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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 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
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.001
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock (based on the last
sale price of such stock as reported by the National Association of Securities
Dealers Automated Quotation National Market System) held by non-affiliates of
the registrant as of November 30, 1996 was $233,497,695.
The number of shares of the Registrant's common stock outstanding as
of November 30, 1996 was 37,665,882.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Company's definitive Proxy Statement for the annual
meeting to be held on February 12, 1997 (the "Proxy Statement") are incorporated
by reference into Part III of this Form 10-K.
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PART I
ITEM 1. BUSINESS
GENERAL
Quarterdeck Corporation develops, markets and supports computer
software products and offers services in two strategic business units: Utilities
and Communications and Internet Solutions. Quarterdeck creates smart tools that
enhance computing on Desktop PC's, the Internet, and intranet. The Company
offers software solutions for corporate, small business, government, education
and individual users in a number of areas including performance enhancement;
disk, file and space management; software and hardware diagnostics/conflict
resolution; communications; internet search and enablement; and graphics
conversion.
The Company was incorporated in California in 1982 as Quarterdeck
Office Systems. In June 1991, the Company changed its state of incorporation
from California to Delaware. In February 1995, the Company changed its name to
Quarterdeck Corporation. The Company's principal offices are located at 13160
Mindanao Way, Marina del Rey, California, 90292; its telephone number is (310)
309-3700. Quarterdeck's Internet home page can be located on the World Wide Web
at http://www.quarterdeck.com/. Quarterdeck also has offices in England and
Australia, with its European headquarters based in Dublin, Ireland. Unless the
context otherwise indicates, the "Company" and "Quarterdeck" refer to
Quarterdeck Corporation, its predecessor and its subsidiaries.
During the last two years, management pursued a strategy to expand
the number of products offered by the Company in the utilities market and to
enter the Internet/intranet related markets and reduce reliance on memory
management products. This strategy was effected, in part, through eleven
significant acquisitions including two which also provided direct marketing
capabilities to supplement the established distributor network upon which the
Company had historically relied. Along with the technology and products obtained
by the Company, it also acquired a much larger administrative organization. The
expenses associated with the acquisitions are reflected in the accompanying
financial statements and contributed to the significant losses incurred in the
fourth quarter and for the fiscal year ended September 30, 1996. As a result,
management has focused on accelerating the slower than anticipated acquisition
integration process during the last quarter of fiscal 1996 culminating in the
announcement and adoption of a comprehensive corporate-wide restructuring plan.
The Company is currently completing such restructuring which includes a
reduction of approximately 40% of the workforce, elimination of redundant
functions, integration of redundant operations, reduction and elimination of
development and marketing efforts in certain non-core product lines, and is
focusing on improving its ability to develop and release new products or
enhanced versions of its existing products to better compete in a rapidly
changing marketplace.
ACQUISITIONS
One element of Quarterdeck's current strategy is to focus on the
integration of the acquisitions that have been completed over the past two
years. Partially as a result of the acquisitions and subsequent restructuring,
the Company believes it is now well positioned to provide a broad range of
software products that enhance computing on desktop PCs, the Internet and
intranet. Quarterdeck, though it has no current plans to do so, may continue
to make strategic acquisitions and investments, as necessary, to provide
certain technology and products for its overall product strategy.
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In the last fiscal year, the Company has completed acquisitions of the
following companies:
<TABLE>
<CAPTION>
Company Acquired Date of Acquisition Software or Activity Acquired
- ---------------- ------------------- -----------------------------
<S> <C> <C>
Inset Systems, Inc. ("Inset") December 29, 1995 Utility applications (Hijaak)
Datastorm Technologies, Inc. March 28, 1996 Data communications
(and Limited) ("Datastorm") (Procomm)
Future Labs, Inc. ("Future Labs") May 15, 1996 Collaborative technology
(TALKShow)
Interlink Technology ("Interlink") July 16, 1996 Remote control software
Vertisoft Systems, Inc. ("Vertisoft") July 18, 1996 Utility products and
Direct mail distribution
Limbex Corporation ("Limbex") August 14, 1996 Metasearch technology,
WebCompass product line
</TABLE>
Additionally, on June 6, 1996, the Company acquired the CleanSweep utility
technology from Pinnacle Software, Inc. ("Pinnacle")
During the fiscal year ended September 30, 1995, the Company completed
acquisitions of the following companies:
<TABLE>
<CAPTION>
Company Acquired Date of Acquisition Software or Activity Acquired
- ---------------- ------------------- -----------------------------
<S> <C> <C>
Landmark Research International Corporation June 30, 1995 Utilities software (MagnaRAM and WINProbe) and
("Landmark") direct marketing organization
Internetware, Inc. ("Internetware") August 28, 1995 Internet software for Novell networks (IWare
Connect) and development resources
Prospero Systems Research,Inc. ("Prospero") September 28, 1995 Internet Relay Chat software and development
resources
StarNine Technologies, Inc. ("StarNine") September 29, 1995 Macintosh based Internet server software
(WebStar) and on-line marketing capabilities
</TABLE>
PRODUCTS
The following table summarizes Quarterdeck's principal products by
its two strategic business units and the operating system(s) on which they run:
<TABLE>
<CAPTION>
PRINCIPAL PRODUCTS OPERATING SYSTEMS
----------------------------------------------------------
<S> <C>
UTILITIES PRODUCTS
QEMM (Quarterdeck Expanded
Memory Manager) Windows 95, Windows 3.x, DOS
MagnaRAM 97 Windows 95, Windows 3.x
SpeedyROM Windows 95
DESQview DOS
WINProbe 95 Windows 95, Windows 3.x
Fix-It Windows 95
CleanSweep Windows NT, Windows 95, Windows 3.x
Remove-It Windows 95, Windows 3.x
Partition-It Windows 95, Windows 3.x
Zip-It Windows NT, Windows 95, Windows 3.x
</TABLE>
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<TABLE>
<S> <C>
Name-It Windows 95
Hijaak 95 Windows 95
Hijaak Pro Windows 95
COMMUNICATIONS AND INTERNET PRODUCTS
Procomm Plus 95 Windows 95
Procomm Plus Windows 3.x, Windows 95 compatible
Procomm Rapid Remote Windows 95
WebCompass Windows NT, Windows 95, Windows 3.x
WebTalk Windows 3.x, Windows 95 compatible
Quarterdeck WebSTAR for Windows 95/NT Windows 95, Windows NT
Quarterdeck WebSTAR for Macintosh Apple Macintosh
Quarterdeck WebAuthor Windows 3.x, Windows 95 compatible
Quarterdeck TotalWeb Windows NT, Windows 95, Windows 3.x
Quarterdeck Iware Connect Novell NetWare 3.x and above, Windows
3.x, Windows
95 compatible
Iware InternetSuite Novell NetWare 3.x and above, Windows
3.x, Windows 95 compatible
DESQview/X DOS
</TABLE>
UTILITIES -
Quarterdeck's utility products are designed to enhance the performance of
personal computers running Microsoft Windows 3.x, Windows 95, Windows NT and DOS
software.
The Company produces utility products in four primary categories: Performance
Enhancement; Software and Hardware Diagnostics/Conflict Resolution; Disk, File
and Space Management; and Graphic Utilities.
Performance Enhancement
QEMM (QUARTERDECK EXPANDED MEMORY MANAGER)
QEMM(R), Quarterdeck's flagship memory management product, is a memory manager
for personal computers providing more available memory for applications running
under Windows 95, Windows 3.x and DOS. The latest version, QEMM 8, was released
in November 1995. Version 8 includes memory solutions and reporting utilities
for Windows 95 and Windows 3.x, as well as continued support for DOS systems.
QEMM 8 incorporates memory optimizing technology which helps both Windows 95 and
Windows 3.x users maximize their available memory for applications, as well as
the Resource Manager, which allows more applications to run and multitask under
Windows 3.x. Incorporated within QEMM is Manifest, a system reporting
information utility program that runs under Windows and DOS. Manifest displays
memory usage and recommends changes to make more efficient use of available
memory resources. Under Windows 95 or Windows 3.x, Manifest gives detailed
reports on memory usage by the operating system itself and the programs running
under it.
MAGNARAM 97
In September 1996, Quarterdeck began shipping MagnaRAM(TM) 97, an updated
version of MagnaRAM 2. This 32-bit program combines data compression technology
with other technologies that are designed to improve the operating performance
of personal computers running Windows 95. The resultant gains allow most users
to run more and larger programs and, in many cases, load and run programs
faster. The benefits of MagnaRAM 97 accrue primarily to users of Pentium-based
Windows 95 systems with 16 mega bytes or more of memory.
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SPEEDYROM
Released in March 1996, SpeedyROM(TM) is a performance enhancement utility for
CD-ROMs running under Windows 95. Using caching technology, SpeedyROM is
designed to intelligently access frequently used information from CD-ROMs,
automatically providing user performance improvements.
Software and Hardware Diagnostics/Conflict Resolution
FIX-IT
Launched in July 1996, Vertisoft Fix-It(TM) is a comprehensive troubleshooter
and problem solver for Windows 95. Fix-It automatically detects and corrects
errors in hundreds of applications including games, utilities, and Internet
software, utilizing an extensive problem-solving database of over 1,000 popular
applications. Fix-It also provides automatic detection and correction of
application conflicts, hardware configuration problems, and Windows environment
problems. Fix-It is designed to automatically alert a user when new conflicts or
problems arise and provide a solution to many problems. Fix-It also includes a
crash-protection system that intercepts many fatal errors caused by applications
before those errors cause a system to crash. As a result, many system crashes
are prevented. The product also includes an online directory of support contact
information for hundreds of leading software and hardware manufacturers.
WINPROBE 95
WINProbe(TM) is a troubleshooting toolbox designed to diagnose hardware problems
in Windows 95 and Windows 3.1 systems. Quarterdeck began shipping the latest
version, WINProbe 95, in June 1996. WINProbe 95 provides over 200 comprehensive
tests that let users determine the cause of many hardware problems.
Disk, File and Space Management
PARTITION-IT
Partition-It(TM) for Windows 95 and Windows 3.1 is a new utility specifically
designed for today's large hard drives. Partition-It is designed to
improve a computer's storage capacity by dividing it into
more manageable sections, without putting the users data at risk.
Partition-It automatically calculates the optimal cluster size for maximum
storage; divides a high-capacity drive into many smaller partitions; and moves
data and applications between partitions utilizing the Move-It(TM) technology.
CLEANSWEEP 3.0
CleanSweep(R) is designed to enhance the performance of Windows by safely
finding and removing outdated, unnecessary or unwanted files, applications and
system components, thus freeing up valuable disk space.
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Quarterdeck began shipping CleanSweep 3.0, the first Internet-enabled 32-bit
application removal and system clean-up utility, in October 1996. The new
version incorporates SafetySweep(TM) technology designed to provide safe,
effective removal of unwanted files and programs. Automatic wizards, which can
be accessed from the program or directly from within the Windows 95 Explorer,
can be used to easily uninstall, backup or move most applications. Its Registry
Genie(TM) guides the user through understanding and editing the windows system
Registry that contains the inner-workings of Windows 95 and NT. CleanSweep is
currently the only application removal software that supports Windows 95, NT and
3.1. Finally, the program's new Update-It(TM) feature is designed to
automatically download updated versions of CleanSweep and its Application
Knowledge Base from the Internet. The Update-It technology is planned to be
incorporated into future versions of other Quarterdeck products. Update-It and
WebCompass, illustrate Quarterdeck's efforts into the area of intelligent
agent technology.
REMOVE-IT
Vertisoft Remove-It(TM) for Windows 95 is a comprehensive application and file
removal system. It is specifically designed to remove any 32-bit or 16-bit
application, duplicate or orphaned file, old faxes, unneeded backups and a host
of other electronic debris that builds up on the hard drive. Remove-It's Log-It
feature automatically records new installations for accurate removal. It's
Cleanup Coach guides the user through cleaning unneeded applications and files
off the hard drive. It's Smart Disk Agent is designed to automatically keep the
system efficient by alerting users to new unneeded applications and files, and
low system resources. Both Remove-It for Windows 95 and Remove-It 2 for Windows
3.1 are included.
ZIP-IT
Vertisoft Zip-It(TM) makes creating PKZIP-compatible compressed files as easy as
dragging and dropping, letting users quickly view and extract compressed files
downloaded from online services or the Internet by simply pointing and clicking.
Files can be reduced in size by up to 98% in Windows 95, 3.1 or NT. Zip-It
features Windows drag-and-drop file compression; point-and-click file unzipping;
a built-in viewer for popular Windows file types; and the ability to view, edit,
and run zipped files without extracting them. Internet functionality is provided
through a Netscape Navigator(R) plug-in module. The product is fully integrated
with Windows 95 Explorer and File Manager.
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Graphic Utilities
HIJAAK PRO
Quarterdeck shipped HiJAAK(R) Pro 4.0 in July 1996. HiJAAK Pro is designed to
provide an extensive set of graphic tools to aid productivity. The product
allows the user to convert, view and manage graphics in over 85 raster, vector
and metafile formats. Shortcut menus provide access to view and convert most
graphics file, including complex formats such as Postscript, DXF, DWG, IGES, 3DS
and VRML. Extensive screen capture functionality enables users to capture
portions of their screen and save it as a graphic file. Cataloging and
thumbnailing features allow users to create personalized catalogs within the
Windows 95 Explorer containing detailed information on graphics files, including
user-defined key words.
COMMUNICATIONS AND INTERNET SOLUTIONS
Quarterdeck's Internet and Communications products are designed to provide
solutions for users to view, share, find and communicate information over the
Internet, inside intranets (private distributed data networks) or through other
standard communications methods. Key categories include Communications and
Internet Search and Enabling.
Communications:
PROCOMM PLUS FOR WINDOWS 95
ProComm Plus(R) for Windows 95, which started shipping in September 1996, is the
latest iteration of the PC communications program, ProComm Plus. The product is
specifically designed to provide a wide range of communication options,
including a new remote control feature, fax, data communications and Internet
support. Each communications module is accessible from within a single intuitive
interface, and can run concurrently by utilizing Windows 95 multitasking
technology. Fax capabilities include OCR, annotation, fax viewer, broadcast fax,
and fax request. Extensive data communications support includes 11 file
transfers and 36 terminal emulations, as well as RIPscript support. The included
remote control functionality allows control of a remote PC, with a host of
advanced security features including data encryption and Turbo Transfer(TM)
technology for high speed file transfers. Extensive Internet functionality is
provided, including news, mail, Microsoft(R) Internet Explorer browser, FTP and
Telnet.
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PROCOMM PLUS 3.0 (WINDOWS 3.1)
ProComm Plus(R) 3.0, for users of Windows 3.1 systems, includes all the
functionality of the Windows 95 version, without the inclusion of Microsoft
Internet Explorer and the remote control software.
PROCOMM RAPIDREMOTE
ProComm(R) RapidRemote(TM) is targeted at the market for departmental and small
business telecommunications. Shipped in December 1996, the product is designed
to be an effective method to control another PC, including copying files or
opening remote applications. The initial version supports Windows 95, while
subsequent versions are expected to support Windows 3.1 and Windows NT. The
product features a broad range of remote control technologies, including
advanced fast screen refresh technology, high-speed access, SmartWizards, which
automatically walk the user through set-up to get connected securely and easily,
and a host of security features.
Internet Search & Enabling:
WEBCOMPASS
WebCompass(TM) 2.0, first shipped in December 1996, is a PC-based metasearch
tool for the World Wide Web, capable of simultaneously accessing and retrieving
information from multiple information sources. Once a subject has been searched,
WebCompass is designed to create detailed summaries of the data, rank the
results for relevancy, and allow the user to update the subject(s)
automatically. Organization options allow the user to further categorize a
search subject, and fine-tune subsequent searches. Search results can also be
posted to a web page, allowing users to maintain a constantly updated
information source published to other users. The new version provides a Windows
Explorer-style interface and a significant increase in speed.
IWARE CONNECT 2.0
Quarterdeck IWare Connect(TM), is designed to provide secure and cost-effective
Internet access for Novell NetWare LANs. It installs onto a single central
NetWare server using resident TCP/IP, eliminating the need for installation on
each networked PC. Quarterdeck IWare Connect provides network security, and can
hide the identity of each workstation and safeguard against most break-in
attempts. The network administrator can control Internet access by user, group,
time-of-day, application and destination. Quarterdeck IWare Connect also
provides Intranet access, so users can distribute internal information on local
NetWare networks.
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WEBSTAR FOR MACINTOSH
StarNine began shipping WebSTAR(R) for Macintosh 2.0 in November 1996. WebSTAR
is designed to allow the user to publish and serve information onto the World
Wide Web using a Macintosh. Key features of WebSTAR for Macintosh include: (i)
compatibility with Microsoft and Netscape, (ii) support for forms and clickable
maps, (iii) integration with both Macintosh and SQL databases, (iv) scriptable
and recordable with AppleScript, (v) domain and IP address level access
controls, (vi) support for thousands of connections per hour, (vii) remote
administration from anywhere on the Internet, (viii) control of multiple servers
from one Macintosh, and (ix) the ability to publish information from many
sources. Through the power of AppleScript, WebSTAR for Macintosh can communicate
with other applications on the user's Macintosh to publish many items contained
in those programs. The WebSTAR Security Toolkit is specifically designed to
provide authentication and encryption using the Secure Sockets Layer (SSL)
standard to ensure that Web connections are completely private. This enables
WebSTAR for Macintosh to encrypt the data transmitted.
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Product Development
Quarterdeck plans to focus its internal development efforts and service
offerings in the areas of Utilities and Communications and Internet Solutions
and to license and publish tactical and opportunistic products to leverage
Quarterdeck's channels of distribution. Quarterdeck's products and services are
planned, designed, developed, documented, and tested using both internal
resources and outside contracting.
The Company's product development activities expanded and diversified during
fiscal 1996. The Company continued to enhance its proprietary core software
technologies and released a number of new products and new product versions. In
particular, development activities were focused on delivering products which
enhance Windows 95 and Windows NT operating systems. The Company believes its
expertise and experience in DOS and Windows operating systems and communications
give it a strong technology foundation from which to achieve it's goal of
delivering products that enhance the user's computing experience.
The Company focused substantial development efforts on the Internet market in
the past year. The Company is now moving its focus away from providing
infrastructure technology for the Internet as this area continues to be in flux
and is dominated by Microsoft and other major companies who in many cases
provide this technology free. The Company is refocusing its efforts on Internet
development in two areas; making all products Internet aware and making use of
the Internet to expand the capabilities of products, and marketing products that
add value to the Internet/intranet. These value-added products directly address
use of the Internet and intranet by managing, connecting, searching, and
organizing Internet/intranet information.
The Company has developed and acquired certain technologies which will help it
achieve its goals. The memory management technology provides expertise in
delivering capabilities aimed at controlling software conflicts and
automatically resolving certain problems in Microsoft Windows. The intelligent
search agent technology in WebCompass provides a core for searching and managing
information from the Internet and intranets.
The Company anticipates that its development activities over the next year will
continue to focus on products for the Microsoft Windows environments, including
products for Windows 95 and its successors, and Windows NT. The Company is
investing in expanding its development using COM, ActiveX, and Java and expects
these tools and approaches to positively impact the Company's development
schedules to better compete in a rapidly changing competitive environment.
Research and development expenses were $21,314,000, $14,286,000 and
$7,520,000 in fiscal 1996, 1995 and 1994 and represented 16.0%, 12.1%, and 8.9%
of net revenues, respectively.
Although the Company believes that its product planning and
development strategies and processes will result in successful development of
technology innovations in the future, because of the inherent uncertainties of
software development projects and the software market in general, there can be
no assurance that the Company's software development efforts will result in
successful product introductions or increased revenues. Even with normal
development cycles, the market environment can change so quickly that features
in certain products can become outdated before or soon after market
introduction.
MARKETING AND SALES
Quarterdeck uses multiple distribution channels to deliver its
products worldwide, including software distributors and dealers, value added
resellers, system integrators, original equipment manufacturers, direct
telemarketing, direct mail, as well as over the Internet.
Quarterdeck supports its distributors and dealers by targeting end
users directly through a variety of programs designed to create demand for its
products. The Company seeks to educate individuals and key decision makers in
corporations, and in the SOHO (small office/home office) and home markets, as
well as government and independent software vendors about the uses for and
benefits of its products. Programs include the following: (i) extensive
worldwide advertising in industry magazines, local computer newspapers, trade
journals and the internet; (ii) targeted direct mail campaigns using customer
response cards, sales
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brochures and postcards; (iii) cooperative channel market development and
promotional activities, and (iv) trade show and user group participation.
The Company's sales force specializes in educating corporate and
government end users as well as dealers about the Company's products. The sales
organization develops leads and introduces potential customers and corporate
accounts to dealers in their geographic area. In situations where large site
license sales are required, the sales organization will offer the customer the
option to purchase products directly from the Company. The sales organization
also provides basic product support and training directly to end users.
The Company sells its products to major software distributors for
resale through software dealers. Quarterdeck's principal North American
distributors are Ingram Micro, Inc., Tech Data Corporation, and Merisel, Inc.
See Note 11 to the Company's Consolidated Financial Statements. Each of these
distributors resells the Company's products on a non-exclusive basis. Pursuant
to its domestic distribution agreements with these distributors, the Company
licenses the resale of its products in the United States for one-year terms with
automatic one-year renewal periods. The Company retains ownership of its
proprietary rights associated with its products and agrees to indemnify the
distributor for third party claims of proprietary rights infringement to the
extent such claims are brought against the distributor. The distribution
agreements are terminable by either party, without cause, upon written notice in
advance. The Company also distributes internationally through foreign based
subsidiaries of Ingram Micro, Inc., and Merisel, Inc. as well as a variety of
other international distributors. The Company estimates it has more than 35,000
distribution outlets selling its products on a worldwide basis, including
computer superstores, office warehouse clubs, software specialty stores,
consumer electronics stores, mass merchants, general warehouse clubs, value
added resellers (VAR's) and corporate resellers. Stores selling the Company's
products include Egghead, CompUSA, Computer City, Best Buy, Staples, Sam's Club,
Wal-Mart, Price-Costco, Stream, Software Spectrum, Harvey Norman, FNAC, Dixons,
and Vobis among others. Quarterdeck trains and supports distributors and key
dealers and sponsors joint marketing programs.
The Company's return and exchange policies generally allow its
distributors to return, within a contractually defined period of time,
contractually limited amounts of any immediately-prior product releases in
exchange for new releases. In addition, distributors may participate, quarterly,
in a stock balancing program which, subject to certain limitations, allows them
to return purchased products for full credit toward future purchases. The
Company may also elect to accept additional returns based upon market conditions
and other factors. The Company also provides its distributors with price
protection rights for a contractually defined period of time from the date of
purchase. End users may return defective products at any time to their dealer or
distributor and the Company will make a full refund or exchange through the
distributor. The Company provides allowances against trade accounts receivable
for the estimated amount of product that will be returned or exchanged in
accordance with these policies.
DIRECT MARKETING: With the acquisition of Landmark in fiscal 1995, the
Company obtained a direct telemarketing organization now called Quarterdeck
Select. This organization was further bolstered by the direct mail organization
acquired with Vertisoft in fiscal 1996. Through direct telemarketing, the
Company is able to target and reach the expanding SOHO and home markets.
Quarterdeck Select sells Quarterdeck software products directly to businesses
and individuals. Its outbound sales division conducts telemarketing campaigns to
existing and new customers using a state-of-the-art Predictive Dialing System
(PDS). Its mail order sales division mails millions of pieces of direct mail
annually to individuals and small businesses. Both outbound and mail order sales
representatives receive on-going product and sales training, and are well-versed
in effective, proprietary selling techniques for cross-selling Quarterdeck
products to maximize average order revenue. Orders are entered using an on-line
order entry system that promotes efficient processing, and a high level of
customer service. Quarterdeck Select's Clearwater, Florida facility also houses
a large warehouse, and is fully-staffed with customer service and administrative
personnel dedicated to servicing and supporting the direct-selling activities.
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INTERNATIONAL SALES: The Company's European operations are
headquartered in Dublin, Ireland, with a marketing support office in Slough,
England. The Company also has a sales office in Sydney, Australia, and
agreements with third parties to distribute its products in Japan, Asia Pacific
and Latin America.
The Company's international marketing support offices, along with
third party representatives in countries where the Company does not have
marketing support offices, prepare marketing programs for each local market,
educate end users and support the international distributor and dealer networks.
The Company's Dublin office was established to handle order processing,
technical support, localization and production for European and other
international sales. The Company ships international english language versions
and translated foreign language versions of its products from its Dublin
facilities.
Sales by the Company to European and other international
distributors, dealers and end users outside of North America represented
approximately 18%, 16% and 11% of the Company's total net revenues for fiscal
years 1996, 1995 and 1994, respectively. See Note 11 of Notes to the Company's
Consolidated Financial Statements for information regarding the Company's
domestic and foreign operations and export sales.
CUSTOMER SUPPORT: The Company believes a significant competitive
factor in the personal computer software business is the ability to provide a
high level of technical customer support. The Company provides extensive
customer support to its distributors, dealers and end users. All registered
users receive 90 days of pre-paid telephone technical support, which commences
upon the user's initial inquiry. The Company offers several levels of paid-for
telephone support programs including special "priority" programs for corporate
customers.
The Company provides 24-hour end-user support through its Q/Fax
service and 1-800 ROBOTECH automated voice-response system, from which users can
receive up-to-date technical information including troubleshooting techniques
for advanced applications of Quarterdeck's products. Technical support notes are
also available worldwide on the Company's own Bulletin Board System (BBS) and
via other on-line services including the Internet and CompuServe.
COMPETITION
The personal computer market is intensely competitive, subject to
strategic alliances of hardware and software companies and characterized by
rapid changes in technology and frequent introductions of new products and
features. The Company's primary competitors include utility, communications and
Internet software vendors. The Company's current revenues and profitability are
dependent on the viability of Microsoft Windows, including Windows 95 and
Windows NT, and Apple Macintosh operating systems. Additionally, the continued
viability and growth of the Internet and the Worldwide Web may have an
influence on revenue and revenue growth although the Company's revenues and
profitability are not as dependent on Internet and Worldwide Web growth. The
Company expects to encounter continued competition both from the established
companies and from new companies that are now developing, or may develop,
competing products. Many of Quarterdeck's existing and potential competitors
have financial, marketing and technological resources significantly greater than
those of Quarterdeck.
The Company's products are designed to provide added features and
functions for users of DOS, Microsoft Windows, Windows 95, Windows NT and Apple
Macintosh operating systems. In some cases the Company's products compete
directly with features of those operating systems. In most cases, however, the
Company's products compete directly with products from other utility and
communications software vendors.
Since the introduction of Windows 95, the software market has
experienced a shift to this platform. In addition, Windows NT is showing
significant increased acceptance as a server and desktop operating system in
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corporate settings. As application programs and device drivers have been
developed to take advantage of these 32-bit operating environments, the
perceived need for software specifically designed to address the memory
limitations inherent in DOS and Windows 3.x and in DOS-based applications has
declined, resulting in a decline in the memory management segment of
Quarterdeck's business. In response to these changing market conditions, the
Company is now focusing substantial development efforts on new value-added
products for Windows 95 and Windows NT, while continuing to support Windows 3.x,
Apple Macintosh and DOS platforms. Quarterdeck released several new products for
Windows 95 in fiscal 1996, including MagnaRAM 97, Fix-It 1.0, WinProbe95, Hijaak
Pro 4.0, WebCompass and Procomm Plus 95 among others. However, Microsoft may
incorporate advanced utilities or other features in Windows 95 or Windows NT
that could have the effect of decreasing the demand for certain of the Company's
products, including certain of those under development. Should Quarterdeck not
be able to successfully and timely develop products that function under
Windows 95 and Windows NT, and offer perceived 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 known at this time, including the level of functionality, performance and
features included in the final release of these competitive products and the
market's evaluation of competitive products compared to the then current
functionality, performance and features of the Company's products.
The Company's Internet-related products may compete with tools from a
variety of companies, including networking and Internet software application
developers. Internet access providers, on-line service providers, and Microsoft
have 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. This practice has adversely impacted Quarterdeck's market for
comparable products. Quarterdeck is dedicating its efforts in the areas of
communications and Internet Solutions towards providing value-added products and
services as opposed to Internet infrastructure products. Quarterdeck is also
focusing on leveraging the existence of the Internet in all of its products to
provide extended capabilities for its products through the use of the Internet.
Quarterdeck expects that its Procomm product line, together with its other
Communications and Internet products, will provide a significant portion of
future revenues. However, 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.
The Company anticipates that the type and level of competition
experienced to date will continue and may increase and that future sales of its
products will be dependent upon the Company's ability to timely and successfully
develop or acquire new products or enhanced versions of its existing products
for Windows 95 and Windows NT, Apple Macintosh and/or other operating systems
that may gain market acceptance, and to demonstrate to the user a need for the
Company's products while developers of operating systems and competitive
software products continue to enhance their products. To the extent that
operating system enhancements, competitive products or bundling of competitive
products with operating systems or computer hardware reduce the number of users
who perceive a benefit from the Company's products, sales of the Company's
products in the future would be adversely impacted. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
The Company believes that the primary competitive factors in the
personal computer software market are product features and performance, time to
market, product reliability, ease of use, product and vendor reputation, price,
timeliness of product upgrades and the quality of customer support and service.
Of these, time to market and price are becoming increasingly significant
factors.
The Company also competes with other companies in the personal
computer software market for distributors and dealers, as well as for alliances
with hardware and software vendors. The Company competes
13
<PAGE> 14
for distributors and dealers on the basis of the revenue opportunities presented
by the Company's products, in addition to discounts, credit terms and
promotional support.
PRODUCTION AND BACKLOG
The principal materials and components used in the Company's products
include CD-ROM, diskettes, user manuals and product display boxes, and are
purchased directly from third party vendors. The Company currently utilizes both
internal and third party contracted resources for the assembly, warehousing and
fulfillment of its products. Outside vendors perform in accordance with Company
specifications, and material quality is ensured prior to the assembly of its
products. Capacity shortages for components, assembly, warehousing and
fulfillment are not anticipated due to multiple third party resources available
for contract; however, if such shortages did occur the Company's operating
results could be materially impacted. The Company believes there are adequate
supplies of and sources for the raw materials used in its products and that
multiple sources are available for CD and diskette duplication, manual printing
and final packaging.
Customer order turnaround is generally within one week of receipt of
the order, unless such orders are pre-orders for unreleased products. Generally
the Company has relatively little, if any, order backlog at any given time and
does not consider backlog to be a significant or important measure of sales for
any future period.
PATENTS, TRADEMARKS AND PRODUCT PROTECTION
Quarterdeck protects its products and technology under a combination
of trade secret, patent, copyright, unfair competition and trademark laws.
Quarterdeck holds two United States patents relating to memory management, one
of which expires in 2010 and the other of which expires in 2011, and one of
Quarterdeck's subsidiaries holds a patent relating to virtual screen overlays
that expires in 2013. Quarterdeck provides its products to end users under a
non-exclusive license that limits the warranties provided by and liability of
Quarterdeck. The ability of software companies to enforce such licenses has not
been finally determined by the United States Supreme Court, although Quarterdeck
believes that its licenses are enforceable. Quarterdeck's trademark and service
mark rights include rights associated with its use of its trademarks and service
marks, and rights obtained by registrations of its trademarks and service marks
("marks"). Quarterdeck has applied for or obtained United States trademark
registrations for certain marks and has applied for or obtained registrations in
various international jurisdictions. The use and registration rights of
Quarterdeck for its marks do not assure that Quarterdeck has superior rights to
others that may have registered or used identical or related marks on related
goods or services.
The extent to which U.S. and foreign copyright and patent laws
protect software has not been fully determined. In addition, changes in the
interpretation of copyright and patent laws could expand or reduce the extent to
which the Company or its competitors are able to protect their software and
related intellectual property.
Because the computer industry is characterized by technological
changes, the policing of the unauthorized use of computer software is a
difficult task. Software piracy is expected to continue to be a persistent
problem for the packaged software industry. Despite steps taken by Quarterdeck
to protect its software products, third parties still make unauthorized copies
of Quarterdeck's products for their own use or for sale to others. These
concerns are particularly acute in certain international markets. The Company
believes that the knowledge, abilities and experience of its employees, its
timely product enhancements and upgrades and the availability and quality of its
support services provided to users are as significant in protecting its software
products as patent, trade secret and copyright protection laws.
14
<PAGE> 15
EMPLOYEES
As of September 30, 1996, Quarterdeck employed 960 people worldwide.
None of the Company's employees are represented by a labor union or subject to a
collective bargaining agreement. Quarterdeck has never experienced a work
stoppage due to labor difficulties and believes that its employee relations are
good. During September 1996, the Company commenced a comprehensive restructuring
program and as of November 30, 1996 the Company employed approximately 600
people worldwide.
Recruitment of personnel in the computer software industry is highly
competitive. The Company believes that its future success will depend, in part,
on its ability to continue to attract and retain highly skilled technical,
marketing and management personnel.
ITEM 2. PROPERTIES
The Company's principal administrative, production, marketing product
development and support facilities are presently located in Marina del Rey,
California, occupying approximately 75,500 square feet. The Company owns a
building in Columbia, Missouri, which was acquired as part of the acquisition of
Datastorm. The building is approximately 152,000 square feet of which
approximately 30,000 square feet is occupied by the Company. The Company also
leases office space amounting to 47,900 square feet in Clearwater, Florida, and
12,500 square feet in Northern California for research and development,
marketing and certain administrative functions. In addition, the Company leases
space for production, sales and support offices in Dublin, Ireland, and
marketing offices in Slough, England and Sydney, Australia.
The Company is currently seeking to terminate certain existing lease
obligations or sub-lease certain space as part of the comprehensive
restructuring program.
ITEM 3. LEGAL PROCEEDINGS
In November and December, two shareholder complaints were filed in
the Superior Court of the State of California, County of Los Angeles, against
Quarterdeck Corporation and a former officer and current officer of the Company
alleging among other things, violations of certain provisions of California
securities laws relating to statements made about the Company. The suits are
purportedly brought on behalf of all persons who purchased the Company's common
stock during the period of January 26, 1996 through June 13, 1996 and seeks
damages in an unspecified amount and other relief. The Company intends to
vigorously defend these actions.
On or about September 3, 1996, a purported class action lawsuit,
Marjorie Williams, et al. v. Quarterdeck Corporation, Case No. 96-3041, was
filed in the Circuit Court of the Eighth Judicial Circuit, Alachua County,
Florida. The complaint purports to allege claims against Quarterdeck on behalf
of all licensees of MagnaRAM2 residing in the United States. The complaint
alleges, among other things that MagnaRAM2 fails to significantly increase
Random Access Memory or otherwise help Windows 95 and Windows 3.x users. The
plaintiffs seek compensatory damages in an unspecified amount, injunctive
relief, and attorney fees and costs. On October 10, 1996, Quarterdeck filed a
motion seeking dismissal of the entire action pursuant to the forum non
conveniens doctrine and, in the alternative, dismissal of certain allegations
and causes of action for failure to state a claim. On November 25, 1996
(the date upon which Quarterdeck's motion was scheduled to be heard), counsel
for plaintiffs agreed to dismiss the entire action, without prejudice. A
stipulation to this effect was entered on the record before the Court. Pursuant
to Florida law, plaintiffs may, within 120 days of November 25, 1996, refile the
action in California and have the complaint "relate back" to the original
September 3, 1996 filing date. Quarterdeck has received no communication from
plaintiffs' counsel since the dismissal and cannot determine whether plaintiffs
intend to refile in California. If a new class action complaint is filed,
Quartedeck intends to defend the case vigorously and to oppose any effort to
certify the claims for class resolution.
The Company is a defendant in various other pending claims (including
intellectual property disputes and employee claims), none of which is expected
to have a material adverse impact on the results of operations or financial
position of the Company.
15
<PAGE> 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
last quarter of fiscal 1996.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
King R. Lee 56 Office of the President
Anatoly Tikhman 40 Office of the President
James Moise 42 Senior Vice President and President - Quarterdeck U.S.A.
Frank R. Greico 39 Senior Vice President and Chief Financial Officer
Bradley D. Schwartz 37 Senior Vice President, General Counsel and Secretary
Joseph Fusco 46 Vice President - Utilities
Suzanne Dickson 36 Vice President - Communications and Internet Solutions
</TABLE>
Mr. Lee was appointed as a member of the Office of the President of the Company
on August 27, 1996 and currently serves in such capacity. Mr. Lee served as
Interim Chief Executive Officer of the Company from December 1994 until February
1995 and served as Interim Chief Operating Officer of the Company between July
and December 1994. He was elected to the Board of Directors of the Company in
July 1994. Mr. Lee is the Chief Executive Officer and Chairman of Wynd
Communications Corporation, a two-way wireless messaging service provider and is
President of King R. Lee & Associates, Inc., a management consulting firm, which
provides consulting services to the Company. From 1987 to 1993, Mr. Lee was
President and Chief Executive Officer of XTree Company, a developer of computer
systems software. He serves as a director of NetSoft, Inc., Nettech Systems,
Inc., Outback Resource Group, Inc., Boss Entertainment and World Childrens
Transplant Fund.
Mr. Tikhman was appointed as a Senior Vice President in July 1996 and as a
member of the Office of the President on August 27, 1996. Prior to July 1996,
Mr. Tikhman was the Chief Executive Officer of Vertisoft Systems, Inc., a
software company, which he founded in 1987 and which was acquired by the Company
in July 1996.
Mr. Moise was appointed Senior Vice President and President -- Quarterdeck
U.S.A. in December 1995. Mr. Moise joined Quarterdeck as Senior Vice President
World Wide Sales in January 1995. Prior to joining Quarterdeck, Mr. Moise
worked as a consultant for a variety of companies in the computer software
industry. Mr. Moise was Vice President of Sales with XTree Corporation from
April 1990 to October 1993, where he was responsible for sales and channel
marketing. Earlier he had been the North American Sales Manager for Aldus
Corporation. Mr. Moise was also founder and President of Market Share, a
manufacturer's representative firm specializing in PC hardware and software
products. Other assignments included Channel Sales Manager with Fujitsu Business
Communications and Marketing Representative with IBM.
Mr. Greico joined the Company in January 1996 as Senior Vice President and Chief
Financial Officer. Prior to joining the Company, Mr. Greico was Chief Financial
Officer and Vice President of Finance and Operations at Knowledge Adventure,
Inc., an educational software publisher. Mr. Greico, a certified public
accountant, has also held several MIS and finance positions within W.R. Grace's
distributor units, most notably as Chief Financial Officer and Vice President of
Finance for their B&T Software distribution company (formerly Soft-Kat). He was
also a senior accountant with Price Waterhouse in New York.
16
<PAGE> 17
Mr. Schwartz joined the Company in February 1996 as Senior Vice President,
General Counsel and Secretary. During 1994 and 1995, Mr. Schwartz was a partner
in the law firm of Gibson, Dunn & Crutcher LLP and from 1985 through 1993 he was
an associate of that law firm.
Mr. Fusco was appointed as a Vice President of the Company after his hiring in
September 1996. Prior thereto, Mr. Fusco held various positions with Symantec
Corporation commencing in 1992, most recently the General Manager of Symantec's
Strategic Technologies business unit. Prior to Symantec, Mr. Fusco held various
positions with Peter Norton Computing commencing in 1989 until its acquisition
by Symantec in 1992.
Ms. Dickson was appointed as a Vice President of the Company in September 1996,
and prior thereto held other positions with the Company commencing in February
1995. Ms. Dickson had held several product and marketing positions with other
software utility companies, including XTree Corporation, Fifth Generation
Systems and Symantec Corporation.
17
<PAGE> 18
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock trades on the Nasdaq National Market,
under the symbol QDEK. The following table sets forth, for the periods
indicated, the high and low closing sales prices of the common stock on the
Nasdaq National Market as reported by the National Association of Securities
Dealers, Inc.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
Fiscal 1995:
First Quarter ...................... $ 3-1/4 $ 1-7/8
Second Quarter ..................... $ 4-7/16 $ 2-7/8
Third Quarter ...................... $12-1/2 $ 3-5/8
Fourth Quarter ..................... $21-7/16 $10-3/8
Fiscal 1996:
First Quarter ...................... $38-1/4 $17-1/8
Second Quarter ..................... $26-3/8 $12
Third Quarter ...................... $16-1/2 $ 8
Fourth Quarter ..................... $ 9-7/8 $ 6
</TABLE>
As of November 30, 1996, Quarterdeck Corporation had 37,665,882
shares outstanding and 589 shareholders of record. The Company estimates there
are more than 20,000 shareholders represented through accounts held by clearing
agencies.
The Company paid no dividends during fiscal 1996. However, the
Company acquired certain entities in pooling of interest transactions who made
certain distributions to their shareholders prior to being acquired by the
Company. Those distributions are reflected in the accompanying consolidated
financial statements. The Company intends to retain earnings for use in its
business and does not anticipate paying any cash dividends in the foreseeable
future. The Company is a party to certain financing agreements in connection
with certain borrowings which prohibit the payment of cash dividends.
18
<PAGE> 19
ITEM 6. 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 1996 presentation. During fiscal 1996, Quarterdeck acquired Inset,
Datastorm, Futurelabs, and Vertisoft in transactions accounted for as poolings
of interests. 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, Datastorm, Inset 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. Vertisoft and Futurelabs had
results of operations that were not material to Quarterdeck's consolidated
financial statements and therefore, periods prior to October 1, 1995 were not
restated for these two transactions. However the number of shares of the
Company's common stock issued in the Vertisoft acquisition are material and
accordingly shares outstanding and earnings per share have been restated to
reflect those shares. All amounts shown are in thousands, except per share data.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net revenues ...................................... $ 133,100 $117,606 $ 84,715 $83,578 $88,602
Cost of revenues .................................. 49,600 34,884 27,403 24,534 21,247
--------- -------- -------- ------- -------
Gross margin ................................ 83,500 82,722 57,312 59,044 67,355
Operating expenses:
Research and development .................... 21,314 14,286 7,520 2,589 1,414
Sales and marketing ......................... 66,355 30,624 27,107 25,775 27,170
General and administrative .................. 32,128 20,704 20,908 20,716 17,671
Acquisition, restructuring
and other charges .......................... 37,789 7,409 12,863 -- --
Litigation settlement ....................... -- -- 615 -- --
--------- -------- -------- ------- -------
Total operating expenses .................... 157,586 73,023 69,013 49,080 46,255
Operating income (loss) ........................... (74,086) 9,699 (11,701) 9,964 21,100
Other income (expense), net ....................... 38 (38) (271) -- --
Interest income (expense), net .................... (105) 1,922 1,365 1,144 1,331
--------- -------- -------- ------- -------
Income (loss) before income taxes ................ (74,153) 11,583 (10,607) 11,108 22,431
Provision (benefit) for income taxes ............. 806 331 (5,982) 639 4,820
--------- -------- -------- ------- -------
Net income (loss) ................................. $ (74,959) $ 11,252 $ (4,625) $10,469 $17,611
========= ======== ======== ======= =======
Net income (loss) per share:
Primary ..................................... $ (2.15) $ 0.32 $ (0.15) $ 0.32 $ 0.53
========= ======== ======== ======= =======
Fully diluted ............................... $ (2.15) $ 0.31 $ (0.15) $ 0.32 $ 0.53
========= ======== ======== ======= =======
Shares used to compute net income (loss) per share:
Primary ..................................... 34,894 35,557 31,825 33,221 33,261
========= ======== ======== ======= =======
Fully diluted ............................... 34,894 36,499 31,825 33,221 33,261
========= ======== ======== ======= =======
Additional unaudited pro forma data:
Income (loss) before income taxes ........... $ (74,153) $ 11,583 $(10,607) $11,108 $22,431
Pro forma income taxes ...................... 806 3,406 576 3,977 7,764
--------- -------- -------- ------- -------
Pro forma net income (loss) ................. $ (74,959) $ 8,177 $(11,183) $ 7,131 $14,667
========= ======== ======== ======= =======
Pro forma income (loss) per share:
Primary ..................................... $ (2.15) $ 0.23 $ (0.35) $ 0.21 $ 0.44
--------- -------- -------- ------- -------
Fully diluted ............................... $ (2.15) $ 0.22 $ (0.35) $ 0.21 $ 0.44
========= ======== ======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
---------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficiency) ...................... $ (4,684) $ 29,490 $ 29,147 $35,619 $38,661
Total assets ...................................... 76,781 76,699 62,471 64,673 65,499
Long-term obligations ............................. 25,108 164 701 130 598
Stockholders' equity .............................. 4,425 44,270 36,606 53,606 52,937
</TABLE>
19
<PAGE> 20
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
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 and the notes thereto. The
historical results of operations are not necessarily indicative of results to
be expected from future performance.
The Company has invested substantial equity and effort to evolve from
a one-product (QEMM) provider to a more diversified software producer.
Quarterdeck has recently commenced a substantial restructuring of its operations
and has experienced, and anticipates further, substantial changes to its
competitive environment. Elements of Quarterdeck's strategy are to focus on the
integration of the acquisitions that have been completed since June 1995 and to
improve the speed of development and release of new products or enhanced
versions of existing products to better compete in a rapidly changing
marketplace. Partially as a result of the acquisitions and subsequent
restructuring, the Company believes it is now well positioned to provide
a broad range of software products that enhance computing on desktop PC's, the
Internet and intranet.
20
<PAGE> 21
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 restructuring its operations in an attempt to maximize the benefit of
such acquisitions. There can be no guarantee that such acquisitions will
ultimately be beneficial.
This Form 10-K contains forward-looking statements which are made
pursuant to the safe-harbor provisions of the Private Securities Litigation
Reform Act of 1995. Within this Form 10-K, words such as "believes",
"anticipates", "plans", "expects", "intends", "designed to" and similar
expressions reflecting something other than historical fact are intended to
identify forward-looking statements, but are not the exclusive means of
identifying such statements. These forward-looking statements involve a number
of risks and uncertainties, including the timely development and market
acceptance of products and technologies, sell-through of products in the sales
channel, successful integration of acquisitions, the ability to secure
additional sources of financing, the ability to reduce operating expenses and
other factors described throughout this Form 10-K and in the Company's other
filings with the Securities and Exchange Commission. The actual results that the
Company achieves may differ materially from any forward-looking statements due
to such risks and uncertainties. The Company undertakes no obligations to revise
or update any forward-looking statements in order to reflect events or
circumstances that may arise after the date of this report.
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,
--------------------------------
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Net revenues ...................................... 100.0% 100.0% 100.0%
Cost of revenues .................................. 37.3 29.7 32.3
----- ----- -----
Gross margin ............................... 62.7 70.3 67.7
Operating expenses:
Research and development ................... 16.0 12.1 8.9
Sales and marketing ........................ 49.9 26.0 32.0
General and administrative ................. 24.1 17.6 24.7
Acquisition, restructuring and other
charges.................................. 28.4 6.3 15.2
Litigation settlement ...................... 0 0 0.7
----- ----- -----
Total operating expenses ................... 118.4 62.1 81.5
Operating income (loss) ........................... (55.7) 8.2 (13.8)
Interest income, net .............................. (0.0) 1.6 1.3
----- ----- -----
Income (loss) before income taxes ................. (55.7) 9.8 (12.5)
Provision (benefit) for income taxes .............. 0.6 0.3 (7.1)
----- ----- -----
Net income (loss) ................................. (56.3)% 9.6% (5.5%)
===== ===== =====
</TABLE>
FISCAL 1996 COMPARED TO FISCAL 1995
Net Revenues: Net revenues for the fiscal year ended September 30,
1996 increased by 13.2% or $15,494,000 over the fiscal year ended September 30,
1995. The increase in net revenues compared with the prior year period resulted
primarily from broadening the Company's product portfolio throughout fiscal 1996
through acquisitions and product development. After adding back returns and
allowances, gross revenues for the year were $165,000,000 representing a 30.2%
increase or $38,200,000 over the prior fiscal year. The $31,900,000 difference
between net and gross revenues for the fiscal year ended September 30, 1996
primarily represents returns and allowances charged to operations during
the fiscal year with $7,213,000 remaining in the reserve for returns at fiscal
year-end versus $3,302,000 at the prior fiscal year-end. The increase in
revenues is also the result of the Company's efforts to broaden its distribution
competency through expansion of its distribution network and acquisition of a
direct sales organization. However, the Company experienced a significant
decline in net revenues in the second half of fiscal 1996 as compared to the
first half of the year primarily due to reduced demand for many of its products
(particularly memory management products). This decline continued during the
September quarter which resulted in the recording of $8,400,000 of additional
return reserves for fiscal 1996.
The Company believes that the decline in sell-through of memory
management products is primarily attributed to the continuing decrease in the
cost of memory (DRAM), controversy surrounding the efficacy of a competitor's
product (SoftRAM), together with the fact that current versions of the Company's
memory management products are nearing the end of their product life-cycle (see
page 27 for further discussion). The Company released a new version of MagnaRAM
in September of 1996 and
21
<PAGE> 22
plans to release an updated version of QEMM in the coming months. The delayed
release of PROCOMM 3.0 from Fall 1995 to February 1996, among other factors, led
to unusually high initial sell-through levels during the quarter ended March 31
1996. A return to normal sales levels during the third and fourth quarters of
fiscal 1996 negatively impacted net revenue in the second half of fiscal 1996.
The Company released a new version of PROCOMM for Windows95 at the end of the
fiscal year. Continued weakness in sales of the Company's memory management
and/or communications products would have a material adverse effect on future
revenues.
The reduction in sell-through of the Company's memory management and
communication products resulted in higher channel inventory levels. In order to
bring inventory levels in line with current and anticipated sell-through levels
the Company reduced shipments of these products during the second half of fiscal
1996. In addition to the revenue reductions resulting from the reduced shipment
levels during the second half of fiscal 1996, the Company recorded an
additional reserve for sales returns to provide for estimated returns as well as
actual returns during the September quarter. This additional reserve further
reduced net revenues for the three months ended September 30, 1996 to
approximately $19.7 million. Consistent with prior years, the Company
establishes allowances for estimated returns and exchanges as a reserve against
revenues. Once the Company recognized that sell-through was less than
anticipated, additional reserves were recorded. Quarterdeck is taking steps to
improve its ability to receive accurate, sell-through information on a timely
basis.
Net revenues from European and other international distributors,
dealers and end users outside of the United States amounted to $23,900,000 and
$19,015,000 for the fiscal years ended September 30, 1996 and 1995 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 $49,600,000 in fiscal 1996 and $34,884,000 in fiscal 1995.
The cost of revenues increased from 29.7% of net revenues in fiscal 1995 to
37.3% of net revenues in fiscal 1996. This increase was primarily due to higher
production and support costs as a result of slower than expected integration of
acquired operations. In addition, the Company increased reserves for obsolete or
slow-moving inventory by $3,914,000. The increase primarily resulted from
increased levels of product in inventory with respect to the Company's memory
management, communication and other utility products the Company has and is
continuing to release updates for, in addition to Internet products the Company
no longer plans to actively market.
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 increased to $3,711,000 in fiscal 1996 from
$1,575,000 in fiscal 1995. The increase in cost of revenues is also due to
amortization acceleration or write-off of $1,746,000 of capitalized third party
software development costs relating to products that have experienced reductions
in demand or Internet products the Company no longer plans to actively market.
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, by single unit versus
multiple license packages, and the mix of third party developed and licensed
products versus internally developed products, among other things. In accordance
with generally accepted accounting principles, cost of revenues includes certain
expenses that do not vary directly with sales; therefore higher net revenues may
produce a lower percentage of cost of revenues and vice versa.
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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 average unit
selling prices and corresponding reduced margins.
Operating Expenses: Approximately $12,200,000 of fiscal 1996 expenses
relating to certain acquisitions consummated during the year were treated as
immaterial poolings. Consequently, prior year results of operations exclude
comparable prior year expenses.
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 $7,028,000 from fiscal 1995, while increasing
as a percentage of net revenues from 12.1% to 16.0%. 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. The increased expense as a percent of net revenues is also
due to investment R&D spending for Internet products which did not have revenue
in proportion to development spending as compared to more established utility
products. Additionally, in fiscal 1996, development resources continued to focus
on products for which technological feasibility had not yet been established and
therefore development costs were expensed, rather than capitalized.
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. During fiscal 1996 and 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
relating to products for which technological feasibility had been established
during 1996 were immaterial. 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
resulting in expense rather than capitalization. During fiscal 1996 and 1995,
the Company purchased and capitalized software costs amounting to $4,262,000 and
$2,563,000, respectively. The increase was primarily due to the addition of
$1,800,000 of capitalized software relating to the Pinnacle technology
acquisition (Cleansweep) and $900,000 relating to the Limbex acquisition
(WebCompass) partially offset by write-offs relating to restructuring, and
acquisition related expenses and accelerated amortization due primarily to
Internet products which the company does not intend to actively market.
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 and/or license of complementary software products.
The Company anticipates that spending for software development and purchased
software will continue as a significant expense 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 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 $35,731,000 from
fiscal 1995, while increasing as a percentage of net revenues from 26.0% to
49.9%. Market development funds, advertising and other variable sales and
marketing expenses were budgeted based upon expected sales levels which did not
occur and as a result such expenses significantly increased as a percentage of
net revenues. The Company has since changed its practice such that variable
sales and marketing expenses are based to a greater extent upon underlying
sell-through levels and to a lesser extent upon future sales estimates. The
increase in dollars primarily consists of increases in sales and marketing
salaries of $10,400,000 relating in part to increases in telemarketing staff. In
addition, direct and channel marketing expenses increased by $7,100,000 over the
prior year primarily relating to increased direct mail activities at the
Company's Clearwater, Florida telemarketing facility as well as the Vertisoft
acquisition which included a direct mail operation. Channel marketing increases
are primarily due to increased spending relating to the launch of new products
in the retail market as well as the outsourcing of the sales function for
Vertisoft products. Finally, marketing development funds, packaging and
collateral related expenses increased by approximately $9,000,000 and $2,400,000
versus prior year respectively, which also contributed to the increase.
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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 and Windows NT, Quarterdeck expects the expenses
associated with these efforts to continue to constitute its most significant
operating expense. There can be no assurance that these sales and marketing
efforts will be successful in achieving their intended results.
General and administrative expenses increased by $11,424,000 from
fiscal 1995 and also increased as a percentage of net revenues from 17.6% to
24.1%. General and administrative expenses were adversely impacted by
redundancies relating to acquisitions which were not integrated as quickly as
expected. Components of the increase include $3,500,000 relating to increased
facilities costs including rent, depreciation/amortization and associated costs,
$2,000,000 of increased corporate communications, public and investor relations
costs, $1,500,000 of increased salary expense primarily relating to finance and
MIS functions that were not integrated, $1,000,000 of increased outside legal
services and $1,000,000 of increased telephone, insurance and travel related
spending. Primarily as a result of operations integration and overall spending
reductions, general and administrative expenses may decrease during fiscal 1997.
Acquisition and Other Charges: In connection with the various
acquisitions completed in fiscal 1996 (see above, and Summary of Significant
Accounting Policies and Note 2 of Notes to Consolidated Financial Statements),
significant acquisition costs were incurred. Through the first nine months of
fiscal 1996 the Company incurred acquisition charges of $8,688,000 related
primarily to the acquisitions of Inset, Datastorm and Future Labs versus
$7,190,000 as a result of the 1995 acquisitions. During the fourth quarter the
Company incurred an additional $16,106,000 of acquisition charges related to
Vertisoft, Limbex, Interlink, and Pinnacle technology. Of that amount,
$14,993,000 was incurred as a result of the write off of acquired in process
research and development.
Restructuring Costs: During September of 1996 the Company began
the implementation of a comprehensive corporate-wide restructuring plan. The
plan is designed to focus the Company's development and marketing efforts on
those products and technologies with the most significant growth opportunities
while optimizing profitability on certain of the Company's products that have
experienced lower demand and are at the end of their product life cycle. The
plan focuses on the reduction and elimination of development and marketing
efforts in areas where the market has either not materialized, the product has
become a commodity or a part of the operating system or browser. In addition,
the plan calls for the Company to minimize redundancies resulting from the
recent acquisitions through integration of the finance, administrative, sales,
marketing and operations related functions.
The Company recorded a charge of $12,995,000 for fiscal 1996 relating
to restructuring. Restructuring charges include $6,200,000 of severance,
$3,500,000 of facility related costs to reserve for estimated lease obligations
(net of estimated sublease income or negotiated settlements) as well as closing,
consolidating or relocating offices and related costs including write-offs of
excess equipment, furniture, fixtures and leasehold improvements. Charges also
include write-offs of $2,700,000 of prepaid royalties and capitalized software
costs relating to products the Company no longer plans to actively market. As
part of the plan, the Company reduced its work force by approximately 40%,
eliminating approximately 500 positions. The Company believes the focusing of
the development and marketing efforts combined with the cost structure
reductions will improve its competitiveness and position the Company to return
to profitability.
Income Taxes: At September 30, 1996, the Company did not have a net
deferred tax asset on the balance sheet due to a valuation allowance of 100% of
the net deferred tax asset of $26.6 million. (See also Note 5 to the
accompanying financial statements). The net deferred tax asset of $26.6 million
(before applying the valuation allowance) is comprised of the estimated tax
effect of expected future reversing temporary differences and tax net operating
losses, 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. Management believes that in light of recent financial results it is not
appropriate to record a deferred tax asset until such time that the Company is
able to establish that it becomes more likely than not that the Company will
realize some or all of the benefit of the net deferred tax asset.
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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 results
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.
Cost of Revenues: 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.
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.
Research and Development: Research and development expense increased
by $6,766,000 from fiscal 1994, while increasing as a percentage of net revenues
from 8.9% to 12.1%. The increase in research and development expense is due in
part to increases in 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 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 relating 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.
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Accordingly, the decrease in the amounts capitalized from 1994 to 1995 was
attributable to the development during fiscal 1995 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.
Sales and Marketing, and General and Administrative Expense:
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%, primarily
resulting from the benefits realized in 1995 relating to the fiscal 1994
restructuring.
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 to Acquisition, Restructuring and Other Charges.
The results for fiscal 1994 included a pretax charge totaling
$12,863,000 relating to restructuring activities and other non recurring
charges. The charges related to the reduction or elimination of non-core product
lines and related development efforts. Capitalized costs of $4,367,000 relating
to the reductions and eliminations were written down or written off as
restructuring and non-recurring charges at September 30, 1994. Other related
restructuring costs of $5,320,000 included the estimated lease obligations for
offices and facilities which were or planned to be closed, consolidated or
relocated and the costs of closing as well as other related costs.
As part of the 1994 restructuring plan, the company
reorganized its staff and reduced its workforce from approximately 300 at June
30, 1994 to approximately 200 at September 30, 1994. Restructuring costs
relating to the reduction in workforce amounted to $586,000, consisting of
severance and termination payments and related costs. The Company also wrote-off
excess equipment and recorded other pretax charges amounting to $2,590,000 which
resulted from the above restructuring activities.
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.
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
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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.
While Quarterdeck expects that memory management will continue to
provide benefit to users of Windows 95 and legacy systems, the Company has
expanded its focus from a sole reliance on memory management to a broader base
of desktop utilities. In September 1995, Quarterdeck released the first of
several new desktop utility products for Windows 95, including: WinProbe (a
system and hardware diagnostic tool), CleanSweep (a disk management utility) and
MagnaRAM (a memory compression utility). QEMM, Quarterdeck's leading memory
management product, was upgraded to version 8.0 with the inclusion of several
new technologies and is targeted to provide solutions for Windows 95 as well as
new enhanced support for Windows 3.1 and continued support for DOS. With the
acquisition of Datastorm Technologies in March 1996, the Company acquired the
PROCOMM communications product line. In July 1996, Quarterdeck released a new
utility for Windows 95 with the release of Fix-IT (a Software and Hardware
Diagnostic/Conflict Resolution tool). Also in July, the Company released a new
version of Winprobe for Windows 95. With the acquisition of Vertisoft in July
1996, Quarterdeck acquired additional utility products including Zip-IT (a
drag-and-drop utility for creating and maintaining compressed files), Name-IT (a
utility to allow Windows 95 long filenames in 16-bit applications) and Remove-IT
(a windows uninstaller utility). The combination of Remove-IT and CleanSweep
give Quarterdeck a leading position in the Windows uninstaller market. While
Quarterdeck has reduced its reliance on memory management with the acquisition
of additional utility and communications products, there can be no assurance
that any of these products and/or technologies will continue to provide
sufficient benefit to the user over and above what the base operating systems,
applications and hardware can provide.
Quarterdeck is devoting substantial efforts to the development of
software products that are designed to operate on Windows 95 and Windows NT.
Microsoft Corporation 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 beyond that which is offered in the base operating systems,
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
connectivity, search, information management, access, creation and server tools
from a variety of companies, including Microsoft Corporation, 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
Corporation and IBM. Certain competitors have also made versions of their
Internet connectivity, search, access, information management, 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 has been
adversely impacted as a result of PC hardware, PC operating system and browser
vendors incorporating Internet tools, functions or capabilities within their
software or PC hardware and thereby reducing the market for stand-alone Internet
products.
Quarterdeck is dedicating substantial efforts on products and
services for the communications 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
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the Internet and World Wide Web, 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 is 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. 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.
The acquisition of Limbex, Vertisoft, Future Labs, Datastorm, Inset,
and other acquisitions completed during fiscal 1996 have broadened the Company's
product portfolio and sales distribution channels. However, 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 technologies. There are significant business risks associated with
acquisitions, including the successful integration 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 results for fiscal 1996 were
negatively impacted by slower than anticipated integration and the Company's
future 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 Corporation and other of the Company's competitors, many
of whom have substantially 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. There can be no assurance that the
Company will negotiate successfully with resellers to obtain shelf space and
other terms needed to sell company's products at the levels currently
anticipated.
The Company's pattern of revenues and earnings were affected during
the third and fourth quarters of fiscal 1996, and may be affected in the future,
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 in 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 may 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
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the Company's operating results. Like other manufacturers of packaged software
products, Quarterdeck is exposed to the risk of product returns from
distributors, reseller and individual customers. 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.
FACTORS AFFECTING 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.
Net income per share is calculated using the treasury stock method
(see Note 1 of Notes to Consolidated Financial Statements). 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 are included
as 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, 1996, cash and cash equivalents totaled $25,554,000,
and had further declined to approximately $10,500,000 as of December 15, 1996.
These amounts can be compared to $39,669,000 at September 30, 1995. Working
capital at September 30, 1996 amounted to a deficit of $4,684,000 a decrease of
$34,174,000 as compared to $29,490,000 at September 30, 1995.
During the year ended September 30, 1996 the Company's total cash and
short term investments has declined by the net amount of $14,115,000. The
decrease in cash and short-term investment balances resulted primarily from the
Company's losses for fiscal 1996, including significant acquisition and
restructuring costs, payment of distributions to stockholders of acquired
companies prior to acquisition, approximately $5.9 million of investments made
by the Company in strategic technologies, including the stock of certain
companies possessing such technology, and $18.0 million in capital investments,
including $10.6 million for the construction of a new facility in Columbia,
Missouri. On August 6, 1996, the Company's Datastorm subsidiary secured
construction financing for its new facility (the "Datastorm Facility") from a
bank for up to $5.0 million with an interest rate equal to the bank's commercial
base rate, currently 8.25%, secured by the Datastorm Facility. The loan is
guaranteed by Quarterdeck and is believed to be sufficient to complete
construction. The principal amount outstanding as of September 30, 1996 was
$2,730,000. The principal amount plus any unpaid interest is due February 7,
1997. It is the Company's intention to extend the term of this loan and it has
received a preliminary commitment from the lender to do so. Management is
presently exploring the potential of a sale-leaseback transaction and other
long-term financing options with respect to the Datastorm Facility. There can be
no assurance that the Company will be successful in obtaining such long-term
financing with acceptable terms and conditions.
On September 30, 1996, the Company issued 200,000 shares of Series B Convertible
Preferred Stock, stated value $100 per share (the "Series B Preferred Stock"),
and a Warrant (the "Warrant") to acquire shares of common stock for $20 million
in cash. The securities were issued to an institutional investor in an overseas
offering pursuant to Regulation S of the Securities Act of 1933, as amended. The
Series B Preferred Stock became convertible into shares of common stock on
November 15, 1996, and will automatically convert into common stock on September
30, 2002 to the extent any shares of Series B Preferred Stock remain outstanding
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at that time. Each share of Series B Preferred Stock is convertible into the
number of shares of common stock equal to the quotient of (i) $100.00 divided by
(ii) the conversion price. The conversion price is the lesser of (i) 101% of the
average of the daily volume-weighted average prices of the common stock on the
NASDAQ national market system (the "market price") during the 40 trading day
period ending two trading days before the date on which the company receives a
notice of conversion from a holder of the Series B Preferred Stock (the
"conversion date"), and (ii) 125% of the average of the market price of the
common stock during the first five trading days of the 40 trading day period
ending two trading days before the conversion date. Assuming a conversion price
of $5.3365 (based on 101% of the average of the market price for the 40 trading
day periods ending on December 12, 1996), each share of Series B Preferred Stock
would be convertible into 18.74 shares of common stock, or an aggregate of
3,747,802 shares of common stock upon conversion of all shares of Series B
Preferred Stock.
On March 28, 1996, the Company issued $25.0 million
principal amount of 6% Convertible Senior Subordinated Notes, due 2001, to a
single institutional investor in a private placement pursuant to the terms of a
Note Agreement, dated March 1, 1996 (the "Note Agreement"). 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.
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, at approximately 18%
above the then current conversion price. The Note Agreement limits the Company's
indebtedness for borrowed funds, other than the Notes, to 50% of Consolidated
Net Worth (as defined in the Note Agreement.)
In April 1996, the Company's Datastorm subsidiary borrowed $2.0
million from a bank to partially finance the completion of the Datastorm
Facility. The loan is secured by Datastorm's equipment and bears interest at a
rate of 4.5% per annum. The rate was subsidized, in part by the State of
Missouri in exchange for certain local employment targets. As part of the
Company's restructuring the Company has revised downward the level of personnel
at this location. In addition, as a result of the restructuring it has written
off a significant portion of the equipment collateral. The Company and the
lender have agreed to a repayment plan providing for the repayment of $750,000
between January 1997 and March 1997 with the balance payable by April 7, 1997.
On December 19, 1996, the Company's revolving credit facility with
Bank of America was amended, and the bank waived the Company's non-compliance
with certain financial covenants therein for the quarter ended September 30,
1996. The Company may borrow 65% of Eligible Accounts Receivable (as defined in
the credit agreement) up to $15.0 million. As of September 30, 1996, the maximum
borrowing the Company was eligible for under this line was approximately $4.1
million. The line is secured by Quarterdeck's domestic accounts receivable and
inventory. The current term of the line of credit matures June 30, 1997. The
line can be used for general corporate purposes, including investments and
acquisitions, and bears interest at the bank's reference (prime) interest rate
plus 0.50%. The line is subject to the Company complying with certain customary
financial covenants and restrictions, including a compensating balance of $3.0
million, a prohibition of the payment of dividends, other than those payable
solely in capital stock, and a prohibition of any stock repurchase activity. As
of September 30, 1996, the Company had borrowings of $3.55 million outstanding
under the line.
The Company believes existing cash and cash equivalents, plus funds
provided by operations, borrowing capacity under the line of credit and
projected borrowing against, or sale of, the Datastorm Facility should be
sufficient to fund operations for the coming twelve months. Nevertheless, the
Company is presently exploring various financing alternatives, including
equipment financing, secured debt, convertible debt, additional sales of equity
securities and the sale of certain of its prior investments in order to finance
the core business of the Company and help provide adequate working capital for
operations. In addition, the expense reductions resulting from the restructuring
are anticipated to provide additional funds from operations in future quarters.
However, there is no assurance that increased sales will occur or that any such
increase will result in adequate operating funds, or that such additional
financing will be available, or if available, will be available on acceptable
terms. Should product shipments be delayed or should the Company experience
significant
30
<PAGE> 31
shortfalls in planned revenues, or not achieve sufficient cost savings as a
result of the restructuring, or experience unforeseen fixed expenses, the
Company believes it has the ability to make additional reductions to variable
expenses to extend its capital. Any decision to obtain financing through debt or
through equity investment 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 or future conversion of any convertible debt would result in
additional dilution to the Company's stockholders.
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 recorded
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. There can be no assurance that actions
taken to manage such exposures 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's financial statements included with this Form 10-K are
set forth under Item 14 hereof.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
31
<PAGE> 32
PART III
ITEM 10. EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT
The information required by Item 10 is set forth in the Proxy
Statement under the caption "Directors" and is incorporated herein by reference
except that the information regarding the Company's executive officers is
included in Part I under the heading "Executive Officers".
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is set forth in the Proxy
Statement under the caption "Executive Compensation" and is incorporated herein
by this reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is set forth in the Proxy
Statement under the caption "Security Ownership of Certain Beneficial Owners and
Management" and is incorporated herein by this reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is set forth in the Proxy
Statement under the caption "Certain Relationships and Related Transactions" and
is incorporated herein by this reference.
32
<PAGE> 33
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. Consolidated Financial Statements
Consolidated Balance Sheets at September 30, 1996 and
1995
Consolidated Statements of Operations for fiscal years
ended September 30, 1996, 1995 and 1994
Consolidated Statements of Stockholders' Equity for
fiscal years ended September 30, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for fiscal years
ended September 30, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
2. Consolidated Financial Statement Schedule
Schedule II--Valuation and Qualifying Accounts
All other schedules are omitted because they are not
required, or are not applicable, or because the required
information is included in Item 8.
3. Exhibits
EXHIBIT
NUMBER DESCRIPTION
------ -----------
3.1(2) Certificate of Incorporation of the
Company.
3.2(1) Certificate of Amendment of
Certificate of Incorporation of the
Company.
3.3(16) Certificate of Designations of Series
B Convertible Preferred Stock.
3.4(1) Amended Designations of Series A
Junior Participating Preferred Stock
of the Company.
3.5(6) Amended and Restated Bylaws of the
Company.
4.1(4) Rights Agreement, dated as of August
11, 1992, between Registrant and Bank
of America NT & SA (the "Rights
Agreement").
4.2(16) Form of Amendment to the Rights
Agreement.
*10.1(2) Amended and Restated 1990 Stock Plan,
as amended to date.
*10.2(3) Form of Option Agreement utilized with
1990 Stock Plan.
*10.3(5) Amended and Restated 1990 Directors
Stock Option Plan and Form of Option
Agreement.
*10.4(12) 1996 Acquisition Stock Incentive Plan.
*10.5(1) Consulting Agreement between the
Company, King R. Lee & Associates,
Inc., and King R. Lee, dated as of
August 27, 1996.
33
<PAGE> 34
*10.6(2) Form of Indemnification Agreement
between the Company and certain of its
officers and directors.
*10.7(10) Management Employment Contract between
the Company and Gaston Bastiaens,
dated as of January 13, 1995.
*10.8(10) Management Employment Contract between
the Company and Jim Moise, dated as of
January 27, 1995.
*10.9(10) Management Employment Contract between
Company and Steve Tropp, dated as
of February 14, 1995.
*10.10(1) Employment Agreement between the
Company and Bradley D. Schwartz, dated
as of January 16, 1995.
*10.11(1) Employment Agreement between the
Company and Anatoly Tikhman, dated as
of July 24, 1996.
*10.12(1) Employment Agreement between the
Company and Joe Fusco, dated as of
September 19, 1996.
10.13(10) Lease between the Company and Marina
Business Center, dated as of July 17,
1995, with respect to headquarters
property.
10.14(10) Lease between Landmark Research
International Corporation, a
subsidiary of the Company, and Chase
Federal Bank, dated as of March 15,
1995, with respect to property used by
Quarterdeck Select.
10.15(2) Domestic (U.S.) Distribution License
Agreement between the Company and
Merisel, Inc., dated as of April 4,
1991.
10.16(2) Domestic (U.S.) Distribution License
Agreement between the Company and
Ingram Micro, Inc., dated as of May
16, 1991.
10.17(7) Agreement and Plan of Reorganization
among the Company, Landmark
Acquisition Corporation, Landmark
Research International Corporation,
and certain of the shareholders of
Landmark Research International
Corporation, dated as of June 30,
1995.
10.18(8) Agreement and Plan of Reorganization
among the Company, IW/QD Acquisition
Corporation, Internetware, Inc., Mango
Systems, Inc., Mango Acquisition
Corporation, and certain of the
shareholders of Internetware, Inc. and
Mango Systems, Inc., dated as of
August 25, 1995.
10.19(9) Amended and Restated Agreement and
Plan of Reorganization among the
Company, Inset Acquisition
Corporation, Inset Systems, Inc., and
certain of the shareholders of Inset
Systems, Inc., dated as of September
5, 1995.
10.20(10) Agreement and Plan of Reorganization
among the Company, StarNine
Acquisition Corporation, StarNine
Technologies, Inc., and certain of the
shareholders of StarNine Technologies,
Inc. dated as of September 27, 1995.
10.21(10) Amended and Restated Asset Purchase
Agreement and Plan of Reorganization
among the Company, Prospero Systems
Research, Inc., and certain of the
shareholders of Prospero Systems
Research, Inc., dated as of September
28, 1995.
34
<PAGE> 35
10.22(11) Agreement and Plan of Reorganization
among the Company, DTI Acquisition
Corporation, Datastorm Technologies,
Inc., and the shareholders of
Datastorm Technologies, Inc. listed on
the execution pages thereto, dated as
of March 28, 1996.
10.23(13) Asset Purchase Agreement and Plan of
Reorganization among the Company, FLS
Acquisition Corp., FutureLabs, Inc.,
and the shareholders of FutureLabs
listed on the execution pages thereto,
dated as of May 15, 1996.
10.24(14) Agreement and Plan of Reorganization
among the Company, VSI Acquisition
Corporation, Vertisoft Systems, Inc.
("Vertisoft"), Vertisoft Direct, Inc.
("Direct"), and the shareholders of
each of Vertisoft and Direct, dated
July 15, 1996.
10.25(15) Agreement and Plan of Reorganization
among the Company, Limbex Corporation,
and the shareholders of Limbex
Corporation, dated as of August 13,
1996.
10.26(16) Credit Agreement (the "Credit
Agreement") between the Company and
Bank of America National Trust and
Savings Association, dated as of
February 14, 1996.
10.27(17) First Amendment to the Credit
Agreement, dated as of March 28, 1996,
and incorporated herein by reference.
10.28(18) Waiver and Second Amendment to the
Credit Agreement, dated as of August
13, 1996, and incorporated herein by
reference.
10.29(1) Third Amendment to the Credit
Agreement, dated as of September 30,
1996, and incorporated herein by
reference.
10.30(1) Waiver and Fourth Amendment to the
Credit Agreement, dated as of December
17, 1996.
21.1(1) Subsidiaries of the Company.
23.1(1) Consent of KPMG Peat Marwick LLP,
independent certified public
accountants.
27(1) Financial Data Schedule
* Denotes a compensation plan or other
arrangement under which directors or
executive officers may participate.
(1) Filed herewith.
(2) Filed as an exhibit to the Company's
Registration Statement on Form S-1, as
amended (File No. 33-40094) and
incorporated herein by reference.
(3) Filed as an exhibit to the Company's
Form 10-Q for the quarter ended March
31, 1992, and incorporated herein by
reference.
(4) Filed as an exhibit to the Company's
Current Report on Form 8-K dated
August 11, 1992, and incorporated
herein by reference.
(5) Filed as an exhibit to the Company's
Form 10-K for the year ended September
30, 1993, and incorporated herein by
reference.
(6) Filed as an exhibit to the Company's
Form 10-K for the year ended September
30, 1994, and incorporated herein by
reference.
(7) Filed as an exhibit to the Company's
Current Report on Form 8-K dated June
30, 1995, and incorporated herein by
reference.
(8) Filed as an exhibit to the Company's
Current Report on Form 8-K dated
August 28, 1995, and incorporated
herein by reference.
(9) Filed as an exhibit to the Company's
Registration Statement on Form S-4, as
amended (File No. 33-984456), and
incorporated herein by reference.
35
<PAGE> 36
(10) Filed as an exhibit to the Company's Annual Report on Form 10-K for
the year ended September 30, 1995, and incorporated herein by
reference.
(11) Filed as an exhibit to the Company's Current Report on Form 8-K dated
March 28, 1996, and incorporated herein by reference.
(12) Filed as an exhibit to the Company's Registration Statement on Form
S-8 (File No. 333-4602), and incorporated herein by reference.
(13) Filed as an exhibit to the Company's Current Report on Form 8-K dated
May 15, 1996, and incorporated herein by reference.
(14) Filed as an exhibit to the Company's Current Report on Form 8-K, dated
July 18, 1996, and incorporated herein by reference.
(15) Filed as an exhibit to the Company's Current Report on Form 8-K, dated
August 14, 1996, and incorporated herein by reference.
(16) Filed as an exhibit to the Company's Current Report on Form 8-K dated
November 25, 1996, and incorporated herein by reference.
(17) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1996, and incorporated herein by
reference.
(18) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1996, and incorporated herein by reference.
36
<PAGE> 37
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Marina del Rey, State of California, on December 29, 1996.
Quarterdeck Corporation
By /s/ KING R. LEE
--------------------------
King R. Lee
Office of the President
Pursuant to the requirements of the Securities Exchange Act of 1934
this report has been signed by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ KING R. LEE Office of the President December 29 1996
- ----------------------------- (Principal Executive Officer),
King R. Lee Director
/s/ FRANK W.T. LAHAYE
- -----------------------------
Frank W.T. LaHaye Chairman of the Board December 29, 1996
/s/ HOWARD L. MORGAN
- ----------------------------
Howard L. Morgan Director December 29, 1996
/s/ WILLIAM H. LANE III
- ----------------------------
William H. Lane III Director December 29, 1996
/s/ FRANK R. GREICO
- ----------------------------
Frank R. Greico Senior Vice President and December 29, 1996
Chief Financial Officer
</TABLE>
37
<PAGE> 38
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
<S> <C>
Independent Auditors' Report............................................. 39
Consolidated Balance Sheets at
September 30, 1996 and 1995................................... 40
Consolidated Statements of Operations
for fiscal years ended September 30, 1996, 1995 and 1994...... 41
Consolidated Statements of Stockholders' Equity
for fiscal years ended September 30, 1996, 1995 and 1994...... 42
Consolidated Statements of Cash Flows
for fiscal years ended September 30, 1996, 1995 and 1994...... 45
Notes to Consolidated Financial Statements............................... 46
CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
Schedule II - Valuation and Qualifying Accounts........................ 69
</TABLE>
38
<PAGE> 39
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Quarterdeck Corporation:
We have audited the consolidated financial statements of Quarterdeck
Corporation and subsidiaries as of September 30, 1996 and 1995 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, 1996. 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, for 1995 and 1994, which statements reflect
total assets constituting 28 percent of the related consolidated totals at
September 30, 1995 and total revenues constituting 34 percent and 50 percent for
each of the years in the two-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, 1996 and 1995, and the results
of their operations and their cash flows for each of the years in the three-year
period ended September 30, 1996, in conformity with generally accepted
accounting principles. Also in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated 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 22, 1996,
except as to the
last paragraph of
Note 13, which is as
of December 19, 1996
39
<PAGE> 40
QUARTERDECK CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
SEPTEMBER 30,
------------------------
1996 1995
-------- --------
<S> <C> <C>
Current assets:
Cash and short-term investments ...................................... $ 25,554 $ 39,669
Trade accounts receivable ............................................ 9,265 13,621
Inventories .......................................................... 2,151 2,281
Deferred income taxes ................................................ -- 2,178
Other current assets ................................................. 5,594 4,006
-------- --------
Total current assets .......................................... 42,564 61,755
Property, plant and equipment ................................................ 21,252 8,335
Capitalized software costs, net .............................................. 3,448 2,807
Note receivable from related party - building ................................ -- 469
Other assets ................................................................. 9,517 3,333
-------- --------
$ 76,781 $ 76,699
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to banks ............................................... $ 8,280 $ --
Accounts payable ..................................................... 10,685 13,582
Accrued liabilities .................................................. 17,232 13,880
Accrued acquisition and restructuring charges ........................ 10,940 3,455
Notes payable to related parties ..................................... -- 1,093
Current portion of long-term obligations ............................. 111 255
-------- --------
Total current liabilities ..................................... 47,248 32,265
Convertible notes ............................................................ 25,000 --
Other long-term obligations, less current portion ............................ 108 164
-------- --------
Total liabilities ............................................. 72,356 32,429
Liquidity (Note 16)
Commitments and litigation (Notes 7 and 10)
Stockholders' equity:
Series B preferred stock (authorized: 2,000; issued and
outstanding: 200 and 0 shares, liquidation preference $20,000) .... 20,000 --
Common stock (authorized: 50,000 shares;
issued and outstanding: 37,666 and 34,673 shares) ................. 38 35
Treasury stock ....................................................... (559) (559)
Additional paid-in capital ........................................... 64,819 39,873
Retained earnings (accumulated deficit) .............................. (79,766) 5,359
Foreign currency translation adjustment .............................. (468) (563)
Notes receivable from directors for sale of stock .................... (18) (70)
Net unrealized gain on marketable securities ......................... 379 195
-------- --------
Total stockholders' equity .................................... 4,425 44,270
-------- --------
$ 76,781 $ 76,699
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
40
<PAGE> 41
QUARTERDECK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
----------------------------------------
1996 1995 1994
--------- -------- --------
<S> <C> <C> <C>
Net revenues ...................................... $ 133,100 $117,606 $ 84,715
Cost of revenues .................................. 49,600 34,884 27,403
--------- -------- --------
Gross profit .............................. 83,500 82,722 57,312
Operating expenses:
Research and development .................. 21,314 14,286 7,520
Sales and marketing ....................... 66,355 30,624 27,107
General and administrative ................ 32,128 20,704 20,908
Acquisition, restructuring and other
charges ................................. 37,789 7,409 12,863
Litigation settlement ..................... -- -- 615
--------- -------- --------
Total operating expenses .................. 157,586 73,023 69,013
Operating income (loss) ........................... (74,086) 9,699 (11,701)
Other income (expense), net ....................... 38 (38) (271)
Interest income (expense), net .................... (105) 1,922 1,365
--------- -------- --------
Income (loss) before income taxes ................. (74,153) 11,583 (10,607)
Provision (benefit) for income taxes .............. 806 331 (5,982)
--------- -------- --------
Net income (loss) ................................. $ (74,959) $ 11,252 $ (4,625)
========= ======== ========
Net income (loss) per share:
Primary ................................... $ (2.15) $ 0.32 $ (0.15)
--------- -------- --------
Fully diluted ............................. $ (2.15) $ 0.31 $ (0.15)
--------- -------- --------
Shares used to compute net income (loss) per share:
Primary ................................... 34,894 35,557 31,825
--------- -------- --------
Fully diluted ............................. 34,894 36,499 31,825
--------- -------- --------
Additional unaudited pro forma data:
Income (loss) before taxes ................ $ (74,153) $ 11,583 $ (10,607)
Pro forma income tax expense .............. 806 3,406 576
--------- -------- --------
Pro forma net income (loss) ........ $ (74,959) $ 8,177 $ (11,183)
========= ======== ========
Pro forma income (loss) per share:
Primary ................................... $ (2.15) $ 0.23 $ (0.35)
--------- -------- --------
Fully diluted ............................. $ (2.15) $ 0.22 $ (0.35)
========= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
41
<PAGE> 42
QUARTERDECK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
SERIES B ADDITIONAL RETAINED
PREFERRED STOCK COMMON STOCK PAID- EARNINGS
--------------- ------------ TREASURY IN (ACCUMULATED
SHARES AMOUNT SHARES AMOUNT STOCK CAPITAL DEFICIT)
------ ------ ------ ------ ----- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1993,
as reported in June 25, 1996
Form 8K........................ -- $ -- 29,503 $29 $(27) $28,408 $25,565
Adjustments to reflect
acquisitions, ................. -- -- 3,500 4 -- -- --
Common stock options
exercised...................... -- -- 30 -- -- 10 --
Tax benefits arising from
exercise of nonqualified stock
options ....................... -- -- -- -- -- 16 --
Net loss......................... -- -- -- -- -- -- (4,625)
Undistributed earnings of
subchapter-S subsidiaries...... -- -- -- -- -- 18,476 (18,476)
Distributions to shareholders.... -- -- -- -- -- (12,215) --
Foreign currency translation
adjustment..................... -- -- -- -- -- -- --
------ ------ ------ --- --- -------- -------
Balance, September 30, 1994 -- $ -- 33,033 $33 $(27) $34,695 $ 2,464
====== ====== ====== === === ======= =======
</TABLE>
<TABLE>
<CAPTION>
NOTES
RECEIVABLE NET
FOREIGN FROM UNREALIZED
CURRENCY DIRECTORS GAIN ON TOTAL
TRANSLATION FOR SALE MARKETABLE STOCKHOLDERS'
ADJUSTMENT OF STOCK SECURITIES EQUITY
---------- -------- ---------- ------
<S> <C> <C> <C> <C>
Balance, September 30, 1993,
as reported in June 25, 1996
Form 8K........................ $(581) $ -- $ -- $53,394
Adjustments to reflect
acquisitions, ................. -- -- -- 4
Common stock options
exercised...................... -- -- -- 10
Tax benefits arising from
exercise of nonqualified stock
options ....................... -- -- -- 16
Net loss......................... -- -- -- (4,625)
Undistributed earnings of
subchapter-S subsidiaries...... -- -- -- --
Distributions to shareholders.... -- -- -- (12,215)
Foreign currency translation
adjustment..................... 25 -- -- 25
---- --- --- -------
Balance, September 30, 1994 $(556) $ -- $ -- $36,609
==== === === =======
</TABLE>
See accompanying notes to consolidated financial statements.
42
<PAGE> 43
QUARTERDECK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
RETAINED
SERIES B EARNINGS FOREIGN
PREFERRED STOCK COMMON STOCK ADDITIONAL (ACCUMU- CURRENCY
--------------- ------------ TREASURY PAID-IN LATED TRANSLATION
SHARES AMOUNT SHARES AMOUNT STOCK CAPITAL DEFICIT) ADJUSTMENT
------ ------ ------ ------ ----- ------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1994 .......... -- $ -- 33,033 $33 $ (27) $ 34,695 $ 2,464 $ (556)
Adjustment for Internetware, Inc. ....
pooling of interest ................ -- -- 460 1 -- 9 (46) --
Adjustment for StarNine Technologies,
Inc. pooling of interest ........... -- -- 524 1 -- 223 245 --
Adjustment for Datastorm, Ltd. .......
pooling of interest ............... -- -- -- -- -- 441 -- --
Acquisition of assets from Prospero .. -- -- 155 -- -- 2,900 -- --
Exercise of StarNine Technologies,
Inc. stock options ................. -- -- 149 -- -- 224 -- --
Issuance of common stock by
Inset Systems, Inc. ................ -- -- 63 -- -- 5 -- --
Common stock options exercised ....... -- -- 351 -- -- 579 -- --
Treasury shares, at cost ............. -- -- (62) -- (532) 22 -- --
Tax benefits arising from exercise
of nonqualified stock options ...... -- -- -- -- -- 59 -- --
Undistributed earnings of subchapter-S
subsidiaries ....................... -- -- -- -- -- 8,154 (8,154) --
Capital contribution ................. -- -- -- -- -- 450 -- --
Net income ........................... -- -- -- -- -- -- 11,252 --
Distributions to shareholders ........ -- -- -- -- -- (7,888) (18) --
Duplicate earnings elimination
for Landmark pooling ............... -- -- -- -- -- -- (384) --
Net increase in unrealized gain ...... -- -- -- -- -- -- -- --
Foreign currency
translation adjustment ............. -- -- -- -- -- -- -- (7)
------ ------ ------ --- ----- -------- -------- -----
Balance, September 30, 1995 .......... -- $ -- 34,673 $35 $(559) $ 39,873 $ 5,359 $(563)
====== ====== ====== === ===== ======== ======== =====
</TABLE>
<TABLE>
<CAPTION>
NOTES
RECEIVABLE NET
FROM UNREALIZED
DIRECTORS GAIN ON TOTAL
FOR SALE MARKETABLE STOCKHOLDERS'
OF STOCK SECURITIES EQUITY
-------- ---------- ------
<S> <C> <C> <C>
Balance, September 30, 1994 .......... $ -- $ -- $ 36,609
Adjustment for Internetware, Inc. ....
pooling of interests ............... -- -- (36)
Adjustment for StarNine Technologies,
Inc. pooling of interest ........... -- 33 502
Adjustment for Datastorm, Ltd. .......
pooling of interest ............... -- -- 441
Acquisition of assets from Prospero .. -- -- 2,900
Exercise of StarNine Technologies,
Inc. stock options ................. -- -- 224
Issuance of common stock by
Inset Systems, Inc. ................ -- -- 5
Common stock options exercised ....... (70) -- 509
Treasury shares, at cost ............. -- -- (510)
Tax benefits arising from exercise
of nonqualified stock options ...... -- -- 59
Undistributed earnings of subchapter-S
subsidiaries ....................... -- -- --
Capital contribution ................. -- -- 450
Net income ........................... -- -- 11,252
Distributions to shareholders ........ -- -- (7,906)
Duplicate earnings elimination
for poolings ....................... -- -- (384)
Net increase in unrealized gain ...... -- 162 162
Foreign currency
translation adjustment ............. -- -- (7)
---- ---- --------
Balance, September 30, 1995 .......... $ (70) $195 $ 44,270
==== ==== ========
</TABLE>
See accompanying notes to consolidated financial statements.
43
<PAGE> 44
QUARTERDECK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
RETAINED
SERIES B EARNINGS
PREFERRED STOCK COMMON STOCK ADDITIONAL (ACCUMU-
--------------- ------------ TREASURY PAID-IN LATED
SHARES AMOUNT SHARES AMOUNT STOCK CAPITAL DEFICIT)
------ ------ ------ ------ ----- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1995...... -- $-- 34,673 $35 $(559) $39,873 $ 5,359
Adjustment for Datastorm and Inset
poolings of interest........... -- -- 35 -- -- 385 --
Adjustment for Vertisoft pooling
of interests................... -- -- -- -- -- 40 999
Adjustment for Future Labs --
pooling of interests........... -- -- 664 1 1,987 (1,481)
Duplicate earnings elimination
for Datastorm pooling.......... -- -- -- -- -- -- (717)
Purchase of Limbex............... -- -- 1,310 1 -- 14,370 --
Stock issuance for purchase of
InterLink...................... -- -- 205 -- -- 3,000 --
Stock issuance for purchase of
assets from Pinnacle........... -- -- 198 -- -- 1,800 --
Net loss......................... -- -- -- -- -- -- (74,959)
Undistributed earnings of
subchapter-S subsidiaries...... -- -- -- -- -- 8,967 (8,967)
Distribution to shareholders..... -- -- -- -- -- (7,307) --
Net increase in unrealized gain.. -- -- -- -- -- -- --
Common stock options exercised... -- -- 581 1 -- 2,979 --
Foreign currency
translation adjustment......... -- -- -- -- -- -- --
Issuance of convertible
preferred stock................ 200 20,000 -- -- -- -- --
Cost of preferred stock issuance. -- -- -- -- -- (1,275) --
--- ------- ------- ---- ------ ------- --------
Balance, September 30, 1996...... 200 $20,000 37,666 $38 $(559) $64,819 $(79,766)
=== ======= ======= ==== ====== ======= ========
</TABLE>
<TABLE>
<CAPTION>
NOTES
RECEIVABLE NET
CURRENCY FROM UNREALIZED
FOREIGN DIRECTORS GAIN ON TOTAL
TRANSLATION FOR SALE MARKETABLE STOCKHOLDERS'
ADJUSTMENT OF STOCK SECURITIES EQUITY
---------- -------- ---------- ------
<S> <C> <C> <C> <C>
Balance, September 30, 1995...... $(563) $(70) $195 $ 44,270
Adjustment for Datastorm and Inset
poolings of interest........... 23 -- -- 408
Adjustment for Vertisoft pooling
of interests................... -- -- -- 1,039
Adjustment for Future Labs
pooling of interests........... -- -- -- 507
Duplicate earnings elimination
for poolings .................. -- -- -- (717)
Purchase of Limbex............... -- -- -- 14,371
Stock issuance for purchase of
Interlink...................... -- -- -- 3,000
Stock issuance for purchase of
assets from Pinnacle........... -- -- -- 1,800
Net loss......................... -- -- -- (74,959)
Undistributed earnings of
subchapter-S subsidiaries...... -- -- -- --
Distribution to shareholders..... -- -- -- (7,307)
Net increase in unrealized gain.. -- -- 184 184
Common stock options exercised... -- 52 -- 3,032
Foreign currency
translation adjustment......... 72 -- -- 72
Issuance of convertible
preferred stock................ -- -- -- 20,000
Cost of preferred stock issuance. -- -- -- (1,275)
----- ---- ---- --------
Balance, September 30, 1996...... $(468) $(18) $379 $ 4,425
===== ==== ==== ========
</TABLE>
See accompanying notes to consolidated financial statements.
44
<PAGE> 45
QUARTERDECK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) .......................................................... $(74,959) $ 11,252 $(4,625)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization of equipment
and leasehold improvements ............................................. 6,063 3,610 3,960
Amortization of capitalized software cost & other intangibles ............ 3,770 1,575 3,171
Write-off of property and equipment ...................................... 1,409 -- 1,719
Write-off of capitalized software costs and prepaid royalties ............ 4,860 -- 3,701
Stock compensation ....................................................... -- 59 --
Elimination of duplicate net income from acquired entities ............... (717) (384) --
Loss on sale or abandonment of assets .................................... -- 38 271
Write-off of in process research and development ......................... 14,993 2,900 --
Changes in assets and liabilities:
Trade accounts receivable ............................................. 4,591 (7,749) 5,333
Refundable income taxes ............................................... -- 6,301 (6,301)
Deferred income taxes ................................................. 3,072 (2,178) --
Inventories ........................................................... 130 (435) 937
Other current assets .................................................. (3,420) (1,565) 7,079
Other assets .......................................................... (4,092) (203) (5,453)
Accounts payable ...................................................... (6,171) 5,342 4,267
Accrued liabilities ................................................... 68 1,865 4,526
Accrued restructuring charges ......................................... 558 (3,476) 5,321
Foreign currency translation adjustment ............................... 95 16 25
-------- --------- --------
Net cash provided by (used in) operating activities .............. (49,750) 16,968 23,931
-------- --------- --------
Cash flows from investing activities:
Purchases of short-term investments ....................................... -- (111,989) (61,351)
Proceeds from sales and maturities of
short-term investments ................................................... 34,285 106,289 59,131
Capital expenditures ...................................................... (19,669) (6,029) (3,396)
Capitalized software costs ................................................ (4,504) (2,564) (3,617)
Purchase of minority interest in affiliates ............................... -- (2,700) --
Loan to related party for note receivable - building ...................... -- (469) --
Advances (to) from affiliates ............................................. 52 (100) 137
Opening cash balance of previously unconsolidated subsidiaries ............ 5,054 559 --
Proceeds from sale of assets .............................................. -- 12 5
Accrued acquisition charges, net of cash acquired ......................... 6,493 2,525 --
-------- --------- --------
Net cash provided by (used in) investing activities .............. 21,711 (14,466) (9,091)
-------- --------- --------
Cash flows from financing activities:
Net proceeds from issuance of preferred stock ............................. 20,000 -- --
Net proceeds from issuance of common stock ................................ 3,529 1,439 11
Proceeds from issuance of long-term convertible notes ..................... 25,000 43 544
Proceeds from issuance of bank debt ....................................... 8,280 -- --
Principal payments under long-term obligations ............................ (200) (482) (555)
Notes payable to related parties .......................................... (1,093) 441 635
Acquisition of treasury stock ............................................. -- (532) --
Distributions to stockholders ............................................. (7,307) (7,906) (12,215)
-------- --------- --------
Net cash provided by (used in) financing activities .............. 48,209 (6,997) (11,580)
-------- --------- --------
Net increase (decrease) in cash and
cash equivalents ................................................ 20,170 (4,495) 3,260
Cash and cash equivalents at beginning of period ............................ 5,384 9,879 6,619
-------- --------- --------
Cash and cash equivalents at end of period .................................. $ 25,554 $ 5,384 $ 9,879
======== ========= ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest ................................................................ $ 468 $ 20 $ 34
Income taxes ............................................................ 1,993 1,534 --
</TABLE>
See accompanying notes to consolidated financial statements.
45
<PAGE> 46
QUARTERDECK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996, 1995 AND 1994
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 the Company and its wholly owned subsidiaries. See note 2 for
a description of pooling of interests and purchase transactions. 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 $31,889,000, $9,136,000
and $7,510,000 in fiscal 1996, 1995 and 1994, 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.
Capitalized Software Costs
Statement of Financial Accounting Standards No. 86, "Accounting for
the Costs of Computer Software to be Sold, Leased or Otherwise Marketed,"
requires the capitalization of 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, 1996, the Company did not capitalize any
internal software development costs. Internal software development costs
related to new products reaching technological feasibility during fiscal
1996 were immaterial. During fiscal 1996, the Company purchased and
capitalized software amounting to $4,504,000. For the years ended
September 30, 1995 and 1994, the Company capitalized $2,564,000 and
$3,617,000, respectively, of software development and purchased software
costs. 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, 1996, 1995 and
1994, the Company recorded $3,711,000, $1,575,000 and $3,171,000 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.
46
<PAGE> 47
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, 1996 and 1995 amounted to $25,554,000
and $5,384,000, respectively. $20 million of the September 30, 1996
balance of $25,554,000 was received pursuant to the Series B Convertible
Preferred Stock (note 15) issuance on September 30, 1996.
As of September 30, 1996, $22,226,000 of the total cash and cash
equivalent balance was invested in interest bearing bank accounts and cash
equivalent money funds.
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 and long-term marketable securities
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, 1996, 1995 and 1994 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,
--------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Weighted average common stock
outstanding during the year 34,893,937 34,112,914 31,824,560
Common stock equivalents of
stock options and warrants
outstanding ............... -- 1,443,997 --
---------- ---------- ----------
Shares used in primary EPS
calculation ............... 34,893,937 35,556,911 31,824,560
========== ========== ==========
Shares used in fully diluted
EPS calculation ........... 34,893,937 36,498,634 31,824,560
========== ========== ==========
</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 which are
accounted for as poolings of interest: 3,500,000 shares for Landmark
Research International Corporation ("Landmark") (note 2), 921,218 shares
for Inset Systems, Inc. ("Inset") (note 2), 5,200,000 shares for Datastorm
Technologies, Inc. and Datastorm Limited (together "Datastorm") (note 2),
47
<PAGE> 48
and 3,499,999 shares for Vertisoft Systems, Inc. ("Vertisoft") (note 2).
The weighted average number of shares of common stock outstanding during
fiscal 1996 includes 663,768 shares issued in the Future Labs, Inc.
("Future Labs") pooling of interests as if the shares were issued at the
beginning of fiscal 1996. Additionally the following shares were issued in
connection with purchase acquisitions and are included as of the
respective acquisition dates: 1,309,890 shares for Limbex Corporation
("Limbex"), 205,000 shares for InterLink Technology, Inc. ("InterLink"),
and 198,000 shares for the Pinnacle Software, Inc. ("Pinnacle") technology
purchase. The weighted average number of shares of common stock
outstanding for the year ended September 30, 1996 excludes 1,028,000
shares issued in connection with the above acquisitions, which are held in
escrow, as their inclusion would be anti-dilutive to the loss per share.
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.
Additionally, effective October 1, 1994 (fiscal 1995), the weighted
average number of common shares has been adjusted to reflect the issuance
of 459,950 and 523,667 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 Company equivalent shares issued on the exercise of StarNine options.
Reclassification
Certain 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 of assets and liabilities to prepare
these financial statements in conformity with generally accepted
accounting principles. Significant estimates are primarily related to
provisions for sales returns, inventory reserve, allowance for doubtful
accounts and valuation of long-term investments. Actual results could
differ from these 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. As of September 30, 1996, the Company had
no short-term investments. As of September 30, 1995, the Company's
investment portfolio was diversified and consisted 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>
Building ....................................................... 40 years
Computer equipment............................................... 3 to 7 years
Office furniture and equipment................................... 5 to 7 years
Leasehold improvements .......................................... Shorter of lease or useful life of asset
Equipment under capital lease ................................... 3 to 7 years
</TABLE>
48
<PAGE> 49
Income Taxes
The Company accounts for income taxes in accordance with Financial
Accounting Standards Board Statement No. 109 "Accounting for Income Taxes"
(FAS 109). SFAS 109 requires the assets and liability method of accounting
for income taxes. Under SFAS 109, deferred tax assets and liabilities are
recognized with respect to the tax consequences attributable to
differences between the financial statement carrying values and the tax
bases of existing assets and liabilities. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to the
taxable income in the years in which these temporary differences are
expected to be recovered or settled. Further, the effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date.
Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued SFAS
No. 123, Accounting for Stock-Based Compensation. SFAS No. 123 will be
effective for fiscal years beginning after December 15, 1995, and will
require that the Company either recognize in its financial statements
costs related to its employee stock-based compensation plans, such as
stock option and stock purchase plans, or make pro forma disclosures of
such costs in a footnote to the financial statements.
The Company expects to continue to use the intrinsic value-based
method of Accounting Principles Board Opinion No. 25, as allowed under
SFAS No. 123, to account for all of its employee stock-based compensation
plans. Therefore, in its financial statements for fiscal 1997, the Company
will make the required pro forma disclosures in a footnote to the
financial statements. SFAS No. 123 is not expected to have a material
effect on the Company's results of operations or financial position.
Non-Cash Transactions
The Company has recorded certain significant non-cash transactions
relating to certain mergers and purchases which included Common
Stock as all or a portion of the consideration and has commenced a
restructuring program which includes recording certain non-cash
charges. See also Notes 2 and 4 herein.
Fair Value of Financial Instruments
The fair values of the Company's cash and cash equivalents, trade
accounts receivable, accounts payable, accrued liabilities and accrued
acquisition and restructuring charges approximate their carrying value due
to the relatively short maturities of these instruments. The fair value of
the loans payable to banks approximate the fair value of the instruments
due to the stated interest rates on such notes and the collateral
supporting the notes. The fair value of the convertible debentures
approximates face value due to the stated interest rate on such instrument
and the indeterminate nature of the value of the convertibility feature of
such debt instrument.
Long-Lived Assets
In March 1995, Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" (SFAS No. 121), was issued. This statement
provides guidelines for the recognition of impairment losses related to
long-term assets and is effective for fiscal years beginning after
December 15, 1995, with earlier application encouraged. The Company will
adopt SFAS No. 121 during fiscal 1997. The Company believes that such
adoption will not have a material impact on the consolidated financial
statements.
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).
NOTE 2. ACQUISITIONS AND STRATEGIC INVESTMENTS
Poolings of Interests
Fiscal 1996:
On December 29, 1995, the Company merged with 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 merger 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.
49
<PAGE> 50
On March 28, 1996, the Company consummated a merger with Datastorm. The
Company issued 5.2 million shares of common stock in exchange for all of
the outstanding stock of Datastorm. The merger has been 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 the Company and Datastorm.
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 Company's statement of operations for the fiscal
year ended September 30, 1995. In order to conform Datastorm's year end to
the Company's fiscal year end, the consolidated statement of operations
for the year ended September 30, 1996, includes three months (October 1995
through 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 fiscal 1996 to eliminate the duplication of net income of $717,000
for the three month period ended December 31, 1995. Financial information
related to Datastorm's fiscal years ended December 31, 1994 and 1993 were
combined with financial information related to the Company's fiscal years
ended September 30, 1994 and 1993, respectively.
Datastorm's S corporation status terminated upon consummation of the
merger and undistributed earnings at March 28, 1996, and all prior
periods, have been reclassified to additional paid-in-capital.
The Company's Datastorm subsidiary leased office and warehouse space
from Three Guys With a Building partnership, a company that was affiliated
to Datastorm through common ownership. As a result of the acquisition and
completion of a new office building for the Company by the partnership,
the existing lease has been terminated at no cost to the Company (see note
14). Lease expense for 1996, 1995 and 1994 totaled $698,000, $686,000 and
$667,000 respectively.
The Company's Datastorm subsidiary owed Intersoft, Inc., an Interest
Charge Domestic International Sales Corporation ("IC-DISC") affiliated
with Datastorm through common ownership, $1,015,000 and $527,000 as of
December 31, 1995 and 1994, respectively, for commission expenses and
interest related to international sales. These amounts are included in
notes payable to related parties.
On May 15, 1996, the Company acquired substantially all of the assets of
Future Labs, a developer of real-time collaborative technology. The
Company issued 663,768 shares of common stock in exchange for all of the
outstanding stock of Future Labs. The transaction was accounted for as an
immaterial pooling of interests and therefore, the consolidated financial
statements for all periods beginning on or after October 1, 1995 have been
restated to reflect the combined operations of the Company and Future
Labs.
On July 18, 1996, the Company acquired 100% of the common stock of
Vertisoft in exchange for 3,499,999 shares of Company common stock. This
transaction has been accounted for as an immaterial
50
<PAGE> 51
pooling of interests, and as a result, the accompanying financial
statements are presented as if the combining companies had been combined
commencing October 1, 1995. The number of shares issued in the Vertisoft
pooling of interests is material to the Company for all periods, and
accordingly the number of common shares outstanding and earnings per share
have been restated for all periods after October 1, 1992, to reflect the
3,499,999 shares issued in such transaction.
Fiscal 1995:
On June 30, 1995, the Company acquired Landmark, a developer of utility
application software for personal computers. The Company 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 the Company and
Landmark.
Landmark's S corporation status terminated upon acquisition by the
Company. Landmark's undistributed earnings at September 30, 1995, and
1994, have been re-classified to additional paid-in capital. Distributions
to Landmark's stockholders, amounting to $2,114,000, and $587,000 for the
years ended September 30, 1995, and 1994, respectively have been charged
to additional paid-in capital.
On August 28, 1995, the Company issued 459,950 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. The Company
recorded an adjustment to beginning equity to reflect the 459,950 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.
51
<PAGE> 52
In connection with the 1996 mergers, the following merger transaction
costs and expenses were recorded and have been charged to expense in
fiscal 1996. These merger transaction costs and expenses include the
following (in thousands):
<TABLE>
<CAPTION>
INSET DATASTORM FUTURELABS VERTISOFT TOTAL
<S> <C> <C> <C> <C> <C>
Acquisition costs............... $ 1,846 $ 4,782 $ 1,417 $1,l75 $ 9,220
Non-cash charges................ -- (863) -- -- (863)
Cash payments................... (1,746) (3,040) (1,058) (400) (6,244)
------- ------- ------- ------- -------
Balance, September 30, 1996 $ 100 $ 879 $ 359 $ 775 $ 2,113
======= ======= ======= ======= =======
</TABLE>
In connection with the 1995 mergers, the following merger transaction
costs and expenses were recorded and charged to expense in fiscal 1995.
These 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
Cash payments (1,688) (565) (125) (2,378)
Additional acquisition costs 482 99 -- 581
------- ------- ------- -------
Balance, September 30, 1996 $ 46 $ 186 $ -- $ 232
======= ======= ======= =======
</TABLE>
The results of operations previously reported by the separate
enterprises, that are discussed above and the combined amounts presented
in the accompanying consolidated financial statements are summarized below
(in thousands):
52
<PAGE> 53
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------------------------------------------------------------
1996 1995 1994
----------------------- ---------------------- ------------------------
NET NET NET
NET INCOME NET INCOME NET INCOME
REVENUES (LOSS) REVENUES (LOSS) REVENUES (LOSS)
-------- -------- -------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C>
Quarterdeck........... $92,030 $(86,856) $54,986 $2,744 $26,753 $(21,171)
Landmark.............. -- -- 11,236 1,309 11,953 2,323
StarNine ............ -- -- 3,981 38 -- --
Internetware ......... -- -- 444 (202) -- --
Inset ............... 2,669 424 6,394 134 4,022 (1,929)
Datastorm ............ 29,413 12,576 40,499 6,990 42,402 16,242
Future Labs........... 1,312 (335) -- -- -- --
Vertisoft............. 7,676 (623) -- -- -- --
Pooling Adjustments... -- (145) 66 239 (415) (90)
-------- -------- -------- ------- ------- -------
Restated Quarterdeck... $133,100 $(74,959) $117,606 $11,252 $84,715 $(4,625)
======== ========= ======== ======= ======= ========
</TABLE>
Net revenues and net income(loss) for Vertisoft, Future Labs,
Datastorm, Inset, Landmark, StarNine and Internetware for the years ended
September 30, 1996 and 1995 reflect the results of each entity for only
the period prior to the date of acquisition by the Company. Results
subsequent to the date of the mergers are included with the Company's
operations. Net revenue and net income (loss) for 1994 reflect the
separate results of Landmark, Inset and Datastorm. Pooling adjustments
were made primarily to conform accounting policies to those of the
Company.
Purchases
Fiscal 1996:
On June 6, 1996, the Company acquired certain software and related
intellectual property rights from Pinnacle in exchange for common stock
with a market value, as defined, of $1,800,000, or 198,000 shares. The
entire amount has been recorded as capitalized software. This transaction
has been accounted for using the purchase method of accounting. The
Company is also obligated to pay certain minimum royalties of $200,000 per
year for four years commencing no later than March 31, 1997. The Company
has paid $100,000 and is obligated for an additional $200,000, as payment
for consulting services and a non-competition agreement with the principal
of Pinnacle.
On July 16, 1996, the Company purchased certain assets and technology
relating to remote control software from InterLink as an essential part
of the Company's communication product line. The Company issued 205,000
shares of common stock and is obligated to issue approximately $1,381,000
worth of additional shares, up to a maximum of 205,000 additional shares,
on the six month anniversary of the closing date based on the trading
price of the Company common stock at such time. The acquisition has been
accounted for as a purchase. The total consideration for the InterLink
acquisition was $3,155,000, including the Company's obligation to issue an
additional $1,381,000 of Common Stock.
On August 14, 1996, the Company acquired the remaining shares of Limbex
not owned by the Company. Prior to such acquisition the Company owned
approximately 20% of Limbex. Limbex is the developer of WebCompass product
line. As a result of the merger, the Company owns 100% of Limbex. The
total consideration for the acquisition was $16,295,000, including
approximately $3,300,000 of consideration to be settled one year from the
closing in cash or common stock of the Company, at the Company's option.
The Company's previous investment of 20% was allocated using the
historical cost of the investment.
The purchase price allocation for the acquisitions of InterLink and
Limbex was made among the identifiable tangible and intangible assets,
based on the fair market value of those assets utilizing the discounted
cash flow of the technology acquired, as well as applying a factor
incorporating the cost of the working capital employed. Specifically,
purchased in process research and development was identified and valued
through extensive interviews and analysis of data concerning each
InterLink or Limbex 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 analysis resulted in an allocation of $2,872,000 and $12,121,000 of
purchased research and development for InterLink and Limbex, respectively,
which had not yet reached technological feasibility and did not have
alternative future uses. The $2,872,000 and $12,121,000 of purchased
research and development is included in acquisition, restructuring and
other charges in the accompanying consolidated statements of operations.
Using the same methodology, goodwill for InterLink and Limbex was
calculated to be $283,000 and $2,546,000, respectively, and is included in
other assets, to be amortized over 10 years. In addition, the Company
allocated $328,000 of the Limbex purchase price to intangible assets which
will be amortized over a period of 24 to 36 months and $396,000 to a
capitalized software technology which will be amortized over 14 months.
The results of operations of these purchased entities for the periods
prior to the acquisitions were immaterial to the Company and, accordingly,
pro forma disclosures of the effect of such transactions have not been
presented.
53
<PAGE> 54
Fiscal 1995:
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,
54
<PAGE> 55
accrued transaction costs, assumed liabilities and stock registration fees
amounted to approximately $196,000 and were classified as accrued
acquisition and restructuring charges.
An allocation of the purchase price was made among the identifiable
tangible and intangible assets, using the same methodology previously
discussed for the Limbex and InterLink purchase price allocations. 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. This analysis resulted in $557,000 of purchased software which had
reached technological feasibility, and therefore was capitalized. The
purchased software will be amortized over a period of 24 months.
Other Investments
On February 7, 1996, the Company acquired, in a private placement of
common stock, less than a 5% interest in Infonautics Corporation
("Infonautics") in exchange for $3,250,000. This transaction is accounted
for under the cost method of accounting and the investment is included on
the balance sheet in other assets and is carried at lower of cost or
market. Infonautics consummated an initial public offering of its common
stock during May of 1996. The Company's shares in Infonautics were not
registered at that time and therefore remain subject to certain
limitations on resale. Infonautics stock has traded at prices below the
Company's cost basis for several months prior to September 30, 1996. The
Company determined that a portion of the reduction in the stock price was
due to an other than temporary decline and accordingly recorded a charge
to other income (expense) of $720,000 to reduce the carrying value of the
investment.
During fiscal 1996, the Company also recorded a charge in other income
(expense) for $727,000 to write off its investment in Streetwise, a
software development firm.
On December 24, 1995, the Company and a Belgian venture capital group
formed a new entity, Quarterdeck Flanders N.V. ("QDF"). The Company
entered into an agreement to purchase 50.002% of QDF in exchange for an
agreement to make a capital contribution of $900,000. In September 1996,
the Company transferred its interest in QDF to a third party who assumed
the Company's obligation to make the capital contribution.
In June 1995, the Company purchased a minority equity position in LHSP,
a company that develops and licenses speech compression technology. The
cash investment of $1,500,000 was accounted for using the cost method.
During the year, LHSP completed an initial public offering. During fiscal
1996, the company sold a portion of this investment for $2,346,000 and
recorded a gain of $1,435,000 which is included in other income (expense)
on the statement of operations. The Company wrote up the value of the
remaining
55
<PAGE> 56
investment by $379,000 during the period ended September 30, 1996. This
increase is recorded directly to the equity section of the balance sheet
and does not affect net income. Therefore, the Company's remaining
investment is carried at $968,000 and included in other assets on the
balance sheet.
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 required 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, 1996, the Company had remitted $1,250,000 to
IAL. This investment is carried at cost and is included in other assets.
56
<PAGE> 57
NOTE 3. BALANCE SHEET AND INCOME STATEMENT INFORMATION
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------
1996 1995
-------- --------
(in thousands)
<S> <C> <C>
Cash and short-term investments:
Cash and cash equivalents ......................... $ 25,554 $ 5,384
Short-term investments ............................ -- 34,285
-------- --------
$ 25,554 $ 39,669
======== ========
Trade accounts receivable:
Receivables ....................................... $ 22,284 $ 18,822
Less: allowance for doubtful accounts ............ (2,032) (870)
Less: allowance for sales returns and marketing
development funds ......................... (10,987) (4,331)
-------- --------
$ 9,265 $ 13,621
======== ========
Other current assets:
Prepaid royalties ................................. $ 901 $ 1,427
Income tax receivable ............................. 2,825 --
Other prepaid expenses ............................ 1,150 1,345
Notes receivable .................................. 1 100
Advances to employees ............................. 26 5
Acquisition costs ................................. -- 287
Other ............................................. 691 842
-------- --------
$ 5,594 $ 4,006
======== ========
Property, plant and equipment:
Construction in progress (building)................ $11,069 $ --
Computer equipment................................. 20,406 14,710
Office furniture and equipment .................... 2,252 3,046
Office furniture and equipment under capital leases 252 26
Leasehold improvements ............................ 1,586 1,696
-------- --------
35,565 19,478
Less: accumulated depreciation and amortization .. (14,313) (11,143)
-------- --------
$ 21,252 $ 8,335
======== ========
Capitalized software costs:
Capitalized software costs ........................ $ 5,254 $ 4,184
Less: accumulated amortization ................... (1,806) (1,377)
-------- --------
$ 3,448 $ 2,807
======== ========
Other assets:
Marketable securities ............................. $ 968 $ --
Other investments ................................. 3,788 2,700
Notes receivable from employee .................... 13 125
Goodwill and other intangible assets acquired, net. 3,125 --
Other ............................................. 1,623 508
-------- --------
$ 9,517 $ 3,333
======== ========
Accrued liabilities:
Accrued expenses .................................. $ 13,824 $ 7,447
Accrued postcontract customer support ............. 456 584
Accrued vacation .................................. 1,460 1,877
Accrued advertising ............................... 1,121 1,608
Deferred revenue .................................. 273 431
Other ............................................. 98 1,387
Income taxes payable .............................. -- 546
-------- --------
$ 17,232 $ 13,880
======== ========
</TABLE>
57
<PAGE> 58
<TABLE>
<S> <C> <C>
Accrued acquisition and restructuring charges:
Acquisitions ...................................... $ 2,345 $ 2,029
Restructurings .................................... 8,280 1,230
Purchase transaction costs ........................ 315 196
-------- --------
$ 10,940 $ 3,455
======== ========
Income Statement:
Acquisition, restructuring and other charges:
Restructuring ..................................... $ 12,995 $ 219
Acquisitions ...................................... 9,801 4,612
In-process research and development ............... 14,993 2,578
-------- --------
$ 37,789 $ 7,409
======== ========
</TABLE>
58
<PAGE> 59
NOTE 4. RESTRUCTURING AND OTHER CHARGES
During fiscal 1996, the Company implemented a comprehensive, corporate
wide restructuring plan. As a result of the plan, the Company recorded a
charge of $12,995,000 and reduced its workforce by approximately 40%,
eliminating nearly 500 positions. As a component of the restructuring, the
Company will also close offices or reduce the amount of space utilized at
its current locations. The restructuring charge includes an estimate of
the impact of the affected lease obligations (net of estimated sublease
income or settlements). The Company also wrote off excess equipment,
furniture and leasehold improvement in connection with the employee and
space reductions. Finally, the charge includes write-offs of capitalized
software and prepaid royalties relating to products which the Company no
longer plans to actively market. This restructuring focuses the Company
around two core business units (utilities and communications and Internet
solutions) and a direct marketing unit. As part of the restructuring, the
Company has centralized operations and eliminated duplicate functions that
resulted from certain acquisitions. The Company believes that these
actions should improve its competitive position.
The following is an analysis of the significant components of the fiscal
1996 restructuring and other charges and 1996 activity (in thousands):
<TABLE>
<CAPTION>
TOTAL CASH PAID
RESTRUCTURING AND NON-CASH IN FISCAL ACCRUED AS OF
NON-RECURRING COSTS COSTS 1996 SEPTEMBER 30, 1996
------------------- -------- --------- ------------------
<S> <C> <C> <C> <C>
Reduction of non-core
product lines ............. $ 2,754 $ 2,754 $ -- $ --
Discontinuance and
consolidation of offices .. 1,420 -- -- 1,420
Severance costs ............. 6,513 -- 550 5,963
Write-off property and
equipment and other charges 2,308 1,240 413 655
------- ------- ------- -------
Total ................ $12,995 $ 3,994 $ 963 $ 8,038
======= ======= ======= =======
</TABLE>
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. 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. Of the total, $7,416,000 were non-cash charges and
$741,000 of the remaining charges were paid prior to September 30, 1994.
During fiscal 1995, $219,000 of additional restructuring charges were
recorded and $3,695,000 of the restructuring charges were paid during
fiscal 1995, leaving an accrual as of September 30, 1995 of $1,230,000.
During fiscal 1996, $890,000 of this amount was paid prior to September
30, 1996, while $98,000 of prior accrual was reversed leaving a balance of
$242,000 at September 30, 1996.
NOTE 5. INCOME TAXES
The components of the provision (benefit) for income taxes for the
fiscal years ended September 30, 1996, 1995 and 1994, respectively, are as
follows (in thousands):
<TABLE>
<CAPTION>
FEDERAL STATE TOTAL
------- ----- -----
<S> <C> <C> <C>
1996:
Current .......... $201 $ 0 $201
Deferred ......... 605 0 605
---- ---- ----
Total ........ $806 $ 0 $806
==== ==== ====
</TABLE>
59
<PAGE> 60
<TABLE>
<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)
======= ======= =======
</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,
--------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Expected income tax expense (benefit) ....... $(25,212) $ 3,938 $( 3,606)
Change in valuation allowance ............... 20,294 483 2,853
State income taxes, net of Federal
income tax benefit ........................ (2,393) 14 --
Net (income) loss on foreign subsidiary ..... 3,005 (608) 1,510
Net income of Subchapter S subsidiary ....... (3,300) (3,014) (6,444)
Tax exempt income benefit ................... (106) (339) (250)
Alternative minimum tax and other tax credits 300 (257) --
Acquisition costs ........................... 9,916 -- --
Other ....................................... (1,698) 114 (45)
-------- -------- --------
$ 806 $ 331 $( 5,982)
======== ======== ========
</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 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 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.
The net change in the total valuation allowance for the twelve months
ended September 30, 1996, was an increase of $20,294,000. Of this amount,
$18,116,000 resulted from an increase in gross deferred tax assets and
$2,178,000 resulted from a decrease in net deferred tax assets. Management
has concluded that the future realization of the deferred tax asset is
uncertain. Accordingly, a full valuation allowance has been applied.
60
<PAGE> 61
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,
------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Accrued restructuring charges ............... $ 2,222 $ 311 $ 684
Software development costs recognized
as incurred for tax purposes .............. (223) 12 (401)
State taxes ................................. 2,393 7 486
Allowance for sales returns ................. 1,819 837 669
Depreciation ................................ 834 825 563
Allowance for doubtful accounts
and other reserves ........................ 3,111 997 879
Acquisition costs ........................... -- 1,591 --
Tax net operating losses .................... 17,265 -- --
Other, net .................................. (782) 934 (27)
Deferred tax assets, valuation allowance..... (26,639) (3,336) (2,853)
-------- -------- --------
Total net deferred tax assets ............. $ -- $ 2,178 $ --
======== ======== ========
</TABLE>
The valuation allowance at September 30, 1996 of $26,639,000 includes
$3,009,000 of tax benefits related to stock options exercised. These tax
benefits will be credited to equity when realized.
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. Prior to being acquired by the
Company, Datastorm elected to be taxed as an S corporation whereby the
income tax effects of Datastorm's activities accrued directly to the
shareholders. Datastorm's S corporation election terminated at the time of
acquisition. As a result, deferred income taxes for both Landmark and
Datastorm, under the provisions of FAS 109 were established and the
effects are included in the accompanying consolidated financial
statements.
The Company has a Federal tax net operating loss of $50,779,000 expiring
in 2011.
61
<PAGE> 62
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. In fiscal 1996, the
Company adopted the 1996 Acquisition Stock Incentive Plan.
1996 ACQUISITION STOCK INCENTIVE PLAN. Under the terms of the 1996
Acquisition Stock Incentive Plan, options may not exceed 10 years in
length. All grants under this plan must be non-qualified stock options.
These options may not be granted at less than 85% of fair market value at
the time the option is granted, unless utilized in exchange for options
previously issued by a combining company in conjunction with a pooling
transaction. During fiscal 1996, the Company granted 105,610 stock options
at exercise prices between $0.00 and $7.75 per share, 297,600 stock
options at an exercise price of $8.81 per share, 665,000 stock options at
an exercise price of $13.63 per share, and 67,715 stock options at
exercise prices between $13.94 and $35.50 per share. During fiscal 1996,
64,036 options were exercised and 164,037 options were cancelled. At
September 30, 1996, 1,117,844 options were outstanding and 68,154 options
were exercisable under the 1996 Acquisition Stock Incentive Plan.
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. 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 1996, the Company granted 769,500 stock options
at exercise prices between $5.00 and $10.00, 353,500 stock options at
exercise prices between $10.01 and $15.00, 756,641 stock options at
exercise prices between $15.01 and $20.00, and 181,946 stock options at
exercise prices between $20.01 and $34.63. 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 1996, 516,767 options were exercised and 738,207 options
were cancelled. 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. At September 30, 1996,
4,828,037 options were outstanding and 1,077,431 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 1996, 52,500 stock options were granted at
exercise prices between $8.00 and $16.50 per share, zero options were
exercised, and zero options were cancelled. 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. At September 30, 1996, 102,500 options were outstanding under
the 1990 Directors' Stock Option Plan and 50,000 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
62
<PAGE> 63
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. At September 30, 1995, no 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 $0,
$59,000 and $16,000 were credited to additional paid-in capital in fiscal
1996, 1995 and 1994, respectively.
A summary of all stock option and warrant activity in the three-year
period ended September 30, 1996 is as follows:
<TABLE>
<CAPTION>
SHARES OPTION RANGE
------ ------------
<S> <C> <C>
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
Options granted ............... 4,099,048 0.00 - 35.50
Options exercised ............. (580,803) 6.25 - 39.00
Options cancelled ............. (902,244) 0.25 - 27.50
---------
Outstanding at September 30, 1996 6,048,381 $0.25 - $34.63
========= ===== ======
</TABLE>
NOTE 7. COMMITMENTS
The Company leases facilities under operating leases that expire through
fiscal 2016. Rental expense for the years ended September 30, 1996, 1995
and 1994 amounted to approximately $4,367,000, $3,076,000, and $3,468,000
respectively.
Minimum annual rental payments under these leases are as follows (in
thousands):
<TABLE>
<CAPTION>
Year ending September 30:
<S> <C>
1997.............................................................. $ 2,421
1998.............................................................. 2,367
1999.............................................................. 2,257
2000.............................................................. 1,954
2001.............................................................. 408
Thereafter........................................................ 4,643
-------
Total........................................................... $14,050
=======
</TABLE>
Accumulated depreciation related to equipment under capital leases was
$143,000 at September 30, 1994. The Company has no equipment under capital
leases as of September 30, 1996 and 1995.
NOTE 8. STOCKHOLDER RIGHTS PLAN
63
<PAGE> 64
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.
In connection with the issuance of the Series B Preferred Stock and the
Warrant during fiscal 1996, (see Note 15), the Company amended the Rights
Agreement dated August 11, 1992 (the "Rights Agreement") between the
Company and Bank of America, National Trust and Savings Association, as
rights agent, to provide that the institutional investor that acquired the
Series B Preferred Stock and Warrant will not be deemed to be an Acquiring
Person (as defined in the Rights Agreement) as a result of its acquisition
of the Series B Preferred Stock, the Warrant or any shares of Common Stock
received upon conversion of the Series B Preferred Stock or exercise of
the Warrants; provided, however, if the institutional investor becomes the
Beneficial Owner (as defined in the Rights Agreement) of any additional
number of shares of Common Stock in excess of 5% of the outstanding shares
of Common Stock other than as a result of the conversion of the Series B
Preferred Stock and/or exercise of the Warrant, then the institutional
investor will be deemed to be an Acquiring Person.
NOTE 9. EMPLOYEE BENEFIT PLANS
In January 1991, the Company adopted a defined contribution 401(k) plan.
Employees must work a minimum of 1,000 hours per year and be 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. As of
January 1996, the plan was amended to allow employee participation in the
plan after at least 3 consecutive months of service. Additionally, the
Company matching was increased to 50% of employee contributions up to 6%
of eligible compensation for calendar 1996. The Company's matching
contributions totaled $1,243,000, $112,000 and $96,000 for fiscal 1996,
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 of Directors 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. As of March 29, 1996 the Datastorm Plan was suspended
and all Datastorm employees became eligible to participate in the
Company's 401k plan as of June 1, 1996.
Subsequent to the acquisition of Datastorm, the Plan has been modified
and merged with the Company plan discussed above.
64
<PAGE> 65
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 1995 and the balance was paid directly by the Company's
insurance carrier.
The Company was a defendant in an action initially commenced on June 29,
1995 by Corum Group Ltd., in King County (Washington) Superior Court
against 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 arose from the Company's
acquisition of Landmark on June 30, 1995. Corum claimed that it acted as a
"broker" in the transaction and sought approximately $2,900,000 it claimed
it was owed 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 asserted
affirmative defenses, counter claims and third-party claims. During fiscal
1996, the Company settled the case. The settlement of this matter did not
have a material impact on the results of operations of the Company.
On or about September 3, 1996, a class action lawsuit, Marjorie
--------
William's, et al. v. Quarterdeck Corporation, was filed in the Circuit
--------------------------------------------
Court of the Eighth Judicial Circuit, Alachua County, Florida (Case No.
96-3041), by Marjorie William's and Penelope Claire Satterwhite on behalf
of all licensees of MagnaRAM2 residing in the United States. The
complaint alleged that MagnaRaAM2 fails to significantly increase Random
Access Memory or otherwise help Windows 95 and Windows 3.x users.
Plaintiffs asserted the following causes of action: breach of express
contract; breach of implied contract; breach of express warranties; breach
of implied warranty of merchantability; breach of implied warranty of
fitness for particular purpose; fraudulent misrepresentation; negligence;
and gross negligence. Plaintiffs sought compensatory damages in an
unspecified amount, injunctive relief, and attorney fees and costs.
On October 10, 1996, the Company filed a motion seeking dismissal of the
entire action pursuant to the forum non conveniens doctrine and, in the
alternative, dismissal of certain allegations and causes of action for
failure to state a claim. On November 25, 1996 (the date upon which the
Company's motion was scheduled to be heard), counsel for plaintiffs agreed
to dismiss the entire action, without prejudice. A stipulation to this
effect was entered on the record before the Court. Pursuant to Florida
law, plaintiffs may, within 120 days of November 25, 1996, refile the
action in California and have the complaint "relate back" to the original
September 3, 1996 filing date. Counsel for the Company has received no
communication from plaintiffs' counsel since the dismissal and cannot
determine whether plaintiffs intend to refile in California. If a new
class action complaint is filed, the Company intends to defend the case
vigorously and to oppose any effort to certify the claims for class
resolution.
Shareholder complaints were filed in November and December 1996 in the
Superior Court of the State of California, County of Los Angeles, against
the Company and one former and one current officer of the Company
alleging, among other things, violations of certain provisions of
California securities laws relating to statements made about the Company.
The suits are purportedly brought on behalf of all persons who purchased
the Company's common stock during the period January 26, 1996 through June
13, 1996 and seeks damages in an unspecified amount and other relief. The
Company intends to vigorously defend against these actions.
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.
NOTE 11. MAJOR CUSTOMERS AND SEGMENT INFORMATION
The Company sells its products primarily through distributors and
dealers. Sales to the two largest distributors by the Company individually
account for 20% and 11%; 31% and 14%; and 39% and 19% of the Company's
consolidated net revenues for the years ended September 30, 1996, 1995 and
1994, respectively.
65
<PAGE> 66
The Company 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,
----------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net revenues:
United States ......... $109,200 $ 98,591 $ 75,425
Europe ................ 18,700 13,809 5,833
Other.................. 5,200 5,206 3,457
-------- -------- --------
$133,100 $117,606 $ 84,715
======== ======== ========
Net revenues from all foreign locations are attributable to export
shipments from the Company's United States operations of $1,486,000,
$4,968,000 and $3,184,000, respectively, and $22,414,000, $14,047,000,
and $6,106,000, respectively of shipments from the Company's European
operations based in Ireland during fiscal 1996, 1995 and 1994.
<S> <C> <C> <C>
Operating income (loss):
United States ......... $(65,444) $ 7,342 $( 7,589)
Europe ................ (8,642) 2,357 (4,112)
-------- -------- --------
$(74,086) $ 9,699 $(11,701)
======== ======== ========
Identifiable assets:
United States ......... $ 73,184 $ 71,130 $ 60,215
Europe ................ 3,597 5,569 2,256
-------- -------- --------
$ 76,781 $ 76,699 $ 62,471
======== ======== ========
</TABLE>
NOTE 12. 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.
NOTE 13. NOTES PAYABLE TO BANKS
Notes payable to banks at September 30, 1996 was comprised of:
<TABLE>
<S> <C>
Revolving credit facility.............. $3,550,000
Building loan.......................... 2,000,000
Secured construction financing......... 2,730,000
----------
$8,280,000
==========
</TABLE>
As of September 30, 1996, the maximum borrowing the Company was eligible
for under this line was approximately $4.1 million. The line is secured by
the Company's domestic accounts receivable and inventory. The current term
of the line of credit matures June 30, 1997. The line can be used for
general corporate purposes, including investments and acquisitions, and
bears interest, at the bank's reference (prime) interest rate plus 0.50%.
The line is subject to the Company complying with certain customary
financial covenants and restrictions, including a compensating balance of
$3.0 million, the prohibition of the payment of dividends, other than
those payable solely in capital stock, and a prohibition of any stock
repurchase activity.
66
<PAGE> 67
In April 1996, the Company borrowed $2.0 million from a bank to
partially finance the completion of the building in Columbia, Missouri.
The loan is secured by Datastorm's equipment and bears interest, at a rate
of 4.5% per annum. The rate was subsidized, in part, by the State of
Missouri in exchange for certain local employment targets. As part of the
Company's restructuring, the Company has revised downward the personnel
complement at this location. This loan will not be renewed upon maturity.
The Company has agreed with the bank to repay $750,000 between January
1997 and March 1997, and to repay the remainder by April 7, 1997.
On August 6, 1996, the Company's Datastorm subsidiary secured
construction financing from a bank of up to $5.0 million with an interest
rate equal to the bank's commercial base rate, currently 8.25%, secured by
the Columbia, Missouri building and guaranteed by the Company. The
principal amount plus any unpaid interest is due February 7, 1997.
On December 19, 1996, the Company's revolving credit facility with Bank
of America was amended, and the bank waived the Company's non-compliance
with certain financial covenants therein for the quarter ended September
30, 1996. The Company may borrow the lesser of 65% of Eligible Accounts
Receivable or $15 million.
NOTE 14. BUILDING AND NOTE RECEIVABLE FROM RELATED PARTY
Prior to merging with the Company, Datastorm loaned to a partnership,
whose partners were Datastorm shareholders, funds which the partnership
used to commence the construction of a new building which now houses
Datastorm. At September 30, 1995, the partnership owned the building. The
note bore interest at the applicable federal midterm rate and was payable
on demand. The advances were carried in note receivable from related party
on the balance sheet. The partners are now shareholders and consultants of
the Company. In connection with the acquisition, the Company was obligated
to acquire the building from the partnership. During the quarter ended
June 30, 1996, the Company completed the acquisition of the building in
exchange for, among other things, cancellation of the note receivable.
NOTE 15. CONVERTIBLE PREFERRED STOCK
On September 30, 1996, the Company issued 200,000 shares of Series B
Convertible Preferred Stock, stated value $100 per share (the "Series B
Preferred Stock"), and a warrant (the "Warrant") to acquire shares of
Common Stock of the Company for $20 million in cash. The securities were
issued to an institutional investor in an overseas offering pursuant to
Regulation S of the Securities Act of 1933, as amended.
The Series B Preferred Stock is convertible into shares of Common Stock
on or after November 15, 1996 and will automatically convert into Common
Stock on September 30, 2002 to the extent any shares of Series B Preferred
Stock remain outstanding at that time. Each share of Series B Preferred
Stock is convertible into the number of shares of Common Stock equal to
the quotient of (i) $100.00 divided by (ii) the Conversion Price. The
Conversion Price is the lesser of (i) 101% of the average of the daily
volume-weighted average prices of the Common Stock on the Nasdaq National
Market System (the "Market Price") during the 40 trading day period ending
two trading days before the date on which the Company receives a notice of
conversion from a holder of the Series B Preferred Stock (the "Conversion
Date"), and (ii) 125% of the average of the Market Price of the Common
Stock during the first five trading days of the 40 trading day period
ending two trading days before the Conversion Date. Assuming a Conversion
Price of $5.3365 (based on 101% of the average of the Market Price for the
40 trading day period ending on December 12, 1996), each share of Series
B Preferred Stock would be convertible into 18.74 shares of Common Stock,
or an aggregate of 3,747,802 shares of Common Stock upon conversion of all
shares of Series B Preferred Stock.
If stockholder approval of the issuance of Common Stock pursuant to the
conversion of the Series B Preferred Stock and exercise of the Warrant is
required either because the number of shares so issuable would equal or
exceed 20% of the number of shares of Common Stock outstanding on
September 30, 1996, or the number of shares issuable pursuant to
conversion or exercise notices received would exceed the number of then
authorized but unissued shares of Common Stock not reserved for other
issuances, the Series B Preferred Stock will not be convertible with
respect to the number of shares of Common Stock that would cause either
(a) the 20% threshold to be exceeded or (b) the number of authorized but
unissued shares to be exceeded, and the
67
<PAGE> 68
Company will be required to seek the necessary stockholder approval. If
such stockholder approval is not obtained within specified periods of
time, the Company will be required, to the extent permitted by applicable
law, to redeem the number of shares of Series B Preferred Stock that could
not be converted for a redemption price of $100.00 per share as soon as
practicable, but in no event no later than September 30, 2001. Although
the Preferred Stock was not convertible at September 30, 1996, the Company
would have had adequate shares to satisfy a conversion, based upon the
closing stock price at that date. In the event the Company does not have
adequate shares, the amount of Preferred Stock which could not be
converted would be reclassified to redeemable Preferred Stock.
The Warrant may be exercised from and after March 30, 1998 (or earlier
if certain mergers, acquisitions or combinations (a "Combination") occur
prior to that date) for a number of shares of Common Stock determined by
dividing (i) 12,666,667 by (ii) the Exercise Price; provided that the
number of shares of Common Stock issuable upon exercise in full of the
Warrant shall not be less than 567,885 nor greater than 1,703,653. The
Exercise Price per share will be equal to 150% of the daily
volume-weighted average prices of the Common Stock for the period from,
and including September 30, 1996, to, and including, April 30, 1997, but
in any event shall not be less than $7.435 per share nor greater than
$22.305 per share. Notwithstanding the foregoing, if the Warrant becomes
exercisable prior to April 30, 1997 as a result of the occurrence of a
Combination, the Exercise Price shall be $10.037 and the number of shares
of Common Stock to be issued upon exercise of the Warrant shall be
1,200,000 shares.
In connection with the issuance of the Series B Preferred Stock and the
Warrant, the Company amended the Rights Agreement dated August 11, 1992
(the "Rights Agreement") (Note 8) between the Company and Bank of America,
National Trust and Savings Association, as rights agent, to provide that
the institutional investor that acquired the Series B Preferred Stock and
Warrant will not be deemed to be an Acquiring Person (as defined in the
Rights Agreement) as a result of its acquisition of the Series B Preferred
Stock, the Warrant or any shares of Common Stock received upon conversion
of the Series B Preferred Stock or exercise of the Warrants; provided,
however, if the institutional investor becomes the Beneficial Owner (as
defined in the Rights Agreement) of any additional number of shares of
Common Stock in excess of 5% of the outstanding shares of Common Stock
other than as a result of the conversion of the Series B Preferred Stock
and/or exercise of this Warrant, then the institutional investor will be
deemed to be an Acquiring Person.
NOTE 16. LIQUIDITY
At September 30, 1996, the Company's cash and short-term investments
totaled $25,554,000, compared to $39,669,000 at September 30, 1995. In
addition, working capital at September 30, 1996 amounted to a deficit of
$4,684,000, a decrease of $34,174,000 as compared to $29,490,000 at
September 30, 1995.
During 1996, the Company utilized $49,750,000 of cash in operating
activities. In addition, approximately $24,173,000 of cash was utilized
relating to fixed asset and software additions. This was financed by sales
of marketable securities of $34,285,000, the issuance of $25,000,000 of
convertible notes, $20,000,000 of Series B preferred stock and notes
payable to banks of $8,280,000.
Although the Company has negative working capital at September 30, 1996,
and has incurred significant operating losses, the Company believes
existing cash and cash equivalents, plus funds provided by operations,
borrowing capacity under the line of credit and projected borrowing
against, or sale of, real estate should be sufficient to fund operations
for the coming twelve months. Nevertheless, the Company is presently
exploring various financing alternatives, including equipment financing,
secured debt, convertible debt, additional sales of equity securities and
the sale of certain of its prior investments in order to finance the core
business of the Company and help provide adequate working capital for
operations. In addition, the expense reductions resulting from the
restructuring are anticipated to provide additional funds from operations
in future quarters. However, there is no assurance that increased sales
will occur or that any such increase will result in adequate operating
funds, or that such additional financing will be available, or if
available, will be available on acceptable terms. Should product shipments
be delayed or should the Company experience significant shortfalls in
planned revenues, or not achieve sufficient cost savings as a result of
the restructuring, or experience unforeseen fixed expenses, the Company
believes it has the ability to make additional reductions to variable
expenses to extend its capital. Accordingly, the Company believes it has
sufficient capital to fund operations through Fiscal 1997. Any decision or
ability to obtain financing through debt or through equity investment 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 or future conversion of any convertible debt would result in
additional dilution to the Company's stockholders.
68
<PAGE> 69
QUARTERDECK CORPORATION AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
YEAR ENDED SEPTEMBER 30, 1996, 1995 AND 1994
(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>
1996 Allowance for
doubtful accounts........................... $ 870 $ 1,903 $ (741)(1) $ 2,032
1995 Allowance for
doubtful accounts........................... 803 333 (266)(1) 870
1994 Allowance for
doubtful accounts........................... 724 265 (186)(1) 803
1996 Inventory obsolescence
reserve..................................... 676 3,914 (612) 3,978
1995 Inventory obsolescence
reserve..................................... 1,086 119 (529) 676
1994 Inventory obsolescence
reserve..................................... 633 453 -- 1,086
1996 Sales returns and marketing
development fund reserve.................... 4,331 43,562 (36,906)(2) 10,987
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
</TABLE>
(1) Uncollectible accounts written off, net of recoveries.
(2) Products returned and reduction of reserve.
69
<PAGE> 70
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT DESCRIPTION PAGE NUMBER
- ------- ----------- -----------
<S> <C> <C>
3.2 Certificate of Amendment of Certificate of Incorporation
of the Company
3.4 Amended Designations of Series A Junior Participating
Preferred Stock of the Company
10.5 Consulting Agreement between the Company, King R. Lee &
Associates, Inc. and King R. Lee, dated as of August 27,
1996.
10.10 Employment Agreement between the Company and Bradley D.
Schwartz, dated as of January 16, 1995.
10.11 Employment Agreement between the Company and Anatoly
Tikhman, dated as of July 24, 1996.
10.12 Employment Agreement between the Company and Joe Fusco,
dated as of September 16, 1996.
10.29 Third Amendment to the Credit Agreement dated as of
September 30, 1996, and incorporated by reference.
10.30 Waiver and Fourth Amendment to the Credit Agreement dated as of
December 17, 1996.
21.1 Subsidiaries of the Company.
23.1 Accountant's Consent
27 Financial Data Schedule
</TABLE>
70
<PAGE> 1
EXHIBIT 3.2
CERTIFICATE OF AMENDMENT OF
CERTIFICATE OF INCORPORATION
OF
QUARTERDECK CORPORATION
QUARTERDECK CORPORATION, a corporation organized and existing under and
by virtue of the General Corporation Law of the State of Delaware:
DOES HEREBY CERTIFY:
FIRST: That at a meeting of the Board of Directors of QUARTERDECK CORPORATION,
resolutions were duly adopted setting forth a proposed amendment of the
Certificate of Incorporation of said corporation, declaring said amendment to
be advisable and calling for consent of the stockholders at a meeting of said
corporation for consideration thereof.
SECOND: That pursuant to such resolution, the first paragraph of Article IV of
said corporation's Certificate of Incorporation would be amended to read as
follows:
"The total authorized number of shares of the Corporation shall be
52,000,000 shares, consisting of 50,000,000 shares designated as Common Stock,
$.001 par value, and 2,000,000 shares designated as Preferred Stock, $.001 par
value."
THIRD: That thereafter, pursuant to resolution of its Board of Directors, the
stockholders of said corporation considered and adopted said amendment of
Article IV at a duly constituted meeting thereof, at which meeting the
necessary number of shares as required by statute were voted in favor of the
amendment.
FOURTH: That said amendment was duly adopted in accordance with the provisions
of Section 242(b) of the General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, said QUARTERDECK CORPORATION has caused this certificate to
be signed by Gaston Bastiaens, its President, and Bradley D. Schwartz, its
Secretary, this 2nd day of February, 1996.
By: /s/ GASTON BASTIAENS
----------------------------
Gaston Bastiaens, President
Attest: /s/ BRADLEY D. SCHWARTZ
--------------------------------------
Bradley D. Schwartz, Secretary
<PAGE> 1
EXHIBIT 3.4
AMENDED DESIGNATIONS
of
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK of
QUARTERDECK CORPORATION
(Pursuant to Section 151 of the
Delaware General Corporation Law)
Quarterdeck Corporation, a corporation organized and existing under
the General Corporate Law of the state of Delaware (the "Corporation"), hereby
certifies that the following resolution was adopted by the Board of Directors
of the Corporation as required by Section 151 of the General Corporation Law on
October 24, 1996.
RESOLVED, that pursuant to the authority granted to and vested in the
Board of Directors of this Corporation (the "Board of Directors" or the
"Board"), in accordance with the provisions of the Certificate of Incorporation
and the Certificate of Designations of Series A Junior Participating Preferred
Stock of the Corporation, the Board of Directors hereby amends the Certificate
of Designations of Series A Junior Participating Preferred Stock of the
Corporation filed with the Secretary of State of the State of Delaware on
August 25, 1992 as follows:
Replace Section 1. with the following:
"Section 1. Designation and Amount. The shares of such series
shall be designated as "Series A Junior Participating Preferred Stock" (the
"Series A Preferred Stock") and the number of shares constituting the Series A
Preferred stock shall be 500,000. Such number of shares may be increased or
decreased by resolution of the Board of Directors; provided, that no decrease
shall reduce the number of shares of Series A Preferred Stock to a number less
than the number of shares then outstanding plus the number of shares reserved
for issuance upon exercise of outstanding options, rights or warranties or upon
the conversion of any outstanding securities issued by the Corporation
convertible into Series A Preferred Stock."
IN WITNESS WHEREOF, this Amended Designations of Series A Junior
Participating Preferred Stock of the Corporation is executed on behalf of the
Corporation by a member of the Office of the President of the Corporation this
24th day of October, 1996.
/s/ King R. Lee
-------------------------------------------
King R. Lee, Member, Office of the President
<PAGE> 1
Exhibit 10.5
CONSULTING AGREEMENT
This Consulting Agreement ("Agreement")is made and entered into as of
August 27, 1996 ("Effective Date"), by and among Quarterdeck Corporation, a
Delaware corporation ("Quarterdeck"), King R. Lee & Associates, Inc.
("Consultant") and King R. Lee ("Lee"), with reference to the following facts:
RECITALS
A. Quarterdeck is engaged in the development, manufacture and
sale of software products.
B. Consultant possesses unique experience in the management
consulting and software business and Lee serves as a director of Quarterdeck.
C. Quarterdeck desires to retain Consultant to perform certain
consulting services for Quarterdeck, and Consultant desires to perform such
services, all upon the terms, covenants and conditions contained herein.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants contained herein, Quarterdeck and Consultant agree as follows:
1. Retention as Consultant.
1.1 Consulting Services. Consultant is hereby retained
by Quarterdeck to provide the consulting services of Lee, who shall serve in
the newly established Office of the President and whose duties shall include
those normally performed by the chief executive officer of Quarterdeck, and
such other duties as shall be assigned to him from time to time by the Chairman
of the Board of Quarterdeck.
1.2 Compensation. For the services rendered hereunder,
Quarterdeck shall pay to Consultant $1,500 per full day, payable semi-monthly.
Consultant shall be normally available for three full days a week for a
three-month period. Consultant shall be responsible for submitting to
Quarterdeck semi-monthly invoices for payment detailing actual days worked,
1
<PAGE> 2
including any necessary supporting documentation. Mr. Lee will also be
entitled to compensation as a director for board meetings which he attends on
days he is not otherwise serving as a consultant.
1.3 Options. Lee shall be granted options to purchase
100,000 shares of the common stock of Quarterdeck under Quarterdeck's Stock
Incentive Plan.
1.4 Expenses. Consultant shall be entitled to
reimbursement of expenses incurred in the performance of his obligations in
accordance with Quarterdeck's reimbursement policy.
2.1 Independent Contractor. In performing the duties
required hereunder, Consultant shall be an independent contractor with respect
to Quarterdeck and shall not be an employee of Quarterdeck, and shall not be
entitled to any Quarterdeck employment rights or benefits.
2.2 Facilities. All consulting services to be performed
by Consultant hereunder shall be performed at Quarterdeck's facilities, unless
specifically authorized below to be performed elsewhere. Consultant shall
utilize such facilities in accordance with good industry standards.
3. Term of Agreement. This Agreement shall commence on the
Effective Date and shall terminate at the end of six months unless extended by
written agreement; provided, that this Agreement may be terminated by
Quarterdeck prior thereto at such time as Quarterdeck appoints a chief
executive officer who assumes office.
4. Other Employment or Relationships.
4.1 Other Employment. Quarterdeck acknowledges that Lee
currently serves as the Chief Executive Officer of Wynd Communications and will
continue in that role during the term of this Agreement. During the term of
this Agreement, Consultant shall not provide consulting services to or engage
in any business which directly competes with Quarterdeck or provide services to
any other such business, directly or indirectly.
2
<PAGE> 3
5. Confidentiality. Consultant and Lee agree to be bound by and
reaffirm their obligations under Sections 5, 6 and 7 of the Consulting
Agreement dated July 18, 1994 between Quarterdeck and Consultant.
6. Notices. All notices, requests, demands and other
communications required or permitted to be given hereunder shall be in writing
and shall be deemed given (i) upon receipt, if given by personal delivery, (ii)
upon confirmation of delivery, if given by electronic facsimile, and (iii) upon
the third business day following mailing, if mailed by deposit in the United
States mail, with certification and postal charges prepaid, addressed:
If to Quarterdeck, to: Quarterdeck Corporation
13160 Mindanao Way
Marina del Rey, CA 90292-9705
Attention: General Counsel
Fax: (310) 309-3284
If to Consultant, to the address shown on the signature page hereof.
Any party to be given notice in accordance with this Section 6 may designate to
the other party another address, telecopier number or person for receipt of
notices hereunder.
7. Governing Law. This Agreement shall be construed and
interpreted in accordance with and governed in all respects by the laws of the
State of California.
8. Transfer and Assignment. The rights and obligations of
Consultant under this Agreement shall not be assigned or transferred by
Consultant without Quarterdeck's prior written consent.
9. Counterparts. This Agreement may be executed in several
counterparts and all documents so executed shall constitute one agreement,
binding on all of the parties hereto, notwithstanding that all of the parties
are not signatory to the original or the same counterpart.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
the date and year first above written.
3
<PAGE> 4
QUARTERDECK CORPORATION KING R. LEE & ASSOCIATES, INC.
By:------------------------------ -----------------------------------
Its:----------------------------- Signature
Address:
----------------------------------
----------------------------------
Federal Identification Number:
----------------------------------
King R. Lee
4
<PAGE> 1
EXHIBIT 10.10
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT entered into as of the 16th day of
January, 1996 by and between QUARTERDECK CORPORATION, a Delaware Corporation
(hereinafter referred to as "Company"), and BRADLEY D. SCHWARTZ (hereinafter
referred to as "Executive").
1. EMPLOYMENT
1.1 Company hereby employs Executive to render services
during the term of this Agreement as Senior Vice President, General Counsel and
Corporate Secretary of the Company and Executive hereby accepts such employment
and agrees to perform his obligations and agreements herein set forth. During
the term of this Agreement, Executive shall be a full-time employee of the
Company and shall devote all of his business time and attention to the
performance of his duties hereunder. Notwithstanding the foregoing, Executive
will be permitted to engage in other business activities and charitable
activities that do not materially interfere with his duties to the Company. In
addition, Executive will be permitted to wind down his affairs as a partner of
the law firm of Gibson, Dunn & Crutcher for a reasonable period of time.
1.2 Executive shall be the senior officer in the legal
department and shall report directly to the Chief Executive Officer of the
Company.
2. COMPENSATION
2.1 Company shall pay to Executive a base salary
("Salary") of $170,000 per annum. Salary shall be payable in equal bi-weekly
installments, less applicable withholdings and deductions, in accordance with
Company's normal payroll practice. At the end of each year there shall be a
good faith review of Salary and Company may, in its sole discretion, increase
(but not decrease) the Salary at that time.
2.2 In addition to the Salary, Executive shall be
entitled to a bonus ("Bonus") of $110,000 multiplied by a "Multiplier." The
Multiplier will be based upon achievement of certain reasonable individual and
department goals proposed by Executive and the Bonus shall be paid on a
quarterly basis. (The Salary and the Bonus shall be referred to as the "Base
Compensation"). Executive shall receive an annual cost of living increase with
respect to the Base Compensation.
3. TERM
3.1 This Agreement shall commence as of the date of this
Agreement set forth above and, unless earlier terminated or extended in
accordance with the terms hereof, shall expire on the Expiration Date. The
"Expiration Date" shall initially be January 16, 2000; provided, however, that
commencing (and including) January 16, 1998, the Expiration Date shall be
extended by one day for each day that expires under this Agreement.
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4. STOCK OPTIONS
4.1 Company shall grant to Executive as of the date of
this Agreement options (the "Options") to purchase 100,000 shares of common
stock of the Company, $.001 par value per share ("Common Stock").
4.2 Executive shall be eligible for additional option
grants in the future commensurate with Executive's status as a senior executive
officer of the Company at least comparable to grants made to other senior
executives of the Company. The amount of any future option grants shall be at
the discretion of the Board of Directors or the Compensation Committee thereof.
5. BENEFITS
5.1 Executive shall be entitled to participate in any
benefit plan generally available to executive officers including, by way of
example, medical and dental plans for Executive and his family, vacation, the
Company's 401(k) Plan and the like. Company agrees to use its best efforts to
provide adequate health insurance coverage to Executive and Executive's spouse
and children; provided, however, if the Company is unable to obtain such
coverage with respect to Executive's spouse due to the existence of a
pre-existing condition it shall promptly reimburse Executive, on an after tax
basis, for all medical costs (including, but not limited to, doctors' fees and
expenses, hospitalization, treatment, medication and the like) of Executive's
spouse.
5.2 Company agrees to pay or reimburse Executive for
reasonable business, travel and entertainment expenses in accordance with
Company policy for executive officers upon the presentation of itemized
statements of such expenses.
5.3 Company shall provide Executive a reasonable
allowance for legal books and publications, seminars, memberships in
organizations, bar dues and similar fees for Executive and persons in the legal
department designated by Executive.
6. RELOCATION ALLOWANCE
6.1 Executive shall receive, in order to offset the
anticipated increases in mortgage and property taxes associated with owning a
residence in the West Los Angeles County area, an annual cost of living
allowance of not to exceed 10% of his Base Compensation, up to a cumulative
total of $90,000 over three years (the "Cost of Living Allowance"). The Cost
of Living Allowance shall be paid quarterly, within 30 days after the end of
each fiscal quarter, for up to three years beginning with the first fiscal
quarter after relocation. The Cost of Living Allowance shall terminate upon
the earlier to occur of (1) payments totaling $90,000 being made to Executive
under this Section 6.1 or (2) the price of the Company's Common Stock reaching
$45.00 after at least 50% of the Options have vested at a time when Executive
is not prohibited from selling shares of Common Stock under the Company's
Insider Trading Policy, under "pooling restrictions" or otherwise under any
agreement or applicable law.
6.2 Executive shall be reimbursed for all reasonable and
actual moving costs associated with the relocation of Executive's personal
residence to the West Los Angeles County area and Executive's office to the
Company's facilities. To the extent the aforementioned reimbursements are not
excludable from Executives gross income or deductible by Executive as qualified
moving expense for federal income tax purposes, Executive shall be paid an
amount in cash equal to a gross up factor calculated by dividing
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the expenses includable in gross income and not deductible by Executive by 58%
(assumes a 42% personal income tax rate) and subtracting from the result the
reimbursed expenses.
6.3 Executive will be reimbursed for rent (up to $4,200
per month for up to six months) for a home in the West Los Angeles County area
and for a security deposit to up to $8,400). The Company will provide
Executive with a loan bearing interest at the applicable federal rate
determined under Section 1274(d) of the Internal Revenue Code for purposes of
making a down payment on a residence in the West Los Angeles County area.
Executive will (if permitted by the senior lender) grant to the Company a
second lien on such residence to secure the loan.
6.4 Company shall reimburse Executive for all commissions
(including standard real estate brokerage commissions) and other costs and fees
incurred in connection with the lease and/or sale of his current residence.
7. TERMINATION
7.1 Executive's employment shall be deemed to have
terminated upon (i) Executive's death or Disability, (ii) Executive's
termination by the Company for Cause, or (iii) after one year from the date
hereof upon 30 days written notice of Executive's election to terminate his
employment. "Disability" for purpose of this paragraph 7.1 shall mean
Executive's inability to perform the essential functions of his position, with
reasonable accommodation, due to physical or mental disability, resulting in
Executive's absence from his duties hereunder on a full time basis for
twenty-six (26) consecutive weeks. "Cause" for purposes of this paragraph
shall mean a termination on the grounds of the Executive's personal gross
neglect of duties, willful misconduct or willful violation of any law which
subjects Employer or Executive to a felony conviction. Employer has the right
to terminate for Cause at any time. In the event of termination pursuant to
this paragraph 7.1, Base Compensation and other benefits due Executive
hereunder shall be prorated so that only that portion due for services rendered
prior to termination shall be payable hereunder.
7.2 In the event (i) Gaston Bastiaens ceases to be the
Chief Executive Officer of the Company and within 60 days of such event
Executive gives written notice of election to terminate this Agreement, or (ii)
a majority of the stock of the Company is acquired by another person or entity
or the Company is merged with another entity, or substantially all of the
assets of the Company are sold to another entity or a "Change in Control" (as
defined in the Company's 1990 Stock Option Plan) occurs, and within 60 days of
such event Executive gives written notice of election to terminate this
Agreement, Executive shall be entitled to the following benefits:
(i) Twelve months Salary plus an amount
equal to the maximum Bonus Executive could receive for such 12 month
period, payable in bi-weekly installments without offset or duty to
mitigate;
(ii) COBRA insurance coverage for
eighteen months, payments for such coverage to be made by the Company
monthly; and
(iii) A lump sum payment equal to the
amount by which $90,000 exceeds the cumulative Cost of Living
Allowance actually paid as of termination date; provided that if the
price of the Company's stock is in excess of
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$45.00 at such time and Executive is not then prohibited from selling
shares of Common Stock under the Company's Insider Trading Policy,
under "pooling restrictions" or otherwise under any agreement or
applicable law, no amount shall be payable pursuant to this
subparagraph (iii).
(iv) Executive shall be immediately
vested in 50% of Executive's unvested stock options outstanding on the
date of termination.
7.3 In the event Company terminates Executive without
Cause or Executive terminates his employment for Good Reason, Executive shall
be entitled to, in addition to all remedies under applicable law, all
compensation and benefits provided under this Agreement for the full term
hereof, without offset or duty to mitigate. "Good Reason" shall mean (i) the
Company relocates outside of the Los Angeles area, (ii) the Company materially
breaches this Agreement, or (iii) Executive is assigned duties by the Company
which constitutes a substantial diminution of his duties hereunder.
8. GENERAL PROVISIONS
8.1 Executive shall execute and deliver with this
Agreement, the Company's Standard Executive Confidentiality Agreement.
8.2 All notices and demands shall be in writing and shall
be served personally, telegraphically or via facsimile or by certified mail.
Service shall be deemed conclusively made at the time of service if personally
served, at the time the telegraph agency confirms to the sender delivery
thereof to the addressee if served telegraphically, at time of confirmation of
receipt if via facsimile, and twenty-four hours after deposit thereof properly
addressed and postage prepaid in the United States mail, if served by certified
mail. All notices or demands shall be given at the respective addresses of the
parties hereto as set forth in this Agreement. Any party may, by written
notice in compliance with this paragraph, alter or change the address or the
identity of the person to whom notice, or copy thereof, is to be sent.
8.3 A waiver in writing by either party of any of the
terms and conditions of this Agreement in any one instance shall not be deemed
or construed to be a
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waiver of such term or condition for the future, or of any subsequent breach
hereof. All remedies, rights, undertakings, obligations and agreements
contained in this Agreement shall be cumulative and none of them shall be in
limitation of any other remedy, right, undertaking, obligation or agreement of
either party.
8.4 All provisions of this Agreement which either
expressly or by implication survive any termination or expiration hereof shall
continue in full force and effect subsequent to said termination or expiration.
8.5 This Agreement shall be governed by and construed in
accordance with the laws of the State of California applicable to contracts
entered into and fully to be performed therein.
8.6 The parties shall execute the Company's form of
Indemnification Agreement for officers and directors.
8.7 If any provision of this Agreement, as applied to any
party or to any circumstance, shall be adjudged by a court to be void, invalid
or unenforceable, the same shall in no way affect any other provision of this
Agreement, the application of any such provision in any other circumstance, or
the validity or enforceability of this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the day and year first above written.
QUARTERDECK CORPORATION
By:/s/ Gaston Bastiaens
------------------------------------
Gaston Bastiaens
Chief Executive Officer
13160 Mindanao Way, 3rd Floor
Marina del Rey, California 90292
EXECUTIVE
By:/s/ Bradley D. Schwartz
------------------------------------
436 Paulette Place
La Canada, California 91011
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Exhibit 10.11
EMPLOYMENT AGREEMENT
THIS AGREEMENT, dated as of July 24, 1996, is made and entered
into between Quarterdeck Corporation, a Delaware corporation ("Quarterdeck")
and Anatoly Tikhman (the "Employee").
1. EMPLOYMENT. Quarterdeck shall employ the Employee
and the Employee shall enter the employ of Quarterdeck in the position of
President of VSI Acquisition Corporation. In addition, subsequent to the date
hereof and subject to and effective upon appointment by the Board of Directors
of Quarterdeck, Employee shall serve as a Senior Vice President of Quarterdeck
and as the General Manager of the Quarterdeck Utilities Division. This
Agreement shall have an initial term of two years terminating on July 24, 1998
(the "Initial Term"), unless sooner terminated in accordance with Section 5 of
this Agreement. At the expiration of such two-year period, the term of this
Agreement shall automatically be extended for successive one-year periods,
unless Quarterdeck or the Employee shall give written notice to the other at
least 30 days prior to the end of the applicable period of its intention to
terminate this Agreement.
2. POSITION AND DUTIES. During the term of employment,
the Employee shall be a full-time employee of Quarterdeck and shall devote all
of his business time and attention to the performance of his duties to
Quarterdeck.
3. COMPENSATION AND RELATED MATTERS.
(a) Annual Base Salary. The Employee shall
receive an aggregate base salary ("Annual Base Salary") of One Hundred Eighty
Thousand Dollars ($180,000) per annum payable in equal bi-weekly installments.
(b) Bonus Compensation. Employee shall be
eligible to receive an annual bonus in an amount not to exceed Ninety Thousand
Dollars ($90,000) ("Incentive Bonus Compensation"), determined in accordance
with the terms of the Management Performance Bonus Plan of Quarterdeck, or any
successor or replacement plan adopted by Quarterdeck and applicable to
individuals at the level of Employee. Such bonus shall be paid on a quarterly
basis.
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(c) Benefits. During the term of employment, the
Employee shall be entitled to participate in or receive benefits under any
employee benefit plan generally made available by Quarterdeck to individuals at
the level of Employee (collectively, "Benefits"), subject to and on a basis
consistent with the terms, conditions and overall administration of such plans
or arrangements for individuals at the level of Employee. Upon appointment of
Employee as a Senior Vice President of Quarterdeck, Quarterdeck shall agree to
provide indemnification to Employee under its Standard Indemnification
Agreement for its officers and directors. Employee shall be permitted to carry
over to Quarterdeck accrued vacation reflected on Vertisoft's balance sheet up
to a maximum of three weeks.
(d) Expenses. Quarterdeck or Vertisoft shall
reimburse the Employee for all reasonable travel and other business expenses
incurred by the Employee in the performance of his duties under this Agreement
upon Employee's submission of appropriately itemized documentation thereof in
accordance with Quarterdeck's reimbursement policy.
(e) Options. Upon commencement of the Employee's
employment by Quarterdeck on July 24, 1996, Employee was granted options to
acquire 250,000 shares of the common stock of Quarterdeck under Quarterdeck's
1990 Employee Stock Incentive Plan (the "Plan"). In addition, so long as
Employee has not materially breached this Agreement, on the one year
anniversary hereof, Employee shall be granted options to acquire 50,000
additional shares of the common stock of Quarterdeck under the Plan. All
options shall have an exercise price equal to the fair market value of the
Quarterdeck common stock on the date of grant.
4. COMPETITION.
(a) The Employee agrees that for the term of this
Agreement, he shall not, directly or indirectly, as principal, agent, employee,
employer, consultant, stockholder, partner or in any other individual or
representative capacity, engage in any business that competes, directly or
indirectly, with the business of Quarterdeck, Vertisoft and any of their
subsidiaries. Notwithstanding anything to the contrary herein, Employee may,
without violating the provisions of this Section 4, purchase and hold up to 5%
of any entity whose shares are publicly traded on the Nasdaq National Market or
any U.S. stock exchange, whether or not such entity is engaged in a Competitive
Business.
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In addition, for a period of six months after termination of this agreement,
Employee will not recruit or solicit any person who was an employee of or
consultant to Quarterdeck or any of its subsidiaries at the time of such
termination or three months prior thereto. Any provision of this Section 4
that is deemed invalid or unenforceable in any jurisdiction shall, as to that
jurisdiction and subject to this paragraph be ineffective to the extent of such
invalidity or unenforceability, without affecting in any way the remaining
provisions of this paragraph in such jurisdiction or rendering that or any
other provisions of this Agreement invalid or unenforceable in any other
jurisdiction. If any covenant should be deemed invalid or unenforceable
because of its scope, geographical area or duration, or any combination
thereof, such covenant shall be modified and reformed so that the scope,
geographic area and duration of the covenant is reduced only to the minimum
extent necessary to render the modified covenant valid and enforceable.
5. TERMINATION. The Employee's employment hereunder may
be terminated by Quarterdeck or the Employee, as applicable upon expiration of
this Agreement pursuant to Section 1 of this Agreement, and under the following
circumstances:
(a) Death. The Employee's employment hereunder
shall terminate upon his death. In the case of the Employee's death,
Quarterdeck shall pay to the Employee's beneficiaries or estate, as
appropriate, (i) promptly after the Employee's death, the unpaid Annual Base
Salary to which he is entitled pursuant to subsection 3(a) prorated through the
date of termination and (ii) as soon as practicable after the close of
Quarterdeck's fiscal quarter in which the Employee's death occurs, a prorated
portion of any unpaid Incentive Bonus Compensation. This subsection 5(a) shall
not limit the entitlement of the Employee's estate or beneficiaries to any
death or other benefits then available to the Employee under any life insurance
or other benefit plan or policy which is maintained by Quarterdeck for the
Employee's benefit.
(b) Cause. Quarterdeck may terminate the
Employee's employment hereunder for Cause (as defined below). In the case of
the Employee's termination for Cause, Quarterdeck shall promptly pay to the
Employee the unpaid Annual Base Salary to which he is entitled pursuant to
subsection 3(a) prorated through the date the Employee is terminated and the
Employee shall be entitled to no other compensation. For purposes of this
Agreement, Quarterdeck shall have "Cause" to terminate the Employee's
employment hereunder if the Employee has (1) engaged in acts or omissions with
respect to Quarterdeck or the Company or any subsidiary of Quarterdeck or the
Company which constitute fraud; (2) breached any non-competition covenant with
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the Company or Quarterdeck; (3) committed willful or intentional acts
constituting a material breach of this Agreement; or (4) been convicted of a
felony or crime of moral turpitude.
(c) Disability.
(i) If Quarterdeck determines in good
faith, after considering all relevant medical evidence, that the Employee has
incurred a Disability (as defined below) during the term of employment,
Quarterdeck shall give the Employee written notice of termination of the
Employee's employment. In such event, the Employee's employment with
Quarterdeck shall terminate effective upon receipt of such notice by the
Employee. Quarterdeck shall pay to the Employee, upon the Employee's
termination, the unpaid Annual Base Salary to which he is entitled pursuant to
subsection 3(a) prorated through the Employee's termination. This subsection
5(c) shall not limit the entitlement of the Employee to any disability or other
benefits then available to the Employee under any disability insurance or other
benefit plan or policy which is maintained by Quarterdeck for the Employee's
benefit.
(ii) For the purpose of this Section,
"Disability" shall mean the Employee's failure to perform his duties to
Quarterdeck on a full-time basis for a total of six months during any
twelve-month period as a result of incapacity due to a mental or physical
illness or injury which is determined by a physician selected by the Board and
acceptable to the Employee or the Employee's legal representative (such
agreement as to acceptability not to be withheld, delayed or conditioned
unreasonably).
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6. CONFIDENTIAL INFORMATION.
6.1 Disclosure. Employee may have knowledge of,
and during the term of this Agreement, Quarterdeck or its subsidiaries may
supply to Employee, certain trade secrets and Confidential Information (as
hereinafter defined). Employee agrees to limit his use of such material to
what is necessary to perform the services under this Agreement and to abide by
all restrictions imposed by Quarterdeck or its subsidiaries on the use of such
material including the restrictions contained in this Agreement. Employee
shall not, directly or indirectly, communicate, divulge, disclose, reveal,
report, publish or transfer to any person or entity, or use to the detriment of
Quarterdeck or use for the benefit of Employee or any other person or entity,
or misuse in any way, any Confidential Information or trade secrets of
Quarterdeck or its subsidiaries, without the prior
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written consent of the Chief Executive Officer and the General Counsel of
Quarterdeck. Employee shall take such precautions as shall be reasonably
calculated to keep strictly confidential such Confidential Information and
trade secrets and to prevent the unauthorized disclosure thereof, provided,
however, that Employee shall be entitled to disclose such Confidential
Information, if necessary, in order to defend any claim under federal or state
laws, rules or regulations or pursuant to an order of a court or government
agency, provided, however, further that in the case of any such disclosure, the
disclosure shall be limited to the greatest extent reasonably possible under
the circumstances and Employee shall use his best efforts to provide
Quarterdeck with sufficient advance notice prior to the disclosure to permit
Quarterdeck to seek a protective order or other order protecting the
Confidential Information from public disclosure. Employee agrees that all
Confidential Information shall be the sole property of Quarterdeck (or, as
applicable, its subsidiaries). After termination of this Agreement, Employee
shall not utilize or divulge in any way such Confidential Information and trade
secrets. Employee's obligations under this Section 6.1 shall continue beyond
the termination of this Agreement for any reason and are in addition to
Employee's obligations under any other confidential agreement with Quarterdeck
or its subsidiaries.
6.2 Confidential Information. For the purposes
of this Agreement, the term "Confidential Information" shall mean information
or material proprietary to Quarterdeck or any related or affiliated person or
entity or any information or material designated as Confidential Information by
Quarterdeck or any related or affiliated person or entity, whether or not owned
or developed by Quarterdeck, which Employee develops or which Employee may
obtain knowledge of or access to, through or as a result of, Employee's prior
or present relationship with Quarterdeck or any related or affiliated person or
entity (including information conceived, originated, discovered or developed in
whole or in part by Employee while acting hereunder). Without limiting the
generality of the foregoing, Confidential Information shall include, but is not
limited to, the following types of information and other information of a
similar nature (whether or not reduced to writing or still in development):
information that has been created, discovered, developed, or otherwise has
become known to Quarterdeck or its subsidiaries and/or in which property rights
have been assigned or otherwise conveyed to Quarterdeck or its subsidiaries,
which has commercial value in the businesses in which Quarterdeck is engaged
including, without limitation, works of authorship, trade secrets, processes,
software and firmware (including any operating programs, whether in object
code, source code or any other form, whether or not embedded in a physical
medium), magnetic media, prototypes, formulae, machines, components,
inventions, creations, systems, designs, methods, materials, assembly
techniques, structures, pending patent applications, compositions,
improvements, ideas, specifications or arts relating to products and services,
or to the manufacture, assembly, testing, sale and service of products and
services, as well as financial projections, financing plans, marketing plans,
strategies, forecasts, customer lists, and other business information related
to present or prospective
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business activities of Quarterdeck or its subsidiaries, and documents, records,
notebooks, drawings, photographs and similar repositories or representations of
such information. The term "Confidential Information" shall not include
information which (i) is or becomes generally available to the public other
than as a result of a disclosure by the Employee in violation of this
Agreement, (ii) is or becomes available to the Employee on a non-confidential
basis from a source other than Quarterdeck, provided that such source is not
known by the Employee to be furnishing such information to the Employee in
violation of a confidentiality agreement with or other obligation of secrecy to
Quarterdeck, or (iii) is derived from information that is not Confidential
Information pursuant to any of the foregoing clauses and does not contain any
Confidential Information.
6.3 Delivery Upon Termination. Upon the
termination for whatever reason of this Agreement, Employee shall deliver to
Quarterdeck all drawings, blueprints, computer disks, computer programs, notes,
memoranda, specifications, designs, devices, documents, data, programs and
other material of any nature containing or disclosing any Confidential
Information or pertaining to Employee's work with Quarterdeck, in whatever form
or media, and any reproduction of any of the foregoing.
6.4 Proprietary Information of Others. Employee
represents that the performance by Employee of the terms of this Agreement do
not, to the best of Employee's present knowledge and belief, and will not
breach any confidential disclosure agreement with or duty owed to another
person or entity. Further, Employee represents that he will not bring to
Quarterdeck or use pursuant to this Agreement the proprietary information of
another person or entity without first obtaining written authorization for the
possession and use of such proprietary information from the owner thereof.
7. ASSIGNMENT OF WORKS MADE FOR HIRE. Employee hereby
agrees that any ideas or original works of authorship, in whole or in part
conceived or made by Employee during or after the term of his relationship with
Quarterdeck, which are made through the use of any Confidential Information,
which relate to the Company's business or which result from any work performed
by Employee for Quarterdeck shall be deemed to be "works made for hire" and
that the Company shall be deemed the author thereof under the U.S. Copyright
Act (Title 17 of the U.S. Code); provided, however, that in the event and to
the extent such works are determined not to constitute "works made for hire" as
a matter of law, Employee hereby irrevocably assigns and
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transfers to Quarterdeck all right, title and interest in such works, including
but not limited to copyrights.
8. INJUNCTIVE RELIEF. Employee acknowledges that
disclosure of any Confidential Information by Employee will give rise to
irreparable injury to Quarterdeck, inadequately compensable in damages.
Accordingly, in the event of an actual or threatened breach by Employee of the
provisions of this Agreement, Quarterdeck shall be entitled to injunctive
relief restraining Employee from such breach or threatened breach. Nothing
herein shall be construed as prohibiting Quarterdeck from pursuing any other
remedies available to them for such breach or threatened breach, including the
recovery of damages from Employee. Employee acknowledges and agrees that the
covenants contained herein are necessary for the protection of Quarterdeck's
legitimate business interests and are reasonable in scope and content.
9. CERTAIN BENEFITS.
9.1. Change of Control. In the event a majority
of the stock of Quarterdeck is acquired by another person or entity which is
not an affiliate of Quarterdeck prior to such transaction ("Entity"), or the
Company is merged with another Entity, or substantially all of the assets of
the Company are sold to another Entity, and within 60 days of such event
Employee gives written notice of election to terminate this Agreement, Employee
shall be entitled to the following benefits:
(i) Twelve months Annual Base Salary plus an
amount equal to the maximum Bonus Executives could receive for
such 12 month period, payable in bi-weekly installments;
(ii) COBRA insurance coverage for eighteen months,
payments for such coverage to be made by the Company monthly;
and
(iii) Employee shall be immediately vested in 50%
of Employee's unvested stock options outstanding on the date
of termination. Such options shall be subject to the
termination provisions contained in the standard form of stock
option agreement of Quarterdeck.
Any and all rights to monetary payments not yet payable by the
Company under this Sections 9.1 shall cease and terminate at such time as
Employee obtains other full-time employment.
9.2 Certain Termination Events. In the event (i)
Quarterdeck terminates Employee without Cause, (ii) the Company materially
breaches this Agreement, or (iii) Employee is assigned duties by the Company
which constitutes substantial diminution of his duties hereunder, and, in the
case of clauses (ii) and (iii) hereof, Employee elects to terminate this
Agreement and cease to
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be an employee of Quarterdeck within sixty days of such event, Employee shall
be entitled to, in addition to all remedies under applicable law, all
compensation and benefits provided under this Agreement for the full term
hereof including full vesting of Employee's stock options that would have
vested during the term of this Agreement, without offset or duty to mitigate.
10. BINDING ON SUCCESSORS. This Agreement shall be
binding upon and inure to the benefit of Quarterdeck, the Employee and their
respective successors, assigns, personal and legal representatives, executors,
administrators, heirs, distributees, devisees, and legatees, as applicable.
11. GOVERNING LAW. This Agreement is being made and
executed in and is intended to be performed in the State of California and
shall be governed, construed, interpreted and enforced in accordance with the
substantive laws of the State of California, without regard to the conflict of
laws principles thereof.
12. VALIDITY. The invalidity or unenforceability of any
provision or provisions of this Agreement shall not affect the validity or
enforceability of any other provision of this Agreement, which shall remain in
full force and effect.
13. NOTICES. Any notice, request, claim, demand,
document and other communication hereunder to any party shall be effective upon
receipt (or refusal of receipt) and shall be in writing and delivered
personally or sent by telex, telecopy, or certified or registered mail, postage
prepaid, as follows:
(a) If to Quarterdeck, addressed to the principal
offices of Quarterdeck to the attention of the Chief Executive Officer;
(b) If to the Employee, to him at the address set
forth below under his signature;
or at any other address as any party shall have specified by notice in writing
to the other parties.
14. COUNTERPARTS. This Agreement may be executed in
several counterparts, each of which shall be deemed to be an original, but all
of which together will constitute one and the same Agreement.
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15. ENTIRE AGREEMENT. The terms of this Agreement are
intended by the parties to be the final expression of their agreement with
respect to the employment of the Employee by Quarterdeck and may not be
contradicted by evidence of any prior or contemporaneous agreement. The
parties further intend that this Agreement shall constitute the complete and
exclusive statement of its terms and that no extrinsic evidence whatsoever may
be introduced in any judicial, administrative or other legal proceeding to vary
the terms of this Agreement. This Agreement supersedes any obligations of
Vertisoft Systems, Inc. under any employment or consulting agreement with
Employee.
16. ATTORNEYS' FEES. In the event that either party
shall bring an action in connection with the performance, breach or
interpretation hereof, then the prevailing party in such action as determined
by the court having jurisdiction shall be entitled to recover from the losing
party in such action, as determined by the court having jurisdiction, all
reasonable costs and expenses of such litigation, including attorneys' fees,
court costs, costs or investigation and other costs reasonably related to such
litigation, in such amount as may be determined in the discretion of the court
having jurisdiction.
17. AMENDMENTS; WAIVERS. This Agreement may not be
modified, amended, or terminated except by an instrument in writing, signed by
the Employee and Quarterdeck. By an instrument in writing similarly executed,
the Employee or Quarterdeck may waive compliance by the other party or parties
with any provision of this Agreement that such other party was or is obligated
to comply with or perform; provided, however, that such waiver shall not
operate as a waiver of, or estoppel with respect to, any other or subsequent
failure. No failure to exercise and no delay in exercising any right, remedy
or power hereunder shall preclude any other or further exercise of any other
right, remedy or power provided herein or by law or in equity.
18. CUMULATIVE REMEDIES. Each and all of the several
rights and remedies provided in this Agreement, or by law or in equity, shall
be cumulative, and no one of them shall be exclusive of any other right or
remedy, and the exercise of any one of such rights or remedies shall not be
deemed a waiver of, or an election to exercise, any other such right or remedy.
No waiver of any term or condition of this Agreement shall be construed as a
waiver of any other term or condition; nor shall any waiver of any default
hereunder be construed as a waiver of any other default hereunder.
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<PAGE> 11
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date and year first above written.
EMPLOYEE:
Anatoly Tikhman
Address: _______________________________
___________________________________________
QUARTERDECK CORPORATION,
a Delaware corporation
By:
Name:
Title:
<PAGE> 1
Exhibit 10.12
EMPLOYMENT AGREEMENT
THIS AGREEMENT, dated as of September 16, 1996, is made and
entered into between Quarterdeck Corporation, a Delaware corporation
("Quarterdeck") and Joseph Fusco (the "Employee").
1. EMPLOYMENT. Quarterdeck shall employ the Employee
and the Employee shall enter the employ of Quarterdeck. This Agreement shall
have a term of two years unless sooner terminated in accordance with Section 5
of this Agreement; provided, however, that Quarterdeck may terminate this
Agreement and Employee's employment "at will" subject to Section 5(c) hereof.
At the end of such two-year period, this Agreement shall automatically be
renewed for successive one-year periods unless within 30 days prior to the end
of the two-year period or any successive one-year period either party gives the
other party written notice of its desire not to renew this Agreement.
2. POSITION AND DUTIES. During the term of employment,
the Employee shall be a full-time employee of Quarterdeck and shall devote all
of his business time and attention to the performance of his duties to
Quarterdeck. Employee shall initially serve as a Vice President of Quarterdeck
and General Manager of the Utilities Business Unit.
3. COMPENSATION AND RELATED MATTERS.
(a) Annual Base Salary. The Employee shall
receive an aggregate base salary ("Annual Base Salary") of One Hundred
Thirty-Five Thousand Dollars ($135,000) per annum.
(b) Bonus Compensation. Employee shall be
eligible to receive an annual target bonus in an amount of Sixty-Seven Thousand
Five Hundred Dollars ($67,500) ("Incentive Bonus Compensation"), payable on a
quarterly basis, determined in accordance with the terms of the Management by
Objective Plan of Quarterdeck, or any successor or replacement plan adopted by
Quarterdeck and contingent upon attainment of objectives mutually agreed to by
Employee and the Chief Executive Officer of Quarterdeck.
(c) Benefits. On the first month of the following
30 days of employment, you will be eligible for health, dental, vision, life
and long-term disability benefits subject to the terms, conditions, and
limitations contained in the applicable plan documents which may be modified by
Quarterdeck in the future. During the term of employment, the Employee shall
be entitled to
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<PAGE> 2
participate in or receive benefits under any other employee benefit plan
generally made available by Quarterdeck to individuals at the level of
Employee, subject to and on a basis consistent with the terms, conditions and
overall administration of such plans or arrangements for individuals at the
level of Employee; provided, however, that Employee shall be entitled to four
weeks paid vacation per year.
(d) Expenses. Quarterdeck shall reimburse the
Employee for all reasonable travel and other business expenses incurred by the
Employee in the performance of his duties under this Agreement upon Employee's
submission of appropriately itemized documentation thereof in accordance with
Quarterdeck's reimbursement policy.
(e) Options. Employee will be granted options to
purchase 75,000 shares of the common stock of Quarterdeck under Quarterdeck's
Employee Stock Option Plan. Such options shall be subject to approval of the
Board of Directors of Quarterdeck or a committee thereof. The options shall
have an exercise price equal to the fair market value of the Quarterdeck common
stock on the date of grant. The options shall vest 25% per year over a
four-year period.
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<PAGE> 3
4. COMPETITION.
(a) The Employee agrees that for the term of this
Agreement and for the Severance Period (as defined below), if applicable, he
shall not, directly or indirectly, as principal, agent, employee, employer,
consultant, stockholder, partner or in any other individual or representative
capacity, engage in any business that competes, directly or indirectly, with
the business of Quarterdeck or any of its subsidiaries. Notwithstanding
anything to the contrary herein, Employee may, without violating the provisions
of this Section 4, purchase and hold up to 5% of any entity whose shares are
publicly traded on the Nasdaq National Market or any U.S. stock exchange,
whether or not such entity is engaged in a Competitive Business. In addition,
Employee agrees that for a period of six months after the termination of his
employment, Employee shall not recruit, attempt to hire, solicit, or assist
others, in recruiting or hiring, any person who was an employee of or
consultant to Quarterdeck or any of its subsidiaries at the time of termination
of his employment or during a period of three months prior thereto. Any
provision of this Section 4 that is deemed invalid or unenforceable in any
jurisdiction shall, as to that jurisdiction and subject to this paragraph be
ineffective to the extent of such invalidity or unenforceability, without
affecting in any way the remaining provisions of this paragraph in such
jurisdiction or rendering that or any other provisions of this Agreement
invalid or unenforceable in any other jurisdiction. If any covenant should be
deemed invalid or unenforceable because of its scope, geographical area or
duration, or any combination thereof, such covenant shall be modified and
reformed so that the scope, geographic area and duration of the covenant is
reduced only to the minimum extent necessary to render the modified covenant
valid and enforceable.
5. TERMINATION. The Employee's employment hereunder may
be terminated by Quarterdeck or the Employee, as applicable upon expiration of
this Agreement pursuant to Section 1 of this Agreement, and under the following
circumstances:
(a) Death. The Employee's employment hereunder
shall terminate upon his death. In the case of the Employee's death,
Quarterdeck shall pay to the Employee's beneficiaries or estate, as
appropriate, (i) promptly after the Employee's death, the unpaid Annual Base
Salary to which he is entitled pursuant to subsection 3(a) prorated through the
date of termination and (ii) as soon as practicable after the close of
Quarterdeck's fiscal quarter in which the Employee's death occurs, a prorated
portion of any unpaid Incentive Bonus Compensation. This subsection 5(a) shall
not limit the entitlement of the Employee's estate or beneficiaries to any
death or other benefits then available to the Employee under any life insurance
or other benefit plan or policy which is maintained by Quarterdeck for the
Employee's benefit.
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<PAGE> 4
(b) Cause. Quarterdeck may terminate the
Employee's employment hereunder for Cause (as defined below). In the case of
the Employee's termination for Cause, Quarterdeck shall promptly pay to the
Employee the unpaid Annual Base Salary to which he is entitled pursuant to
subsection 3(a) prorated through the date the Employee is terminated and the
Employee shall be entitled to no other compensation. For purposes of this
Agreement, Quarterdeck shall have "Cause" to terminate the Employee's
employment hereunder upon a finding by the Board of Directors of Quarterdeck
(the "Board") that the Employee has (1) engaged in acts or omissions with
respect to Quarterdeck or the Company or any subsidiary of Quarterdeck or the
Company which constitute intentional misconduct, fraud or dishonesty; (2)
breached any non-competition covenant with the Company or Quarterdeck; (3)
committed willful or intentional acts constituting a material breach of this
Agreement; (4) been convicted of a felony or crime of moral turpitude or (5)
committed other acts constituting intentional misconduct or dishonesty that in
the reasonable discretion of the Board are likely to have a material adverse
effect on the Company, (6) consistently failed to perform at a level
commensurate with his position and compensation level or habitual neglect of
duties, or (7) disregarded policies of Quarterdeck that cause material loss or
damage to Quarterdeck.
(c) At Will. Quarterdeck may terminate the
Employee's employment hereunder "at will" at any time, provided, however, that
if such termination is prior to the expiration of the term of this Agreement
and is not for Cause, Quarterdeck shall (i) promptly pay to Employee the unpaid
Annual Base Salary to which he is entitled pursuant to subsection 3(a) prorated
through the date of termination, (ii) pay to Employee as soon as practicable
after the close of Quarterdeck's fiscal quarter in which such termination
occurs, a prorated portion of any unpaid Incentive Bonus Compensation to which
he would have been entitled to, (iii) subject to continued compliance with
Section 4 and the other terms of this Agreement that by their terms remain
applicable after termination of employment and execution of a release in a form
reasonably satisfactory to Quarterdeck, pay to Employee six months (the
"Severance Period") Annual Base Salary (at Employee's then current level),
payable over such six-month period in accordance with Quarterdeck's normal
payroll policy.
(d) Disability.
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<PAGE> 5
(i) If Quarterdeck determines in good
faith, after considering all relevant medical evidence, that the Employee has
incurred a Disability (as defined below) during the term of employment,
Quarterdeck shall give the Employee written notice of termination of the
Employee's employment. In such event, the Employee's employment with
Quarterdeck shall terminate effective upon receipt of such notice by the
Employee. Quarterdeck shall pay to the Employee, upon the Employee's
termination, the unpaid Annual Base Salary to which he is entitled pursuant to
subsection 3(a) prorated through the Employee's termination. This subsection
5(c) shall not limit the entitlement of the Employee to any disability or other
benefits then available to the Employee under any disability insurance or other
benefit plan or policy which is maintained by Quarterdeck for the Employee's
benefit.
(ii) For the purpose of this Section,
"Disability" shall mean the Employee's failure to perform his duties to
Quarterdeck on a full-time basis for a total of six months during any
twelve-month period as a result of incapacity due to a mental or physical
illness or injury which is determined by a physician selected by the Board and
acceptable to the Employee or the Employee's legal representative (such
agreement as to acceptability not to be withheld, delayed or conditioned
unreasonably).
(e) Voluntarily by Employee. Employee may
terminate her employment hereunder at any time upon 45 days' prior written
notice to Quarterdeck. Quarterdeck shall pay to Employee, upon Employee's
termination, the unpaid Annual Base Salary to which she is entitled pursuant to
subsection 3(a) prorated through Employee's termination.
6. CONFIDENTIAL INFORMATION.
6.1 Disclosure. Employee may have knowledge of,
and during the term of this Agreement, Quarterdeck or its subsidiaries may
supply to Employee, certain trade secrets and Confidential Information (as
hereinafter defined). Employee agrees to limit its use of such material to
what is necessary to perform the services under this Agreement and to abide by
all restrictions imposed by Quarterdeck or its subsidiaries on the use of such
material including the restrictions contained in this Agreement. Employee
shall not, directly or indirectly, communicate, divulge, disclose, reveal,
report, publish or transfer to any person or entity, or use to the detriment of
Quarterdeck or use for the benefit of Employee or any other person or entity,
or misuse in any way, any Confidential Information or trade secrets of
Quarterdeck or its subsidiaries, without the prior written consent of the chief
executive officer and the general counsel of Quarterdeck. Employee shall
5
<PAGE> 6
take such precautions as shall be reasonably calculated to keep strictly
confidential such Confidential Information and trade secrets and to prevent the
unauthorized disclosure thereof, provided, however, that Employee shall be
entitled to disclose such Confidential Information, if necessary, in order to
defend any claim under federal or state laws, rules or regulations or pursuant
to an order of a court or government agency, provided, however, further that in
the case of any such disclosure, the disclosure shall be limited to the
greatest extent reasonably possible under the circumstances and Employee shall
use his best efforts to provide Quarterdeck with sufficient advance notice
prior to the disclosure to permit Quarterdeck to seek a protective order or
other order protecting the Confidential Information from public disclosure.
Employee agrees that all Confidential Information shall be the sole property of
Quarterdeck (or, as applicable, its subsidiaries). After termination of this
Agreement, Employee shall not utilize or divulge in any way such Confidential
Information and trade secrets. Employee's obligations under this Section 6.1
shall continue beyond the termination of this Agreement for any reason.
Employee's obligations hereunder are in addition to Employee's obligation under
any other confidentiality agreement entered into between Quarterdeck and
Employee.
6.2 Confidential Information. For the purposes
of this Agreement, the term "Confidential Information" shall mean information
or material proprietary to Quarterdeck or any related or affiliated person or
entity or any information or material designated as Confidential Information by
Quarterdeck or any related or affiliated person or entity, whether or not owned
or developed by Quarterdeck, which Employee develops or which Employee may
obtain knowledge of or access to, through or as a result of, Employee's prior
or present relationship with Quarterdeck or any related or affiliated person or
entity (including information conceived, originated, discovered or developed in
whole or in part by Employee while acting hereunder). Without limiting the
generality of the foregoing, Confidential Information shall include, but is not
limited to, the following types of information and other information of a
similar nature (whether or not reduced to writing or still in development):
information that has been created, discovered, developed, or otherwise has
become known to Quarterdeck or its subsidiaries and/or in which property rights
have been assigned or otherwise conveyed to Quarterdeck or its subsidiaries,
which has commercial value in the businesses in which Quarterdeck is engaged
including, without limitation, works of authorship, trade secrets, processes,
software and firmware (including any operating programs, whether in object
code, source code or any other form, whether or not embedded in a physical
medium), magnetic media, prototypes, formulae, machines, components,
inventions, creations, systems, designs, methods, materials, assembly
techniques, structures, pending patent applications, compositions,
improvements, ideas, specifications or arts relating to products and services,
or to the manufacture, assembly, testing, sale and service of products and
services, as well as financial projections, financing plans, marketing plans,
strategies, forecasts, customer lists, and other business information related
to present or prospective business activities of Quarterdeck or its
subsidiaries, and documents, records, notebooks, drawings, photographs and
similar repositories or representations of such information. The term
"Confidential
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<PAGE> 7
Information" shall not include information which (i) is or becomes generally
available to the public other than as a result of a disclosure by the Employee
in violation of this Agreement, (ii) is or becomes available to the Employee on
a non-confidential basis from a source other than Quarterdeck, provided that
such source is not known by the Employee to be furnishing such information to
the Employee in violation of a confidentiality agreement with or other
obligation of secrecy to Quarterdeck, or (iii) is derived from information that
is not Confidential Information pursuant to any of the foregoing clauses and
does not contain any Confidential Information.
6.3 Delivery Upon Termination. Upon the
termination for whatever reason of this Agreement, Employee shall deliver to
Quarterdeck all drawings, blueprints, computer disks, computer programs, notes,
memoranda, specifications, designs, devices, documents, data, programs and
other material of any nature containing or disclosing any Confidential
Information or pertaining to Employee's work with Quarterdeck, in whatever form
or media, and any reproduction of any of the foregoing.
6.4 Proprietary Information of Others. Employee
represents that the performance by Employee of the terms of this Agreement do
not, to the best of Employee's present knowledge and belief, and will not
breach any confidential disclosure agreement with or duty owed to another
person or entity. Further, Employee represents that he will not bring to
Quarterdeck or use pursuant to this Agreement the proprietary information of
another person or entity without first obtaining written authorization for the
possession and use of such proprietary information from the owner thereof.
7. ASSIGNMENT OF WORKS MADE FOR HIRE. Employee
hereby agrees that any ideas or original works of authorship, in whole or in
part conceived or made by Employee during or after the term of his relationship
with Quarterdeck, which are made through the use of any Confidential
Information, which relate to the Company's business or which result from any
work performed by Employee for Quarterdeck shall be deemed to be "works made
for hire" and that the Company shall be deemed the author thereof under the
U.S. Copyright Act (Title 17 of the U.S. Code); provided, however, that in the
event and to the extent such works are determined not to constitute "works made
for hire" as a matter of law, Employee hereby irrevocably assigns and transfers
to Quarterdeck all right, title and interest in such works, including but not
limited to copyrights.
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<PAGE> 8
8. INJUNCTIVE RELIEF. Employee acknowledges
that disclosure of any Confidential Information by Employee will give rise to
irreparable injury to Quarterdeck, inadequately compensable in damages.
Accordingly, in the event of an actual or threatened breach by Employee of the
provisions of this Agreement, Quarterdeck shall be entitled to injunctive
relief restraining Employee from such breach or threatened breach. Nothing
herein shall be construed as prohibiting Quarterdeck from pursuing any other
remedies available to them for such breach or threatened breach, including the
recovery of damages from Employee. Employee acknowledges and agrees that the
covenants contained herein are necessary for the protection of Quarterdeck's
legitimate business interests and are reasonable in scope and content.
9. BINDING ON SUCCESSORS. This Agreement shall
be binding upon and inure to the benefit of Quarterdeck, the Employee and their
respective successors, assigns, personal and legal representatives, executors,
administrators, heirs, distributees, devisees, and legatees, as applicable.
10. GOVERNING LAW. This Agreement is being made
and executed in and is intended to be performed in the State of California and
shall be governed, construed, interpreted and enforced in accordance with the
substantive laws of the State of California, without regard to the conflict of
laws principles thereof.
11. VALIDITY. The invalidity or unenforceability
of any provision or provisions of this Agreement shall not affect the validity
or enforceability of any other provision of this Agreement, which shall remain
in full force and effect.
12. NOTICES. Any notice, request, claim, demand,
document and other communication hereunder to any party shall be effective upon
receipt (or refusal of receipt) and shall be in writing and delivered
personally or sent by telex, telecopy, or certified or registered mail, postage
prepaid, as follows:
(a) If to Quarterdeck, addressed to the principal
offices of Quarterdeck to the attention of the Chief Executive Officer;
(b) If to the Employee, to him at the address set
forth below under his signature;
or at any other address as any party shall have specified by notice in writing
to the other parties.
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13. COUNTERPARTS. This Agreement may be executed
in several counterparts, each of which shall be deemed to be an original, but
all of which together will constitute one and the same Agreement.
14. ENTIRE AGREEMENT. The terms of this
Agreement are intended by the parties to be the final expression of their
agreement with respect to the employment of the Employee by Quarterdeck and may
not be contradicted by evidence of any prior or contemporaneous agreement. The
parties further intend that this Agreement shall constitute the complete and
exclusive statement of its terms and that no extrinsic evidence whatsoever may
be introduced in any judicial, administrative or other legal proceeding to vary
the terms of this Agreement.
15. AMENDMENTS; WAIVERS. This Agreement may not
be modified, amended, or terminated except by an instrument in writing, signed
by the Employee and Quarterdeck. By an instrument in writing similarly
executed, the Employee or Quarterdeck may waive compliance by the other party
or parties with any provision of this Agreement that such other party was or is
obligated to comply with or perform; provided, however, that such waiver shall
not operate as a waiver of, or estoppel with respect to, any other or
subsequent failure. No failure to exercise and no delay in exercising any
right, remedy or power hereunder shall preclude any other or further exercise
of any other right, remedy or power provided herein or by law or in equity.
16. CUMULATIVE REMEDIES. Each and all of the
several rights and remedies provided in this Agreement, or by law or in equity,
shall be cumulative, and no one of them shall be exclusive of any other right
or remedy, and the exercise of any one of such rights or remedies shall not be
deemed a waiver of, or an election to exercise, any other such right or remedy.
No waiver of any term or condition of this Agreement shall be construed as a
waiver of any other term or condition; nor shall any waiver of any default
hereunder be construed as a waiver of any other default hereunder.
IN WITNESS WHEREOF, the parties have executed this
Agreement as of the date and year first above written.
EMPLOYEE:
Address: __________________________________
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QUARTERDECK CORPORATION,
a Delaware corporation
By:___________________________________________
Name:_________________________________________
Title:________________________________________
10
<PAGE> 1
EXHIBIT 10.29
THIRD AMENDMENT TO CREDIT AGREEMENT
THIS THIRD AMENDMENT TO CREDIT AGREEMENT (the "Amendment"), dated as of
September 30, 1996, is entered into by and between QUARTERDECK CORPORATION (the
"Borrower") and BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION (the
"Bank").
RECITALS
A. The Borrower and the Bank are parties to a Credit Agreement dated as
of February 14, 1996, as amended by that First Amendment to Credit Agreement
dated as of March 28, 1996, and that Waiver and Second Amendment to Credit
Agreement dated as of August 13, 1996 (as amended, the "Credit Agreement"),
pursuant to which the Bank has extended certain credit facilities to the
Borrower and its Acceptable Subsidiaries.
B. The Borrower has requested that the Bank agree to certain amendments
of the Credit Agreement.
C. The Bank is willing to amend the Credit Agreement, subject to the
terms and conditions of this Amendment.
NOW, THEREFORE, for valuable consideration, the receipt and adequacy of
which are hereby acknowledged, the parties hereto hereby agree as follows:
1. Defined Terms. Unless otherwise defined herein, capitalized terms
used herein shall have the meanings, if any, assigned to them in the Credit
Agreement.
2. Amendments to Credit Agreement.
(a) Subsection 7.01(d) of the Credit Agreement shall be amended and
restated in its entirety to read as follows:
"(d) indebtedness secured by liens permitted by subsections
7.02(f), (n), (o), (p) and (q)."
(b) Section 7.02 of the Credit Agreement shall be amended by
relettering subsection 7.02(q) as 7.02(r) and inserting the following subsection
(q) after the semicolon at the end of subsection (p) thereof:
"(q) liens on offshore assets (including accounts receivable but
excluding cash) owned by any offshore Subsidiary, securing
indebtedness of such offshore Subsidiary not to exceed in aggregate
principal amount at any one time the Equivalent Amount of
$5,000,000;"
3. Representations and Warranties. The Borrower hereby represents and
warrants to the Bank as follows:
<PAGE> 2
(a) No Default or Event of Default has occurred and is continuing.
(b) The execution, delivery and performance by the Borrower of this
Amendment have been duly authorized by all necessary corporate and other action
and do not and will not require any registration with, consent or approval of,
notice to or action by, any Person (including any governmental authority) in
order to be effective and enforceable. The Credit Agreement as amended by this
Amendment constitutes the legal, valid and binding obligations of the Borrower,
enforceable against it in accordance with its respective terms, without defense,
counterclaim or offset.
(c) All representations and warranties of the Borrower contained in
the Credit Agreement are true and correct as of the date hereof.
(d) The Borrower is entering into this Amendment on the basis of its
own investigation and for its own reasons, without reliance upon the Bank or any
other Person.
4. Effective Date. This Amendment will become effective as of the date
first above written (the "Effective Date"), provided that the Bank has received
from the Borrower a duly executed original (or, if elected by the Bank, an
executed facsimile copy) of this Amendment.
5. Consent of Guarantor. The Borrower, as guarantor with respect to the
obligations of the Acceptable Subsidiaries to the Bank under the Credit
Agreement, as amended by this Amendment, hereby reaffirms and agrees that each
Guaranty to which the Borrower is party, and all other documents and agreements
executed and delivered by the Borrower to the Bank in connection therewith, are
in full force and effect, without defense, offset or counterclaim.
6. Reservation of Rights. The Borrower acknowledges and agrees that the
execution and delivery by the Bank of this Amendment shall not be deemed to
create a course of dealing or otherwise obligate the Bank to execute similar
consents or amendments under the same or similar circumstances in the future.
7. Miscellaneous.
(a) Except as herein expressly amended, all terms, covenants and
provisions of the Credit Agreement are and shall remain in full force and effect
and all references therein to such Credit Agreement shall henceforth refer to
the Credit Agreement as amended by this Amendment. This Amendment shall be
deemed incorporated into, and a part of, the Credit Agreement.
(b) This Amendment shall be binding upon and inure to the benefit of
the parties hereto and thereto and their
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<PAGE> 3
respective successors and assigns. No third party beneficiaries are intended in
connection with this Amendment.
(c) This Amendment shall be governed by and construed in accordance
with the law of the State of California.
(d) This Amendment may be executed in any number of counterparts,
each of which shall be deemed an original, but all such counterparts together
shall constitute but one and the same instrument. Each of the parties hereto
understands and agrees that this document may be delivered by any party thereto
either in the form of an executed original or an executed original sent by
facsimile transmission to be followed promptly by mailing of a hard copy
original, and that receipt by the Bank of a facsimile transmitted document
purportedly bearing the signature of the Borrower shall bind the Borrower with
the same force and effect as the delivery of a hard copy original. Any failure
by the Bank to receive the hard copy executed original of such document shall
not diminish the binding effect of receipt of the facsimile transmitted executed
original of such document which hard copy ,page was not received by the Bank.
(e) This Amendment, together with the Credit Agreement, contains the
entire and exclusive agreement of the parties hereto with reference to the
matters discussed herein and therein. This Amendment supersedes all prior drafts
and communications with respect thereto. This Amendment may not be amended
except in accordance with the provisions of Section 9.05 of the Credit
Agreement.
(f) If any term or provision of this Amendment shall be deemed
prohibited by or invalid under any applicable law, such provision shall be
invalidated without affecting the remaining provisions of this Amendment or the
Credit Agreement, respectively.
(g) The Borrower covenants to pay to or reimburse the Bank, upon
demand, for all reasonable costs and expenses (including reasonable allocated
costs of in-house counsel) incurred in connection with the development,
preparation, negotiation, execution and delivery of this Amendment.
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<PAGE> 4
IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Amendment as of the date first above written.
QUARTERDECK CORPORATION
By:/s/ Frank Greico
--------------------------------
Title: Chief Financial Officer
By:
Title:
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION
By: /s/ Cecilia Person
--------------------------------
Title: Vice President
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<PAGE> 1
EXHIBIT 10.30
WAIVER AND FOURTH AMENDMENT TO CREDIT AGREEMENT
THIS WAIVER AND FOURTH AMENDMENT TO CREDIT AGREEMENT ("Waiver and
Amendment"), dated as of December 17, 1996, is entered into by and between
QUARTERDECK CORPORATION (the "Borrower") and BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION (the "Bank").
RECITALS
A. The Bank and the Borrower are parties to a Credit Agreement dated as
of February 14, 1996, as amended by that First Amendment to Credit Agreement
dated as of March 28, 1996, that Waiver and Second Amendment to Credit Agreement
dated as of August 13, 1996, and that Third Amendment to Credit Agreement dated
as of September 30, 1996 (as amended, the "Credit Agreement"), pursuant to which
the Bank has extended certain credit facilities to the Borrower and its
Acceptable Subsidiaries.
B. The Borrower has reported to the Bank the existence of certain
Events of Default under the Credit Agreement. The Borrower has requested that
the Bank waive certain Events of Default and agree to certain amendments to the
Credit Agreement.
C. The Bank is willing to waive certain Events of Default under the
Credit Agreement, and to amend the Credit Agreement, subject to the terms and
conditions of this Waiver and Amendment.
NOW, THEREFORE, for valuable consideration, the receipt and adequacy of
which are hereby acknowledged, the parties hereto hereby agree as follows:
1. Defined Terms. Unless otherwise defined herein, capitalized terms
used herein shall have the meanings, if any, assigned to them in the Credit
Agreement.
2. Defaults and Waiver.
(a) For purposes of this Waiver and Amendment, the "Existing
Defaults" shall mean:
(i) the Event of Default existing on this date under
Section 8.01(c) of the Credit Agreement as a consequence of a
breach of the negative covenant set forth at Section 7.12 of
the Credit Agreement solely for the quarter ended September
30, 1996 and thereafter through the Effective Date;
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(ii) the Event of Default existing on this date under
Section 8.01(c) of the Credit Agreement as a consequence of a
breach of the negative covenant set forth at Section 7.13 of
the Credit Agreement solely for the quarter ended September
30, 1996 and thereafter through the Effective Date;
(iii) the Event of Default existing on this date
under Section 8.01(c) of the Credit Agreement as a consequence
of a breach of the negative covenant set forth at Section 7.14
of the Credit Agreement solely for the quarter ended September
30, 1996 and thereafter through the Effective Date; and
(iv) the Event of Default existing on this date under
Section 8.01(c) of the Credit Agreement as a consequence of a
breach of the negative covenant set forth at Section 7.15 of
the Credit Agreement solely for the quarter ended September
30, 1996 and thereafter through the Effective Date.
(b) Subject to and upon the terms and conditions hereof, the
Bank hereby waives the Existing Defaults.
(c) Nothing contained herein shall be deemed a waiver of (or
otherwise affect the Bank's ability to enforce) any other default or
Event of Default, including without limitation (i) any default or Event
of Default as may now or hereafter exist and arise from or otherwise be
related to the Existing Defaults (including without limitation any
cross-default arising under the Credit Agreement by virtue of any
matters resulting from the Existing Defaults), and (ii) any default or
Event of Default arising at any time after the Effective Date and which
arises under the same provisions of the Credit Agreement as those
implicated by any of the Existing Defaults.
3. Amendments to Credit Agreement.
(a) Section 1.01 of the Credit Agreement shall be amended at
the defined term "Borrowing Base" by amending and restating such
defined term in its entirety as follows:
"'Borrowing Base': (i) as of any date of
determination thereof before March 31, 1997, an amount equal
to 65% of the value of all Eligible Accounts (net of all bad
debt reserves, reserves for returns, discounts and marketing
funds, or similar reserves applicable thereto) (such net
amount, the "Net Eligible Accounts") outstanding at such date,
and (ii) as of any
2
<PAGE> 3
date of determination thereof on or after March 31, 1997,
75% of the Net Eligible Accounts."
(b) Section 1.01 of the Credit Agreement shall be amended by
deleting the defined term "Permitted Acquisition Charges" in its entirety.
(c) Section 2.02 of the Credit Agreement shall be amended by
adding the following as new subsection (c) after subsection (b) thereof:
"(c) Notwithstanding anything herein to the contrary,
no election may be made to have all or portions of Dollar
Advances bear interest at the Offshore Rate or to convert any
Reference Rate Advance into an Offshore Rate Advance unless,
as of the end of the fiscal quarter immediately preceding the
date of the requested borrowing or conversion, (i) the ratio
on a consolidated basis of (A) the Borrower's total
liabilities (which shall include all outstanding Advances (or
the Equivalent Amount thereof) and the L/C Outstanding Amount,
and exclude the outstanding principal amount of the
Subordinated Notes) was less than l.25 times Tangible Net
Worth (for purposes of this subsection 2.02(c) only, Tangible
Net Worth shall include the outstanding principal amount of
the Subordinated Notes) and (ii) on a consolidated basis, the
Borrower's (A) unencumbered cash, but including cash subject
to encumbrances in favor of the Bank pursuant to the Credit
Documents, plus (B) unencumbered short-term marketable
securities, less (C) all outstanding Advances (or the
Equivalent Amount thereof) and the L/C Outstanding Amount,
exceeded $10,000,000. "
(d) Section 3.01 shall be amended and restated in its entirety
to read as follows:
"3.01 Requests for Credit. Each request for an extension of
credit shall be made in writing on a form acceptable to the Bank or in
any other manner acceptable to the Bank. Each request for an extension
of or renewal of credit (including issuances, amendments or renewals of
letters of credit) shall include a certification by the chief financial
officer of the Borrower that (i) the representations and warranties of
the Borrower contained in this Agreement are and shall be true on and
as of the date of each extension of credit (except to the extent such
representations and warranties expressly refer to an earlier date, in
which case they shall be true and
3
<PAGE> 4
correct as of such earlier date), (ii) immediately prior to
and immediately after giving effect to such extension of
credit, no Default or Event of Default exists or shall exist
and there shall have occurred no Material Adverse Effect, and
(iii) after giving effect to such extension of credit, (x) the
aggregate of (A) all Dollar Advances, (B) the Equivalent
Amount of all Local Currency Advances and (C) the L/C
Outstanding Amount shall not exceed the Credit Limit or the
Borrowing Base, and (y) the L/C Outstanding Amount shall not
exceed $2,000,000 or the Borrowing Base."
(e) Section 6.02(d) of the Credit Agreement shall be amended
and restated in its entirety as follows:
"(d) within 25 days after the end of each calendar month
(or, if there exists an Event of Default, more frequently as
may be required by the Bank), (i) a Borrowing Base
Certificate, (ii) a detailed aging of all accounts receivable
outstanding as of such last day in form and substance
reasonably requested by the Bank, and (iii) a statement of
cash and short-term marketable securities on hand as of such
last day in form and substance reasonably requested by the
Bank; and"
(f) Section 7.12 of the Credit Agreement shall be amended and
restated in its entirety as follows:
"7.12 Minimum Cash Balance. The Borrower shall not
permit, on a consolidated basis, at any time when the
Borrower's consolidated quick ratio as of the last day of the
fiscal quarter immediately preceding the time of determination
was less than 1.00: 1.00, its balance of unencumbered cash,
but including cash subject to encumbrances in favor of the
Bank pursuant to the Credit Documents, and unencumbered
short-term marketable securities (less all outstanding
Advances (or the Equivalent Amount thereof) and the L/C
Outstanding Amount) to be less than $3,000,000. For purposes
of this Section 7.12, the Borrower's consolidated quick ratio
shall mean the ratio of (i) the sum of unencumbered cash,
unencumbered short-term cash investments, unencumbered
marketable securities not classified as long-term investments
and unencumbered accounts receivable (net of any bad debt
reserve), but in each case including such item to the extent
subject to encumbrances in favor of the Bank pursuant to the
Credit Documents, to (ii) current liabilities (which shall
include all outstanding
4
<PAGE> 5
Advances (or the Equivalent Amount thereof) and the L/C
Outstanding Amount), in each case on a consolidated basis.
(g) Section 7.13 of the Credit Agreement shall be amended and
restated in its entirety as follows:
"7.13 Total Liabilities to Tangible Net Worth. The
Borrower shall not permit as of the last day of any fiscal
quarter on a consolidated basis the Borrower's total
liabilities (which shall include all outstanding Advances (or
the Equivalent Amount thereof) and the L/C Outstanding Amount,
and exclude the outstanding principal amount of the
Subordinated Notes) to exceed 2.00 times Tangible Net Worth.
For purposes of this covenant only, Tangible Net Worth shall
include the outstanding principal amount of the Subordinated
Notes."
(h) Section 7.14 of the Credit Agreement shall be amended and
restated in its entirety as follows:
"7.14 Tangible Net Worth. The Borrower shall not
permit as of the last day of any fiscal quarter on a
consolidated basis its Tangible Net Worth to be less (i) its
Tangible Net Worth as of September 30, 1996 plus (ii) the net
proceeds from any equity securities issued after September 30,
1996, plus (iii) any increase in stockholders' equity
resulting from the conversion of debt securities to equity
securities after September 30, 1996."
(i) Section 7.15 of the Credit Agreement shall be amended and
restated in its entirety as follows:
"7.15 Profitability. The Borrower shall not permit as
of the last day of any fiscal quarter for the fiscal quarter
then ending on a consolidated basis (i) a negative net
operating income, which shall be defined as income before any
deduction for interest expense, taxes, or extraordinary items,
and without giving effect to any interest or other
non-operating income or (ii) a negative net income, which
shall be defined as net income after tax (excluding
extraordinary items)."
(f) Exhibit A to the Credit Agreement shall be
amended and restated in its entirety in the form of Exhibit A attached hereto.
(g) Exhibit B to the Credit Agreement shall be amended
5
<PAGE> 6
and restated in its entirety in the form of Exhibit B attached hereto.
4. Representations and Warranties. The Borrower hereby represents and
warrants to the Bank as follows:
(a) Other than the Existing Defaults, no Default or Event of
Default has occurred and is continuing.
(b) The execution, delivery and performance by the Borrower of
this Waiver and Amendment have been duly authorized by all necessary
corporate and other action and do not and will not require any
registration with, consent or approval of, notice to or action by, any
Person (including any governmental authority) in order to be effective
and enforceable. The Credit Agreement as amended by this Waiver and
Amendment constitutes the legal, valid and binding obligations of the
Borrower, enforceable against it in accordance with its respective
terms, without defense, counterclaim or offset.
(c) Subject to the Existing Defaults, all representations and
warranties of the Borrower contained in the Credit Agreement are true
and correct.
(d) The Borrower is entering into this Waiver and Amendment on
the basis of its own investigation and for its own reasons, without
reliance upon the Bank or any other Person.
5. Effective Date. This Waiver and Amendment will become effective as
of the date first above written (the "Effective Date"), provided that each of
the following conditions precedent are satisfied:
(a) The Bank has received from the Borrower a duly executed
original (or, if elected by the Bank, an executed facsimile copy) of
this Waiver and Amendment and from Datastorm Technologies, Inc.
("Datastorm") a duly executed original (or, if elected by the Bank, an
executed facsimile copy) of a Pledgor Acknowledgement and Consent in
the form attached hereto (the "Consent").
(b) The Bank has received from the Borrower a copy of a
resolution passed by the board of directors of such corporation,
certified by the Secretary or an Assistant Secretary of such
corporation as being in full force and effect on the date hereof,
authorizing the execution, delivery and performance of this Waiver and
Amendment.
6
<PAGE> 7
(c) All representations and warranties contained herein are
true and correct as of the Effective Date.
(d) The Bank has received from the Borrower the amount of
$10,000, representing payment in full of a non-refundable amendment fee
which amount the Borrower hereby covenants to pay to the Bank on
demand.
6. Consent of Guarantor. The Borrower, as guarantor with respect to the
obligations of the Acceptable Subsidiaries to the Bank under the Credit
Agreement, as amended by this Waiver and Amendment, hereby reaffirms and agrees
that each Guaranty to which the Borrower is party, and all other documents and
agreements executed and delivered by the Borrower to the Bank in connection
therewith, are in full force and effect, without defense, offset or
counterclaim.
7. Reservation of Rights. The Borrower acknowledges and agrees that
neither the Bank's forbearance in exercising its rights and remedies in
connection with the Existing Defaults, nor the execution and delivery by the
Bank of this Waiver and Amendment, shall be deemed to create a course of dealing
or otherwise obligate the Bank to forbear or execute similar waivers under the
same or similar circumstances in the future.
8. Miscellaneous.
(a) Except as herein expressly amended, all terms, covenants
and provisions of the Credit Agreement are and shall remain in full
force and effect and all references therein and in the other Credit
Documents to such Credit Agreement shall henceforth refer to the Credit
Agreement as amended by this Waiver and Amendment. This Waiver and
Amendment shall be deemed incorporated into, and a part of, the Credit
Agreement.
(b) This Waiver and Amendment shall be binding upon and inure
to the benefit of the parties hereto and thereto and their respective
successors and assigns. No third party beneficiaries are intended in
connection with this Waiver and Amendment.
(c) This Waiver and Amendment shall be governed by and
construed in accordance with the law of the State of California.
(d) This Waiver and Amendment may be executed in any number of
counterparts, each of which shall be deemed an original, but all such
counterparts together shall constitute but one and the same instrument.
Each of the
7
<PAGE> 8
parties hereto and Datastorm, by its execution and delivery of the
Consent, understands and agrees that this document (and any other
document required herein) may be delivered by any party thereto either
in the form of an executed original or an executed original sent by
facsimile transmission to be followed promptly by mailing of a hard
copy original, and that receipt by the Bank of a facsimile transmitted
document purportedly bearing the signature of the Borrower or Datastorm
shall bind the Borrower or Datastorm, as the case may be, with the same
force and effect as the delivery of a hard copy original. Any failure
by the Bank to receive the hard copy executed original of such document
shall not diminish the binding effect of receipt of the facsimile
transmitted executed original of such document which hard copy page was
not received by the Bank.
(e) This Waiver and Amendment, together with the Credit
Agreement, contains the entire and exclusive agreement of the parties
hereto with reference to the matters discussed herein and therein. This
Waiver and Amendment supersedes all prior drafts and communications
with respect thereto. This Waiver and Amendment may not be amended
except in accordance with the provisions of Section 9.05 of the Credit
Agreement.
(f) If any term or provision of this Waiver and Amendment
shall be deemed prohibited by or invalid under any applicable law, such
provision shall be invalidated without affecting the remaining
provisions of this Waiver and Amendment or the Credit Agreement,
respectively.
(g) The Borrower covenants to pay to or reimburse the Bank,
upon demand, for all reasonable costs and expenses (including
reasonable allocated costs of in-house counsel) incurred in connection
with the development, preparation, negotiation, execution and delivery
of this Waiver and Amendment and the administration of the Existing
Defaults, including without limitation appraisal, audit, search and
filing fees incurred in connection therewith.
8
<PAGE> 9
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Waiver and Amendment as of the date first above written.
QUARTERDECK CORPORATION
By: _______________________________
Title: ____________________________
By: _______________________________
Title: ____________________________
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION
By: _______________________________
Title: Vice President
9
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
The following is a list of the subsidiaries of the Registrant:
<TABLE>
<CAPTION>
NAME JURISDICTION OF INCORPORATION
---- -----------------------------
<S> <C>
Quarterdeck International Limited Ireland
Quarterdeck GmbH West Germany
Quarterdeck S.A.R.L. France
Quarterdeck U.K. Limited United Kingdom
Quarterdeck FSC, Ltd. U.S. Virgin Islands
Quarterdeck Australia Australia
Pty Limited
Quarterdeck Select Corporation Florida
StarNine Technologies, Inc. California
Internetware, Inc. California
Datastorm Technologies, Inc. Missouri
Inset Labs, Inc. Connecticut
Future Labs, Inc California
Vertisoft Systems, Inc. California
Limbex Corporation California
</TABLE>
72
<PAGE> 1
EXHIBIT 23.1
ACCOUNTANTS' CONSENT
The Board of Directors
Quarterdeck Corporation:
We consent to the incorporation by reference in the registration
statements (No. 33-96064, No. 333-04606, and No. 333-10269) on Form S-3, the
registration statement (No. 33-98456) on Form S-4 and the Registration
statements (No. 333-01766 and No. 333-04602) on Form S-8 of Quarterdeck
Corporation of our report dated November 22, 1996, except as to the last
paragraph of Note 13, which is as of December 19, 1996, relating to the
consolidated balance sheets of Quarterdeck Corporation and subsidiaries as of
September 30, 1996, and 1995 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, 1996, and the related schedule, which
report appears in the September 30, 1996 annual report on Form 10-K of
Quarterdeck Corporation.
KPMG Peat Marwick LLP
Los Angeles, California
December 27, 1996
73
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AUDITED
CONSOLIDATED FINANCIAL STATEMENTS, AUDIT REPORT DATED NOVEMBER 22, 1996, BY KPMG
PEAT MARWICK LLP, LOS ANGELES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH 1996 ANNUAL REPORT ON FORM 10K FOR THE FISCAL YEAR ENDED SEPTEMBER 30,
1996.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<CASH> 25,554
<SECURITIES> 0
<RECEIVABLES> 22,284
<ALLOWANCES> (13,019)
<INVENTORY> 2,151
<CURRENT-ASSETS> 42,564
<PP&E> 35,565
<DEPRECIATION> 14,313
<TOTAL-ASSETS> 76,781
<CURRENT-LIABILITIES> 47,248
<BONDS> 25,000
0
20,000
<COMMON> 38
<OTHER-SE> (15,613)
<TOTAL-LIABILITY-AND-EQUITY> 76,781
<SALES> 133,100
<TOTAL-REVENUES> 133,100
<CGS> 49,600
<TOTAL-COSTS> 157,586
<OTHER-EXPENSES> (38)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 105
<INCOME-PRETAX> (74,153)
<INCOME-TAX> 806
<INCOME-CONTINUING> (74,959)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (74,959)
<EPS-PRIMARY> (2.15)
<EPS-DILUTED> (2.15)
</TABLE>
