QSFT Quest Software, Inc. (MM)

Quest Software, Inc. (Nasdaq: QSFT) today reported financial results for the quarter ended June 30, 2012. Total revenues were $215.7 million, a 6.3% increase compared to the prior year’s second quarter revenues of $203.0 million. Total revenues for the six months ended June 30, 2012, were $427.9 million, a 9.4% increase compared to $391.1 million for the same period in 2011. Operating margins were (12.5%) and (5.1%) for the quarter and six months ended June 30, 2012. GAAP results for the quarter and six months were impacted by costs associated with the previously announced Dell Inc. (“Dell”) transaction. For the quarter and six months ended June 30, 2011, operating margins were 5.0% and 4.0%, respectively. On a non-GAAP basis, which excludes the aforementioned Dell transaction costs and other items, operating margins were 17.1% and 16.1% for the quarter and six months ended June 30, 2012, respectively.

Cash and investments at June 30, 2012, totaled $249.6 million, a decrease of $32.8 million from the comparable balance at March 31, 2012. Cash flow from operations was ($19.2) million for the three months ended June 30, 2012. During the quarter, we paid $37.0 million in termination fees and expenses to Insight Venture Management, LLC and Vector Capital related to acceptance of the superior Dell offer.

GAAP Results

Net loss attributable to Quest Software, Inc. for the second quarter of 2012 was ($31.4) million, or ($0.36) per fully diluted share. This compares to net income of $5.7 million, or $0.06 per share on a fully diluted basis, for the second quarter of 2011. Operating margin was (12.5%) in the second quarter of 2012 compared to 5.0% in the comparable period of 2011, resulting in an operating loss of ($27.0) million, which compares to operating income of $10.2 million for the corresponding period in 2011. Net loss attributable to Quest Software, Inc. for the six months ended June 30, 2012, was ($28.7) million or ($0.33) per fully diluted share compared to net income of $9.1 million, or $0.10 per fully diluted share for the same period in 2011.

Non-GAAP Results

On a non-GAAP basis, net income attributable to Quest Software, Inc. for the second quarter of 2012 was $26.7 million, or $0.31 per fully diluted share. This compares to non-GAAP net income of $20.1 million, or $0.22 per share on a fully diluted basis for the second quarter of 2011. The non-GAAP operating margin was 17.1% in the second quarter of 2012, resulting in non-GAAP operating income of $36.8 million, compared to non-GAAP operating margin and operating income of 13.7% and $27.8 million, respectively, for the corresponding period in 2011. For the six months ended June 30, 2012, non-GAAP net income was $49.5 million, or $0.58 per fully diluted share. This compares to non-GAAP net income of $38.8 million, or $0.42 per fully diluted share, for the six months ended June 30, 2011. The non-GAAP operating margin was 16.1% for the six months ended June 30, 2012, resulting in non-GAAP operating income of $69.0 million, compared to non-GAAP operating margin and operating income of 13.2% and $51.8 million, respectively, in the comparable period of 2011.

Non-GAAP results exclude the after-tax effects of amortization of intangible assets acquired with business combinations, stock-based compensation expenses, costs directly associated with the company’s pending merger transaction, adjustment of redeemable noncontrolling interest to redemption value, retention bonus and severance costs related to the establishment of our Business Operations and Advanced Technology Center in Cork, Ireland, and patent infringement litigation costs. A reconciliation of GAAP to non-GAAP financial results is included with this press release.

Quest Software’s management prepares and uses non-GAAP financial measures in the presentation of the Company’s results to provide a consistent understanding of its historical operating performance and comparisons with peer companies. Management believes that non-GAAP reporting provides a meaningful representation of the Company’s on-going economic performance and therefore uses non-GAAP reporting internally to evaluate and manage the Company’s operations. Management believes excluding charges such as those described above from its GAAP results facilitates investors’ understanding of the Company’s ongoing business operating results. These non-GAAP financial measures also facilitate comparisons to the operating results of the Company’s competitors and provide investors with transparency with respect to the supplemental information used by management in its operational and financial decision making. These non-GAAP financial measures are not intended to be considered in isolation or as a substitute for measures of financial performance prepared in conformity with GAAP.

Change in Consolidated Statement of Cash Flows Presentation

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 the change of presentation is not material to any periods affected. We have adjusted previously reported consolidated statements of cash flows to conform to the current year presentation.

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 with the SEC 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. We have presented the corrected consolidated balance sheet as of December 31, 2011, the corrected statement of operations for the three months and six months ended June 30, 2011, and the corrected statement of cash flows for the three months and six months ended June 30, 2011.

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, subject to certain exceptions, all of the outstanding shares of the Company’s common stock for a purchase price of $28.00 per share in cash. In connection with entering into the Merger Agreement, the Company and affiliates of Insight Venture Management, LLC (“Insight”) and Vector Capital (together with Insight, the “Buyout Group”) agreed to terminate 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 termination of the Prior Merger Agreement became effective on June 30, 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. No assurance can be given that the merger will be completed.

Additional Information about the Pending Merger and Where to Find It

This communication may be deemed to be solicitation material in respect of the pending merger of the Company with a subsidiary of Dell. In connection with the pending transaction, the Company has filed a preliminary proxy statement and other relevant materials with the Securities and Exchange Commission (“SEC”), and intends to file a definitive proxy statement and other relevant materials. The definitive proxy statement will be sent or given to the stockholders of the Company and will contain important information about the pending transaction and related matters. BEFORE MAKING ANY VOTING DECISION, QUEST SOFTWARE’S STOCKHOLDERS ARE URGED TO READ THE PROXY STATEMENT AND THOSE OTHER MATERIALS CAREFULLY AND IN THEIR ENTIRETY BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION ABOUT THE COMPANY AND THE PENDING TRANSACTION. The proxy statement and other relevant materials (when they become available), and any other documents filed by Quest Software with the SEC, may be obtained free of charge at the SEC’s website at www.sec.gov. In addition, security holders will be able to obtain free copies of the proxy statement from Quest Software by contacting Quest Software’s Investor Relations by telephone at (949) 754-8000, or by mail at Quest Software, Inc., 5 Polaris Way, Aliso Viejo, California 92656, Attention: Investor Relations, or by going to Quest Software’s Investor Relations page on its corporate web site at www.quest.com.

Participants in the Solicitation

Quest Software and its directors and executive officers may be deemed to be participants in the solicitation of proxies from the stockholders of Quest Software in connection with the pending merger. Information regarding the interests of these directors and executive officers in the transaction described herein will be included in the proxy statement described above. Additional information regarding these directors and executive officers is included in Quest Software’s amended Annual Report on Form 10-K/A, which was filed with the SEC on April 30, 2012.

About Quest Software, Inc.

Established in 1987, Quest Software (Nasdaq: QSFT) provides simple and innovative IT management solutions that enable more than 100,000 global customers to save time and money across physical and virtual environments. Quest products solve complex IT challenges ranging from database management, data protection, identity and access management, monitoring, user workspace management to Windows management.

Quest and Quest Software are registered trademarks of Quest Software, Inc. The Quest Software logo and all other Quest Software product or service names and slogans are registered trademarks or trademarks of Quest Software, Inc. All other trademarks and registered trademarks are property of their respective owners.

Forward-Looking Statements

This release may include predictions, estimates and other information that might be considered forward-looking statements, including statements relating to expectations of future revenue and operating margin performance and other operating prospects. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially from those anticipated as a result of various factors, including: (a) the risk that Quest Software’s business could be disrupted as a result of uncertainty related to its recently announced merger agreement with Dell (the “Merger”); (b) the inability to complete the Merger in the timeframe or manner currently anticipated, or at all, as a result of several factors, including, among other things, the failure of one or more of the merger agreement’s closing conditions, litigation relating to the Merger, or the failure to obtain stockholder approval of the Merger; (c) the requirement in the merger agreement that we secure Dell’s consent prior to engaging in certain actions during the pendency of the Merger, (d) the risk that this requirement will prevent us from pursuing opportunities or otherwise taking actions that we might otherwise have; (e) the impact of adverse changes in general economic conditions on Quest Software’s relationships with customers, strategic partners and vendors; reductions or delays in information technology spending; variations in demand or the size and timing of customer orders; (f) competitive conditions in Quest Software’s various product areas; (g) rapid technological change; (h) risks associated with the development and market acceptance of new products and product strategies; (i) disruptions caused by acquisitions of companies and/or technologies; (j) fluctuating currency exchange rates and risks associated with international operations; (k) the need to attract and retain qualified employees; (l) risks associated with Quest Software’s ongoing patent litigation; and (m) other risks inherent in software businesses. For a discussion of these and other related risks, please refer to Quest Software’s recent SEC filings, including, but not limited to, the Annual Report on Form 10-K for the year ended December 31, 2011, the Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, and any subsequently filed reports, which are available on the SEC's website at www.sec.gov. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date thereof. Quest Software undertakes no obligation to update forward-looking statements to reflect events or circumstances after the date thereof.

Social Networks:

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Web Links Referenced in this Release:

Quest Software, Inc.: www.quest.comTwitter: http://twitter.com/#!/QuestFacebook: http://www.facebook.com/#!/pages/Quest-Software/65026711832LinkedIn: http://www.linkedin.com/companies/quest-softwareQuest TV: http://www.quest.com/tv/

  QUEST SOFTWARE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) (Unaudited)         Three Months Ended Six Months Ended June 30 June 30 2012 2011 2012 2011   Revenues: Licenses $ 71,752 $ 77,632 $ 141,735 $ 144,367 Services   143,950     125,338   286,162     246,760 Total revenues 215,702 202,970 427,897 391,127 Cost of revenues: Licenses 2,786 2,550 5,669 4,334 Services 24,650 22,634 48,652 43,600 Amortization of purchased technology   7,296     5,249   14,264     9,899 Total cost of revenues   34,732     30,433   68,585     57,833 Gross profit 180,970 172,537 359,312 333,294 Operating expenses: Sales and marketing 87,277 86,983 173,239 168,713 Research and development 45,461 43,117 91,835 84,840 General and administrative 24,258 28,078 51,085 56,271 Amortization of other purchased intangible assets 4,551 4,198 12,842 7,945 Transaction fees - pending merger   46,426     -   52,061     - Total operating expenses   207,973     162,376   381,062     317,769 Income (loss) from operations (27,003 ) 10,161 (21,750 ) 15,525 Other (expense) income, net   (2,400 )   122   (3,274 )   1,279 Income (loss) before income tax provision (29,403 ) 10,283 (25,024 ) 16,804 Income tax provision   2,102     4,565   3,880     7,716 Net income (loss) (31,505 ) 5,718 (28,904 ) 9,088 Net loss attributable to noncontrolling interest   114     -   181     - Net income (loss) attributable to Quest Software, Inc. $ (31,391 ) $ 5,718 $ (28,723 ) $ 9,088   Net income (loss) per share attributable to Quest Software, Inc. stockholders: Basic $ (0.37 ) $ 0.06 $ (0.34 ) $ 0.10 Diluted $ (0.36 ) $ 0.06 $ (0.33 ) $ 0.10   Weighted–average common shares outstanding: Basic 84,368 88,320 83,896 90,301 Diluted 86,769 90,363 85,987 92,742  

Reconciliation of Non-GAAP Financial Measures to Comparable U.S. GAAP Measures (Unaudited)

The Company has provided a reconciliation of each non-GAAP financial measure used in this earnings release to the most directly comparable GAAP financial measure. These measures differ from GAAP in that they exclude amortization of intangible assets acquired with business combinations, stock-based compensation expenses, costs directly associated with the company’s pending merger transaction, adjustment of redeemable noncontrolling interest to redemption value, retention bonus and severance costs related to the establishment of our Business Operations and Advanced Technology Center in Cork, Ireland, and patent infringement litigation costs. The Company’s basis for these adjustments is described below.

Quest Software’s management prepares and uses non-GAAP financial measures in the presentation of the Company’s results to provide a consistent understanding of its historical operating performance and comparisons with peer companies. Management believes that non-GAAP reporting provides a meaningful representation of the Company’s on-going economic performance and therefore uses non-GAAP reporting internally to evaluate and manage the Company’s operations. Management believes excluding charges such as those described above from its GAAP results facilitates investors’ understanding of the Company’s ongoing business operating results. These non-GAAP financial measures also facilitate comparisons to the operating results of the Company’s competitors and provide investors with transparency with respect to the supplemental information used by management in its operational and financial decision making. These non-GAAP financial measures are not intended to be considered in isolation or as a substitute for measures of financial performance prepared in conformity with GAAP.

Management excludes the expenses described above when evaluating the Company’s operating performance and believes that the resulting non-GAAP measures are useful to investors and financial analysts in assessing the Company’s operating performance due to the following factors:

• The Company does not acquire businesses on a predictable cycle. The Company, therefore, believes that the presentation of non-GAAP measures that adjust for the impact of intangible asset amortization that are related to business combinations and acquisition related costs, provides investors and financial analysts with a consistent basis for comparison across accounting periods and, therefore, is useful to help investors and financial analysts understand the Company's operating results and underlying operational trends.
• Amortization costs are fixed at the time of an acquisition, then amortized over a period of several years after the acquisition and generally cannot be changed or influenced by management after the acquisition.
• Although stock-based compensation is an important aspect of the compensation of the Company’s employees and executives, stock-based compensation expense and its related tax impact are excluded as such charges are generally fixed at the time of grant and amortized over a period of several years and cannot be changed or influenced by management after the grant.
• Stock-based compensation is not an expense that typically requires or will require cash settlement by the Company.
• Litigation costs arising from our patent litigations are excluded because they are non-recurring.
• Adjustment to the value of redeemable noncontrolling interest to the redemption amount is excluded as the Company believes it is not indicative of future operating results and that investors benefit from an understanding of Quest Software’s operating results without giving effect to this adjustment.
• Costs directly associated with the Company’s pending merger transaction are excluded as such costs are non-recurring.
• Retention bonus and severance costs related to the establishment of our Business Operations and Advanced Technology Center in Cork, Ireland are excluded because these expenses are non-recurring.
• The estimated income tax effects on the above items adjust the provision for income taxes to reflect the effect of the non-GAAP adjustments on non-GAAP operating income.

These non-GAAP financial measures are not prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and may differ from the non-GAAP information used by other companies. There are significant limitations associated with the use of non-GAAP financial measures. The additional non-GAAP financial information presented here should be considered in conjunction with, and not as a substitute for or superior to, the financial information presented in accordance with GAAP (such as net income and earnings per share) and should not be considered measures of the Company’s liquidity. Furthermore, the Company in the future may exclude amortization related to new business combinations from financial measures that it releases, and the Company expects to continue to incur stock-based compensation expenses.

  QUEST SOFTWARE, INC. AND SUBSIDIARIES RECONCILIATION OF NON-GAAP FINANCIAL MEASURES TO MOST DIRECTLY COMPARABLE GAAP FINANCIAL MEASURES (In thousands, except per share data) (Unaudited)           Three Months Ended June 30 Six Months Ended June 30 2012 2011 2012 2011 GAAP total cost of revenues $ 34,732 $ 30,433 $ 68,585 $ 57,833 Amortization of purchased technology (7,296 ) (5,249 ) (14,264 ) (9,899 ) Stock-based compensation expense (217 ) (238 ) (450 ) (554 ) Acquisition related costs (7 ) - (7 ) - Retention bonus and severance costs   -     (29 )   -     (29 ) Non-GAAP total cost of revenues $ 27,212   $ 24,917   $ 53,864   $ 47,351     GAAP gross profit $ 180,970 $ 172,537 $ 359,312 $ 333,294 Amortization of purchased technology 7,296 5,249 14,264 9,899 Stock-based compensation expense 217 238 450 554 Acquisition related costs 7 - 7 - Retention bonus and severance costs   -     29     -     29   Non-GAAP gross profit $ 188,490   $ 178,053   $ 374,033   $ 343,776     GAAP income (loss) from operations $ (27,003 ) $ 10,161 $ (21,750 ) $ 15,525 Amortization of purchased technology 7,296 5,249 14,264 9,899 Amortization of other purchased intangible assets 4,551 4,198 12,842 7,945 Stock-based compensation expense 5,191 5,493 11,275 12,906 Pending merger transaction costs 46,426 - 52,061 - Patent infringement litigation costs 158 1,400 316 1,769 Acquisition related costs 228 448 (6 ) 1,255 Retention bonus and severance costs   (52 )   896     (48 )   2,473   Non-GAAP income from operations $ 36,795   $ 27,845   $ 68,954   $ 51,772     GAAP net income (loss) attributable to Quest Software, Inc. $ (31,391 ) $ 5,718 $ (28,723 ) $ 9,088 Amortization of purchased technology 7,296 5,249 14,264 9,899 Amortization of other purchased intangible assets 4,551 4,198 12,842 7,945 Stock-based compensation expense 5,191 5,493 11,275 12,906 Pending merger transaction costs 46,426 - 52,061 - Patent infringement litigation costs 158 1,400 316 1,769 Acquisition related costs 228 448 (6 ) 1,255 Retention bonus and severance costs (52 ) 896 (48 ) 2,473 Other income 362 (9 ) 362 (9 ) Tax effect of these adjustments (5,902 ) (3,343 ) (12,505 ) (6,557 ) Net loss attributable to noncontrolling interest   (132 )   -     (350 )   -   Non-GAAP net income attributable to Quest Software, Inc. $ 26,735   $ 20,050   $ 49,488   $ 38,769     GAAP net income (loss) per basic share attributable to Quest Software, Inc. stockholders $ (0.37 ) $ 0.06 $ (0.34 ) $ 0.10 Amortization of purchased technology 0.09 0.06 0.17 0.11 Amortization of other purchased intangible assets 0.05 0.05 0.15 0.09 Stock-based compensation expense 0.06 0.06 0.13 0.14 Pending merger transaction costs 0.55 - 0.62 - Patent infringement litigation costs 0.00 0.02 0.00 0.02 Acquisition related costs 0.00 0.01 (0.00 ) 0.01 Retention bonus and severance costs (0.00 ) 0.01 (0.00 ) 0.03 Other income 0.01 (0.00 ) 0.01 (0.00 ) Tax effect of these adjustments (0.07 ) (0.04 ) (0.15 ) (0.07 ) Net loss attributable to noncontrolling interest   (0.00 )   -     (0.00 )   -   Non-GAAP net income per basic share attributable to Quest Software, Inc. stockholders $ 0.32   $ 0.23   $ 0.59   $ 0.43     Shares used in basic per share amounts   84,368     88,320     83,896     90,301     GAAP net income (loss) per fully diluted share attributable to Quest Software, Inc. stockholders $ (0.36 ) $ 0.06 $ (0.33 ) $ 0.10 Amortization of purchased technology 0.08 0.06 0.17 0.11 Amortization of other purchased intangible assets 0.05 0.05 0.15 0.09 Stock-based compensation expense 0.06 0.06 0.13 0.14 Pending merger transaction costs 0.54 - 0.61 - Patent infringement litigation costs 0.00 0.02 0.00 0.02 Acquisition related costs 0.00 0.00 (0.00 ) 0.00 Retention bonus and severance costs (0.00 ) 0.01 (0.00 ) 0.03 Other income 0.01 (0.00 ) 0.00 (0.00 ) Tax effect of these adjustments (0.07 ) (0.04 ) (0.15 ) (0.07 ) Net loss attributable to noncontrolling interest   (0.00 )   -     (0.00 )   -   Non-GAAP net income per fully diluted share attributable to Quest Software, Inc. stockholders $ 0.31   $ 0.22   $ 0.58   $ 0.42     Shares used in fully diluted per share amounts   86,769     90,363     85,987     92,742     QUEST SOFTWARE, INC. AND SUBSIDIARIES RECONCILIATION OF NON-GAAP FINANCIAL MEASURES TO MOST DIRECTLY COMPARABLE GAAP FINANCIAL MEASURES (Continued) (In thousands) (Unaudited)               Three Months Ended June 30, 2012 Sales and Marketing   Research and Development   General and Administrative   Transaction Fees   Amortization of Other Purchased Intangible Assets   Total Operating Expenses GAAP operating expenses $ 87,277 $ 45,461 $ 24,258 $ 46,426 $ 4,551 $ 207,973 Amortization - other purchased intangible assets - - - - (4,551 ) (4,551 ) Stock-based compensation expense (1,736 ) (1,387 ) (1,851 ) - - (4,974 ) Pending merger transaction costs - - - (46,426 ) - (46,426 ) Patent infringement litigation costs - - (158 ) - - (158 ) Retention bonus and severance costs 49 - 3 - - 52 Acquisition related costs   7       (228 )   -     -     (221 ) Non-GAAP operating expenses $ 85,597   $ 44,074   $ 22,024   $ -   $ -   $ 151,695     Three Months Ended June 30, 2011 Sales and Marketing   Research and Development   General and Administrative   Transaction Fees   Amortization of Other Purchased Intangible Assets   Total Operating Expenses GAAP operating expenses $ 86,983 $ 43,117 $ 28,078 $ - $ 4,198 $ 162,376 Amortization - other purchased intangible assets - - - - (4,198 ) (4,198 ) Stock-based compensation expense (1,682 ) (1,614 ) (1,958 ) - - (5,254 ) Patent infringement litigation costs - - (1,400 ) - - (1,400 ) Retention bonus and severance costs (677 ) - (191 ) - - (868 ) Acquisition related costs   -     -     (448 )   -     -     (448 ) Non-GAAP operating expenses $ 84,624   $ 41,503   $ 24,081   $ -   $ -   $ 150,208     Six Months Ended June 30, 2012 Sales and Marketing   Research and Development   General and Administrative   Transaction Fees   Amortization of Other Purchased Intangible Assets   Total Operating Expenses GAAP operating expenses $ 173,239 $ 91,835 $ 51,085 $ 52,061 $ 12,842 $ 381,062 Amortization - other purchased intangible assets - - - - (12,842 ) (12,842 ) Stock-based compensation expense (3,464 ) (2,884 ) (4,477 ) - - (10,825 ) Pending merger transaction costs - - - (52,061 ) - (52,061 ) Patent infringement litigation costs - - (316 ) - - (316 ) Retention bonus and severance costs 61 - (13 ) - - 48 Acquisition related costs   -     (58 )   71     -     -     13   Non-GAAP operating expenses $ 169,836   $ 88,893   $ 46,350   $ -   $ -   $ 305,079     Six Months Ended June 30, 2011 Sales and Marketing   Research and Development   General and Administrative   Transaction Fees   Amortization of Other Purchased Intangible Assets   Total Operating Expenses GAAP operating expenses $ 168,713 $ 84,840 $ 56,271 $ - $ 7,945 $ 317,769 Amortization - other purchased intangible assets - - - - (7,945 ) (7,945 ) Stock-based compensation expense (3,791 ) (3,767 ) (4,794 ) - - (12,352 ) Patent infringement litigation costs - - (1,769 ) - - (1,769 ) Retention bonus and severance costs (1,646 ) - (798 ) - - (2,444 ) Acquisition related costs   -     -     (1,255 )   -     -     (1,255 ) Non-GAAP operating expenses $ 163,276   $ 81,073   $ 47,655   $ -   $ -   $ 292,004     QUEST SOFTWARE, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands) (Unaudited)     June 30 December 31 2012 2011   ASSETS   Current assets: Cash and cash equivalents $ 197,356 $ 192,165 Short-term investments 41,360 36,774 Accounts receivable, net 147,690 201,636 Prepaid expenses and other current assets 54,453 45,846 Deferred income taxes, net   21,382   21,647 Total current assets 462,241 498,068 Property and equipment, net 101,834 94,602 Long-term investments 10,896 24,832 Intangible assets, net 126,843 150,386 Goodwill 864,670 858,444 Deferred income taxes, net 20,123 17,559 Other assets   64,888   55,627 Total assets $ 1,651,495 $ 1,699,518   LIABILITIES AND EQUITY   Current liabilities: Accounts payable $ 9,367 $ 11,723 Accrued compensation 55,433 56,148 Other accrued expenses 44,963 42,845 Income taxes payable 8,415 14,482 Loans payable 70,672 91,597 Deferred revenue   366,332   388,788 Total current liabilities   555,182   605,583   Long-term liabilities: Deferred revenue 109,955 111,050 Income taxes payable 51,299 51,276 Loans payable 33,381 32,133 Other long-term liabilities   7,177   9,942 Total long-term liabilities   201,812   204,401   Total liabilities 756,994 809,984   Redeemable noncontrolling interest 22,000 22,000   Quest Software Inc. stockholders' equity 859,734 854,585 Noncontrolling interest   12,767   12,949 Total equity   872,501   867,534 Total liabilities and equity $ 1,651,495 $ 1,699,518   QUEST SOFTWARE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)           Three Months Ended Six Months Ended June 30 June 30 2012 2011 2012 2011 Cash flows from operating activities: Net income (loss) $ (31,505 ) $ 5,718 $ (28,904 ) $ 9,088 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 15,630 13,369 31,381 25,798 Compensation expense associated with stock-based payments 5,191 5,493 11,274 12,906 Impairment losses on intangible assets 195 - 3,560 - Unrealized foreign currency gains, net 1,978 681 (1,451 ) (2,666 ) Deferred income taxes (135 ) (75 ) 271 (296 ) Excess tax benefit related to stock-based compensation (1,136 ) (388 ) (1,402 ) (1,869 ) Other non-cash adjustments, net 1,028 356 1,329 924 Changes in operating assets and liabilities, net of effects of acquisitions: Accounts receivable (11,494 ) (8,889 ) 54,435 52,704 Prepaid expenses and other current assets 1,063 (1,442 ) (1,437 ) 1,600 Other assets (435 ) 562 (567 ) 2,307 Accounts payable (1,955 ) 2,519 325 3,305 Accrued compensation 6,706 4,831 (177 ) (5,892 ) Other accrued expenses 5,758 (162 ) 5,373 1,836 Income taxes payable (6,777 ) 20,878 (14,459 ) 20,188 Deferred revenue (2,938 ) 1,848 (23,552 ) (2,944 ) Other liabilities   (385 )   (1,090 )   (2,962 )   (3,139 ) Net cash (used in) provided by operating activities   (19,211 )   44,209     33,037     113,850   Cash flows from investing activities: Cash paid for acquisitions, net of cash acquired (3,164 ) (18,705 ) (10,730 ) (89,429 ) Purchases of property and equipment (8,477 ) (12,887 ) (16,606 ) (17,314 ) Change in restricted cash 140 3,428 1,077 (7,903 ) Purchases of cost method investments (4,217 ) (7,031 ) (6,323 ) (27,234 ) Purchases of investment securities (5,000 ) (1,069 ) (11,007 ) (5,136 ) Sales and maturities of investment securities 14,171 34,501 19,648 63,562 Contributions on equity method investment (3,500 ) - (5,426 ) - Cash paid for intellectual property - (1,500 ) - (1,500 ) Change in notes receivable   90     (400 )   -     (750 ) Net cash used in investing activities   (9,957 )   (3,663 )   (29,367 )   (85,704 ) Cash flows from financing activities: Proceeds from loans payable 1,004 - 1,565 - Repayment of loans payable (1,145 ) (135 ) (21,293 ) (238 ) Repurchases of common stock - (121,386 ) - (205,745 ) Repayment of capital lease obligations (117 ) (44 ) (248 ) (69 ) Cash paid for line of credit fees - - - (500 ) Proceeds from the exercise of stock options 8,226 4,677 22,977 24,925 Excess tax benefit related to stock-based compensation   1,136     388     1,402     1,869   Net cash provided by (used in) financing activities   9,104     (116,500 )   4,403     (179,758 ) Effect of exchange rate changes on cash and cash equivalents   (2,586 )   (5,367 )   (2,882 )   (827 ) Net (decrease) increase in cash and cash equivalents (22,650 ) (81,321 ) 5,191 (152,439 ) Cash and cash equivalents, beginning of period   220,006     285,415     192,165     356,533   Cash and cash equivalents, end of period $ 197,356   $ 204,094   $ 197,356   $ 204,094