Quest Software 10-K 2005
Documents found in this filing:
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Amendment No. 1)
For the Fiscal Year Ended December 31, 2004
For the Transition Period from to .
Commission File No. 000-26937
QUEST SOFTWARE, INC.
(Exact Name of Registrant as Specified in its Charter)
Registrants Telephone Number, Including Area Code: (949) 754-8000
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act: Common Stock
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of Registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2) Yes x No ¨
The aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $690.8 million as of June 30, 2004, based upon the closing sale price reported for that date on the NASDAQ National Market. Shares of Common Stock held by each officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded because such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily conclusive for other purposes.
As of February 22, 2005, 96,549,026 shares of the Registrants common stock were outstanding.
TABLE OF CONTENTS
The Registrant is filing this Amendment No. 1 to its Annual Report on Form 10-K for the fiscal year ended December 31, 2004 solely for the purpose of providing the information required by Items 10, 11, 12, 13 and 14 of Part III of Form 10-K. Such information was to be incorporated by reference from the Registrants definitive proxy statement in connection with the Registrants 2005 Annual Meeting of Shareholders.
Item 10. Directors and Executive Officers of the Registrant
The names of our executive officers and other information about them are shown below.
Vincent C. Smith has served as our Chief Executive Officer since 1997 and a director since 1995. Mr. Smith became Chairman of the Board in 1998. From 1992 to 1994, Mr. Smith served as Vice President of Worldwide Sales and Marketing at Patrol Software North America, a company he founded. Following Patrols acquisition by BMC Software in 1994, Mr. Smith managed BMCs sales operations as Director of Open Systems. From 1987 to 1992, Mr. Smith held a variety of sales management positions at Oracle Corporation.
Douglas F. Garn has served as our President since February 2005. Mr. Garn previously served as our Vice President, Worldwide Sales from January 1998 to January 2002, and returned to this position in January 2003 after a medical leave of absence. From March 1996 to January 1998, Mr. Garn was Vice President of North American Sales for Peregrine Systems, Inc.
M. Brinkley Morse has served as our Senior Vice President, Corporate Development since April 2005. Mr. Morse previously served as our Vice President, Finance and Operations since January 2001 and as our Chief Financial Officer since May 2003. Before joining Quest, Mr. Morse served as Senior Vice President, Corporate Development and Secretary of BMC Software from September 1998 to August 2000, and he served as General Counsel and Secretary of BMC from November 1988 to September 1998.
Michael J. Lambert has served as our Senior Vice President, Chief Financial Officer since April 2005. Mr. Lambert previously served as our Senior Vice President, Finance since November 2004. Before joining Quest, Mr. Lambert served as Executive Vice President and CFO at Quantum Corporation, a publicly held provider of storage solutions, from June 2001 through June 2004. Prior to Quantum, Mr. Lambert was Senior Vice President and CFO of NerveWire, a systems integration consulting firm. From March 1996 to July 2000, Mr. Lambert worked for Lucent Technologies, most recently as Vice President and CFO of the InterNetworking Systems Division. Mr. Lambert holds an MBA from Harvard Business School and a bachelors degree in Business Administration from Stonehill College.
Anthony Foley has served as our Senior Vice President, Worldwide Sales since April 2005. Mr. Foley previously served as our Vice President Sales, EMEA since April 2000. From February 1997 until he joined Quest, Mr. Foley served in senior sales and operations management positions for the European operations of Computer Associates International, Inc. Prior to his employment with CA, Mr. Foley served in business development positions for European subsidiaries of GE Capital and IBM.
Listed below is information regarding the seven individuals serving as our directors as of April 28, 2005:
Information for Vincent C. Smith is included in the previous section titled Executive Officers.
Doran G. Machin has served as a director since 1987. Mr. Machin is a co-founder of Quest and served as our Executive Vice President from 1987 through April 1999. Prior to 1987, Mr. Machin was employed as an independent computer consultant and worked for Hewlett-Packard and American Data Industries.
Jerry Murdock, Jr. has served as a director since April 1999. Mr. Murdock is a General Partner of InSight Capital Partners, an investment firm, which he co-founded in 1995. From 1987 to 1995, Mr. Murdock was President of Aspen Technology Group, a consulting firm that he founded in 1987. Mr. Murdock is a Trustee of The Aspen Institute.
Raymond J. Lane has served as a director since October 2000. Mr. Lane is a General Partner of Kleiner Perkins Caufield & Byers, a venture capital firm. Prior to joining Kleiner Perkins in July 2000, Mr. Lane was President and Chief Operating Officer and a Director of Oracle, where he served in various executive management positions. Before joining Oracle in June 1992, Mr. Lane was a Senior Vice President and Managing Partner of Booz-Allen & Hamilton. He also served on Booz-Allens Board of Directors and Executive Management Committee. Currently, Mr. Lane is a member of the Board of Trustees of Carnegie-Mellon University and serves as the Chairman of the Board of Directors of SeeBeyond Technology Corporation.
Augustine L. Nieto II has served as a director since October 2002. Mr. Nieto is Founder of Life Fitness, a leading manufacturer of exercise equipment for commercial and consumer use, and has held a variety of executive positions with Life Fitness since he co-founded the company in 1977. He is currently a Senior Advisor for North Castle Partners, a private equity firm in Greenwich, Connecticut. Mr. Nieto serves on the Board of Directors of EAS and Grand Expedition.
Kevin M. Klausmeyer joined our Board of Directors in July 2003. Mr. Klausmeyer is Chief Financial Officer of RLX Technologies, Inc., a privately held provider (and inventor) of blade server and related modular computing hardware and software solutions. From December 1999 to February 2003, Mr. Klausmeyer was chief financial officer of PentaSafe Security Technologies, Inc., which was acquired by NetIQ Corporation in December 2002. From August 1993 to November 1999, Mr. Klausmeyer was vice president and chief accounting officer of BMC Software, Inc. Mr. Klausmeyer serves as one of two industry representatives on the AICPA Software Revenue Recognition Task Force, which interprets and provides guidance to the software industry on the U.S. authoritative software revenue accounting rules.
Mr. Sallaberry joined our Board of Directors in February 2005. Mr. Sallaberry previously held several executive level positions with VERITAS Software, most recently as Executive Vice President, Worldwide Field Operations. Prior to that, Mr. Sallaberry served as Senior Vice President, Worldwide Sales of Veritas from July 1999 to December 1999, and Vice President, Worldwide Sales of Veritas from April 1997 to July 1999.
Our board of directors and management are committed to good corporate governance to ensure that we are managed for the long-term benefit of our shareholders. We have in place a variety of policies and practices to promote good corporate governance. Consistent with our Corporate Governance Guidelines, a majority of our board of directors is independent in accordance with Nasdaq listing standards, and all members of our Audit Committee, our Compensation Committee, and our Nominating and Corporate Governance Committee also meet Nasdaq guidelines for independence. We have also established:
The nominating and corporate governance committee of our board of directors is responsible for reviewing the Corporate Governance Guidelines from time to time and reporting and making recommendations to the board concerning corporate governance matters. In April 2005, our Nominating and Corporate Governance Committee established our Corporate Governance Guidelines. Among the matters addressed by our Corporate Governance Guidelines are:
Copies of our Corporate Governance Guidelines and Code of Business Conduct and Ethics can be found in the Investor Relations Corporate Governance area of our website at www.quest.com.
Audit Committee Financial Expert
We have a standing audit committee consisting of Messrs. Murdock, Klausmeyer and Nieto. Our board of directors has determined that Mr. Klausmeyer is an audit committee financial expert.
Nominations for Director
The policy of the Nominating Committee is to consider shareholder recommendations for candidates for membership on the Board. Shareholder recommendations for nominations should be delivered to our Corporate Secretary as follows:
Quest Software, Inc.
5 Polaris Way
Aliso Viejo, CA 92656
Shareholder recommendations should set forth, among other matters: (i) the name, age and business address of the nominee; (ii) the principal occupation or employment of the nominee; (iii) the number of shares of Quest capital stock owned by the nominee; and (iv) other information relating to the nominee that is required to be disclosed in solicitations for proxies for election of directors under applicable rules and regulations of the Commission.
The Nominating Committee utilizes a variety of methods for identifying and evaluating nominees for director. In the event that vacancies on the Board arise, the Nominating Committee considers potential candidates for director, which may come to the attention of the Nominating Committee through current directors, professional search firms, shareholders or other persons. As described above, the Nominating Committee considers properly submitted shareholder recommendations for nomination to the Board in the same manner as it evaluates other nominees. Following verification of the shareholder status of persons proposing candidates, recommendations are aggregated and considered by the Nominating Committee. Materials provided by a shareholder for consideration of a nominee for director are forwarded to the Nominating Committee for evaluation. In evaluating such nominations, the Nominating Committee seeks to achieve the appropriate balance of industry and business knowledge and experience in light of the function and needs of the Board.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Companys executive officers and
directors, and persons who own more than ten percent of a registered class of the Companys equity securities, to file reports of securities ownership and changes in such ownership with the Securities and Exchange Commission. Executive officers, directors and greater than ten percent shareholders also are required by rules promulgated by the SEC to furnish the Company with copies of all Section 16(a) forms they file.
Based solely upon a review of the copies of such forms furnished to the Company or written representations that no Forms 4 or 5 were required, the Company believes that, during 2004, its officers, directors and greater than ten percent beneficial owners complied with all applicable Section 16(a) filing requirements, except that each of Messrs. Garn and Merritt filed late reports for two transactions, Mr. Smith filed a late report for one transaction and Kevin Brooks, our Vice President, Corporate Controller, filed a late report for one transaction.
Code of Ethics
We have adopted a Code of Ethics that applies to all of our employees, including our Chief Executive Officer, Chief Financial Officer, Controller and other persons performing similar functions. A copy of our Code of Ethics was filed as Exhibit 14 to our Annual Report on Form 10-K for the year ended December 31, 2003 and is also posted on the Investors section of our website at www.quest.com. We intend to satisfy the disclosure requirements under Item 10 of Form 8-K regarding amendments to, or waivers from, the Code of Ethics by either providing such information on a Form 8-K filed with the Securities and Exchange Commission or by posting such information on the Investors section of our website at www.quest.com. Information contained on our website is not part of this Report.
Item 11. Executive Compensation
Summary Compensation Table
The following table sets forth for the years ended December 31, 2002, 2003 and 2004 all compensation received for services rendered to Quest in all capacities by our chief executive officer and each of our executive officers. These officers are referred to in this Report as the Named Executive Officers.
Option Grants in Last Fiscal Year
The following table sets forth certain information with respect to stock options granted to each of the Named Executive Officers in 2004, including the potential realizable value over the ten-year term of the options, based on assumed rates of stock appreciation of 5% and 10%, compounded annually. These assumed rates of appreciation comply with the rules of the SEC and do not represent our estimate of future stock price. Actual gains, if any, on stock option exercises will be dependent on the future performance of our Common Stock. No stock appreciation rights were granted during 2004.
The potential realizable value is calculated based on the ten-year term of the option at its time of grant. It is calculated based on the assumption that the market value of our common stock appreciates at the indicated annual rate compounded annually for the entire term of the option and that the option is exercised and sold on the last day of its term for the appreciated stock price. Actual gains, if any, on stock option exercises are dependent on the future performance of the Common Stock and overall stock market conditions.
Aggregated Option Exercises in Last Fiscal Year and Year-End Option Values
The following table sets forth, for the year ending December 31, 2004, certain information regarding options exercised by, and held at year-end by, the Named Executive Officers.
Director Compensation and Other Arrangements
Non-employee directors receive an annual retainer of $25,000 for serving on the board of directors, and are reimbursed for reasonable expenses incurred by them in attending board and committee meetings. In addition, the chairman of our Audit Committee receives an additional $10,000 annual fee, our Audit Committee Financial Expert receives an additional $15,000 annual fee, and other members of the Audit Committee receive an additional $5,000 annual fee. The chairman of our Compensation Committee receives an additional $5,000 annual fee, and each other member of the Compensation Committee receives an additional $2,500 annual fee.
Non-employee directors are permitted to elect to receive annual board and committee fees in the form of stock options, in lieu of cash, pursuant to the director fee option grant program in our 1999 Stock Incentive Plan. Non-employee board members who have served on the board since the date of the prior years annual meeting of shareholders also receive option grants pursuant to the provisions of the automatic option grant program under our 1999 Stock Incentive Plan.
Compensation Committee Interlocks and Insider Participation
No interlocking relationship exists between any of our executive officers or any member of our compensation committee and any member of any other companys board of directors or compensation committee.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information as of April 6, 2005 with respect to the beneficial ownership of Quest Common Stock by (i) each person Quest believes beneficially holds more than 5% of the outstanding shares of Common Stock; (ii) each director; (iii) each Named Executive Officer and (iv) all directors and executive officers as a group. Unless otherwise indicated, all persons named as beneficial owners of Common Stock have sole voting power and sole investment power with respect to the shares indicated as beneficially owned. Beneficial ownership also includes shares of Quest Common Stock issuable upon exercise of stock options that are exercisable or will become exercisable within 60 days of April 6, 2005, as reflected in the table below. Unless otherwise indicated, the principal address of each of the shareholders below is c/o Quest Software, Inc., 5 Polaris Way, Aliso Viejo, California 92656.
Equity Compensation Plan Information
The following table gives information about our Common Stock that may be issued upon the exercise of options under all of our existing equity compensation plans as of December 31, 2004, including our 1999 Stock Incentive Plan and 2001 Stock Incentive Plan, and stock options assumed in connection with our acquisitions of Foglight Software, OnWire Technologies and Aelita Software.
2001 Stock Incentive Plan
As of December 31, 2004, we had 8,386,215 shares of Common Stock reserved for issuance under the 2001 Stock Incentive Plan (the 2001 Plan) for employees. The 2001 Plan provides for the granting of non-qualified stock options to employees at the fair market value of our Common Stock at the grant date. Officers and directors of Quest are not eligible to participate in the 2001 Plan unless and until the 2001 Plan is approved by our shareholders. Options granted under the 2001 Plan have ten-year terms and generally vest 20% after the first year and in 10% increments every six months thereafter. The 2001 Plan is not required to be and has not been approved by our shareholders.
Item 13. Certain Relationships and Related Transactions
On March 17, 2004, we acquired Aelita Software Corporation (Aelita), a privately held company that provides systems management solutions that improve the productivity, system availability and security of Microsoft Active Directory and Exchange, in a transaction valued at approximately $115 million. Certain venture capital funds associated with Insight Venture Partners (the Insight Funds) previously holding shares of Aelitas preferred stock became entitled to receive (subject to claims against an indemnity escrow fund) approximately $47.6 million in cash in respect of those shares of preferred stock as a result of this acquisition. Jerry Murdock, a director of Quest, is a Managing Director and the co-founder of Insight Venture Partners and an investor in the Insight Funds. Vincent Smith, Quests Chairman of the Board and CEO, and Ray Lane and Paul Sallaberry, directors of Quest, are passive limited partners in Insight Funds, and received a portion of the proceeds from the Aelita transaction by virtue of their respective ownership interests therein. We believe that the financial interests of Mr. Smith, Mr. Lane and Mr. Sallaberry in the Aelita transaction are not material.
The acquisition of Aelita was reviewed and approved by our board of directors, as well as by our Audit Committee. Mr. Murdock, who is the chairman of our Audit Committee, did not participate in the meeting of our board of directors at which the Aelita transaction was approved and abstained from voting at the meeting of our Audit Committee at which the Aelita transaction was approved. Mr. Sallaberry did not join our board of directors until February 2005, and thus also did not participate in the meeting of our board of directors at which the Aelita transaction was approved.
On April 26, 2005, we entered into an Agreement and Plan of Merger with Imceda Software, Inc. (Imceda), a privately held company that provides systems, storage and database management solutions, contemplating the acquisition of Imceda by Quest in a transaction valued at approximately $60.6 million. The Insight Funds hold shares of Imcedas preferred stock, and will be entitled upon the closing of the transaction to receive (in respect of those shares of preferred stock) cash and (subject to claims against an indemnity escrow fund) shares of Quest common stock, such cash and stock representing an aggregate value (based on the manner in which Quest common stock is valued under the Agreement and Plan of Merger) of approximately $47.3 million. Each of Mr. Murdock, Mr. Smith, Mr. Lane and Mr. Sallaberry will be entitled to a portion of the proceeds from the Imceda transaction by virtue of their respective ownership interests in Insight Funds. We believe that the financial interests of Mr. Smith, Mr. Lane and Mr. Sallaberry in the Imceda transaction are not material.
The proposed acquisition of Imceda was reviewed and approved by our board of directors, as well as by our Audit Committee. Mr. Murdock did not participate in the meetings of our board of directors and our Audit Committee at which the Imceda transaction was approved.
We have entered into indemnification agreements with certain of our executive officers and our directors containing provisions that may require us, among other things, to indemnify our officers and our directors against certain liabilities that may arise by reason of their status or service as officers or directors, other than liabilities arising from willful misconduct of a culpable nature, and to advance expenses incurred as a result of any proceeding against them as to which they could be indemnified.
We believe that all of the transactions set forth above were made on terms no less favorable to us than could have been otherwise obtained from unaffiliated third parties.
Item 14. Principal Accountant Fees and Services
The following table presents the fees billed to Quest for professional audit services rendered by Deloitte & Touche LLP, the member firms of Deloitte Touche Tohmatsu, and their respective affiliates (collectively, Deloitte), for the audit of our annual financial statements for the years ended December 31, 2004 and 2003, and fees billed for other services rendered by Deloitte during those periods.
The Audit Committee of the Board of Directors has considered whether the provision by Deloitte of the non-audit services listed above is compatible with maintaining Deloittes independence.
The Audit Committees policy is to pre-approve all audit and permissible non-audit services provided by the independent auditors. These services may include audit services, audit-related services, tax services and other services. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to the particular service or category of services, and may be subject to a specific budget. The independent auditors and management are required to periodically report to the Audit Committee regarding the extent of services provided by the independent auditors in accordance with this pre-approval policy, and the related amounts of fees for services performed. The Audit Committee may also pre-approve particular services on a case-by-case basis
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.