ORGANIZATION, PENDING MERGER AND BASES OF PRESENTATION (Policies)

6 Months Ended

Jun. 30, 2012

Pending Merger Transaction

On June 30, 2012, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Dell Inc., a Delaware corporation (“Dell”), and Diamond Merger Sub, Inc. a Delaware corporation and wholly owned subsidiary of Dell, pursuant to which Dell will acquire all of the outstanding shares of the Company’s common stock for a purchase price of $28.00 per share in cash. 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 July 2, 2012 (See Note 19).

Effective June 30, 2012, the Company and affiliates of Insight Venture Management, LLC (“Insight”) and Vector Capital (together with Insight, the “Buyout Group”) agreed to terminate (the “Mutual Termination”) the previously announced Agreement and Plan of Merger, dated March 8, 2012, as amended on June 19, 2012 (the “Prior Merger Agreement”), among the Company and the Buyout Group. The terms and conditions of the Mutual Termination are set forth in Exhibit 10.3 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on July 2, 2012. In connection with the Mutual Termination the Company paid $37.0 million in termination fees and expenses to Insight. This $37.0 million is reflected on the statement of operations as the primary component of Transaction fees-pending merger for the three and six months ended June 30, 2012.

Simultaneous with the termination of the Prior Merger Agreement, also terminated pursuant to their terms were the previously announced (i) rollover commitment letter among Vincent C. Smith, Chairman and Chief Executive Officer of the Company, and the Vincent C. Smith Annuity Trust 2010-1, the Vincent C. Smith Annuity Trust 2010-2, the Vincent C. Smith Annuity Trust 2011-1 and the Teach A Man To Fish Foundation, (collectively, the “VS Parties”), and Expedition Holding Company, Inc., a Delaware corporation, (ii) limited guaranty among the VS Parties, the Buyout Group and the Company, and (iii) the voting agreement among the Company and the VS Parties (collectively, the “Terminated Ancillary Agreements”). A description of the material terms of the Prior Merger Agreement and the Terminated Ancillary Agreements can be found in our Current Reports on Form 8-K filed with the Securities and Exchange Commission on March 9, 2012 and June 20, 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. The Company and Dell filed the required notification and report forms under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, with the Federal Trade Commission (the “FTC”) and the Antitrust Division of the Department of Justice on July 11, 2012 and July 9, 2012, respectively. On July 20, 2012, the FTC granted early termination of the applicable waiting period. We expect to incur and pay additional fees and expenses through calendar year 2012 including transaction fees amounting to approximately $22 million payable to our financial advisor and contingent upon the closing of the pending merger transaction with Dell. No assurance can be given that the merger will be completed.

Impact Of Change In Consolidated Statement Of Cash Flows Presentation To Prior Periods

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):


	Six Months Ended June 30, 2011
	As Previously Reported			As Adjusted			Impact
Unrealized foreign currency gains, net	$	—		$	(3,229	)	$	(3,229	)
Changes in operating assets and liabilities, net of effects of acquisitions		66,332			69,445			3,113

Net cash provided by operating activities		113,966			113,850			(116	)
Effect of exchange rate changes in cash and cash equivalents		(943	)		(827	)		116

Net impact								—

Correction of A Tax Error Related To Prior Periods

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 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 statement of operations for the three months and six months ended June 30, 2011 and the corrected consolidated statement of cash flows for the six months ended June 30, 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 Statements of Operations:


	Three Months Ended June 30, 2011
	As Previously Reported		As Corrected		Increase/ (Decrease)
Other income, net	$	573	$	122	$	(451	)
Income before income tax provision		10,734		10,283		(451	)
Income tax provision		4,404		4,565		161
Net income		6,330		5,718		(612	)
Net income attributable to Quest Software, Inc.		6,330		5,718		(612	)
Net income per share:
Basic	$	0.07	$	0.06	$	(0.01	)
Diluted	$	0.07	$	0.06	$	(0.01	)


	Six Months Ended June 30, 2011
	As Previously Reported		As Corrected		Increase/ (Decrease)
Other income, net	$	1,843	$	1,279	$	(564	)
Income before income tax provision		17,368		16,804		(564	)
Income tax provision		7,410		7,716		306
Net income		9,958		9,088		(870	)
Net income attributable to Quest Software, Inc.		9,958		9,088		(870	)
Net income per share:
Basic	$	0.11	$	0.10	$	(0.01	)
Diluted	$	0.11	$	0.10	$	(0.01	)

Corrected Consolidated Statement of Cash Flows:


	Six Months Ended June 30, 2011
	As Adjusted⁽¹⁾			As Corrected			Increase/ (Decrease)
Net income	$	9,958		$	9,088		$	(870	)
Unrealized foreign currency gains, net		(3,230	)		(2,666	)		564
Changes in operating assets and liabilities:
Deferred income taxes		(82	)		(296	)		(214	)
Income taxes payable		19,668			20,188			520

Net cash provided by operating activities		113,850			113,850		$	—

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