| QUEST SOFTWARE INC Item 1A 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 |
| 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 part or all of your investment |
| Our future success may be impaired and our operating results will suffer if we cannot respond to rapid market, competitive and technological conditions in the software industry The market for our software products and services is characterized by: • rapidly changing technology; • frequent introduction of new products and services and enhancements to existing products and services by platform vendors of database, application and infrastructure products and by our competitors; • increasing complexity and interdependence of software applications; • consolidation of the software industry; • changes in industry standards and practices; • ability to attract and retain key personnel; and • changes in customer requirements and demands |
| To maintain our competitive position, we must continue to enhance our existing products and develop new products and services, functionality, and technology that address the increasingly sophisticated and varied needs of our customers and prospective customers, which requires significant investment in research and development resources and capabilities, involves significant technical and business risks and requires substantial lead-time and significant investments in product development |
| If we fail to anticipate new technology developments, customer requirements, industry standards, or if we are unable to develop new products and services that adequately address these new developments, requirements, and standards in a timely manner, or if we are incapable of timely bringing new or enhanced products to market, our products and services may become obsolete, we may not generate suitable returns from our research and development investments, and our ability to compete may be impaired, our revenue could decline, and our operating results may suffer |
| 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 and operating results |
| ” 11 ______________________________________________________________________ [38]Table of Contents • the discretionary nature of our customers’ purchasing decisions and budget cycles; • the timing of revenue recognition for sales of software products and services; • the extent to which our customers renew their maintenance contracts with us; • exposure to general economic conditions and reductions in corporate IT spending; • changes in our level of operating expenses and our ability to control costs; • our ability to attain market acceptance of new products and services and enhancements to our existing products; • our ability to introduce new products or enhancements to existing products and services in a timely manner; • our ability to maintain our field and inside sales organizations with adequate numbers of sales and services personnel, and to minimize our costs of sales and marketing through efficient allocation of sales resources and methods to products having different sales characteristics and profiles; • the introduction of new or enhanced products and services by our competitors and changes in the pricing policies of these competitors; • the relative growth rates of competing operating system, database and application platforms and competitive conditions among vendors of these platforms; • the unpredictability of the timing, level of sales and subsequent revenue recognition of our expanded efforts within our indirect sales channels; • costs related to acquisitions of technologies or businesses, including amortization costs for intangible assets with indefinite lives and uncertainties arising from the integration of products, services, employees and operations of acquired companies; and • the timing of releases of new versions of third-party software products that our products support or with which our products compete |
| In addition, the timing of our software product revenues is difficult to predict and can vary substantially from product-to-product and customer-to-customer |
| We base our operating expenses on our expectations regarding future revenue levels |
| The timing of larger orders and customer buying patterns are difficult to forecast |
| Therefore, we may not learn of shortfalls in revenue or earnings or other failures to meet our expectations until late in a particular quarter |
| As a result, if total revenues for a particular quarter are below our expectations, we would not be able to proportionately reduce operating expenses for that quarter |
| We have experienced seasonality in our orders and revenues, which may result in seasonality in our earnings |
| The fourth quarter of the year typically has the highest orders and revenues for the year and higher orders and revenues than the first quarter of the following year |
| We believe that this seasonality results primarily from the budgeting cycles of our customers being typically higher in the third and fourth quarters and, to a lesser extent, from the structure of our sales commission program |
| In addition, the tendency of some of our customers to wait until the end of a fiscal quarter to finalize orders has resulted in higher order volumes towards the end of the quarter |
| We expect this seasonality to continue in the future |
| Due to these factors, we believe that period-to-period comparisons of our results of operations are not necessarily meaningful and should not be relied upon as indications of future performance |
| Fluctuations in our results of operations are also likely to affect the market price of our common stock, if our operating results differ from expectations of investors or securities analysts, and may not be related to or indicative of our long-term performance |
| 12 ______________________________________________________________________ [39]Table of Contents The recent accounting pronouncement requiring employee stock-based payments to be accounted for using a fair-value method will materially reduce our reported operating margins, operating income, net income and net income per share We currently account for the issuance of stock options under Accounting Principles Board (“APB”) Opinion Nodtta 25, “Accounting for Stock Issued to Employees |
| ” Under APB Nodtta 25, no compensation expense is recognized for options granted to employees where the exercise price equals the market price of the underlying stock on the date of grant |
| In December 2004, the FASB issued SFAS Nodtta 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”), which eliminates the alternative to use the intrinsic value method of accounting under SFAS Nodtta 123, “Accounting for Stock-Based Compensation” (“SFAS 123”) and supersedes APB Nodtta 25, and its related implementation guidance |
| SFAS 123R will require us to measure all employee stock-based compensation awards using a fair value method and record such amounts as an expense in our statement of operations |
| We adopted SFAS 123R in our first quarter of 2006, beginning January 1, 2006 |
| The additional expense associated with stock options will be substantial and will materially reduce our operating margins, operating income, net income and net income per share |
| These reductions in our operating results may result in a reduction to our stock price and market value, the magnitude of which cannot be determined |
| Note 1 of our “Notes to Consolidated Financial Statements” contains a detailed presentation of our current methods of accounting for stock-based compensation plans and includes pro forma fair value disclosures currently required under SFAS Nodtta 123 |
| Variations in the size and timing of our customer orders and differing nature of our products and services could expose us to revenue fluctuations and higher operating costs Our license revenues in any quarter are substantially dependent on orders booked and delivered in that quarter |
| Our revenues in a given quarter could be adversely affected if we are unable to complete one or more large license agreements, or if the contract terms were to prevent us from recognizing revenue during that quarter |
| The sales cycles for certain of our software products, such as SharePlex, can last from three to nine months, or longer, and often require pre-purchase evaluation periods and customer education, which can affect timing of orders |
| Further, we have often booked a large amount of our sales in the last month, weeks or days 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 current order volumes to generate revenues for that quarter |
| These factors may cause significant periodic variation in our license revenues |
| In addition, we incur or commit to operating expenses based on anticipated revenue levels, and generally do not know whether revenues in any quarter will meet expectations until the end of that quarter |
| Our product portfolio is engineered for a broad variety of operating system, database and application platforms, and having a diverse set of functions and features |
| Some products, such as our database management products and other component products, are directed at database administrators and are generally sold at lower price points, and we strive to generate demand for these products through our telesales organization and marketing programs designed to maximize lead generation and website traffic |
| Sales of other, enterprise-wide products, such as SharePlex, our application management offerings and products acquired from Vintela, require substantial time and effort from our sales and support staff as well as involvement by our professional services organizations and, to an increasing degree, our systems integrator partners |
| Large individual sales, or even small delays in customer orders, can cause significant variation in our revenues and adversely affect our results of operations for a particular period |
| Historically, we have not placed significant reliance on large sales transactions in any given quarter, with a substantial volume of our revenues being driven from smaller transactions |
| However, if we encounter difficulty sustaining our component product volumes, and cannot generate a sufficient number of large customer orders, or if customers delay or cancel such orders in a particular quarter, our revenues and operating results may be adversely affected |
| For these reasons, we face increasing complexity in building and sustaining the optimum combination of field and inside sales personnel to address the various and changing sales and distribution characteristics of our products, which in turn impacts our ability to manage and minimize our sales and marketing costs |
| 13 ______________________________________________________________________ [40]Table of Contents We rely heavily on our direct sales activities for license and services revenues, including renewals of annual post-contract technical support services |
| We have in the past restructured or made other adjustments to our sales force in response to management changes, product changes, performance issues and other internal considerations |
| We recently made some adjustments to our coverage model to increase focus on global and other major accounts |
| We’ve also recently increased headcount in our telesales and sales associate groups and relocated our US support billing personnel |
| These changes can result in a temporary lack of focus and reduced productivity, which could have temporary negative effects on our license or services revenues |
| Accordingly, if our revenue growth rates slow or our revenues decline, or if we fail to efficiently correlate our sales and marketing resources to our various products and their differing sales and distribution strategies, our operating results could be seriously impaired because many of our expenses are relatively fixed in nature and cannot be easily or quickly changed |
| Many of our products are vulnerable to direct competition from Oracle and other platform vendors We compete with Oracle in the market for database management solutions and the competitive pressure continues to increase |
| 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 and expand their development products possibly at no additional cost to its users |
| Competition from Oracle with certain of our Database Management products including SharePlex and Quest Central for Oracle has increased over the last two years and has continued to increase with Oracle’s introduction of the next version of its database, known as Oracle 10g |
| Oracle 10g has enhanced capabilities in the functions competitive with SharePlex, Quest Central for Oracle and with the Oracle monitoring capabilities of Foglight |
| We believe increased competition from Oracle has materially depressed our SharePlex and Quest Central for Oracle revenues over the last four years |
| Oracle recently announced general availability of products to compete with our market leading Code Quality and Optimization products for Oracle databases, which contribute significantly to our revenues and net income |
| In some cases these types of platform vendor-provided tools are bundled with the platform and in other cases they are separately chargeable products, albeit at significantly lower price points |
| The inclusion of the functionality of our software as standard features of the underlying database solution or application supported by our products or sale at much lower cost could erode our revenues, particularly if the competing products and features were of comparable capability to our products |
| Even if the functionality provided as standard features or lower costs by these system providers is more limited than that of our software, there can be no assurance that a significant number of customers would not elect to accept more limited functionality in lieu of purchasing our products |
| Moreover, there is substantial risk that the mere announcements of competing products or features by large competitors such as Oracle could result in the delay or cancellation of customer orders for our products in anticipation of the introduction of such new products or features |
| Our migration products for Microsoft’s Active Directory and Exchange are vulnerable to fluctuations in the rate at which customers migrate to these products Our products for the migration, administration and management of Microsoft’s Active Directory and Exchange products currently contribute approximately one-third of our revenue from software license sales and have been the primary contributors to license revenue growth in fiscal 2005 and 2004 |
| Our ability to sell licenses for our Active Directory and Exchange migration products depends in part on the rate at which customers migrate to newer versions of Microsoft’s Windows 2000 or Windows XP operating system or to newer versions of Microsoft Exchange, and from other messaging platforms to Exchange |
| If these migration rates were to materially decrease, our license revenues from these migration products would likely decline |
| Many of our products are dependent on database or application technologies of others; if these technologies lose market share or become incompatible with our products, or if these vendors introduce 14 ______________________________________________________________________ [41]Table of Contents competitive products or acquire or form strategic relationships with our competitors, 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 relationships with providers of major database and enterprise software programs, including Oracle, IBM, Microsoft, SAP and Siebel (now a part of Oracle) |
| Our competitive advantage consists in substantial part on the integration between our products and products provided by these major software providers, and our extensive knowledge of their products and technologies |
| If these companies for any reason decide to promote technologies and standards that are not compatible with our technologies, or if they lose market share for their database or application products, our business, operating results and financial condition would be materially adversely affected |
| Furthermore, these major software vendors could attempt to increase their presence in the markets we serve by either introducing products that compete with our products or acquiring or forming strategic alliances with our competitors |
| These companies have longer operating histories, larger installed bases of customers and substantially greater financial, distribution, marketing and technical resources than we do, as well as well-established relationships with many of our present and potential customers, and may be in better position to withstand and respond to the current factors impacting this industry |
| As a result, we may not be able to compete effectively with these companies in the future, which could materially adversely affect our business, operating results and financial condition |
| Failure to develop and sustain additional distribution channels in the future may adversely affect our ability to grow revenues We intend to direct additional efforts to drive domestic and international revenue growth through sales of our products and services through indirect distribution channels, such as global hardware and software vendors, systems integrators, or value-added resellers |
| Our ability to increase future revenues depends on our ability to expand our indirect distribution channels |
| If we fail in our efforts to maintain, expand and diversify our indirect distribution channels, our business, results of operations and financial condition could be adversely affected |
| Increasing activity in indirect distribution channels will present a number of additional risks, including: • we may face conflicts between the activities of our indirect channels and our direct sales and marketing activities, which may result in lost sales and customer confusion; • our channel partners can cease marketing and distributing our products and services with limited or no notice and with little or no penalty; • our channel partners may not be able to effectively sell our products and services; • our channel partners may experience financial difficulties that might lead to delays, or even default, in their payment obligations; • we may not be able to recruit additional channel partners, or replace any of our existing ones; and • our channel partners may also offer competitive products and services, and may not give priority to marketing our products or services |
| Failure to maintain effective internal control over financial reporting could adversely affect the price of our common stock Pursuant to rules adopted by the SEC implementing Section 404 of the Sarbanes-Oxley Act of 2002, we are required to assess the effectiveness of our internal controls over financial reporting and report whether such internal controls are effective |
| Our auditors must issue an attestation report on such assessment |
| Accordingly, we have undertaken to evaluate, test and remediate, if necessary, our internal controls pursuant to a clearly defined internal plan and schedule |
| Although we believe that our efforts will enable us to provide the required report and our independent auditors to provide the required attestation as of the end of each fiscal year, there can be no assurance that our assessment will conclude that our internal controls over financial reporting are effective |
| 15 ______________________________________________________________________ [42]Table of Contents Future weaknesses or significant deficiencies in our internal control over financial reporting could adversely affect the market price of our common stock |
| Intense competition in the markets for our products could adversely affect our results of operations The markets for our products are highly competitive |
| As a result, our future success will be affected by our ability to, among other things, outperform our competitors in meeting the needs of current and prospective customers and identifying and addressing new technological and market opportunities |
| Our competitors may develop more advanced technology, adopt more aggressive pricing policies and undertake more effective sales and marketing campaigns and may be able to leverage more extensive financial, technical or partner resources |
| If we are unable to maintain our competitive position, our revenues may decline and our operating results may be adversely affected |
| Our operating results may be negatively impacted by fluctuations in foreign currency exchange rates Our international operations are generally conducted through our international subsidiaries, with the associated revenues and related expenses, and balance sheets, denominated in the currency of the country in which the international subsidiaries operate |
| As a result, our operating results may be harmed by fluctuations in exchange rates between the US Dollar and other foreign currencies |
| The foreign currencies to which we currently have the most significant exposure are the Canadian Dollar, the British Pound, the Euro and the Australian Dollar |
| To date, we have not used derivative financial instruments to hedge our exposure to fluctuations in foreign currency exchange rates |
| Our international operations and our planned expansion of our international operations expose us to certain risks We maintain research and development operations primarily in Canada, Australia, Russia and Israel, and continue to expand our international sales activities as part of our business strategy |
| As a percentage of total revenues, revenues outside of North America were 34prca and 31prca for the years ended December 31, 2005 and 2004, respectively |
| As a result, we face increasing risks from our international operations, including, among others: • difficulties in staffing, managing and operating our foreign operations; • difficulties in coordinating the activities of our geographically dispersed and culturally diverse operations; • difficulties in adapting our existing foreign operations, particularly in Asia, to the control structure and requirements of a US public entity given those Asian countries historical environment and their cultural approach to conducting business; • longer payment cycles and difficulties in collecting accounts receivable; • seasonal reductions in business activity during the summer months in EMEA and in other periods in other countries; • increased financial accounting and reporting burdens and complexities; • difficulties in hedging foreign currency transaction exposures; • limitations on future growth or inability to maintain current levels of revenue from international operations if we do not invest sufficiently in our international operations; • potentially adverse tax consequences; • potential loss of proprietary information due to piracy, misappropriation or weaker laws regarding intellectual property protection; 16 ______________________________________________________________________ [43]Table of Contents • delays in localizing our products; • political unrest or terrorism, particularly in areas in which we have facilities; • our ability to adapt and conform to accepted local business practices and customs, including providing letters of credit or other forms of support to or for the benefit of our subsidiaries or resellers; • compliance with a wide variety of complex foreign laws and treaties, including employment restrictions; and • compliance with licenses, tariffs and other trade barriers |
| Operating in international markets also requires significant management attention and financial resources and will place additional burdens on our management, administrative, operational and financial infrastructure |
| We cannot be certain that investment and additional resources required in establishing facilities in other countries will produce desired levels of revenue or profitability |
| In addition, we have limited experience in developing localized versions of our products and marketing and distributing them internationally |
| 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 |
| Acquisitions require us 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 |
| In addition, integrating multiple acquisitions at the same time, which we must now do with Vintela and Imceda, places significant strain on our existing personnel and resources |
| 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 use cash, incur debt or issue equity securities to pay for any future acquisitions |
| Use of cash or debt may affect our liquidity and use of cash would reduce our cash reserves and reduce our financial flexibility |
| 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 intangible assets with indefinite useful lives |
| 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 an acquisition |
| Accounting for equity investments in companies may affect our operating results We have made equity investments in other software companies and a private equity fund |
| Some of these investments have not performed well, and we’ve recognized accounting charges due to the impairment of the value of our investments |
| Other investments have performed better, including our investment in one software company, which was subsequently acquired by a publicly traded company |
| We regularly consider opportunities to make equity investments in other companies focused on software development or marketing activities, and expect from time to time to complete additional investments |
| These investments are risky because the market for the products and technologies being developed by these companies are typically in the early stages and may never materialize |
| In addition, we have made at least one investment in a private software company that has required us to consolidate the results of operations of this company into ours and we may determine in the future to invest in additional companies at similar levels |
| We may be required to incur charges for the impairment of value of our investments |
| We will be required to closely monitor the financial health of the private companies in which we hold or make equity investments |
| If we are required to consolidate the operating results of these companies and they are unable to operate to a profit, our operating results may be adversely affected |
| For 17 ______________________________________________________________________ [44]Table of Contents investments accounted for under the equity method, we will also be required to record losses if we determine that an impairment exists |
| We face risks associated with governmental contracting We derive a portion of our revenues from contracts with the United States government and its agencies and from contracts with state and local governments or agencies |
| Demand and payment for our products and services are impacted by public sector budgetary cycles and funding availability, with funding reductions or delays adversely impacting public sector demand for our products and services |
| Public sector customers may also change the way they procure new contracts and may adopt new rules or regulations governing contract procurement, including required competitive bidding or use of “open source” products, where available |
| These factors may limit the growth of or reduce the amount of revenues we derive from the public sector, which could negatively affect our results of operations |
| Our efforts to constrain costs may strain our management, administrative, operational and financial infrastructure We are focused on increasing our operating margins |
| These efforts place a strain on our management, administrative, operational and financial infrastructure |
| Our ability to manage our increasingly complex operations while reducing operating costs requires us to continue to improve our operational, financial and management controls and reporting systems and procedures |
| There can be no guarantees that we will be successful in achieving our profitability targets in any future quarterly or annual period |
| 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 |
| 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 |
| Failure to develop or leverage strategic relationships could harm our business by denying us selling opportunities and other benefits Our development, marketing, and distribution strategies rely increasingly on our ability to form strategic relationships with software and other technology companies |
| These business relationships often consist of cooperative marketing programs, joint customer seminars, lead referrals, and cooperation in product development |
| Many of these relationships are not contractual and depend on the continued voluntary cooperation of each party with us |
| Divergence in strategy or change in focus by, or competitive product offerings by, any of these companies may interfere with our ability to develop, market, sell, or support our products, which in turn could harm our business |
| Further, if these companies enter into strategic alliances with other companies or are acquired, they could reduce their support of our products |
| Our existing relationships may be jeopardized if we enter into alliances with competitors of our strategic partners |
| In addition, one or more of these companies may use the information they gain from their relationship with us to develop or market competing products |
| Failure to adequately protect our intellectual property rights 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 generally rely on a combination of trademark, trade secret, patent, copyright law and contractual restrictions to establish and protect our proprietary rights in our products and services |
| 18 ______________________________________________________________________ [45]Table of Contents 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, whether successful or unsuccessful, could result in substantial costs and diversion of management and financial resources, which could harm our business |
| 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 |
| Third parties may claim that our software products or services infringe on their intellectual property rights, exposing us to litigation that, regardless of merit, may be costly to defend Our success and ability to compete are also dependent upon our ability to operate without infringing upon the proprietary rights of others |
| Third parties may claim that our current or future products infringe their intellectual property rights |
| Any such claim, with or without merit, could have a significant effect on our business and financial results |
| Any future third party claim could be time consuming, divert management’s attention from our business operations and result in substantial litigation costs, including any monetary damages and customer indemnification obligations, which may result from such claims |
| In addition, parties making these claims may be able to obtain injunctive or other equitable relief affecting our ability to license the products that incorporate the challenged intellectual property |
| As a result of such claims, we may be required to obtain licenses from third parties, develop alternative technology or redesign our products |
| We cannot be sure that such licenses would be available on terms acceptable to us, if at all |
| If a successful claim is made against us and we are unable to develop or license alternative technology, our business and financial results and position could be materially adversely affected |
| Our business may be adversely affected if our software contains errors or security flaws The software products we offer are inherently complex |
| Despite testing and quality control, we cannot be certain that errors or security flaws 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 them 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 security flaws or if we fail to meet our customers’ expectations |
| As a result of the foregoing, we could experience: • 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; 19 ______________________________________________________________________ [46]Table of Contents • legal actions by customers against us which could, whether or not successful, increase costs and distract our management; and • increased insurance costs |
| The detection and correction of any security flaws can be time consuming and costly |
| 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 is located in California, and we are subject to risks of damage and business disruptions resulting from earthquakes, floods, fires and similar events, as well as from power outages |
| We have in the past 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 |
| Failure to attract and retain personnel may negatively impact our business Our ability to manage the operation of our business and our future success depend on our ability to attract, motivate and retain qualified employees |
| In addition, the success of our business is substantially dependent on the services of our Chief Executive Officer and other officers and key employees |
| As our business grows, we will need to hire additional administrative, sales and marketing, support, research and development and other personnel |
| 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 |
| 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 |
| We have historically used stock-based compensation as an important tool to attract and retain employees, generally through stock options granted under our stock incentive plans |
| The number of options available for grant under our stock incentive plans is limited and any future increase would require shareholder approval |
| There can be no guarantees that we will be able to obtain shareholder approval for required future increases in the number of shares authorized under our stock incentive plans |
| In addition, when we change the way we account 20 ______________________________________________________________________ [47]Table of Contents for stock options as a result of pending changes in accounting rules, we may reduce our reliance on the use of stock options, which may negatively affect our ability to recruit and retain qualified personnel |