<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ______________________ to ___________________
Commission File No. 000-26937
QUEST SOFTWARE, INC.
-----------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
CALIFORNIA 33-0231678
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8001 IRVINE CENTER DRIVE
IRVINE, CALIFORNIA 92618
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (949) 754-8000
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
The number of shares outstanding of the Registrant's Common Stock, no par value,
as of May 8, 2000 was 85,660,542.
<PAGE> 2
QUEST SOFTWARE, INC.
FORM 10-Q
INDEX
PAGE NUMBER
-----------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2000 (unaudited)
and December 31, 1999......................................... 2
Consolidated Statements of Operations for the Three
Months Ended March 31, 2000 and 1999 (unaudited).............. 3
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2000 and 1999 (unaudited)..................... 4
Notes to Consolidated Financial Statements (unaudited).......... 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 9
Item 3. Qualitative and Quantitative Disclosure about Market Risk....... 20
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds....................... 21
Item 6. Exhibits and Reports on Form 8-K................................ 21
Signatures............................................................... 22
ii
<PAGE> 3
PART I
FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
QUEST SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................. $ 134,115 $ 39,643
Short-term marketable securities ...................... 6,950 11,000
Accounts receivable, net .............................. 16,458 18,771
Prepaid expenses and other current assets ............. 5,643 3,244
Deferred income taxes ................................. 5,229 2,089
--------- --------
Total current assets ............................... 168,395 74,747
Property and equipment, net ............................... 9,633 7,179
Long-term marketable securities ........................... 148,940 4,484
Purchased technology and software licenses, net ........... 5,598 441
Goodwill, net ............................................. 119,839 11,452
Deferred income taxes ..................................... 415 415
Other assets .............................................. 1,667 431
--------- --------
Total assets ....................................... $ 454,487 $ 99,149
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ...................................... $ 1,360 $ 3,436
Accrued compensation .................................. 4,881 4,966
Other accrued expenses ................................ 6,066 7,062
Income taxes payable .................................. 1,939 2,030
Deferred support revenue .............................. 15,103 13,932
Deferred license revenue .............................. 7,197 4,651
--------- --------
Total current liabilities .......................... 36,546 36,077
Long-term liabilities ..................................... 846 403
Shareholders' equity:
Preferred stock, no par value, 5,000 shares authorized;
no shares issued or outstanding ..................... -- --
Common stock, no par value, 150,000 shares authorized;
85,296 and 77,810 issued and outstanding at March 31,
2000 and December 31, 1999, respectively ............ 454,014 94,010
Retained earnings (deficit) ........................... (3,821) 1,864
Accumulated other comprehensive income (loss) ......... (481) (26)
Notes receivable from sale of common stock ............ (2,553) (3,115)
Capital distribution in excess of basis in common stock (30,064) (30,064)
--------- --------
Total shareholders' equity ......................... 417,095 62,669
--------- --------
Total liabilities and shareholders' equity ......... $ 454,487 $ 99,149
========= ========
</TABLE>
See accompanying notes to the consolidated financial statements.
2
<PAGE> 4
QUEST SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------
2000 1999
-------- -------
<S> <C> <C>
Revenues:
Licenses ................................... $ 21,895 $ 9,540
Services ................................... 6,830 3,299
-------- -------
Total revenues ......................... 28,725 12,839
Cost of revenues:
Licenses ................................... 635 684
Services ................................... 1,870 904
Amortization of technology rights .......... 657 --
-------- -------
Total cost of revenues ................. 3,162 1,588
-------- -------
Gross profit ................................... 25,563 11,251
Operating expenses:
Sales and marketing ........................ 13,914 5,036
Research and development ................... 7,366 2,758
General and administrative ................. 3,097 1,938
Compensation costs and goodwill amortization 7,378 --
-------- -------
Total operating expenses ............... 31,755 9,732
-------- -------
Income (loss) from operations .................. (6,192) 1,519
Other income, net .............................. 979 113
-------- -------
Income (loss) before income tax provision ...... (5,213) 1,632
Income tax provision ........................... 472 689
-------- -------
Net income (loss) .............................. $ (5,685) $ 943
======== =======
Basic and diluted net income (loss) per share .. $ (0.07) $ 0.01
======== =======
Weighted average shares:
Basic ...................................... 81,371 89,078
Diluted .................................... 81,371 91,417
</TABLE>
See accompanying notes to the consolidated financial statements.
3
<PAGE> 5
QUEST SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------
2000 1999
--------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ............................................. $ (5,685) $ 943
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization .............................. 7,291 611
Compensation expense associated with stock option grants ... 764 --
Accrued interest receivable from shareholders .............. (49) (48)
Changes in assets and liabilities, net of effects
of acquisitions:
Accounts receivable ...................................... 4,163 892
Prepaid expenses and other current assets ................ (2,221) 51
Other assets ............................................. (285) 15
Accounts payable ......................................... (2,175) 43
Accrued compensation ..................................... (68) 623
Income taxes payable ..................................... 244 --
Other accrued expenses ................................... (4,156) (25)
Deferred revenue ......................................... 3,170 1,379
--------- --------
Net cash provided by operating activities ................ 993 4,484
Cash flows used in investing activities:
Purchases of property and equipment ........................... (2,114) (733)
Purchases of software licenses ................................ -- (232)
Cash paid for acquisitions, net of cash acquired .............. (15,851) --
Purchases of marketable securities ............................ (165,096) --
Sales and maturities of marketable securities ................. 24,235 --
--------- --------
Net cash used in investing activities .................... (158,826) (965)
Cash flows from financing activities:
Repayment of notes payable .................................... (2,603) --
Repayment of capital lease obligations ........................ (697) --
Proceeds from exercise of stock options ....................... 677 2
Proceeds from employee stock purchase plan .................... 1,417 --
Proceeds from issuance of common stock, net ................... 253,469 --
--------- --------
Net cash provided by financing activities ................ 252,263 2
Effect of exchange rate changes on cash and cash equivalents ....... 42 --
--------- --------
Net increase in cash and cash equivalents .......................... 94,472 3,521
Cash and cash equivalents, beginning of period ..................... 39,643 8,981
--------- --------
Cash and cash equivalents, end of period ........................... $ 134,115 $ 12,502
========= ========
Supplemental disclosures of consolidated cash flow information:
Cash paid for:
Interest ....................................................... $ 118 $ --
========= ========
Income taxes ................................................... $ 346 $ 85
========= ========
Supplemental schedule of noncash investing and financing activities:
Accrued interest receivable from shareholders .................. $ 444 $ 48
========= ========
Unrealized loss from available-for-sale securities ............. $ 455 $ --
========= ========
Tax benefit related to stock option exercises .................. $ 336 $ --
========= ========
</TABLE>
See Note 2 for details of assets acquired and liabilities assumed
in purchase transactions.
See accompanying notes to the consolidated financial statements.
4
<PAGE> 6
QUEST SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements of
Quest Software, Inc., a California corporation (the "Company" or "Quest"), for
the three months ended March 31, 2000 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 interim
periods presented. These financial statements have been prepared in accordance
with generally accepted accounting principles of interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
These financial statements should be read in conjunction with the
audited financial statements included in the Company's Annual Report on Form
10-K for the year ended December 31, 1999.
Operating results for the three month period ended March 31, 2000 are
not necessarily indicative of the results that may be expected for the full year
ending December 31, 2000.
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 6 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 January 7, 2000, the Company acquired all of the outstanding common
stock of Foglight Software, Inc. ("Foglight") in exchange for 1.2 million shares
of the Company's common stock valued at $101.8 million, cash payments of $0.5
million, and the assumption of unvested Foglight stock options valued at $2.2
million. The acquisition was accounted for as a purchase, and the purchase
price, including $0.4 million of direct acquisition costs, was allocated as
follows (in thousands):
Current assets $ 637
Deferred taxes 3,140
Fixed assets 865
Goodwill and other intangibles 105,547
Other assets 28
Liabilities assumed (5,728)
--------
Total purchase price $104,489
========
5
<PAGE> 7
On February 1, 2000, the Company acquired all of the outstanding common
stock of QMaster Software Solutions ("QMaster") for a cash payment of $15.0
million, including $0.1 million in direct acquisition costs. The acquisition was
accounted for as a purchase, and the purchase price was allocated as follows (in
thousands):
Current assets $ 565
Fixed assets 106
Goodwill and other intangibles 14,953
Liabilities assumed (521)
--------
Total purchase price $ 15,103
========
3. NET INCOME (LOSS) PER SHARE
The Company computes net income (loss) per share in accordance with
SFAS No. 128, Earnings per Share. Basic earnings per share is computed by
dividing net income (loss) 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.
The table below sets forth the reconciliation of the denominator of the
earnings per share calculation (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------
2000 1999
------ ------
<S> <C> <C>
Shares used in computing basic net income (loss) per share 81,371 89,078
Dilutive effect of stock options --(1) 2,339
------ ------
Shares used in computing diluted net income (loss) per share 81,371 91,417
====== ======
</TABLE>
(1) Effect would have been anti-dilutive, accordingly, the amount is
excluded from shares used in computing diluted net income (loss)
per share. The dilutive effect of stock options would have been
6,169.
4. SHAREHOLDERS' EQUITY
In February 2000, 238,000 shares of common stock were issued under the
Company's Employee Stock Purchase Plan at a price of $5.95 per share.
In March 2000, the Company and certain selling shareholders sold 4.2
million shares of its common stock as part of a secondary offering. Of the
shares sold in the offering, 1.9 million shares were sold by the Company and 2.3
million shares were sold by existing shareholders. The Company's net proceeds
from its sale of stock were $253.6 million, after underwriting and offering
expenses. The Company plans to use the proceeds of the offering for general
corporate purposes, including working capital, expanding sales and marketing
efforts, product development, expansion of its customer support organization,
possible acquisitions and capital expenditures. The Company did not receive any
proceeds from the shares sold by existing shareholders.
In March 2000, the Company completed a 2-for-1 stock split of its
common stock, effective on March 31, 2000, for shareholders of record on March
20, 2000. The consolidated financials statements have been adjusted to reflect
the split, for all periods presented.
6
<PAGE> 8
5. STOCK OPTION PLANS
The following table summarizes information about stock options
outstanding as of March 31, 2000 (in thousands, except for per share data):
<TABLE>
<CAPTION>
Number of Options
Number of Exercisable as of
Shares Price per Share March 31, 2000
--------- ---------------- -----------------
<S> <C> <C> <C>
Balance at December 31, 1999 10,512 $ 0.50 - $40.25
Granted 268 18.88 - 39.78
Exercised (1,166) 0.10 - 2.37
Canceled (462) 0.50 - 40.25
------
Balance at March 31, 2000 9,152 $ 0.50 - $40.25 1,044
======
</TABLE>
6. OPERATING SEGMENT DATA
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 Licenses 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.
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 revenues 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 months ended March 31, 2000 and
1999, respectively was as follows (in thousands):
LICENSES SERVICES TOTAL
-------- -------- -------
First quarter ended March 31, 2000:
Revenues $ 21,895 $6,830 $28,725
Cost of revenues 1,292(1) 1,870 3,162
-------- ------ -------
Gross profit $ 20,603 $4,960 $25,563
======== ====== =======
First quarter ended March 31, 1999:
Revenues $ 9,540 $3,299 $12,839
Cost of revenues 684 904 1,588
-------- ------ -------
Gross profit $ 8,856 $2,395 $11,251
======== ====== =======
- ---------------
(1) Includes amortization of technology rights of $657, which is included in
total cost of revenues in the accompanying Consolidated Statement of
Operations.
7
<PAGE> 9
Revenues are attributed to geographic areas based on the location of
the entity to which the products or services were sold. Revenues and gross
profit from operations concerning principal geographic areas in which the
Company operates are as follows (in thousands):
<TABLE>
<CAPTION>
UNITED STATES INTERNATIONAL ELIMINATIONS TOTAL
------------- ------------- ------------ ---------
<S> <C> <C> <C> <C>
First quarter ended March 31, 2000:
Revenues $ 23,509 $7,107 $(1,891) $ 28,725
Gross profit 22,979 4,527 (1,943) 25,563
Long-lived assets 134,556(1) 1,511 -- 136,067
First quarter ended March 31, 1999:
Revenues $ 11,785 $1,780 $ (726) $ 12,839
Gross profit 10,294 1,688 (731) 11,251
Long-lived assets 1,895 374 -- 2,269
</TABLE>
- ----------------
(1) Includes $998 of other intangible assets (net), which are included in other
assets in the accompanying Consolidated Balance Sheet.
7. SUBSEQUENT EVENTS
On April 17, 2000, the Company acquired all of the outstanding common
stock of Client/Server Solutions, Inc. for a cash payment of $13.0 million
(subject to reduction for certain transaction-related and other expenses). The
acquisition will be accounted for as a purchase, and the purchase price is
expected to be allocated primarily to goodwill and other intangible assets.
On April 27, 2000, the Company acquired all of the outstanding common
stock of MessageWise Inc. for a combination of cash and stock totaling
approximately $12.0 million. The acquisition will be accounted for as a
purchase, and the purchase price is expected to be allocated primarily to
goodwill and other intangible assets.
8
<PAGE> 10
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain statements in this report, including statements regarding the
Company's strategy, financial performance and revenue sources, are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995, Section 21E of the Securities Exchange Act of
1934, as amended, and Section 27A of the Securities Act of 1933, as amended, and
are subject to the safe harbors created by those sections. These forward-looking
statements are based on current expectations and entail various risks and
uncertainties that could cause actual results to differ materially from those
expressed in such forward-looking statements. The Company's actual results could
differ materially from the results anticipated in these forward-looking
statements as a result of certain factors set forth under "Risk Factors" and
elsewhere in this report. Readers are urged to carefully review and consider the
various disclosures made by the Company in this report and in the Company's
other reports filed with the SEC, including the Company's Annual Report on Form
10-K, and the Company's Registration Statement on Form S-1 (No. 333-30816) and
the related prospectus dated March 10, 2000, as filed with the SEC, that attempt
to advise interested parties of certain risks and factors that may affect the
Company's business. Readers are cautioned not to place undue reliance on these
forward-looking statements to reflect events or circumstances occurring after
the date hereof. The following discussion should be read in conjunction with the
Company's consolidated financial statements and notes thereto.
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 extended enterprise.
We derive our revenues primarily from the sale of software licenses and
related annual maintenance fees. 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-cancelable 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.
We market our software and services primarily through our direct sales
organization in the United States, Canada, the United Kingdom, Germany and
Australia. 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 four wholly-owned subsidiaries in Canada, the United
Kingdom, Germany, and Australia, which consist of both direct sales and sales
through distributors. Our international subsidiaries conduct business in the
currency of the country in which they operate, exposing us to currency
fluctuations and currency transaction losses or gains that 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.
9
<PAGE> 11
RESULTS OF OPERATIONS
The following table sets forth certain consolidated statements of
operations data as a percentage of total revenues for the periods indicated:
<TABLE>
<CAPTION>
Three months ended
March 31,
---------------------
2000 1999
---- ----
<S> <C> <C>
Revenues:
Licenses 76% 74%
Services 24 26
--- ---
Total revenues 100 100
Cost of revenues:
Licenses 2 5
Services 7 7
Amortization of technology rights 2 --
--- ---
Total cost of revenues 11 12
--- ---
Gross profit 89 88
Operating expenses:
Sales and marketing 48 39
Research and development 26 22
General and administrative 11 15
Compensation costs and goodwill amortization 26 --
--- ---
Total operating expenses 111 76
--- ---
Income (loss) from operations (22) 12
Other income, net 4 1
--- ---
Income (loss) before income tax provision (18) 13
Income tax provision 2 6
--- ---
Net income (loss) (20)% 7%
=== ===
</TABLE>
THREE MONTHS ENDED MARCH 31, 2000 AND 1999, RESPECTIVELY
REVENUES
Total revenues for the three months ended March 31, 2000 were $28.7
million, an increase of 124% from the comparable period of 1999. International
revenues for the three months ended March 31, 2000 were $5.2 million, an
increase of 157% from the comparable period of 1999.
LICENSES
Licenses revenues for the three months ended March 31, 2000 were $21.9
million, an increase of 130% from the comparable period of 1999. The increase
resulted both from the 186% increase in the size of our worldwide sales
organization since March 31, 1999 as well as the availability of new products.
Products available in the first three months of 2000 that were not available in
1999 included Foglight enterprise monitoring product, QMASTER Output, and Schema
Xpress. Licenses revenues represented 76% of total revenues for the three months
ended March 31, 2000 compared to 74% for the comparable period of 1999.
International licenses revenues for the three months ended March 31, 2000 were
$4.3 million, an increase of 182% from the comparable period of 1999 due to the
growth of our worldwide sales organization.
SERVICES
Services revenues for the three months ended March 31, 2000 were $6.8
million, an increase of 107% from the comparable period of 1999. Services
consist primarily of annual maintenance contracts for technical support
10
<PAGE> 12
and product enhancements. Maintenance fees are generally renewable annually at
the customer's option and the fees are recognized over the term of each
agreement. The increase in services for the three months of 2000 reflected
increases in the installed base of customers that purchased maintenance.
Services revenues represented 24% of total revenues for the three months of 2000
compared to 26% in the comparable period of 1999. International services
revenues for the three months ended March 31, 2000 were $0.9 million, an
increase of 84% from the comparable period of 1999 for the reasons noted above.
COST OF REVENUES
COST OF LICENSES
Cost of licenses includes amortization of software licenses, product
media, printing and duplication costs, and royalties. Cost of licenses for the
three months ended March 31, 2000 were $0.6 million, a decrease of 7% from the
comparable period of 1999. This decrease was principally a result of a decrease
in amortization of software licenses of $0.2 million, offset in part by an
increase in product media, duplication costs and printing compared to the
comparable period of 1999. Cost of licenses as a percentage of license revenues
in the three months ended March 31, 2000 were 3%, compared to 7% in the
comparable period of 1999. The decrease for the three months of 2000 as a
percentage of licenses revenues resulted from increased licenses revenues
without a corresponding increase in amortization of software licenses, which do
not vary by the number of licenses sold.
COST OF SERVICES
Cost of services includes salaries and related costs for customer
support personnel. Cost of services for the three months ended March 31, 2000
were $1.9 million, an increase of 107% from the comparable period of 1999. The
increase was primarily due to a 125% increase in the number of customer support
personnel required to manage and support our growing customer base as well as
the increased number of product offerings since March 31, 1999. Also
contributing to the increased costs were related training and travel expenses
associated with the increase in Company service personnel. Cost of services as a
percentage of services revenues in the three months ended March 31, 2000 were
27%, unchanged from the comparable period of 1999. We expect the cost of
services to increase in absolute dollars for the foreseeable future as
additional customer support personnel are retained.
AMORTIZATION OF TECHNOLOGY RIGHTS
Amortization of technology rights was $0.7 million during the three
months ended March 31, 2000, compared with none in the same period of 1999. This
increase is due entirely to technology purchased as part of the Foglight and
QMaster acquisitions in January 2000 and February 2000, respectively.
OPERATING EXPENSES
SALES AND MARKETING
Sales and marketing expenses consist primarily of salaries, commissions
earned by sales personnel, recruiting costs, trade show, travel and
entertainment and other marketing communications costs such as advertising and
promotion. Sales and marketing expenses for the three months ended March 31,
2000 were $13.9 million, an increase of 176% from the comparable period of 1999.
The increase reflects the increase in salaries and related expenses due to the
186% increase in our sales and marketing organization personnel since March 31,
1999 and an increase in sales commissions due to revenue growth. Sales and
marketing expenses as a percentage of total revenues in the three months ended
March 31, 2000 were 48%, compared to 39% in the comparable period of 1999. We
expect that sales and marketing expenses will continue to increase in absolute
dollars for the foreseeable future as commissions increase with expected
increases in revenues and as we continue to expand the size of our sales and
marketing organization.
RESEARCH AND DEVELOPMENT
Research and development expenses consist primarily of salaries and
benefits for software developers, software product managers and quality
assurance personnel and payments to third party software development
11
<PAGE> 13
contractors. Research and development expenses for the three months ended March
31, 2000 were $7.4 million, an increase of 167% from the comparable period of
1999. The increase was primarily related to an increase in the number of
software developers since March 31, 1999, both in our domestic and Australian
development operations. These expenses as a percentage of total revenues in the
three months ended March 31, 2000 were 26%, compared to 22% in the comparable
period of 1999. We expect that research and development expenses will continue
to increase in absolute dollars for the foreseeable future as additional
development personnel are hired.
GENERAL AND ADMINISTRATIVE
General and administrative expenses consist primarily of salaries,
benefits and related costs for our executive, finance, administrative and
information services personnel. General and administrative expenses for the
three months ended March 31, 2000 were $3.1 million, an increase of 60% from the
comparable period of 1999. The increase was due to a number of factors,
including an increase in salaries and related expenses as a result of an
increase in headcount necessary to support our expanding operations, increases
in professional fees, and depreciation. These expenses as a percentage of total
revenues in the three months ended March 31, 2000 were 11%, compared to 15% in
the comparable period of 1999. We expect that general and administrative
expenses will continue to increase in absolute dollars for the foreseeable
future as a result of the continued expansion of administrative staff and
expenses associated with being a public company, including annual and other
public reporting costs, directors' and officers' liability insurance premiums,
investor relations programs, and professional services fees.
COMPENSATION COSTS AND GOODWILL AMORTIZATION
Compensation costs and goodwill amortization for the three months ended
March 31, 2000 were $7.4 million, compared to none in the comparable period of
1999. The increase in these costs was attributable to compensation costs of $1.7
million related to the grant of stock options below fair market value and
amortization of goodwill associated with acquisitions of $5.7 million.
OTHER INCOME, NET
Other income, net is comprised of interest income, interest expense and
foreign currency transaction gains and losses. Other income, net for the three
months ended March 31, 2000 was $1.0 million, an increase of 766% from the
comparable period of 1999. The increase is due to increases in interest income
from larger cash and marketable securities balances related to the proceeds from
our initial and secondary public offerings.
PROVISION FOR INCOME TAXES
Provision for income taxes for the three months ended March 31, 2000
was $0.5 million, compared with $0.7 million for the comparable period of 1999.
Excluding amortization of goodwill and acquired technology, our effective income
tax rate for the three months ended March 31, 2000 was 40%, compared to 42% for
the comparable period of 1999.
NET INCOME (LOSS)
Net income (loss) for the three months ended March 31, 2000 was $(5.7)
million, compared to $0.9 million in the comparable period of 1999 for the
reasons noted above.
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INFLATION
Inflation has not had a significant effect on our results of operations
or financial position for the three months ended March 31, 2000 or the
comparable period of 1999.
LIQUIDITY AND CAPITAL RESOURCES
We have funded our business to date primarily from cash generated by
our operations, net proceeds of $64.9 million from our initial public offering
in August 1999, and net proceeds of $253.6 million from our secondary offering
in March 2000. Our sources of liquidity as of March 31, 2000 consisted
principally of cash and cash equivalents of $134.1 million and $155.9 million in
high grade corporate and government short-term and long-term marketable
securities.
Net cash provided by operating activities was $1.0 million and $4.5
million for the three months ended March 31, 2000 and 1999, respectively. The
decrease in 2000 was primarily due to net losses, payments for prepaid and other
current assets, and payments on accounts payable and other accrued expenses,
offset by increases in deferred revenue resulting from additional service
contracts and collections on accounts receivable.
Investing activities used $158.8 million and $1.0 million for the three
months ended March 31, 2000 and 1999, respectively. Investing activities have
consisted of purchases of property and equipment, marketable securities and
acquisitions. Capital expenditures totaled $2.1 million and $0.7 million in the
three months ended March 31, 2000 and 1999, respectively. Purchases of
marketable securities were $165.1 million for the three months ended March 31,
2000 versus none in the same period of 1999. Purchases of technology and
software licenses were none and $0.2 million for the three months ended March
31, 2000 and 1999, respectively. Cash paid for acquisitions, net of cash
acquired was $15.9 million and none for the three months ended March 31, 2000
and 1999, respectively.
Financing activities provided $252.3 million and $0.0 million for the
three months ended March 31, 2000 and 1999, respectively. In March 2000, we
raised net proceeds of $253.6 million from a secondary public offering of 4.2
million shares of our common stock at a price of $140.00 per share. Of the
shares sold in the offering 1.9 million shares were sold by the Company and 2.3
million shares were sold by existing shareholders.
We plan to continue to use the proceeds of the offerings for general
corporate purposes, including working capital, expanding sales and marketing
efforts, product development, expansion of our customer support organization,
possible acquisitions and capital expenditures. We did not receive any proceeds
from the shares sold by the selling shareholders.
We believe that the net proceeds from the offerings, 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, we can not assure you that such financing will be available to us at
commercially reasonable terms or at all.
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RISK FACTORS
The following information should be read in conjunction with the
consolidated historical financial information and the notes thereto included in
Item 1 of this report and Management's Discussion and Analysis of Financial
Condition and Results of Operations contained in the Company's Annual Report on
Form 10-K as filed with the Securities and Exchange Commission.
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:
o 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."
o increased expenses, whether related to sales and marketing, product
development or administration;
o our ability to attain market acceptance of new products and services
and enhancements to our existing products;
o delays in introducing new products;
o new product introductions by competitors;
o lack of order backlog;
o changes in our pricing policies or the pricing policies of our
competitors;
o costs related to acquisitions of technologies or businesses;
o the timing of releases of new versions of third-party software
products that our products support, including, without limitation,
product releases by Oracle; and
o 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 significant portion of our
orders in the last month of a quarter and delays in the closing of orders near
the end of a quarter could cause quarterly revenues 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
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 is 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.
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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 types
of relationships. There can be no 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 309 as of March 31, 1999 to 833 as of March 31, 2000. Our ability
to manage our operations and growth requires us to continue to improve our
operational, financial and management controls, and reporting systems and
procedures. In addition, we will be required to hire additional management,
financial, and
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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:
o increase our sales and marketing activities, including expanding our
direct sales and telesales forces;
o increase our research and development activities;
o expand our general and administrative activities; and
o expand our customer support organizations.
Accordingly, we will be required to significantly increase our revenues
in order to maintain profitability. These expenses will be incurred before we
generate any revenues by this increased spending. If we do not significantly
increase revenues from these efforts, our business and operating results would
be negatively impacted.
OUR INTERNATIONAL OPERATIONS AND OUR PLANNED EXPANSION OF OUR INTERNATIONAL
OPERATIONS EXPOSES US TO CERTAIN RISKS
Substantially all of our current international revenues are derived
from the operations of our four wholly-owned subsidiaries in Canada, the United
Kingdom, Germany, and Australia. Revenues from licenses and services to
customers outside of the United States were $5.2 million for the three months
ended March 31, 2000, representing 18% of total revenues, and $2.0 million in
the three months ended March 31, 1999, representing 16% of total revenues. As a
result, we face increasing risks from doing business on an international basis,
including, among others:
o difficulties in staffing and managing foreign operations;
o longer payment cycles;
o seasonal reductions in business activity in Europe;
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o increased financial accounting and reporting burdens and
complexities;
o potentially adverse tax consequences;
o delays in localizing our products;
o compliance with a wide variety of complex foreign laws and treaties;
o reduced protection for intellectual property rights in some
countries; and
o 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 that 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
ad 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 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.
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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:
o loss of or delay in revenues and loss of market share;
o loss of customers;
o damage to our reputation;
o failure to achieve market acceptance;
o diversion of development resources;
o increased service and warranty costs;
o legal actions by customers against us which could, whether or not
successful, increase costs and distract our management; and
o increased insurance costs.
In addition, a product liability claim, whether or not successful,
could harm our business by increasing our costs and distracting our management.
WE INCORPORATE SOFTWARE LICENSED FROM THIRD PARTIES INTO SOME OF OUR PRODUCTS
AND ANY SIGNIFICANT INTERRUPTION IN THE AVAILABILITY OF THESE THIRD-PARTY
SOFTWARE PRODUCTS OR DEFECTS IN THESE PRODUCTS COULD REDUCE THE DEMAND FOR, OR
PREVENT THE SHIPPING OF, OUR PRODUCTS
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
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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:
o 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;
o avoiding difficulties that could delay or prevent the successful
development, introduction or marketing of these products; or
o achieving market acceptance for our new products and product
enhancements.
WE MAY NOT BE ABLE TO ATTRACT AND RETAIN PERSONNEL
Our future success depends on the continued service of our executive
officers and other key administrative, sales and marketing and support
personnel, many of whom have recently joined our company. In addition, the
success of our business is substantially dependent on the services of our Chief
Executive Officer and our President and Chief Technical Officer. We intend to
hire a significant number of additional sales, support, marketing,
administrative and research and development personnel over at least the next 12
months. There has in the past been and there may in the future be a shortage of
personnel that possess the technical background necessary to sell, support and
develop our products effectively. Competition for skilled personnel is intense,
and we may not be able to attract, assimilate or retain highly qualified
personnel in the future. Our business may not be able to grow if we cannot
attract qualified personnel. Hiring qualified sales, marketing, administrative,
research and development and customer support personnel, is very competitive in
our industry, particularly in Southern California, where Quest is headquartered.
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. The adoption of SOP 98-9 has not had a material effect on our
financial position or results of operations.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
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 Canada,
the United Kingdom, Germany, and Australia denominated in the respective local
currency.
To date, we have not used hedging contracts to hedge our
foreign-currency fluctuation risks. We will assess the need to utilize financial
instruments to hedge currency exposures on an ongoing basis. We also do not use
derivative financial instruments for speculative trading purposes.
INTEREST RATE RISK
Our exposure to market rate risk for changes in interest rates relates
primarily to our investment portfolio. We have not used derivative financial
instruments in our investment portfolio. We place our investments with
high-quality issuers and, by policy, limit the amount of credit exposure to any
one issuer. Our investments in marketable securities consist primarily of
high-grade corporate and government securities with maturities of less than two
years. Investments purchased with an original maturity of three months or less
are considered to be cash equivalents. We classify all of our investments as
available-for-sale. Available-for-sale securities are carried at fair value,
with unrealized gains and losses, net of tax, reported in a separate component
of shareholders' equity. At March 31, 2000, the net loss on available-for-sale
securities of $0.5 million comprised 46 positions, all with unrealized losses or
values equivalent to fair market value.
The following table provides information about our investment portfolio
at March 31, 2000. For investment securities, the table presents principal cash
flows and related weighted average interest rates by expected maturity dates.
<TABLE>
<CAPTION>
MARCH 31, 2000
---------------------
(dollars in thousands)
<S> <C>
Cash and cash equivalents $134,115
Average interest rate 3.06%
Short-term marketable securities $ 6,950
Average interest rate 5.43%
Long-term marketable securities $148,940
Average interest rate 6.23%
Total portfolio $290,005
Average interest rate 4.75%
</TABLE>
We consider the carrying value of our investment securities to
approximate their fair value due to the relatively short period of time between
origination of the investments and their expected realization. Accordingly,
changes in the market interest rate would not have a material effect on the fair
value of such investments.
EUROPEAN MONETARY UNION
Within Europe, the European Economic and Monetary Union introduced a
new currency, the euro, on January 1, 1999. The new currency is in response to
the European Union's policy of economic convergence to harmonize trade policy,
eliminate business costs associated with currency exchange, and to promote the
free flow of capital, goods and services.
On January 1, 1999, the participating countries adopted the euro as
their local currency, initially available for currency trading on currency
exchanges and non-cash transactions such as banking. The existing local
currencies, or legacy currencies, will remain legal tender through January 1,
2002. Beginning on January 1, 2002, euro-denominated bills and coins will be
issued for cash transactions. For a period of up to six months from this
date, both legacy currencies and the euro will be legal tender. On or before
July 1, 2002, the participating countries will withdraw all legacy currencies
and exclusively use the euro.
Our transactions are recorded in both U.S. dollars and foreign
currencies. Future transactions may be recorded in the euro. We have not
incurred and do not expect to incur any significant costs from the continued
implementation of the euro. However, the currency risk of the euro could harm
our business.
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PART II
OTHER INFORMATION
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) SALES OF UNREGISTERED SECURITIES.
1. On January 7, 2000, we issued an aggregate of 1,161,000 shares of
our common stock to the former shareholders of Foglight Software,
Inc. in connection with our acquisition of Foglight Software, Inc.
The foregoing transaction did not involve any underwriters,
underwriting discounts or commissions, or any public offering, and the Company
believes that the transaction was exempt from the registration requirements of
the Securities Act by virtue of Section 3(a)(10). The transaction was completed
after the California Department of Corporations conducted a fairness hearing.
(d) USE OF PROCEEDS FROM SALES OF REGISTERED SECURITIES.
On August 18, 1999 we completed the initial public offering of our
common stock pursuant to our Registration Statement on Form S-1 (File No.
333-80543) that was declared effective by the Securities and Exchange Commission
on August 12, 1999. There has been no material change with respect to our use of
proceeds from our initial public offering to the information discussed in our
Quarterly Report on Form 10-Q for the nine months ended September 30, 1999 and
all of the net proceeds from our initial public offering have been applied.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
EXHIBIT NUMBER DESCRIPTION
27.1 Financial Data Schedule
(b) REPORTS ON FORM 8-K
The Company filed a current report on March 16, 2000 reporting a
2-for-1 stock split on March 31, 2000 under Item 5.
The Company filed a current report on Form 8-K on January 21, 2000
reporting the acquisition of Foglight Software, Inc. under Item 2,
which was amended on February 23, 2000 to include historical financial
statements of Foglight Software, Inc. and pro forma financial
statements under Item 7.
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<PAGE> 23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
QUEST SOFTWARE, INC.
May 15, 2000 /s/ JOHN J. LASKEY
--------------------------------
John J. Laskey
Chief Financial Officer and Vice
President, Finance
(Principal Financial and
Accounting Officer)
22
<PAGE> 24
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 134,115
<SECURITIES> 6,950
<RECEIVABLES> 18,928
<ALLOWANCES> 2,470
<INVENTORY> 0
<CURRENT-ASSETS> 168,395
<PP&E> 12,634
<DEPRECIATION> 3,001
<TOTAL-ASSETS> 454,487
<CURRENT-LIABILITIES> 36,546
<BONDS> 0
0
0
<COMMON> 454,014
<OTHER-SE> (36,919)
<TOTAL-LIABILITY-AND-EQUITY> 454,487
<SALES> 21,895
<TOTAL-REVENUES> 28,725
<CGS> 635
<TOTAL-COSTS> 3,162
<OTHER-EXPENSES> 31,755
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 119
<INCOME-PRETAX> (5,213)
<INCOME-TAX> 472
<INCOME-CONTINUING> (5,685)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,685)
<EPS-BASIC> (0.07)
<EPS-DILUTED> (0.07)
</TABLE>
