may, after default by Tenant, collect rent from the
assignee, subtenant, or occupant, and apply the net amount collected to Rent. No
assignment, sublease, occupancy, or collection shall be deemed (a) a waiver of
the provisions of this Article 10; (b) the acceptance of the assignee,
subtenant, or occupant as Tenant; or (c) a release of Tenant from the further
performance by Tenant of covenants on the part of Tenant contained in this Lease
including, without limitation, the covenant to pay Rent. The consent by Landlord
to an assignment or sublease will not be construed to relieve Tenant from
obtaining Landlord's prior written consent in writing to any further assignment
or sublease. No assignment or subletting shall relieve Tenant from its
obligations hereunder, and Tenant shall continue to be liable as a principal and
not as a guarantor or surety to the same extent as though no assignment or
sublease has been made. No permitted subtenant may assign or encumber its
sublease or further sublease all or any portion of its subleased space, or
otherwise permit the subleased space or any part of its subleased space to be
used or occupied by others, without Landlord's prior written consent in each
instance. Notwithstanding anything to the contrary contained herein, Landlord
may withhold consent to a sublease or assignment unless Landlord is provided
with waivers from any brokers involved in such subleasing or assignment of all
lien rights of any such brokers under Illinois law, including but not limited to
the Commercial Real Estate Broker Lien Act. Landlord also may withhold consent
to a sublease or assignment if the proposed assignee or sublessee or its
business is subject to compliance with additional requirements of the ADA,
including related regulations as hereinafter defined, beyond those requirements
which are applicable to Tenant unless Tenant, its assignee or subtenant at
Landlord's request agree to make such alterations to the Premises and the
Project that may be necessary in order to comply with the ADA as it applies to
the use, occupancy, or alteration of the Premises, and to deposit with Landlord
100% of Landlord's reasonable estimate of the cost of such alterations.
Notwithstanding anything in this Lease to the contrary, Tenant shall not assign
this Lease or sublet all or any part of the Premises to a proposed assignee or
sublessee whose use, occupancy, or tenancy of the Premises is prohibited by the
terms of a lease between Landlord and any other tenant in: (i) the Building or
(ii) any other building owned, developed, or constructed by or at the direction
of Landlord on land adjacent to the Project. ("Prohibited Tenant.") Prohibited
Tenant shall include, but not be limited to, BURGER KING, CHECKERS, HARDEE'S,
WHITE CASTLE, WENDY'S, CARL'S JUNIOR, JACK IN THE BOX, AND RALLY'S.
10.2 RECAPTURE. Landlord shall have the additional right to terminate
this Lease as to that portion of the Premises which the Tenant seeks to assign,
or in the case of a sublease, to suspend this Lease as to that portion of the
Premises and for that portion of the Term which the Tenant seeks to sublet. The
Landlord may exercise such right to terminate or suspend by giving written
notice to Tenant at any time on or before the date by which the Landlord
notifies Tenant whether it consents to a proposed assignment or sublease. If the
Landlord exercises such right to terminate or suspend, such termination or
suspension shall become effective on the date set forth in the Landlord's
written notice, which shall in no event be sooner than fifteen (15) days prior
to, or later than fifteen (15)
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days following, the effective date of the proposed assignment or sublease as set
forth in the Tenant's request for the Landlord's consent; provided that if the
Tenant has failed to request such consent, then the effective date of any
termination or suspension by the Landlord pursuant to this Article 10.2 shall be
on any date specified by the Landlord which is reasonably determined to be the
date which would have been necessary to get the space ready for possession by
the Tenant's proposed subtenant or assignee. Upon any termination of this Lease
pursuant to this Article 10.2, whether with respect to all or any portion of the
Premises, Tenant shall have no further obligation under this Lease with respect
to all or such portion of the Premises, as the case may be, for the period
following the termination; provided that the Tenant shall remain liable to the
Landlord for obligations which arose prior to the termination. Upon any
suspension of this Lease pursuant to this Article 10.2, whether with respect to
all or any portion of the Premises, Tenant shall have no obligations to Landlord
with respect to all or such portion of the Premises, as the case may be, for the
period of such suspension but shall remain liable for all obligations which
arose prior to the effective date of the suspension, and shall again become
liable for all obligations arising after the expiration of the suspension.
Notwithstanding the foregoing, if Landlord shall exercise its right to terminate
or suspend this Lease by giving written notice pursuant to this Article 10.2,
the Tenant may rescind its request for an assignment, or subletting, by giving
the Landlord written notice of such decision within fifteen (15) days of the
Landlord's written notice of termination or suspension, and upon such rescission
the termination or suspension of this Lease by the Landlord shall be null and
void. The recapture right set forth in this Article 10.2 will not apply to any
sublease that will, by its terms, (i) expire at least 12 months before the
expiration of the Lease Term, with the subtenant having no right to renew or
extend the sublease term into such 12-month period, AND (ii) grant to the
subtenant the right to use no more than 3,500 rentable square feet.
Prior to seeking Landlord's consent to a specific sublease or
assignment, Tenant may elect to notify Landlord of Tenant's intention to
sublease a portion of the Premises or to assign this Lease, and to request
Landlord to state whether Landlord would exercise its right of recapture in
connection therewith. Tenant's notice need not be accompanied by a copy of the
sublease or assignment, but must contain in reasonable detail the name of the
proposed subtenant or assignee, a description of the space to be subleased
(including the number of rentable square feet and a depiction), the proposed
commencement and expiration dates of the sublease or the commencement of the
assignment, a summary of the key economic terms and any material nonmonetary
terms of the proposed transaction, and must request Landlord to notify Tenant
whether Landlord will exercise its recapture right under this Section 10.2 in
connection therewith. If Landlord receives such a notice, Landlord will notify
Tenant whether Landlord elects to exercise its recapture right under this
Section 10.2 with respect to such proposal. If Tenant's notice (requesting
Landlord's notice of whether Landlord will exercise its recapture right)
contains the following phrase in bold capital letters, then Landlord's right to
exercise its recapture right with respect to such proposal will expire at the
end of the 15th day after Landlord's receipt of such notice if it is not
exercised within such time: "LANDLORD'S FAILURE TO EXERCISE ITS RECAPTURE RIGHT
WITHIN 15 DAYS AFTER RECEIPT OF THIS NOTICE WILL RESULT IN EXPIRATION OF SUCH
RECAPTURE RIGHT, AS SET FORTH IN SECTION 10.2 OF THE LEASE." If Landlord
notifies Tenant that Landlord elects to recapture, then Tenant may, within 15
days after Landlord's notice, notify Landlord that Tenant elects not to proceed
with the subject sublease or assignment and desires to keep this Lease in full
force and effect, in which case Landlord's exercise of its recapture right will
be rescinded. If, in response to Tenant's initial notice, Landlord notifies
Tenant that Landlord elects not to recapture, then if Landlord receives from
Tenant within 90 days after Landlord's notice of election a written request for
Landlord's consent to a sublease or assignment conforming in all material
respects (including, without limitation, commencement and expiration dates) to
the proposal with respect to which Landlord elected not to recapture, then
Landlord will not exercise its recapture right with respect to such sublease or
assignment. Landlord's election not to recapture will not constitute Landlord's
consent to the proposed transaction.
10.3 SUBMISSION OF INFORMATION. If Tenant requests Landlord's consent
to a specific assignment or subletting, Tenant shall submit in writing to
Landlord at least thirty (30) business days prior to the effective date of the
proposed assignment or sublease (a) the name and address of the proposed
assignee or subtenant; (b) the business terms of the proposed assignment or
sublease; (c) reasonably satisfactory information as to the nature and character
of the business of the proposed assignee or subtenant, and as to the nature of
its proposed use of the space; (d) banking, financial, or other credit
information reasonably sufficient to enable Landlord to determine the financial
responsibility and character of the proposed assignee or subtenant; (e) the
proposed form of assignment or sublease for Landlord's reasonable approval and
any other information which Landlord may reasonably deem relevant.
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10.4 PAYMENTS TO LANDLORD. If Landlord consents to a proposed
assignment or sublease, then Landlord shall have the right to require Tenant to
pay to Landlord (I) 50% of the total amount of (a) any rent or other
consideration paid to Tenant by any proposed transferee that (after deducting
the costs of Tenant, if any, in effecting the assignment or sublease, including
reasonable alterations costs, commissions and legal fees) is in excess of the
Rent allocable to the transferred space then being paid by Tenant to Landlord
pursuant to this Lease; and (b) any other profit or gain (after deducting any
necessary expenses incurred) realized by Tenant from any such sublease or
assignment; plus (II) 100% of Landlord's reasonable attorneys' fees and costs
incurred in connection with negotiation, review, and processing of the transfer.
All such sums payable will be payable to Landlord at the time the next payment
of Monthly Rent is due.
10.5 PROHIBITED TRANSFERS. The transfer of a majority of the issued and
outstanding capital stock of any corporate tenant or subtenant of this Lease, or
a majority of the total interest in any partnership tenant or subtenant, however
accomplished, and whether in a single transaction or in a series of related or
unrelated transactions, will be deemed an assignment of this Lease or of such
sublease requiring Landlord's consent in each instance. For purposes of this
Article 10, the transfer of outstanding capital stock of any corporate tenant
will not include any sale of such stock by persons other than those deemed
"insiders" within the meaning of the Securities Exchange Act of 1934, as
amended, effected through the "over-the-counter market" or through any
recognized stock exchange.
10.6 PERMITTED TRANSFER. Notwithstanding anything to the contrary
contained in this Article, Landlord's consent shall not be required for an
assignment or other transfer of Tenant's interest under this Lease or a sublease
of the entire Premises to an affiliate of Tenant or to an entity resulting from
a merger with Tenant or to an entity purchasing substantially all of the assets
or capital stock of Tenant provided that (i) Tenant shall notify Landlord in
writing of the proposed transaction and the identity of the proposed assignee or
sublessee, (ii) at the time of such proposed assignment, transfer or sublease,
Tenant shall not be in default of any of the terms of this Lease, (iii) any
proposed assignee or transferee shall agree in a writing reasonably acceptable
to Landlord that it will assume and be bound by the terms of this Lease, (iv)
there shall be no change in use of the Premises, (v) any proposed assignee or
transferee shall have a net worth no less than the net worth of Tenant as of the
date of execution of this Lease, and (vi) that Tenant agrees to make such
alterations to the Premises and the Project that may be necessary in order to
comply with the ADA as it applies to the use, occupancy, or alteration of the
Premises by the assignee or subtenant. As used herein, an "affiliate" shall mean
an entity which directly or indirectly controls or is controlled by or is under
common control with Tenant. "Controls," "controlled by" or "under common
control" means with regard to a corporation ownership of at least 50% of the
issued and outstanding stock or with regard to a corporation and any other
entity, ownership of at least 50% of the equity, interests, voting or other
decision making power.
10.7 CONDITION. It is an express condition of any permitted assignment
or sublease that Tenant not be in default of any of the terms of this Lease at
the time Tenant provides Landlord its request for written consent to such
assignment or sublease.
10.8 REMEDIES. If Tenant believes that Landlord has unreasonably
withheld or delayed its consent pursuant to this Article 10, Tenant's sole
remedy will be to seek a declaratory judgment that Landlord has unreasonably
withheld or delayed its consent or an order of specific performance or mandatory
injunction of the Landlord's agreement to not unreasonably withhold or delay its
consent.
ARTICLE 11. RULES AND REGULATIONS.
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Tenant and its employees, agents, licensees, and visitors shall at all
times observe faithfully, and comply strictly with, the Rules and Regulations
set forth in Exhibit D. Landlord may from time to time reasonably amend, delete,
or modify existing rules and regulations, or adopt reasonable new rules and
regulations for the use, safety, cleanliness, and care of the Premises, the
Building, and the Project, and the comfort, quiet, and convenience of occupants
of the Project. Modifications or additions to the Rules and Regulations will be
effective upon thirty (30) days' prior written notice to Tenant from Landlord.
In the event of any breach of any of the Rules or Regulations or any amendments
or additions thereto, Landlord shall have all remedies that this Lease provides
for default by Tenant, and shall in addition have any remedies available at law
or in equity, including the right to enjoin any breach of such Rules and
Regulations. Landlord shall not be liable to Tenant for violation of such Rules
and Regulations by any other person. In the event of any conflict between the
provisions of this Lease and the Rules and Regulations, the provisions of this
Lease shall govern.
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ARTICLE 12. COMMON AREAS.
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As used in this Lease, the term "Common Areas" means, without
limitation, the above ground parking area, hallways, entryways, stairs,
elevators, driveways, walkways, terraces, docks, loading areas, restrooms, trash
facilities, and all other areas and facilities in the Project that are provided
and designated from time to time by Landlord for the general nonexclusive use
and convenience of Tenant with Landlord and their guests, invitees, employees,
licensees, or visitors. Without advance written notice to Tenant, except with
respect to matters covered by Article 12(a) below, and without any liability to
Tenant in any respect, provided Landlord will take no action permitted under
Article 12(a) in such a manner as to materially impair or adversely affect
Tenant's substantial benefit and enjoyment of the Premises, Landlord will have
the right to:
(a) Close off any of the Common Areas to whatever extent required
in the reasonable opinion of Landlord to prevent a dedication
of any of the Common Areas or the accrual of any rights by any
person or the public to the Common Areas;
(b) Temporarily close any of the Common Areas for maintenance,
alteration, or improvement purposes; and
(c) Subject to the provisions of Article 27, change the size, use,
shape, or nature of any such Common Areas, including erecting
additional Buildings on the Common Areas, expanding the
Building or other Buildings to cover a portion of the Common
Areas, converting Common Areas to a portion of the Building or
other Buildings, altering the Common Areas in order to comply
with the ADA, or converting any portion of the Building
(excluding the Premises) or other Buildings to Common Areas.
Upon erection of any additional Buildings or change in Common
Areas, the portion of the Project upon which Buildings or
structures have been erected shall no longer be deemed to be a
part of the Common Areas.
ARTICLE 13. LANDLORD'S SERVICES.
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13.1 LANDLORD'S REPAIR AND MAINTENANCE. Landlord shall maintain and
repair the Common Areas of the Project, including lobbies, stairs, elevators,
corridors, and restrooms, the windows in the Building, the mechanical, plumbing
and electrical equipment serving the Building, and the structural elements of
the Building in reasonably good order and condition, the cost of which is
included in Operating Expenses.
13.2 LANDLORD'S OTHER SERVICES.
(a) Landlord shall furnish the Premises with those services customarily
provided in comparable office buildings in the vicinity of the Project,
including without limitation (1) heat and air conditioning reasonably required
for the comfortable occupation of the Premises during business hours; (2) access
and elevator service; (3) lighting replacement during business hours (for
Building standard lights, but not for any special Tenant lights, which will be
replaced at Tenant's sole cost and expense); (4) restroom supplies; (5) window
washing with reasonable frequency, as determined by Landlord; and (6) cleaning
service five (5) days per week in accordance with the cleaning specifications
attached hereto as Exhibit G. Landlord may, but will not be obligated to
provide, any such services (except access and elevator service) on holidays.
Landlord shall not provide electricity for lighting, receptables and outlets or
incidental uses in the Premises which shall be separately metered to Tenant.
Tenant, at its sole cost and expense, shall make all necessary arrangements with
the utility company for the provision of electric service and shall pay for
electric current furnished by it to Tenant and Tenant shall pay for all charges
for electric current consumed on the Premises during Tenant's occupancy thereof.
Landlord will cause the initial Premises to be separately metered for
electricity, and will bear the cost of such meter and the installation thereof.
(b) Tenant will have the right to purchase for use during business
hours and non-business hours the services described in Article 13.2(a)(1) and
(2) in excess of the amounts Landlord has agreed to furnish so long as
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(1) Tenant gives Landlord reasonable prior written notice of its desire to do
so; (2) the excess services are reasonably available to Landlord and to the
Premises; and (3) Tenant pays as Additional Rent (at the time the next payment
of Monthly Rent is due) the cost of such excess service from time to time
charged by Landlord; subject to the procedures established by Landlord from time
to time for providing such additional or excess services.
(c) The term "business hours" means 8:00 a.m. to 6:00 p.m. on Monday
through Friday, except holidays (as that term is defined below), and 8:00 a.m.
to 1:00 p.m. on Saturdays, except holidays. The term "holidays" means New Year's
Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas
Day.
13.3 TENANT'S COSTS. Whenever equipment or lighting (other than
building standard lights) is used in the Premises by Tenant and such equipment
or lighting affects the temperature otherwise normally maintained by the design
of the Building's air conditioning system, Landlord shall have the right, after
prior written notice to Tenant, to install supplementary air conditioning
facilities in the Premises or otherwise modify the ventilating and air
conditioning system serving the Premises; and the cost of such facilities,
modifications, and additional service shall be paid by Tenant as Additional Rent
within thirty (30) days of receipt of an invoice. Should Tenant desire any
additional service beyond that described in Article 13.2 hereof, Landlord may,
at Landlord's option upon reasonable advance notice from Tenant to Landlord, (i)
refuse to consent to such services or (ii) consent to such services upon such
conditions as Landlord elects (including the requirement that submeters be
installed at Tenant's expense, that Tenant pay directly to the provider of such
service (in the case of submetered services) or to Landlord, as Additional Rent
within thirty (30) days of receipt of an invoice, Landlord's additional expenses
resulting therefrom, and that Tenant pay the cost of all alterations or
additions made to accommodate such excess use, including the cost of a submeter
and installation of the same.) Neither party to this Lease is aware of anything
set forth in the Working Drawings (as defined in the Work Letter) that would
require supplemental heating or air conditioning.
13.4 LIMITATION ON LIABILITY. Landlord shall not be in default under
this Lease or be liable to Tenant or any other person for direct or
consequential damage, or otherwise, for any failure to supply any heat, air
conditioning, elevator, cleaning, lighting, security; for surges or
interruptions of electricity; or for other services which Landlord has agreed to
supply during any period provided that Landlord uses commercially reasonable
diligence to supply such services. Landlord will use commercially reasonable
efforts to diligently remedy any interruption in the furnishing of such
services. Landlord reserves the right temporarily to discontinue such services
at such times as may be necessary by reason of accident, repairs, alterations or
improvements, strikes, lockouts, riots, acts of God, governmental preemption in
connection with a national or local emergency, any rule, order, or regulation of
any governmental agency, conditions of supply and demand that make any product
unavailable, Landlord's compliance with any mandatory governmental energy
conservation or environmental protection program, or any voluntary governmental
energy conservation program at the request of or with consent or acquiescence of
Tenant, mandatory or prohibitive injunction issued in connection with the
enforcement of the ADA, or any other event or condition beyond the control of
Landlord. Landlord shall not be liable to Tenant or any other person or entity
for direct or consequential damages resulting from the admission to or exclusion
from the Building or Project of any person. In the event of invasion, mob, riot,
public excitement, strikes, lockouts, or other circumstances rendering such
action advisable in Landlord's sole opinion, Landlord shall have the right to
prevent access to the Building or Project during the continuance of the same by
such means as Landlord, in its sole discretion, may deem appropriate, including
without limitation locking doors and closing parking areas and other Common
Areas. Landlord shall not be liable for damages to person or property or for
injury to, or interruption of, business for any discontinuance permitted under
this Article 13, nor will such discontinuance in any way be construed as an
eviction of Tenant or (except as otherwise provided below in this Article 13.4)
cause an abatement of Rent or operate to release Tenant from any of Tenant's
obligations under this Lease. If any utility or other service described in this
Article 13.4 is interrupted, Tenant will promptly notify Landlord in writing. If
(a) any utility or other service described in this Article 13.4 is discontinued
or interrupted and (b) such discontinuance or interruption is within Landlord's
reasonable control, and (c) such discontinuance or interruption continues for at
least five consecutive business days and renders all or a material portion of
the Premises untenantable for such period such that Tenant cannot and does not
operate its business from the Premises or such portion for such period, then as
Tenant's sole and exclusive remedy for such discontinuance or interruption
Landlord will equitably abate Tenant's obligation to pay Monthly Rent and
Tenant's Proportionate Share of Operating Expenses (as set forth in Article 5)
beginning on the sixth business day after the later of (i) the first day of such
interruption and (ii) the date of Landlord's receipt of Tenant's notice thereof,
and ending on the date on which such service is substantially restored.
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ARTICLE 14. TENANT'S CARE OF THE PREMISES.
- -------------------------------------------
Tenant shall maintain the Premises (including Tenant's equipment,
personal property, and trade fixtures located in the Premises) in the same
condition as at the time they were delivered to Tenant, reasonable wear and tear
and damage by casualty excluded. Tenant shall immediately advise Landlord of any
damage to the Premises, Building or the Project. All damage or injury to the
Premises, Building or the Project, or the fixtures, appurtenances, and equipment
therein that is caused by Tenant, its agents, employees, or invitees may be
repaired, restored, or replaced by Landlord, at the expense of Tenant. Such
expense (plus 10% of such expense for Landlord's overhead) will be collectible
as Additional Rent and will be paid by Tenant within ten (10) days after
delivery of a statement for such expense.
ARTICLE 15. ALTERATIONS.
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15.1 GENERAL.
(a) Except as otherwise specifically set forth in the Work Letter,
Tenant shall not make or allow to be made any alterations, additions, or
improvements to or of the Premises, the Building or the Project or any part
thereof, or attach any fixtures or equipment thereto after the Lease Date,
without first obtaining Landlord's prior written consent, which consent shall
not be unreasonably withheld or delayed; provided however that Landlord may
withhold its consent, in its sole and absolute discretion, to any alteration,
addition or improvement to the structural portions or the HVAC, plumbing or
electrical systems of the Building. All such alterations, additions, and
improvements consented to by Landlord, and capital improvements that are
required to be made to the Project as a result of the nature of Tenant's use of
the Premises:
(1) Shall be performed by contractors reasonably approved
by Landlord and subject to conditions specified by
Landlord (which may include requiring the posting of
a mechanic's or materialmen's lien bond); and
(2) At Landlord's option, will be made by Landlord for
Tenant's account, and Tenant will reimburse Landlord
for their cost within ten (10) days after receipt of
a statement of such cost.
(b) Subject to Tenant's rights in Article 17 herein, all alterations,
additions, fixtures, and improvements, whether temporary or permanent in
character, made in or upon the Premises either by Tenant or Landlord, shall
immediately become Landlord's property, and at the end of the Term shall remain
on the Premises without compensation to Tenant, unless when consenting to such
alterations, additions, fixtures, or improvements, Landlord has advised Tenant
in writing that such alterations, additions, fixtures, or improvements must be
removed at the expiration or other termination of this Lease.
15.2 FREE-STANDING PARTITIONS. Tenant shall have the right to install
free-standing work station partitions, without Landlord's prior written consent,
so long as no building or other governmental permit is required for their
installation or relocation; however, if a permit is required, Landlord shall not
unreasonably withhold its consent to such relocation or installation. The
free-standing work station partitions for which Tenant pays shall be part of
Tenant's trade fixtures for all purposes under this Lease.
15.3 REMOVAL. If Landlord has required Tenant to remove any or all
alterations, additions, fixtures, and improvements that are made in or upon the
Premises pursuant to this Article 15 prior to the Expiration Date, Tenant shall
remove such alterations, additions, fixtures, and improvements at Tenant's sole
cost and shall restore the Premises to the condition in which they were before
such alterations, additions, fixtures, improvements, and additions were made,
reasonable wear and tear excepted. However, at the time that Tenant requests
Landlord's consent to specific alterations, Tenant may also request that
Landlord notify Tenant whether Landlord will, upon expiration or termination of
the Lease Term, require Tenant to remove the subject improvements. If Tenant so
requests and if Landlord consents to the alterations, then Landlord will also
notify Tenant whether Landlord will require removal of any such alterations or
improvements at the expiration or termination of the Lease Term. At the
expiration or termination of the Lease Term, Tenant will not be required to
remove any alterations or improvements which Landlord has previously notified
would not be required to be removed. Landlord will not require removal of
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any of the initial Tenant Improvements performed under the Work Letter attached
hereto as Exhibit B.
15.4 ADA COMPLIANCE. Landlord shall comply with ADA Requirements,
defined below, with respect to the Common Areas. Tenant, with respect to the
Premises, at Tenant's sole cost and expense (but subject to Landlord's prior
written approval, which approval shall not be unreasonably withheld or delayed),
shall comply with the requirements imposed by the Americans with Disabilities
Act (42 U.S.C. Article 12101 et seq.) and any regulations promulgated pursuant
thereto effective from time to time during the Term ("ADA Requirements") if:
(a) the requirement for such alteration or addition arises as a
result of:
(1) Any alteration or addition by Tenant after the Lease
Date;
(2) Any violation by Tenant of any ADA Requirements;
(3) A special use of the Premises or any part thereof by
Tenant or any assignee or subtenant of Tenant
(including but not limited to use for a facility
which constitutes, or if open to the public generally
would constitute, a "place of public accommodation"
under the ADA Requirements);
(4) The special needs of the employee(s) of Tenant or any
assignee or subtenant of Tenant; or
(b) The ADA Requirements would otherwise make Tenant rather than
Landlord primarily responsible for making such alteration or
addition.
ARTICLE 16. MECHANICS' LIENS.
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Tenant shall pay or cause to be paid all costs and charges for work (a)
done by Tenant or caused to be done by Tenant, in or to the Premises, and (b)
for all materials furnished for or in connection with such work. Tenant shall
indemnify Landlord against and hold Landlord, the Premises, and the Project
free, clear, and harmless of and from all mechanics' liens and claims of liens,
and all other liabilities, liens, claims, and demands on account of such work by
or on behalf of Tenant, other than work performed by Landlord pursuant to this
Lease. If any such lien, at any time, is filed against the Premises or any part
of the Project, Tenant shall cause such lien to be discharged of record within
ten (10) days after the filing of such lien, except that if Tenant desires to
contest such lien, it shall deliver to Landlord, within such 10-day period, at
least one hundred percent (100%) of the amount of the claim, plus estimated
costs and interest, by cashier's check or certified funds, which shall be held
by Landlord as security to insure payment of the lien and to prevent any sale of
the Project by foreclosure or otherwise by reason of such lien, or, at Tenant's
option, Tenant may within such time cause such lien to be insured over or bonded
over, by a title insurance or bonding company and in an amount reasonably
satisfactory to Landlord. If a final judgment establishing the validity or
existence of a lien for any amount is entered, Tenant shall pay and satisfy the
same at once. If Tenant fails to pay any charge, cost or expense for which a
mechanics' lien has been filed, and has not given Landlord security as described
above, Landlord may, at its option, pay such charge and related costs and
interest, and the amount so paid, together with reasonable attorneys' fees
incurred in connection with such lien, shall be immediately due from Tenant to
Landlord as Additional Rent. Nothing contained in this Lease will be deemed the
consent or agreement of Landlord to subject Landlord's interest in the Project
to liability under any mechanics' or other lien law. If Tenant receives written
notice that a lien has been or is about to be filed against the Premises or the
Project, or that any action affecting title to the Project has been commenced on
account of work done by or for or materials furnished to or for Tenant, it shall
immediately give Landlord written notice of such notice. At least fifteen (15)
days prior to the commencement of any work (including but not limited to any
maintenance, repairs, alterations, additions, improvements, or installations) in
or to the Premises, by or for Tenant, Tenant shall give Landlord (i) written
notice of the proposed work and the names and addresses of the persons supplying
labor and materials for the proposed work and (ii) two copies of Tenant's plans
and specifications for such work.
ARTICLE 17. END OF TERM.
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On the Expiration Date or earlier termination of this Lease, Tenant
shall promptly quit and surrender the Premises broom-clean, in good order and
repair, ordinary wear and tear and damage from casualty or condemnation. If
Tenant is not then in default, Tenant may remove from the Premises any trade
fixtures, equipment, and movable furniture placed in the Premises by Tenant,
whether or not such trade fixtures or equipment
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are fastened to the Building. Tenant shall not remove any trade fixtures or
equipment without Landlord's prior written consent if such fixtures or equipment
are used in the operation of the Building, or if the removal of such fixtures or
equipment may result in impairing the structural strength of the Building.
Whether or not Tenant is in default, Tenant shall remove such alterations,
additions, improvements, trade fixtures, equipment, and furniture as Landlord
has requested in accordance with Article 15. Tenant shall fully repair any
damage occasioned by the removal of any trade fixtures, equipment, furniture,
alterations, additions, and improvements. All trade fixtures, equipment,
furniture, inventory, effects, alterations, additions, and improvements on the
Premises after the end of the Term shall be deemed conclusively to have been
abandoned and may be appropriated, sold, stored, destroyed, or otherwise
disposed of by Landlord without written notice to Tenant or any other person and
without obligation to account for them. Tenant shall pay Landlord for all
expenses reasonably incurred in connection with the removal of such property,
including but not limited to the cost of repairing any damage to the Building or
Premises caused by the removal of such property. Tenant's obligation to observe
and perform this covenant will survive the expiration or other termination of
this Lease.
ARTICLE 18. EMINENT DOMAIN.
- ----------------------------
If all of the Premises are taken by exercise of the power of eminent
domain (or conveyed by Landlord in lieu of such exercise) this Lease shall
terminate on a date (the "Termination Date") which is the earlier of the date
upon which the condemning authority takes possession of the Premises or the date
on which title to the Premises is vested in the condemning authority. If any
material portion of the Premises is so taken which prevents Tenant's reasonable
use of the Premises for its intended purpose ("Material Portion"), Tenant will
have the right to cancel this Lease by written notice to Landlord given within
twenty (20) days after the termination date. If less than a Material Portion of
the Premises is so taken, or if the Tenant does not cancel this Lease according
to the preceding sentence, the Monthly Rent shall be abated in the proportion of
the rentable area of the Premises so taken to the rentable area of the Premises
immediately before such taking, and Tenant's Proportionate Share shall be
appropriately recalculated. If twenty-five percent (25%) or more of the Building
or the Project is so taken, Landlord may cancel this Lease by written notice to
Tenant given within thirty (30) days after the termination date. In the event of
any such taking, the entire award shall be paid to Landlord and Tenant will have
no right or claim to any part of such award; however, Tenant shall have the
right to assert a claim against the condemning authority in a separate action,
so long as Landlord's award is not otherwise reduced, for Tenant's moving
expenses and leasehold improvements owned by Tenant.
ARTICLE 19. DAMAGE AND DESTRUCTION.
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(a) If the Premises or the Building are damaged by fire or other
insured casualty, Landlord shall give Tenant written notice of the time which
will be needed to repair such damage, as determined by Landlord in its
reasonable discretion, and the election (if any) which Landlord has made
according to this Article 19. Such notice will be given before the thirtieth
(30th) day (the "notice date") after the fire or other insured casualty.
(b) If the Premises or the Building are damaged by fire or other
insured casualty to an extent which may be repaired within 180 days after the
notice date, as reasonably determined by Landlord, Landlord shall promptly begin
to repair the damage after the notice date and will diligently pursue the
completion of such repair. In that event this Lease will continue in full force
and effect except that Monthly Rent shall be abated on a pro rata basis from the
date of the damage until the date of the completion of such repairs (the "repair
period") based on the proportion of the rentable area of the Premises Tenant is
unable to use during the repair period.
(c) If the Premises or the Building are damaged by fire or other
insured casualty to an extent that may not be repaired within 180 days after the
notice date, as reasonably determined by Landlord, then (1) Landlord may cancel
this Lease as of the date of such damage by written notice given to Tenant on or
before the notice date or (2) Tenant may cancel this Lease as of the date of
such damage by written notice given to Landlord within 30 days after Landlord's
delivery of a written notice that the repairs cannot be made within such 180-day
period. If neither Landlord nor Tenant so elects to cancel this Lease, Landlord
shall diligently proceed to repair the Building and Premises and Monthly Rent
shall be abated on a pro rata basis during the repair period based on the
proportion of the rentable area of the Premises Tenant is unable to use during
the repair period.
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(d) Notwithstanding the provisions of Article 19(a), (b), and (c)
above, if the Premises or the Building are damaged by uninsured casualty, or if
the proceeds of insurance are insufficient to pay for the repair of any damage
to the Premises or the Building, Landlord shall have the option to repair such
damage or cancel this Lease as of the date of such casualty by written notice to
Tenant on or before the notice date. However, nothing in this clause (d) will
waive or diminish Tenant's remedies for Landlord's failure to maintain the
property insurance that Landlord is required to maintain under Article 6.1(a).
(e) If any such damage by fire or other casualty is the result of the
willful conduct or negligence or failure to act of Tenant, its agents,
contractors, employees, or invitees, there will be no abatement of Monthly Rent
as otherwise provided for in this Article 19. Tenant shall have no rights to
terminate this Lease on account of any damage to the Premises, the Building, or
the Project except as specifically set forth herein, Tenant hereby waiving any
such right which exists at law or in equity to the extent Tenant is not in
violation of any laws.
ARTICLE 20. SUBORDINATION.
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20.1 GENERAL. This Lease and Tenant's rights under this Lease are
subject and subordinate to any ground or underlying lease, mortgage, indenture,
deed of trust, or other lien encumbrance (each a "superior lien"), together with
any renewals, extensions, modifications, consolidations, and replacements of
such superior lien, now or after the date affecting or placed, charged, or
enforced against the Land, the Building, or all or any portion of the Project or
any interest of Landlord in them or Landlord's interest in this Lease and the
leasehold estate created by this Lease (except to the extent any such instrument
expressly provides that this Lease is superior to such instrument); provided,
however, that any such subordination shall be subject to the right of Tenant to
remain in possession of the Premises pursuant to the terms of this Lease,
notwithstanding any foreclosure of such superior lien or any sale pursuant
thereto, so long as Tenant is not in default under this Lease. This provision
shall be self-operative and no further instrument shall be required in order to
effect it. Notwithstanding the foregoing, Tenant shall execute, acknowledge, and
deliver to Landlord, within twenty (20) days after written demand by Landlord,
such documents as may be reasonably requested by Landlord or the holder of any
superior lien to confirm or effect any such subordination and non-disturbance
agreement.
20.2 ATTORNMENT. Tenant agrees that in the event that any holder of a
superior lien succeeds to Landlord's interest in the Premises, Tenant shall pay
to such holder all Rent subsequently payable under this Lease provided Tenant is
given notice of such lien and succession. Further, Tenant agrees that in the
event of the enforcement by the holder of a superior lien of the remedies
provided for by law or by such superior lien, Tenant shall, upon request of any
person or party succeeding to the interest of Landlord as a result of such
enforcement, automatically become the Tenant of and attorn to such successor in
interest without change in the terms or provisions of this Lease provided Tenant
is given notice of such lien and succession. Such successor in interest,
however, shall not be bound by:
(a) Any payment of rent for more than one month in advance, except
prepayments in the nature of security for the performance by
Tenant of its obligations under this Lease;
(b) Any amendment or modification of this Lease made without the
written consent of such successor in interest (if such consent
was required under the terms of such superior lien and Tenant
was notified of such required consent);
(c) Any claim against Landlord arising prior to the date on which
such successor in interest succeeded to Landlord's interest;
or
(d) Any claim or offset of Rent against the Landlord.
Upon request by such successor in interest and without cost to Landlord or such
successor in interest, Tenant shall, within twenty (20) days after written
demand, execute, acknowledge, and deliver an instrument or instruments
confirming the attornment, so long as such instrument provides that such
successor in interest will not disturb Tenant in its use of the Premises in
accordance with this Lease.
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ARTICLE 21. ENTRY BY LANDLORD.
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Landlord, its agents, employees, and contractors may enter the Premises
at reasonable hours after reasonable notice, or at any time in response to an
emergency, to:
(a) Inspect the Premises;
(b) Exhibit the Premises to prospective purchasers, lenders, or,
during the last twelve (12) months of the Term, to prospective
tenants;
(c) Determine whether Tenant is complying with all its obligations
in this Lease;
(d) Supply cleaning service and any other service to be provided
by Landlord to Tenant according to this Lease;
(e) Post written notices of nonresponsibility or similar notices;
or
(f) Make repairs required of Landlord under the terms of this
Lease or make repairs to any adjoining space or utility
services or make repairs, alterations, or improvements to any
other portion of the Building; however, all such work shall be
done as promptly as reasonably possible and so as to cause as
little interference to Tenant as reasonably possible.
Tenant, pursuant to this Article 21, waives any claim against Landlord, its
agents, employees, or contractors for damages for any injury or inconvenience to
or interference with Tenant's business, any loss of occupancy or quiet enjoyment
of the Premises, or any other loss occasioned by any permitted entry in
accordance with this Article 21. Landlord shall at all times have and retain a
key with which to unlock all of the doors in, on, or about the Premises
(excluding Tenant's vaults, safes, and similar areas designated in writing by
Tenant in advance). Landlord shall have the right to use any and all lawful
means Landlord may deem proper to open doors in and to the Premises in an
emergency in order to obtain entry to the Premises, provided that Landlord will
promptly repair any damages caused by any forced entry. Any entry to the
Premises by Landlord in accordance with this Article 21 will not be construed or
deemed to be a forcible or unlawful entry into or a detainer of the Premises or
an eviction, actual or constructive, of Tenant from the Premises or any portion
of the Premises, nor shall any such entry entitle Tenant to damages or an
abatement of Monthly Rent, Additional Rent, or other charges that this Lease
requires Tenant to pay.
ARTICLE 22. INDEMNIFICATION, WAIVER AND RELEASE.
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22.1 TENANT'S INDEMNIFICATION. Except for any injury to persons or
damage to property on the Premises that is proximately caused by or results
proximately from the negligence or deliberate act of Landlord, its employees or
agents, and subject to the provisions of Article 6.4 herein, Tenant shall
indemnify and hold Landlord, Landlord's wholly owned subsidiaries and the
employees and agents of Landlord and Landlord's wholly owned subsidiaries,
(hereinafter collectively referred to as the "Indemnified Parties" and
individually as an "Indemnified Party"), their employees and agents harmless
from and against, any and all demands, claims, causes of action, fines,
penalties, damages, liabilities, judgments, and expenses (including, without
limitation, reasonable attorney's fees) incurred in connection with or arising
from:
(a) the use or occupancy or manner of use or occupancy of the
Premises by Tenant or any person claiming under Tenant;
(b) any activity, work, or thing done or permitted by Tenant in or
about the Premises, the Building, or the Project;
(c) any breach by Tenant or its employees, agents, contractors, or
invitees of this Lease;
(d) any injury or damage to the person, property, or business of
Tenant, its employees, agents, contractors, or invitees
entering upon the Premises under the express or implied
invitation of Tenant; and
(e) any alleged violation by Tenant of any statutes, laws, rules,
regulations, including, without limitation, the ADA.
If any action or proceeding is brought against an Indemnified Party by
reason of any such claim for which Tenant has indemnified the Indemnified
Parties, Tenant, upon written notice from such Indemnified Party, shall defend
the same at Tenant's expense, with counsel reasonably satisfactory to Landlord.
22.2 WAIVER AND RELEASE. Tenant, as a material part of the
consideration to Landlord for this Lease, by this Article 22.2 waives and
releases all claims against Landlord, Landlord's wholly owned subsidiaries, and
their employees and agents with respect to all matters for which Landlord has
disclaimed liability pursuant to the provisions of this Lease.
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ARTICLE 23. QUIET ENJOYMENT.
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Landlord covenants and agrees with Tenant that, so long as Tenant pays
the Rent and observes and performs all the terms, covenants, and conditions of
this Lease on Tenant's part to be observed and performed, Tenant may peaceably
and quietly enjoy the Premises and Tenant's possession will not be disturbed by
anyone claiming by, through, or under Landlord, subject to the terms and
conditions of this Lease.
ARTICLE 24. EFFECT OF SALE.
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A sale, conveyance, or assignment of the Building or the Project shall
operate to release Landlord from liability from and after the effective date of
such sale, conveyance, or assignment upon all of the covenants, terms, and
conditions of this Lease, express or implied, except those liabilities that
arose prior to such effective date, and, after the effective date of such sale,
conveyance, or assignment, Tenant shall look solely to Landlord's successor in
interest in and to this Lease. Landlord will deliver or credit to any such
successor in interest the unapplied portion of any security deposit paid by
Tenant under this Lease. This Lease shall not be affected by any such sale,
conveyance, or assignment, and Tenant shall attorn to Landlord's successor in
interest to this Lease, so long as such successor in interest assumes Landlord's
obligations under the Lease from and after such effective date.
ARTICLE 25. DEFAULT.
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25.1 EVENTS OF DEFAULT BY TENANT. The following events are referred to,
collectively, as "events of default" or, individually, as an "Event of Default":
(a) Tenant fails to pay Rent when due, and such failure continues
for five (5) days after written notice from Landlord;
(b) Tenant breaches any of the other agreements, terms, covenants,
or conditions that this Lease requires Tenant to perform, and
such breach continues for a period of fifteen (15) days after
written notice from Landlord to Tenant or, if such breach
cannot be cured reasonably within such fifteen (15-day)
period, if Tenant fails to diligently commence to cure such
breach within fifteen (15) days after written notice from
Landlord and to complete such cure within a reasonable time
thereafter.
(c) This Lease or the Premises or any part of the Premises are
taken upon execution or by other process of law directed
against Tenant, or are taken upon or subject to any attachment
by any creditor of Tenant or claimant against Tenant, and said
attachment is not discharged or disposed of within fifteen
(15) days after its levy;
(d) Tenant files a petition in bankruptcy or insolvency or for
reorganization or arrangement under the bankruptcy laws of the
United States or under any insolvency act of any state, or
admits the material allegations of any such petition by answer
or otherwise, or is dissolved or makes an assignment for the
benefit of creditors;
(e) Involuntary proceedings under any such bankruptcy law or
insolvency act or for the dissolution of Tenant are instituted
against Tenant, or a receiver or trustee is appointed for all
or substantially all of the property of Tenant, and such
proceeding is not dismissed or such receivership or
trusteeship vacated within sixty (60) days after such
institution or appointment;
(f) Tenant shall repeatedly default in the timely payment of Rent
or any other charges required to be paid, or shall repeatedly
default in keeping, observing or performing any other
covenant, agreement, condition or provision of this Lease,
whether or not Tenant shall timely cure any such payment or
other default. For the purposes of this Article 25.1, the
occurrence of similar defaults three (3) times during any
twelve (12) month period shall constitute a repeated default.
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25.2 LANDLORD'S REMEDIES. If any one or more events of default set
forth in Article 25.1 occurs then Landlord has the right, at its election:
(a) To give Tenant written notice of Landlord's intention to
terminate this Lease on the earliest date permitted by law or
on any later date specified in such notice, in which case
Tenant's right to possession of the Premises shall cease and
this Lease shall be terminated, except as to Tenant's
liability, on the date specified by Landlord;
(b) Without further demand or notice, to reenter and take
possession of the Premises or any part of the Premises,
repossess the same, expel Tenant and those claiming through or
under Tenant, and remove the effects of both or either, using
such lawful force for such purposes as may be necessary,
without being liable for prosecution, without being deemed
guilty of any manner of trespass, and without prejudice to any
remedies for arrears of Monthly Rent or other amounts payable
under this Lease or as a result of any preceding breach of
covenants or conditions; or
(c) Without further demand or notice to cure any Event of Default
and to charge Tenant for the cost of effecting such cure,
including without limitation reasonable attorneys' fees and
interest on the amount so advanced at the rate set forth in
Article 28.32, provided that Landlord will have no obligation
to cure any such Event of Default of Tenant.
Should Landlord elect to reenter as provided in Article 25.2(b), or should
Landlord take possession pursuant to legal proceedings or pursuant to any notice
provided by law, Landlord may, from time to time, without terminating this
Lease, relet the Premises or any part of the Premises in Landlord's or Tenant's
name, but for the account of Tenant, for such term or terms (which may be
greater or less than the period which would otherwise have constituted the
balance of the Term) and on such conditions and upon such other terms (which may
include concessions of free rent and alteration and repair of the Premises) as
Landlord, in its reasonable discretion, may determine, and Landlord may collect
and receive the Rent. Landlord will in no way be responsible or liable for any
failure to relet the Premises, or any part of the Premises, or for any failure
to collect any Rent due upon such reletting. No such reentry or taking
possession of the Premises by Landlord will be construed as an election on
Landlord's part to terminate this Lease unless a written notice of such
intention is given to Tenant. No written notice from Landlord under this Article
or under a forcible or unlawful entry and detainer statute or similar law will
constitute an election by Landlord to terminate this Lease unless such notice
specifically so states. Landlord reserves the right following any such reentry
or reletting to exercise its right to terminate this Lease by giving Tenant such
written notice, in which event this Lease will terminate as specified in such
notice.
25.3 DAMAGES; NO TERMINATION. In the event that Landlord does not elect
to terminate this Lease as permitted in Article 25.2(a), but on the contrary
elects to take possession as provided in Article 25.2(b), Tenant shall pay to
Landlord Monthly Rent and other sums as provided in this Lease that would be
payable under this Lease if such repossession had not occurred, less the net
proceeds, if any, of any reletting of the Premises after deducting all of
Landlord's reasonable expenses in connection with such reletting, including
without limitation all repossession costs, brokerage commissions, reasonable
attorneys' fees, expenses of employees, alteration and repair costs, and
expenses of preparation for such reletting. If, in connection with any
reletting, the new lease term extends beyond the Term, or the Premises covered
by such new lease includes other premises not part of the Premises, a fair
apportionment of the Rent received from such reletting and the expenses incurred
in connection with such reletting as provided in this Article 25.3 will be made
in determining the net proceeds from such reletting, and any Rent concessions
will be equally apportioned over the term of the new lease. Tenant will pay such
rent and other sums to Landlord monthly on the day on which the Monthly Rent
would have been payable under this Lease if possession had not been retaken, and
Landlord shall be entitled to receive such rent and other sums from Tenant on
each such day.
25.4 DAMAGES UPON TERMINATION.
(i) If this Lease is terminated on account of the occurrence of an
Event of Default, Tenant shall remain liable to Landlord for damages in an
amount equal to Monthly Rent and other amounts that would have been owing by
Tenant for the balance of the Term, had this Lease not been terminated, less the
net proceeds, if any, of any reletting of the Premises by Landlord subsequent to
such termination, after deducting all of Landlord's expenses in connection with
such reletting, including without limitation the expenses enumerated in Article
25.3. Landlord shall be entitled to collect such damages from Tenant monthly on
the day on which Monthly Rent and other amounts would have been payable under
this Lease if this Lease had not been terminated, and Landlord shall be entitled
to receive such Monthly Rent and other amounts from Tenant on each such day.
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(ii) Alternatively, at the option of Landlord, in the event this Lease
is so terminated, Landlord shall be entitled, upon written notice to Tenant at
any time after such termination, to declare the present cash value (as of the
date of such default) of the entire balance of Rent for the remainder of the
Term to be due and payable, and to collect such balance in addition to any
additional amounts due prior to such termination in any manner not inconsistent
with applicable law. For the purpose of this Article 25.4, the "present cash
value" shall be computed by adding interest at the per annum interest rate
described in Article 28.34 herein from the date on which this Lease is
terminated to the date Landlord obtains a court judgment against Tenant for the
amount due and discounting the entire balance due to Landlord at the Discount
Rate charged by the Federal Reserve Banks as published in the "Money Rates"
section of the Wall Street Journal on the day the Lease is terminated or if not
published on such date, the publication date immediately prior to the
termination date, plus two percent (2%).
25.5 CUMULATIVE REMEDIES. Any suit or suits for the recovery of the
amounts and damages set forth in Articles 25.3 and 25.4 may be brought by
Landlord, from time to time, at Landlord's election, and nothing in this Lease
will be deemed to require Landlord to await the date upon which this Lease or
the Term would have expired had there occurred no Event of Default. Tenant
agrees that Landlord may file suit to recover any sums due to Landlord under
this Lease from time to time and that such suit or recovery of any amount due
Landlord hereunder shall not be any defense to any subsequent action brought for
any amount not previously reduced to judgment in favor of Landlord. Each right
and remedy provided for in this Lease is cumulative and is in addition to every
other right or remedy provided for in this Lease or now or after the Lease date
existing at law or in equity or by statute or otherwise, and the exercise or
beginning of the exercise by Landlord of any one or more of the rights or
remedies provided for in this Lease or now or after the Lease Date existing at
law or in equity or by statute or otherwise will not preclude the simultaneous
or later exercise by Landlord of any or all other rights or remedies provided
for in this Lease or now or after the Lease Date existing at law or in equity or
by statute or otherwise. All costs incurred by Landlord in collecting any
amounts and damages owing by Tenant pursuant to the provisions of this Lease or
to enforce any provision of this Lease, including reasonable attorneys' fees
from the date any such matter is turned over to an attorney, whether or not one
or more actions are commenced by Landlord, will also be recoverable by Landlord
from Tenant.
25.6 Landlord shall take reasonable measures to mitigate the damages
recoverable against Tenant. Tenant shall bear the burden of proving Landlord
failed to take such reasonable measures to mitigate damages in any lawsuit filed
by Landlord to recover damages under or pursuant to this Lease.
ARTICLE 26. INTENTIONALLY OMITTED.
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ARTICLE 27. PARKING.
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At all times during the Term of this Lease and any duly exercised
Renewal Term, and conditioned upon this Lease being in full force and effect and
there being no Event of Default thereunder as defined herein, Tenant shall be
permitted to use the above ground, outdoor surface areas of the Project (the
"Outdoor Parking") as Landlord may designate from time to time for parking
automobiles, subject to the Rules and Regulations set forth in Exhibit D, and
any amendments or additions to such Rules and Regulations. The Outdoor Parking
will be used by Tenant and/ or tenant's guests and/or visitors on an unassigned,
nonreserved, and nondesignated basis or such other basis as Landlord directs
from time to time. During the Term of this Lease, Tenant will have the right to
use 3 vehicular parking spaces in the below-ground parking facility at an no
charge, together with the vehicular drives affording ingress to and egress from
said below-ground parking facility. In addition, during the Term of this Lease,
Tenant will have the right to use 2 additional vehicular parking spaces in the
below-ground parking facility, at an initial monthly charge of $50.00 per space,
together with the vehicular drives affording ingress to and egress from said
below-ground parking facility. Such charge will be subject to periodic increases
by Landlord, but not more than once per Lease Year. Tenant's specific
below-ground parking spaces will be designated by Landlord, and Tenant will use
the below-ground parking facility in common with others whom Landlord may permit
to use the same.
Landlord represents that for the Term of this Lease there will be at least 520
paved parking spaces serving the Project. In the event such parking is not
reasonably adequate for tenants at the Building in Landlord's reasonable
judgment, Landlord shall provide additional parking at the Building so that a
total of at least 570 paved parking spaces are serving the Project.
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ARTICLE 28. MISCELLANEOUS.
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28.1 INTENTIONALLY OMITTED.
28.2 SECURITY DEPOSIT. As of the Lease Date, Tenant has deposited the
Security Deposit referred to in Article 1. of this Lease with Landlord as
security for the full, faithful, and timely performance of every provision of
this Lease to be performed by Tenant. If Tenant defaults with respect to any
provision of this Lease, including but not limited to the provisions relating to
the payment of Rent, Landlord may use, apply, or retain all or any part of the
Security Deposit for the payment of any Rent, or any other sum in default, or
for the payment of any other amount Landlord may spend or become obligated to
spend by reason of Tenant's default, or to compensate Landlord for any other
loss or damage Landlord may suffer by reason of Tenant's default. If any portion
of the Security Deposit is so used, applied, or retained, Tenant shall, within
five (5) days after written demand, deposit cash with Landlord in an amount
sufficient to restore the Security Deposit to its original amount. Landlord will
not be required to keep the Security Deposit separate from its general funds,
and Tenant will not be entitled to interest on the Security Deposit. The
Security Deposit shall not be deemed a limitation on Landlord's damages or a
payment of liquidated damages or a payment of the Monthly Rent due for the last
month of the Term. If Tenant fully, faithfully, and timely performs every
provision of this Lease to be performed by it, the Security Deposit or any
balance of the Security Deposit will be returned to Tenant within sixty (60)
days after the expiration of the Term. Landlord may deliver the funds deposited
under this Lease by Tenant to the purchaser of the Building in the event the
Building is sold, and after such time Landlord will have no further liability to
Tenant with respect to the Security Deposit.
If Tenant notifies Landlord that Tenant desires to replace Tenant's cash
Security Deposit with a letter of credit, Landlord will not unreasonably
withhold its consent thereto. The form and terms of the letter of credit and the
issuing bank will be subject to Landlord's approval.
28.3 SIGNS.
(a) Except for signs that are located inside the Building and
are not visible outside the Building, no signs will be placed in the Premises,
Building or Project without the prior written consent of Landlord as to size,
design, color, location, content, illumination, composition, material, and
mobility, which consent may be withheld for any reason in the sole discretion of
Landlord. All signs will be maintained by Tenant in good condition during the
Term and any duly exercised Renewal Term and shall, in any event, comply with
the Design Guidelines of the Cantera Owners Association. Tenant shall remove all
signs at the end of the Term or duly exercised Renewal Term and shall repair and
restore any damage caused by their installation or removal.
(b) So long as Tenant is not in default under this Lease and
so long as Tenant is primarily in the business of writing computer software and
computer operating systems, Landlord agrees that during the initial Term of this
Lease Landlord will not grant to another tenant of the Building the right to
have such tenant's sign installed on the exterior surface of the Building if
such tenant is primarily in the business of writing computer software or
computer operating systems unless, at the time Landlord grants such right to
such tenant, such tenant leases or has agreed in writing to lease a greater
number of rentable square feet in the Building than is then being leased by
Landlord to Tenant in the Building.
28.4 NO OFFER. This Lease is submitted to Tenant on the understanding
that it will not be considered an offer and will not bind Landlord in any way
until Tenant has duly executed and delivered duplicate originals to Landlord and
Landlord has executed and delivered one of such originals to Tenant.
28.5 JOINT AND SEVERAL LIABILITY. If Tenant is composed of more than
one signatory to this Lease, each signatory will be jointly and severally liable
with each other signatory for payment and performance according to this Lease.
The act of, written notice to, written notice from, refund to, or signature of
any signatory to this Lease (including without limitation modifications of this
Lease made by fewer than all such signatories) will bind every other signatory
as though every other signatory had so acted, or received or given the written
notice or refund, or signed.
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28.6 NO CONSTRUCTION AGAINST DRAFTING PARTY. Landlord and Tenant
acknowledge that each of them and their counsel have had an opportunity to
review this Lease and that this Lease will not be construed against Landlord
merely because Landlord has prepared it.
28.7 TIME OF THE ESSENCE. Time is of the essence of each and every
provision of this Lease.
28.8 NO RECORDATION. Tenant's recordation of this Lease or any
memorandum or short form of it will be void and a default under this Lease.
28.9 NO WAIVER. The waiver by Landlord of any agreement, condition, or
provision contained in this Lease will not be deemed to be a waiver of any
subsequent breach of the same or any other agreement, condition, or provision
contained in this Lease, nor will any custom or practice that may grow up
between the parties in the administration of the Terms of this Lease be
construed to waive or to lessen the right of Landlord to insist upon the
performance by Tenant in strict accordance with the Terms of this Lease. The
subsequent acceptance of rent by Landlord will not be deemed to be a waiver of
any preceding breach by Tenant of any agreement, condition, or provision of this
Lease, other than the failure of Tenant to pay the particular rent so accepted,
regardless of Landlord's knowledge of such preceding breach at the time of
acceptance of such rent.
28.10 LIMITATION ON RECOURSE. It is expressly understood and agreed by
Tenant that none of Landlord's covenants, undertaking or agreements continued in
this Lease are made or intended as personal covenants, undertaking or agreements
by Landlord or its partners. Tenant specifically agrees to look solely to
Landlord's interest in the Project for the recovery of any judgments from
Landlord. It is agreed that Landlord (and its shareholders, venturers, and
partners, and their shareholders, venturers, and partners and all of their
officers, directors, and employees) shall not be personally liable for any such
judgments. The provisions contained in the preceding sentences are not intended
to and will not limit any right that Tenant might otherwise have to obtain
injunctive relief against Landlord or relief in any suit or action in connection
with enforcement or collection of amounts that may become owing or payable under
or on account of insurance maintained by Landlord.
28.11 ESTOPPEL CERTIFICATES. At any time and from time to time but
within ten (10) days after prior written request by Landlord, Tenant shall
execute, acknowledge, and deliver to Landlord, promptly upon request, a
certificate in the form attached hereto as Exhibit E certifying as to the
matters set forth therein. Any such certificate may be relied upon by any
prospective purchaser or existing or prospective mortgagee or beneficiary under
any deed of trust of the Building or any part of the Project. Tenant's failure
to deliver such a certificate within such time will be conclusive evidence of
the matters set forth in it. Landlord will, at the request of Tenant, at any
time and from time to time upon not less than 10 days' prior notice, execute and
deliver to Tenant a certificate stating the following, as requested: (a) that
this Lease is unmodified and in full force and effect, (or, if modified, stating
the nature of such modification and certifying that this Lease, as so modified,
is in full force and effect); (b) the date the Lease commenced and the rent
commencement date (if different); (c) the current monthly installments of
Monthly Rent and Tenant's Proportionate Share of Operating Expenses, the dates
to which such rental and other charges have been paid, and that no such rent has
been paid for more than 30 days in advance of its due date; (d) the amount of
the Security Deposit paid to Landlord; (e) that Tenant is paying rent on a
current basis, and there are not, to Landlord's knowledge, any uncured defaults
on the part of Tenant (or specifying such offsets, claims or defaults, if any
are claimed); and (f) such other matters as may be reasonably requested.
28.12 WAIVER OF JURY TRIAL. LANDLORD AND TENANT, BY THIS ARTICLE 28.12,
WAIVE TRIAL BY JURY IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM BROUGHT BY EITHER
OF THE PARTIES TO THIS LEASE AGAINST THE OTHER ON ANY MATTERS WHATSOEVER ARISING
OUT OF OR IN ANY WAY CONNECTED WITH THIS LEASE, THE RELATIONSHIP OF LANDLORD AND
TENANT, TENANT'S USE OR OCCUPANCY OF THE PREMISES, OR ANY OTHER CLAIMS (EXCEPT
CLAIMS FOR PERSONAL INJURY OR PROPERTY DAMAGE), AND ANY EMERGENCY STATUTORY OR
ANY OTHER STATUTORY REMEDY.
28.13 NO MERGER. The voluntary or other surrender of this Lease by
Tenant or the cancellation of this Lease by mutual agreement of Tenant and
Landlord or the termination of this Lease on account of Tenant's default shall
not work a merger, and shall, at Landlord's option, (a) terminate all or any
subleases and subtenancies or (b) operate as an assignment to Landlord of all or
any subleases or subtenancies. Landlord's option under this Article 28.13 shall
be exercised by written notice to Tenant and all known sublessees or subtenants
in the Premises or any part of the Premises.
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28.14 HOLDING OVER. Tenant shall have no right to remain in possession
of all or any part of the Premises after the expiration of the Term. If Tenant
remains in possession of all or any part of the Premises after the expiration of
the Term, with the express or implied consent of Landlord: (a) such tenancy
shall be deemed to be a periodic tenancy from month-to-month only; (b) such
tenancy shall not constitute a renewal or extension of this Lease for any
further Term; and (c) such tenancy may be terminated by Landlord upon the
earlier of 30 days' prior written notice or the earliest date permitted by law.
In the event Tenant remains in possession after the expiration of the Term,
Monthly Rent shall be increased to an amount equal to one hundred fifty percent
(150%) of the Monthly Rent payable during the last month of the Term, and any
other sums due under this Lease shall be payable in the amount and at the times
specified in this Lease. Such month-to-month tenancy shall be subject to every
other term, condition, and covenant contained in this Lease.
28.15 NOTICES. Any notice, request, demand, consent, approval, or other
communication required or permitted under this Lease must be in writing and
shall be deemed to have been given when (a) hand-delivered, effective upon
receipt, (b) sent by United States Express Mail or by private overnight courier,
effective upon receipt, or (c) sent by certified mail, return receipt requested,
addressed to the party for whom it is intended at its address set forth in
Article 1.1, deposited in the United States Mail, with postage thereon fully
prepaid, effective on the day of actual delivery as shown by the addressee's
return receipt or the expiration of three (3) business days after the date of
mailing, whichever is earlier, or (d) sent by facsimile transmission, effective
upon receipt provided that a hard copy is delivered by one of the methods
outlined in clauses (a) through (c) above within three (3) days thereafter.
Either Landlord or Tenant may add additional addresses or change its address for
purposes of receipt of any such communication by giving ten (10) days' prior
written notice of such change to the other party in the manner prescribed in
this Article 28.15.
28.16 SEVERABILITY. If any provision of this Lease proves to be
illegal, invalid, or unenforceable, the remainder of this Lease will not be
affected by such finding, and in lieu of each provision of this Lease that is
illegal, invalid, or unenforceable a provision will be added as a part of this
Lease as similar in terms to such illegal, invalid, or unenforceable provision
as may be possible and be legal, valid, and enforceable.
28.17 WRITTEN AMENDMENT REQUIRED. No amendment, alteration,
modification of, or addition to the Lease shall be valid or binding unless
expressed in writing and signed by Landlord and Tenant. Tenant agrees to make
any modifications of the Terms and provisions of this Lease required or
requested by any lending institution providing financing for the Building, or
Project, as the case may be, provided that no such modifications will materially
adversely affect Tenant's rights and obligations under this Lease.
28.18 CAPTIONS. The captions of the various articles of this Lease are
for convenience only and do not necessarily define, limit, describe, or construe
the contents of such articles.
28.19 AUTHORITY. Tenant and the party executing this Lease on behalf of
Tenant represent to Landlord that such party is authorized to do so by requisite
action of the board of directors or partners, as the case may be, and agrees,
upon execution of this Lease, to deliver to Landlord a resolution or similar
document to that effect.
28.20 BROKERS. Landlord and Tenant respectively represent and warrant
to each other that neither of them has consulted or negotiated with any broker
or finder with regard to the Premises except that Landlord has retained the
Broker and Tenant has retained the Tenant's Broker, each as named in Article 1.1
hereof. Landlord agrees to be responsible for payment of Broker's fees and for
the payment of Tenant's Broker's fees pursuant to separate agreement. Landlord
and Tenant shall mutually indemnify and hold each other harmless from and
against any claim for brokerage or finder's fees or other like payment based in
any way upon agreements, arrangements or understanding made or claimed to have
been made by Landlord or Tenant with any person other than Broker and Tenant's
Broker.
28.21 GOVERNING LAW. This Lease shall be governed by and construed
pursuant to the laws of the state of Illinois.
28.22 NO EASEMENTS FOR AIR OR LIGHT. Any diminution or shutting off of
light, air, or view by any structure that may be erected on lands adjacent to
the Building shall in no way affect this Lease or impose any liability on
Landlord.
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28.23 TAX CREDITS. Landlord is entitled to claim all tax credits and
depreciation attributable to leasehold improvements in the Premises. Promptly
after Landlord's demand, Landlord and Tenant shall prepare a detailed list of
the leasehold improvements and fixtures and their respective costs for which
Landlord or Tenant has paid. Landlord shall be entitled to all credits and
depreciation for those items for which Landlord has paid by means of any Tenant
finish allowance or otherwise. Tenant shall be entitled to any tax credits and
depreciation for all items for which Tenant has paid with funds not provided or
reimbursed by Landlord.
28.24 INTENTIONALLY OMITTED.
28.25 LANDLORD'S FEES. Whenever Tenant requests Landlord to take any
action or give any consent required or permitted under this Lease, Tenant shall
reimburse Landlord for all of Landlord's reasonable costs incurred in reviewing
the proposed action or consent, including without limitation reasonable
attorneys', engineers' or architects' fees, within ten (10) days after
Landlord's delivery to Tenant of a statement of such costs. Tenant shall be
obligated to make such reimbursement without regard to whether Landlord consents
to any such proposed action. However, in any action for the enforcement, defense
or interpretation of either party's right under this Lease, in addition to the
rents and other sums, found to be due hereunder, the prevailing party will be
entitled to payment of all collection and court costs incurred together with
reasonable attorneys' and paralegals' fees, whether such fees and costs be
incurred out of court, at trial, on appeal, or in any bankruptcy, arbitration or
other administrative proceedings.
28.26 NON-WAIVER. Any default in the payment of Monthly Rent or
Additional Rent or other charges, or any failure of Landlord to enforce the
provisions of this Lease upon any default by the Tenant shall not be construed
as creating a custom of deferring payment or as modifying in any way the Terms
of this Lease or as a waiver of Landlord's right to terminate this Lease as
herein provided, or otherwise, to enforce the provisions hereof for any prior or
subsequent default.
28.27 PRESUMPTION. In all cases hereunder, and in any suit, action or
proceeding of any kind between the parties, it shall be presumptive evidence of
the fact a charge being due, if Landlord shall produce a bill, notice or
certificate to the effect that such charge appears of record on the books in
Landlord's office or appears as an open charge on the books, records or official
bills of municipal authorities, and has not been paid.
28.28 WAIVER OF TECHNICAL DEFECTS IN NOTICES. In lieu of Landlord or
Tenant waiving the right to receive any notices, both parties hereby waives any
technical defects as to form, substance and delivery in the giving of any
notices required by this Lease and Illinois Compiled Statutes so long as the
notice reasonably apprises the appropriate party of the general nature of the
reason for the giving of the notice and affords such party a reasonable
opportunity to cure, if applicable.
28.29 NO RIGHT TO TERMINATE. Tenant hereby waives the remedies of
termination and rescission and hereby agrees that Tenant's sole remedies for
Landlord's default hereunder and for breach of any promise or inducement shall
be limited to a suit for damages and/or injunction.
28.30 NO LIABILITY FOR CRIMES. Landlord makes no representations or
warranties with respect to crime in the area, undertakes no duty to protect
against criminal acts and shall not be liable for any injury, wrongful death or
property damage arising from any criminal acts. The Landlord may, from time to
time, employ or caused to be employed security personnel and equipment, however,
such personnel and equipment are only for the protection of Landlord's property.
Landlord reserves the right, in its sole and absolute discretion, to start,
alter or terminate any such security services without notice. Tenant is urged to
provide security for its invitees, its own personnel, and property as it deems
necessary. Tenant is urged to obtain insurance to protect against criminal acts.
28.31 BINDING EFFECT. The covenants, conditions, and agreements
contained in this Lease will bind and inure to the benefit of Landlord and
Tenant and their respective heirs, distributees, executors, administrators,
successors, and, except as otherwise provided in this Lease, their assigns.
28.32 CONFIDENTIALITY. Tenant acknowledges that the terms and
conditions of this Lease are to remain confidential for the Landlord's benefit,
and shall not be disclosed by Tenant to anyone, by any manner or means,
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directly or indirectly, without Landlord's prior written consent; provided,
however, Tenant may disclose such terms or conditions to affiliates of Tenant
and prospective subtenants and assignee for the sole purpose of evaluating a
potential sublease or assignment so long as such affiliates and prospective
subtenants and assignees agree to abide by the terms of this Article 28.32.
Tenant may also disclose the terms of this Lease to Tenant's attorneys,
accountants and consultants on a need-to-know basis, so long as Tenant advises
such attorneys, accountants and consultants of the confidential nature of such
information and such attorneys, accountants and consultants (as the case may be)
agree to maintain such confidentiality. The consent by Landlord to any
disclosures shall not be deemed to be a waiver on the part of Landlord of any
prohibition against any future disclosure.
28.33 FORCE MAJEURE. Landlord shall have no liability to Tenant, nor
will Tenant have any right to terminate this Lease or abate Rent or assert a
claim of partial or total actual or constructive eviction, because of Landlord's
failure to perform any of its obligations in the Lease if the failure is due to
reasons beyond Landlord's reasonable control, including without limitation
strikes or other labor difficulties; inability to obtain necessary governmental
permits and approvals (including building permits or certificates of occupancy);
unavailability or scarcity of materials; war; riot; civil insurrection;
accidents; acts of God; and governmental preemption in connection with a
national emergency. If Landlord fails to perform its obligations because of any
reasons beyond Landlord's reasonable control (including those enumerated above),
the period for Tenant's performance will be extended day for day for the
duration of the cause of Landlord's failure.
28.34 INTEREST. All Rent and other sums dues under this Lease which are
not paid when due shall accrue interest at the lesser of 12% per annum or the
highest rate allowed by law.
28.35 ENTIRE AGREEMENT. This Lease, the exhibits and addenda, if any,
contain the entire agreement between Landlord and Tenant. No promises or
representations, except as contained in this Lease, have been made to Tenant
respecting the condition or the manner of operating the Premises, the Building,
or the Project.
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IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease as of the Lease
Date.
LANDLORD: THE NORTHWESTERN MUTUAL LIFE
INSURANCE COMPANY
By: NORTHWESTERN INVESTMENT MANAGEMENT
COMPANY, its wholly owned subsidiary
and authorized representative
By:
---------------------------------
Its:
--------------------------------
TENANT: QUEST SOFTWARE, INC.
By:
---------------------------------
Its:
--------------------------------
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EXHIBIT A
LAYOUT OF THE PREMISES
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<PAGE> 36
EXHIBIT B
WORK LETTER
This Work Letter is attached to and forms part of the Office Lease
dated September 30, 1999 between THE NORTHWESTERN MUTUAL LIFE
INSURANCE COMPANY and QUEST SOFTWARE, INC., leasing space in the
Building commonly known as Cornerstone At Cantera, Warrenville,
Illinois
To induce Tenant to enter into the Lease, and in consideration of the
mutual covenants in the Lease and this agreement, Landlord and Tenant mutually
agree as follows:
1. Landlord will improve the Premises (the"Tenant Improvements" or
"Work") at its sole cost and expense in accordance with those certain plans (the
"Working Drawings") dated October 4, 1999, prepared by Gensler Inc. (the
"Architect"). However, if Tenant requests any changes in the Working Drawings,
Tenant will be solely responsible for any additional costs resulting from such
changes.
Landlord will pay for the preparation of the Working Drawings. All
additional costs and expenses relating to the preparation and completion of
plans or space plans for the Premises will be borne by Tenant, and will be due
and payable to Landlord by Tenant when billed.
2. Subject to the other terms and conditions of this Work Letter and
the Lease, Landlord will proceed diligently and use reasonable efforts to cause
the Work to be substantially completed on or before the Commencement Date set
forth in Section 1.1(m) of the Lease. Unless a Tenant Delay (defined below)
occurs, the Term of the Lease and Tenant's obligation to pay rent under the
Lease will not commence until the Work has been substantially completed, as
reasonably determined by Landlord. If Landlord fails to substantially complete
the Work by the Commencement Date set forth in Section 1.1(m) of the Lease and
any Tenant Delay (defined below) occurs, then the Term and Tenant's obligation
to pay rent under the Lease will commence on the date on which the Work would
have been substantially completed but for the Tenant Delay, as reasonably
determined by Landlord. All work to be done in the Premises, including, without
limitation, the Work, will be subject to Landlord's approval, and no work may be
undertaken in the Premises until such approval is given.
3. (a) When Landlord is of the opinion that the Tenant Improvements are
substantially complete, then Landlord shall notify Tenant. Tenant agrees that,
upon such notification, Tenant will promptly (and not later than two (2)
business days after the date of Landlord's notice) inspect the Premises and, if
applicable, furnish to Landlord a written statement that the Tenant Improvements
are substantially completed, with the exception of certain specified and
enumerated incomplete items consisting of insubstantial details of construction,
decoration or mechanical adjustment, none of which interferes with Tenant's use
and occupancy of the Premises for the conduct of its business, if any ("Punch
List"). If Tenant fails to inspect the Premises or to provide Landlord a Punch
List, the Tenant Improvements shall be deemed complete. Substantial completion
of the Work will include a final inspection by the City of Warrenville and the
oral or written approval by such City for occupancy of the Premises.
(b) Tenant agrees that, at the request of Landlord from time to time
thereafter, Tenant will promptly furnish to Landlord revised Punch Lists
reflecting any completion of any prior Punch List items. If the Punch List or
any revised Punch List consists only of items, the non-completion of which would
not materially impair Tenant's occupancy of the Premises, then, in such event,
the Premises shall be deemed to be substantially complete and Tenant will
acknowledge in writing that the Premises are substantially complete and accept
possession of the Premises. Tenant's acknowledgement or acceptance of the
Premises shall not relieve Landlord of its obligation to complete all Punch List
items.
4. Tenant shall have the right to inspect the Work from time to time,
provided that Tenant does not interfere with the progress of the Work. All
procedures and requirements relating to extras, changes and deletions
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in the Work, and the costs thereof, shall be governed by the terms of the
construction contract documents. No extras, changes, or deletions in the Work
materially affecting any structural elements, windows, elevators or HVAC,
electrical, plumbing or other systems serving portions of the Building, or
affecting the character or design of the Work shall be permitted without the
prior written consent of Landlord, which Landlord may withhold in its sole
discretion.
5. If Tenant wishes Landlord to do any work in connection with the
Premises prior to the Lease Commencement Date other than the Work (such other
work hereinafter is referred to as "Tenant's Extra Work"), the following terms,
conditions, agreements and procedures shall apply and control:
a. Tenant, at its sole cost and expense, shall submit to
Landlord, all necessary drawings, plans and
specifications for the proposed Tenant's Extra Work
(such drawings, plans and specifications hereinafter
are referred to as "Tenant's Extra Work Plans").
Tenant's Extra Work Plans must be acceptable in all
respects to Landlord, which acceptance Landlord may
withhold in its sole discretion.
b. Landlord will construct or cause to be constructed
Tenant's Extra Work substantially in accordance with
Tenant's Extra Work Plans provided that Tenant's
Extra Work Plans have been accepted in writing by
Landlord, and that Tenant has complied with all
provisions, terms and conditions of this Work Letter.
c. All of Tenant's Extra Work shall be done at Tenant's
sole cost and expense. Within 15 days after the
submission by Tenant to Landlord of proposed Tenant's
Extra Work Plans, Landlord shall submit to Tenant for
Tenant's approval a written estimate of the cost of
Tenant's Extra Work (hereinafter referred to as an
"Estimate"). Landlord may elect not to proceed with
Tenant's Extra Work unless and until: (i) one
Estimate covering the same is approved in writing by
Tenant and an approved copy is delivered to Landlord;
and (ii) Tenant has deposited with Landlord in escrow
an amount sufficient to cover all costs of performing
Tenant's Extra Work.
d. If Tenant desires any extras, changes or deletions in
Tenant's Extra Work at any time, Tenant in each
instance shall follow the same procedure prescribed
in this Paragraph 5 for the initiation, approval and
commencement of Tenant's Extra Work.
e. Tenant agrees to pay or reimburse Landlord for all
Architect's, Landlord's general contractor's,
subcontractor's and general conditions' costs
pertaining to Tenant's Extra Work. In the event
Tenant has not deposited in escrow an amount
sufficient to cover all costs of performing Tenant's
Extra Work or any extra or change as provided in
paragraph 5d hereof, then within 15 days after being
billed therefor, Tenant shall pay to Landlord or as
Landlord otherwise directs, all such costs for
Tenant's Extra Work. Landlord shall have, in
connection with all such costs, all the rights and
remedies that Landlord has under the Lease in
connection with Rent that is due and payable by
Tenant thereunder. All such costs shall be deemed
Additional Rent due and payable under the Lease.
However, the noncompletion of Tenant's Extra Work will not delay the Lease
Commencement Date.
6. Tenant, with Landlord's prior written permission, may enter the
Premises up to 5 days prior to the date specified in the Lease for the
commencement of payment of Rent, in order that Tenant may perform, through
Tenant's own contractors (which contractors shall be subject to Landlord's
approval), such other work and decorations as Tenant may desire and as may be
permitted in accordance with the terms and conditions of the Lease at the same
time that Landlord's contractors are working in the space. However, the
foregoing license to enter is conditioned upon Tenant's first obtaining the
insurance coverage required under the Lease and furnishing Landlord with
certificates of such insurance and paid premium receipts, and upon Tenant's
contractors and workmen working in harmony and not interfering with the labor
employed by Landlord, Landlord's contractors or any other tenant or their
contractors. If, at any time, such entry shall cause disharmony or interference
therewith, this license may be withdrawn by Landlord immediately (with no notice
being required). Such entry shall be deemed to be under all of
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the terms, covenants, conditions, provisions and agreements of the Lease except
the covenant to pay Rent. Landlord shall not be liable in any way for any work,
decorations or installations which are made prior to the date specified in the
commencement of the payment of Rent or to the equipment, materials or tools of
Tenant or its contractors, the same being solely at Tenant's risk. Prior to
commencement of any work under this paragraph, Tenant shall deliver to Landlord
all necessary permits, licenses, approvals, certificates and authorizations for
prosecution and completion of the work.
7. Miscellaneous:
a. The Work and Tenant's Extra Work, if any, shall be
done by Landlord and/or its designers, contractors
and subcontractors, in accordance with the terms,
conditions and provisions herein contained.
b. Except as provided in the Lease and the Working
Drawings, and except as herein expressly set forth,
Landlord has no agreement with Tenant and has no
obligation to perform or provide any other work with
respect to the Premises.
Any other work in the Premises which may be permitted
by Landlord pursuant to the terms and conditions of
the Lease shall be done at Tenant's sole cost and
expense and in accordance with the terms and
conditions and provisions of the Lease and this Work
Letter.
c. Under no circumstances shall the Lease Commencement
Date or Tenant's obligation to commence paying Rent
be delayed in whole or in part because of any delay
or cost arising from or incurred in connection with
(i) any extra, change or deletion requested or caused
by Tenant or its agents or contractors at any time to
any of the Work, (ii) Tenant's Extra Work or (iii)
delay due to special equipment, fixtures or materials
requested by Tenant or the unavailability of
materials specified for Tenant Improvements (each, a
"Tenant Delay").
d. Time is of the essence under this Agreement.
e. Landlord's preparation of Working Drawings and the
construction of Tenant Improvements shall not create
or imply any responsibility or liability on the part
of Landlord with regard to the completeness and
design sufficiency of both the Working Drawings and
the Tenant Improvements, or with regard to the
compliance of the Working Drawings and the Tenant
Improvements with all laws, rules and regulations of
governmental agencies.
f. Any person signing this Work Letter on behalf of the
Tenant warrants and represents that he has the
express authority of Tenant to do so.
g. Landlord appoints Janet Reuter as Landlord's
representative to act for Landlord in all matters
associated with this Work Letter. Tenant appoints
Susan Twellman, as Tenant's representative to act for
Tenant in all matters associated with this Work
Letter. All inquiries, requests, instructions,
authorizations, and other communications with respect
to the matters covered by this Work Letter shall be
made to Landlord's representative or Tenant's
representative, as the case may be. Tenant shall not
make any inquiries of or requests to, and will not
give any instructions or authorizations to, any
employee or agent of Landlord, including, without
limitation, Landlord's architect, engineers, and
contractors or any of their agents or employees, with
regard to matters associated with this Work Letter at
any time by providing three (3) days' prior written
notice to the other party.
h. This Work Letter shall not be deemed applicable to
any additional space added to the original Premises
at any time, whether by any options under the Lease
or otherwise, or to
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any portion of the original Premises or any additions
thereto in the event of a renewal or extension of the
original Term of the Lease, whether obtained pursuant
to any options under the Lease or otherwise, unless
expressly so provided in the Lease or a written
amendment or supplement thereto.
i. This Work Letter shall be binding upon and inure to
the benefit of the parties hereto and their
respective heirs, legal representatives, successors
and assigns.
j. All capitalized terms contained in this Work Letter
and all terms otherwise undefined shall have the same
meaning set forth in the Lease to the extent the same
are used or defined therein.
LANDLORD: THE NORTHWESTERN MUTUAL LIFE INSURANCE
COMPANY
By: NORTHWESTERN INVESTMENT MANAGEMENT COMPANY,
its wholly owned subsidiary and authorized
representative
By:
------------------------------------------
Its:
-----------------------------------------
TENANT: QUEST SOFTWARE, INC.
By:
------------------------------------------
Its:
-----------------------------------------
35
<PAGE> 40
EXHIBIT C
COMMENCEMENT DATE CERTIFICATE
This Commencement Date certificate is entered into by Landlord and
Tenant pursuant to Article 3.1 of the Lease.
1. DEFINITIONS. In this certificate the following terms have the
meanings given to them in the Lease:
(a) Landlord: __________________________________________
(b) Tenant: ____________________________________________
(c) Lease: Office Lease dated [date] between Landlord and Tenant.
(d) Premises: ___________________________________________
(e) Building Address: ____________________________________
2. CONFIRMATION OF LEASE COMMENCEMENT: Landlord and Tenant confirm that
the Commencement Date of the Lease is ____________ and the Expiration Date is
____________ and that Article 1.1 of the Lease is amended accordingly.
Landlord and Tenant have executed this Commencement Date certificate as
of the dates set forth below.
TENANT: ___________________________ LANDLORD: ________________________
By: ___________________________ By: _________________________
Its: ___________________________ Its: _________________________
Date: Date:
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EXHIBIT D
RULES AND REGULATIONS
1. Landlord may from time to time adopt reasonable and appropriate
systems and procedures for the security or safety of the Building, or any
equipment, furnishings, or contents of the Building, and Tenant will comply with
Landlord's reasonable requirements relative to such systems and procedures.
2. The sidewalks, halls, passages, exits, entrances, elevators, and
stairways of the Building shall not be obstructed by Tenant or used by Tenant
for any purpose other than for ingress to and egress from the Premises. The
halls, passages, exits, entrances, elevators, escalators, and stairways are not
for the general public, and Landlord shall in all cases retain the right to
control and prevent access to such halls, passages, exits, entrances, elevators,
and stairways of all persons whose presence in the judgment of Landlord would be
prejudicial to the safety, character, reputation, and interests of the Building,
provided that nothing contained in these Rules and Regulations shall be
construed to prevent such access to persons with whom any Tenant normally deals
in the ordinary course of its business, unless such persons are engaged in
illegal activities. Neither Tenant nor any employee or invitee of Tenant shall
go upon the roof of the Building. Tenant shall not be permitted to place or
install any object (including without limitation radio and television antennas,
loudspeakers, sound amplifiers, microwave dishes, solar devices, or similar
devices) on the exterior of the Building or on the roof of the Building.
3. Other than draperies expressly permitted by Landlord and building
standard mini-blinds, material visible from outside the building shall not be
permitted. In the event of the violation of this rule by Tenant, Landlord may
remove the violating items without any liability, and may charge the expense
incurred by such removal to the Tenant.
4. No cooking shall be done or permitted by Tenant on the Premises,
except in areas of the Premises which are specially constructed for cooking and
except that use by the Tenant of microwave ovens and Underwriters' Laboratory
approved equipment for brewing coffee, tea, hot chocolate, and similar beverages
shall be permitted, provided that such use is in accordance with all applicable
federal, state, and city laws, codes, ordinances, rules, and regulations.
5. Tenant shall not employ any person or persons other than the
cleaning service of Landlord for the purpose of cleaning the Premises, unless
otherwise agreed to by Landlord in writing. Except with the written consent of
Landlord, no person or persons other than those approved by Landlord shall be
permitted to enter the Building for the purpose of cleaning it. No Tenant shall
cause any unnecessary labor by reason of Tenant's carelessness or indifference
in the preservation of good order and cleanliness. Should Tenant's actions
result in any increased expense for any required cleaning, Landlord reserves the
right to assess Tenant for such expenses.
6. The toilet rooms, toilets, urinals, wash bowls and other plumbing
fixtures shall not be used for any purposes other than those for which they were
constructed, and no sweepings, rubbish, rags, or other foreign substances shall
be thrown in such plumbing fixtures. All damages resulting from any misuse of
the fixtures shall be borne by the Tenant who, or whose servants, employees,
agents, visitors, or licensees, caused the same.
7. Tenant shall not in any way deface any part of the Premises or the
Building of which they form a part. In those portions of the Premises where
carpet has been provided directly or indirectly by Landlord, Tenant shall at its
own expense install and maintain pads to protect the carpet under all furniture
having casters other than carpet casters.
8. Tenant shall not alter, change, replace, or rekey any lock or
install a new lock or a knocker on any door of the Premises. Landlord, its
agents, or employees shall retain a pass (master) key to all door locks on the
Premises. Any new door locks required by Tenant or any change in keying of
existing locks shall be installed or changed by Landlord following Tenant's
written request to Landlord and shall be at Tenant's expense. All new locks and
rekeyed locks shall remain operable by Landlord's pass (master) key. Tenant,
upon termination of its tenancy, shall deliver to Landlord all keys and access
cards for the Premises and Building that have been furnished to Tenant. Landlord
will not unreasonably withhold its consent to Tenant's installation of a card
key access system for accessing the Premises.
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9. The elevator designated for freight by Landlord shall be available
for use by Tenant during the hours and pursuant to such procedures as Landlord
may determine from time to time. The persons employed to move Tenant's
equipment, material, furniture, or other property in or out of the Building must
be acceptable to Landlord. The moving company must be a locally recognized
professional mover, whose primary business is the performing of relocation
services, and must be bonded and fully insured. A certificate or other
verification of such insurance must be received and approved by Landlord prior
to the start of any moving operations. Insurance must be sufficient, in
Landlord's sole opinion, to cover all personal liability, theft or damage to the
Project, including but not limited to floor coverings, doors, walls, elevators,
stairs, foliage, and landscaping. Special care must be taken to prevent damage
to foliage and landscaping during adverse weather. All moving operations shall
be conducted at such times and in such a manner as Landlord shall direct, and
all moving shall take place during non-business hours unless Landlord agrees in
writing otherwise. Tenant shall be responsible for the provision of Building
security during all moving operations, and shall be liable for all losses and
damages sustained by any party as a result of the failure to supply adequate
security. Landlord shall have the right to prescribe the weight, size, and
position of all equipment, materials, furniture, or other property brought into
the Building. Heavy objects shall, if considered necessary by Landlord, stand on
wood strips of such thickness as is necessary to properly distribute the weight.
Landlord shall not be responsible for loss of or damage to any such property
from any cause, and all damage done to the Building by moving or maintaining
such property shall be repaired at the expense of Tenant. Landlord reserves the
right to inspect all such property to be brought into the Building and to
exclude from the Building all such property which violates any of these Rules
and Regulations or the Lease of which these Rules and Regulations are a part.
Supplies, goods, materials, packages, furniture, and all other items of every
kind delivered to or taken from the Premises shall be delivered or removed
through the entrance and route designated by Landlord, and Landlord shall not be
responsible for the loss or damage of any such property unless such loss or
damage results from the negligence of Landlord, its agents, or employees.
10. Tenant shall not use or keep in the Premises or the Building any
kerosene, gasoline, or any flammable, combustible or explosive fluid or material
or chemical substance other than cleaning fluids and solvents required in
Tenant's normal operations in the Premises. Without Landlord's prior written
approval, Tenant shall not use any method of heating or air conditioning other
than that supplied by Landlord. Tenant shall not use or keep or permit to be
used or kept any foul or noxious gas or substance in the Premises.
11. Subject to the restrictions set forth in Section 28.3(b), Landlord
shall have the right, exercisable upon written notice and without liability to
Tenant, to change the name and street address of the Building. If Landlord
changes the street address of the Building, Landlord will, upon written request
from Tenant, reimburse Tenant for Tenant's reasonable out-of-pocket costs of
replacing its stationery and business cards due to such change (not to exceed a
6-month supply)
12. Landlord shall have the right to prohibit any advertising by Tenant
mentioning the Building that, in Landlord's reasonable opinion, tends to impair
the reputation of the Building or its desirability as a Building for offices,
and upon written notice from Landlord, Tenant shall refrain from or discontinue
such advertising.
13. Tenant shall not bring any animals (except "Seeing Eye" dogs or
other guide animals) or birds into the Building, and shall not permit bicycles
or other vehicles inside or on the sidewalks outside the Building except in
areas designated from time to time by Landlord for such purposes.
14. All persons entering or leaving the Building between the hours of 6
p.m. and 7 a.m. Monday through Friday, and at all hours on Saturdays, Sundays,
and holidays shall comply with such off-hour regulations as Landlord may
establish and modify from time to time.
15. Tenant shall store all its trash and garbage within its Premises.
No material shall be placed in the trash boxes or receptacles if such material
is of such nature that it may not be disposed of in the ordinary and customary
manner of removing and disposing of trash and garbage without being in violation
of any law or ordinance governing such disposal. All garbage and refuse disposal
shall be made only through entryways and elevators provided for such purposes
and at such times as Landlord designates. Removal of any furniture or
furnishings, large equipment, packing crates, packing materials, and boxes shall
be the responsibility of each Tenant
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and such items may not be disposed of in the Building trash receptacles nor
shall they be removed by the Building's janitorial service, except at Landlord's
sole option and at the Tenant's expense. No furniture, appliances, equipment, or
flammable products of any type may be disposed of in the Building trash
receptacles.
16. Canvassing, peddling, soliciting, and distributing handbills or any
other written materials in the Building are prohibited, and Tenant shall
cooperate to prevent the same.
17. The requirements of the Tenant shall be attended to only upon
application by written, personal, or telephone notice at the office of the
Building. Employees of Landlord shall not perform any work or do anything
outside of their regular duties unless under special instructions from Landlord.
18. Tenant shall see that the doors of the Premises are closed and
locked and that all water faucets, water apparatus, and utilities are shut off
before Tenant or Tenant's employees leave the Premises, so as to prevent waste
or damage, and for any default or carelessness in this regard Tenant shall make
good all injuries sustained by other Tenants or occupants of the Building or
Landlord.
19. Tenant shall not conduct itself in any manner that is inconsistent
with the character of the Building as a first quality Building.
20. Neither Landlord nor any operator of the parking areas within the
Project wherein the parking is located, as the same are designated and modified
by Landlord, in its sole discretion, from time to time (sometimes collectively
the "parking areas") shall be liable for loss of or damage to any vehicle or any
contents of such vehicle or accessories to any such vehicle, or any property
left in any of the parking areas, resulting from fire, theft, vandalism,
accident, conduct of other users of the parking areas and other persons, or any
other casualty or cause. Further, Tenant understands and agrees that: (a)
Landlord shall not be obligated to provide any traffic control, security
protection or operator for the parking areas; (b) Tenant uses the parking areas
at its own risk; and (c) Landlord shall not be liable for personal injury or
death, or theft, loss of, or damage to property. Tenant waives and releases
Landlord from any and all liability arising out of the use of the parking areas
by Tenant, its employees, agents, invitees, and visitors, whether brought by any
of such persons or any other person.
21. Tenant [including Tenant's employees, agents, invitees, and
visitors] shall use the parking described in Paragraph 27 of the Lease solely
for the purpose of parking passenger cars, small vans, and small trucks and
shall comply in all respects with any rules and regulations that may be
promulgated by Landlord from time to time with respect thereto. Tenant shall
ensure that any vehicle parked in any of the parking spaces shall be kept in
proper repair, good operating condition, currently licensed, and shall not leak
excessive amounts of oil or grease or any amount of gasoline. If any of the
parking is at any time used (a) for any purpose other than parking as provided
above; (b) in any way or manner reasonably objectionable to Landlord; or (c) by
Tenant after default by Tenant under the Lease, Landlord, in addition to any
other rights otherwise available to Landlord, including, at the Tenant's
expense, the right to tow or boot the offending vehicle, may consider such
default an Event of Default under the Lease.
22. Tenant's right to use the parking shall be in common with other
parties permitted by Landlord to use the parking areas. Subject to the terms of
the Lease, Landlord shall not be liable to Tenant for any unavailability of
parking nor shall any unavailability entitle Tenant to any refund, deduction, or
allowance.
23. If the parking areas are damaged or destroyed, or if the use of the
parking areas is limited or prohibited by any governmental authority, or the use
or operation of the parking areas is limited or prevented by strikes or other
labor difficulties or other causes beyond Landlord's control, Tenant's inability
to use the parking areas shall not subject Landlord or any operator of the
parking areas to any liability to Tenant and shall not relieve Tenant of any of
its obligations under the Lease and the Lease shall remain in full force and
effect, subject to the terms of the Lease.
24. Tenant has no right to assign, sublease or sublicense, as the case
may be, any of its rights in the parking, except as part of a permitted
assignment or sublease of the Lease. However, Tenant may allocate the parking
among its employees.
39
<PAGE> 44
25. No act or thing done or omitted to be done by Landlord or
Landlord's agent during the Term of the Lease in connection with the enforcement
of these Rules and Regulations shall constitute an eviction by Landlord of any
Tenant nor shall it be deemed an acceptance of surrender of the Premises by any
Tenant, and no agreement to accept such termination or surrender shall be valid
unless in a writing signed by Landlord. The delivery of keys to any employee or
agent of Landlord shall not operate as a termination of the Lease or a surrender
of the Premises unless such delivery of keys is done in connection with a
written instrument executed by Landlord approving the Termination or surrender.
26. As used in these Rules and Regulations, the word "Tenant" includes
the employees, agents, invitees, and licensees of Tenant and others permitted by
Tenant to use or occupy the Premises.
27. Landlord shall have the right to designate all or any portion of
the Building and/or Project as a non-smoking facility at any time during the
Term.
28. These rules and regulations are in addition to, and shall not be
construed to modify or amend, in whole or in part, the terms, covenants,
agreements, and conditions of the Lease.
40
<PAGE> 45
EXHIBIT E
TENANT ESTOPPEL CERTIFICATE
RE: Lease dated ____________________ ("Lease") between The Northwestern
Mutual Life Insurance Company ("Landlord") and ____________________
("Tenant") for Suite _______ ("Premises") in a building located at
________________ and commonly known as ________________("Building").
The Tenant hereby certifies to Landlord, and to _________________, a
______________ ("_____________________") that the following information
with respect to the Lease is true and correct:
1. The Lease is in full force and effect and has not been modified or
amended except as specifically set forth in Paragraph 4. below. There
are no other agreements, understandings, contracts or commitments of
any kind with respect to the Lease or the Premises except as expressly
provided in the Lease or in any amendment or supplement thereto set
forth in Paragraph 4., below.
2. The Tenant asserts no claim of default, offset or defense against rent
or other charges payable by the maintenance of the property of which
the Premises are a part. To the best of Tenant's knowledge and belief,
there is no default by Landlord under the Lease and all commitments
made by Landlord to Tenant to induce Tenant to enter into the Lease
have been satisfied.
3. All rent due under the Lease has been paid to the end of the current
calendar month, which is ____, ____, and no rent due under the Lease
has been paid more than one month in advance of its due date.
4. Dates of any Lease amendments or modifications: _____________________.
5. Current Monthly Rental: ___________________________.
6. Lease Commencement Date: ___________________________________.
7. Lease Expiration Date: _______________________________________.
8. The Lease contains no options to renew, first rights of refusal,
options to expand, or options to terminate, except as follows:
______________________.
9. The Tenant has not assigned, or otherwise transferred its interest
under the Lease, except as follows: ____________________________.
10. Tenant is using the Premises only for those purposes specifically
permitted under the Lease, which is ____________________________.
11. Landlord is holding Tenant's security deposit of $__________________.
12. Tenant is not in default under the Lease nor are there any conditions,
or events which have occurred or which, with the passage of time or the
giving of notice or both, would constitute a default or breach. Tenant
is current in the payment of all taxes, utilities, common area
maintenance payments, and other charges required to be paid by the
Tenant pursuant to the Lease, and there exists no dispute relative to
any such amounts.
13. The improvements and space required to be furnished according to the
Lease have been duly delivered by the Landlord and accepted by the
Tenant.
41
<PAGE> 46
14. The undersigned has all requisite authority to execute this Estoppel
Certificate on behalf of Tenant.
Dated: _______________________, ____.
By:
------------------------------------
Its:
-----------------------------------
42
<PAGE> 47
EXHIBIT F
OPTION TO RENEW
Subject to the provisions set forth below, the Lease Term may be
renewed as to all (but not less than all) of the Premises as it then exists
(including any expansion space then leased by Tenant in the Building under this
Lease), at the option of Tenant, for one (1) additional period of 60 months (the
"RENEWAL TERM"). The Renewal Term will be upon the same terms, covenants and
conditions contained in the Lease, excluding the provision of Sections 2.2
(Termination Right), 3.3 (ROFO) and 28.3(b) (Signage Restrictions) of the Lease
and excluding the Work Letter, and except for the amount of Monthly Rent payable
during the Renewal Term, and any reference in the Lease to the "Lease Term" will
be deemed to include the Renewal Term and apply thereto, unless it is expressly
provided otherwise. Tenant will be deemed to have accepted the Premises in
"as-is" condition as of the commencement of the Renewal Term, it being
understood that Landlord will have no additional obligation to renovate or
remodel the Premises or any portion of the Building as a result of Tenant's
renewal of the Lease. Tenant will have no renewal option beyond the aforesaid
60-month period.
(a) The initial Monthly Rent during the Renewal Term for any
space then constituting a portion of the Premises will be at a rate
equal to the then prevailing market rate as reasonably determined by
Landlord for fully credit worthy tenants for comparable space in the
Building, for a term equal or comparable to the Renewal Term. The
Monthly Rent will increase by fixed amounts on each anniversary of the
commencement of the Renewal Term based on prevailing-market Monthly
Rent increases applicable at the commencement of the Renewal Term, as
reasonably determined by Landlord. Tenant's obligation to pay Tenant's
Proportionate Share of the Excess (actual Operating Expenses minus Base
Year Operating Expenses) pursuant to the Lease will continue during the
Renewal Term.
(b) Such option to renew will be exercised by Tenant by
delivering an initial nonbinding notice to Landlord no later than
February 1, 2006, and not earlier than 60 days before such date, in
which Tenant expresses its intention to exercise such option to renew.
Thereafter, Landlord will notify Tenant ("LANDLORD'S NOTICE") of
Landlord's calculation of (i) the initial prevailing market rate of
Monthly Rent for the Premises, which calculation will reflect the
market rate that would be payable per annum for a term commencing on
the first day of the Renewal Term, and (ii) the prevailing market rate
of increase in Monthly Rent applicable for such Renewal Term. If Tenant
fails to give its initial nonbinding notice of intent to exercise its
option to renew when due as provided in this Exhibit, Tenant will
irrevocably be deemed to have waived such option to renew. Such
calculation by Landlord will be final and will not be recalculated at
the actual commencement of the Renewal Term (if any).
(c) Within 15 days after Landlord delivers Landlord's Notice,
Tenant will deliver to Landlord a final binding notice in which Tenant
(i) elects to renew the Lease and accepts the terms stated in
Landlord's Notice, or (ii) declines to renew the Lease term, in which
case Tenant's rights under this Exhibit will be null and void. If
Tenant fails to notify Landlord within the 15-day period described
above (after having given its initial nonbinding notice within the
required time), time being of the essence, then Tenant will
conclusively be deemed to have elected to renew the Lease on the terms
set forth in Landlord's Notice and in this Exhibit.
(d) Tenant's right to exercise its option to renew this Lease
pursuant to this Exhibit is subject to the following conditions: (i)
that on the date that Tenant delivers notice of its election to
exercise its option to renew, no Event of Default exists, and no
condition exists which, with the giving of notice or the passage of
time, or both, would constitute an Event of Default; and (ii) that
Tenant has not assigned the Lease or sublet the Premises, at any time
during the period commencing with the date that Tenant delivers its
notice to Landlord of Tenant's exercise of such option to renew and
ending on the commencement date of the Renewal Term, or at any time
prior to such period, if such assignment or sublease extends into such
period.
43
<PAGE> 48
EXHIBIT G
JANITORIAL SPECIFICATIONS
1. NIGHT CLEANING
A. Night Cleaning Services
Service Contractor shall perform the following Night Cleaning Services
for the Property:
OFFICES & COMMON AREA'S:
------------------------
o Vacuum all high traffic carpeted area's (Hallways, receptionist area, etc.)
o Light vacuum individual office areas at least twice per week.
o Empty wastepaper baskets, and other trash receptacles, and remove to
appropriate outside trash container. Large cardboard boxes must be broken
down by tenant prior to removal.
o Clean cigarette urns (if any), and replace sand as necessary.
o Sanitize and clean all drinking fountains.
o Sweep all resilient tile and hard surface floors, and damp mop as
necessary.
o Damp dust tops of filing cabinets (any personal items and papers must be
removed), bookcases, window ledges & shelves.
o Dust all telephones.
o Desk tops and computer screens will be feather dusted. Desktops must be
clear and free of all paper and personal items for us to damp dust. We will
do this per your instructions.
o Clean upper side of all glass furniture tops (if any).
o Designated lights are to be turned off after work and buildings to be left
in a neat and orderly condition.
RESTROOMS:
----------
o Empty and clean all paper towel and sanitary disposal receptacles.
o Clean all mirrors, powder shelves, and bright work (includes flushometers
and piping).
o Refill soap, toilet tissue, and towel dispensers. Restroom stock is to be
supplied by the customer.
o Sanitary napkin dispensers (if any) are to be stocked and serviced by
customer.
o Mop all hard surface floors with a disinfectant cleaner three times a week.
o Remove wastepaper and refuse to designated trash pick up area or bin.
KITCHEN AREA & LUNCHROOM:
-------------------------
o Clean and sanitize sinks.
o Clean inside of Microwave Ovens.
o Dispose of any left over coffee and clean coffee pots.
o Clean tops of counter tops with disinfectant cleaner.
o Wipe down fronts of appliances and vending machines (if any).
o Sweep and spot damp mot tile flooring daily to remove spillage or track-in.
o Clean tops of tables and spot clean chairs (as needed) with disinfectant
cleaner.
o Damp mop tile floor thoroughly twice a week.
o Vacuum any carpeting (if any) and spot clean as necessary.
44
<PAGE> 49
VESTIBULES:
-----------
o All entry doors to be checked for finger marks and smudges and cleaned.
o Roll up mats (if any) cleaned.
o Mop hard surface flooring (as needed).
LAB AREA:
---------
o Clean as per instructed by tenant. Labs are critical areas that need to be
discussed.
MONTHLY:
--------
o Dust blinds (if any) in individual offices and receptionist area.
QUARTERLY:
----------
o Perform all high dusting which includes vertical surfaces such as walls
(cobwebs), partitions, and other surfaces not reached in daily cleaning.
o Wash partitions and tile walls with disinfectant in all restrooms.
o Vacuum upholstered furniture (if any).
o Clean leather furniture (if any) with leather cleaner.
SEMI-ANNUAL:
------------
o Carpet Cleaning: Recommend that carpeting in the high traffic areas be
cleaned at least semi-annually, and in the individual offices annually. A
separate bid will be submitted on this when the tenant is ready.
INTERIOR AND EXTERIOR WINDOW CLEANING:
--------------------------------------
o Interior and exterior cleaning of windows will be done on a separate bid
basis.
45
<PAGE> 1
EXHIBIT 21.1
<TABLE>
<CAPTION>
JURISDICTION OF
NAME ORGANIZATION
- ---- ---------------
<S> <C>
Common Sense Computing (U.K.) Ltd. U.K.
Quest Software GmbH Germany
Quest Software Pty Ltd. Australia
Quest Software Company Ltd. Ireland
Quest Software Israel Ltd. Israel
Quest Software Foreign Sales Corporation Barbados
Quest Software International Ltd. U.K.
MBR Technologies, Inc. California
Foglight Software, Inc. Delaware
Quest Software Canada, Inc. Canada
QMASTER Software Solutions, Inc. Canada
</TABLE>
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE
To the Board of Directors and Stockholders of
Quest Software, Inc. and subsidiaries
We consent to the use in this Registration Statement of Quest Software, Inc. on
Form S-1 of our report dated February 1, 2000 (except for Note 12 as to which
the date is February 11, 2000) appearing in the Prospectus, which is a part of
this Registration Statement, and to the reference to us under the heading
"Experts" in such Prospectus.
Our audits of the financial statements referred to in our aforementioned report
also included the financial statement schedule of Quest Software, Inc. and
subsidiaries, listed in Item 16. This financial statement schedule is the
responsibility of the corporation's management. Our responsibility is to express
an opinion based on our audits. In our opinion, such financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
/s/ DELOITTE & TOUCHE LLP
Costa Mesa, California
February 17, 2000
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement (No. 333- ) on Form S-1 of our report dated
September 29, 1999 relating to the financial statements of MBR Technologies,
Inc., which appears in such Prospectus. We also consent to the references to us
under the headings "Experts."
SWENSON ADVISORS, LLP
Temecula, California
February 18, 2000
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of
our report dated September 13, 1999, except for Note 10, for which it is October
29, 1999 relating to the financial statements and financial statement schedules
of Foglight Software, Inc. as of December 31, 1998 and for the period from
November 10, 1997 (date of inception) to December 31, 1998, which appear in such
Registration Statement. We also consent to the references to us under the
headings "Experts" and "Selected Financial Data" in such Registration Statement.
/s/ PricewaterhouseCoopers LLP
San Jose, California
February 17, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> DEC-31-1998
<PERIOD-END> DEC-31-1999
<CASH> 39,643
<SECURITIES> 11,000
<RECEIVABLES> 22,010
<ALLOWANCES> 3,239
<INVENTORY> 0
<CURRENT-ASSETS> 74,747
<PP&E> 9,430
<DEPRECIATION> 2,251
<TOTAL-ASSETS> 99,149
<CURRENT-LIABILITIES> 36,077
<BONDS> 0
0
0
<COMMON> 94,010
<OTHER-SE> (31,341)
<TOTAL-LIABILITY-AND-EQUITY> 99,149
<SALES> 54,269
<TOTAL-REVENUES> 70,868
<CGS> 2,998
<TOTAL-COSTS> 7,193
<OTHER-EXPENSES> 59,207
<LOSS-PROVISION> 352
<INTEREST-EXPENSE> 257
<INCOME-PRETAX> 5,670
<INCOME-TAX> 2,273
<INCOME-CONTINUING> 3,397
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,807
<EPS-BASIC> .07
<EPS-DILUTED> .07
</TABLE>
