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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1997
COMMISSION FILE NO. 0-19207
QUARTERDECK CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<TABLE>
<S> <C>
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)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (310) 309-3700
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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, 1997 was $89,522,108.
The number of shares of the Registrant's common stock outstanding as of
November 30, 1997 was 43,370,265.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's definitive Proxy Statement for the annual meeting
to be held on February 5, 1998 (the "Proxy Statement") are incorporated by
reference into Part III of this Form 10-K.
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PART I
ITEM 1. BUSINESS
Quarterdeck Corporation ("Quarterdeck" or the "Company") develops and
markets software products that help personal computer (PC) users manage
information and communications with minimal technical support, reducing the
overhead costs of networked personal computing. The Company markets its products
worldwide through retail distribution, corporate resellers, original equipment
manufacturers (OEM's), direct marketing, and the Internet, focusing in
particular on customers in "low support" environments, e.g. small offices/home
offices (SOHO's), small businesses and work groups, and remote/mobile users.
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 and in February 1995 changed its name to Quarterdeck
Corporation.
The principal offices of the Company are located at 13160 Mindanao Way,
Third Floor, Marina del Rey, California, 90292, telephone number (310) 309-3700.
OVERVIEW OF STRATEGY
The Company's business addresses one of the personal computer industry's
most critical problems -- the high overhead burden of technical and
administrative support required for networked personal computing.
PC networking is emerging as the world's standard vehicle for managing most
forms of information and communication. According to Dataquest, the global base
of PC's is approximately 87,000,000, growing at nearly 16.1% per year, and is
rapidly networking together through the Internet and corporate intranets. As PC
systems continue escalating in power, function, and storage capacity, and as
network usage continues its explosive growth, performance problems and support
costs inevitably multiply. This is because managing information and
communication through networked PC's requires the flawless interaction of many
hardware and software components from diverse vendors; because these components
undergo frequent technological upgrading and replacement; and because networking
itself continuously imports new applications, viruses, agents, and data types
into the networked systems. As a consequence, annual PC support costs often
exceed system acquisition costs.
Quarterdeck believes the solution lies not in reversing the advance of PC
power, functionality, storage capacity, and networkability but instead in
supplementing these advances with equally smart "helpware" -- new software
technologies that automatically detect, prevent, and resolve personal computer
problems and replace outside technical support with user-friendly self-help and
automatic-help tools.
Quarterdeck's helpware strategy leverages the Company's long experience in
designing PC utilities, communications software, and Internet tools for retail
sale to "power users" who demand peak performance. On the product side,
Quarterdeck is using both internal development and technology licenses to
assemble a single, broad portfolio of helpware components that can work
together, in various product configurations, to help make networked personal
computing a "self-supporting" activity. On the sales side, the Company is
building upon its worldwide retail presence and brand equities to expand its
reach through indirect distribution and direct marketing channels, into those
business environments that most need helpware technologies, i.e., SOHO, small
business, departmental, and remote/mobile working environments where onsite MIS
support is thin or absent.
Quarterdeck's goal is to lead the industry in providing comprehensive
helpware solutions for the core performance problems of networked personal
computing.
PRODUCTS AND TECHNOLOGY
Quarterdeck develops and licenses technology, and assembles and sells
products, to provide automatic help and user self-help capabilities in five key
categories of networked PC system management: Conflict
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Resolution, Storage, Security, Configuration and Network Access. In these
categories, the Company currently markets the following new or recently upgraded
product lines:
<TABLE>
<CAPTION>
TECHNOLOGY CATEGORY PRODUCT LINES
- -------------------------------------------- --------------------------------------------
<S> <C>
- - CONFLICT RESOLUTION: preventing, RealHelp
diagnosing, and solving problems among
diverse software and/or system hardware
elements
- - STORAGE: cleaning and optimizing disk CleanSweep, RemoveIt, Partition-It, ZipIt,
space and memory QEMM
- - SECURITY: protecting systems against ViruSweep
viruses, rogue agents, and intruders
- - CONFIGURATION: inventorying and updating TuneUp, TuneUp.com
software applications and other system
elements
- - NETWORK ACCESS: enhancing user access to ProComm Plus, Rapid Remote, WebCompass,
networked information and communication Iware Connect
resources
</TABLE>
In fiscal 1997, ProComm Plus and Cleansweep -- leaders in their respective
markets -- were the largest revenue producers among these product lines. The
RealHelp and ViruSweep product lines were launched in early fiscal 1998, and
Quarterdeck acquired and relaunched TuneUp.com, an Internet-based "PC Service
Station" venture, near the end of fiscal 1997.
For each of its major product lines, the Company plans to reach a variety
of markets by packaging the underlying technologies in three distinct delivery
formats -- as shrink-wrapped retail products, as Internet-based technology
services (under the TuneUp.com label), and as corporate-controllable intranet
products. The current product lines are available now in retail formats; the
Internet service format was begun in late fiscal 1997; and the development and
launch of intranet-deliverable products are planned for fiscal 1998.
To accelerate product development across system management categories and
delivery formats, Quarterdeck is reimplementing many of its core technologies as
standard, networkable "components". This initiative has already led to
considerable technology sharing among the ViruSweep, CleanSweep, RealHelp,
WebCompass, RapidRemote, and ProComm product lines. The Company is also
emphasizing the incorporation in its automatic help and self-help products of
intelligent agent technologies and continuously updatable knowledge-bases,
supplemented by advanced search technologies.
Quarterdeck organizes its research and development resources in a single,
global department, to facilitate technology integration, although most engineers
are dedicated to particular product teams. In 1997, 1996 and 1995, the Company
spent $16,419,000, $21,314,000 and $14,286,000 on research and development,
respectively or 19.6%, 16.0%, and 12.1% of net revenues, respectively, and
expects to continue investing significantly in helpware development.
MARKETING AND SALES
Quarterdeck sells its products on a worldwide basis via retail
distribution, corporate resellers, and OEM's, direct marketing, and the
Internet. The Company's end user customers include corporate and government
organizations as well as small business and individual personal computer users.
None of Quarterdeck's individual end user customers is believed by the Company
to account for 5% or more of Quarterdeck's sales in any fiscal year. Products
sold to government entities are primarily off-the-shelf items sold from
inventory and are not subject to renegotiation of profits or termination of
purchase contracts at the election of the government.
Traditionally, retail sales have dominated the Company's revenues, and
Quarterdeck intends to continue vigorous participation in this channel, both to
retain and build brand awareness and to reach individual "power users" and SOHO
and small business customers. The Company sells its products to major software
distributors for resale through software retailers and corporate resellers.
Quarterdeck's principal North American distributors are Ingram Micro, Inc.,
Merisel, Inc. and Tech Data Corporation. See Note 15 of the Notes to the
Company's Consolidated Financial Statements. Each of these distributors resells
Quarterdeck's products on a non-exclusive basis. The Company also distributes
internationally through foreign based
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subsidiaries of Ingram Micro, Inc., and Merisel, Inc. as well as a variety of
other international distributors. In Japan, Quarterdeck's distributor and
marketing partner is Marubeni Corporation. Quarterdeck 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.
The Company reaches corporate end-users through a corporate direct
telesales force and through corporate resellers, many of whom purchase the
products through major software distributors. Quarterdeck plans to continue
expanding its presence in these corporate direct marketing and reseller
channels, with an increased emphasis on value-added resellers (VAR's) as more of
its products become enabled for corporate controlled intranet implementation.
Through its Quarterdeck Select organization in Clearwater, Florida, the
Company uses direct telesales and direct mail to reach SOHO and home users.
Quarterdeck Select also sells some third party software products. During 1997,
the Company decreased emphasis on third party sales and focused Quarterdeck
Select on supporting sales of Quarterdeck products.
The Company also sells its products directly over the Internet, maintaining
a "store" on its website, (www.Quarterdeck.com) and offering "trialware"
versions of some of its products for free download. Though Internet sales are
currently a small portion of total revenues, Quarterdeck expects this channel to
expand significantly as individuals and businesses become accustomed to
electronic software distribution. The Company plans to increase the availability
of its products over the Internet through third party online stores.
Geographically, Quarterdeck plans increased investments in European and
Japanese markets and is engineering its new and upgraded products for rapid
localization and near-simultaneous release on a global basis. The Company's
European operations are headquartered in Dublin, Ireland, with a marketing
support office in Slough, England. Quarterdeck's Dublin office handles 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 third
party fulfillment centers in Ireland. Quarterdeck 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
Quarterdeck does not have marketing support offices, prepare marketing programs
for each local market, educate end users and support the international
distributor and dealer networks. During fiscal 1998, Quarterdeck expects to
begin shipping product to Australian customers from a third party fulfillment
center located in Australia. In Japan, the Company has recently entered into an
exclusive distribution arrangement with Marubeni Corporation, a large trading
company, and will establish with Marubeni a Quarterdeck marketing office in
Tokyo. Marubeni has also invested $1,000,000 in Quarterdeck's Series C Preferred
Stock.
Sales by the Company to European and other international distributors,
dealers and end users outside of North America represented approximately 21.9%,
18.0% and 16.2% of Quarterdeck's total net revenues for fiscal years 1997, 1996
and 1995, respectively. See Note 15 of the Notes to the Company's Consolidated
Financial Statements for information regarding Quarterdeck's domestic and
foreign operations and export sales.
OPERATIONS, SUPPORT SERVICES, PRODUCTION AND BACKLOG
Quarterdeck's departments are organized by function -- e.g. research and
development, sales and marketing, finance -- with product teams coordinating
across departments. Internationally, regional teams or distribution partners
handle localization, marketing, and sales. The Company offers on-line and
phone-based support for its products, on both a free and paid basis, chiefly
through its technical support centers in Columbia, Missouri and Dublin, Ireland.
The principal materials and components used in Quarterdeck's products
include CD-ROM's, diskettes, user manuals and product display boxes, which are
purchased directly from third party vendors. Quarterdeck currently utilizes both
internal and third party contracted resources for the assembly, warehousing and
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fulfillment of its products. Outside vendors perform in accordance with
Quarterdeck 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
Quarterdeck's operating results could be materially impacted. Quarterdeck
believes there are adequate supplies of and sources for the raw materials used
in its products and that multiple sources are available for CD-ROM 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,
Quarterdeck has relatively little, if any, order backlog at any given time and
does not consider backlog to be a significant measure of sales for any future
period.
EMPLOYEES
As of September 30, 1997, Quarterdeck employed 486 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. See Trends and Uncertainties (page 17) for a discussion of the Company's
ability to attract and retain personnel.
COMPETITION
The personal computer software 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 competitors include developers of operating systems,
applications and utility software and personal computer manufacturers that
develop their own software products. Quarterdeck expects to encounter continued
competition both from established companies and from new companies that are now
developing, or may develop, competing products. Many of the Company's existing
and potential competitors have financial, marketing and technological resources
significantly greater than those of Quarterdeck .
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 Quarterdeck's products will depend on various factors that are not fully
known at this time, including the level of functionality, performance and
features included in the final release of these competitive products and the
price thereof and the market's evaluation of competitive products compared to
the then current functionality, performance, features and price of the Company's
products.
Quarterdeck anticipates that the type and level of competition experienced
to date to continue, and may increase, and future sales of its products will be
dependent upon the Company's ability to develop or acquire new products or
enhanced versions of its existing products for Windows 95 and Windows NT and/or
other operating systems that may gain market acceptance. In addition,
Quarterdeck must 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
Quarterdeck's products, sales of the Company's products in the future would be
adversely impacted.
Quarterdeck 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. Quarterdeck competes for
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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.
ITEM 2. PROPERTIES
Quarterdeck's principal administrative, production, marketing, product
development and support facilities occupy approximately 75,500 square feet of
leased space, in Marina del Rey, California. The Company owns a building in
Columbia, Missouri, which is currently listed for sale and which is
approximately 152,000 square feet of which 30,000 square feet is occupied by
Quarterdeck. Quarterdeck leases 47,900 square feet of office space in
Clearwater, Florida for its direct marketing functions, and 12,500 square feet
in Palo Alto, California for research and development functions. In addition,
Quarterdeck leases offices in Dublin, Ireland, Slough, England and Sydney,
Australia for marketing and sales functions.
Quarterdeck is continuing to reduce its leased space as part of its
restructuring programs.
ITEM 3. LEGAL PROCEEDINGS
Federal and state shareholder actions were brought against the Company and
one former and one current officer of the Company alleging among other things,
violations of certain provisions of California and Federal securities laws
relating to statements made about Quarterdeck. On December 19, 1997, the Company
reached an agreement in principle to settle such actions for a total amount of
$12,500,000, of which the Company will be required to pay approximately
$1,905,000, with the balance to be paid by the Company's directors and officers'
insurance policy. The settlement is subject to, among other things, court
approval. The Company has recorded a charge of $1,905,000 for its fiscal year
ended September 30, 1997. See Note 13 of "Notes to Consolidated Financial
Statements" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
In March 1997, a purported class action lawsuit brought on behalf of all
licensees of MagnaRAM2 residing in the United States, Jack Abbott, et al. v.
Quarterdeck Corporation, Case No. 00709198, was filed in the Superior Court of
the State of California, County of San Diego. The complaint alleges, among other
things, that MagnaRAM2 fails to increase Random Access Memory significantly or
otherwise help Windows 95 and Windows 3.x users. The plaintiffs seek
compensatory damages and punitive damages in unspecified amounts, injunctive
relief, and attorney fees and costs. Quarterdeck intends to defend the case
vigorously and to oppose any effort to certify the claims for class resolution.
No assurances can be given that the ultimate disposition of this case will not
have a material adverse effect on the Company's results of operations, financial
condition or liquidity.
In October 1997, a complaint was filed in the United States District Court
for the District of Utah on behalf of PowerQuest Corporation against the
Company. The complaint alleges that the Company's partitioning software
(Partition-It) violates a patent held by PowerQuest. The plaintiff seeks an
injunction against distribution of Partition-It and damages. The Company intends
to defend the case vigorously. No assurances can be given that the ultimate
disposition of this case will not have a material adverse effect on the
Company's results of operations, financial condition or liquidity.
Quarterdeck is a defendant in various other pending claims and lawsuits.
Although there can be no assurances, management believes that the disposition of
such matters will not have a material adverse impact on the results of
operations or financial position of the Company.
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 1997.
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EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers and other officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------- --- -----------------------------------------------------------
<S> <C> <C>
Curtis A. Hessler........ 53 President and Chief Executive Officer
Marc Epstein............. 40 Senior Vice President -- Technology and Business
Development, and Chief Technology Officer
Joseph Fusco............. 47 Senior Vice President -- Marketing and Product Management
Frank R. Greico.......... 40 Senior Vice President and Chief Financial Officer
Ron Ben-Yehuda........... 36 Vice President, General Counsel and Secretary
James Carrigan........... 45 Vice President, Research and Development
Janet Daly............... 37 Vice President, Marketing (Joined Quarterdeck in November,
1997)
Suzanne Dickson.......... 37 Vice President, Product Management
Eoin Gilley.............. 35 General Manager, Quarterdeck International Limited
Tom Mackey............... 41 Vice President -- US and Canadian Sales
John Strosahl............ 31 Vice President -- International
</TABLE>
BIOGRAPHIES
Mr. Hessler was appointed President and Chief Executive Officer of the
Company in February 1997 and currently serves in such capacity. From 1995 until
he joined Quarterdeck, Mr. Hessler was Chairman of the Board of I-Net, Inc., a
personal computer network management services company. He served as Executive
Vice President of The Times Mirror Company during 199l through 1995, managing
that publishing enterprise's professional information, cable systems, magazine,
and digital media businesses. Earlier in his career, Mr. Hessler served as Vice
Chairman of Unisys Corporation, a large computer and computer services firm and
practiced corporate law with firms in New York and Los Angeles. During the
administration of President Carter, he served as Assistant Secretary of the
Treasury Department.
Mr. Epstein joined the Company in July 1997 as Senior Vice
President -- Technology and Business Development, and Chief Technology Officer.
Prior to joining the Company, Mr. Epstein was Vice President and General Manager
of the Management Products Division at Novell where he was responsible for
defining, creating, and launching software products aimed at the Enterprise and
PC-Workgroup intranet markets. Other positions Mr. Epstein held at Novell
included Vice President and General Manager, Network Services Division, Vice
President of Product Management, NetWare Products Division, and Director of
Product Planning, Unix Systems Group. Prior to Novell, Mr. Epstein was the
Director of Product Engineering at Univel, a group manager at USL/Network
Planning and AT&T Computer Systems and a member of the technical staff at AT&T
Bell Labs.
Mr. Fusco was appointed as a Vice President of the Company after his hiring
in September 1996 and in April 1997, he was appointed Senior Vice
President -- Marketing and Product Management. 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.
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.
Mr. Ben-Yehuda was appointed Vice President and General Counsel of the
Company in May 1997. From April 1996 until such appointment he was Associate
General Counsel of the Company. Before joining the Company, Mr. Ben-Yehuda was a
partner in the law firm of Blanc Williams Johnston & Kronstadt, where his
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practice focused primarily on the representation of technology companies in
transactional and other matters relating to the development, acquisition,
licensing, and other exploitation of intellectual property.
Mr. Carrigan joined the company in April 1997 as Vice President of Research
and Development. Prior to joining the company, Mr. Carrigan was General Manager
of Software Services for Thuridion Services. Mr. Carrigan was also Director of
Engineering Services for Locus Computing and Director of Customer Support for
Versyss Corporation.
Ms. Daly joined Quarterdeck in November 1997 as Vice President of
Marketing. Before joining Quarterdeck, Ms. Daly was Director of Marketing for
CyberMedia. Ms. Daly also held several marketing positions, most notably as
Product Marketing Manager for Davidson & Associates. She was also Marketing
Manager for SiSoft in Milan, Italy.
Ms. Dickson was appointed Vice President of Product Mangement of the
Company in October 1996. Before her appointment, Ms. Dickson was Senoir Product
Manager for the Company. Before joining Quarterdeck, Ms. Dickson held Senior
Marketing Manager positions for Symantec and Executive Systems.
Mr. Gilley joined the Company in 1996 as General Manager, Europe in the
Dublin, Ireland office. Prior to joining Quarterdeck, Mr. Gilley was Manager for
Apple Computers in both Irelend and in the United States. Mr. Gilley was
employed for over ten years at Apple Computer before joining Quarterdeck
International Limited.
Mr. Mackey joined the Company in August 1997 as Vice President -- US and
Canadian Sales. From September 1994 until he joined the Company, Mr. Mackey was
Vice President and General Manager of the CD-ROM Division of American Business
Information, a leading compiler of business to business information in the US
and Canada. From February 1993 until September 1994, Mr. Mackey was Vice
President of Sales for Binar Graphics, Inc., a developer and publisher of
software utilities. From May 1991 until he joined Binar, Mr. Mackey was Director
of Sales at AddStor, Inc., a developer of data compression software.
Mr. Strosahl was appointed Vice President -- International in August 1997
after serving as interim Vice President -- Worldwide Sales from March 1997. Mr.
Strosahl was Senior Director, Asia/Pacific/Latin America from March 1996. Prior
to that date, Mr. Strosahl was with Datastorm Technologies, serving as the
Director -- International, responsible for Datastorm's international sales,
marketing, and business operations. Prior to joining Datastorm, Mr. Strosahl
held various positions in operations at International Business Machines.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS;
RECENT SALES OF UNREGISTERED SECURITIES
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 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
FISCAL 1997:
First Quarter................................................ $ 7 1/8 $ 4 /16
Second Quarter............................................... $ 6 1/4 $ 2 1/4
Third Quarter................................................ $ 3 3/8 $ 2 1/4
Fourth Quarter............................................... $ 3 7/32 $ 2 1/2
</TABLE>
As of November 30, 1997, Quarterdeck Corporation had 43,370,265 shares
outstanding and 614 shareholders of record. The Company estimates there are more
than 5,000 shareholders represented through accounts held by clearing agencies.
The Company paid no dividends during fiscal 1997. The Company intends to
retain earnings for use in its business and therefore does not anticipate paying
any cash dividends in the foreseeable future. The Company is a party to certain
financing agreements which prohibit the payment of cash dividends.
RECENT SALES OF UNREGISTERED SECURITIES
On September 30, 1997, the Company issued 26,025 shares of Series C
Convertible Preferred Stock, stated value $1000 per share (the "Series C
Preferred Stock"), of the Company for $26,025,000 in cash. Between October and
November 4, 1997, an additional 2,975 shares of Series C Preferred Stock were
issued for $2,975,000. In addition, Quarterdeck issued warrants to purchase
2,900 shares of Series C Preferred Stock to the placement agents of the private
placement. The securities were issued to various accredited investors in a
private placement pursuant to Regulation D of the Securities Act of 1933, as
amended.
The holders of the Series C Preferred Stock are not entitled to receive
dividends. The shares of Series C Preferred Stock are currently convertible into
shares of the Company's Common Stock. The shares of Series C Preferred Stock
will automatically convert into Common Stock on September 30, 2002 to the extent
any shares of Series C Preferred Stock remain outstanding at that time. Each
share of Series C Preferred Stock is convertible into the number of shares of
Common Stock equal to the quotient of (i) $1000.00 divided by (ii) the
Conversion Price. Up until March 1, 1998, the Conversion Price will be $5.00.
Thereafter, subject to the maximum Conversion Price specified below, the
Conversion Price will be equal to 101% of the average of the three lowest daily
trading prices for the 22 consecutive trading days immediately preceding the
date of conversion (the "Conversion Date"). If the market price of the Common
Stock was $1.00, $2.00 or $3.00, the aggregate number of shares of Common Stock
issuable upon conversion of the Series C Preferred Stock would be approximately
31,600,000, 15,800,000 or 10,500,000 shares of Common Stock, respectively. The
maximum Conversion Price is $5.125 until March 31, 1999, and thereafter will be
the lesser of (i) $5.125, (ii) 101% of the average daily low trade prices of the
Common Stock for all trading days in March 1999, (ii) 101% of the average daily
low trade prices of the Common Stock for all trading days in September 1999 and
(iii) 101% of the average daily low trade prices of the Common Stock for all
trading days in March 2000.
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The Company will not be obligated to issue shares of Common Stock upon
conversion of shares of Series C Preferred Stock in excess of 20% of the number
of shares of Common Stock outstanding on September 30, 1997 (the "Share Limit")
without obtaining shareholder approval in accordance with NASD rules. If such
stockholder approval is not obtained on or before February 28, 1998, the Company
will be obligated to immediately redeem, at the Special Redemption Price (as
defined below), a sufficient number of shares of Series C Preferred Stock which,
in its reasonable judgment, will permit conversion of the remaining shares of
Series C Preferred Stock without violating the Share Limit. The "Special
Redemption Price" means a cash payment equal to 110% of the liquidation
preference of $1000 (subject to adjustments under certain circumstances). See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" for further discussion.
The amount of cash which the Company would be required to pay in the event
stockholder approval is not obtained will depend on the per share market price
of the Common Stock. Assuming a market price of $1.00, $2.00 or $3.00 per share,
the Company would be required to pay approximately $25,900,000, $16,600,000 or
$7,400,000, respectively, to redeem shares of Series C Preferred Stock. Since
the number of shares of Common Stock issuable upon conversion of the Series C
Preferred Stock will increase if the market price of the Common Stock decreases,
the number of shares of Series C Preferred Stock which could not be converted
into Common Stock would increase and the amount of cash that the Company would
be required to pay to holders of the Series C Preferred Stock would increase.
There can be no assurance that the Company will have available the cash
resources to satisfy its redemption obligations or that it would be able to
effectuate the redemption in compliance with applicable law. In the event the
stockholder approval sought is not obtained, compliance with the redemption
obligation would likely have a material adverse effect on the Company's
financial condition and ability to implement its business strategy. In addition,
any delay in payment will cause such redemption amount to accrue interest at the
rate of 0.1% per day until paid. If the Company fails or is unable to effect the
redemption, then the holders of the outstanding shares of Series C Preferred
Stock shall have the right to elect a majority of the directors of the Company
unless and until such redemption is effectuated.
In addition, in the event that stockholder approval is not obtained, any
shares of Series C Preferred Stock submitted for conversion over and above the
Share Limit shall entitle the holder thereof to receive, in lieu of shares of
Common Stock, cash in an amount equal to the proceeds that would otherwise have
been received by the holder of the converted shares if Common Stock had been
delivered upon such conversion and sold at the highest reported sale price of
the Common Stock on the date of conversion.
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<PAGE> 11
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
consolidated financial statements of fiscal 1995, 1994, and 1993 have been
reclassified to conform to the 1997 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's results of operations were immaterial to Quarterdeck's
financial position and, therefore, periods prior to October 1, 1995 were not
restated for these entities. 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,
-----------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net revenues......................... $ 83,787 $133,100 $117,606 $ 84,715 $83,578
Cost of revenues..................... 21,271 49,600 34,884 27,403 24,534
-------- -------- -------- -------- -------
Gross margin....................... 62,516 83,500 82,722 57,312 59,044
Operating expenses:
Research and development........... 16,419 21,314 14,286 7,520 2,589
Sales and marketing................ 29,305 66,355 30,624 27,107 25,775
General and administrative......... 17,227 32,128 20,704 20,908 20,716
Acquisition, restructuring and
other charges................... 11,713 37,789 7,409 12,863 --
Litigation settlement.............. 1,905 -- -- 615 --
-------- -------- -------- -------- -------
Total operating expenses........... 76,569 157,586 73,023 69,013 49,080
Operating income (loss).............. (14,053) (74,086) 9,699 (11,701) 9,964
Other income (expense), net........ (2,143) 38 (38) (271) --
Interest income (expense), net....... (2,072) (105) 1,922 1,365 1,144
-------- -------- -------- -------- -------
Income (loss) before income taxes.... (18,268) (74,153) 11,583 (10,607) 11,108
Provision (benefit) for income
taxes.............................. 130 806 331 (5,982) 639
-------- -------- -------- -------- -------
Net income (loss).................... $(18,398) $(74,959) $ 11,252 $ (4,625) $10,469
======== ======== ======== ======== =======
Net income (loss) per share:
Primary............................ $ (0.43) $ (2.15) $ 0.32 $ (0.15) $ 0.32
======== ======== ======== ======== =======
Fully diluted...................... $ (0.43) $ (2.15) $ 0.31 $ (0.15) $ 0.32
======== ======== ======== ======== =======
Shares used to compute net income
(loss) per share:
Primary............................ 43,168 34,894 35,557 31,825 33,221
======== ======== ======== ======== =======
Fully diluted...................... 43,168 34,894 36,499 31,825 33,221
======== ======== ======== ======== =======
Additional unaudited pro forma data:
Income (loss) before income
taxes........................... $(18,268) $(74,153) $ 11,583 $(10,607) $11,108
Pro forma income taxes............. 130 806 3,406 576 3,977
-------- -------- -------- -------- -------
Pro forma net income (loss)........ $(18,398) $(74,959) $ 8,177 $(11,183) $ 7,131
======== ======== ======== ======== =======
Pro forma income (loss) per share:
Primary............................ $ (0.43) $ (2.15) $ 0.23 $ (0.35) $ 0.21
-------- -------- -------- -------- -------
Fully diluted...................... $ (0.43) $ (2.15) $ 0.22 $ (0.35) $ 0.21
======== ======== ======== ======== =======
</TABLE>
11
<PAGE> 12
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
-------------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital / (deficiency)........... $ 6,917 $(4,684) $29,490 $29,147 $35,619
Total assets............................. 55,881 76,781 76,699 62,471 64,673
Long-term obligations.................... 25,114 25,108 164 701 130
Stockholders' equity..................... 1,173 4,425 44,270 36,606 53,606
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
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 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.
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 effect of conversion of the Company's
convertible preferred stock, 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.
OVERVIEW
During fiscal 1995 and 1996, Quarterdeck acquired ten companies in
transactions accounted for as either pooling of interests or purchases and also
acquired software and technology. At the end of fiscal 1996 and during fiscal
1997, Quarterdeck implemented a comprehensive restructuring, which included a
significant reduction in its workforce, the closure of offices, and the
divestiture of non-core assets. This resulted in a shift in the Company's
strategy from utility, communication and Internet products to developing and
marketing software to help personal computers operate efficiently without
extensive technical or administrative support. As a result of this change in
strategy, non-strategic products and assets were discontinued or divested during
fiscal 1997 while products were developed and/or acquired to pursue the
Company's new strategy. See "Business" for a further discussion.
DURING 1997:
- New officers joined the company in several key positions: President/Chief
Executive Officer, Sr. Vice President/Chief Technology Officer, Vice
President/Engineering, Vice President/Marketing, and Vice President/North
American Sales.
- Multiple acquisitions made by the Company in 1995 and 1996 were
consolidated into worldwide functional departments, to conserve costs and
to accelerate the integration of acquired skills and technologies.
- The Company's communication and information management product lines
(e.g., ProComm, Iware, Rapid Remote, and WebCompass) were utilized to
provide important technologies for the system
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<PAGE> 13
management product lines, and certain non-strategic product lines were
de-emphasized; e.g., many "Internet-utility" products were discontinued;
a graphics software line was licensed to an outside company; and
MacIntosh-based products were de-emphasized.
- Direct marketing activities were focused on promoting the Company's own
products to its customer base, and away from marketing third party
products.
- The Company acquired the assets of TuneUp.com, an Internet-based "PC
service station" venture, which will become the Company's main vehicle
for delivering its system management technology over the Internet.
- New financing was accomplished through the issuance of preferred stock,
the repurchase of former preferred stock, and a new bankline.
- A distribution and marketing alliance was forged with Marubeni
Corporation in Japan.
- The balance sheet was strengthened through improved cash management.
- An agreement in principle to settle the shareholder litigation was
reached on December 19, 1997.
Incident to these activities, the Company took $11,051,000 in
restructuring, asset write-downs, and severance charges in fiscal year 1997
representing a cash outlay of approximately $6,155,000. The Company also
recorded a charge of $1,364,000 in fiscal 1997 related to the restructuring in
September 1996. In addition, in connection with the agreement in principle to
settle the shareholder litigation, Quarterdeck recorded a charge of $1,905,000
in fiscal 1997.
RESULTS OF OPERATIONS
For convenient reference, the following table sets forth, a summary of
revenue, cost, and income data derived from the Company's Consolidated
Statements of Operations:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Net revenues......................................................... 100.0% 100.0% 100.0%
Cost of revenues..................................................... 25.4 37.3 29.7
----- ----- -----
Gross margin....................................................... 74.6 62.7 70.3
Operating expenses:
Research and development........................................... 19.6 16.0 12.1
Sales and marketing................................................ 35.0 49.9 26.0
General and administrative......................................... 20.5 24.1 17.6
Acquisition, restructuring and other charges....................... 14.0 28.4 6.3
Litigation Settlement.............................................. 2.3 -- --
----- ----- -----
Total operating expenses........................................... 91.4 118.4 62.1
Operating income (loss).............................................. (16.8) (55.7) 8.2
Other income (expense), net.......................................... (2.5) -- --
Interest income (expense), net....................................... (2.5) (0.0) 1.6
----- ----- -----
Income (loss) before income taxes.................................... (21.8) (55.7) 9.8
Provision (benefit) for income taxes................................. 0.2 0.6 0.3
----- ----- -----
Net income (loss).................................................... (22.0)% (56.3)% 9.6%
===== ===== =====
</TABLE>
FISCAL 1997, 1996 AND 1995
Net Revenues: The Company's net revenues consist of gross sales of its
products, less provisions for returns and customer allowances. In the retail and
corporate reseller channels, the Company's main sales vehicles, gross sales are
recorded as products are shipped on order to first-tier distributors, with
provisions for returns calculated on the basis of projected sell-through of new
products and demonstrated sell-through experience of established products. These
provisions reflect the industry's practice of accepting returns from
13
<PAGE> 14
distributors, resellers, and retailers of products not sold through to final
customers. If projected sell-through does not occur, actual returns may exceed
earlier provisions, and net revenues for a period may suffer significant
declines even when distributor orders for new or replacement products are
meeting expectations.
In fiscal 1997, net revenues of $83,787,000 decreased 37.0% or $49,313,000,
from net revenues of $133,100,000 in fiscal 1996. This decline reflected reduced
sales for the Company's memory management, Internet utility, and communications
products, the discontinuance during fiscal 1997 of certain non-core product
lines (e.g., Internet utilities and graphic utilities), reduced efforts to sell
third party products through the Company's direct mail and telesales units, and
management concentration on integrating the Company's operations and on
commencing development on new strategic products, rather than on expanding sales
of end-of-life or non strategic product lines.
During fiscal 1997, a majority of the Company's revenues were generated by
sales of its ProComm products and its storage management products, especially
CleanSweep. The Company also recorded approximately $2,000,000 in revenues from
licensing certain of its technologies to third parties. In August 1997, the
Company completed an acquisition of certain assets of TOC Holding Company,
formerly known as TuneUp.com. This Internet based "PC Service Station" venture
contributed no significant revenues in fiscal 1997 but will become the Company's
platform for delivering system management technologies as subscription services
over the Internet.
In fiscal 1996, net revenues of $133,100,000 increased 13.2% or $15,494,000
from net revenues of $117,606,000 in fiscal 1995. This increase resulted
primarily from broadening the Company's product portfolio, through acquisitions
and internal development, from acquiring a telesales operation, and from
increased retail channel marketing initiatives.
The majority of Quarterdeck's revenues are derived from US sales, but the
relative contribution from international revenues has grown, representing 21.9%,
18.0% and 16.2% of the Company's net revenues in fiscal 1997, 1996 and 1995,
respectively. In the fourth quarter of fiscal 1997, in order to continue its
international expansion, Quarterdeck entered into an exclusive distribution
agreement for Japan with Marubeni Corporation. The agreement commits Marubeni to
minimum quarterly order amounts and provides for a jointly established
Quarterdeck marketing office in Tokyo.
Cost of Revenues: Cost of revenues include product production, packaging,
documentation and media, amortization of capitalized software costs, technical
support and certain license fees paid to third parties. In fiscal 1997, cost of
revenues of $21,271,000 decreased 57.1% or $28,329,000, from cost of revenues of
$49,600,000 in fiscal 1996, while declining as a percent of net revenues to
25.4% in fiscal 1997 from 37.3% in fiscal 1996. The dollar decrease in cost of
revenues was largely due to reduced sales and to improved efficiency in
production and technical support activities. The reduction as a percent of net
revenues was primarily due to a decrease in the manufacturing cost per unit
resulting from a change in the Company's product mix to the CD-Rom format from
higher cost floppy disks, consolidation of the purchasing function which allowed
the Company to obtain volume discounts with respect to manufacturing, continued
reduction of technical support costs and reduced software amortization and
royalty expense in the current year. In fiscal 1996, cost of revenues of
$49,600,000 increased 42.2% or $14,716,000, from cost of revenues of $34,884,000
in fiscal 1995, while increasing as a percent of net revenues to 37.3% in fiscal
1996 from 29.7% in fiscal 1995. This dollar increase in cost of revenues was
largely due to a corresponding increase in net revenues. The increase as a
percent of net revenues resulted from higher production and technical support
costs in fiscal 1996 due to the slower than expected integration of acquired
operations. Additionally, the Company increased the reserves for obsolete and
slow moving inventory during fiscal 1996.
Software development and purchased software costs are capitalized once
technological feasibility is achieved and are generally amortized over one to
three year periods, commencing upon initial product release. In fiscal 1997,
1996, and 1995, Quarterdeck did not capitalize any internal software
development, judging that costs incurred after achieving technological
feasibility were immaterial, but did capitalize external software purchases of
$0, $4,504,000 and $2,564,000, respectively.
14
<PAGE> 15
In fiscal 1997, amortization of capitalized software costs of $1,670,000
decreased 55% or $2,041,000, from amortization of capitalized software costs of
$3,711,000 in fiscal 1996, reflecting the winding down of earlier capitalized
amounts. In fiscal 1996, amortization of capitalized software costs of
$3,711,000 increased 135.6% or $2,136,000, from amortization of capitalized
software costs of $1,575,000 in fiscal 1995, largely reflecting the write-off of
$1,746,000 in capitalization of products for which market demand had fallen or
which the Company no longer planned to market.
Future cost of revenues as a percentage of net revenues will depend upon
the amount of amortization of capitalized software, the mix of sales by product,
domestic versus international, and single unit sales versus multiple license
packages, and the mix of third party developed and licensed products versus
internally developed products, among other things.
OPERATING EXPENSES
In fiscal 1997, total operating expenses of $76,569,000 decreased 51.4% or
$81,017,000, from total operating expenses of $157,586,000 in fiscal 1996, while
declining as a percent of net revenues to 91.4% in fiscal 1997 from 118.4% in
fiscal 1996. This decline in total operating expenses resulted primarily from
the Company's restructuring, consolidation, and downsizing activities which
began late in fiscal 1996. In fiscal 1996, total operating expenses of
$157,586,000 increased 115.8% or $84,563,000, from total operating expenses of
$73,023,000 in fiscal 1995, while increasing as a percent of net revenues to
118.4% in fiscal 1996 from 62.1% in fiscal 1995. The large fiscal 1996 increase
was primarily due to the expansion of the business through acquisitions during
fiscal 1995 and fiscal 1996. During fiscal 1996, several mergers were accounted
for as immaterial pooling of interests and periods prior to October 1, 1995 were
not restated. Accordingly, $12,200,000 of fiscal 1996 operating expenses related
to the acquired companies which were treated as immaterial pooling of interests
do not include comparable expenses for fiscal 1995.
Research and Development: Research and development expenses consist
primarily of salaries, benefits and consulting fees to support product
development, including product testing and documentation. In fiscal 1997,
research and development expenses of $16,419,000 decreased 23.0% or $4,895,000,
from research and development expenses of $21,314,000 in fiscal 1996, while
increasing as a percent of net revenues to 19.6% in fiscal 1997 from 16.0% in
fiscal 1996. The decrease in research and development expenses was largely due
to a reduction in the quantity of products the Company is exploiting or
developing. As discussed earlier, the Company has discontinued or divested
non-core products. The research and development expenditures during fiscal 1997
were primarily focused on the portfolio of PC "helpware" products which comprise
the Company's product strategy (See page 2). The increase in research and
development expenses as a percent of net revenues was largely due to the
reduction in net revenues during fiscal 1997 as compared to fiscal 1996. In
fiscal 1996, research and development expenses of $21,314,000 increased 49.2% or
$7,028,000, from research and development expenses of $14,286,000 in fiscal
1995, while increasing as a percent of net revenues to 16.0% in fiscal 1996 from
12.1% in fiscal 1995. The dollar increase was 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
was largely due to cost incurred to develop Internet products which did not
generate revenue in proportion to development spending as compared to more
established utility products.
Sales and Marketing: Sales and marketing expenses consist of salaries and
commissions and related costs of sales and marketing and customer service
personnel as well as advertising, trade show and promotional expenses. In fiscal
1997, sales and marketing expenses of $29,305,000 decreased 55.8% or
$37,050,000, from sales and marketing expenses of $66,355,000 in fiscal 1996,
while decreasing as a percent of net revenues to 35.0% in fiscal 1997 from 49.9%
in fiscal 1996. These decreases were largely due to headcount reductions due to
the restructuring efforts and reduced advertising and market development
expenditures. In fiscal 1996, sales and marketing expenses of $66,355,000
increased 116.7% or $35,731,000, from sales and marketing expenses of
$30,624,000 in fiscal 1995, while increasing as a percent of net revenues to
49.9% in fiscal 1996 from 26.0% in fiscal 1995. The dollar increase in sales and
marketing expense was primarily due to increases in sales and marketing
headcount, increases in direct marketing expenses, and increases in market
development funds, packaging, and collateral related expenses as a result of the
Company's increased product portfolio. The 1996
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<PAGE> 16
increase as a percentage of net revenues was due to large expenditures for
market development funds, advertising, and other variable sales and marketing
expenditures which were committed based upon expected sales levels which did not
occur.
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 updgraded
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: General and administrative expenses consist of
salaries and related costs of support departments, overhead and facilities. In
fiscal 1997, general and administrative expenses of $17,227,000 decreased 46.4%
or $14,901,000, from general and administrative expenses of $32,128,000 in
fiscal 1996, while decreasing as a percent of net revenue to 20.5% in fiscal
1997 from 24.1% in fiscal 1996. These declines were largely due to reductions in
headcount and facility related expenses due to the restructuring efforts late in
fiscal 1996 and in fiscal 1997. In fiscal 1996, general and administrative
expenses of $32,128,000 increased 55.2% or $11,424,000, from general and
administrative expenses of $20,704,000 in fiscal 1995, while increasing as a
percent of net revenues to 24.1% in fiscal 1996 from 17.6% in fiscal 1995. This
increase as a percentage of net revenues was largely due to redundancies
relating to acquisitions which were not integrated as quickly as expected.
Acquisition and Other Charges: In fiscal 1997, acquisition and other
charges of $(702,000) decreased 102.8% or $25,496,000, from acquisition and
other charges of $24,794,000 in fiscal 1996, while decreasing as a percent of
net revenues to (0.8%) in fiscal 1997 from 18.6% in fiscal 1996. During fiscal
1997, the Company acquired certain assets of TuneUp.com which resulted in an
in-process research and development charge of approximately $268,000.
Additionally, during fiscal 1997 Quarterdeck reversed over-accrued acquisition
costs into income in the amount of $970,000 which related to estimated
acquisition integration costs for companies acquired during fiscal 1995 and
1996, which were determined as no longer necessary, based on actual costs
incurred. In fiscal 1996, acquisition and other charges of $24,794,000 increased
244.8% or $17,604,000, from acquisition and other charges of $7,190,000 in
fiscal 1995, while increasing as a percent of net revenues to 18.6% in fiscal
1996 from 6.1% in fiscal 1995. During fiscal 1996, the Company recorded
acquisition costs totaling $24,794,000 related primarily to the acquisitions of
Inset, Datastorm, Future Labs, Vertisoft, Limbex, Interlink and Pinnacle
technology. Included in this amount is $14,993,000 of acquired in-process
research and development charges. During fiscal 1995, Quarterdeck recorded costs
of $7,190,000 as a result of 1995 acquisitions. See Note 1 and Note 2 of Notes
to Consolidated Financial Statements for further discussion.
Restructuring Costs: In fiscal 1997, restructuring costs of $12,415,000
decreased 4.5% or $580,000, from restructuring costs of $12,995,000 in fiscal
1996, while increasing as a percent of net revenues to 14.8% in fiscal 1997 from
9.8% in fiscal 1996. During fiscal 1997, the Company recorded a total charge of
$11,051,000 of which $6,155,000 is expected to be paid in cash, during the next
fiscal year, relating to a restructuring program designed to continue to focus
the Company on the new corporate strategy. This charge included the write off of
operating assets used in discontinued operations, a severance provision for
individuals who were terminated, the write down of the value of a building the
Company plans to sell, and other obligations associated with recent downsizing
and divestiture activities. In addition, the Company recorded an additional
charge of $1,364,000 in fiscal 1997 related to the restructuring in September
1996.
In fiscal 1996, restructuring costs of $12,995,000 increased $12,776,000,
from restructuring costs of $219,000 in fiscal 1995, while increasing as a
percent of net revenues to 9.8% in fiscal 1996 from 0.2% in fiscal 1995. Late in
fiscal 1996, Quarterdeck implemented a comprehensive, corporate wide
restructuring plan, 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 Quarterdeck's
products that had experienced lower demand or were at the end of their product
life cycle.
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<PAGE> 17
Litigation Settlement: On December 19, 1997, the Company reached an
agreement in principle to settle federal and state shareholder actions for
$12,500,000, of which the Company will be required to pay approximately
$1,905,000. Accordingly, Quarterdeck has recorded a charge of $1,905,000 for
fiscal 1997. There were no litigation settlements in fiscal 1996 or fiscal 1995.
See Legal Proceedings for further discussion.
Other income (expense): In fiscal 1997, net other expense, of $2,143,000
increased $2,181,000, from net other income of $38,000 in fiscal 1996, while
increasing as a percent of net revenues to 2.6% in fiscal 1997 from 0.0% in
fiscal 1996. During fiscal 1997, net other expense was primarily due to losses
of $2,922,000 on the Company's investments in Infonautics and Intelligence At
Large partially offset by gains on the sales of Lernout & Hauspie stock and
warrants of $1,026,000. Additionally, net losses on disposal of fixed assets
were recorded of approximately $247,000. During fiscal 1996, net other income of
$38,000 was comprised of gains on the sale of short term investments and sales
of equipment.
Interest income (expense): In fiscal 1997, net interest expense of
$2,072,000 increased $1,967,000, from net interest expense of $105,000 in fiscal
1996, while increasing as a percent of net revenues to 2.5% in fiscal 1997 from
0.0% in fiscal 1996. Interest expense increased in fiscal 1997 because the
convertible bonds issued in March 1996 were outstanding for the full year versus
six months in fiscal 1996. Additionally, larger interest payments were made on
its construction loan due to higher loan balances outstanding in fiscal 1997,
and a higher interest rate was paid on a new revolving line of credit than under
the previous line which was outstanding during fiscal 1996.
Income Taxes: Income tax expenses for fiscal 1997, 1996 and 1995 were
$130,000, $806,000 and $331,000, respectively. A 100% valuation allowance was
applied to Quarterdeck's net deferred tax asset of $32,805,000 at September 30,
1997 (See Note 12 of the Notes to the Consolidated Financial Statements). The
net deferred tax asset (before applying the valuation allowance) is comprised of
the estimated tax effect of (a) 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 and (b) tax
net operating losses. Management believes that it is not appropriate to record a
deferred tax asset until such time as 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. The net deferred tax assets, prior to the
application of valuation allowances, for fiscal 1996 was $24,858,000 and for
fiscal 1995 was $5,514,000.
TRENDS AND UNCERTAINTIES
The computer software industry is subject to rapid technological change
often evidenced by new competing products, improvements in existing products and
improvements and/or upgrades to operating systems. The Company 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 years that have begun to experience reduced revenues or have
become obsolete. If the Company's leading products become outdated or are
rendered obsolete as a result of improvements in operating systems, hardware or
technology generally and lose market share faster than those revenues are
replaced by new products or if new products or existing product upgrades are not
introduced in a timely manner or do not achieve the revenues anticipated by the
Company, the Company's operating results could be materially adversely affected.
Even with normal development cycles, the market environment can change so
quickly that features in certain 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.
The Company is focusing significant efforts on evolving its core utilities
and communication product lines into a set of products designed to enhance user
performance, simplify system management and reduce the ongoing cost of ownership
for networked personal computing. As part of this effort, the Company is
developing new products and adapting its current technology into these products
and has made and may continue to make strategic acquisitions and divestitures.
There is no assurance these efforts will be successful. Other significant risks
associated with the Company's focus on this category of products include the
timing of releases in relation to competitive products, uncertainties
surrounding the rate and extent of development of this new market and one-time
losses and charges that may result from divestitures of non-core assets.
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<PAGE> 18
The Company is also devoting substantial efforts to the development of
software products that are designed to operate on Microsoft's Windows 95 and
Windows NT. As a result of this focus, the Company's current revenues and
profitability are dependent on the viability of such operating systems. In
addition, Microsoft Corporation may incorporate advanced utilities or other
features in Windows 95 and/or Windows NT that may decrease the demand for
certain of the Company's products including those under development. Should the
Company not be able to develop and market products successfully and timely that
function under Windows 95 and Windows NT, and offer perceived value to Windows
95 and Window NT users beyond that which is offered in the base operating
system, future revenues would be adversely affected.
Although Quarterdeck believes that its product planning and development
strategies and processes will result in successful development of technology
innovations in the future, 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.
Quarterdeck 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.
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, including the level of functionality, performance and
features included in the final release of these competitive products and the
price thereof and the market's evaluation of competitive products compared to
the then current functionality, performance, features and price of the Company's
products.
Quarterdeck believes substantial sales and marketing efforts are essential
to achieve revenue growth and to maintain and enhance the Company's competitive
position. Accordingly, 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.
The Company's pattern of revenues and earnings were affected during prior
periods 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 a product 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. 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 of the
product. Such order delays or cancellations can cause material fluctuations in
revenues from one quarter to the next. Net revenues may be materially affected
favorably or adversely by these effects. Like other manufacturers of package
software products, the Company is exposed to the risk of product returns from
distributors and reseller customers. Quarterdeck's return policy generally
allows its distributors, subject to certain limitations, to return purchased
products in exchange for new products or for credit toward future purchases.
However, competitive factors and/or market conditions often require the Company
to offer expanded rights of return for products that distributors or retailers
are unable to sell. The Company also provides price protection rights to its
distributors which generally give distributors credit for price decreases on
products remaining in the
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<PAGE> 19
distributors' inventory and on products remaining in retail customers'
inventory. The Company estimates and maintains reserves for product returns. In
addition to detailed historical return rates, the Company's estimate of return
reserves takes into account future product upgrades and new releases, current
market conditions and customer inventories, as well as any other known factors
that could impact anticipated returns. There can be no assurance that actual
returns will not exceed recorded allowances. Such excess returns can result in a
material adverse effect on business, operating results and financial condition.
Recruitment of personnel in the computer software industry is highly
competitive. The Company's success depends to a significant extent upon the
performance of its executive officers and other key personnel. The Company
believes its ability to attract and retain highly qualified personnel has been
adversely affected by the Company's recent restructurings and financial
performance. As a result, there can be no assurance that the Company will be
successful in attracting and retaining such personnel. The loss of the services
of key individuals or the inability to attract and retain highly qualified
personnel, including developers, could have a material adverse effect on the
Company.
The Company's Series C Preferred Stock is convertible into shares of Common
Stock as described in Note 6 to the Consolidated Financial Statements. The exact
number of shares of Common Stock issuable upon conversion of all of the Series C
Preferred Stock cannot currently be estimated but, generally, such issuances of
Common Stock, respectively, will vary inversely with the market price of the
Common Stock. The holders of Common Stock may be materially diluted by
conversion of the Series C Preferred Stock which dilution will depend on, among
other things, the future market price of the Common Stock and the decisions by
holders of shares of Series C Preferred Stock as to when to convert such shares.
If the market price of the Common Stock was $1.00, $2.00 or $3.00, the aggregate
number of shares of Common Stock issuable upon conversion of the Series C
Preferred Stock would be approximately 31,600,000, 15,800,000 or 10,500,000
shares of Common Stock, respectively. To the extent the market price per share
of the Common Stock is lower or higher than the examples set forth above, the
Company would issue more or less shares of Common Stock than reflected in such
examples, and such difference could be material. The Company's stock has
experienced wide fluctuations in its stock price and stock market volatility,
whether related to the stock market generally or the Company specifically. Such
fluctuations, if coincident in time with conversions of Series C Preferred
Stock, will impact directly the number of shares of Common Stock issuable upon
conversion thereof. The terms of the Series C Preferred Stock do not provide for
any limit on the number of shares of Common Stock which the Company may be
required to issue in respect thereof. See Part II for further discussion.
During fiscal 1995 and fiscal 1996, the Company consummated a number of
acquisitions which broadened the Company's product portfolio and sales
distribution channels. At the end of fiscal 1996 and during fiscal 1997, the
Company implemented a comprehensive, corporate-wide restructuring plan to focus
the Company in the utilities and communications software categories. The
Company's results for fiscal 1996 and fiscal 1997 were negatively impacted by
the costs of integrations, acquisitions, including severance payments and asset
devaluations. The Company may in the future make strategic acquisitions and
divestitures. Implementation of these strategic transactions could result in
charges and write-downs having a material adverse effect on the Company's
financial results. In addition, 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, the diversion of management's
attention from day to day matters and the integration of acquired products.
Acquisitions may result in the Company competing with companies and in markets
where the Company had not previously competed. There may also be an adverse
impact on the revenues of acquired companies due to the transition of products
sales and marketing and research and development activities.
PATENTS, TRADEMARKS AND PRODUCT PROTECTION
The Company relies on a combination of trade secret, patent, copyright and
trademark laws, license agreements and nondisclosure agreements to protect its
rights to its products. The Company provides its products to end users under a
nonexclusive license that by its terms limits the warranties provided by and
liability of the Company. The ability of software companies to enforce such
licenses has not been finally
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<PAGE> 20
determined by the U.S. Supreme Court. The use and registration by the Company of
its trademarks and servicemarks do not assure that the Company has superior
rights to others that may have registered or used identical or related marks on
related goods or services, nor that such registrations or uses by others will
not be used to attempt to foreclose use of a particular mark by the Company.
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.
Policing the unauthorized use of computer software is difficult and
software piracy is expected to continue to be a persistent problem for the
packaged software industry, particularly in certain international markets, and
therefore for the Company.
Over the last several years, the number of software-related patents issued
by the United States Patent and Trademark Office has increased dramatically. The
Company does not know all of the patents that have issued or that may be pending
that could cover any of its products. Accordingly, the Company may not have, or
may at any time lose, the right to develop, use or distribute one or more of its
products. Any patent that precludes the Company from developing, using or
distributing one or more of its products, that forces the Company to pay
substantial royalties or substantial attorneys fees and other litigation costs,
or that casts doubt on the Company's right to develop, use or distribute any
product could have a material adverse effect on the Company.
FACTORS AFFECTING QUARTERLY RESULTS AND STOCK PRICE
The Company's future operating results and stock price could be subject to
significant fluctuations and volatility. 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. The Company's net revenues and net
income (loss) have fluctuated significantly from year to year and from quarter
to quarter since the Company's initial public offering June 1991.
The Company also has experienced wide fluctuations in its stock price,
which may be subject to significant fluctuations in the future over a short
period of time. The trading price of the Common Stock increased from
approximately $3.00 in January 1995 to a high of approximately $39.00 in
December 1995 to a low of approximately $2.00 in May 1997. Fluctuations may be
due to factors specific to the Company, to changes in analysts' estimates or to
factors affecting the computer industry or the securities markets in general. In
addition, since net income per share is calculated using the treasury stock
method (see Note 1 of the 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. This and other factors,
including the existence or conversion of any outstanding convertible securities,
any decline in revenues or quarterly operating results, or the failure to meet
market expectations, could have an immediate and significant effect on the
trading price of the Common Stock in any given period.
In accordance with generally accepted accounting principles, the effect of
convertible securities and common stock equivalents would be considered in
performing the calculation of fully diluted earnings per share. In the event the
Company were to record a net profit, the number of shares used to calculate
earnings per share would be significantly higher due to the effect these
convertible securities and common stock equivalents.
RECENT ACCOUNTING PRONOUNCEMENTS
New accounting pronouncements SFAS No. 128, "Earnings Per Share," SFAS No.
130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosure about
Segments of an Enterprise and Related
20
<PAGE> 21
Information," (discussed in Note 1 to the Consolidated Financial Statements,
"Summary of Significant Accounting Policies)."
The Company's basic earnings (loss) per share as calculated under SFAS 128
are $(0.43), $(2.15) and $0.33 for the years ended September 30, 1997, 1996 and
1995, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased $1,903,000 to $23,651,000 at September
30, 1997 from $25,554,000 at September 30, 1996. Working capital, which is the
excess of current assets over current liabilities, at September 30, 1997 was
$6,917,000 as compared to a deficit of $(4,684,000) at September 30, 1996.
Operating activities: Cash used in operating activities of $(10,889,000)
was primarily due to a net reduction in assets and liabilities of $(7,546,000)
which resulted from net reductions in receivables, inventories, and other assets
of $7,124,000 being offset by net reductions in payables, accrued liabilities,
accrued acquisition, restructuring and other charges, and foreign currency
translation adjustment of $(14,670,000). An additional $(3,343,000) of cash was
used as a result of the Company's net loss of $(18,398,000) offset by non cash
charges of $15,055,000.
The reduction in accounts payable and accrued liabilities was due to
payments made to trade vendors and an overall decline in the level of the
Company's operating expenses as a result of the execution of the restructuring
plans. The reduction in accrued acquisition, restructuring and other charges was
due to payments made during the execution of the fiscal 1996 restructuring plan.
The reductions in accounts receivable and inventory were due to aggressive
collections and tight inventory control and the consolidation of the purchasing
function during fiscal 1997. The reduction in other assets was largely due to a
write off of the Intelligence At Large investment, the sale of the Lernout and
Hauspie investment during fiscal 1997, and the reclassification of the
Infonautics investment to other current assets.
Investing activities: Cash used in investing activities of $3,686,000 was
largely due to capital expenditures of $2,093,000 related to completing the
construction of the Columbia, Missouri building, as required by the March 1996
acquisition agreement of Datastorm and normal purchases of office, computer, and
telephone system equipment for the Company.
Financing activities: Cash provided by financing activities of $12,672,000
was primarily related to net proceeds of $24,594,000 from the sale of Series C
convertible preferred stock, $10,000,000 of which was utilized to repurchase the
remaining outstanding Series B convertible preferred stock. An additional
$689,000 was received from the issuance of common stock due to the exercise of
stock options and $1,669,000 in borrowings offset by approximately $4,280,000 in
repayments of debt.
On March 28, 1996, the Company issued $25,000,000 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. See Note 5 of the Consolidated Financial Statements for further
discussion.
In April 1997, the Company established an asset based line of credit with
Greyrock Business Credit, a division of NationsBank. The Company repaid and
terminated its existing line with Bank of America with proceeds from the new
line. Maximum borrowings under the new line are the lesser of $12,000,000 and
the sum of 85% of eligible accounts receivable plus the value of inventory to a
maximum of $2,000,000. The line can be used for general corporate purposes,
including investments and acquisitions, and bears interest at prime plus 2%. The
line is secured by substantially all assets of Quarterdeck. The Company is
obligated to pay a minimum interest charge of $10,000 per month and comply with
certain other non-financial covenants and restrictions. At September 30, 1997,
the Company had $1,579,000 outstanding under the line and the ability to borrow
up to a maximum amount of $9,528,000. The current term of the agreement matures
on March 31, 1998. This agreement is automatically renewable for successive
additional one year terms unless advance notification is provided by either
party prior to the next maturity date.
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<PAGE> 22
In April 1996, the Company borrowed $2,000,000 from a bank to partially
finance the completion of the building in Columbia, Missouri. The loan was paid
in full in April 1997.
On August 6, 1996, the Company's Datastorm subsidiary secured construction
financing from a bank of up to $5,000,000 with an interest rate equal to the
bank's commercial base rate, currently prime plus 2%, secured by the newly
constructed Columbia, Missouri building. The principal amount outstanding as of
September 30, 1997 is $4,000,000. The principal amount plus any unpaid interest
was originally due February 7, 1997, and has been extended until October 5, 1997
with the maximum borrowings reduced to $3,500,000 as of October 5, 1997. The
loan is due for repayment in full on January 5, 1998. Management is pursuing the
sale and/or lease of the facility and other long-term take-out financing
options. There can be no assurance that the Company will be successful in
achieving a sale on favorable terms or in obtaining such longterm financing with
acceptable terms and conditions. As part of the September 30, 1997
restructuring, the Company wrote the net book value of the building down to
$7,000,000 and in the event the building is sold for a price lower than
Quarterdeck's net book value at the time of the sale, the Company would realize
a loss which may be material to Quarterdeck's financial results.
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 $20,000,000 in cash. During fiscal 1997, $10,000,000 of
Series B Convertible Preferred Stock was converted into Common Stock and
$10,000,000 was repurchased by the Company with a portion of the proceeds from
the issuance of the Series C Convertible Preferred Stock.
In September and between October and November 4, 1997, the Company issued
26,025 and 2,975 shares, respectively of Series C Convertible Preferred Stock,
stated value $1000 per share (the "Series C Preferred Stock"), of the Company
for $26,025,000 and $2,975,000, respectively. See Part II and Note 6 to the
Consolidated Financial Statements for further discussion.
Stockholder approval is being sought to allow the Company to issue 20% or
more of its Common Stock upon conversion of the Series C Preferred Stock. If
such approval is not obtained, the Company will be obligated to immediately
redeem, at a premium, shares of Series C Preferred Stock, the number of which
will depend on the per share market price of the Common Stock on the date of
redemption. There can be no assurance that the Company will have available the
cash resources to satisfy its redemption obligations. Compliance with the
redemption obligation would have a material adverse affect on the Company's
financial condition and ability to implement its business strategy. See "Part
II, Recent Sales of Unregistered Securities" for a further discussion.
On December 19, 1997, the Company reached an agreement in principle to
settle the shareholder litigation for $12,500,000. The Company will be required
to pay approximately $1,905,000 as part of this settlement. The Company's
directors' and officers' insurance carrier will contribute $10,595,000 to the
settlement.
The Company believes existing working capital, borrowing capacity under the
line of credit and additional borrowing against, or net proceeds from the sale
of, real estate will be sufficient to fund operations of the Company's core
business for fiscal 1998. Nevertheless, the Company may explore various
financing alternatives in order to finance an expansion of the core business of
the Company and help provide additional working capital for operations. There is
no assurance that additional financing will be available, or if available, will
be available on acceptable terms. Any decision or ability to obtain financing
through debt or equity investment will depend on various factors, including,
among others, revenues, 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 continue to be successful or that
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<PAGE> 23
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.
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.
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, 1997 and 1996
Consolidated Statements of Operations for fiscal years ended September
30, 1997, 1996 and 1995
Consolidated Statements of Stockholders' Equity for fiscal years ended
September 30, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for fiscal years ended September
30, 1997, 1996 and 1995
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.
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3. Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
----------
<S> <C>
3.1(2) Certificate of Incorporation of the Company.
3.2(11) Certificate of Amendment of Certificate of Incorporation of the Company.
3.3(10) Certificate of Designations of Series B Convertible Preferred Stock.
3.4(11) Amended Designations of Series A Junior Participating Preferred Stock of the
Company.
3.5(15) Certificate of Designations of Series C Convertible Preferred Stock.
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(10) Form of Amendment to the Rights Agreement dated November 7, 1996.
4.3(15) Form of Amendment to the Rights Agreement dated September 30, 1997.
4.4(8) Note Agreement between the Company and The Northwestern Mutual Life Insurance
Company dated as of March 1, 1996.
*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(9) 1996 Acquisition Stock Incentive Plan.
*10.5(11) Consulting Agreement between the Company, King R. Lee & Associates, Inc., and
King R. Lee, dated as of August 27, 1996.
*10.6(2) Form of Indemnification Agreement between the Company and certain of its
officers and directors.
*10.7(7) Management Employment Contract between the Company and Jim Moise, dated as of
January 27, 1995.
*10.8(11) Employment Agreement between the Company and Bradley D. Schwartz, dated as of
January 16, 1995.
*10.9(11) Employment Agreement between the Company and Anatoly Tikhman, dated as of July
24, 1996.
*10.10(11) Employment Agreement between the Company and Joe Fusco, dated as of September
19, 1996.
*10.11(12) Employment Agreement between the Company and Curt Hessler, dated as of January
13, 1997.
*10.12(14) Employment Agreement between the Company and Ron Ben-Yehuda, dated as of May
1, 1996, as amended.
*10.13(14) Employment Agreement between the Company and Marc Epstein, dated as of July
11, 1996.
*10.14(14) Employment Agreement between the Company and Tom Mackey, dated as of June 20,
1997.
10.15(7) Lease between the Company and Marina Business Center, dated as of July 17,
1995, with respect to headquarters property.
10.16(7) 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.
</TABLE>
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<TABLE>
<CAPTION>
EXHIBIT
NUMBER
----------
<S> <C>
10.17(2) Domestic (U.S.) Distribution License Agreement between the Company and Ingram
Micro, Inc., dated as of May 16, 1991.
10.18(13) Loan and Security Agreement between the Company and Greyrock Business Credit,
a division of NationsCredit Commercial Corporation, dated as of April 1, 1997.
10.19(14) Asset Purchase Agreement between TOC Holding Company formerly known as
TuneUp.Com, Inc. and the Company, dated as of May 14, 1997.
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
</TABLE>
- ---------------
* 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 Annual Report on Form 10-K for the
year ended September 30, 1995, and incorporated herein by reference.
(8) Filed as an exhibit to the Company's Current Report on Form 8-K dated March
28, 1996, and incorporated herein by reference.
(9) Filed as an exhibit to the Company's Registration Statement on Form S-8
(File No. 333-4602), and incorporated herein by reference.
(10) Filed as an exhibit to the Company's Current Report on Form 8-K dated
November 25, 1996, and incorporated herein by reference.
(11) Filed as an exhibit to the Company's Annual Report on Form 10-Q for the
year ended September 30, 1996, and incorporated herein by reference.
(12) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended December 31, 1996, and incorporated herein by reference.
(13) Filed as an exhibit to the Company's Current Report on Form 8-K dated April
14, 1997, and incorporated herein by reference.
(14) 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.
(15) Filed as an exhibit to the Company's Current Report on Form 8-K dated
September 30, 1996, and incorporated herein by reference.
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<PAGE> 26
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.......................................................... 27
Consolidated Balance Sheets at September 30, 1997 and 1996............................ 28
Consolidated Statements of Operations for fiscal years ended September 30, 1997, 1996
and 1995............................................................................ 29
Consolidated Statements of Stockholders' Equity for fiscal years ended September 30,
1997, 1996 and 1995................................................................. 30
Consolidated Statements of Cash Flows for fiscal years ended September 30, 1997, 1996
and 1995............................................................................ 33
Notes to Consolidated Financial Statements............................................ 34
CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
Schedule II -- Valuation and Qualifying Accounts...................................... 56
</TABLE>
26
<PAGE> 27
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, 1997 and 1996 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, 1997. 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 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, 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, 1997
and 1996, and the results of their operations and their cash flows for each of
the years in the three-year period ended September 30, 1997, 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 7, 1997, except for the first paragraph
of note 13, which is as of December 19, 1997
27
<PAGE> 28
QUARTERDECK CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
1997 1996
------- -------
<S> <C> <C>
Current assets:
Cash and short-term investments........................................ $23,651 $25,554
Trade accounts receivable.............................................. 7,028 9,265
Inventories............................................................ 1,177 2,151
Other current assets................................................... 4,655 5,594
------- -------
Total current assets........................................... 36,511 42,564
Equipment and leasehold improvements, net................................ 14,153 21,252
Capitalized software costs, net.......................................... 1,790 3,448
Other assets............................................................. 3,427 9,517
------- -------
$55,881 $76,781
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable....................................................... $ 3,792 $10,685
Accrued liabilities.................................................... 14,196 17,232
Accrued acquisition, restructuring and other charges................... 5,385 10,940
Income tax payable..................................................... 627 --
Notes payable to banks................................................. 5,579 8,280
Current portion of long-term obligations............................... 15 111
------- -------
Total current liabilities...................................... 29,594 47,248
Convertible notes........................................................ 25,000 25,000
Other long-term obligations, less current portion........................ 114 108
------- -------
Total liabilities.............................................. 54,708 72,356
Liquidity (Note 16)
Commitments and litigation (Notes 13 and 14)
Stockholders' equity:
Series B Preferred stock (Par value $100, authorized: 2,000,000; issued
and outstanding: 0 and 200,000 shares, respectively, liquidation
preference $20,000)................................................. -- 20,000
Series C Preferred stock (Par value $1,000, authorized: 29,000; issued
and outstanding: 26,025 and 0 shares, respectively, liquidation
preference $26,025)................................................. 24,594 --
Common stock (Par value $0.001, authorized: 70,000,000 shares; issued
and outstanding: 43,339,000 and 37,666,000 shares, respectively).... 43 38
Additional paid-in capital............................................. 75,630 64,819
Accumulated deficit.................................................... (98,164) (79,766)
Foreign currency translation adjustment................................ (281) (468)
Notes receivable from directors for sale of stock...................... (18) (18)
Net unrealized gain (loss) on marketable securities.................... (72) 379
Treasury stock......................................................... (559) (559)
------- -------
Total stockholders' equity..................................... 1,173 4,425
------- -------
$55,881 $76,781
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE> 29
QUARTERDECK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
----------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Net revenues............................................... $ 83,787 $133,100 $117,606
Cost of revenues........................................... 21,271 49,600 34,884
-------- -------- --------
Gross profit............................................. 62,516 83,500 82,722
Operating expenses:
Research and development................................. 16,419 21,314 14,286
Sales and marketing...................................... 29,305 66,355 30,624
General and administrative............................... 17,227 32,128 20,704
Acquisition, restructuring and other charges............. 11,713 37,789 7,409
Litigation settlement.................................... 1,905 -- --
-------- -------- --------
Total operating expenses................................. 76,569 157,586 73,023
Operating income (loss).................................... (14,053) (74,086) 9,699
Other income (expense), net................................ (2,143) 38 (38)
Interest income (expense), net............................. (2,072) (105) 1,922
-------- -------- --------
Income (loss) before income taxes.......................... (18,268) (74,153) 11,583
Provision for income taxes................................. 130 806 331
-------- -------- --------
Net income (loss).......................................... $(18,398) $(74,959) $ 11,252
======== ======== ========
Net income (loss) per share:
Primary.................................................. $ (0 .43) $ (2.15) $ 0.32
-------- -------- --------
Fully diluted............................................ $ (0 .43) $ (2.15) $ 0.31
-------- -------- --------
Shares used to compute net income (loss) per share:
Primary.................................................. 43,168 34,894 35,557
-------- -------- --------
Fully diluted............................................ 43,168 34,894 36,499
-------- -------- --------
Additional unaudited pro forma data:
Income (loss) before taxes............................... $(18,268) $(74,153) $ 11,583
Pro forma income tax expense............................. 130 806 3,406
-------- -------- --------
Pro forma net income (loss).............................. $(18,398) $(74,959) $ 8,177
======== ======== ========
Pro forma income (loss) per share:
Primary.................................................. $ (0 .43) $ (2.15) $ 0.23
-------- -------- --------
Fully diluted............................................ $ (0 .43) $ (2.15) $ 0.22
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
29
<PAGE> 30
QUARTERDECK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
SERIES B SERIES C
PREFERRED STOCK PREFERRED STOCK COMMON STOCK ADDITIONAL FOREIGN
--------------- --------------- --------------- TREASURY PAID IN CURRENCY
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT STOCK CAPITAL TRANSACTION
------- ------ ------- ------ ------- ------ -------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1994...... -- -- -- -- 33,033 $ 33 $ (27) $ 34,695 $(556)
Adjustment for Internetware, Inc.
pooling of interest............ -- -- -- -- 460 1 -- 9 --
Adjustment for StarNine
Technologies, Inc. pooling of
interest....................... -- -- -- -- 524 1 -- 223 --
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 non-qualified stock
options........................ -- -- -- -- -- -- -- 59 --
Undistributed earnings of
subchapter -S- subsidiaries.... -- -- -- -- -- -- -- 8,154 --
Capital contributions............ -- -- -- -- -- -- -- 450 --
Net income....................... -- -- -- -- -- -- -- -- --
Distribution to shareholders..... -- -- -- -- -- -- -- (7,888) --
Duplicate earnings elimination
for poolings................... -- -- -- -- -- -- -- -- --
Net increase in unrealized
gain........................... -- -- -- -- -- -- -- -- --
Foreign currency translation
adjustment..................... -- -- -- -- -- -- -- -- (7)
------ ---- ------ ---- ------ --- ----- ------- -----
Balance, September 30, 1995...... -- $ -- -- $ -- 34,673 $ 35 $ (559) $ 39,873 $(563)
====== ==== ====== ==== ====== === ===== ======= =====
<CAPTION>
NOTES NET
RECEIVABLE UNREALIZED
FROM GAIN/(LOSS) RETAINED
DIRECTORS ON EARNINGS TOTAL
FOR SALES MARKETABLE (ACCUMULATED STOCKHOLDER'S
OF STOCK SECURITIES DEFICIT) EQUITY
---------- ----------- ------------ -------------
<S> <<C> <C> <C> <C>
Balance, September 30, 1994...... -- $ -- $ 2,464 $36,609
Adjustment for Internetware, Inc.
pooling of interest............ -- -- (46) (36)
Adjustment for StarNine
Technologies, Inc. pooling of
interest....................... -- 33 245 502
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 non-qualified stock
options........................ -- -- -- 59
Undistributed earnings of
subchapter -S- subsidiaries.... -- -- (8,154) --
Capital contributions............ -- -- -- 450
Net income....................... -- -- 11,252 11,252
Distribution to shareholders..... -- -- (18) (7,906)
Duplicate earnings elimination
for poolings................... -- -- (384) (384)
Net increase in unrealized
gain........................... -- 162 -- 162
Foreign currency translation
adjustment..................... -- -- -- (7)
---- ---- ------- -------
Balance, September 30, 1995...... $(70) $ 195 $ 5,359 $44,270
==== ==== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements
30
<PAGE> 31
QUARTERDECK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SERIES B SERIES C
PREFERRED STOCK PREFERRED STOCK COMMON STOCK ADDITIONAL FOREIGN
---------------- ---------------- --------------- TREASURY PAID-IN CURRENCY
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT STOCK CAPITAL TRANSLATION
------ ------- ------ ------- ------ ------ -------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1995....... -- $ -- -- $ -- 34,673 $ 35 $ (559) $ 39,873 $(563)
Adjustment for Datastorm and Inset
poolings of interest............ -- -- -- -- 35 -- -- 385 23
Adjustment for Vertisoft pooling
of interest..................... -- -- -- -- -- -- -- 40 --
Adjustment for Future Labs pooling
of interest..................... -- -- -- -- 664 1 -- 1,987 --
Duplicate earnings elimination for
Datastorm pooling............... -- -- -- -- -- -- -- -- --
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.......................... -- -- -- -- -- -- -- -- --
Undistributed earnings of
subchapter - S- subsidiaries.... -- -- -- -- -- -- -- 8,967 --
Distribution to shareholders...... -- -- -- -- -- -- -- (7,307) --
Net increase in unrealized gain... -- -- -- -- -- -- -- -- --
Common stock options exercised.... -- -- -- -- 581 1 -- 2,979 --
Foreign currency translation
adjustment...................... -- -- -- -- -- -- -- -- 72
Issuance of convertible
preferred....................... 200 20,000 -- -- -- -- -- -- --
Cost of preferred stock
issuance........................ -- -- -- -- -- -- -- (1,275) --
--- ------- --- --- ------- ---- ----- ------- -----
Balance, September 30, 1996....... 200 $20,000 -- $ -- 37,666 $ 38 $ (559) $ 64,819 $(468)
=== ======= === === ======= ==== ===== ======= =====
<CAPTION>
NOTES NET
RECEIVABLE UNREALIZED
FROM GAIN/(LOSS) RETAINED
DIRECTORS ON EARNINGS TOTAL
FOR SALES MARKETABLE (ACCUMULATED STOCKHOLDER'S
OF STOCK SECURITIES DEFICIT) EQUITY
---------- ---------- ------------ -------------
<S> <C> <C> <C> <C>
Balance, September 30, 1995....... $(70) $195 $ 5,359 $44,270
Adjustment for Datastorm and Inset
poolings of interest............ -- -- -- 408
Adjustment for Vertisoft pooling
of interest..................... -- -- 999 1,039
Adjustment for Future Labs pooling
of interest..................... -- -- (1,481) 507
Duplicate earnings elimination for
Datastorm pooling............... -- -- (717) (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) (74,959)
Undistributed earnings of
subchapter - S- subsidiaries.... -- -- (8,967) --
Distribution to shareholders...... -- -- -- (7,307)
Net increase in unrealized gain... -- 184 -- 184
Common stock options exercised.... 52 -- -- 3,032
Foreign currency translation
adjustment...................... -- -- -- 72
Issuance of convertible
preferred....................... -- -- -- 20,000
Cost of preferred stock
issuance........................ -- -- -- (1,275)
---- ---- ------- ------
Balance, September 30, 1996....... $(18) $379 $(79,766) $ 4,425
==== ==== ======= ======
</TABLE>
See accompanying notes to consolidated financial statements.
31
<PAGE> 32
QUARTERDECK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
SERIES B SERIES C
PREFERRED STOCK PREFERRED STOCK COMMON STOCK ADDITIONAL FOREIGN
----------------- ---------------- --------------- TREASURY PAID IN CURRENCY
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT STOCK CAPITAL TRANSACTION
------ -------- ------ ------- ------ ------ -------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1996..... 200 $ 20,000 -- $ -- 37,666 $ 38 $ (559) $ 64,819 $(468)
Common stock options
exercised..................... -- -- -- -- 334 -- -- 689 --
Net loss........................ -- -- -- -- -- -- -- -- --
Other........................... -- -- -- -- -- -- -- 31 --
Net decrease in unrealized
gain.......................... -- -- -- -- -- -- -- -- --
Stock issuance for purchase of
Limbex........................ -- -- -- -- 1,372 1 -- (1) --
Amortization of warrants
issued........................ -- -- -- -- -- -- -- 96 --
Stock issuance for purchase of
InterLink..................... -- -- -- -- 205 -- -- -- --
Conversion of Series B preferred
stock......................... (100) (10,000) -- -- 3,762 4 -- 9,996 --
Issuance of convertible
preferred stock, net.......... -- -- 26 24,594 -- -- -- -- --
Repurchase of convertible
preferred stock............... (100) (10,000) -- -- -- -- -- -- --
Foreign currency translation
adjustment.................... -- -- -- -- -- -- -- -- 187
---- ------ --- ------- ------ ----- - --- ----- ------ -
Balance, September 30, 1997..... 0 $ 0 26 $24,594 43,339 $ 43 $ (559) $ 75,630 $(281)
==== ====== === ======= ====== ====== === ===== =======
<CAPTION>
NOTES NET
RECEIVABLE UNREALIZED
FROM GAIN/(LOSS) RETAINED
DIRECTORS ON EARNINGS TOTAL
FOR SALES MARKETABLE (ACCUMULATED STOCKHOLDER'S
OF STOCK SECURITIES DEFICIT) EQUITY
---------- ----------- ------------ -------------
<S> <<C> <C> <C> <C>
Balance, September 30, 1996..... $(18) $ 379 $(79,766) $ 4,425
Common stock options
exercised..................... -- -- -- 689
Net loss........................ -- -- (18,398) (18,398)
Other........................... -- -- -- 31
Net decrease in unrealized
gain.......................... -- (451) -- (451)
Stock issuance for purchase of
Limbex........................ -- -- -- --
Amortization of warrants
issued........................ -- -- -- 96
Stock issuance for purchase of
InterLink..................... -- -- -- --
Conversion of Series B preferred
stock......................... -- -- -- --
Issuance of convertible
preferred stock, net.......... -- -- -- 24,594
Repurchase of convertible
preferred stock............... -- -- -- (10,000)
Foreign currency translation
adjustment.................... -- -- -- 187
----- ---- -------- -------
Balance, September 30, 1997..... $(18) $ (72) $(98,164) $ 1,173
===== ==== ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
32
<PAGE> 33
QUARTERDECK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------------
1997 1996 1995
-------- -------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................................. $(18,398) $(74,959) $ 11,252
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization of equipment and leasehold
improvements.................................................. 4,900 6,063 3,610
Amortization of capitalized software costs and other
intangibles................................................... 1,670 3,770 1,575
Write-off of property and equipment............................. 6,474 1,409 --
Write-off of capitalized software costs and prepaid royalties... 77 4,860 --
Realized loss on marketable securities.......................... 1,666 -- --
Stock compensation.............................................. -- -- 59
Elimination of duplicate net income from acquired entities...... -- (717) (384)
Loss on sale or abandonment of assets........................... -- -- 38
Write-off of in-process research and development................ 268 14,993 2,900
Changes in assets and liabilities:
Trade accounts receivable....................................... 2,237 4,591 (7,749)
Refundable income taxes......................................... -- -- 6,301
Deferred income taxes........................................... -- 3,072 (2,178)
Inventories..................................................... 974 130 (435)
Other current assets............................................ (511) (3,420) (1,565)
Other assets.................................................... 4,424 (4,092) (203)
Accounts payable................................................ (6,893) (6,171) 5,342
Accrued liabilities............................................. (3,036) 68 1,865
Income taxes payable............................................ 627 -- --
Accrued acquisition, restructuring and other charges............ (5,555) 558 (3,476)
Foreign currency translation adjustment......................... 187 95 16
-------- -------- ---------
Net cash provided by (used in) operating activities........ (10,889) (49,750) 16,968
-------- -------- ---------
Cash flows from investing activities:
Purchases of short-term investments............................. -- -- (111,989)
Proceeds from sales and maturities of short-term investments.... -- 34,285 106,289
Capital expenditures............................................ (4,275) (19,669) (6,029)
Sale of marketable security..................................... 589 -- --
Capitalized software costs...................................... -- (4,504) (2,564)
Purchase of minority interest in affiliates..................... -- -- (2,700)
Loan to related party for note receivable -- building........... -- -- (469)
Advances (to) from affiliates................................... -- 52 (100)
Opening cash balance of previously unconsolidated subsidiary.... -- 5,054 559
Proceeds from sale of assets.................................... -- -- 12
Accrued acquisition charges, net of cash acquired............... -- 6,493 2,525
-------- -------- ---------
Net cash provided by (used in) investing activities........ (3,686) 21,711 (14,466)
-------- -------- ---------
Cash flows from financing activities:
Net proceeds from issuance of preferred stock, Series C......... 24,594 -- --
Net proceeds from issuance of preferred stock, Series B......... -- 20,000 --
Repurchase of preferred stock, series B......................... (10,000) -- --
Net proceeds from issuance of common stock...................... 689 3,529 1,439
Principal debt repayments....................................... (4,280) -- --
Proceeds from issuance of long-term convertible notes........... -- 25,000 43
Proceeds from issuance of bank debt............................. 1,579 8,280 --
Net proceeds (payments) under long-term obligations............. 90 (200) (482)
Notes payable to related parties................................ -- (1,093) 441
Acquisition of treasury stock................................... -- -- (532)
Distributions to stockholders................................... -- (7,307) (7,906)
-------- -------- ---------
Net cash provided by (used in) financing activities........ 12,672 48,209 (6,997)
-------- -------- ---------
Net increase (decrease) in cash and cash equivalents....... (1,903) 20,170 (4,495)
Cash and cash equivalents at beginning of period.................... 25,554 5,384 9,879
-------- -------- ---------
Cash and cash equivalents at end of period.......................... $ 23,651 $ 25,554 $ 5,384
======== ======== =========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest........................................................ $ 2,072 $ 468 $ 20
Income taxes.................................................... 240 1,993 1,534
</TABLE>
See accompanying notes to consolidated financial statements.
33
<PAGE> 34
QUARTERDECK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997, 1996 AND 1995
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. The Company accepts product returns from customers as defined by
the Company's general distributor agreements and as market conditions and other
factors require. The Company establishes allowances for estimated product
returns and exchanges as a reserve against revenues. Additionally, price
protection is generally granted to customers to reduce the customers cost of
inventory, as of the date of a price reduction which is initiated by
Quarterdeck. Provisions for sales returns, exchanges and price protection were
approximately $16,705,000, $31,889,000 and $9,136,000 in fiscal 1997, 1996 and
1995, 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. Revenue from subscription licenses is
recognized ratably over the term of the subscription.
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, 1997, the Company did not capitalize any internal software development costs
or any purchased software costs as such costs were immaterial. For the years
ended September 30, 1996 and 1995, the Company capitalized $4,504,000 and
$2,564,000, 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 greater of the
straight-line method over the estimated life or revenue recognized compared to
estimated revenue, 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,
1997, 1996 and 1995, the Company recorded $1,670,000, $3,711,000 and $1,575,000
of amortization of capitalized software costs, respectively. Amortization of
capitalized software costs is included in cost of revenues in the accompanying
consolidated statement of operations.
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.
34
<PAGE> 35
QUARTERDECK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997, 1996 AND 1995
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.
As of September 30, 1997, $22,191,000 of the total cash and cash equivalent
balance was invested in interest bearing bank accounts and cash equivalent money
market funds.
The Company accounts for short-term investments in accordance with
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 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.
Computation of Net Income (Loss) per Share
The primary net income (loss) per common and common equivalent share for
the years ended September 30, 1997, 1996 and 1995 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,
-----------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Weighted average common stock outstanding
during the year...................................... 43,167,682 34,893,937 34,112,914
Common stock equivalents of stock options and warrants
outstanding.......................................... -- -- 1,443,997
---------- ---------- ----------
Shares used in primary EPS calculation................. 43,167,682 34,893,937 35,556,911
========== ========== ==========
Shares used in fully diluted EPS calculation........... 43,167,682 34,893,937 36,498,634
========== ========== ==========
</TABLE>
The weighted average number of shares of common stock outstanding during
1996 and 1995 have been adjusted to reflect the issuance of common stock in
connection with the following acquisitions which were 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), 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 were held in escrow, as their inclusion would have
been anti-dilutive to the loss per share.
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.
35
<PAGE> 36
QUARTERDECK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997, 1996 AND 1995
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 were made in the provisions for sales returns, inventory
reserve, allowance for doubtful accounts, valuation of long-term investments,
and impairment of long lived assets. 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 shortterm investments and
trade accounts receivable. As of September 30, 1997 and 1996, the Company had no
short-term investments. 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.
Advertising
Advertising expenditures are expensed as incurred except for certain direct
mail campaigns which are deferred and amortized over the expected period of
benefit. Deferred advertising costs have not been material in all periods
presented. Advertising expense for fiscal 1997, 1996 and 1995 was approximately
$3,784,000, $16,501,000 and $7,603,000 respectively.
Depreciation and Amortization
Equipment and leasehold improvements are stated at cost. Depreciation and
amortization of equipment, leasehold improvements and goodwill 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
Goodwill................................ 10 years
</TABLE>
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 liabilities 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.
36
<PAGE> 37
QUARTERDECK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997, 1996 AND 1995
Stock-Based Compensation
Prior to October 1, 1996, the Company accounted for its stock option plan
in accordance with the provisions of Accounting Principles Board (APB) Opinion
No. 25, "Accounting for Stock Issued to Employees," and related interpretations.
As such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. On
October 1, 1996, the Company adopted SFAS No. 123, "Accounting for Stock Based
Compensation," which permits entities to recognize as expense over the vesting
period the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net income and pro forma
net income per share disclosures for employee stock option grants made in 1995
and future years as if the fair-value-based method defined in SFAS No. 123 had
been applied. The Company has elected to continue to apply the provisions of APB
Opinion No. 25 and provide the pro forma disclosure required by SFAS No. 123.
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 restructuring programs which include the
recording of certain non-cash charges. See also Notes 2 and 11 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
The Company adopted 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), during the fiscal year ended September 30, 1997.
This statement requires that long-lived assets be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
the asset may not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset to future net
cash flows expected to be generated by the asset. If such assets are considered
to be impaired, the impairment to be recognized is measured by the amount by
which the carrying amount of the assets exceed the fair value of the assets.
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).
37
<PAGE> 38
QUARTERDECK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997, 1996 AND 1995
Recent Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share." SFAS No. 128 specifies new standards designed to
improve the earnings per share (EPS) information provided in financial
statements by simplifying the existing computational guidelines, revising the
disclosure requirements and increasing the comparability of EPS data on an
international basis. Some of the changes made to simplify the EPS computations
include: (a) eliminating the presentation of primary EPS and replacing it with
basic EPS, for which common stock equivalents are not considered, (b)
eliminating the modified treasury stock method and the three percent materiality
provision and (c) revising the contingent share provision and the supplemental
EPS data requirements. SFAS No. 128 also makes a number of changes to existing
disclosure statements issued for periods ending after December 15, 1997,
including interim periods.
The Company's basic earnings per share as calculated under SFAS 128 are
$(0.43), $(2.15) and $0.33 for the years ended September 30, 1997, 1996 and
1995, respectively.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of general-purpose financial
statements. SFAS No. 130 is effective for financial statements issued for
periods beginning after December 15, 1997. The Company has not determined the
impact of SFAS No. 130 on its consolidated financial statements.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." SFAS No.
131 establishes standards for the reporting of operating segment information in
annual financial statements and in interim financial reports issued to
shareholders. SFAS No. 131 is effective for financial statements issued for
periods beginning after December 15, 1997. Quarterdeck has not determined the
impact of SFAS No. 131 on its consolidated financial statements.
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 fiscal 1996 and 1995 have
been restated to include the accounts and results of operations of Inset.
On March 28, 1996, the Company consummated the merger with Datastorm, the
developer and publisher of Procomm Plus, one of the industry's leading data
communications products. The Company issued 5,200,000 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
38
<PAGE> 39
QUARTERDECK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997, 1996 AND 1995
earnings during fiscal 1996 to eliminate the duplication of net income of
$717,000 for the three month period ended December 31, 1995.
Datastorm's S corporation status terminated upon consummation of the
merger. Datastorm's undistributed earnings at March 28, 1996, and all prior
periods, have been reclassified to additional paid-in-capital in the
accompanying consolidated financial statements in accordance with pooling of
interests accounting. Accordingly, distributions by Datastorm to Datastorm
shareholders have been charged to additional paid-in-capital.
The Company'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. The partners of such partnership are now
shareholders and consultants of the Company. The lease expires on December 31,
2001, however, 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. Lease expense for 1997, 1996 and 1995
totaled $0, $698,000 and $686,000 respectively.
On May 15, 1996, the Company consummated the merger with 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 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, however, 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 presented herein to
reflect the 3,499,999 shares issued in such transaction.
Fiscal 1995
During fiscal 1995, the Company completed the following acquisitions which
were all accounted for as pooling of interests and, accordingly, the
accompanying financial statements are presented as if the combining companies
had been combined for all periods presented herein.
<TABLE>
<CAPTION>
NUMBER OF
QUARTERDECK
COMPANY DATE OF ACQUISITION SHARES ISSUED
- --------------- -------------------- -------------
<S> <C> <C>
Landmark June 30, 1995 3,500,000
InternetWare August 28, 1995 459,950
Starnine September 29, 1995 672,667
</TABLE>
39
<PAGE> 40
QUARTERDECK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997, 1996 AND 1995
The following table reflects the Company's original estimates of
acquisition costs relating to the transactions entered into in fiscal 1996 and
activity through September 30, 1997 (in thousands).
<TABLE>
<CAPTION>
INSET DATASTORM FUTURELABS VERTISOFT TOTAL
------- --------- ---------- --------- -------
<S> <C> <C> <C> <C> <C>
Acquisition Costs....................... $ 1,846 $ 4,782 $ 1,417 $ 1,175 $ 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
Reversal of acquisition costs........... (34) (3) (320) (350) (707)
Cash payments........................... (66) (876) (39) (425) (1,406)
------- ------- ------- ------- -------
Balance, September 30, 1997............. $ -- $ -- $ -- $ -- $ --
======= ======= ======= ======= =======
</TABLE>
The following table reflects the Company's original estimate of acquisition
costs reflecting the fiscal 1995 transactions and activity through September 30,
1997 (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
Reversal of acquisition costs........................... (27) (131) -- (158)
Cash payments........................................... (19) (5) -- (24)
------- ------ ----- -------
Balance, September 30, 1997............................. $ -- $ 50 $ -- $ 50
======= ====== ===== =======
</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):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------------------------------
1996 1995
------------------------- -------------------------
NET INCOME NET INCOME
NET REVENUES (LOSS) NET REVENUES (LOSS)
------------ ---------- ------------ ----------
<S> <C> <C> <C> <C>
Quarterdeck...................................... $ 92,030 $(86,856) $ 54,986 $ 2,744
Landmark......................................... -- -- 11,236 1,309
StarNine......................................... -- -- 3,981 38
Internetware..................................... -- -- 444 (202)
Inset............................................ 2,669 424 6,394 134
Datastorm........................................ 29,413 12,576 40,499 6,990
Future Labs...................................... 1,312 (335) -- --
Vertisoft........................................ 7,676 (623) -- --
Pooling adjustments.............................. -- (145) 66 239
-------- -------- -------- -------
Restated Quarterdeck............................. $133,100 $(74,959) $117,606 $ 11,252
======== ======== ======== =======
</TABLE>
40
<PAGE> 41
QUARTERDECK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997, 1996 AND 1995
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. Pooling adjustments were
made primarily to conform accounting policies to those of the Company.
PURCHASES
Fiscal 1997
On August 12, 1997, the Company consummated the acquisition of certain
assets primarily consisting of software and related intellectual property rights
of TOC Holding Company, formerly known as TuneUp.com, Inc. for an aggregate
purchase price of $250,000 plus acquisition costs of $18,000. The entire amount
has been recorded as in-process research and development expense and is included
in acquisition, restructuring and other charges in the accompanying 1997
consolidated statement of operations. Quarterdeck had managed the assets of
TuneUp.com under a management agreement from May 9, 1997 until the consummation
of the acquisition.
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 an additional $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. The total consideration for
the Interlink acquisition was $3,155,000. An accrual was established for
estimated acquisition costs in July 1996. As of September 30, 1997, a balance of
$70,000 remained in the accrual. This balance was reversed into income in
September 1997.
On August 14, 1996, the Company acquired the remaining shares of Limbex
which were not already owned by the Company. Prior to such acquisition, the
Company owned approximately 20% of Limbex. The total consideration for the
acquisition was $16,295,000. An accrual was established for estimated
acquisition costs in August 1996. As of September 30, 1997, a balance of $35,000
remained in the accrual. This balance was reversed into income in September
1997.
A purchase price allocation of the assets of both Interlink and Limbex was
performed which was based on the fair market value of those assets utilizing the
discounted cash flow of the technology acquired. In-process research and
development was identified and valued by taking into consideration the
discounted future cash flows of each project, the uncertainties in completing
the projects and reaching technological feasibility, and potential changes in
the target markets for the products.
This allocation resulted in $2,872,000 and $12,121,000 of purchased
research and development for Interlink and Limbex, respectively, related to
products 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 1996 statement of operations. Using the same methodology,
Goodwill was calculated to be $283,000 and $2,546,000, respectively, and is
included in other assets, and is being amortized over 10 years. In addition, the
Company allocated $328,000 of
41
<PAGE> 42
QUARTERDECK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997, 1996 AND 1995
the Limbex purchase price to intangible assets which is being amortized over a
period of 24 to 36 months and $396,000 to a capitalized software technology
which is being amortized over 14 months.
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.
An allocation of the purchase price was made among the identifiable
tangible and intangible assets, based on the fair market value of those assets
using a risk adjusted income approach. Specifically, purchased research and
development was identified and valued through extensive interviews and analysis
of data concerning each Prospero development project. Expected future cash flows
of each development project were discounted taking into account risks associated
with the inherent difficulties and uncertainties in completing the project, and
thereby achieving technological feasibility, and risks related to the viability
of and potential changes in future target markets. This allocation resulted in
$2,578,000 of purchased research and development which had not yet reached
technological feasibility and did not have alternative future uses. Therefore,
the $2,578,000 of purchased research and development is included in acquisition,
restructuring and other charges in the accompanying 1995 consolidated statements
of operations.
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. Prior to March 1997, this transaction was accounted for
under the cost method of accounting and the investment was included on the
balance sheet in other assets and carried at lower of cost or market.
Infonautics consummated an initial public offering of its common stock during
May, 1996. The Company's shares in Infonautics were not registered at that time
and therefore were subject to certain limitations on resale. During the fiscal
year ended September 30, 1996, the Company determined Infonautics stock had been
reduced below the Company's cost basis and that a portion of the reduction 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. In March 1997, the Infonautics investment was reclassified as a
marketable security and is being held as an "available for sale security" under
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities". The price of the Infonautics stock has continued to decline during
fiscal 1997 and, accordingly, the Company recorded a $1,666,000 charge to other
income (expense) as a permanent reduction to the carrying value of the
investment. The carrying value of this investment has been adjusted to fair
value of $792,000 as of September 30, 1997 and the unrealized loss of $72,000
has been recorded as a component of stockholders' equity.
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.
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 on the statement of operations.
Furthermore, in accordance with statement of Financial Accounting Standards No.
115, "FAS115" issued by the Financial Accounting Standards Board. the Company
recorded an unrealized gain in the value of the remaining investment of
$379,000. This increase was recorded directly to the equity section of the
balance sheet and does not affect net income. Therefore, as of September 30,
1996,
42
<PAGE> 43
QUARTERDECK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997, 1996 AND 1995
the Company's remaining investment was carried at $968,000 in other assets on
the balance sheet. During fiscal 1997, the Company liquidated its remaining
investment in LHSP common stock and also sold LHSP warrants resulting in a
realized gain of $1,026,000 which is included in other income in the 1997
statement of operations.
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. The investment
was made during fiscal 1996 and carried as a component of other assets. However,
during the fiscal year ended September 30, 1997, the Company determined that the
value of this investment has been impaired and, accordingly, recorded a
$1,250,000 charge in other income (expense) to write off the carrying value of
this investment.
43
<PAGE> 44
QUARTERDECK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997, 1996 AND 1995
NOTE 3. BALANCE SHEET AND INCOME STATEMENT INFORMATION
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET:
Trade accounts receivable:
Receivables.................................................................... $ 16,274 $ 22,284
Less: allowance for doubtful accounts.......................................... (1,761) (2,032)
Less: allowance for sales returns.............................................. (4,243) (7,213)
Less: allowance marketing development funds.................................... (3,242) (3,774)
-------- --------
$ 7,028 $ 9,265
======== ========
Other current assets:
Prepaid royalties.............................................................. $ 352 $ 901
Income tax receivable.......................................................... 520 2,825
Other prepaid expenses......................................................... 800 1,150
Notes receivable............................................................... 51 1
Advances to employees.......................................................... 24 26
Marketable Securities.......................................................... 792 --
Other.......................................................................... 2,116 691
-------- --------
$ 4,655 $ 5,594
======== ========
Equipment and leasehold improvements:
Building (asset held for sale)................................................. $ 7,359 $ 11,069
Computer equipment............................................................. 7,769 20,406
Office furniture and equipment................................................. 6,575 2,252
Office furniture and equipment under capital leases............................ 99 252
Leasehold improvements......................................................... 2,638 1,586
-------- --------
24,440 35,565
Less: accumulated depreciation and amortization................................ (10,287) (14,313)
-------- --------
$ 14,153 $ 21,252
======== ========
Capitalized software costs:
Capitalized software costs..................................................... $ 5,498 $ 5,254
Less: accumulated amortization................................................. (3,708) (1,806)
-------- --------
$ 1,790 $ 3,448
======== ========
Other assets:
Marketable securities.......................................................... $ -- $ 968
Other investments.............................................................. -- 3,788
Notes receivable from employee................................................. -- 13
Intangible assets acquired, net................................................ 2,683 3,125
Other.......................................................................... 744 1,623
-------- --------
$ 3,427 $ 9,517
======== ========
Accrued liabilities:
Accrued expenses............................................................... $ 12,291 $ 17,232
Accrued litigation settlement.................................................. 1,905 --
-------- --------
$ 14,196 $ 17,232
======== ========
Accrued acquisition, restructuring and other charges:
Acquisition.................................................................... $ 50 $ 2,345
Restructuring.................................................................. 5,335 8,280
Purchase transaction costs..................................................... -- 315
-------- --------
$ 5,385 $ 10,940
======== ========
Income Statement:
Acquisition, restructuring and other charges (benefit):
Restructuring.................................................................. $ 12,415 $ 12,995
Acquisition.................................................................... (970) 9,801
In-process R&D................................................................. 268 14,993
-------- --------
$ 11,713 $ 37,789
======== ========
</TABLE>
44
<PAGE> 45
QUARTERDECK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997, 1996 AND 1995
NOTE 4. NOTES PAYABLE TO BANKS
In April, 1997, the Company established an asset based line of credit with
Greyrock Business Credit, a division of NationsBank. The Company repaid and
terminated the then existing line with Bank of America with proceeds from the
new line. Maximum borrowings under the new line are the lesser of $12,000,000
and the sum of 85% of eligible accounts receivable plus the value of inventory
to a maximum of $2,000,000. The line can be used for general corporate purposes,
including investments and acquisitions, and bears interest at prime plus 2%. The
line is secured by substantially all assets of Quarterdeck. The Company is
obligated to pay a minimum interest charge of $10,000 per month and comply with
certain other non-financial covenants and restrictions. At September 30, 1997
the Company had $1,579,000 outstanding under the line and the ability to borrow
up to a maximum amount of $9,528,000. The current term of the agreement matures
March 31, 1998 and contains renewal provisions.
In April 1996, the Company borrowed $2,000,000 from a bank to partially
finance the completion of the building in Columbia, Missouri. The loan was paid
in full in April 1997.
On August 6, 1996, the Company's Datastorm subsidiary secured construction
financing from a bank of up to $5,000,000 with an interest rate equal to the
bank's commercial base rate, currently prime plus 2%, secured by the newly
constructed Columbia, Missouri building. The principal amount outstanding as of
September 30, 1997 is $4,000,000. The principal amount plus any unpaid interest
was originally due February 7, 1997, and has been extended until October 5, 1997
with the maximum borrowings reduced to $3,500,000 as of October 5, 1997. The
loan is due for repayment in full on January 5, 1998. Management is pursuing the
sale and/or lease of the facility. There can be no assurance that the Company
will be successful in achieving a sale on favorable terms or in obtaining such
long-term financing with acceptable terms and conditions. As part of the
September 30, 1997 restructuring, the Company wrote the net book value of the
building down to $7,000,000 and in the event the building is sold for a price
lower than Quarterdeck's net book value at the time of the sale, the Company
would realize a loss which may be material to Quarterdeck's financial results.
NOTE 5. CONVERTIBLE NOTES
On March 28, 1996, the Company issued $25,000,000 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 6. 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 $20,000,000 in cash. During 1997, $10,000,000 of Series
B Preferred Stock was converted into 3,762,000 shares of Common Stock and on
September 30, 1997, for $10,000,000, the Company repurchased, at par, all of the
outstanding shares of Series B Preferred Stock and canceled warrants to purchase
800,000 shares of the Company's Common Stock owned by the holder of the Series B
Preferred Stock. As a result of the conversions and repurchase, no shares of
Series B Preferred Stock remain outstanding as of the date hereof. The Warrants
still outstanding may be exercised from and after
45
<PAGE> 46
QUARTERDECK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997, 1996 AND 1995
March 30, 1998 (or earlier if certain mergers, acquisitions or combinations
occur prior to that date) for 903,653 shares of Common Stock at an exercise
price per share of $7.435.
In September and between October and November 4, 1997, the Company issued
26,025 and 2,975 shares, respectively, of Series C Convertible Preferred Stock,
stated value $1000 per share (the "Series C Preferred Stock"), of the Company
for $26,025,000 and $2,975,000, respectively, in cash. The securities were
issued to various accredited investors in a private placement pursuant to
Regulation D of the Securities Act of 1933, as amended. In addition, Quarterdeck
issued warrants to purchase 2,900 shares of Series C Preferred Stock to the
placement agents of the private placement.
The holders of the Series C Preferred Stock are not entitled to receive
dividends. The shares of Series C Preferred Stock are convertible into shares of
the Company's Common Stock. The shares of Series C Preferred Stock will
automatically convert into Common Stock on September 30, 2002 to the extent any
shares of Series C Preferred Stock remain outstanding at that time. Each share
of Series C Preferred Stock is convertible into the number of shares of Common
Stock equal to the quotient of (i) $1000.00 divided by (ii) the Conversion
Price. Up until March 1, 1998, the Conversion Price will be $5.00. Thereafter,
subject to the maximum Conversion Price specified below, the Conversion Price
will be equal to 101% of the average of the three lowest daily trading prices
for the 22 consecutive trading days immediately preceding the date of conversion
(the "Conversion Date"). If the market price of the Common Stock was $1.00,
$2.00 or $3.00, the aggregate number of shares of Common Stock issuable upon
conversion of the Series C Preferred Stock would be approximately 31,600,000,
15,800,000 or 10,500,000 shares of Common Stock, respectively. The maximum
Conversion Price is $5.125 until March 31, 1999, and thereafter will be the
lesser of (i) $5.125, (ii) 101% of the average daily low trade prices of the
Common Stock for all trading days in March 1999, (ii) 101% of the average daily
low trade prices of the Common Stock for all trading days in September 1999 and
(iii) 101% of the average daily low trade prices of the Common Stock for all
trading days in March 2000.
The Company will not be obligated to issue shares of Common Stock upon
conversion of shares of Series C Preferred Stock in excess of 20% of the number
of shares of Common Stock outstanding on September 30, 1997 (the "Share Limit")
without obtaining shareholder approval in accordance with NASD rules. If such
stockholder approval is not obtained on or before February 28, 1998, the Company
will be required to redeem, at a significant premium, the number of shares of
Series C Preferred Stock that would be convertible into shares of Common Stock
in excess of the Share Limit.
NOTE 7. STOCK OPTIONS AND WARRANTS
1996 Acquisition Stock Incentive Plan: In fiscal 1996, the Company adopted
the 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. During fiscal 1997, the Company granted 690,839 stock options
(including grants under the repricing) at exercise prices between $2.38 and
$5.56 per share. 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. The number of shares of stock authorized for issuance
under the 1996 Acquisition Stock Incentive Plan is 2,000,000. During fiscal
1997, 21,902 options were exercised and 1,185,633 options were canceled
(including those which were repriced). At September 30, 1997, 629,181 options
were outstanding. 196,401 and 68,154 options were exercisable as of September
30, 1997 and 1996, respectively under the 1996 Acquisition Stock Incentive Plan.
46
<PAGE> 47
QUARTERDECK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997, 1996 AND 1995
In January 1997, the Board of Directors approved the repricing of options
granted under this plan to an exercise price of $4.6875 per share for all
optionees. As part of the repricing, 536,381 shares were canceled and 425,999
new shares were granted at the new exercise price.
1990 Stock Plan: In fiscal 1990, the Company adopted the 1990 Stock Plan.
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. During 1996, 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 6,000,000 to 7,500,000 shares, which
amendment was approved by the shareholders on February 12, 1997. 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 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 1997, the Company
granted 3,841,347 stock options (including grants under the repricing) at
exercise prices between $2.34 and $5.56 per share. 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 1997, 312,118 options were exercised and 3,949,525 options
were canceled (including those which were repriced). During fiscal 1996, 516,767
options were exercised and 738,207 options were canceled. During fiscal 1995,
205,650 options were exercised and 268,550 options were canceled. 4,379,708
options were outstanding as of September 30, 1997 and 1,575,191, 1,077,431 and
468,700 options were exercisable at September 30, 1997, 1996 and 1995,
respectively, under the 1990 Stock Plan.
In January 1997, the Board of Directors approved the repricing of options
granted under this plan to an exercise price of $4.6875 per share for all
optionees. As part of the repricing, 2,021,555 shares were canceled and
1,605,592 new shares were granted at the new exercise price.
1990 Directors' Stock Option Plan: Under the terms of the 1990 Directors'
Stock Option Plan, 500,000 shares are reserved for issuance to non-employee
directors. Such options are exercisable in varying increments and expire within
five years or upon earlier directorship termination. During fiscal 1997, 130,000
stock options were granted at exercise prices between $3.63 and $4.50 per share,
zero options were exercised, and zero options were canceled. 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 canceled. During
fiscal 1995, 15,000 stock options were granted at an exercise price of $4.00 per
share, 52,500 options were exercised, and zero options were canceled. 232,500
options were outstanding under the 1990 Directors' Stock Option Plan as of
September 30, 1997 and 82,500, 50,000 and 30,000 options were exercisable as of
September 30, 1997, 1996 and 1995 respectively.
Employee Compensation Option Agreements. In fiscal 1997, the Company
entered into employment agreements with two executive officers of the Company,
Mr. Hessler and Mr. Epstein, pursuant to which the
47
<PAGE> 48
QUARTERDECK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997, 1996 AND 1995
Company granted, in addition to shares granted under the above stock option
plans, to such employees 750,000 and 100,000 options, respectively, to purchase
shares of Common Stock. The Company granted Mr. Hessler's options on January 3,
1997 at an exercise price of $4.44 and granted Mr. Epstein's options on August
7, 1997 at an exercise price of $2.69. Mr Hessler's and Mr. Epstein's options
are exercisable in varying increments commencing one year after the date of
grant and expiring ten years from the date of grant or upon earlier termination.
1989 Non-Qualified Stock Plan. In October 1989, the Company adopted its
1989 Non-Qualified Stock Plan pursuant to which options were granted at prices
determined by the Board of Directors. The options were exercisable in varying
increments and expire five years from date of grant or upon earlier termination
of employment. No additional options may be granted under this plan. A total of
385,000 option shares at an option price of $0.10 per share have been granted
pursuant to the plan, all of which were granted in October 1989. During fiscal
1995, 93,125 options were exercised and no options were canceled. 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, $0 and $59,000
were credited to additional paid-in capital in fiscal 1997, 1996, and 1995
respectively.
A summary of all stock option and warrant activity in the three-year period
ended September 30, 1997 is as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
EXERCISE PRICE PER
SHARES SHARE
---------- -------------------
<S> <C> <C>
Outstanding at September 30, 1994............... 1,834,850 4.43
Options granted............................... 2,217,355 6.33
Options exercised............................. (351,275) 7.99
Options canceled.............................. (268,550) 5.84
----------
Outstanding at September 30, 1995............... 3,432,380 5.81
Options granted............................... 4,099,048 12.71
Options exercised............................. (580,803) 18.81
Options canceled.............................. (902,244) 10.90
----------
Outstanding at September 30, 1996............... 6,048,381 9.12
Options granted............................... 5,512,186 3.89
Options exercised............................. (334,020) 4.54
Options canceled.............................. (5,135,158) 10.18
----------
Outstanding at September 30, 1997............... 6,091,389 3.89
==========
</TABLE>
NOTE 8. ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company has adopted the provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation," and elected to continue to apply Accounting
Principles Board Opinion No. 25 and related interpretations in accounting for
its plans and make the necessary pro forma disclosures. If the Company had
elected to recognize compensation cost based on the fair value at the date of
grants for award under the plans (including modified awards), consistent with
the method as prescribed by SFAS No. 123, net income (loss) and net
48
<PAGE> 49
QUARTERDECK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997, 1996 AND 1995
income (loss) per share would have changed to the pro forma amounts indicated
below (in thousands, except per share data):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Net loss as reported................................... $(18,398) $(74,959)
======= =======
Pro forma.............................................. $(20,215) $(76,776)
======= =======
Net loss per share as reported......................... (0.43) (2.15)
======= =======
Pro forma.............................................. (0.47) (2.20)
======= =======
</TABLE>
The pro forma disclosure of compensation cost under this pronouncement was
based on the Black-Scholes single-option pricing model with the following
weighted average assumptions for 1997 and 1996: volatility of 70%, risk-free
interest rate of 5.875%, and an expected option life of 4 years.
Pro forma net loss reflects only options granted in fiscal 1997 and fiscal
1996. Therefore the full amount of calculating compensation cost for stock
options under SFAS No. 123 is not reflected in the pro forma net loss amounts
presented above because compensation cost for options granted prior to October
1, 1995 is not considered. The disclosure of compensation cost under this
pronouncement may not be representative of the effects on net income (loss) for
future years.
The weighted average fair value of options granted in 1997 and 1996 were
$1.46 and $0.70, respectively. The following table summarizes information
regarding options outstanding and options exercisable at September 30, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
--------------------------------------- EXERCISABLE AT
OUTSTANDING AT REMAINING WEIGHTED AVERAGE SEPTEMBER 30,
RANGE OF EXERCISE PRICES SEPTEMBER 30, 1997 CONTRACTUAL LIFE EXERCISE PRICE 1997
- ------------------------ ------------------ ---------------- ---------------- --------------
<S> <C> <C> <C> <C>
$0.47 - 2.53 1,441,927 9.6 2.42 13,594
2.63 - 3.63 442,000 9.8 3.08 --
4.44 - 16.63 3,177,170 9.3 4.93 931,420
--------- --- ---- -------
5,061,097 9.4 4.05 945,014
========= === ==== =======
</TABLE>
NOTE 9. STOCKHOLDER RIGHTS PLAN
In September 1992, the Company made a dividend distribution of one
preferred share purchase right for each outstanding share of common stock. The
rights trade with the common stock and only become exercisable, or transferable
apart from the common stock, ten business days after a person or group
(Acquiring Person) acquires beneficial ownership of, or commences a tender or
exchange offer for, 15% or more of the Company's common stock. Each right, under
certain circumstances, entitles its holder to acquire one one-hundredth of a
share of a newly created Series A Junior Participating Preferred Stock, par
value $0.001 per share, at a price of $35, subject to adjustment. If 15% of the
Company's common stock is acquired, or a tender offer to acquire 15% of the
Company's common stock is made, each right not owned by an Acquiring Person will
entitle the holder to purchase at the exercise price, Company common stock
having a market value of twice the exercise price of the rights. In addition, if
the Company is acquired in a merger or other business combination, the rights
will entitle a holder to buy a number of shares of common stock of the acquiring
Company having a market value of twice the exercise price of each right. The
rights may be redeemed by the Company at $0.01 per right at any time until a 15%
position has been acquired. The rights expire on August 22, 2002, and at no time
have voting power.
In connection with the issuance of the Series C Preferred Stock during
fiscal 1997 (see Note 16), the Company amended the Rights Agreement to provide
that the initial investors that acquired the Series C Preferred Stock will not
be deemed to be an Acquiring Person as a result of its acquisition of the Series
C
49
<PAGE> 50
QUARTERDECK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997, 1996 AND 1995
Preferred Stock or any shares of Common Stock received upon conversion of the
Series C Preferred Stock, subject to compliance by such investors with certain
covenants contained in the Preferred Stock Investment Agreements.
NOTE 10. 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 3 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 $337,000, $1,243,000, and $112,000 for
fiscal 1997, 1996 and 1995, respectively.
NOTE 11. RESTRUCTURING AND OTHER CHARGES
During September 1997, the Company implemented a restructuring plan which
was designed to focus the Company on the new corporate strategy which resulted
in charges totaling $11,051,000. The net book value of the building in Columbia,
Missouri was written down by $5,803,000, to $7,000,000, the Company's estimated
fair market value. Other restructuring charges of $2,400,000 were recorded to
write down non performing assets as a result of the restructuring and accrue
amounts owed under consulting agreements for individuals who were terminated,
$569,000 for ongoing lease payments for vacant facilities which have not been
subleased, employee severance and other payments of $2,012,000 related to non
core business units that are being closed or divested and $267,000 relating to
write downs of inventory and fixed assets of business units being closed or
divested.
The following is an analysis of the significant components of the fiscal
1997 restructuring and other charges (in thousands) :
<TABLE>
<CAPTION>
DISCONTINUANCE AND SEVERANCE WRITE-OFF
CONSOLIDATION OF AND PROPERTY AND
OFFICES OTHER EQUIPMENT TOTAL
------------------- ----------- -------------- -------
<S> <C> <C> <C> <C>
Total restructuring and non-recurring
costs.................................. $ 6,372 $ 4,412 $ 267 $11,051
Non-cash costs........................... (5,803) (290) (167) (6,260)
------- ------ ---- -------
Accrued, September 30, 1997.............. $ 569 $ 4,122 $ 100 $ 4,791
======= ====== ==== =======
</TABLE>
50
<PAGE> 51
QUARTERDECK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997, 1996 AND 1995
The following is an analysis of the significant components of the fiscal
1996 restructuring (in thousands):
<TABLE>
<CAPTION>
REDUCTION OF DISCONTINUANCE AND SEVERANCE WRITE-OFF
NON-CORE CONSOLIDATION OF AND PROPERTY AND
PRODUCT LINES OFFICES OTHER EQUIPMENT TOTAL
--------------- ------------------- ----------- -------------- -------
<S> <C> <C> <C> <C> <C>
Restructuring and
non-recurring costs......... $ 2,754 $ 1,420 $ 6,513 $ 2,308 $12,995
Non-cash costs................ (2,754) -- -- (1,240) (3,994)
Cash payments................. -- -- (550) (413) (963)
------ ------ ------ ------ -------
Accrued , September 30,
1996........................ -- 1,420 5,963 655 8,038
Non-cash costs................ -- -- (75) (370) (445)
Cash payments................. -- (883) (7,530) -- (8,413)
Additional charges............ 67 1,297 1,364
Category reclass.............. -- (150) 435 (285) --
------ ------ ------ ------ -------
Accrued, September 30, 1997... $ -- $ 454 $ 90 $ -- $ 544
====== ====== ====== ====== =======
</TABLE>
During 1997, the Company recorded an additional charge of $1,364,000 to
increase the restructuring accrual based on actual costs incurred and estimates
of additional costs.
NOTE 12. INCOME TAXES
The components of the provision (benefit) for income taxes for the fiscal
years ended September 30, 1997, 1996 and 1995, respectively, are as follows (in
thousands):
<TABLE>
<CAPTION>
FEDERAL STATE TOTAL
------- ----- -------
<S> <C> <C> <C>
1997:
Current....................................... $ 130 $ 0 $ 130
Deferred...................................... 0 0 0
------ ----- ------
Total...................................... $ 130 $ 0 $ 130
====== ===== ======
1996:
Current....................................... $ 201 $ 0 $ 201
Deferred...................................... 605 0 605
------ ----- ------
Total...................................... $ 806 $ 0 $ 806
====== ===== ======
1995:
Current....................................... $ 2,330 $ 179 $ 2,509
Deferred...................................... (2,021) (157) (2,178)
------ ----- ------
Total...................................... $ 309 $ 22 $ 331
====== ===== ======
</TABLE>
51
<PAGE> 52
QUARTERDECK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997, 1996 AND 1995
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,
--------------------------------
1997 1996 1995
------- -------- -------
<S> <C> <C> <C>
Expected income tax expense (benefit)........................ $(5,563) $(25,212) $ 3,938
Change in valuation allowance................................ 7,947 21,522 483
State income taxes, net of Federal income tax benefit........ (832) (2,393) 14
Net (income) loss on foreign subsidiary...................... (680) 3,005 (608)
Net income of Subchapter S subsidiary........................ -- (3,300) (3,014)
Tax exempt income benefit.................................... -- (106) (339)
Alternative minimum tax and other tax credits................ -- 300 (257)
Acquisition costs............................................ (416) 9,916 --
Stock options................................................ (174) (3,009) --
Other........................................................ (152) 83 114
------- -------- -------
$ 130 $ 806 $ 331
======= ======== =======
</TABLE>
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,
---------------------------------
1997 1996 1995
-------- -------- -------
<S> <C> <C> <C>
Accrued restructuring charges............................... $ 4,131 $ 2,222 $ 311
Software development costs recognized as incurred for tax
purposes.................................................. -- (223) 12
State taxes................................................. 2,664 2,393 7
Allowance for sales returns................................. 1,390 1,819 837
Depreciation................................................ 1,097 834 825
Allowance for doubtful accounts and other reserves.......... 1,995 3,111 997
Acquisition costs........................................... -- -- 1,591
Tax net operating losses.................................... 23,044 15,484 --
Other, net.................................................. (1,516) (782) 934
Deferred tax assets, valuation allowance.................. (32,805) (24,858) (3,336)
-------- -------- -------
Total net deferred tax assets............................. $ -- $ -- $ 2,178
======== ======== =======
</TABLE>
At September 30, 1997, the Company had deferred tax assets amounting to
$32,805,000, 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 primarily from restructuring charges in fiscal
1997, which were not deductible for federal income tax purposes until the
amounts are actually paid and tax net operating losses. 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. Management has concluded that the
future realization of the deferred tax asset is uncertain. Accordingly, a full
valuation allowance has been applied.
The net change in the total valuation allowance for the twelve months ended
September 30, 1996, was an increase of $21,522,000. Of this amount, $19,344,000
resulted from an increase in gross deferred tax assets and
52
<PAGE> 53
QUARTERDECK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997, 1996 AND 1995
$2,178,000 resulted from a decrease in net deferred tax assets. Management
concluded that the future realization of the deferred tax asset was uncertain.
Accordingly, a full valuation allowance was applied.
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.
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 Federal tax net operating losses of $63,471,000 expiring
from fiscal years ended 2008 through 2011.
NOTE 13. LITIGATION
Federal and state shareholder actions were brought against the Company and
one former and one current officer of the Company alleging among other things,
violations of certain provisions of California and Federal securities laws
relating to statements made about Quarterdeck. On December 19, 1997, the Company
reached an agreement in principle to settle such actions for a total amount of
$12,500,000, of which the Company will be required to pay approximately
$1,905,000, with the balance of $10,595,000 to be paid under the Company's
directors' and officers' insurance policy. The settlement is subject to, among
other things, court approval. The Company has recorded a charge of $1,905,000
for its fiscal year ended September 30, 1997.
In March 1997, a purported class action lawsuit brought on behalf of all
licensees of MagnaRAM2 residing in the United States, Jack Abbott, et al. v.
Quarterdeck Corporation, Case No. 00709198, was filed in the Superior Court of
the State of California, County of San Diego. The complaint alleges, among other
things, that MagnaRAM2 fails to increase Random Access Memory significantly or
otherwise help Windows 95 and Windows 3.x users. The plaintiffs seek
compensatory damages and punitive damages in unspecified amounts, injunctive
relief, and attorney fees and costs. Quarterdeck intends to defend the case
vigorously and to oppose any effort to certify the claims for class resolution.
No assurances can be given that the ultimate disposition of this case will not
have a material adverse effect on the Company's results of operations, financial
condition or liquidity.
In October 1997, a complaint was filed in the United States District Court
for the District of Utah on behalf of PowerQuest Corporation against the
Company. The complaint alleges that the Company's partitioning software
(Partition-It) violates a patent held by PowerQuest. The plaintiff seeks an
injunction against distribution of Partition-It and damages. The Company intends
to defend the case vigorously. No assurances can be given that the ultimate
disposition of this case will not have a material adverse effect on the
Company's results of operations, financial condition or liquidity.
53
<PAGE> 54
QUARTERDECK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997, 1996 AND 1995
The Company is a defendant in various other pending claims and lawsuits.
Although there can be no assurances, management believes that the disposition of
such matters will not have a material adverse impact on the results of
operations or financial position of the Company.
NOTE 14. COMMITMENTS
The Company leases facilities under non-cancelable operating leases that
expire through fiscal 2016. Rental expense for the years ended September 30,
1997, 1996 and 1995 amounted to approximately $2,506,000, $4,367,000, and
$3,076,000 respectively.
Minimum annual rental payments under these leases are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDING SEPTEMBER 30
-------------------------------------------------
<S> <C>
1998........................................ $ 2,365
1999........................................ 2,302
2000........................................ 1,615
2001........................................ 331
2002........................................ 255
Thereafter.................................. 3,207
-------
Total.................................. $10,075
=======
</TABLE>
NOTE 15. 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
19% and 15%; 20% and 11%; 31% and 14%; of the Company's consolidated net
revenues for the years ended September 30, 1997, 1996 and 1995, respectively.
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,
---------------------------------
NET REVENUES 1997 1996 1995
------------------------------------ ------- -------- --------
<S> <C> <C> <C>
United States....................... $65,415 $109,200 $ 98,591
Europe.............................. 11,528 18,700 13,809
Foreign locations................... 6,844 5,200 5,206
------- -------- --------
$83,787 $133,100 $117,606
======= ======== ========
</TABLE>
Net revenues from the Company's United States operations includes export
shipments of $4,899,000, $1,486,000 and $4,968,000, respectively during fiscal
1997, 1996 and 1995.
<TABLE>
<S> <C> <C> <C>
Operating income (loss):
United States.................. $(16,180) $(65,444) $ 7,342
Europe......................... $ 2,127 (8,642) 2,357
-------- -------- -------
$(14,053) $(74,086) $ 9,699
======== ======== =======
Identifiable assets:
United States.................. $ 52,404 $ 73,184 $71,130
Europe......................... 3,477 3,597 5,569
-------- -------- -------
$ 55,881 $ 76,781 $76,699
======== ======== =======
</TABLE>
54
<PAGE> 55
QUARTERDECK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997, 1996 AND 1995
NOTE 16. LIQUIDITY
Cash and cash equivalents decreased $1,903,000 to $23,651,000 at September
30, 1997 from $25,554,000 at September 30, 1996. Working capital at September
30, 1997 was $6,917,000 as compared to a deficit of $4,684,000 at September 30,
1996.
On December 19, 1997, the Company reached an agreement in principle to
settle the shareholder litigation for $12,500,000. The Company will be required
to pay approximately $1,905,000 as part of this settlement. The Company's
directors' and officers' insurance carrier will contribute $10,595,000 to the
settlement.
The Company believes existing working capital, borrowing capacity under the
line of credit and additional borrowing against, or net proceeds from the sale
of, real estate will be sufficient to fund operations of the Company's core
business for fiscal 1998. Nevertheless, the Company may explore various
financing alternatives in order to finance an expansion of the core business of
the Company and help provide additional working capital for operations. There is
no assurance that additional financing will be available, or if available, will
be available on acceptable terms. Any decision or ability to obtain financing
through debt or equity investment will depend on various factors, including,
among others, revenues, 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.
55
<PAGE> 56
QUARTERDECK CORPORATION AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
YEAR ENDED SEPTEMBER 30, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE ADDITIONS
AT CHARGED BALANCE
BEGINNING TO AT END
SEPTEMBER 30, ITEM OF THE YEAR EXPENSES DEDUCTIONS OF THE YEAR
------------- -------------------------------------- ----------- --------- ---------- -----------
<C> <S> <C> <C> <C> <C>
1997 Allowance for doubtful accounts....... $ 2,032 $ 379 $ (650)(1) $ 1,761
1996 Allowance for doubtful accounts....... 870 1,903 (741)(1) 2,032
1995 Allowance for doubtful accounts....... 803 333 (266)(1) 870
1997 Inventory obsolescence reserve........ 3,978 2,075 (5,110) 943
1996 Inventory obsolescence reserve........ 676 3,914 (612) 3,978
1995 Inventory obsolescence reserve........ 1,086 119 (529) 676
1997 Sales returns reserve................. 7,213 16,705 (19,675)(2) 4,243
1996 Sales returns reserve................. 3,280 31,889 (27,956)(2) 7,213
1995 Sales returns reserve................. 2,487 9,136 (8,343)(2) 3,280
1997 Marketing development fund reserve.... 3,774 4,562 (5,094) 3,242
1996 Marketing development fund reserve.... 1,051 11,673 (8,950) 3,774
1995 Marketing development fund reserve.... 336 2,262 (1,547) 1,051
</TABLE>
- ---------------
(1) Uncollectible accounts written off, net of recoveries.
(2) Products returned.
56
<PAGE> 57
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 15, 1997.
QUARTERDECK CORPORATION
By /s/ CURTIS A. HESSLER
------------------------------------
Curtis A. Hessler
President and Chief Executive
Officer
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
- --------------------------------------------- --------------------------- ------------------
<C> <S> <C>
/s/ CURTIS A. HESSLER President, Chief Executive December 15, 1997
- --------------------------------------------- Officer and Director
Curtis A. Hessler
/s/ FRANK W.T. LAHAYE Chairman of the Board December 15, 1997
- ---------------------------------------------
Frank W.T. LaHaye
/s/ KING R. LEE Director December 15, 1997
- ---------------------------------------------
King R. Lee
/s/ HOWARD L. MORGAN Director December 15, 1997
- ---------------------------------------------
Howard L. Morgan
/s/ WILLIAM H. LANE III Director December 15, 1997
- ---------------------------------------------
William H. Lane III
/s/ FRANK R. GREICO Chief Financial Officer December 15, 1997
- ---------------------------------------------
Frank R. Greico
</TABLE>
57
<PAGE> 58
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------- ---------------------------------------------------------------------------------
<S> <C>
21.1 Subsidiaries of the Company
23.1 Consent of KPMG Peat Marwick LLP, independent certified public accountants
27 Financial Data Schedule
</TABLE>
<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>
<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. 333-04606, 333-10269, No. 333-22325, and No. 333-38693) on Form S-3, the
registration statement (No. 33-98456) on Form S-4 and the registration
statements (No. 333-01766, No. 333-04602, 333-26107, and 333-26105) on Form S-8
of Quarterdeck Corporation of our report dated November 7, 1997, except for the
first paragraph of note 13, which is as of December 19, 1997, with respect to
the consolidated balance sheets of Quarterdeck Corporation and subsidiaries as
of September 30, 1997 and 1996 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, 1997, and the related schedule, which
report appears in the September 30, 1997 annual report on Form 10-K of
Quarterdeck Corporation.
KPMG PEAT MARWICK LLP
Los Angeles, California
December 23, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<CASH> 23,651
<SECURITIES> 0
<RECEIVABLES> 16,274
<ALLOWANCES> (9,246)
<INVENTORY> 1,177
<CURRENT-ASSETS> 36,511
<PP&E> 24,440
<DEPRECIATION> 10,287
<TOTAL-ASSETS> 55,881
<CURRENT-LIABILITIES> 29,594
<BONDS> 25,000
0
24,594
<COMMON> 43
<OTHER-SE> (23,464)
<TOTAL-LIABILITY-AND-EQUITY> 55,881
<SALES> 83,787
<TOTAL-REVENUES> 83,787
<CGS> 21,271
<TOTAL-COSTS> 76,569
<OTHER-EXPENSES> 2,143
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,072
<INCOME-PRETAX> (18,268)
<INCOME-TAX> 130
<INCOME-CONTINUING> (18,398)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (18,398)
<EPS-PRIMARY> (0.43)
<EPS-DILUTED> (0.43)
</TABLE>
