Organization, Proposed Merger And Bases Of Presentation

3 Months Ended

Mar. 31, 2012

Organization, Proposed Merger And Bases Of Presentation [Abstract]

Organization, Proposed Merger And Bases Of Presentation

NOTE 1 — ORGANIZATION, PROPOSED MERGER AND BASES OF PRESENTATION

Quest Software, Inc. was incorporated in California in 1987 and reincorporated in Delaware in 2009. We are a leading developer and vendor of Database Management, Performance Monitoring, Data Protection, User Workspace Management, Windows Server Management, and Identity and Access Management software products. We also provide consulting, training, and support services to our customers. References to "Quest," "Quest Software," the "Company," "we," "us," or "our" refer to Quest Software, Inc. and its consolidated subsidiaries.

Our accompanying unaudited condensed consolidated financial statements as of March 31, 2012 and for the three months ended March 31, 2012 and 2011 reflect all adjustments (consisting of normal recurring accruals) that, 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 accounting principles generally accepted in the United States of America for 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.

The information included in this Quarterly Report on Form 10-Q should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," and "Quantitative and Qualitative Disclosures About Market Risk" included in Quest's Annual Report on Form 10-K for the year ended December 31, 2011 ("2011 Form 10-K"), and the "Corrected Consolidated Financial Statements and Notes to the Consolidated Financial Statements" included in our Current Report on Form 8-K filed on May 10, 2012. The results for the interim periods presented are not necessarily indicative of the results that may be expected for any future period

Pending Proposed Merger Transaction

On March 8, 2012, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") with Expedition Holding Company, Inc., a Delaware corporation ("Parent"), and Expedition Merger Sub, Inc., a Delaware corporation and wholly owned subsidiary of Parent, pursuant to which Parent will acquire, subject to certain exceptions, all of the outstanding shares of the Company's common stock for a purchase price of $23.00 per share in cash. Parent and Merger Sub are beneficially owned by funds affiliated with Insight Venture Management, LLC, a Delaware limited liability company ("Insight").

For terms of the Merger Agreement, including circumstances under which the Merger Agreement can be terminated and the ramifications of such a termination, as well as other terms and conditions, refer to the Merger Agreement filed as Exhibit 2.1 to our Current Report on Form 8-K with the Securities and Exchange Commission on March 9, 2012.

The merger is currently expected to close in the third quarter of this year, and is subject to customary closing conditions as well as approval and adoption of the Merger Agreement by the Company's stockholders (including approval by a majority of the outstanding unaffiliated shares of common stock, which excludes any shares of common stock held by Parent, Merger Sub and Vincent Smith, President, Chief Executive Officer and Chairman of the Board, and certain related trusts). If completed, the merger will result in the Company becoming a privately-held company, and its shares of common stock will no longer be listed on any public market. No assurance can be given that the merger will be completed.

Impact of Change in Consolidated Statement of Cash Flows Presentation to Prior Periods

We maintain positions in certain foreign currencies which may at times create unrealized gains or losses. Unrealized foreign currency gains/losses should be presented as an adjustment to reconcile net income to net cash provided by operating activities in our consolidated statement of cash flows. Effective during the third quarter of 2011, we presented such unrealized foreign currency gains/losses in our consolidated statement of cash flows. This change impacts our cash flow presentation and does not impact earnings or cash balances. Management has concluded that this change of presentation is not material to any periods affected. The following represents the details of the impact to our previously reported consolidated statement of cash flows to conform to the current year presentation (in thousands):

	Three Months Ended March 31, 2011
	As  Previously Reported		As Adjusted		Impact
Unrealized foreign currency gains, net	$	—	$	(3,459)	$	(3,459	)
Changes in operating assets and liabilities, net of effects of acquisitions		48,912		50,688		1,776
Net cash provided by operating activities		71,327		69,644		(1,683	)
Effect of exchange rate changes in cash and cash equivalents		2,854		4,537		1,683
Net impact						—

Correction of a Tax Error Related to Prior Periods

During March 2012, we discovered an error in the historical Australian income tax returns of our wholly-owned subsidiary, Quest Software Pty. Ltd., related to an incorrectly claimed research and development benefit that resulted in a cumulative liability including income tax, interest and penalties of $14.5 million. The error impacts multiple prior periods back to the year ended December 31, 1999. We have concluded that this error has not caused a material misstatement within any previously issued consolidated financial statement for any period. However, if the cumulative effect of the income taxes, interest and penalties were to be included solely within the first quarter of 2012, it would be material to that quarter's results. Thus, after considering Staff Accounting Bulletin Release No. 108, "Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements", we have corrected the Consolidated Financial Statements for the fiscal years ended December 31, 2011, 2010, and 2009 in our Current Report on Form 8-K filed on May 10, 2012, which prior to the corrections were filed previously with Quest's Annual Report on Form 10-K for the period ended December 31, 2011.

In connection with this tax correction, we have presented in this Form 10-Q the corrected consolidated balance sheet as of December 31, 2011, the corrected consolidated income statement for the three months ended March 31, 2011 and the corrected consolidated statement of cash flows for the three months ended March 31, 2011. The following represents the impact of the tax correction to our previously reported consolidated financial statements (in thousands, except per share data):

Corrected Consolidated Balance Sheet:

	December 31, 2011
	As  Previously Reported		As Corrected		Increase/ (Decrease)
Deferred income taxes, net – current	$	19,780	$	21,647	$	1,867
Total current assets		496,201		498,068		1,867
Total assets		1,697,651		1,699,518		1,867
Income taxes payable – current		—		14,482		14,482
Total current liabilities		591,101		605,583		14,482
Total liabilities		795,502		809,984		14,482
Retained earnings		345,672		333,057		(12,615	)
Total Quest Software Inc. stockholders' equity		867,200		854,585		(12,615	)
Total equity		880,149		867,534		(12,615	)
Total liabilities and equity		1,697,651		1,699,518		1,867

Corrected Consolidated Income Statement:

	Three Months Ended March 31, 2011
	As  Previously Reported		As Corrected		Increase/ (Decrease)
Other income, net	$	1,269	$	1,156	$	(113	)
Income before income tax provision		6,635		6,522		(113	)
Income tax provision		3,006		3,151		145
Net income		3,629		3,371		(258	)
Net income attributable to Quest Software, Inc.		3,629		3,371		(258	)
Net income per share:
Basic	$	0.04	$	0.04	$	—
Diluted	$	0.04	$	0.04	$	—

Corrected Consolidated Statement of Cash Flows:

	Three Months Ended March 31, 2011
	As Adjusted  (1)			As Corrected			Increase/ (Decrease)
Net income	$	3,629		$	3,371		$	(258	)
Unrealized foreign currency gains, net		(3,459	)		(3,346	)		113
Changes in operating assets and liabilities:
Deferred income taxes		(142	)		(221	)		(79	)
Income taxes payable		(916	)		(692	)		224
Net cash provided by operating activities		69,644			69,644		$	—

(1) Refer to the above section "Impact of Change in Consolidated Statement of Cash Flows Presentation to Prior Periods".

On April 27, 2012, Quest Software Pty. Ltd., filed a voluntary disclosure request with the Australian Tax Office ("ATO") and paid all outstanding taxes due for all impacted tax years which amounted to $6.5 million. Further discussions with the ATO will focus on negotiating interest and penalty amounts to be remitted as a result of the understated taxes.

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