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, 2001
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 2, 2001 was 87,695,352.
2
QUEST SOFTWARE, INC.
FORM 10-Q
INDEX
PAGE NUMBER
-----------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of December 31, 2000
and March 31, 2001 (unaudited)................................................ 3
Consolidated Statements of Operations for the Three
Months Ended March 31, 2000 and 2001 (unaudited).............................. 4
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2000 and 2001 (unaudited)..................................... 5
Consolidated Statements of Comprehensive Operations for the Three
Months Ended March 31, 2000 and 2001 (unaudited).............................. 6
Notes to Consolidated Financial Statements (unaudited)................................. 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................................ 11
Item 3. Quantitative and Qualitative Disclosure about Market Risk............................. 23
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K...................................................... 24
Signatures..................................................................................... 25
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PART I
FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
QUEST SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
MARCH 31,
DECEMBER 31, 2001
2000 (UNAUDITED)
------------ -----------
Current assets:
Cash and cash equivalents $ 25,155 $ 35,169
Short-term marketable securities 8,587 9,873
Accounts receivable, net 38,443 36,347
Prepaid expenses and other current assets 11,390 11,456
Income taxes receivable 1,558 1,582
Deferred income taxes 14,833 14,786
--------- ---------
Total current assets 99,966 109,213
Property and equipment, net 46,840 56,816
Long-term marketable securities 118,084 115,717
Goodwill and purchased intangible assets, net 255,858 238,807
Deferred income taxes 3,001 3,001
Other assets 10,423 10,309
--------- ---------
Total assets $ 534,172 $ 533,863
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,503 $ 5,122
Accrued compensation 9,350 10,111
Other accrued expenses 22,491 18,468
Deferred revenue 32,052 40,299
--------- ---------
Total current liabilities 69,396 74,000
Long-term liabilities and other 6,422 6,305
Shareholders' equity:
Preferred stock, no par value, 10,000 shares authorized; no shares issued or outstanding -- --
Common stock, no par value, 150,000 shares authorized; 86,710 and 87,151 issued and
outstanding at December 31, 2000 and March 31, 2001, respectively 500,324 510,353
Accumulated deficit (23,214) (37,996)
Accumulated other comprehensive income 132 390
Notes receivable from sale of common stock (18,888) (19,189)
--------- ---------
Total shareholders' equity 458,354 453,558
--------- ---------
Total liabilities and shareholders' equity $ 534,172 $ 533,863
========= =========
See accompanying notes to the
consolidated financial statements.
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QUEST SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
---------------------
2000 2001
-------- --------
Revenues:
Licenses $ 21,895 $ 48,429
Services 6,830 14,683
-------- --------
Total revenues 28,725 63,112
Cost of revenues:
Licenses 635 889
Services 1,870 4,078
Amortization of purchased intangible assets 657 2,035
-------- --------
Total cost of revenues 3,162 7,002
-------- --------
Gross profit 25,563 56,110
Operating expenses:
Sales and marketing 13,914 30,860
Research and development 7,366 13,930
General and administrative 3,097 6,353
Other compensation costs and intangible amortization 7,378 15,982
-------- --------
Total operating expenses 31,755 67,125
-------- --------
Loss from operations (6,192) (11,015)
Other income, net 979 1,777
-------- --------
Loss before income tax provision (5,213) (9,238)
Income tax provision 472 5,543
-------- --------
Net loss $ (5,685) $(14,781)
======== ========
Basic and diluted net loss per share $ (0.07) $ (0.17)
======== ========
Basic and diluted weighted average shares 81,371 87,016
See accompanying notes to the
consolidated financial statements.
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QUEST SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
----------------------
2000 2001
--------- --------
Cash flows from operating activities:
Net loss $ (5,685) $(14,781)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 7,291 18,453
Compensation expense associated with stock option grants 764 2,029
Accrued interest receivable from shareholders (49) (301)
Provision for bad debts -- 285
Changes in assets and liabilities, net of
effects of acquisitions:
Accounts receivable 4,163 1,170
Prepaid expenses and other current assets (2,221) 329
Other assets (285) (496)
Accounts payable (2,175) (322)
Accrued compensation (68) 948
Income taxes payable 244 5,474
Other accrued expenses (4,156) (3,848)
Other liabilities -- (226)
Deferred revenue 3,170 8,717
--------- --------
Net cash provided by operating activities 993 17,431
Cash flows from investing activities:
Purchases of property and equipment (2,114) (12,534)
Cash paid for acquisitions, net of cash acquired (15,851) --
Purchases of marketable securities (165,096) (18,939)
Sales and maturities of marketable securities 24,235 20,277
--------- --------
Net cash used in investing activities (158,826) (11,196)
Cash flows from financing activities:
Repayment of notes payable (2,603) --
Repayment of capital lease obligations (697) (146)
Proceeds from exercise of stock options 677 905
Proceeds from employee stock purchase plan 1,417 2,992
Proceeds from issuance of common stock, net 253,469 --
--------- --------
Net cash provided by financing activities 252,263 3,751
Effect of exchange rate changes on cash and cash equivalents 42 28
--------- --------
Net increase in cash and cash equivalents 94,472 10,014
Cash and cash equivalents, beginning of period 39,643 25,155
--------- --------
Cash and cash equivalents, end of period $ 134,115 $ 35,169
========= ========
Supplemental disclosures of consolidated cash flow information:
Cash paid for:
Interest $ 118 $ 36
========= ========
Income taxes $ 346 $ 66
========= ========
Supplemental schedule of noncash investing and
financing activities:
Unrealized (loss) gain from available-for-sale securities $ (455) $ 258
========= ========
Tax benefit related to stock option exercises $ 336 $ 5,523
========= ========
See accompanying notes to the
consolidated financial statements.
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QUEST SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
---------------------
2000 2001
------- --------
Net loss $(5,685) $(14,781)
Other comprehensive (loss) gain:
Unrealized (loss) gain on available-for-sale securities (455) 258
------- --------
Comprehensive loss $(6,140) $(14,523)
======= ========
See accompanying notes to the
consolidated financial statements.
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QUEST SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements of
Quest Software, Inc., a California corporation (the "Company" or "Quest"), as of
March 31, 2001 and for the three months ended March 31, 2000 and 2001 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, 2000.
Operating results for the three months ended March 31, 2001 are not
necessarily indicative of the results that may be expected for the full year
ending December 31, 2001.
NEW ACCOUNTING PRONOUNCEMENTS:
In September 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS No. 133"). SFAS No. 133, as amended,
is effective for all fiscal years beginning after June 15, 2000, and establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities.
Under SFAS No. 133, certain contracts that were not formerly considered
derivatives may now meet the definition of a derivative which would be required
to be reported as assets or liabilities and carried at fair value. The Company
adopted SFAS No. 133 effective January 1, 2001. The adoption of SFAS No. 133 did
not have a significant impact on the financial position, results of operations,
or cash flows of the Company.
2. ACQUISITIONS
Operations of the companies acquired throughout fiscal 2000 are included in
the consolidated financial statements from the dates of acquisition. The first
quarter of 2001 includes actual results of these acquisitions. The pro forma
results of operations data for the first quarter of 2000 presented below assume
that the acquisitions had been made at the beginning of fiscal 2000, and include
amortization of goodwill and identified intangibles from that date. The pro
forma data is presented for informational purposes only, and is not necessarily
indicative of the results of future operations nor of the actual results that
would have been achieved had the acquisitions taken place at the beginning of
fiscal 2000 (in thousands):
First Quarter Ended March 31,
---------------------------------
2000 2001
-------- --------
(pro forma) (as reported)
Revenues $ 32,450 $ 63,112
Net loss (18,125) (14,781)
Net loss per share - basic and diluted (0.22) (0.17)
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3. OTHER COMPENSATION COSTS
The Company records compensation expense for options to purchase the
Company's common stock granted at below fair market value. 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 is recognized
ratably over the vesting period of the stock options, which is currently four to
five years. The following table shows the allocation to Cost of Services
Revenues, Sales and Marketing, Research and Development and General and
Administrative expenses of such costs based on the related headcount (in
thousands):
ALLOCATION OF
OTHER COMPENSATION
AS REPORTED EXPENSE PRO FORMA
----------- ------------------ ---------
First quarter ended March 31, 2000
Cost of services revenues $ 1,870 $ -- $ 1,870
Sales and marketing 13,914 688 14,602
Research and development 7,366 42 7,408
General and administrative 3,097 34 3,131
First quarter ended March 31, 2001
Cost of services revenues $ 4,078 $ 126 $ 4,204
Sales and marketing 30,860 725 31,585
Research and development 13,930 1,025 14,955
General and administrative 6,353 153 6,506
4. NET LOSS PER SHARE
The Company computes net loss per share in accordance with SFAS No. 128,
Earnings per Share. Basic earnings per share is computed by dividing net 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 calculations (in thousands):
THREE MONTHS ENDED
MARCH 31,
------------------
2000 2001
------ ------
Shares used in computing basic net income (loss) per share 81,371 87,016
Dilutive effect of stock options --(1) --(1)
------ ------
Shares used in computing diluted net income (loss) per share 81,371 87,016
====== ======
(1) Effect would have been anti-dilutive, accordingly, the amount is excluded
from shares used in computing diluted net loss per share. The dilutive
effect of stock options would have been 6,169 and 3,985 for the three
months ended March 31, 2000 and 2001, respectively.
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5. ACCUMULATED OTHER COMPREHENSIVE INCOME
Accumulated other comprehensive operations as of March 31, 2001 is
comprised of the following (in thousands):
UNREALIZED GAIN
ON
AVAILABLE-FOR-SALE
SECURITIES
------------------
Balance, December 31, 2000.......... $132
Current period changes 258
---
Balance, March 31, 2001............. $390
===
6. SHAREHOLDERS' EQUITY
In January 2001, approximately 94,000 shares of common stock were issued
under the Company's Employee Stock Purchase Plan at a price of $31.82 per share.
7. STOCK OPTION PLANS
The following table summarizes information about stock options outstanding
as of March 31, 2001 (in thousands, except for per share data):
Number of Options
Number of Exercisable as of
Shares Price per Share March 31, 2001
--------- --------------- -----------------
Balance at December 31, 2000 10,641 $ 0.50 - $53.63
Granted 3,457 15.13 - 23.69
Exercised (351) 0.50 - 25.38
Canceled (510) 0.59 - 53.63
------
Balance at March 31, 2001 13,237 $ 0.50 - $53.63 2,104
======
8. 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, gross
profit and income (loss) from operations, as this information and the geographic
information described below are the only information provided to the chief
operating decision maker on a segment basis.
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Operating segment data for the three months ended March 31, 2000 and 2001
were 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 1,870 3,162
------- ------- -------
Gross profit $20,603 $ 4,960 $25,563
======= ======= =======
First quarter ended March 31, 2001
Revenues $48,429 $14,683 $63,112
Cost of revenues 2,924 4,078 7,002
------- ------- -------
Gross profit $45,505 $10,605 $56,110
======= ======= =======
Revenues are attributed to geographic areas based on the location of the
entity from 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 as of and for the three months
ended March 31, 2000 and 2001, respectively, were as follows (in thousands):
NORTH OTHER
AMERICA(1) EUROPE INTERNATIONAL TOTAL
---------- ------- ------------- ---------
First quarter ended March 31, 2000
Revenues $ 23,717 $ 4,463 $ 545 $ 28,725
Gross profit 23,161 2,302 100 25,563
Income (loss) from operations (6,368) 336 (160) (6,192)
Long-lived assets 134,556 564 947 136,067
First quarter ended March 31, 2001
Revenues $ 52,112 9,272 1,728 $ 63,112
Gross profit 50,839 5,099 172 56,110
Income (loss) from operations (1,765) (2,366) (6,884) (11,015)
Long-lived assets 292,703 1,611 1,309 295,623
(1) Principally represents operations in the United States.
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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. 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 for the year ended December
31, 2000, 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 management software solutions that enhance our
customers' return on IT investment dollars by maximizing availability, improving
performance, maximizing the effectiveness of IT personnel and improving the
quality of business critical applications. Our product families are designed to
meet the availability and performance requirements of our customers' most
critical applications. Each product family consists of an integrated suite of
software tools that enable personnel to manage and administer complex database
systems and business applications, both packaged and custom developed. These
applications can include ERP (enterprise resource planning) systems, CRM
(customer relationship management) systems, B2B (business to business)
e-commerce systems, corporate messaging and Internet and web-based applications.
We enable organizations to leverage IT infrastructure investments by maximizing
the performance and availability of enterprise applications with solutions for
High Availability, Application Monitoring, Database Management, SQL Development,
and Report Management.
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. Services
consist primarily of annual maintenance contracts for technical support and
product enhancements, and consulting services.
We recognize software license revenues when a non-cancelable license
agreement has been signed with a customer, delivery of the software has
occurred, the fees are fixed and determinable, no significant post-delivery
vendor obligations remain and collection is deemed probable. Maintenance
revenues are recognized ratably over the contract term, which is typically one
year. Revenues for consulting services are recognized as such services are
performed.
International revenues from licenses and services sold to customers outside
of North America were $15.3 million in 1999 and $28.7 million in 2000, and were
$5.0 and $11.0 for the three months ended March 31, 2000 and 2001, respectively.
We intend to expand our international sales activities as part of our business
strategy. All of our current international revenues are derived from the
operations of our wholly owned international subsidiaries, which consist of both
direct sales and sales through distributors. Our international subsidiaries
conduct business in the currency of the country in which they operate (with the
exception of Mexico and Brazil where the U.S. Dollar is used), exposing us to
currency fluctuations and currency transaction losses or gains which are outside
of our control. Historically, fluctuations in foreign currency exchange rates
have not had a material effect on our business. We have not, to date, conducted
any hedging transactions to reduce our risk to currency fluctuations.
In the development of new products and enhancements of existing products,
the technological feasibility of the software is not established until
substantially all product development is complete. Historically, our software
development costs eligible for capitalization have been insignificant, and all
costs related to internal research and development have been expensed as
incurred.
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RESULTS OF OPERATIONS
The following table sets forth certain consolidated statements of
operations data as a percentage of total revenues, except as indicated:
Three months ended
March 31,
-------------------
2000 2001
------ ------
Revenues:
Licenses 76.2% 76.7%
Services 23.8 23.3
------ ------
Total revenues 100.0 100.0
Cost of revenues:
Licenses 2.2 1.4
Services 6.5 6.5
Amortization of purchased intangible assets 2.3 3.2
------ ------
Total cost of revenues 11.0 11.1
------ ------
Gross profit 89.0 88.9
Operating expenses:
Sales and marketing 48.4 48.9
Research and development 25.6 22.1
General and administrative 10.8 10.1
Other compensation costs and intangible amortization 25.7 25.3
------ ------
Total operating expenses 110.5 106.4
------ ------
Loss from operations (21.5) (17.5)
Other income, net 3.4 2.8
------ ------
Loss before income tax provision (18.1) (14.7)
Income tax provision 1.6 8.8
------ ------
Net Loss (19.7)% (23.5)%
====== ======
As a Percentage of Related Revenues:
Cost of licenses 2.9% 1.8%
Cost of services 27.4 27.8
THREE MONTHS ENDED MARCH 31, 2000 AND 2001
REVENUES
Total revenues for the three months ended March 31, 2001 were $63.1
million, an increase of 120% from the comparable period of 2000. Revenues
outside of North America for the three months ended March 31, 2001 were $11.0
million, an increase of 120% from the comparable period of 2000. We believe that
the percentage increase in total revenues achieved during this period are not
necessarily indicative of future results but we expect revenues to continue to
grow in the foreseeable future.
LICENSES
Licenses for the three months ended March 31, 2001 were $48.4 million, an
increase of 121% from the comparable period of 2000. Licenses represented 76.7%
of total revenues for the three months ended March 31, 2001, compared to 76.2%
for the same period of 2000. Licenses outside of North America accounted for
19.1% and 18.3% of total licenses for the three months ended March 31, 2000 and
2001, respectively. The increases in licenses during the first quarter of 2001
were due to expansion of our worldwide sales force, as well as increased market
acceptance of our software products and availability of new products relative to
the first quarter of 2000.
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SERVICES
Services for the three months ended March 31, 2001 were $14.7 million, an
increase of 115% from the comparable period of 2000. Services revenues
represented 23.3% and 23.8% of total revenues for the three months ended March
31, 2000 and 2001, respectively. Services revenues outside of North America
accounted for 12.0% and 14.4% of total services for the three months ended March
31, 2000 and 2001, respectively. The increases in services during the first
quarter of 2001 reflect an increase in the number of software licenses sold with
maintenance agreements and renewals of maintenance agreements on existing
licenses relative to the first quarter of 2000, as well as the increase in
consulting and training services performed for customers.
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 were $0.9
million for the three months ended March 31, 2001, versus $0.6 million in the
comparable period of 2000, representing an increase of 40%. Cost of licenses as
a percentage of license revenues was 2.9% and 1.8% for the three months ended
March 31, 2000 and 2001, respectively. The increase in cost of licenses was
principally the result of increases in royalties resulting from the growth in
sales of related products, partially offset by a decrease in printing and
duplication costs. The improvement in gross margin resulted from increased
license revenues without a corresponding increase in amortization of acquired
software licenses, which does not vary by the number of licenses sold.
COST OF SERVICES
Cost of services includes salaries and related costs for customer support
and consulting personnel. Cost of services for the three months ended March 31,
2001 were $4.1 million versus $1.9 million for the comparable period of 2000,
representing an increase of 118%. Cost of services as a percentage of services
revenues were 27.4% and 27.8% for the three months ended March 31, 2000 and
2001, respectively. The increase in cost of services is primarily due to the
increase in the number of technical support personnel required to manage and
support our growing customer base as well as increased product offerings. Our
gross margin on services revenues could fluctuate on a quarterly basis in the
future, reflecting the timing differences between increasing our organizational
investments and the corresponding revenue growth that we expect as a result. We
expect the cost of services to increase in absolute dollars for the foreseeable
future as additional customer support and consulting personnel are hired.
AMORTIZATION OF PURCHASED INTANGIBLE ASSETS
Amortization of purchased intangible assets was $2.0 million during the
three months ended March 31, 2001 versus $0.7 million in the same period of
2000, representing an increase of 210%. This increase was due entirely to
amortization of technology purchased as part of the acquisitions made during the
second and third quarters of 2000. The useful lives of the technology acquired
ranges from one to three years, and we expect the amortization to be at least
$1.0 million over the next eight quarters.
OPERATING EXPENSES
SALES AND MARKETING
Sales and marketing expenses consist primarily of salaries, commissions
earned by sales personnel, recruiting costs, trade shows, travel and
entertainment, and other marketing communications costs such as advertising and
promotion. Sales and marketing expenses were $30.9 million for the three months
ended March 31, 2001 versus $13.9 million for the comparable period of 2000,
representing an increase of 122%. Sales and marketing expenses as a percentage
of total revenues were 48.4% and 48.9% for the three months ended March 31, 2000
and 2001, respectively. The increases reflect our increasing investment in our
sales and marketing organization. In particular, salaries and related costs
increased $10.7 million, and trade show, advertising and promotional costs
increased $1.8 million over the first quarter of 2000. We intend to continue to
expand our sales and marketing infrastructure during 2001 and, as a result,
expect sales and marketing expenses to increase in absolute dollars.
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RESEARCH AND DEVELOPMENT
Research and development expenses consist primarily of salaries and
benefits for software developers, software product managers, quality assurance
personnel, and payments made to outside software development contractors.
Research and development expenses were $13.9 million for the three months ended
March 31, 2001 versus $7.4 million in the same period of 2000, representing an
increase of 89%. These expenses as a percentage of total revenues were 25.6% and
22.1% for the three months ended March 31, 2000 and 2001, respectively. The
increase in research and development expenses was due to continued investments
in research and development efforts, including the increase in the number of
software developers and quality assurance personnel. As a result, salaries and
related expenses increased $4.9 million over the first quarter of 2000. The
decrease in these expenses as a percentage of total revenues is due to the
higher revenues over a relatively smaller growth in these expenses. We believe
significant expenditures in research and development are required to remain
competitive, and expect these expenses to continue to increase in absolute
dollars in 2001.
GENERAL AND ADMINISTRATIVE
General and administrative expenses consist primarily of salaries, benefits
and related costs for our executive, finance, administrative and information
services personnel. General and administrative expenses were $6.4 million for
the three months ended March 31, 2001 versus $3.1 million in the same period of
2000, representing an increase of 105%. These expenses as a percentage of total
revenues were 10.8% and 10.1% for the three months ended March 31, 2000 and
2001, respectively. The increase in general and administrative expenses was
primarily due to the increase in headcount to support our growing infrastructure
and expanding operations. As a result, salaries and related costs increased $1.8
million over the first quarter of 2000. The decrease in these expenses as a
percentage of total revenues was due to higher revenues over a relatively
smaller growth in these expenses. We expect that general and administrative
expenses will continue to increase in absolute dollars as we continue to enhance
our infrastructure and support expansion of our operations.
OTHER COMPENSATION COSTS AND INTANGIBLE AMORTIZATION
Other compensation costs and intangible amortization include compensation
expense associated with the issuance (primarily in 1999) of stock options below
fair market value and the amortization of goodwill and other intangible assets
associated with acquisitions. These costs totaled $16.0 million for the three
months ended March 31, 2001 compared to $7.4 million in the same period of 2000,
representing an increase of 117%. These expenses as a percentage of total
revenues were 25.7% and 25.3% for the three months ended March 31, 2000 and
2001, respectively. The increase in these costs was due to the acquisitions made
during the second and third quarters of 2000. The goodwill and other intangibles
are being amortized over their useful lives, and we expect these costs to be at
least approximately $15.0 million per quarter through the second quarter of
2003.
OTHER INCOME, NET
Other income, net was $1.8 million for the three months ended March 31,
2001 compared to $1.0 million for the same period of 2000, representing an
increase of 82%. The increase is due to the fact that the first quarter of 2001
had the benefit of a full quarter's interest on proceeds from our secondary
public offering, which took place near the end of the first quarter of 2000.
PROVISION FOR INCOME TAXES
Provision for income taxes was $5.5 million for the three months ended
March 31, 2001 compared with $0.5 million for the comparable period of 2000,
representing effective rates for these periods of (8.4)% and (60.0%),
respectively. Excluding non-deductible amortization of intangible assets and
other compensation costs, our effective income tax rate was 40% for both the
three months ended March 31, 2000 and 2001.
INFLATION
Inflation has not had a significant effect on our results of operations or
financial position for the three months ended March 31, 2001 or the comparable
period of 2000.
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LIQUIDITY AND CAPITAL RESOURCES
We have funded our business, to date, primarily from cash generated by our
operations, net proceeds of $64.9 million from our initial public offering in
August 1999, and net proceeds of $253.5 million from our secondary offering in
March 2000. Our sources of liquidity as of March 31, 2001 consisted principally
of cash and cash equivalents of $35.2 million and $115.7 million in both short-
and long-term high grade corporate and government marketable securities.
Net cash provided by operating activities was $0.9 million and $17.4
million for the three months ended March 31, 2000 and 2001, respectively. The
increase in 2001 was primarily due to higher non-cash depreciation and
amortization expenses and increases in deferred revenue and income taxes
payable, offset by net losses and the decrease in other accrued expenses.
Investing activities used $158.8 million and $11.2 million during the three
months ended March 31, 2000 and 2001, respectively. The decrease in 2001 is due
to the decrease in purchases of marketable securities as a result of our
secondary public offering in March 2000, as well as acquisitions made during the
first quarter of 2000. Offset by this decrease is an increase in capital
expenditures made during 2001, which primarily consisted of computer hardware
and software to enhance our infrastructure and support our continued expansion.
Financing activities provided $252.3 million and $3.8 million for the three
months ended March 31, 2000 and 2001, respectively. The decrease is the
primarily due to the proceeds of $253.5 million received from the secondary
public offering in March 2000. Offsetting this decrease were increases in
proceeds from the exercise of stock options and our employee stock purchase
plan.
We believe that our existing cash, cash equivalents and investment balances
and cash flows from operations will be sufficient to finance our working capital
and capital expenditure requirements through at least the next 12 months. We may
require additional funds to support our working capital requirements or for
other purposes, and may seek to raise additional funds through public or private
equity or debt financing, or from other sources. If additional financing is
needed, we cannot assure you that such financing will be available to us at
commercially reasonable terms or at all.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In September 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS No. 133"). SFAS No. 133, as amended,
is effective for all fiscal years beginning after June 15, 2000, and establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities.
Under SFAS 133, certain contracts that were not formerly considered derivatives
may now meet the definition of a derivative which would be required to be
reported as assets or liabilities and carried at fair value. The Company adopted
SFAS 133 effective January 1, 2001. The adoption of SFAS No. 133 did not have a
significant impact on the financial position, results of operations, or cash
flows of the Company.
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RISK FACTORS
An investment in our shares involves risks and uncertainties. You should
carefully consider the factors described below before making an investment
decision in our securities. The risks described below are the risks that we
currently believe are material risks of business and the industry in which we
compete.
Our business, financial condition and results of operations could be
adversely affected by any of the following risks. If we are adversely affected
by such risks, then the trading price of our common stock could decline, and you
could lose all or part of your investment.
RISKS RELATED TO OUR BUSINESS
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE IN FUTURE PERIODS AND, AS A
RESULT, WE MAY FAIL TO MEET EXPECTATIONS OF INVESTORS AND ANALYSTS, CAUSING OUR
STOCK PRICE TO FLUCTUATE OR DECLINE
Our revenues and operating results may vary significantly from quarter to
quarter due to a number of factors. These factors include the following:
- the size and timing of customer orders. See "-- The size and timing of
our customer orders may vary significantly from quarter to quarter which
could cause fluctuations in our revenues."
- the unpredictability of the timing and level of sales through our
indirect sales channel;
- the timing of revenue recognition for sales of software products and
services;
- the extent to which our customers renew their maintenance contracts with
us;
- the possibility that our customers may cancel or defer purchases as a
result of reduced IT budgets or in anticipation of new products or
product updates by us or by our competitors;
- the possibility of an economic slowdown generally;
- the amount and timing of expenditures related to expansion of our
operations;
- our ability to attain market acceptance of new products and services and
enhancements to our existing products;
- lack of order backlog;
- changes in our pricing policies or the pricing policies of our
competitors;
- the relative growth rates of the Windows NT and UNIX markets, as well as
the rate of adoption of Microsoft's release of Windows 2000 by users;
- costs related to acquisitions of technologies or businesses, including
amortization of goodwill and other intangible assets; and
- the timing of releases of new versions of third-party software products
that our products support.
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Fluctuations in our results of operations are likely to affect the market
price of our common stock that may not be related to our long-term performance.
THE SIZE AND TIMING OF OUR CUSTOMER ORDERS MAY VARY SIGNIFICANTLY FROM QUARTER
TO QUARTER WHICH COULD CAUSE FLUCTUATIONS IN OUR REVENUES
In any given quarter, sales of some of our products have involved large
financial commitments from a relatively small number of customers, and
cancellation or deferral of these large contracts would reduce our revenues. In
addition, the sales cycles for certain of our software products, such as Vista
Plus and SharePlex, can last from three to nine months and often require
pre-purchase evaluation periods and customer education. These relatively long
sales cycles may cause significant periodic variation in our license revenues.
Also, we have often booked a large amount of our sales in the last month or
weeks of each quarter and delays in the closing of sales near the end of a
quarter could cause quarterly revenue to fall short of anticipated levels.
Finally, while a portion of our revenues each quarter is recognized from
previously deferred revenue, our quarterly performance will depend primarily
upon entering into new contracts to generate revenues for that quarter.
MANY OF OUR PRODUCTS ARE DEPENDENT ON ORACLE'S TECHNOLOGIES; IF ORACLE'S
TECHNOLOGIES LOSE MARKET SHARE OR BECOME INCOMPATIBLE WITH OUR PRODUCTS, THE
DEMAND FOR OUR PRODUCTS COULD SUFFER
We believe that our success has depended in part, and will continue to
depend in part for the foreseeable future, upon our relationship with Oracle and
our status as a complementary software provider for Oracle's database and
application products. Many versions of our products, including SharePlex, SQLab
Vision, and SQL Navigator, are specifically designed to be used with Oracle
databases. Although a number of our products work with other environments, our
competitive advantage consists in substantial part on the integration between
our products and Oracle's products, and our extensive knowledge of Oracle's
technology. Currently, a significant portion of our total revenues are derived
from products that specifically support Oracle-based products. If Oracle for any
reason decides to promote technologies and standards that are not compatible
with our technology, or if Oracle loses market share for its database products,
our business, operating results and financial condition would be materially
adversely affected.
MANY OF OUR PRODUCTS ARE VULNERABLE TO DIRECT COMPETITION FROM ORACLE
We currently compete with Oracle in the market for database management
solutions. We expect that Oracle's commitment to and presence in the database
management product market will increase in the future and therefore
substantially increase competitive pressures. We believe that Oracle will
continue to incorporate database management technology into its server software
offerings, possibly at no additional cost to its users. We believe that Oracle
will also continue to enhance its database management technology. Furthermore,
Oracle could attempt to increase its presence in this market by acquiring or
forming strategic alliances with our competitors, and Oracle may be in better
position to withstand and respond to the current factors impacting this
industry. Oracle has a longer operating history, a larger installed base of
customers and substantially greater financial, distribution, marketing and
technical resources than we do. In addition, Oracle has well-established
relationships with many of our present and potential customers. As a result, we
may not be able to compete effectively with Oracle in the future, which could
materially adversely affect our business, operating results and financial
condition.
OUR SUCCESS DEPENDS ON OUR ABILITY TO DEVELOP NEW AND ENHANCED PRODUCTS THAT
ACHIEVE WIDESPREAD MARKET ACCEPTANCE
Our future success depends on our ability to address the rapidly changing
needs of our customers by developing and introducing new products, product
updates and services on a timely basis, by extending the operation of our
products on new platforms and by keeping pace with technological developments
and emerging industry standards. In order to grow our business, we are
committing substantial resources to developing software products and services
for the applications management market. If this market does not continue to
develop as anticipated, or demand for our products in this market does not
materialize or occurs more slowly than we expect, or if our development efforts
are delayed or unsuccessful, we will have expended substantial resources and
capital without realizing sufficient revenues, and our business and operating
results could be adversely affected.
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ACQUISITIONS OF COMPANIES OR TECHNOLOGIES MAY RESULT IN DISRUPTIONS TO OUR
BUSINESS AND DIVERSION OF MANAGEMENT ATTENTION
We have in the past made and we expect to continue to make acquisitions of
complementary companies, products or technologies. If we make any additional
acquisitions, we will be required to assimilate the operations, products and
personnel of the acquired businesses and train, retain and motivate key
personnel from the acquired businesses. We may be unable to maintain uniform
standards, controls, procedures and policies if we fail in these efforts.
Similarly, acquisitions may subject us to liabilities and risks that are not
known or identifiable at the time of the acquisition or may cause disruptions in
our operations and divert management's attention from day-to-day operations,
which could impair our relationships with our current employees, customers and
strategic partners. We may have to incur debt or issue equity securities to pay
for any future acquisitions. The issuance of equity securities for any
acquisition could be substantially dilutive to our shareholders. In addition,
our profitability may suffer because of acquisition-related costs or
amortization costs for acquired goodwill and other intangible assets. In
consummating acquisitions, we are also subject to risks of entering geographic
and business markets in which we have no or limited prior experience. If we are
unable to fully integrate acquired businesses, products or technologies with our
existing operations, we may not receive the intended benefits of acquisition.
OUR ABILITY TO INCREASE OUR REVENUES DEPENDS ON OUR ABILITY TO EXPAND OUR
INDIRECT SALES CHANNELS
We intend to aggressively pursue expansion of our indirect sales channels
through arrangements with resellers, systems integrators and distributors. In
certain domestic and international markets we may miss sales opportunities if we
are unable to enter into successful relationships with locally based resellers.
We may become more dependent on these type of relationships. There can be no
assurance that we will successfully develop these relationships or that the
expansion of indirect sales distribution methods will increase revenues.
OUR PAST AND FUTURE GROWTH MAY STRAIN OUR MANAGEMENT, ADMINISTRATIVE,
OPERATIONAL AND FINANCIAL INFRASTRUCTURE
We have recently experienced a period of rapid growth in our operations
that has placed and will continue to place a strain on our management,
administrative, operational and financial infrastructure. During this period, we
have experienced an increase in the number of our employees, increasing demands
on our operating and financial systems and personnel, and an expansion in the
geographic coverage of our operations. Our ability to manage our operations and
growth requires us to continue to improve our operational, financial and
management controls, and reporting systems and procedures. We may need to expand
our facilities or relocate some or all of our employees or operations from time
to time to support growth. These relocations could result in temporary
disruptions of our operations or a diversion of management's attention and
resources. In addition, we will be required to hire additional management,
financial and sales and marketing personnel to manage our expanding operations.
If we are unable to manage this growth effectively, our business, operating
results and financial condition may be materially adversely affected.
WE MAY NOT GENERATE INCREASED BUSINESS FROM OUR CURRENT CUSTOMERS, WHICH COULD
SLOW OUR REVENUE GROWTH IN THE FUTURE
Most of our customers initially make a purchase of our products for a
single department or location. Many of these customers may choose not to expand
their use of our products. If we fail to generate expanded business from our
current customers, our business, operating results and financial condition could
be materially adversely affected. In addition, as we deploy new modules and
features for our existing products or introduce new products, our current
customers may choose not to purchase this new functionality or these new
products. Moreover, if customers elect not to renew their maintenance
agreements, our service revenues would be materially adversely affected.
WE EXPECT TO INCUR SIGNIFICANT INCREASES IN OUR OPERATING EXPENSES IN THE
FORESEEABLE FUTURE, WHICH MAY AFFECT OUR FUTURE PROFITABILITY
We intend to substantially increase our operating expenses for the
foreseeable future as we continue to:
- increase our sales and marketing activities, including expanding our
direct sales and telesales forces;
- increase our research and development activities;
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- expand our general and administrative activities; and
- expand our customer support organizations.
Accordingly, we will be required to significantly increase our revenues in
order to maintain profitability. These expenses will be incurred before we
generate any revenues by this increased spending. If we do not significantly
increase revenues from these efforts, our business and operating results would
be negatively impacted.
OUR INTERNATIONAL OPERATIONS AND OUR PLANNED EXPANSION OF OUR INTERNATIONAL
OPERATIONS EXPOSES US TO CERTAIN RISKS
Substantially all of our current international revenues are derived from
the operations of three of our wholly-owned subsidiaries in Australia, the
United Kingdom and Germany. Revenues from licenses and services to customers
outside of North America were $15.3 million in 1999 (representing 21.6% of total
revenues), $28.7 million in 2000 (representing 17.3% of total revenues), and
$5.0 and $11.0 in the three month periods ended March 31, 2000 and 2001,
respectively (representing 17.4% of total revenues in both periods). As a
result, we face increasing risks from doing business on an international basis,
including, among others:
- difficulties in staffing and managing foreign operations;
- longer payment cycles;
- seasonal reductions in business activity in Europe;
- increased financial accounting and reporting burdens and complexities;
- potentially adverse tax consequences;
- potential loss of proprietary information due to piracy, misappropriation
or weaker laws regarding intellectual property protection;
- delays in localizing our products;
- compliance with a wide variety of complex foreign laws and treaties; and
- licenses, tariffs and other trade barriers.
In addition, because our international subsidiaries conduct business in the
currency of the country in which they operate, we are subject to currency
fluctuations and currency transaction losses or gains which are outside of our
control.
We plan to expand our international operations as part of our business
strategy. The expansion of our existing international operations and entry into
additional international markets will require significant management attention
and financial resources and will place additional burdens on our management,
administrative, operational and financial infrastructure. We cannot be certain
that our investments in establishing facilities in other countries will produce
desired levels of revenue or profitability. In addition, we have sold our
products internationally for only a few years and we have limited experience in
developing localized versions of our products and marketing and distributing
them internationally. As our international operations expand, our exposure to
exchange rate fluctuations will increase as we use an increasing number of
foreign currencies. We have not yet entered into any hedging transactions to
date to mitigate our expense to currency fluctuations.
OUR RECENTLY-IMPLEMENTED STRATEGY OF INVESTING IN DEVELOPMENT-STAGE COMPANIES
INVOLVES A NUMBER OF RISKS AND UNCERTAINTIES
We have and may continue to make investments in development-stage companies
that we believe provide strategic opportunities for Quest. Each of these
investments involves a number of risks and uncertainties, including diversion of
management attention, inability to identify strategic opportunities, inability
to value investments
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appropriately, inability to manage investments effectively and loss of cash
invested. We intend that these investments will complement our own research and
development efforts, provide access to new technologies and emerging markets,
and create opportunities for additional sales of our products and services.
However, we cannot assure you that this initiative will have the above mentioned
desired results, or even that we will not lose all or any part of these
investments.
FAILURE TO DEVELOP STRATEGIC RELATIONSHIPS COULD HARM OUR BUSINESS BY DENYING US
SELLING OPPORTUNITIES AND OTHER BENEFITS
Our current collaborative relationships may not prove to be beneficial to
us, and they may not be sustained. We also may not be able to enter into
successful new strategic relationships in the future, which could have a
material adverse effect on our business, operating results and financial
condition. From time to time, we have collaborated with other companies,
including Hewlett-Packard and Oracle and certain of the national accounting
firms that provide system integration services, in areas such as product
development, marketing, distribution and implementation. We could lose sales
opportunities if we fail to work effectively with these parties. Moreover, we
expect that maintaining and enhancing these and other relationships will become
a more meaningful part of our business strategy in the future. However, many of
our current partners are either actual or potential competitors with us. In
addition, many of these third parties also work with competing software
companies and we may not be able to maintain these existing relationships, due
to the fact that these relationships are informal or, if written, are terminable
with little or no notice.
OUR PROPRIETARY RIGHTS MAY BE INADEQUATELY PROTECTED, AND THERE IS RISK OF
INFRINGEMENT CLAIMS OR INDEPENDENT DEVELOPMENT OF COMPETING TECHNOLOGY THAT
COULD HARM OUR COMPETITIVE POSITION
Our success and ability to compete are dependent on our ability to develop
and maintain the proprietary aspects of our technology. We rely on a combination
of trademark, trade secret, copyright law and contractual restrictions to
protect the proprietary aspects of our technology.
Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or to obtain and use information
that we regard as proprietary. Litigation may be necessary in the future to
enforce our intellectual property rights, to protect our trade secrets, and to
determine the validity and scope of the proprietary rights of others. Any such
resulting litigation could result in substantial costs and diversion of
resources.
Our means of protecting our proprietary rights may prove to be inadequate
and competitors may independently develop similar or superior technology.
Policing unauthorized use of our products is difficult, and we cannot be certain
that the steps we have taken will prevent misappropriation of our technology,
particularly in foreign countries where the laws may not protect our proprietary
rights as fully as in the United States. We also believe that, because of the
rapid rate of technological change in the software industry, trade secret and
copyright protection are less significant than factors such as the knowledge,
ability and experience of our employees, frequent product enhancements and the
timeliness and quality of customer support services.
Our success and ability to compete are also dependent on our ability to
operate without infringing upon the proprietary rights of others. Third parties
may claim infringement by us of their intellectual property rights. In the event
of a successful claim of product infringement against us and our failure or
inability to either license the infringed or similar technology or develop
alternative technology on a timely basis, we may incur substantial licensing
fees, be liable for infringement damage, or be unable to market our products.
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:
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- loss of or delay in revenues and loss of market share;
- loss of customers;
- damage to our reputation;
- failure to achieve market acceptance;
- diversion of development resources;
- increased service and warranty costs;
- legal actions by customers against us which could, whether or not
successful, increase costs and distract our management; and
- increased insurance costs.
In addition, a product liability claim, whether or not successful, could
harm our business by increasing our costs and distracting our management.
WE INCORPORATE SOFTWARE LICENSED FROM THIRD PARTIES INTO SOME OF OUR PRODUCTS
AND ANY SIGNIFICANT INTERRUPTION IN THE AVAILABILITY OF THESE THIRD-PARTY
SOFTWARE PRODUCTS OR DEFECTS IN THESE PRODUCTS COULD REDUCE THE DEMAND FOR, OR
PREVENT THE SHIPPING OF, OUR PRODUCTS
Certain of our software products contain components developed and
maintained by third-party software vendors. We expect that we may have to
incorporate software from third-party vendors in our future products. We may not
be able to replace the functionality provided by the third-party software
currently offered with our products if that software becomes obsolete, defective
or incompatible with future versions of our products or is not adequately
maintained or updated. Any significant interruption in the availability of these
third-party software products or defects in these products could harm our sales
unless and until we can secure an alternative source. Although we believe there
are adequate alternate sources for the technology licensed to us, such alternate
sources may not provide us with the same functionality as that currently
provided to us.
NATURAL DISASTERS OR POWER OUTAGES COULD DISRUPT OUR BUSINESS
A substantial portion of our operations are located in California, and we
are subject to risks of damage and business disruptions resulting from
earthquakes, floods and similar events, as well as from power outages. We have
recently experienced limited and temporary power losses in our California
facilities due to power shortages, and we expect in the future to experience
additional power losses. While the impact to our business and operating results
has not been material, we cannot assure you that power losses will not adversely
affect our business in the future, or that the cost of acquiring sufficient
power to run our business will not increase significantly. Since we do not have
sufficient redundancy in our networking infrastructure, a natural disaster or
other unanticipated problem could have an adverse effect on our business,
including both our internal operations and our ability to communicate with our
customers or sell and deliver our products.
RISKS RELATED TO OUR INDUSTRY
THE DEMAND FOR OUR PRODUCTS WILL DEPEND ON OUR ABILITY TO ADAPT TO RAPID
TECHNOLOGICAL CHANGE
Our future success will depend on our ability to continue to enhance our
current products and to develop and introduce new products on a timely basis
that keep pace with technological developments and satisfy increasingly
sophisticated customer requirements. Rapid technological change, frequent new
product introductions and enhancements, uncertain product life cycles, changes
in customer demands and evolving industry standards characterize the market for
our products. The introduction of products embodying new technologies and the
emergence of new industry standards can render our existing products obsolete
and unmarketable. As a result of the complexities inherent in today's computing
environments and the performance demanded by customers for embedded databases
and Web-based products, new products and product enhancements can require long
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development and testing periods. As a result, significant delays in the general
availability of such new releases or significant problems in the installation or
implementation of such new releases could have a material adverse effect on our
business, operating results and financial condition. We may not be successful
in:
- developing and marketing, on a timely and cost-effective basis, new
products or new product enhancements that respond to technological
change, evolving industry standards or customer requirements;
- avoiding difficulties that could delay or prevent the successful
development, introduction or marketing of these products; or
- achieving market acceptance for our new products and product
enhancements.
WE MAY NOT BE ABLE TO ATTRACT AND RETAIN PERSONNEL
Our future success depends on the continued service of our executive
officers and other key administrative, sales and marketing and support
personnel, many of whom have recently joined our company. In addition, the
success of our business is substantially dependent on the services of our Chief
Executive Officer and our President and Chief Technical Officer. We intend to
hire a significant number of additional sales, support, marketing,
administrative and research and development personnel over at least the next 12
months. There has in the past been and there may in the future be a shortage of
personnel that possess the technical background necessary to sell, support and
develop our products effectively. Competition for skilled personnel is intense,
and we may not be able to attract, assimilate or retain highly qualified
personnel in the future. Our business may not be able to grow if we cannot
attract qualified personnel. Hiring qualified sales, marketing, administrative,
research and development and customer support personnel is very competitive in
our industry, particularly in Southern California where Quest is headquartered.
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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, 2001, the net gain on available-for-sale
securities of $0.4 million comprised 46 positions, all of which carry unrealized
gains.
The following table provides information about our investment portfolio at
March 31, 2001:
MARCH 31, 2001
--------------
(dollars in thousands)
Cash and cash equivalents $ 35,169
Average interest rate 4.92%
Short-term marketable securities $ 9,873
Average interest rate 3.81%
Long-term marketable securities $115,717
Average interest rate 7.69%
Total portfolio $160,759
Average interest rate 6.85%
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. We also maintain a level of
cash and cash equivalents such that we have generally been able to hold our
investments to maturity. Accordingly, changes in the market interest rate would
not have a material effect on the fair value of such investments.
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PART II
OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
None.
(b) REPORTS ON FORM 8-K
None.
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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, 2001 /s/ M. Brinkley Morse
--------------------------------
M. Brinkley Morse
Vice President, Finance and
Operations
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