<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 8-K
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED):MARCH 28, 1996
COMMISSION FILE NO. 0-19207
QUARTERDECK CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 95-4320650
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
13160 MINDANAO WAY, MARINA DEL REY, CALIFORNIA 90292
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (310) 309-3700
<PAGE> 2
ITEM 5. OTHER EVENTS
On March 28, 1996, Quarterdeck Corporation ("Quarterdeck") acquired
100% of the common stock of Datastorm Technologies, Inc. ("Datastorm") in
exchange for 5,200,000 shares of Quarterdeck Common Stock. This transaction
has been accounted for as a pooling of interests, and, as a result, the
accompanying consolidated financial statements are presented as if the
companies had been combined for all periods presented.
Datastorm had a calendar year end and accordingly, the Datastorm
Statements of Operations for the years ended December 31, 1995, 1994 and 1993
have been combined with the Quarterdeck Statements of Operations for the fiscal
years ended September 30, 1995, 1994 and 1993.
On December 29, 1995, Quarterdeck acquired Inset Systems, Inc. ("Inset") in
exchange for 921,219 shares of Quarterdeck's common stock in a transaction that
was also accounted for as a pooling of interests.
The accompanying consolidated balance sheets as of September 30, 1995 and
1994 and the related statements of operations, stockholders' equity, and cash
flows for each of the years in the three year period ended September 30, 1995
have been restated to include the accounts and results of Datastorm and Inset.
Additional information relating to the Datastorm acquisition has been
provided in the Form 8-K filed on April 12, 1996, and in the form 8-K/A filed
on May 30, 1996. Additional information relating to the Inset acquisition has
been provided in the Form 8-K filed on January 12, 1996.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Pro Forma Financial Information:
Selected Consolidated Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Management's Discussion and Analysis of Financial Condition and Results of Operation . . . . . . . . . . . 4
Financial Statements and Financial Statement Schedule of Quarterdeck Corporation:
Consent of Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Consolidated Balance Sheets at September 30, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . . . 15
Consolidated Statements of Operations for fiscal years
ended September 30, 1995, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Consolidated Statements of Stockholders' Equity for
fiscal years ended September 30, 1995, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Consolidated Statements of Cash Flows for fiscal years ended
September 30, 1995, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Schedule II - Valuation and Qualifying Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
</TABLE>
2
<PAGE> 3
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data are derived from the
Company's consolidated financial statements. Historical results should not be
taken as necessarily indicative of the results that may be expected for any
future period. This consolidated data should be read in conjunction with the
consolidated financial statements and notes thereto. Certain items in the prior
years' consolidated financial statements have been reclassified to conform to
the 1995 presentation. During fiscal 1995, Quarterdeck acquired Landmark
Research International, Inc., Internetware, Inc. and StarNine Technologies, Inc.
in transactions accounted for as poolings of interest. All financial information
subsequent to October 1, 1992 has been restated to reflect the combined
operations of Landmark and Quarterdeck. StarNine and Internetware had results of
operations that were not material to Quarterdeck's consolidated financial
statements and therefore, periods prior to October 1, 1994 were not restated for
these two transactions. During the first six months of fiscal 1996, Quarterdeck
acquired Inset Systems, Inc. ("Inset") and Datastorm Technologies, Inc.
("Datastorm") in transactions accounted for as poolings of interest. All
financial information subsequent to October 1, 1990 has been restated to reflect
the combined operations of Inset, Datastorm and Quarterdeck. All amounts shown
are in thousands, except per share data.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net revenues . . . . . . . . . . . . . . . $117,606 $84,715 $83,578 $88,602 $68,838
Cost of revenues . . . . . . . . . . . . . 34,884 27,403 24,534 21,247 12,040
-------- -------- ------- ------- -------
Gross margin . . . . . . . . . . . . 82,722 57,312 59,044 67,355 56,798
Operating expenses:
Research and development . . . . . . 14,286 7,520 2,589 1,414 665
Sales and marketing . . . . . . . . . 30,624 27,107 25,775 27,170 15,522
General and administrative . . . . . 20,704 20,908 20,716 17,671 14,730
Acquisition, restructuring
and other charges . . . . . . . . 7,409 12,863 -- -- --
Litigation settlement . . . . . . . . -- 615 -- -- --
Total operating expenses . . . . . . 73,023 69,013 49,080 46,255 30,917
Operating income (loss) . . . . . . . . . . 9,699 (11,701) 9,964 21,100 25,881
Interest income (expense), net . . . . . . 1,884 1,094 1,144 1,331 1,135
-------- -------- ------- ------- -------
Income (loss) before income taxes . . . . 11,583 (10,607) 11,108 22,431 27,016
Provision (benefit) for income taxes . . . 331 (5,982) 639 4,820 7,995
-------- -------- ------- ------- -------
Net income (loss) . . . . . . . . . . . . . $ 11,252 ($4,625) $10,469 $17,611 $19,021
======== ======== ======= ======= =======
Net income (loss) per share:
Primary . . . . . . . . . . . . . . $0.35 ($0.16) $0.35 $0.59 $0.76
======== ======== ======= ======= =======
Fully diluted . . . . . . . . . . . . $0.34 ($0.16) $0.35 $0.59 $0.76
======== ======== ======= ======= =======
Shares used to compute net income
(loss) per share:
Primary . . . . . . . . . . . . . . 32,057 28,675 29,721 29,761 25,119
======== ======== ======= ======= =======
Fully diluted . . . . . . . . . . . . 32,999 28,675 29,721 29,761 25,119
======== ======== ======= ======= =======
Additional unaudited pro forma data:
Income (loss) before income taxes . . $ 11,583 ($10,607) $11,108 $22,431 $27,016
Pro forma income taxes . . . . . . . 3,406 576 3,977 7,764 10,446
-------- -------- ------- ------- -------
Pro forma net income (loss) . . . . . $ 8,177 ($11,183) $ 7,131 $14,667 $16,570
======== ======== ======= ======= =======
Pro forma income (loss) per share:
Primary . . . . . . . . . . . . . . . $0.26 ($0.39) $0.24 $0.49 $0.66
-------- -------- ------- ------- -------
Fully diluted . . . . . . . . . . . . $0.25 ($0.39) $0.24 $0.49 $0.66
======== ======== ======= ======= =======
AS OF SEPTEMBER 30,
------------------------------------------------------------------------------
1995 1994 1993 1992 1991
------- ------- ------- ------- -------
BALANCE SHEET DATA:
Working capital . . . . . . . . . . . . . . $29,490 $29,147 $35,619 $38,661 $32,266
Total assets . . . . . . . . . . . . . . . . 76,699 62,471 64,673 65,499 49,489
Long-term obligations . . . . . . . . . . . . 164 701 130 598 106
Stockholders' equity . . . . . . . . . . . . 44,270 36,606 53,606 52,937 41,683
</TABLE>
3
<PAGE> 4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Management's discussion and analysis of financial condition and
results of operations focuses primarily on liquidity, capital resources and the
results of the Company's operations. This Item should be read in conjunction
with the consolidated financial statements, the notes thereto and in the
Company's Form S-4 and Form 8-K regarding the Company's acquisition of Inset
Systems, Inc. ("Inset"), and in the Company's Form S-3 and Forms 8-K and 8-K/A
regarding the Company's acquisition of Datastorm Technologies, Inc.
("Datastorm"). This item should also be read in conjunction with the Company's
Quarterly Reports on Form 10-Q, which discuss the results of operations
subsequent to September 30, 1995. The historical results of operations are
not necessarily indicative of results to be expected from future performance.
In addition to an analysis of recent and historical financial results,
the following discussion includes an analysis of certain of the Company's
business risks, including risks which are inherent to software development as
well as specific trends and uncertainties relating to the competitive
environment in which the Company operates. The Company has sought to identify
the most significant risks to its business. However, the Company cannot predict
whether, or to what extent any of such risks may be realized nor can there be
any assurance that the Company has identified all possible issues which the
Company might face. In particular, the Company has recently completed a number
of acquisitions and made investments in certain companies and is in the process
of making additional acquisitions. During fiscal 1995, Quarterdeck acquired
Landmark, Internetware and StarNine in transactions accounted for as poolings of
interests. During the first six months of fiscal 1996, Quarterdeck acquired
Inset and Datastorm in transactions also accounted for as poolings of interests.
All financial information subsequent to October 1, 1992 has been restated to
reflect the combined operations of Landmark and all financial information
subsequent to October 1, 1990 has been restated to reflect the combined
operations of Inset and Datastorm together with Quarterdeck. StarNine and
Internetware had results of operations that were not material to Quarterdeck's
consolidated financial statements and therefore, periods prior to October 1,
1994 were not restated. The Company has also experienced substantial
restructuring of its operations and has experienced, and anticipates further,
substantial changes to its competitive environment. Investors should carefully
consider all such risks before making an investment decision with respect to the
Company's stock.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
percentage of net revenues represented by certain data derived from the
Company's Consolidated Statements of Operations:
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
---------------------------------
1995 1994 1993
----- ----- -----
<S> <C> <C> <C>
Net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0%
Cost of revenues . . . . . . . . . . . . . . . . . . . . . . . 29.7 32.3 29.4
----- ----- -----
Gross margin . . . . . . . . . . . . . . . . . . . . . . 70.3 67.7 70.6
Operating expenses:
Research and development . . . . . . . . . . . . . . . . 12.2 8.9 3.1
Sales and marketing . . . . . . . . . . . . . . . . . . 26.0 32.0 30.8
General and administrative . . . . . . . . . . . . . . . 17.6 24.7 24.8
Acquisition, restructuring and other charges . . . . . . . 6.3 15.2 --
Litigation settlement . . . . . . . . . . . . . . . . -- 0.7 --
----- ----- -----
Total operating expenses . . . . . . . . . . . . . . . . 62.1 81.5 58.7
----- ----- -----
Operating income (loss) . . . . . . . . . . . . . . . . . . . 8.2 (13.8) 11.9
Interest income, net . . . . . . . . . . . . . . . . . . . . . 1.6 1.3 1.4
----- ----- -----
Income (loss) before income taxes . . . . . . . . . . . . . . 9.8 (12.5) 13.3
Provision (benefit) for income taxes . . . . . . . . . . . . . 0.2 (7.0) 0.8
----- ----- -----
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . 9.6% (5.5%) 12.5%
===== ===== =====
</TABLE>
4
<PAGE> 5
FISCAL 1995 COMPARED TO FISCAL 1994
Net Revenues: Net revenues for the fiscal year ended September 30,
1995 increased by 38.8% or $32,891,000 over the fiscal year ended September 30,
1994. The increase in net revenues compared with the prior year period
resulted primarily from broadening the Company's product portfolio throughout
fiscal 1995 through product development and acquisitions. The Company has also
broadened its distribution capabilities through expansion of its distribution
network and acquisition of a direct sales organization.
The Company released several new products during fiscal 1995 including
a complete line of products for use on the Internet and private distributed
data networks. The first of these products, Quarterdeck WebAuthor, was
released in March 1995. Three other Internet related applications, Quarterdeck
Mosaic, Quarterdeck InternetSuite, and Quarterdeck WebServer, were released in
June 1995. The Company also released several new utility products during
fiscal 1995 which included MagnaRAM 2, CleanSweep 95, WINProbe 4, and
GameRunner. The Company's largest subsidiary, Datastorm, did not have any
new releases during fiscal 1995.
Net revenues from European and other international distributors,
dealers and end users outside of the United States amounted to $19,015,000 and
$9,290,000 representing 16.2% and 11.0% of the Company's total net revenues for
the 1995 and 1994 fiscal years, respectively.
Due to the inherent uncertainties in software development and in the
microcomputer software industry, the Company is unable to predict whether the
net revenue trends noted above will continue.
Cost of Revenues: The Company's cost of revenues includes product
packaging, documentation and media, manufacturing expenses, amortization of
capitalized software costs, technical support and production costs as well as
translation costs and certain license fees paid to third parties. Cost of
revenues amounted to $34,884,000 in fiscal 1995 and $27,403,000 in fiscal 1994.
The cost of revenues decreased from 32.3% of net revenues in fiscal 1994 to
29.7% of net revenues in fiscal 1995. This decrease was primarily due to a
decrease in the amortization of capitalized software costs, as well as
substantially higher revenues in fiscal 1995 over which indirect costs and
expenses, including production and technical support costs, were spread.
In order to conform to evolving financial reporting practices by the
software industry, the Company is reporting the amortization of capitalized
software and technical support costs as costs of revenues for all periods
presented. Such costs were previously classified as research and development
and sales and marketing expenses, respectively.
Capitalized software development and purchased software costs are
generally amortized over one to three year periods, commencing upon initial
product release. Fluctuations in amortization expense between periods may
arise depending on the amount of software costs incurred and capitalized for
particular software products and their respective release dates. Amortization
of capitalized software costs decreased from $3,171,000 in fiscal 1994 to
$1,575,000 in fiscal 1995. The decrease in amortization of software
development costs resulted primarily from the shift in the nature of product
development from 1994 to 1995. See further discussion under Research and
Development.
Future cost of revenues as a percentage of net revenues will depend,
in addition to the amount of amortization of capitalized software, on the mix
of sales by product, by domestic versus international, and by single unit
versus multiple license packages, among other things.
The microcomputer software industry has experienced increased price
competition in recent years. The Company anticipates that increased price
competition will continue in the future and may result in reduced margins.
Research and Development: Research and development expenses consist
primarily of salaries and benefits and consulting fees to support product
development, including product testing and documentation. Research and
development expense increased by $6,766,000 from fiscal 1994, while increasing
as a percentage of
5
<PAGE> 6
net revenues from 8.9% to 12.2%. The increase in research and development
expense is due in part to increased research and development staffing levels
and to increases in payments to third parties for contracted product
development required to support the Company's expanded product development
efforts. Additionally, in fiscal 1995, development resources were shifted to
products for which technological feasibility had not been established and
therefore more development costs were expensed, rather than capitalized, in the
periods incurred.
The costs of software product development are capitalized once
technological feasibility is achieved. Costs incurred prior to attaining
technological feasibility are expensed in the period incurred as research and
development expenses. The Company capitalized $3,617,000 of internal software
development and purchased software costs during fiscal 1994. During fiscal
1995, the Company did not capitalize any internal software development costs,
since the majority of development efforts incurred during the period related to
new products for which technological feasibility had not been established.
Software development costs related to new products for which technological
feasibility had been established during fiscal 1995 are immaterial. The
development of new products requires significantly more resources to reach
technological feasibility as compared to the development effort required to
reach technological feasibility for upgraded products. Accordingly, the
decrease in the amounts capitalized from 1994 to 1995 was attributable to the
current year development of a number of new products which had not yet reached
technological feasibility as compared to prior year product development
consisting primarily of upgrades to existing products. In addition, the
recoverability of the cost of new product development, including products in
lines of business the Company has not engaged in previously, is more uncertain
than that for product upgrades. During fiscal 1995, the Company purchased and
capitalized software amounting to $2,564,000.
The Company believes that to remain competitive it is necessary to
continue to invest in software development efforts while at the same time
considering the acquisition of complementary software products. The Company
anticipates that spending for software development and purchased software will
increase in the future. However, because of the inherent uncertainties of
software development projects and the software market in general, there can be
no assurance that increased software development efforts or additional
purchased software will result in successful product introductions or increased
sales.
Sales and Marketing, and General and Administrative: Sales and
marketing, and general and administrative expenses consist of salaries and
related costs of administrative, sales and marketing, customer service and
support personnel as well as advertising, trade show and promotional expenses
and facilities costs. Sales and marketing expenses increased by $3,517,000
from fiscal 1994, while decreasing as a percentage of net revenues from 32.0%
to 26.0%. General and administrative expenses decreased by $204,000 from
fiscal 1994 and also decreased as a percentage of net revenues from 24.7% to
17.6%.
Quarterdeck believes substantial sales and marketing efforts are
essential to achieve revenue growth and to maintain and enhance the Company's
competitive position. Accordingly, with the continued expansion of its product
lines and international operations, as well as the introduction of new and
upgraded products, including products recently released and currently being
developed for Windows 95, Quarterdeck expects the expenses associated with
these efforts to increase in dollar amount and to continue to constitute its
most significant operating expense. There can be no assurance that these
increased sales and marketing efforts will be successful in achieving their
intended results.
Future growth of the Company is expected to result in an increase in
the dollar amount of sales and marketing expenses and also general and
administrative expenses from current levels.
Acquisition, Restructuring and Other Charges: In connection with the
various acquisitions completed in fiscal 1995 (see Summary of Significant
Accounting Policies and Note 2 of Notes to Consolidated Financial Statements),
significant acquisition costs were incurred. In connection with the
acquisition of Landmark in June 1995, acquisition costs amounting to $3,600,000
were recorded. In connection with the acquisitions of StarNine and
Internetware in September 1995, acquisition costs amounting to $1,200,000 and
$300,000 were recorded. These expenses principally include fees for financial
advisory, legal and accounting services, personnel severance and benefits, and
other related expenses. In connection with the acquisition of assets from
Prospero Systems Research, Inc. in September 1995, $2,578,000 of purchased, in-
process, research and development was charged
6
<PAGE> 7
to Acquisition, Restructuring and Other Charges. During the September 1995
quarter, the Company recognized a reduction in accrued restructuring costs,
which net of additional restructuring expenses incurred, amounted to
approximately $300,000.
Income Taxes: At September 30, 1995, the Company had a net deferred
tax asset of $2,178,000, net of a valuation allowance of $3,336,000. This net
deferred tax asset is comprised of the estimated tax effect of expected
future reversing temporary differences, relating in part to charges taken for
book purposes that are not deductible for federal income tax purposes until the
amounts are paid in the future, net of the valuation allowance. Management
believes that it is more likely than not that the Company will realize benefit
of the net deferred tax asset. Further reduction of the valuation allowance is
dependent on a number of factors including the timing of reversal of the
temporary differences, and an assessment of the future realization of the
deferred tax assets.
FISCAL 1994 COMPARED TO FISCAL 1993
Net Revenues: Net revenues for the fiscal year ended September 30,
1994 increased by $1,137,000 or 1.4% from the fiscal year ended September 30,
1993. Although the aggregate revenue did not experience much change, there was
significant variation in the revenue derived from certain products. The
largest shifts were lower sales of the Company's QEMM memory management
products due to decreased volume, and a large increase in sales from the
Datastorm subsidiary due to a new release, Procomm Plus for Windows 2.0. Sales
of certain of the Company's other products also declined.
Net revenues from European and other international distributors,
dealers and end users outside of the United States amounted to $9,290,000 and
$8,829,000 representing 11.0% and 10.6% of the Company's total net revenues for
the 1994 and 1993 fiscal years, respectively.
Cost of Revenues: The cost of revenues increased from 29.4% of net
revenues in fiscal 1993 to 32.3% of net revenues in fiscal 1994. This increase
was partly due to an increase in amortization of capitalized software costs,
but more significantly to an increase in the reserves for excess and obsolete
inventory, resulting in part from the release of new versions of products
during fiscal 1994. Amortization of capitalized software costs increased only
slightly from $3,133,000 for fiscal 1993 to $3,171,000 for fiscal 1994. At
September 30, 1994, unamortized software development costs and acquired
technology rights were $1,819,000.
Research and Development: Research and development expense nearly
tripled with an increase of $4,931,000 from fiscal 1993, while increasing as a
percentage of net revenues from 3.1% to 8.9%. The increase in the dollar
amount of research and development expenses was primarily due to increased
staffing levels and to increases in payments to third parties for contracted
product development required to support the Company's development efforts.
These development efforts were directed primarily at the Internet and X Windows
server products. As the development of these products incorporated new and
unproven technologies, related development costs were being expensed in the
periods incurred, with capitalization deferred until technological feasibility
is achieved.
The Company capitalized $3,617,000 and $4,941,000 of software
development and purchased software costs during the 1994 and 1993 fiscal years,
respectively, which represents 32.5% and 65.6% of total expenditures for
research and development during these respective periods. The decrease of the
amount capitalized resulted primarily from the shift of development resources
from DESQview/X, for which technological feasibility was achieved and
accordingly, development costs were capitalized as incurred, to the development
of the Company's telecommunications and collaborative computing and Internet
applications for which development costs were being expensed in the periods
incurred until technological feasibility was achieved.
Sales and Marketing, and General and Administrative: Sales and
marketing expenses increased in a nearly proportionate manner to net revenue.
They increased by $1,332,000 from fiscal 1993, while increasing as a percentage
of net revenues from 30.8% to 32.0%. General and administrative expenses
remained nearly constant with only a small increase of $192,000 from fiscal 1993
while decreasing as a percentage of net revenue from 24.8% to 24.7%. The
absence of significant change in the aggregate level of these operating
7
<PAGE> 8
expenses is the net result of decreased expense levels by those parts of the
Company who were experiencing declining revenues offset by expense increases,
particularly selling expenses, at the Datastorm subsidiary. The decrease in the
dollar amounts of certain operating expenses throughout a significant part of
the Company was primarily due to cost reduction programs initiated in fiscal
1993. As a result of continued declining revenues from certain product lines,
the Company took further restructuring measures to reduce related operating
expenses in the fourth quarter of fiscal 1994. However, as the restructuring
occurred in the latter half of the fourth fiscal quarter, its impact was not
reflected in the fiscal 1994 operating expense results.
The Company was able to reduce sales and marketing expenses from 30.8%
of net revenues to 26.0% of net revenues between fiscal 1993 and fiscal 1995.
Similarly general and administrative expenses decreased from 24.8% to 17.6% of
net revenues during that time. These decreases were overshadowed by the
significant increase in research and development costs which increased from
3.1% to 12.2% of net revenues.
Acquisition, Restructuring and Other Charges: During the fourth
quarter of fiscal 1994, in response to declining revenue levels and reported
operating losses from many product lines, management adopted a comprehensive
restructuring plan designed to focus the Company's efforts on strategic product
and market opportunities as well as to reduce its cost structure related to
those declining products, improve its productivity and competitiveness and help
position the Company to return to profitability. The results for fiscal 1994
include a pretax charge totalling $12,863,000 relating to the restructuring
activities and other non-recurring charges.
After consideration of competitive factors and market trends, the
restructuring plan called for the Company to realign and focus its product
development and marketing efforts on four strategic business areas: utilities,
remote computing, communications and Internet applications. Certain non-core
product lines and development efforts were reduced or eliminated. Capitalized
acquired and developed software costs, inventory balances and other costs
related to reduced or eliminated product lines amounting to $4,367,000 were
written down to estimated net realizable value or written-off as restructuring
and non-recurring charges during the period ended September 30, 1994.
The restructuring plan included the discontinuance of certain U.S. and
international sales and training offices, plus the consolidation and relocation
of the Company's Santa Monica, California and Dublin, Ireland headquarters
facilities. Related restructuring costs, amounting to $5,320,000 include the
estimated lease obligations for offices and facilities which were, or were
planned to be, closed, consolidated or relocated, estimated fixed asset
write-offs for all affected offices and facilities, costs of closing
discontinued offices, as well as other related costs. The estimated lease
obligations included in restructuring costs were net of estimated negotiated
reductions in lease obligations or sublease income expected to be derived by
subleasing the facilities.
As part of the restructuring plan, the Company reorganized its staff
and reduced its workforce by approximately 100 employees between June 30, 1994
and September 30, 1994. Restructuring costs directly related to the reduction in
workforce amounted to $586,000, consisting of severance and termination
payments, outplacement costs and other related costs. The Company wrote-off
excess equipment and recorded other pretax charges amounting to $2,590,000 which
resulted from the above restructuring activities.
Litigation Settlement: In the fourth quarter of fiscal 1994, the
Company entered into agreements in principal with plaintiffs' counsel and the
Company's insurance carrier to settle all securities class action claims then
pending against the Company and its directors. Under the terms of the
settlement, Quarterdeck paid $585,000 of a $3,900,000 settlement amount, with
the difference covered by the insurance carrier. The Company recorded a charge
in the fourth quarter to provide for the settlement and legal fees.
8
<PAGE> 9
Income Taxes: At September 30, 1994, the Company had a gross
deferred tax asset of $2,853,000. This deferred asset was comprised of the tax
effect of future reversing temporary differences, resulting in part from
current period restructuring charges which were not deductible for federal
income tax purposes until the amounts were paid in the future. Due to
uncertainties with respect to realization of this asset, a full valuation
allowance was provided.
Trends and Uncertainties
The computer software industry is subject to rapid technological
changes often evidenced by new competing products and improvements in existing
products. Quarterdeck depends on the successful development or acquisition and
resulting sales of new products, including upgrades of existing products, to
replace revenues from products introduced in prior periods that may have begun
to experience reduced revenues. If Quarterdeck's current leading products
become outdated and lose market share faster than those revenues are replaced
by new products, or if new products or existing product upgrades are not
introduced when planned or do not achieve the revenues anticipated by
Quarterdeck, Quarterdeck's operating results could be materially adversely
affected. Even with normal development cycles, the market environment can
change so quickly that features in products can become outdated soon after
market introduction. These events may occur in the future and may have an
adverse effect on future revenues and operating results.
With the introduction of Windows 95, the software market is
experiencing a shift to this new platform. As application programs and device
drivers are developed to take advantage of this 32-bit operating environment,
they are expected to lack certain of the memory limitations inherent in DOS and
Windows 3.x and in DOS-based applications. Quarterdeck is focusing its
development efforts on the Windows 95 and Windows NT platforms, while
continuing to support Windows 3.x and DOS platforms. In September 1995,
Quarterdeck released several new utility products for Windows 95, including
memory compression (MagnaRAM), diagnostics (WINProbe) and disk management
(CleanSweep). QEMM, Quarterdeck's leading memory management product, has been
upgraded to version 8.0; QEMM 8.0 enhancements include new memory solutions for
Windows 3.x and Windows 95, as well as continued support for DOS systems. It
is Quarterdeck's expectation that memory management products will continue to
be needed on Windows 95, but that memory management has experienced a shift
from 16-bit DOS device driver management (older versions of QEMM) to complex
solutions such as memory compression and better use of virtual memory (QEMM
8.0).
Quarterdeck is devoting substantial efforts to the development of
software products that are designed to operate on Microsoft's Windows 95 and
Windows NT. Microsoft may incorporate advanced utilities or other features in
Windows 95 or Windows NT that may decrease the demand for certain of the
Company's products, including those under development. If Quarterdeck is not
able to continue to successfully, and timely develop and market products that
function under Windows 95 and Windows NT, and offer value to Windows 95 and
Windows NT users, future revenues would be adversely affected.
Future competitive product releases may cause disruptions in orders
for the Company's products while users and the marketplace evaluate the
competitive products. The extent of the disruption in orders and the impact on
future orders of the Company's products will depend on various factors that are
not fully known at this time. Among those factors are the level of
functionality, performance and features included in the final release of
competitive products and the market's evaluation of those products as compared
to the then current functionality, performance and features of the Company's
products.
The Company's Internet-related products compete with Internet access,
creation and server tools from a variety of companies, including Netscape
Communications Corporation and other connectivity, networking and Internet
software application developers, Internet access providers and other on-line
service providers, as well as operating system vendors, including Microsoft and
IBM. The original Mosaic browser developed by the National
9
<PAGE> 10
Center for Supercomputing Applications is available for download in electronic
format for free from the Internet. Certain competitors have also made versions
of their Internet access, creation and server products available on the
Internet for users to download at no charge or for extended evaluation. In
addition, the market for Internet products may be adversely impacted to the
extent that vendors of PC hardware or PC operating systems incorporate Internet
tools, functions or capabilities within their operating systems or PC hardware
and thereby reduce the market for stand-alone Internet products.
Quarterdeck is dedicating substantial efforts on products and services
for the telecommunications and collaborative computing and Internet markets and
expects that a significant portion of future revenues will come from these
products and services. The revenues from such new products and services may be
less than Quarterdeck anticipates due to various factors including the timing
of release in relation to competitive products and services, and uncertainties
surrounding the rate and extent of development of these new and emerging
markets. Quarterdeck's Internet-related products and services are dependent on
the viability and continued growth of the Internet, and its expanded use by
businesses and individuals for networking and communications.
There are currently few laws or regulations directly applicable to
access or to commerce on the Internet. However, due to the increasing
popularity and use of the Internet, it is possible that a number of laws and
regulations may be adopted with respect to the Internet. Such laws and
regulations may cover issues such as user privacy, pricing and characteristics
and quality of products and services. The Telecommunications Act of 1996 (the
"1996 Act"), which was recently enacted and the judicial interpretation of
which remains uncertain, imposes criminal penalties for transmission of or
allowing access to certain obscene communications over the Internet and other
computer services and contains additional provisions intended to protect
minors. In addition, America's Carriers Telecommunication Association ("ACTA")
recently filed a Petition for Declaratory Ruling Special Relief, and
Institution of Rulemaking (the "ACTA Petition") before the Federal
Communications Commission ("FCC"), arguing that the FCC has authority to
regulate the Internet and, as such, should regulate, as they do the
telecommunications carriers, the providers of computer software products (such
as the Company) which enable voice transmission over the Internet. The ACTA
Petition requests the FCC to declare its authority over interstate and
international telecommunications services using the Internet, to order
providers of the aforementioned software to cease the sale of such software
pending a rulemaking, and to institute a rulemaking body to govern the use of
the Internet as a means for providing telecommunications services. The
enactment of the 1996 Act, and of any similar laws or regulations in the
future, may decrease the growth or use of the Internet, which could in turn
decrease the demand for the Company's services and products and increase the
Company's cost of doing business or otherwise have an adverse effect on the
Company's business, operating results and financial condition.
10
<PAGE> 11
While the acquisition of Datastorm, Inset, and those acquisitions
previously completed during fiscal 1995, have broadened the Company's product
portfolio and sales distribution channels, the acquisitions have resulted in
the Company competing with other companies and in markets where it has not
previously competed. The Company has also made investments in certain
companies, and anticipates that it may make additional synergistic acquisitions
and investments in the future. There are significant business risks associated
with acquisitions, including the successful combination of the companies in an
efficient and timely manner, the coordination of research and development and
sales efforts, the retention of key personnel, diversion of management's
attention away from day-to-day matters and the integration of the acquired
products. Additionally, there may be an adverse impact on revenues of acquired
companies due to the transition of products' sales and marketing and research
and development activities. The Company's success will depend, in part, on its
ability to integrate the operations of acquired companies and effectively
utilize the acquired intellectual property.
The Company's distributor and reseller customers also carry the
products of Microsoft and other of the Company's competitors, many of whom have
greater financial resources than the Company. The distributors and resellers
have limited capital to invest in inventory and their decisions to purchase the
Company's products and in the case of resellers, to give them critical shelf
space, is partly a function of pricing, terms and special promotions offered by
the Company's competitors, over which the Company has no control and which it
cannot predict.
The Company's pattern of revenues and earnings may be affected by the
phenomenon known as "channel fill." Channel fill occurs following the
introduction of a new product or a new version of products as distributors buy
significant quantities of the new product or version in anticipation of sales
of such product or version. Following such purchases, the rate of
distributors' purchases often declines, depending on the rates of purchases by
end users or "sell-through." The phenomenon of "channel fill" may also occur
in anticipation of price increases or in response to sales promotions or
incentives, some of which may be designed to encourage customers to accelerate
purchases that might otherwise occur in later periods. Channels may also
become filled simply because the distributors are unable to, or do not, sell
their inventories to retail distribution or end users as anticipated. If
sell-through does not occur at a sufficient rate, distributors will delay
purchases or cancel orders in later periods or return prior purchases in order
to reduce their inventories. Consequently, there can be no assurance that
existing inventories will not adversely impact the sales of future periods. In
addition, between the date the Company announces a new version or new product
and the date of release, distributors, dealers and end users often delay
purchases, cancel orders or return products in anticipation of the availability
of the new version or new product. Such order delays or cancellations can
cause material fluctuations in revenues from one quarter to the next. Net
revenues may be materially affected favorably or adversely by these effects.
The Company operates with relatively little order backlog; therefore,
if near-term demand for the Company's products weaken in a given quarter, there
could be a material adverse effect on revenues and on the Company's operating
results. Like other manufacturers of packaged software products, Quarterdeck
is exposed to the risk of product returns from distributors and reseller
customers. Although Quarterdeck believes that it provides adequate allowances
for returns, there can be no assurance that actual returns in excess of
recorded allowances will not result in a material adverse effect on business,
operating results and financial condition.
CERTAIN FACTORS EFFECTING QUARTERLY RESULTS AND STOCK PRICE
The Company has in the past experienced wide fluctuations in its
operating results and stock price, and the Company's future operating results
and stock price could be subject to significant volatility, particularly on a
quarterly basis. The Company's revenues and quarterly operating results may
experience significant fluctuations and be unpredictable as the result of a
number of factors including, among others, introduction of new or enhanced
products by the Company or its competitors, rapid technological changes in the
Company's markets, seasonality of revenues, changes in operating expenses and
general economic conditions. Any shortfalls in revenues or quarterly results
could have an immediate and significant adverse effect on the trading price of
the Company's common stock in any given period.
11
<PAGE> 12
Net income per share is calculated using the treasury stock method
(see Note 1 of Notes to Consolidated Financial Statements). Therefore,
increases in the price of Quarterdeck's stock can have an adverse impact on the
calculation of net income per share in that period as more outstanding
instruments (e.g. options) are included as (equivalent) common shares
outstanding.
As a result of the foregoing factors and other factors that may arise
in the future, the market price of the Company's common stock may be subject to
significant fluctuations over a short period of time. These fluctuations may
be due to factors specific to the Company, to changes in analysts' earnings
estimates, or to factors affecting the computer industry or the securities
markets in general.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1995, cash and cash equivalents totaled $5,384,000
and short-term investments amounted to $34,285,000 as compared to $9,879,000
and $28,504,000, respectively, at September 30, 1994. Working capital at
September 30, 1995 amounted to $29,490,000, an increase of $343,000 as compared
to $29,147,000 at September 30, 1994.
The Company conducts business in various foreign currencies and is
therefore subject to the transaction exposures that arise from foreign exchange
rate movements between the dates that foreign currency transactions are
committed and the date that they are consummated. The Company is also subject
to certain exposures arising from the translation and consolidation of the
financial results of its foreign subsidiaries. The Company utilizes
operational hedging from time to time to mitigate the Company's
transaction exposures. Occasionally, the Company has also hedged residual
transaction exposures through the use of forward foreign exchange contracts.
However, there can be no assurance that actions taken to manage such exposure
will be successful or that future changes in currency exchange rates will not
have a material impact on the Company's future operating results. The Company
does not hedge either its translation risk or its economic risk.
The Company believes existing cash and short-term investments and funds
provided by operations will be sufficient to fund operations for the next year.
However, due to cash payments made and expected to be made during fiscal 1996
related primarily to costs associated with the previous acquisitions and
restructurings (See Note 2), the Company anticipates that aggregate cash and
short-term investments will significantly decline. Further, the Company's
capital requirements are dependent on management's plans regarding the levels
and timing of additional acquisitions or investments. The Company may utilize
additional cash in connection with the potential acquisition of or investment in
additional companies and software product rights in the future. The Company may
need to raise additional capital in order to fund such acquisitions and
investments. There is no guarantee that such financing could be obtained. Any
decision to sell additional equity securities will depend on various factors,
including, among others, financial market conditions, strategic acquisition and
investment opportunities, and developments in the Company's markets. The sale
of additional equity securities would result in additional dilution to the
Company's stockholders. During the second quarter of fiscal 1996 the Company
obtained a bank credit line and issued convertible notes, these transactions are
discussed further in Note 14 to the accompanying consolidated financial
statements.
12
<PAGE> 13
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors
Quarterdeck Corporation
We consent to the incorporation by reference in the previously filed
registration statements (No. 33-96064 and No. 333-4606) on Form S-3 and the
registration statements (No. 333-01766 and No. 333-4602) on Form S-8 of
Quarterdeck Corporation of our report dated November 8, 1995, except as to Note
14, which is as of March 28, 1996, with respect to the consolidated balance
sheets of Quarterdeck Corporation and subsidiaries as of September 30, 1995 and
1994, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the years in the three year period ended
September 30, 1995, which report appears in the Form 8-K of Quarterdeck
Corporation dated June 25, 1996.
\s\ KPMG Peat Marwick LLP
- --------------------------
Los Angeles, California
June 25, 1996
13
<PAGE> 14
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Quarterdeck Corporation:
We have audited the accompanying consolidated balance sheets of
Quarterdeck Corporation and subsidiaries as of September 30, 1995 and 1994, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the years in the three-year period ended September 30,
1995. In connection with our audits of the consolidated financial statements,
we have audited the financial statement schedule. These consolidated financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on
our audits. We did not audit the financial statements of Datastorm
Technologies, Inc., a wholly-owned subsidiary, which statements reflect total
assets constituting 28 percent and 29 percent at September 30, 1995 and 1994,
respectively, of the related consolidated totals and total revenues
constituting 34 percent, 50 percent and 32 percent for each of the years in the
three-year period ended September 30, 1995, respectively, of the related
consolidated totals. Those statements were audited by other auditors whose
report has been furnished to us, and our opinion, insofar as it relates to the
amounts included for Datastorm Technologies, Inc. is based solely on the report
of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, based on our audits and the report of the other
auditors, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Quarterdeck
Corporation and subsidiaries as of September 30, 1995 and 1994, and the results
of their operations and their cash flows for each of the years in the three-year
period ended September 30, 1995, in conformity with generally accepted
accounting principles. Also in our opinion, based on our audits and the report
of the other auditors, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly,
in all material respects, the information set forth therein.
/s/ KPMG Peat Marwick LLP
Los Angeles, California
November 8, 1995, except as to
Note 14, which is as of March 28, 1996
14
<PAGE> 15
QUARTERDECK CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
SEPTEMBER 30,
-------------
1995 1994
---- ----
<S> <C> <C>
Current assets:
Cash and short-term investments . . . . . . . . . . . . . . . . . . . $39,669 $38,383
Trade accounts receivable . . . . . . . . . . . . . . . . . . . . . . 13,621 5,480
Refundable income taxes . . . . . . . . . . . . . . . . . . . . . -- 6,301
Deferred income taxes (Note 5) . . . . . . . . . . . . . . . . . . . 2,178 --
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,281 1,743
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . 4,006 2,404
------- -------
Total current assets . . . . . . . . . . . . . . . . . . . . . 61,755 54,311
Note receivable from related party - building . . . . . . . . . . . . . . . 469 --
Equipment and leasehold improvements, net . . . . . . . . . . . . . . . . 8,335 5,901
Capitalized software costs . . . . . . . . . . . . . . . . . . . . . . . . 2,807 1,819
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,333 440
------- -------
$76,699 $62,471
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . $13,582 $ 9,416
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 13,880 10,233
Notes payable to related parties . . . . . . . . . . . . . . . . 1,093 652
Current portion of long-term obligations . . . . . . . . . . . . . . 255 157
Accrued acquisition and restructuring charges (Notes 2 and 4) . . . . 3,455 4,706
------- -------
Total current liabilities . . . . . . . . . . . . . . . . . . . 32,265 25,164
Long-term obligations, less current portion . . . . . . . . . . . . . . . . 164 701
------- -------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . 32,429 25,865
Commitments and litigation (Notes 7 and 10)
Stockholders' equity:
Preferred stock (authorized: 2,000; issued and
outstanding: none) . . . . . . . . . . . . . . . . . . . . . . . . -- --
Common stock (authorized: 50,000 shares;
issued and outstanding: 31,173 and 29,533 shares) . . . . . . . . 31 30
Treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . (559) (27)
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . 39,877 34,695
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . 5,359 2,464
Foreign currency translation adjustment . . . . . . . . . . . . . . . (563) (556)
Notes receivable from directors for sale of stock . . . . . . . . . . (70) --
Net unrealized gain on marketable securities . . . . . . . . . . . . 195 --
------- -------
Total stockholders' equity . . . . . . . . . . . . . . . . . . 44,270 36,606
------- -------
$76,699 $62,471
======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
15
<PAGE> 16
QUARTERDECK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . $117,606 $ 84,715 $83,578
Cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . . . 34,884 27,403 24,534
-------- -------- -------
Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . 82,722 57,312 59,044
Operating expenses:
Research and development . . . . . . . . . . . . . . . . . . . 14,286 7,520 2,589
Sales and marketing . . . . . . . . . . . . . . . . . . . . . . 30,624 27,107 25,775
General and administrative . . . . . . . . . . . . . . . . . . 20,704 20,908 20,716
Acquisition, restructuring and other
charges (Notes 2 and 4) . . . . . . . . . . . . . . . . . . . 7,409 12,863 --
Litigation settlement (Note 10) . . . . . . . . . . . . . . . -- 615 --
-------- -------- -------
Total operating expenses . . . . . . . . . . . . . . . . . . . 73,023 69,013 49,080
Operating income (loss) . . . . . . . . . . . . . . . . . . . . . . 9,699 (11,701) 9,964
Interest income, net . . . . . . . . . . . . . . . . . . . . . . . . 1,884 1,094 1,144
-------- -------- -------
Income (loss) before income taxes . . . . . . . . . . . . . . . . . 11,583 (10,607) 11,108
Provision (benefit) for income taxes (Note 5) . . . . . . . . . . . . 331 (5,982) 639
-------- -------- -------
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,252 ($4,625) $10,469
======== ======== =======
Net income (loss) per share:
Primary . . . . . . . . . . . . . . . . . . . . . . . . . . . . $0 .35 ($0.16) $0.35
-------- -------- -------
Fully diluted . . . . . . . . . . . . . . . . . . . . . . . . . $0 .34 ($0.16) $0.35
-------- -------- -------
Shares used to compute net income (loss) per share:
Primary . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,057 28,675 29,721
------- -------- -------
Fully diluted . . . . . . . . . . . . . . . . . . . . . . . . . 32,999 28,675 29,721
------- -------- ------
Additional unaudited pro forma data (note 5):
Income (loss) before taxes . . . . . . . . . . . . . . . . . . $ 11,583 ($10,607) $11,108
Pro forma income tax expense . . . . . . . . . . . . . . . . 3,406 576 3,977
-------- -------- -------
Pro forma net income (loss) . . . . . . . . . . . . . . . . . . $ 8,177 ($11,183) $ 7,131
======== ======== =======
Pro forma income (loss) per share:
Primary . . . . . . . . . . . . . . . . . . . . . . . . . . . . $0 .26 ($0.39) $0.24
-------- -------- -------
Fully diluted . . . . . . . . . . . . . . . . . . . . . . . . . $0 .25 ($0.39) $0.24
======== ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
16
<PAGE> 17
QUARTERDECK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
NOTES
RECEIVABLE
FOREIGN FROM
COMMON STOCK ADDITIONAL CURRENCY DIRECTORS
-------------------- TREASURY PAID-IN RETAINED TRANSLATION FOR SALE
SHARES AMOUNT STOCK CAPITAL EARNINGS ADJUSTMENT OF STOCK
-------------------- ---------- ---------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1992,
as reported . . . . . . . . . . . . . . . 23,380 $23 ($27) $23,980 $24,397 $42 --
Adjustment to reflect
acquisitions (Note 14) . . . . . . . . . . 6,023 6 -- 4,350 166 -- --
------------------------------------------------------------------------------------
Balance, September 30, 1992,
as adjusted. . . . . . . . . . . . . . . . 29,403 29 (27) 28,330 24,563 42
Common stock options exercised
(Note 6) . . . . . . . . . . . . . . . . . 100 -- -- 40 -- -- --
Tax benefits arising from exercise of
nonqualified stock options (Note 6). . . . -- -- -- 105 -- -- --
Net income . . . . . . . . . . . . . . . . . -- -- -- -- 10,469 -- --
Undistributed earnings of subchapter-S
subsidiary (Note 14) . . . . . . . . . . . 9,305 (9,305)
Distributions to shareholders (Notes 2 & 14) -- -- -- (9,372) -- -- --
Foreign currency translation adjustment. . . -- -- -- -- -- (623) --
Net loss of Inset Systems, Inc
excluded from results of operations. . . . -- -- -- -- (162) -- --
------------------------------------------------------------------------------------
Balance, September 30, 1993. . . . . . . . . 29,503 $29 ($27) $28,408 $25,565 ($581) --
Common stock options exercised . . . . . . . 30 1 -- 10 -- -- --
Tax benefits arising from exercise of
nonqualified stock options (Note 6). . . . -- -- -- 16 -- -- --
Net loss . . . . . . . . . . . . . . . . . . -- -- -- -- (4,625) -- --
Undistributed earnings of subchapter-S
subsidiaries (Notes 2 & 14). . . . . . . . -- -- -- 18,476 (18,476) -- --
Distributions to shareholders (Notes 2 & 14) -- -- -- (12,215) -- -- --
Foreign currency translation adjustment. . . -- -- -- -- -- 25 --
------------------------------------------------------------------------------------
Balance, September 30, 1994. . . . . . . . . 29,533 $30 ($27) $34,695 $ 2,464 ($556) --
====================================================================================
</TABLE>
<TABLE>
<CAPTION>
UNREALIZED
GAIN ON TOTAL
MARKETABLE STOCKHOLDERS'
SECURITIES EQUITY
---------- -------------
<S> <C> <C>
Balance, September 30, 1992,
as reported. . . . . . . . . . . . . . . . -- $48,415
Adjustment to reflect
acquisitions (Note 14) . . . . . . . . . . -- 4,522
--------------------------
Balance, September 30, 1992,
as adjusted. . . . . . . . . . . . . . . . 52,937
Common stock options exercised
(Note 6) . . . . . . . . . . . . . . . . . -- 40
Tax benefits arising from exercise of
nonqualified stock options (Note 6). . . . -- 105
Net income . . . . . . . . . . . . . . . . . -- 10,469
Undistributed earnings of subchapter-S
subsidiary (Note 14) . . . . . . . . . . . --
Distributions to shareholders (Notes 2 & 14) -- (9,372)
Foreign currency translation adjustment. . . -- (623)
Net loss of Inset Systems, Inc
excluded from results of operations. . . . -- (162)
--------------------------
Balance, September 30, 1993. . . . . . . . . -- $53,394
Common stock options exercised . . . . . . . -- 11
Tax benefits arising from exercise of
nonqualified stock options (Note 6). . . . -- 16
Net loss . . . . . . . . . . . . . . . . . . -- (4,625)
Undistributed earnings of subchapter-S
subsidiaries (Notes 2 & 14). . . . . . . . -- --
Distributions to shareholders (Notes 2 & 14) -- (12,215)
Foreign currency translation adjustment. . . -- 25
--------------------------
Balance, September 30, 1994. . . . . . . . . -- $36,606
==========================
</TABLE>
17
<PAGE> 18
QUARTERDECK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
NOTES
RECEIVABLE
FOREIGN FROM
COMMON STOCK ADDITIONAL CURRENCY DIRECTORS
-------------------- TREASURY PAID-IN RETAINED TRANSLATION FOR SALE
SHARES AMOUNT STOCK CAPITAL EARNINGS ADJUSTMENT OF STOCK
-------------------- -------- ---------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1994 . . . . . . . 29,533 $30 ($27) $34,695 $2,464 ($556) --
Adjustment for Internetware, Inc.
pooling of interests (Note 2) . . . . . 460 1 -- 9 (46) -- --
Adjustment for StarNine Technologies,
Inc. pooling of interest (Note 2) . . . 524 -- -- 223 245 -- --
Adjustment for Datastorm, Ltd.
pooling of interests (Note 14) . . . . -- -- -- 441 -- -- --
Acquisition of assets from Prospero
(Note 2) . . . . . . . . . . . . . . . 155 -- -- 2,900 -- -- --
Exercise of StarNine Technologies,
Inc. options (Note 2) . . . . . . . . . 149 -- -- 224 -- -- --
Issuance of common stock by
Inset Systems, Inc. . . . . . . . . . 63 -- -- 5 -- -- --
Common stock options exercised
(Note 6) . . . . . . . . . . . . . . . 351 -- -- 583 -- -- (70)
Treasury shares, at cost . . . . . . . . (62) -- (532) 22 -- -- --
Tax benefits arising from exercise
of nonqualified stock options
(Note 6) . . . . . . . . . . . . . . . -- -- -- 59 -- -- --
Undistributed earnings of subchapter-S
subsidiaries . . . . . . . . . . . . . -- -- -- 8,154 (8,154) -- --
Capital contribution (Note 2) . . . . . . -- -- -- 450 -- -- --
Net income . . . . . . . . . . . . . . . -- -- -- -- 11,252 -- --
Distributions to shareholders
(Notes 2 & 14) . . . . . . . . . . . . -- -- -- (7,888) (18) -- --
Duplicate earnings elimination
for poolings (Note 2) . . . . . . . . . -- -- -- -- (384) -- --
Net increase in unrealized gain . . . . . -- -- -- -- -- -- --
Foreign currency
translation adjustment . . . . . . . . -- -- -- -- -- (7) --
---------------------------------------------------------------------------------
Balance, September 30, 1995 . . . . . . . 31,173 $31 ($559) $39,877 $ 5,359 ($563) ($70)
=================================================================================
</TABLE>
<TABLE>
<CAPTION>
UNREALIZED
GAIN ON TOTAL
MARKETABLE STOCKHOLDERS'
SECURITIES EQUITY
---------- -------------
<S> <C> <C>
Balance, September 30, 1994 . . . . . . . -- $36,606
Adjustment for Internetware, Inc.
pooling of interests (Note 2) . . . . . -- (36)
Adjustment for StarNine Technologies,
Inc. pooling of interest (Note 2) . . . 33 501
Adjustment for Datastorm, Ltd.
pooling of interests (Note 14) . . . . -- 441
Acquisition of assets from Prospero
(Note 2) . . . . . . . . . . . . . . . -- 2,900
Exercise of StarNine Technologies,
Inc. options (Note 2) . . . . . . . . . -- 224
Issuance of common stock by
Inset Systems, Inc. . . . . . . . . . . -- 5
Common stock options exercised
(Note 6) . . . . . . . . . . . . . . . -- 513
Treasury shares, at cost . . . . . . . . -- (510)
Tax benefits arising from exercise
of nonqualified stock options
(Note 6) . . . . . . . . . . . . . . . -- 59
Undistributed earnings of subchapter-S
subsidiaries . . . . . . . . . . . . . -- --
Capital contribution (Note 2) . . . . . . -- 450
Net income . . . . . . . . . . . . . . . -- 11,252
Distributions to shareholders
(Notes 2 & 14) . . . . . . . . . . . . -- (7,906)
Duplicate earnings elimination
for poolings (Note 2) . . . . . . . . . -- (384)
Net increase in unrealized gain . . . . . 162 162
Foreign currency
translation adjustment . . . . . . . . -- (7)
--------------------------
Balance, September 30, 1995 . . . . . . . $195 $44,270
==========================
</TABLE>
See accompanying notes to consolidated financial statements.
18
<PAGE> 19
QUARTERDECK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . $ 11,252 ($4,625) $ 10,469
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization of equipment
and leasehold improvements . . . . . . . . . . . . . . . . 3,610 3,960 2,692
Amortization of capitalized software costs . . . . . . . . . 1,575 3,171 3,133
Write-off of property and equipment . . . . . . . . . . . -- 1,719 --
Write-off of capitalized software costs . . . . . . . . . -- 3,701 --
Write down of acquired assets of Prospero . . . . . . . . . 2,900 -- --
Stock compensation . . . . . . . . . . . . . . . . . . . . 59 -- --
Elimination of duplicate net income from Landmark . . . . . (384) -- --
Loss on sale or abandonement of assets . . . . . . . . . . . . . . 38 271 3
Net loss of Inset excluded from results of operations . . -- -- (162)
Changes in assets and liabilities:
Trade accounts receivable . . . . . . . . . . . . . . . . (7,749) 5,333 (4,641)
Refundable income taxes . . . . . . . . . . . . . . . . . 6,301 (6,301) 70
Deferred income taxes . . . . . . . . . . . . . . . . . (2,178) -- --
Inventories . . . . . . . . . . . . . . . . . . . . . . (435) 937 349
Other current assets . . . . . . . . . . . . . . . . . . (1,565) 7,079 1,954
Other assets . . . . . . . . . . . . . . . . . . . . . (203) (5,453) (863)
Accounts payable . . . . . . . . . . . . . . . . . . . . 5,342 4,267 324
Accrued liabilities . . . . . . . . . . . . . . . . . . . 1,865 4,526 228
Accrued restructuring charges . . . . . . . . . . . . . (3,476) 5,321 --
Foreign currency translation adjustment . . . . . . . . 16 25 (623)
--------- -------- --------
Net cash provided by operating activities . . . . . 16,968 23,931 12,933
--------- -------- --------
Cash flows from investing activities:
Purchases of short-term investments . . . . . . . . . . . . . (111,989) (61,351) (25,276)
Proceeds from sales and maturities of
short-term investments . . . . . . . . . . . . . . . . . . . 106,289 59,131 24,345
Capital expenditures . . . . . . . . . . . . . . . . . . . . (6,029) (3,396) (2,388)
Capitalized software costs . . . . . . . . . . . . . . . . . (2,564) (3,617) (4,941)
Purchase of minority interest in affiliates . . . . . . . . (2,700) -- --
Loan to related party for note receivable - building . . . . . . (469) -- --
Advances (to) from affiliates . . . . . . . . . . . . . . (100) 137 800
Opening cash balance of previously unconsolidated subsidiary . . . 559 -- --
Proceeds from sale of assets . . . . . . . . . . . . . . . . . . . 12 5 --
Accrued acquisition charges, net of cash acquired . . . . . . 2,525 -- --
-------- -------- --------
Net cash used in investing activities . . . . . . . (14,466) (9,091) (7,460)
-------- -------- --------
Cash flows from financing activities:
Net proceeds from issuance of common stock . . . . . . . . . 1,439 11 40
Proceeds from issuance of long-term obligations . . . . . . 43 544 65
Principal payments under long-term obligations . . . . . . . (482) (555) (108)
Notes payable to related parties . . . . . . . . . . . . . 441 635 (23)
Acquisition of treasury stock . . . . . . . . . . . . . . . (532) -- --
Distributions to stockholders . . . . . . . . . . . . . . . (7,906) (12,215) (11,248)
-------- -------- --------
Net cash used in financing activities . . . . . . . . (6,997) (11,580) (11,274)
-------- -------- --------
Net increase (decrease) in cash and
cash equivalents . . . . . . . . . . . . . . . . . . (4,495) 3,260 (5,801)
Cash and cash equivalents at beginning of period . . . . . . . 9,879 6,619 12,420
-------- -------- --------
Cash and cash equivalents at end of period . . . . . . . . . . $ 5,384 $ 9,879 $ 6,619
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . $ 20 $ 34 $ 29
Income taxes . . . . . . . . . . . . . . . . . . . . . . . 1,534 -- 650
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
19
<PAGE> 20
QUARTERDECK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995, 1994 AND 1993
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Quarterdeck Corporation ("the Company") commenced operations as a
California corporation on September 16, 1982, and was reincorporated in
Delaware in 1991. The consolidated financial statements include the accounts
of Quarterdeck Corporation and its wholly owned subsidiaries. See also notes 2
and 12. All significant intercompany transactions have been eliminated in
consolidation.
Revenue Recognition
Revenue from the sale of software products is recognized upon
shipment, where collection of the resulting receivable is probable and there
are no significant obligations remaining. The estimated cost to fulfill
technical support obligations to end users arising from the sale of software is
accrued upon shipment. Certain limited rights of return and exchange from
customers exist as defined by the Company's general distributor agreements.
The Company establishes allowances for estimated product returns and exchanges
as a reserve against revenues. Provisions for sales returns and exchanges were
approximately $8,205,000, $7,510,000 and $8,884,000 in fiscal 1995, 1994 and
1993, respectively. Revenue from the sale or licensing of intellectual
property is recognized when all significant obligations of the Company have
been met and no customer right of return exists.
Foreign Currency Translation
Assets and liabilities denominated in foreign currencies are
translated to U.S. dollars at the exchange rate on the balance sheet date.
Revenues, costs and expenses are translated at average rates of exchange
prevailing during the year. Translation adjustments resulting from this
process are shown separately in stockholders' equity. Foreign currency
transaction gains and losses are not material and are included in the
determination of net income (loss).
Capitalized Software Costs
Pursuant to Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed," issued by the Financial Accounting Standards Board, the Company is
required to capitalize certain software development and production costs once
technological feasibility has been achieved. The cost of purchased software is
capitalized when related to a product which has achieved technological
feasibility or that has an alternative future use. For the year ended
September 30, 1995, the Company did not capitalize any internal software
development costs. Internal software development costs related to new products
reaching technological feasibility during fiscal 1995 were immaterial. During
fiscal 1995, the Company purchased and capitalized software amounting to
$2,564,000. For the years ended September 30, 1994 and 1993, the Company
capitalized $3,617,000 and $4,941,000 of software development and purchased
software costs, respectively. Software development costs incurred prior to
achieving technological feasibility as well as certain licensing costs are
charged to research and development expense as incurred.
Capitalized software development and purchased software costs are
reported at the lower of unamortized cost or net realizable value. Commencing
upon initial product release, these costs are amortized based on the
straight-line method over the estimated life, generally one year for internal
software development costs and twelve to thirty-six months for purchased
software. Fully amortized software costs are removed from the financial
records. For the years ended September 30, 1995, 1994 and 1993, the Company
recorded $1,575,000, $3,171,000 and $3,133,000 of amortization of capitalized
software costs, respectively, based on the straight-line method. Amortization
of capitalized software costs is included in cost of revenues in the
accompanying consolidated statement of operations.
20
<PAGE> 21
Inventories
Inventories, consisting primarily of product packaging, documentation
and media, is stated at the lower of cost or market (net realizable value).
Cost is determined by the first-in, first-out (FIFO) method.
Cash Equivalents and Short-Term Investments
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. Cash and
cash equivalents at September 30, 1995 and 1994 amounted to $5,384,000 and
$9,879,000, respectively.
Short-term investments at September 30, 1995 amounted to $34,285,000
consisting of municipal bonds of $31,755,000, U.S. debt securities of
$2,375,000 and corporate securities of $155,000. Effective October 1, 1994,
the Company adopted the provisions of Statement of Financial Accounting
Standards No. 115 (FAS 115), "Accounting for Certain Investments in Debt and
Equity Securities." Under FAS 115, the Company has classified its short-term
investments as available-for-sale. Available-for-sale securities are stated at
market value and unrealized holding gains and losses, net of the related tax
effect, are excluded from earnings and are reported as a separate component of
stockholders' equity until realized. A decline in the market value of the
security below cost that is deemed other than temporary is charged to earnings
resulting in the establishment of a new cost basis for the security.
Since the market value of short-term investments at October 1, 1994
approximated cost, the adoption of FAS 115 did not have a material effect on
the Company's consolidated financial statements.
Computation of Net Income (Loss) per Share
The primary net income (loss) per common and common equivalent share
for the years ended September 30, 1995, 1994 and 1993 has been computed using
the weighted average number of common and dilutive common stock equivalent
shares outstanding for each year as summarized below:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Weighted average common stock
outstanding during the year . . . . . . . . . . . . 30,612,915 28,674,560 29,463,814
Common stock equivalents of
stock options and warrants
outstanding . . . . . . . . . . . . . . . . . . . . 1,443,997 -- 256,838
-------------------------------------------------------
Shares used in primary EPS
calculation . . . . . . . . . . . . . . . . . . . . 32,056,912 28,674,560 29,720,652
=======================================================
Shares used in fully diluted
EPS calculation . . . . . . . . . . . . . . . . . . 32,998,635 28,674,560 29,720,652
=======================================================
</TABLE>
The weighted average number of shares of common stock outstanding
during each of the years has been adjusted to reflect the issuance of common
stock in connection with the following acquisitions; 3,500,000 shares for
Landmark Research International Corporation ("Landmark") (note 2), 921,000
shares for Inset Systems, Inc. ("Inset") (note 14), and 5,200,000 shares for
Datastorm Technologies, Inc. ("Datastorm") (note 14). The weighted average
number of shares of common stock outstanding for the year ended September 30,
1994, excluded 962,000 shares issued in connection with the above
acquisitions, which are held in escrow, as their inclusion would be
anti-dilutive.
21
<PAGE> 22
Additionally, effective October 1, 1994, the weighted average number
of common shares has been adjusted to reflect the issuance of 460,000 and
524,000 shares of common stock issued in connection with the Internetware, Inc.
and a related party (together "Internetware") and StarNine Technologies, Inc.
("StarNine") mergers, accounted for as immaterial pooling of interests,
respectively, and 149,000 shares of common stock issued during the year ended
September 30, 1995 relating to the Quarterdeck equivalent shares issued on the
exercise of StarNine options.
Reclassification
In order to conform to evolving financial reporting practices by the
software industry, the Company is reporting the amortization of capitalized
software and technical support costs as cost of revenues for all periods
presented. The Company had previously reported amortization of capitalized
software as research and development expense, and technical support costs as
sales and marketing expense.
Certain additional items in prior year's consolidated financial
statements have been reclassified to conform to the current year's
presentation.
Use of Estimates
Management of the Company has made a number of estimates and
assumptions relating to the reporting assets and liabilities to prepare these
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of short-term investments and
trade accounts receivable. The Company's investment portfolio is diversified
and consists of investment grade securities. The credit risk associated with
trade accounts receivable is mitigated by the Company's credit evaluation
process, reasonably short collection terms and the geographical dispersion of
sales transactions.
Depreciation and Amortization
Depreciation and amortization of equipment and leasehold improvements
is provided by the straight-line method over the estimated useful lives of the
related assets as follows:
<TABLE>
<S> <C>
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . 3 to 7 years
Furniture and fixtures . . . . . . . . . . . . . . . . . . . . 5 to 7 years
Leasehold improvements . . . . . . . . . . . . . . . . . . . Shorter of lease or useful life of asset
Equipment under capital lease . . . . . . . . . . . . . . . . 3 to 7 years
</TABLE>
Income Taxes
In February 1992, the Financial Accounting Standards Board issued
Statement No. 109 "Accounting for Income Taxes" (FAS 109) which adopts
significant changes that apply to all companies that are subject to income
taxes. The Company adopted the provisions of FAS 109 effective October 1,
1993. The application of FAS 109 had an immaterial effect on the Company's
financial statements for periods prior to October 1, 1993.
Pro Forma Data
The consolidated statements of operations include a pro forma
presentation for an estimated amount of income taxes which would have been
recorded if Landmark and Datastorm had been C corporations for all periods
presented.
22
<PAGE> 23
NOTE 2. ACQUISITIONS AND STRATEGIC INVESTMENTS
Pooling of Interests
On June 30, 1995, Quarterdeck acquired Landmark, a developer of
utility application software for personal computers. Quarterdeck issued
3,500,000 shares of common stock in exchange for all of the outstanding common
stock of Landmark. The transaction was accounted for as a pooling of interests
and therefore, the consolidated financial statements for all periods presented
herein reflect the combined operations of Quarterdeck and Landmark.
Consolidated financial statements for periods prior to October 1, 1992 will not
be restated.
Landmark had a calendar year end and, accordingly, the Landmark
statement of income for the year ended December 31, 1994 has been combined with
the Quarterdeck statement of operations for the fiscal year ended September 30,
1994. In order to conform Landmark's year end to Quarterdeck's fiscal year
end, the consolidated statement of operations for the year ended September 30,
1995 includes three months (October, November and December 1994) for Landmark,
which are also included in the consolidated statement of operations for the
fiscal year ended September 30, 1994. Accordingly, an adjustment has been made
to September 30, 1995 retained earnings for the duplication of net income of
$384,000 for such three month period. Other results for such three month
period of Landmark include net revenues of $3,257,000.
Landmark's S corporation status terminated upon acquisition by
Quarterdeck. Landmark's undistributed earnings at September 30, 1995, 1994 and
1993, have been re-classified to additional paid-in capital in the consolidated
financial statements. Distributions to Landmark's stockholders, amounting to
$2,114,000, $587,000 and $184,000 for the years ended September 30, 1995, 1994
and 1993, respectively have been charged to additional paid-in capital.
On August 28, 1995, the Company issued 460,000 shares of its common
stock in exchange for 100% of the outstanding shares of Internetware. The
transaction was accounted for as an immaterial pooling of interests, and
accordingly, the consolidated financial statements have been prepared as if
Internetware had been combined beginning October 1, 1994. Consolidated
financial statements for periods prior to October 1, 1994 have not been
restated to reflect the effects of the Internetware acquisition. The Company
recorded an adjustment to beginning equity to reflect the 460,000 shares issued
in the transaction and Internetware's stockholders' deficiency of $36,000 at
September 30, 1994. Acquisition costs paid by certain stockholders of
Internetware, amounting to $450,000 have been recorded as acquisition expenses
of the combined entities and a capital contribution.
On September 29, 1995, the Company issued 672,667 shares of its common
stock in exchange for 100% of the outstanding shares of StarNine. This
transaction was accounted for as an immaterial pooling of interests, and
accordingly, the consolidated financial statements have been prepared as if
StarNine had been combined beginning October 1, 1994. Consolidated financial
statements for periods prior to October 1, 1994 have therefore not been
restated. The Company recorded an adjustment to beginning equity to reflect
approximately 524,000 of the shares issued in the transaction (relating to the
2,729,400 shares of StarNine outstanding at September 30, 1994) and StarNine's
stockholders' equity balance of $501,000 at September 30, 1994.
In addition, during the period from October 1, 1994 to September 29,
1995 (closing date) activity related to StarNine options (with Quarterdeck
equivalent shares) was as follows:
<TABLE>
<CAPTION>
APPROXIMATE
QUARTERDECK
STARNINE EXERCISE EQUIVALENT
OPTIONS PRICE SHARES
-------------------------------------------
<S> <C> <C> <C>
Outstanding at September 30, 1994 . . . . . . . . . . . 355,000 $0.25 - $0.29 68,000
Options granted . . . . . . . . . . . . . . . . . . 600,000 $0.29 115,000
Options exercised . . . . . . . . . . . . . . . . . (775,000) $0.25 - $0.29 (149,000)
Options cancelled . . . . . . . . . . . . . . . . . (180,000) $0.29 (34,000)
-------- --------
Outstanding at September 29, 1995 (closing date) . . . -- --
=============================================
</TABLE>
23
<PAGE> 24
Between September 30, 1995 and March 31, 1996, the Company completed
two additional acquisitions that are accounted for under the pooling of
interests method (See Note 12); Quarterdeck issued 921,218 shares of its common
stock in exchange for 100% of the outstanding shares of Inset Systems, Inc. and
issued 5,200,000 shares of its common stock for 100% of the outstanding shares
of Datastorm and Datastorm Technologies, Ltd.
For a summary of the impact of the poolings on revenues and income
(loss) please refer to the table presented in Note 14.
In connection with the 1995 mergers, the following merger transaction
costs and expenses were recorded and have been charged to expense in fiscal
1995. These nonrecurring merger transaction costs and expenses include the
following (in thousands):
<TABLE>
<CAPTION>
LANDMARK STARNINE INTERNETWARE TOTAL
---------------------------------------------------------
<S> <C> <C> <C> <C>
Acquisition costs . . . . . . . . . . $ 3,600 $1,200 $ 300 $ 5,100
Non-cash charges . . . . . . . . . -- (450) -- (450)
Cash payments . . . . . . . . . . . . (1,860) (98) (175) (2,133)
Reversal of acquisition costs . . . . (488) -- -- (488)
------- -------------------------------------
Balance, September 30, 1995 . . . . . $ 1,252 $ 652 $ 125 $ 2,029
========================================================
.
</TABLE>
Purchase
On September 28, 1995, the Company acquired the intellectual property
assets of Prospero in exchange for common stock with a market value, as
defined, of $2,950,000, or 154,693 shares, plus the assumption of $60,000 of
liabilities, and transaction costs amounting to approximately $125,000. This
transaction has been accounted for using the purchase method of accounting. At
September 30, 1995, accrued transaction costs, assumed liabilities and stock
registration fees amounted to approximately $196,000 and have been classified
as accrued acquisition and restructuring charges.
An allocation of the purchase price was made among the identifiable
tangible and intangible assets, based on the fair market value of those assets
using a risk adjusted income approach. Specifically, purchased research and
development was identified and valued through extensive interviews and analysis
of data concerning each Prospero development project. Expected future cash
flows of each development project were discounted taking into account risks
associated with the inherent difficulties and uncertainties in completing the
project, and thereby achieving technological feasibility, and risks related to
the viability of and potential changes in future target markets.
This allocation resulted in $2,578,000 of purchased research and
development which had not yet reached technological feasibility and did not
have alternative future uses. Therefore, in accordance with generally accepted
accounting principles, the $2,578,000 of purchased research and development is
included in acquisition, restructuring and other charges in the accompanying
consolidated statements of operations.
Using the same methodology, purchased software was identified and
valued. Expected future cash flows of each purchased software product were
discounted taking into account risks related to the characteristics and
applications of each product, existing and future markets, and assessments of
the life cycle of each product. This analysis resulted in $557,000 of
purchased software which had reached technological feasibility, and therefore
was capitalized. The amount of purchase price allocated to purchased software
resulted in a smaller value than that allocated to purchased research and
development due to the relatively lower expected revenues generated by
purchased software products and the importance of the research and development
products to Quarterdeck products. The purchased software will be amortized
over a period of 24 months.
24
<PAGE> 25
The following unaudited pro forma financial information presents the
combined results of operations of the Company and Prospero as if the
acquisition had occurred as of the beginning of the fiscal year ended September
30, 1994 (in thousands, except per share data):
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
-----------------------------------
1995 1994
-----------------------------------
<S> <C> <C>
Revenues . . . . . . . . . . . . . . . $117,719 $84,805
Net income (loss) . . . . . . . . . . 10,869 (7,452)
Net income (loss) per share:
Primary . . . . . . . . . . . . . . $0.34 ($0.26)
===================================
Fully diluted . . . . . . . . . . . . $0.33 ($0.26)
===================================
</TABLE>
Other Investments
In March 1995, the Company agreed to purchase a minority equity
position in Limbex Corporation ("Limbex"), a company that holds the exclusive
assignable license to certain intelligent Internet search technology. The
agreement requires the Company to make four $200,000 installments through
February 1996. The Company has accounted for this investment using the cost
method. As of September 30, 1995, the Company had remitted the first two
installments.
In June 1995, the Company purchased a minority equity position in
Lernout and Hauspie Speech Products N.V. ("Lernout and Hauspie"), a company
that develops and licenses speech compression technology. This cash investment
of $1,500,000 was accounted for using the cost method. Quarterdeck has paid a
$405,000 non-refundable royalty to Lernout and Hauspie for technology that will
be included in future products.
In June 1995, the Company agreed to purchase a minority equity
position in Intelligence at Large, Inc. ("IAL"), a company that develops
Internet audio technology. The agreement requires the Company to make a total
investment of $1,250,000, payable upon IAL achieving specified development
milestones. The Company has accounted for this investment using the cost
method. As of September 30, 1995, the Company had remitted $800,000 to IAL.
25
<PAGE> 26
NOTE 3. BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------
1995 1994
-------------------------
(in thousands)
<S> <C> <C>
Cash and short-term investments:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . $ 5,384 $ 9,879
Short-term investments . . . . . . . . . . . . . . . . . . . . . . . 34,285 28,504
------------------------
$39,669 $38,383
========================
Trade accounts receivable:
Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . $18,822 $ 9,106
Less: allowance for doubtful accounts . . . . . . . . . . . . (870) (803)
Less: allowance for sales returns and marketing
development funds . . . . . . . . . . . . . . . . . . . . (4,331) (2,823)
------------------------
$13,621 $ 5,480
========================
Other current assets:
Prepaid royalties . . . . . . . . . . . . . . . . . . . . . . . . . $1,427 $ 126
Other prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . 1,345 1,139
Notes receivable . . . . . . . . . . . . . . . . . . . . . . . . . 100 --
Advances to employees . . . . . . . . . . . . . . . . . . . . . . 5 30
Acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . 287 --
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 842 1,109
------------------------
$4,006 $2,404
========================
Equipment and leasehold improvements:
Computer equipment . . . . . . . . . . . . . . . . . . . . . . . . . $14,710 $10,525
Office furniture and equipment . . . . . . . . . . . . . . . . . . 3,046 2,233
Office furniture and equipment under capital leases . . . . . . . 26 199
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . 1,696 2,030
------------------------
19,478 14,987
Less: accumulated depreciation and amortization . . . . . . . . . (11,143) (9,086)
-----------------------
$ 8,335 $ 5,901
=======================
Capitalized software costs:
Capitalized software costs . . . . . . . . . . . . . . . . . . . . $ 4,184 $ 3,475
Less: accumulated amortization . . . . . . . . . . . . . . . . (1,377) (1,656)
-----------------------
$ 2,807 $ 1,819
=======================
Other assets:
Investment in unconsolidated
subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,700 $ --
Notes receivable from employee . . . . . . . . . . . . . . . . . . 125 --
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 508 440
------------------------
$ 3,333 $ 440
========================
Accrued liabilities:
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,447 $ 4,963
Accrued postcontract customer support . . . . . . . . . . . . . . 584 553
Accrued vacation . . . . . . . . . . . . . . . . . . . . . . . . 1,877 1,377
Accrued advertising . . . . . . . . . . . . . . . . . . . . . . . 1,608 688
Accrued litigation settlement . . . . . . . . . . . . . . . . . . -- 615
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,387 989
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . 431 1,048
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . 546 --
------------------------
$13,880 $10,233
========================
</TABLE>
26
<PAGE> 27
NOTE 4. RESTRUCTURING AND OTHER CHARGES
During the fourth fiscal quarter of 1994, management adopted a
Company-wide restructuring plan designed to focus the Company's efforts on
strategic product and market opportunities as well as to reduce its cost
structure and improve its productivity and competitiveness. The results for
the fourth quarter and fiscal year 1994 included a pre-tax charge totaling
$12,863,000 relating to the restructuring activities and other non-recurring
charges.
The following is an analysis of the significant components of the
fiscal 1994 restructuring and other charges and 1994 activity (in thousands):
<TABLE>
<CAPTION>
TOTAL CASH PAID
RESTRUCTURING AND NON-CASH IN FISCAL ACCRUED AS OF
NON-RECURRING COSTS COSTS 1994 SEPTEMBER 30, 1994
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Reduction of non-core
product lines . . . . . . . . . . . . . $ 4,367 $4,367 $ -- $ --
Discontinuance and
consolidation of offices . . . . . . . 5,320 1,365 245 3,710
Severance costs . . . . . . . . . . . . . 586 158 366 62
Write-off property and
equipment and other charges . . . . . . 2,590 1,526 130 934
----------------------------------------------------------
Total . . . . . . . . . . . . . . $12,863 $7,416 $741 $4,706
==========================================================
</TABLE>
As part of the restructuring plan, certain non-core product lines and
development efforts were reduced or eliminated. Capitalized acquired and
developed software costs, inventory balances and other costs related to these
reduced or eliminated product lines were written down to estimated net
realizable value or written off and charged to restructuring and non-recurring
charges at September 30, 1994.
The restructuring plan included the discontinuance of certain U.S. and
international sales and training offices, plus the consolidation and relocation
of the Company's Santa Monica, California and Dublin, Ireland headquarters
facilities. Related restructuring costs included the estimated lease
obligations for offices and facilities which were, or were planned to be,
closed, consolidated or relocated, estimated fixed asset write-offs for all
effected offices, as well as other related costs. The estimated lease
obligations included in restructuring costs were net of estimated negotiated
reductions in lease obligations or sublease income expected to be derived by
subleasing the facilities.
As part of the restructuring plan, the Company reorganized its staff
and reduced its workforce. Related severance costs consisted of involuntary
termination payments, outplacement costs and other related costs.
The Company wrote off excess equipment and recorded other pretax
charges which resulted from the above restructuring activities.
27
<PAGE> 28
The following is an analysis of the activity for significant
components of the fiscal 1994 restructuring charges in the fiscal year ended
September 30, 1995 (in thousands):
<TABLE>
<CAPTION>
ADDITIONAL
REVERSAL OF RESTRUCTURING CASH
ACCRUED AS OF PRIOR EXPENSES PAID IN ACCRUED AS OF
SEPTEMBER 30, RESTRUCTURING INCURRED FISCAL SEPTEMBER 30,
1994 ACCRUALS IN FISCAL 1995 1995 1995
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Discontinuance and
consolidation of offices . . . $3,710 ($1,728) $ 760 ($1,912) $ 830
Severance costs . . . . . . . . 62 -- -- (25) 37
Other charges . . . . . . . . . . 934 (264) 1,451 (1,758) 363
----------------------------------------------------------------------
Balances . . . . . . . . . . . . $4,706 ($1,992) $2,211 ($3,695) $1,230
======================================================================
</TABLE>
Reversal of prior restructuring accruals represent reductions in the
restructuring charges based upon information obtained during fiscal 1995 or
recent changes in management's strategic plans. The most significant credit
amounting to approximately $1,120,000, relates to the reversal of an accrual
established for the Company's previously anticipated consolidation of the
Dublin lease. Management has decided to continue operations in Dublin as
current year operations have increased significantly. Additional restructuring
charges represent restructuring related expenses incurred in 1995 which were
not known or could not be accrued at September 30, 1994 relating to the
restructuring.
28
<PAGE> 29
NOTE 5. INCOME TAXES
The components of the provision (benefit) for income taxes for the
fiscal years ended September 30, 1995, 1994 and 1993, respectively, are as
follows (in thousands):
<TABLE>
<CAPTION>
FEDERAL STATE TOTAL
---------------------------------------
<S> <C> <C> <C>
1995:
Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,330 179 $2,509
Deferred . . . . . . . . . . . . . . . . . . . . . . . . . (2,021) (157) (2,178)
---------------------------------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . $ 309 $ 22 $ 331
========================================
1994:
Current . . . . . . . . . . . . . . . . . . . . . . . . . . . ($5,984) $ 2 ($5,982)
Deferred . . . . . . . . . . . . . . . . . . . . . . . . . -- -- --
----------------------------------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . ($5,984) $ 2 ($5,982)
========================================
1993:
Current . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 646 $ 195 $ 841
Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . (187) (15) (202)
---------------------------------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . $ 459 180 $ 639
=======================================
</TABLE>
The actual income tax expense (benefit) differs from the "expected"
income tax expense (benefit) computed by applying the effective Federal income
tax rate of 34% to income (loss) before income taxes as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------------
1995 1994 1993
------------------------------------------
<S> <C> <C> <C>
Expected income tax expense (benefit) . . . . . . . . . . . . . . $3,938 $(3,606) $ 3,777
Deferred tax asset not recognized . . . . . . . . . . . . . . . -- 2,853 --
Change in valuation allowance . . . . . . . . . . . . . . . . . . 483 -- --
State income taxes, net of Federal
income tax benefit . . . . . . . . . . . . . . . . . . . . . . 14 -- 119
Net (income) loss on foreign subsidiary . . . . . . . . . . . . . (608) 1,510 --
Net income of Subchapter S subsidiary . . . . . . . . . . . . (3,014) (6,444) (3,257)
Tax exempt income benefit . . . . . . . . . . . . . . . . . . . . (339) (250) (351)
Alternative minimum tax and other tax credits . . . . . . . . . . (257) -- 232
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (114) (45) 119
------ ------- ------
$ 331 ($5,982) $ 639
=========================================
</TABLE>
At September 30, 1994, the Company had deferred tax assets amounting
to $2,853,000, for which a full valuation allowance was provided. The deferred
tax assets consisted of the tax effect from the expected future reversal of
temporary differences, resulting in part from restructuring charges in fiscal
1994, which were not deductible for federal income tax purposes until the
amounts are actually paid. Recognition of the deferred tax assets is dependent
on a number of factors, including the timing of reversal of the temporary
differences and an assessment of the future realizability of the deferred tax
assets.
The valuation allowance for deferred tax assets as of September 30,
1994 was $2,853,000. The net change in the total valuation allowance for the
twelve months ended September 30, 1995 was an increase of $483,000. Of this
amount, $2,661,000 resulted from increases in gross deferred tax assets offset
by an increase in the total net deferred assets of $2,178,000. The increase in
total net deferred assets resulted from the Company's revaluation of the
realizability of the future income tax benefit occasioned by various events
which occurred during the third and fourth quarters of fiscal 1995. The
acquisition of four new businesses in the third and fourth quarters of fiscal
1995, which significantly increased revenues and the occurrence of other
events, made it more
29
<PAGE> 30
likely than not that the various tax benefits would be realized. As a result,
the carrying value of the net deferred tax benefit was increased by $2,178,000,
which was recognized as a current period income tax benefit. These income tax
benefits will be realized upon the Company earning approximately $6,400,000 of
taxable income during the carryforward period.
Management believes that it is more likely than not that it will
generate taxable income sufficient to realize the deferred tax asset based on
the current estimates of future taxable income. If the Company is unable to
generate sufficient taxable income in the future through operating results,
increases in the valuation allowance will be required through a charge to
expense. However, if the Company achieves sufficient profitability to utilize
a greater portion of the deferred tax benefit, the valuation allowance will be
reduced through a credit to income.
Under FAS 109, deferred tax assets and liabilities are recognized for
the expected future tax consequences of differences between the carrying amount
of assets and liabilities and their respective tax bases using enacted tax
rates in effect for the year in which the differences are expected to reverse.
Deferred tax assets (liabilities) consist of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------------
1995 1994 1993
-----------------------------------------
<S> <C> <C> <C>
Accrued restructuring charges . . . . . . . . . . . . . . . . . . $311 $ 684 $ --
Software development costs recognized
as incurred for tax purposes . . . . . . . . . . . . . . . . . 12 (401) 959
State taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 486 (183)
Allowance for sales returns . . . . . . . . . . . . . . . . . . 837 669 (776)
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . 825 563 --
Allowance for doubtful accounts
and other reserves . . . . . . . . . . . . . . . . . . . . . . 997 879 26
Acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . 1,591 -- --
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . 934 (27) (228)
--------------------------------------
Gross deferred tax assets (liabilities) . . . . . . . . 5,514 2,853 (202)
Deferred tax assets, valuation allowance . . . . . . . . 3,336 2,853 --
--------------------------------------
Total net deferred tax assets (liabilities) . . . . . . $2,178 $ -- ($202)
======================================
</TABLE>
Prior to June 30, 1995, Landmark elected to be taxed as an S
corporation whereby the income tax effects of Landmark's activities accrued
directly to its shareholders. Landmark's S corporation election terminated on
June 30, 1995, at the time of the acquisition. As a result, deferred income
taxes under the provisions of FAS 109 were established and the effects are
included in the consolidated condensed financial statements. Prior to March
31, 1996, Datastorm, which was acquired during March of 1996, was an S
corporation whereby the income tax effects of Datastorm's activities accrued
directly to its shareholders. Datastorm's S corporation election terminated
upon acquisition by Quarterdeck and deferred income taxes under the provisions
of FAS 109 will be established and the effects will be included in the
company's financial statements beginning in the third fiscal quarter of 1996.
The conversion to record the deferred tax attributes of Datastorm is not
expected to have a material effect on the company's results of operations.
The consolidated statements of operations include a pro forma
presentation for income taxes which would have been recorded if Landmark and
Datastorm had been C corporations for all periods presented.
30
<PAGE> 31
NOTE 6. STOCK OPTIONS AND WARRANTS
In fiscal 1990, the Company adopted two stock option plans, the 1990
Directors' Stock Option Plan and the 1990 Stock Plan. Both plans have
subsequently been amended. During 1995, the Company's Board of Directors
approved an amendment to increase the number of shares of stock authorized for
issuance under the 1990 Stock Plan from 3,000,000 to 6,000,000 shares, which
amendment was approved by the shareholders on February 2, 1996. Under the
amended terms of the 1990 Stock Plan, shares of common stock are reserved for
issuance to employees and consultants pursuant to incentive stock options,
nonqualified stock options, stock appreciation rights, restricted stock awards
or stock bonuses. The Company has never issued a stock appreciation right, a
restricted stock award or a stock bonus. Under the terms of the 1990
Directors' Stock Option Plan, 300,000 shares are reserved for issuance to
non-employee directors.
1990 STOCK PLAN. Under the terms of the 1990 Stock Plan, options may
not exceed 10 years in length. Incentive stock options are granted at 100% of
fair market value. Non-qualified stock options may not be granted at less than
85% of fair market value, although the Company has always granted them at 100%
of fair market value. Options outstanding under the 1990 Stock Plan are
exercisable in varying increments commencing one year after date of grant and
expire five to ten years from date of grant or upon earlier termination.
During fiscal 1995, the Company granted 522,772 stock options at exercise
prices between $2.50 and $5.00 per share, 40,000 stock options at exercise
prices between $5.01 and $10.37 per share, and 1,639,583 stock options at
exercise prices between $10.38 and $17.50 per share. During fiscal 1994, the
Company granted 10,000 stock options at an exercise price of $2.50, 485,700
stock options at an exercise price of $2.00 per share and 503,600 stock options
at an exercise price of $2.25 per share. During fiscal 1993, the Company
granted 580,000 stock options at an exercise price of $3.563 per share and
49,000 stock options at an exercise price of $3.063 per share.
During fiscal 1995, 205,650 options were exercised and 268,550 options
were cancelled. During fiscal 1994, 7,501 options were exercised and 481,399
options were cancelled. During fiscal 1993, 26,500 options were exercised and
68,525 options were cancelled. At September 30, 1995, 3,382,380 options were
outstanding and 468,700 options were exercisable under the 1990 Stock Plan.
1990 DIRECTORS' STOCK OPTION PLAN. Under the terms of the 1990
Directors' Stock Option Plan, options are exercisable in varying increments and
expire within five years or upon earlier directorship termination. During
fiscal 1995, 15,000 stock options were granted at an exercise price of $4.00
per share, 52,500 options were exercised, and no options were cancelled.
During fiscal 1994, 30,000 options were granted at an exercise price of $2.625
per share and 15,000 options were granted at an exercise price of $2.25 per
share. During fiscal 1994, 2,500 options were exercised and no options were
cancelled. During fiscal 1993, the Company granted 15,000 stock options at an
exercise price of $3.50 per share, 30,000 stock options were exercised and no
options were cancelled. At September 30, 1995, 50,000 options were outstanding
under the 1990 Directors' Stock Option Plan and 30,000 options were
exercisable.
1989 NON-QUALIFIED STOCK PLAN. In October 1989, the Company adopted
its 1989 Non-Qualified Stock Plan pursuant to which options were granted at
prices determined by the Board of Directors. The options were exercisable in
varying increments and expire five years from date of grant or upon earlier
termination of employment. No additional options may be granted under this
plan. A total of 385,000 option shares at an option price of $0.10 per share
have been granted pursuant to the plan, all of which were granted in October
1989. During fiscal 1995, 93,125 options were exercised and no options were
cancelled. During fiscal 1994, 20,250 options were exercised and no options
were cancelled. During fiscal 1993, 23,250 options were exercised and 625
options were cancelled. At September 30, 1995, no other options were
outstanding and exercisable under the 1989 Non-Qualified Stock Plan and
accordingly, the plan was terminated.
To the extent the Company derives a tax benefit from options exercised
by employees, such benefit is credited to paid-in capital when realized on the
Company's income tax return. Tax benefits realized totaling $59,000, $16,000
and $105,000 were credited to paid-in capital in fiscal 1995, 1994 and 1993,
respectively.
31
<PAGE> 32
A summary of all stock option and warrant activity in the three-year
period ended September 30, 1995 is as follows:
<TABLE>
<CAPTION>
OPTION
SHARES RANGE
---------------------------------------
<S> <C> <C> <C>
Outstanding at September 30, 1992 . . . . . . . . . . . . . . 827,100 $0.10 - $17.50
Options granted . . . . . . . . . . . . . . . . . . . . . . 644,000 3.06 - 3.56
Options and warrant exercised . . . . . . . . . . . . . . (99,750) 0.10 - 0.62
Options cancelled . . . . . . . . . . . . . . . . . . . . (69,150) 0.10 - 17.50
---------
Outstanding at September 30, 1993 . . . . . . . . . . . . . . 1,302,200 0.10 - 17.50
Options granted . . . . . . . . . . . . . . . . . . . . . . 1,044,300 2.00 - 2.63
Options exercised . . . . . . . . . . . . . . . . . . . . (30,251) 0.10 - 3.56
Options cancelled . . . . . . . . . . . . . . . . . . . . . (481,399) 0.62 - 17.50
---------
Outstanding at September 30, 1994 . . . . . . . . . . . . . . 1,834,850 0.10 - 17.50
Options granted . . . . . . . . . . . . . . . . . . . . . . 2,217,355 2.50 - 17.50
Options exercised . . . . . . . . . . . . . . . . . . . (351,275) 0.10 - 17.50
Options cancelled . . . . . . . . . . . . . . . . . . . . . (268,550) 2.00 - 17.50
---------
Outstanding at September 30, 1995 . . . . . . . . . . . . . . 3,432,380 $2.00 - $17.50
========= ===== ======
</TABLE>
NOTE 7. COMMITMENTS
The Company leases facilities under operating leases that expire
through fiscal 2016. Rental expense for the years ended September 30, 1995,
1994 and 1993 amounted to approximately $3,076,000, $3,468,000 and $2,866,000,
respectively.
Minimum annual rental payments under these leases are as follows (in
thousands):
<TABLE>
<CAPTION>
Year ending September 30:
<S> <C>
1996 . . . . . . . . . . . . . . . . . . . . . . . $3,303
1997 . . . . . . . . . . . . . . . . . . . . . . 2,933
1998 . . . . . . . . . . . . . . . . . . . . . . . 2,610
1999 . . . . . . . . . . . . . . . . . . . . . . . 2,537
2000 . . . . . . . . . . . . . . . . . . . . . . . 2,331
Thereafter . . . . . . . . . . . . . . . . . . . 12,453
-------
$26,167
=======
</TABLE>
Accumulated depreciation related to equipment under capital leases was
$143,000 and $130,000 at September 30, 1994, and 1993, respectively. The
Company has no equipment under capital leases as of September 30, 1995.
32
<PAGE> 33
NOTE 8. STOCKHOLDER RIGHTS PLAN
In September 1992, the Company made a dividend distribution of one
preferred share purchase right for each outstanding share of common stock. The
rights trade with the common stock and only become exercisable, or transferable
apart from the common stock, ten business days after a person or group
(Acquiring Person) acquires beneficial ownership of, or commences a tender or
exchange offer for, 15% or more of the Company's common stock. Each right,
under certain circumstances, entitles its holder to acquire one one-hundredth
of a share of a newly created Series A Junior Participating Preferred Stock,
par value $0.001 per share, at a price of $35, subject to adjustment. If 15%
of the Company's common stock is acquired, or a tender offer to acquire 15% of
the Company's common stock is made, each right not owned by an Acquiring Person
will entitle the holder to purchase at the exercise price, Company common stock
having a market value of twice the exercise price of the rights. In addition,
if the Company is acquired in a merger or other business combination, the
rights will entitle a holder to buy a number of shares of common stock of the
acquiring Company having a market value of twice the exercise price of each
right. The rights may be redeemed by the Company at $0.01 per right at any
time until a 15% position has been acquired. The rights expire on August 22,
2002, and at no time have voting power.
NOTE 9. EMPLOYEE BENEFIT PLANS
In January 1991, the Company adopted a defined contribution 401(k)
plan. Employees must be full-time employees at least 21 years of age and must
have completed at least 12 consecutive months of service to be eligible for the
plan. Participants may contribute 1% to 15% of their compensation. During
fiscal 1993, the Board of Directors approved a Company match of 25% of employee
contributions up to 5% of eligible compensation. The Company match was
increased to 50% of employee contributions up to 5% of eligible compensation
for calendar 1995. The Company's matching contributions totaled $112,000 and
$96,000 for fiscal 1995 and 1994, respectively.
Employees of the Company's Datastorm subsidiary participated in the
Datastorm Technologies, Inc., Integrated Profit Sharing Plan and Trust
("Plan"). Annually, Datastorm contributed to the Plan an amount determined by
the Datastorm Board at its discretion. Profit sharing expense totaled $713,000
and $451,000 for the years ended September 30, 1995 and 1994, respectively. To
participate in the Plan, an employee must have completed six months of service
with Datastorm and attain the age of 20.5 years. To qualify for the Employer
Contribution to the Plan, participants must complete 1,000 hours of service
during a Plan year and be employed by the Company on the last day of the Plan
year. For each Plan year the Employer contributes to the Plan, the Trustees
will allocate this contribution to the separate accounts maintained for
participants. An employee-participant may (but is not required to) contribute
to the Plan. Participant accounts are invested among five investment funds as
directed by the participant.
Subsequent to the acquisition of Datastorm, the Plan has been
modified and merged with the Company plan discussed above.
NOTE 10. LITIGATION
On May 26, 1995, a Final Judgment and Order of Dismissal was entered
in the In Re Quarterdeck Office Systems, Inc. securities litigation in the
United States District Court, Central District of California. The judgment
approved the settlement of the litigation. The settlement involved a payment
of $3,900,000 of which approximately $585,000 was paid by the Company in the
current year and the balance was paid directly by the Company's insurance
carrier.
The Company is a defendant in an action initially commenced on June
29, 1995 by Corum Group Ltd., in King County (Washington) Superior Court
against Landmark Research International Corporation ("Landmark"). On July 7,
1995, Corum filed an amended complaint asserting tort and breach of contract
claims against the Company and two former shareholders of Landmark. The
lawsuit arises out of the Company's acquisition of Landmark on June 30, 1995.
Corum claims that it acted as a "broker" in the transaction and is seeking
approximately $2,900,000 it claims it is owed as a commission with respect to
the acquisition. The Company removed the action to U.S. District Court (Case
No. 95-1126WD, United States District Court, Western District of Washington)
and has asserted affirmative defenses, counter claims and third-party claims.
Subsequent to the
33
<PAGE> 34
end of the year, the Company settled this case. The settlement of this matter
did not have a material adverse impact on the results of operations of the
Company.
The Company is a defendant in various other pending claims and
lawsuits. Management believes that the disposition of such matters will not
have a material adverse impact on the results of operation or financial
position of the Company.
34
<PAGE> 35
NOTE 11. MAJOR CUSTOMERS AND SEGMENT INFORMATION
The Company sells its products primarily through distributors and
dealers. Two of the largest distributors of Quarterdeck products are also the
two largest distributors of Datastorm's products. Sales to these distributors
by Quarterdeck, inclusive of Datastorm sales, have individually accounted for
31% and 14%; 39% and 19%; and 29% and 25% of the Company's consolidated net
revenues for the years ended September 30, 1995, 1994 and 1993, respectively.
Quarterdeck is engaged in a single business segment - the development
and marketing of personal computer software.
Geographic information is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------------
1995 1994 1993
--------------------------------------
<S> <C> <C> <C>
Net revenues:
United States . . . . . . . . . . . . . . . . . . . $ 98,591 $75,425 $74,749
Europe . . . . . . . . . . . . . . . . . . . . . . . 13,809 5,833 7,649
Other . . . . . . . . . . . . . . . . . . . . . . . 5,206 3,457 1,180
----------------------------------------
$117,606 $84,715 $83,578
========================================
</TABLE>
Net revenues from foreign locations are attributable to export
shipments from the Company's United States operations, as well as $14,047,000,
$6,106,000 and $7,922,000 of shipments during fiscal 1995, 1994 and 1993,
respectively, from the Company's European operations based in the United
Kingdom.
<TABLE>
<S> <C> <C> <C>
Operating income (loss):
United States . . . . . . . . . . . . . . . . . . . . $ 7,342 ($7,589) $ 9,903
Europe . . . . . . . . . . . . . . . . . . . . . . . . 2,357 (4,112) 61
--------------------------------------
$ 9,699 ($11,701) $ 9,964
======================================
Identifiable assets:
United States . . . . . . . . . . . . . . . . . . . . $71,130 $60,215 $60,963
Europe . . . . . . . . . . . . . . . . . . . . . . . . 5,569 2,256 3,710
--------------------------------------
$76,699 $62,471 $64,673
======================================
</TABLE>
35
<PAGE> 36
NOTE 12 NOTE RECEIVABLE FROM RELATED PARTY
Prior to being acquired by Quarterdeck, Datastorm loaned to a
partnership, whose partners were Datastorm shareholders, funds the partnership
used to commence the construction of a new building which is planned to house
Datastorm. At September 30, 1995 the partnership owned the building. The note
bears interest at the applicable federal midterm rate and is payable on demand.
The partners are now shareholders and employees or consultants of
Quarterdeck.. In connection with the acquisition, the Company is obligated to
acquire the building from the partnership. The Company plans to complete the
acquisition of the building in the near future (approximately June, 1996). It
is planned to be acquired in exchange for, among other things, cancellation of
the Note receivable.
NOTE 13 CERTAIN RELATED PARTY TRANSACTIONS
The Company's Datastorm subsidiary sells products to Datastorm Ltd., a foreign
company that was acquired by Quarterdeck as part of the Datastorm acquisition.
Datastorm Ltd. was affiliated with Datastorm (U.S.) through common ownership.
The accompanying financial statements include the results of operations, for
the year ended December 31, 1995 and financial position as of December 31, 1995
of Datastorm Ltd. Intercompany transactions for this period have been
eliminated in consolidation. The results from this entity are immaterial for
all periods prior to January 1, 1995 and are, therefore, not included. Sales
to Datastorm Ltd. totaled $1,413,000 and $1,383,000 in 1994 and 1993,
respectively. As a result of these sales, outstanding receivables from
Datastorm Ltd. as of December 31, 1994 and 1993, totaled $410,000 and $479,000,
respectively.
The Company's Datastorm subsidiary leases office and warehouse space from Three
Guys With a Building partnership, a company that was affiliated to Datastorm
through common ownership. The partners of such partnership are now
shareholders and employees or consultants of Quarterdeck. The lease expires on
December 31, 2001, however, as a result of the acquisition and upon completion
of a new office building currently under construction for the Company by the
partnership, the existing lease will be terminated at no cost to the Company.
Lease expense for 1995, 1994 and 1993 totaled $686,000, $667,000 and $632,000
respectively.
The Company's Datastorm subsidiary owed Intersoft, Inc., an Interest Charge
Domestic International Sales Corporation ("IC-DISC") affiliated to Datastorm
through common ownership, $1,015,000 and $527,000 as of December 31, 1995 and
1994, for commission expenses and interest related to international sales.
These amounts are included in notes payable to related parties. Loans were
entered into at the end of each month for each month's commission expense.
Simple interest was accrued at the applicable federal midterm rate. The loans
and related accrued interest were paid in full during the second quarter of
fiscal 1996. Intersoft, Inc. was formed on December 31, 1993. An election to
treat Intersoft, Inc. as an IC-DISC was made effective January 1, 1994.
NOTE 14. SUBSEQUENT EVENTS
Acquisition of Inset On December 29, 1995, Quarterdeck acquired
Inset, a developer of utility application software for personal computers. The
Company issued 921,218 shares of common stock in exchange for all of the
outstanding common stock of Inset. This business combination has been
accounted for as a pooling of interests combination and accordingly, the
consolidated financial statements for all periods presented herein have been
restated to include the accounts and results of operations of Inset.
The merger agreement provides for an escrow arrangement whereby 10% of
the shares issued in the merger, or 92,122 shares, (allocated pro rata based on
the number of shares issued to each Inset shareholder) will be held in escrow
until the earlier of December 29, 1996 or the date the first audit of the
Company's consolidated financial statements which includes the results of
operations of Inset has been completed. The escrow shares shall serve as
collateral for the general representations and warranties of the Inset
shareholders contained in the merger agreement.
Inset had a fiscal year end of March 31, and, accordingly, Inset's
statement of operations for the year ended March 31, 1993 has been combined
with the Company's statement of operations for the fiscal year ended September
30, 1993. Accordingly, Inset's results of operations for the six months ended
September 30, 1993
36
<PAGE> 37
have been excluded from the consolidated statement of operations. Therefore,
Inset's results of operations for the six months ended September 30, 1993 have
been included as an adjustment to stockholders' equity to properly reflect the
balance at September 30, 1995.
Acquisition of Datastorm On March 28, 1996, Quarterdeck consummated
the acquisition of Datastorm, the developer and publisher of Procomm Plus, one
of the industry's leading data communications products. Quarterdeck issued 5.2
million shares of common stock in exchange for all of the outstanding stock of
Datastorm. The transaction was accounted for as a pooling of interests and
therefore, the consolidated financial statements for all periods presented
herein have been restated to reflect the combined operations of Quarterdeck and
Datastorm.
The Agreement and Plan of Reorganization ("Agreement") provides for an
escrow arrangement whereby 10% of the shares issued in the merger, or 520,000
shares, (allocated pro rata based on the number of shares issued to each
Datastorm shareholder) will be held in escrow until the earlier of March 28,
1997 or the date the first audit of the Company's consolidated financial
statements which includes the results of operations of Datastorm has been
completed. The escrow shares shall serve as collateral for the general
representations and warranties of the Datastorm shareholders contained in the
Agreement.
Datastorm had a calendar year end and accordingly, the Datastorm
statement of operations for the year ended December 31, 1995, was restated and
combined with the Quarterdeck statement of operations for the fiscal year ended
September 30, 1995. In order to conform Datastorm's year end to Quarterdeck's
fiscal year end, the consolidated unaudited condensed statement of operations
for the six months ended March 31, 1996, as reported in the Copmpany's report on
form 10-Q dated March 31, 1996, includes three months (October, November,
December 1995) for Datastorm, which are included in the consolidated statement
of operations for the fiscal year ended September 30, 1995. Accordingly an
adjustment has been made to retained earnings during the three months ended
March 31, 1996 for the duplication of net income of $771,000 for the three month
period ended December 31, 1995. Financial information related to Datastorm's
fiscal years ended December 31, 1994 and 1993 combined with financial
information related to Quarterdeck's fiscal years ended September 30, 1994 and
1993, respectively.
Datastorm's S corporation status terminated upon acquisition by
Quarterdeck. Datastorm's undistributed earnings at September 30, 1995, and all
prior periods, have been reclassified to additional paid-in-capital in the
accompanying consolidated financial statements in accordance with pooling of
interests accounting. Accordingly, distributions by Datastorm to Datastorm
shareholders have been charged to additional paid-in-capital.
The Company recorded acquisition and related restructuring costs
amounting to $7.3 million for financial advisory, legal, accounting services,
personnel severance and benefits, and other related expenses in connection with
the acquisitions of Datastorm and Inset. These costs have been reflected in the
consolidated unaudited condensed statements of operations and balance sheets of
the combined companies for the period ended March 31, 1996, as filed with the
Securities and Exchange Commission on May 15, 1996.
The results of operations previously reported by the separate
enterprises, that are discussed above and in Note 2, and the combined amounts
presented in the accompanying consolidated financial statements are summarized
below:
37
<PAGE> 38
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------------------------------------------------
1995 1994 1993
-------------------- ------------------------ --------------------
NET NET NET
NET INCOME NET INCOME NET INCOME
REVENUES (LOSS) REVENUES (LOSS) REVENUES (LOSS)
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Quarterdeck Corporation . . . . . $54,986 $2,744 $26,753 ($21,171) $44,939 $1,241
Landmark Research
International, Inc. . . . . . . 11,236 1,309 11,953 2,323 8,070 247
StarNine Technologies, Inc. . . . 3,981 38 -- -- -- --
Internetware, Inc. . . . . . . . 444 (202) -- -- -- --
Inset Systems, Inc. . . . . . . . 6,394 134 4,022 (1,929) 4,360 (27)
Datastorm . . . . . . . . . . . 40,499 6,990 42,402 16,242 26,798 9,305
Pooling Adjustments . . . . . . . 66 239 (415) (90) (589) (297)
------- ------ ------ ------- ------ ------
Restated Quarterdeck . . . . . . $117,606 $11,252 $84,715 ($4,625) $83,578 $10,469
======== ======= ======= ======= ======= =======
</TABLE>
Net revenues and net income for Landmark, StarNine and Internetware
for the year ended September 30, 1995 reflect the results of each entity for
only the period prior to the date of being acquired by Quarterdeck. Results
subsequent to the date of the merger(s) are included with Quarterdeck's
operations. Net revenue and net income (loss) for 1994 and 1993 reflect the
separate results of Landmark for those periods. Net revenue and net income
(loss) for all periods presented above reflect the separate results for Inset
and Datastorm. Pooling adjustments were made primarily to conform accounting
policies to those of the Company.
During the year ended September 30, 1994, Inset granted 65,811 options
(55,807 Quarterdeck equivalent shares). During the year ended September 30,
1995 and for the period from October 1, 1995 to December 29, 1995 (closing
date) activity related to these options (stated with the approximate
Quarterdeck equivalent shares) was as follows:
<TABLE>
<CAPTION>
QUARTERDECK INSET EXERCISE
EQUIVALENT OPTIONS PRICE SHARES
----------- ------- ----- --------
<S> <C> <C> <C>
Outstanding at September 30, 1994 . . . . . . . . . . . . . 66,153 $0.45 - 0.50 56,097
Options granted . . . . . . . . . . . . . . . . . . . . 14,000 $0.00 11,872
Options exercised . . . . . . . . . . . . . . . . . . (8,783) $0.50 (7,448)
Outstanding at September 30, 1995 . . . . . . . . . . . . . . 71,370 $0.00 - 0.50 60,521
------- -------
Options exercised . . . . . . . . . . . . . . . . . . (41,770) $0.45 - 0.50 (35,420)
------- -------
Outstanding at December 29, 1995 (closing date) . . . . . . . 29,600 $0.00 - 0.45 25,101
======= ============ =======
</TABLE>
Bank Credit Line: On February 14, 1996 the Company obtained an
unsecured revolving line of credit from a bank and may borrow the lesser of 80%
of Eligible Accounts Receivable or $12 million. The current term of the line
of credit matures February 13, 1997. The line can be used for general
corporate purposes, including investments and acquisitions, and bears interest,
at the Company's option, at either the bank's reference (prime) interest rate
or the U.S. offshore rate plus a margin of 1.25% on the first $6 million of
borrowings and a margin of 1.50% thereafter. The line is subject to the
Company complying with certain customary financial covenants and restrictions,
including a prohibition of the payment of dividends, other than those payable
solely in capital stock, and a prohibition of any stock repurchase activity.
Issuance of Convertible Notes: On March 28, 1996, the Company issued
$25 million principal amount of 6% Convertible Senior Subordinated Notes, due
2001 ("Notes"), to an institutional investor in a private placement pursuant to
the terms of a Note Agreement, dated March 1, 1996. The Notes are convertible
generally after April 1, 1997, at an initial conversion price of $21.18 per
share. The conversion price is adjustable for certain below market equity
issuances and the Notes contain other customary anti-dilution provisions.
Subject to complying with other certain terms, the Notes may be prepaid without
penalty, subject to conversion, anytime between April 1997 and April 1999 if
the Company's Common Stock had been trading, for 20 of the 30 trading days
preceding notice of prepayment, approximately 18% above the then current
conversion price.
38
<PAGE> 39
NOTE 15. SELECTED QUARTERLY DATA (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------------------------------------------------
SEP. 30, JUN. 30, MAR. 31, DEC. 31, SEP. 30, JUN. 30, MAR. 31, DEC. 31,
1995 1995 1995 1994 1994 1994 1994 1993
-------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues . . . . . . . . . . . . $31,304 $28,091 $30,555 $27,656 $ 22,444 $23,150 $18,292 $20,829
Cost of revenues . . . . . . . . . . 9,876 8,120 9,182 7,706 7,848 7,599 5,981 5,975
-----------------------------------------------------------------------------------------
Gross margin . . . . . . . . . . . 21,428 19,971 21,373 19,950 14,596 15,551 12,311 14,854
Operating expenses:
Research and development . . . . . 3,746 3,937 3,342 3,261 3,139 1,691 1,721 969
Sales and marketing . . . . . . . . 9,304 7,699 7,045 6,576 7,536 6,447 6,397 6,727
General and administrative . . . . 4,924 4,913 5,982 4,885 6,591 5,794 4,503 4,020
Acquisition, restructuring
and other charges . . . . . . . . 3,806 3,459 160 (16) 12,863 -- -- --
Litigation settlement . . . . . . . -- -- -- -- 615 -- -- --
--------------------------------------------------------------------------------------------
Total operating expenses . . . . . 21,780 20,008 16,529 14,706 30,744 13,932 12,621 11,716
Operating income (loss) . . . . . . . (352) (37) 4,844 5,244 (16,148) 1,619 (310) 3,138
Interest income, net . . . . . . . . 605 600 438 241 397 258 225 214
-----------------------------------------------------------------------------------------
Income (loss) before income taxes . . 253 563 5,282 5,485 (15,751) 1,877 (85) 3,352
Provision (benefit) for income taxes. (24) 33 (1) 323 (3,456) (1,354) (839) (333)
-----------------------------------------------------------------------------------------
Net income (loss) . . . . . . . . . . $277 $530 $ 5,283 $ 5,162 ($12,295) $3,231 $754 $3,685
=========================================================================================
Net income (loss) per share . . . . . . $0.01 $0.02 $0.17 $0.17 ($0.43) $0.11 $0.03 0.13
=========================================================================================
Shares used to compute net
income (loss) per share . . . . . . 30,405 30,649 31,031 30,424 28,654 29,169 29,167 29,162
=========================================================================================
Additional unaudited pro forma
data (note 5):
Income (loss) before taxes . . . . $253 $563 $ 5,282 $5,485 ($15,751) $1,877 ($85) $3,352
Pro forma income tax expense
(benefit) . . . . . . . . . . . . 243 648 867 1,648 (1,802) 1,002 129 1,247
-----------------------------------------------------------------------------------------
Pro forma net income (loss) . . . . $10 ($ 85) $ 4,415 $ 3,837 ($13,949) $875 ($214) $2,105
=========================================================================================
Pro forma net income (loss)
per share . . . . . . . . . . . . $0.00 $0.00 $0.14 $0.13 ($0.49) $0.03 ($0.01) $0.07
=========================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Certain items in the quarterly data have been reclassified to conform to the
September 1995 quarter presentation.
39
<PAGE> 40
QUARTERDECK CORPORATION AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
YEAR ENDED SEPTEMBER 30, 1995, 1994 AND 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE ADDITIONS
AT CHARGED BALANCE
SEPTEMBER BEGINNING TO AT END
30, ITEM OF THE YEAR EXPENSES DEDUCTIONS OF THE YEAR
- ------------------------------------------------------------------------------------------------- ---------------
<S> <C> <C> <C> <C> <C>
1995 Allowance for
doubtful accounts . . . . . . . . . . $803 $ 333 ($266) (1) $870
1994 Allowance for
doubtful accounts . . . . . . . . . . 724 265 (186) (1) 803
1993 Allowance for
doubtful accounts . . . . . . . . . 505 394 (175) (1) 724
1995 Inventory obsolescence
reserve . . . . . . . . . . . . . . 1,086 119 (529) 676
1994 Inventory obsolescence
reserve . . . . . . . . . . . . . . 633 453 -- 1,086
1993 Inventory obsolescence
reserve . . . . . . . . . . . . . . 235 398 -- 633
1995 Sales returns and marketing
development fund reserve . . . . . . 2,823 8,205 (6,697) (2) 4,331
1994 Sales returns and marketing
development fund reserve . . . . . . 3,941 7,510 (8,628) (2) 2,823
1993 Sales returns and marketing
development fund reserve . . . . . . 1,955 8,884 (6,898) (2) 3,941
</TABLE>
(1) Uncollectible accounts written off, net of recoveries.
(2) Products returned and reduction of reserve.
40
<PAGE> 41
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
QUARTERDECK CORPORATION, a
Delaware Corporation
Date: June 25, 1996 \s\ Gaston Bastiaens
--------------------
Gaston Bastiaens
President and Chief Executive Officer
Date: June 25, 1996 \s\ Frank Greico
----------------
Frank Greico
Senior Vice President and
Chief Financial Officer
41
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENTS OF OPERATIONS AND IS
QUALIFIED IN ITS ENTIRETY BY THIS REFERENCE TO SUCH FINANCIAL STATEMENTS,
INCLUDING THE ACCOMPANYING FOOTNOTES
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-START> OCT-01-1994
<PERIOD-END> SEP-30-1995
<CASH> 5,384
<SECURITIES> 34,285
<RECEIVABLES> 13,621
<ALLOWANCES> 0
<INVENTORY> 2,281
<CURRENT-ASSETS> 61,755
<PP&E> 8,335
<DEPRECIATION> 0
<TOTAL-ASSETS> 76,699
<CURRENT-LIABILITIES> 32,265
<BONDS> 0
0
0
<COMMON> 31
<OTHER-SE> 44,239
<TOTAL-LIABILITY-AND-EQUITY> 76,699
<SALES> 117,606
<TOTAL-REVENUES> 117,606
<CGS> 34,884
<TOTAL-COSTS> 34,884
<OTHER-EXPENSES> 73,023
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,884)
<INCOME-PRETAX> 11,583
<INCOME-TAX> 331
<INCOME-CONTINUING> 11,252
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,252
<EPS-PRIMARY> 0.35
<EPS-DILUTED> 0.34
</TABLE>
