<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended September 30, 1996
Commission File No. 0-19207
QUARTERDECK CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 95-4320650
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
13160 Mindanao Way, Marina del Rey, California 90292
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (310) 309-3700
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.001
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No__
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock (based on the last sale
price of such stock as reported by the National Association of Securities
Dealers Automated Quotation National Market System) held by non-affiliates of
the registrant as of November 30, 1996 was $233,497,695.
The number of shares of the Registrant's common stock outstanding as of
November 30, 1996 was 37,665,882.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Company's definitive Proxy Statement for the Annual
Meeting held on February 12, 1997 are incorporated by reference into Part III of
the Form 10-K.
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EXPLANATORY NOTE
This amendment to the Company's Annual Report on Form 10-K for the
fiscal year ended September 30, 1996 (the "Form 10-K") is being filed to include
the Report of the Independent Public Accountants for the years ended
December 31, 1994 and 1995 for Datastorm Technologies, Inc., a wholly owned
subsidiary of the Company and include such accountant's consent as an exhibit
(Exhibit 23.2) to the Form 10-K. The financial statements included herein have
not been amended, but are included herein as this amendment must set forth
the complete text of the amended item.
PART II
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.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as part of this report:
1. Consolidated Financial Statements
Consolidated Balance Sheets at September 30, 1996 and 1995
Consolidated Statements of Operations for fiscal years ended
September 30, 1996, 1995 and 1994
Consolidated Statements of Stockholders' Equity for fiscal years
ended September 30, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for fiscal years ended
September 30, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
2. Consolidated Financial Statement Schedule
Schedule II--Valuation and Qualifying Accounts
All other schedules are omitted because they are not required, or
are not applicable, or because the required information is
included in Item 8.
3. Exhibits
EXHIBIT NUMBER
--------------
DESCRIPTION
-----------
3.1(2) Certificate of Incorporation of the Company
3.2(19) Certificate of Amendment of Certificate of
Incorporation of the Company.
3.3(16) Certificate of Designations of Series B Convertible
Preferred Stock.
3.4(19) Amended Designations of Series A Junior Participating
Preferred Stock of the Company.
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<PAGE> 3
3.5(6) Amended and Restated Bylaws of the Company.
4.1(4) Rights Agreement, dated as of August 11, 1992, between
Registrant and Bank of America NT & SA (the "Rights
Agreement").
4.2(16) Form of Amendment to the Rights Agreement.
*10.1(2) Amended and Restated 1990 Stock Plan, as amended to
date.
*10.2(3) Form of Option Agreement utilized with 1990 Stock Plan.
*10.3(5) Amended and Restated 1990 Directors Stock Option Plan
and Form of Option Agreement.
*10.4(12) 1996 Acquisition Stock Incentive Plan.
*10.5(19) 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(10) Management Employment Contract between the Company
and Gaston Bastiaens,dated as of January 13, 1995.
*10.8(10) Management Employment Contract between the Company
and Jim Moise, dated as of January 27, 1995.
*10.9(10) Management Employment Contract between Company and
Steve Tropp, dated as of February 14, 1995.
*10.10(19) Employment Agreement between the Company and Bradley D.
Schwartz, dated as of January 16, 1995.
*10.11(19) Employment Agreement between the Company and
Anatoly Tikhman, dated as of July 24, 1996.
*10.12(19) Employment Agreement between the Company and Joe F
usco, dated as of September 19, 1996.
10.13(10) Lease between the Company and Marina Business Center,
dated as of July 17, 1995, with respect to headquarters
property.
10.14(10) Lease between Landmark Research International
Corporation, a subsidiary of the Company, and Chase
Federal Bank, dated as of March 15, 1995, with respect
to property used by Quarterdeck Select.
10.15(2) Domestic (U.S.) Distribution License Agreement
between the Company and Merisel, Inc., dated as of
April 4, 1991.
10.16(2) Domestic (U.S.) Distribution License Agreement
between the Company and Ingram Micro, Inc., dated as
of May 16, 1991.
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10.17(7) Agreement and Plan of Reorganization among the Company,
Landmark Acquisition Corporation, Landmark Research
International Corporation, and certain of the
shareholders of Landmark Research International
Corporation, dated as of June 30, 1995.
10.18(8) Agreement and Plan of Reorganization among the Company,
IW/QD Acquisition Corporation, Internetware, Inc.,
Mango Systems, Inc., Mango Acquisition Corporation,
and certain of the shareholders of Internetware, Inc.
and Mango Systems, Inc., dated as of August 25, 1995.
10.19(9) Amended and Restated Agreement and Plan of
Reorganization among the Company, Inset Acquisition
Corporation, Inset Systems, Inc., and certain of the
shareholders of Inset Systems, Inc., dated as of
September 5, 1995.
10.20(10) Agreement and Plan of Reorganization among the Company,
StarNine Acquisition Corporation, StarNine
Technologies, Inc., and certain of the shareholders of
StarNine Technologies, Inc. dated as of
September 27, 1995.
10.21(10) Amended and Restated Asset Purchase Agreement and Plan
of Reorganization among the Company, Prospero Systems
Research, Inc., and certain of the shareholders of
Prospero Systems Research, Inc., dated as of September
28, 1995.
10.22(11) Agreement and Plan of Reorganization among the Company,
DTI Acquisition Corporation, Datastorm Technologies,
Inc., and the shareholders of Datastorm Technologies,
Inc. listed on the execution pages thereto, dated as
of March 28, 1996.
10.23(13) Asset Purchase Agreement and Plan of Reorganization
among the Company, FLS Acquisition Corp., Future Labs,
Inc., and the shareholders of FutureLabs listed on the
execution pages thereto, dated as of May 15, 1996.
10.24(14) Agreement and Plan of Reorganization among the Company,
VSI Acquisition Corporation, Vertisoft Systems, Inc.
("Vertisoft"), Vertisoft Direct, Inc. ("Direct"),
and the shareholders of each of Vertisoft and Direct,
dated July 15, 1996.
10.25(15) Agreement and Plan of Reorganization among the Company,
Limbex Corporation, and the shareholders of Limbex
Corporation, dated as of August 13, 1996.
10.26(16) Credit Agreement (the "Credit Agreement") between the
Company and Bank of America National Trust and
Savings Association, dated as of February 14, 1996.
10.27(17) First Amendment to the Credit Agreement, dated as of
March 28, 1996, and incorporated herein by reference.
10.28(18) Waiver and Second Amendment to the Credit Agreement,
dated as of August 13, 1996, and incorporated herein
by reference.
10.29(19) Third Amendment to the Credit Agreement, dated as of
September 30, 1996, and incorporated herein by
reference.
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10.30(19) Waiver and Fourth Amendment to the Credit Agreement,
dated as of December 17, 1996.
21.1(19) Subsidiaries of the Company.
23.1(1) Consent of KPMG Peat Marwick LLP, independent
certified public accountants.
23.2(1) Consent of Arthur Andersen LLP, independent certified
public accountants.
27(19) Financial Data Schedule
- ------------
* Denotes a compensation plan or other arrangement under which directors
or executive officers may participate.
(1) Filed herewith.
(2) Filed as an exhibit to the Company's Registration Statement on
Form S-1, as amended (File No. 33-40094) and incorporated herein by
reference.
(3) Filed as an exhibit to the Company's Form 10-Q for the quarter ended
March 31, 1992, and incorporated herein by reference.
(4) Filed as an exhibit to the Company's Current Report on Form 8-K dated
August 11, 1992, and incorporated herein by reference.
(5) Filed as an exhibit to the Company's Form 10-K for the year ended
September 30, 1993, and incorporated herein by reference.
(6) Filed as an exhibit to the Company's Form 10-K for the year ended
September 30, 1994, and incorporated herein by reference.
(7) Filed as an exhibit to the Company's Current Report on Form 8-K dated
June 30, 1995, and incorporated herein by reference.
(8) Filed as an exhibit to the Company's Current Report on Form 8-K dated
August 28, 1995, and incorporated herein by reference.
(9) Filed as an exhibit to the Company's Registration Statement on
Form S-4, as amended (File No. 33-984456), and incorporated herein by
reference.
(10) Filed as an exhibit to the Company's Annual Report on Form 10-K for
the year ended September 30, 1995, and incorporated herein by
reference.
(11) Filed as an exhibit to the Company's Current Report on Form 8-K dated
March 28, 1996, and incorporated herein by reference.
(12) Filed as an exhibit to the Company's Registration Statement on
Form S-8 (File No. 333-4602), and incorporated herein by reference.
(13) Filed as an exhibit to the Company's Current Report on Form 8-K dated
May 15, 1996, and incorporated herein by reference.
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(14) Filed as an exhibit to the Company's Current Report on Form 8-K, dated
July 18, 1996, and incorporated herein by reference.
(15) Filed as an exhibit to the Company's Current Report on Form 8-K, dated
August 14, 1996, and incorporated herein by reference.
(16) Filed as an exhibit to the Company's Current Report on Form 8-K dated
November 25, 1996, and incorporated herein by reference.
(17) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1996, and incorporated herein by reference.
(18) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1996, and incorporated herein by reference.
(19) Filed as an exhibit to the Company's Annual Report on Form 10-K for
the year ended September 30, 1996, and incorporated herein by
reference.
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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 July 18, 1997.
QUARTERDECK CORPORATION
By: /s/ Curtis A. Hessler
-----------------------------------------
Curtis A. Hessler
President and Chief Executive Officer
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<PAGE> 8
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Reports......................................................... 9
Consolidated Balance Sheets at September 30, 1996 and 1995............................ 11
Consolidated Statements of Operations for fiscal years ended September 30, 1996, 1995
and 1994............................................................................ 12
Consolidated Statements of Stockholders' Equity for fiscal years ended September 30,
1996, 1995 and 1994................................................................. 13
Consolidated Statements of Cash Flows for fiscal years ended September 30, 1996, 1995
and 1994............................................................................ 16
Notes to Consolidated Financial Statements............................................ 17
CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
Schedule II -- Valuation and Qualifying Accounts...................................... 38
</TABLE>
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<PAGE> 9
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Quarterdeck Corporation:
We have audited the consolidated financial statements of Quarterdeck
Corporation and subsidiaries as of September 30, 1996 and 1995 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years in the three-year period ended September 30, 1996. In
connection with our audits of the consolidated financial statements, we have
audited the financial statement schedule. These consolidated financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on our
audits. We did not audit the financial statements of Datastorm Technologies,
Inc., a wholly-owned subsidiary, for 1995 and 1994, which statements reflect
total assets constituting 28 percent of the related consolidated totals at
September 30, 1995 and total revenues constituting 34 percent and 50 percent for
each of the years in the two-year period ended September 30, 1995, respectively,
of the related consolidated totals. Those statements were audited by other
auditors whose report has been furnished to us, and our opinion, insofar as it
relates to the amounts included for Datastorm Technologies, Inc. is based solely
on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Quarterdeck Corporation and
subsidiaries as of September 30, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended September 30, 1996, in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
KPMG PEAT MARWICK LLP
Los Angeles, California
November 22, 1996,
except as to the
last paragraph of
Note 13, which is as
of December 19, 1996
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<PAGE> 10
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
DATASTORM Technologies, Inc.:
We have audited the balance sheet of DATASTORM Technologies, Inc. (a Missouri
corporation) as of December 31, 1995, and the related statements of income and
changes in retained earnings, and cash flows for the years ended December 31,
1995 and 1994 (not presented herein). These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements 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, the financial statements referred to above present fairly, in
all material respects, the financial position of DATASTORM Technologies, Inc.,
as of December 31, 1995, and the results of its operations and its cash flows
for the years ended December 31, 1995 and 1994, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
St. Louis, Missouri,
March 1, 1996
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<PAGE> 11
QUARTERDECK CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
1996 1995
------- -------
<S> <C> <C>
Current assets:
Cash and short-term investments........................................ $25,554 $39,669
Trade accounts receivable.............................................. 9,265 13,621
Inventories............................................................ 2,151 2,281
Deferred income taxes.................................................. -- 2,178
Other current assets................................................... 5,594 4,006
------- -------
Total current assets................................................ 42,564 61,755
Property, plant and equipment............................................ 21,252 8,335
Capitalized software costs, net.......................................... 3,448 2,807
Note receivable from related party -- building........................... -- 469
Other assets............................................................. 9,517 3,333
------- -------
$76,781 $76,699
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to banks................................................. $ 8,280 $ --
Accounts payable....................................................... 10,685 13,582
Accrued liabilities.................................................... 17,232 13,880
Accrued acquisition and restructuring charges.......................... 10,940 3,455
Notes payable to related parties....................................... -- 1,093
Current portion of long-term obligations............................... 111 255
------- -------
Total current liabilities...................................... 47,248 32,265
Convertible notes........................................................ 25,000 --
Other long-term obligations, less current portion........................ 108 164
------- -------
Total liabilities.............................................. 72,356 32,429
Liquidity (Note 16)
Commitments and litigation (Notes 7 and 10)
Stockholders' equity:
Series B preferred stock (authorized: 2,000; issued and outstanding:
200 and 0 shares, liquidation preference $20,000)................... 20,000 --
Common stock (authorized: 50,000 shares; issued and outstanding: 37,666
and 34,673 shares).................................................. 38 35
Treasury stock......................................................... (559) (559)
Additional paid-in capital............................................. 64,819 39,873
Retained earnings (accumulated deficit)................................ (79,766) 5,359
Foreign currency translation adjustment................................ (468) (563)
Notes receivable from directors for sale of stock...................... (18) (70)
Net unrealized gain on marketable securities........................... 379 195
------- -------
Total stockholders' equity..................................... 4,425 44,270
------- -------
$76,781 $76,699
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 12
QUARTERDECK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Net revenues............................................... $133,100 $117,606 $ 84,715
Cost of revenues........................................... 49,600 34,884 27,403
-------- -------- --------
Gross profit............................................. 83,500 82,722 57,312
Operating expenses:
Research and development................................. 21,314 14,286 7,520
Sales and marketing...................................... 66,355 30,624 27,107
General and administrative............................... 32,128 20,704 20,908
Acquisition, restructuring and other charges............. 37,789 7,409 12,863
Litigation settlement.................................... -- -- 615
-------- -------- --------
Total operating expenses................................. 157,586 73,023 69,013
Operating income (loss).................................... (74,086) 9,699 (11,701)
Other income (expense), net................................ 38 (38) (271)
Interest income (expense), net............................. (105) 1,922 1,365
-------- -------- --------
Income (loss) before income taxes.......................... (74,153) 11,583 (10,607)
Provision (benefit) for income taxes....................... 806 331 (5,982)
-------- -------- --------
Net income (loss).......................................... $(74,959) $ 11,252 $ (4,625)
======== ======== ========
Net income (loss) per share:
Primary.................................................. $ (2.15) $ 0.32 $ (0.15)
-------- -------- --------
Fully diluted............................................ $ (2.15) $ 0.31 $ (0.15)
-------- -------- --------
Shares used to compute net income (loss) per share:
Primary.................................................. 34,894 35,557 31,825
-------- -------- --------
Fully diluted............................................ 34,894 36,499 31,825
-------- -------- --------
Additional unaudited pro forma data:
Income (loss) before taxes............................... $(74,153) $ 11,583 $(10,607)
Pro forma income tax expense............................. 806 3,406 576
-------- -------- --------
Pro forma net income (loss)........................... $(74,959) $ 8,177 $(11,183)
======== ======== ========
Pro forma income (loss) per share:
Primary.................................................. $ (2.15) $ 0.23 $ (0.35)
-------- -------- --------
Fully diluted............................................ $ (2.15) $ 0.22 $ (0.35)
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 13
QUARTERDECK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
NOTES
RECEIVABLE
SERIES B RETAINED FOREIGN FROM
PREFERRED STOCK COMMON STOCK ADDITIONAL EARNINGS CURRENCY DIRECTORS
----------------- --------------- TREASURY PAID-IN (ACCUMULATED TRANSLATION FOR SALE
SHARES AMOUNT SHARES AMOUNT STOCK CAPITAL DEFICIT) ADJUSTMENT OF STOCK
------ -------- ------ ------ -------- ---------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, September 30,
1993, as reported in
June 25, 1996 Form
8K................... -- $ -- 29,503 $ 29 $ (27) $ 28,408 $ 25,565 $(581) $ --
Adjustments to reflect
acquisitions,........ -- -- 3,500 4 -- -- -- -- --
Common stock options
exercised............ -- -- 30 -- -- 10 -- -- --
Tax benefits arising
from exercise of
nonqualified stock
options.............. -- -- -- -- -- 16 -- -- --
Net loss............... -- -- -- -- -- -- (4,625) -- --
Undistributed earnings
of subchapter-S
subsidiaries......... -- -- -- -- -- 18,476 (18,476) -- --
Distributions to
shareholders......... -- -- -- -- -- (12,215) -- -- --
Foreign currency
translation
adjustment........... -- -- -- -- -- -- -- 25 --
--
--- ------ --- ----- -------- -------- ----- ---
Balance, September 30,
1994................. -- $ -- 33,033 $ 33 $ (27) $ 34,695 $ 2,464 $(556) $ --
== === ====== === ===== ======== ======== ===== ===
<CAPTION>
NET
UNREALIZED
GAIN ON TOTAL
MARKETABLE STOCKHOLDERS'
SECURITIES EQUITY
---------- -------------
<S> <C> <C>
Balance, September 30,
1993, as reported in
June 25, 1996 Form
8K................... $ -- $ 53,394
Adjustments to reflect
acquisitions,........ -- 4
Common stock options
exercised............ -- 10
Tax benefits arising
from exercise of
nonqualified stock
options.............. -- 16
Net loss............... -- (4,625)
Undistributed earnings
of subchapter-S
subsidiaries......... -- --
Distributions to
shareholders......... -- (12,215)
Foreign currency
translation
adjustment........... -- 25
--- --------
Balance, September 30,
1994................. $ -- $ 36,609
=== ========
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 14
QUARTERDECK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
NOTES
RECEIVABLE
SERIES B RETAINED FOREIGN FROM
PREFERRED STOCK COMMON STOCK ADDITIONAL EARNINGS CURRENCY DIRECTORS
----------------- --------------- TREASURY PAID-IN (ACCUMULATED TRANSLATION FOR SALE
SHARES AMOUNT SHARES AMOUNT STOCK CAPITAL DEFICIT) ADJUSTMENT OF STOCK
------ -------- ------ ------ -------- ---------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, September 30,
1994................. -- $ -- 33,033 $ 33 $ (27) $ 34,695 $ 2,464 $(556) $ --
Adjustment for
Internetware, Inc.
pooling of
interest............. -- -- 460 1 -- 9 (46) -- --
Adjustment for StarNine
Technologies, Inc.
pooling of
interest............. -- -- 524 1 -- 223 245 -- --
Adjustment for
Datastorm, Ltd.
pooling of
interest............. -- -- -- -- -- 441 -- -- --
Acquisition of assets
from Prospero........ -- -- 155 -- -- 2,900 -- -- --
Exercise of StarNine
Technologies, Inc.
stock options........ -- -- 149 -- -- 224 -- -- --
Issuance of common
stock by Inset
Systems, Inc......... -- -- 63 -- -- 5 -- -- --
Common stock options
exercised............ -- -- 351 -- -- 579 -- -- (70)
Treasury shares, at
cost................. -- -- (62) -- (532) 22 -- -- --
Tax benefits arising
from exercise of
nonqualified stock
options.............. -- -- -- -- -- 59 -- -- --
Undistributed earnings
of subchapter-S
subsidiaries......... -- -- -- -- -- 8,154 (8,154) -- --
Capital contribution... -- -- -- -- -- 450 -- -- --
Net income............. -- -- -- -- -- -- 11,252 -- --
Distributions to
shareholders......... -- -- -- -- -- (7,888) (18) -- --
Duplicate earnings
elimination for
Landmark pooling..... -- -- -- -- -- -- (384) -- --
Net increase in
unrealized gain...... -- -- -- -- -- -- -- -- --
Foreign currency
translation
adjustment........... -- -- -- -- -- -- -- (7) --
--- ---- ------ ---- ------ -------- ------- ----- -----
Balance, September 30,
1995................. -- $ -- 34,673 $ 35 $ (559) $ 39,873 $ 5,359 $(563) $ (70)
=== ==== ====== ==== ====== ======== ======= ===== =====
<CAPTION>
NET
UNREALIZED
GAIN ON TOTAL
MARKETABLE STOCKHOLDERS'
SECURITIES EQUITY
---------- -------------
<S> <C> <C>
Balance, September 30,
1994................. $ -- $ 36,609
Adjustment for
Internetware, Inc.
pooling of
interest............. -- (36)
Adjustment for StarNine
Technologies, Inc.
pooling of
interest............. 33 502
Adjustment for
Datastorm, Ltd.
pooling of
interest............. -- 441
Acquisition of assets
from Prospero........ -- 2,900
Exercise of StarNine
Technologies, Inc.
stock options........ -- 224
Issuance of common
stock by Inset
Systems, Inc......... -- 5
Common stock options
exercised............ -- 509
Treasury shares, at
cost................. -- (510)
Tax benefits arising
from exercise of
nonqualified stock
options.............. -- 59
Undistributed earnings
of subchapter-S
subsidiaries......... -- --
Capital contribution... -- 450
Net income............. -- 11,252
Distributions to
shareholders......... -- (7,906)
Duplicate earnings
elimination for
Landmark pooling..... -- (384)
Net increase in
unrealized gain...... 162 162
Foreign currency
translation
adjustment........... -- (7)
---- --------
Balance, September 30,
1995................. $ 195 $ 44,270
==== ========
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 15
QUARTERDECK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
NOTES
RECEIVABLE
SERIES B RETAINED FOREIGN FROM
PREFERRED STOCK COMMON STOCK ADDITIONAL EARNINGS CURRENCY DIRECTORS
----------------- --------------- TREASURY PAID-IN (ACCUMULATED TRANSLATION FOR SALE
SHARES AMOUNT SHARES AMOUNT STOCK CAPITAL DEFICIT) ADJUSTMENT OF STOCK
------ -------- ------ ------ -------- ---------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, September 30,
1995................. -- $ -- 34,673 $ 35 $ (559) $ 39,873 $ 5,359 $(563) $ (70)
Adjustment for
Datastorm and Inset
poolings of
interest............. -- -- 35 -- -- 385 -- 23 --
Adjustment for
Vertisoft pooling of
interests............ -- -- -- -- -- 40 999 -- --
Adjustment for Future
Labs pooling of
interests............ -- -- 664 1 1,987 (1,481) -- --
Duplicate earnings
elimination for
Datastorm pooling.... -- -- -- -- -- -- (717) -- --
Purchase of Limbex..... -- -- 1,310 1 -- 14,370 -- -- --
Stock issuance for
purchase of
InterLink............ -- -- 205 -- -- 3,000 -- -- --
Stock issuance for
purchase of assets
from Pinnacle........ -- -- 198 -- -- 1,800 -- -- --
Net loss............... -- -- -- -- -- -- (74,959) -- --
Undistributed earnings
of subchapter-S
subsidiaries......... -- -- -- -- -- 8,967 (8,967) -- --
Distribution to
shareholders......... -- -- -- -- -- (7,307) -- -- --
Net increase in
unrealized gain...... -- -- -- -- -- -- -- -- --
Common stock options
exercised............ -- -- 581 1 -- 2,979 -- -- 52
Foreign currency
translation
adjustment........... -- -- -- -- -- -- -- 72 --
Issuance of convertible
preferred stock...... 200 20,000 -- -- -- -- -- -- --
Cost of preferred stock
issuance............. -- -- -- -- -- (1,275) -- -- --
--- -------- ------ ---- ------ -------- -------- ----- -----
Balance, September 30,
1996................. 200 $ 20,000 37,666 $ 38 $ (559) $ 64,819 $(79,766) $(468) $ (18)
=== ======== ====== ==== ====== ======== ======== ===== =====
<CAPTION>
NET
UNREALIZED
GAIN ON TOTAL
MARKETABLE STOCKHOLDERS'
SECURITIES EQUITY
---------- -------------
<S> <C> <C>
Balance, September 30,
1995................. $ 195 $ 44,270
Adjustment for
Datastorm and Inset
poolings of
interest............. -- 408
Adjustment for
Vertisoft pooling of
interests............ -- 1,039
Adjustment for Future
Labs pooling of
interests............ -- 507
Duplicate earnings
elimination for
Datastorm pooling.... -- (717)
Purchase of Limbex..... -- 14,371
Stock issuance for
purchase of
InterLink............ -- 3,000
Stock issuance for
purchase of assets
from Pinnacle........ -- 1,800
Net loss............... -- (74,959)
Undistributed earnings
of subchapter-S
subsidiaries......... -- --
Distribution to
shareholders......... -- (7,307)
Net increase in
unrealized gain...... 184 184
Common stock options
exercised............ -- 3,032
Foreign currency
translation
adjustment........... -- 72
Issuance of convertible
preferred stock...... -- 20,000
Cost of preferred stock
issuance............. -- (1,275)
----- --------
Balance, September 30,
1996................. $ 379 $ 4,425
===== ========
</TABLE>
See accompanying notes to consolidated financial statements.
- 15 -
<PAGE> 16
QUARTERDECK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------
1996 1995 1994
-------- --------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)..................................................... $(74,959) $ 11,252 $ (4,625)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization of equipment and leasehold
improvements...................................................... 6,063 3,610 3,960
Amortization of capitalized software cost & other intangibles....... 3,770 1,575 3,171
Write-off of property and equipment................................. 1,409 -- 1,719
Write-off of capitalized software costs and prepaid royalties....... 4,860 -- 3,701
Stock compensation.................................................. -- 59 --
Elimination of duplicate net income from acquired entities.......... (717) (384) --
Loss on sale or abandonment of assets............................... -- 38 271
Write-off of in process research and development.................... 14,993 2,900 --
Changes in assets and liabilities:
Trade accounts receivable........................................... 4,591 (7,749) 5,333
Refundable income taxes............................................. -- 6,301 (6,301)
Deferred income taxes............................................... 3,072 (2,178) --
Inventories......................................................... 130 (435) 937
Other current assets................................................ (3,420) (1,565) 7,079
Other assets........................................................ (4,092) (203) (5,453)
Accounts payable.................................................... (6,171) 5,342 4,267
Accrued liabilities................................................. 68 1,865 4,526
Accrued restructuring charges....................................... 558 (3,476) 5,321
Foreign currency translation adjustment............................. 95 16 25
-------- --------- --------
Net cash provided by (used in) operating activities............ (49,750) 16,968 23,931
-------- --------- --------
Cash flows from investing activities:
Purchases of short-term investments................................... -- (111,989) (61,351)
Proceeds from sales and maturities of short-term investments.......... 34,285 106,289 59,131
Capital expenditures.................................................. (19,669) (6,029) (3,396)
Capitalized software costs............................................ (4,504) (2,564) (3,617)
Purchase of minority interest in affiliates........................... -- (2,700) --
Loan to related party for note receivable -- building................. -- (469) --
Advances (to) from affiliates......................................... 52 (100) 137
Opening cash balance of previously unconsolidated subsidiaries........ 5,054 559 --
Proceeds from sale of assets.......................................... -- 12 5
Accrued acquisition charges, net of cash acquired..................... 6,493 2,525 --
-------- --------- --------
Net cash provided by (used in) investing activities............ 21,711 (14,466) (9,091)
-------- --------- --------
Cash flows from financing activities:
Net proceeds from issuance of preferred stock......................... 20,000 -- --
Net proceeds from issuance of common stock............................ 3,529 1,439 11
Proceeds from issuance of long-term convertible notes................. 25,000 43 544
Proceeds from issuance of bank debt................................... 8,280 -- --
Principal payments under long-term obligations........................ (200) (482) (555)
Notes payable to related parties...................................... (1,093) 441 635
Acquisition of treasury stock......................................... -- (532) --
Distributions to stockholders......................................... (7,307) (7,906) (12,215)
-------- --------- --------
Net cash provided by (used in) financing activities............ 48,209 (6,997) (11,580)
-------- --------- --------
Net increase (decrease) in cash and cash equivalents........... 20,170 (4,495) 3,260
Cash and cash equivalents at beginning of period........................ 5,384 9,879 6,619
-------- --------- --------
Cash and cash equivalents at end of period.............................. $ 25,554 $ 5,384 $ 9,879
======== ========= ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest............................................................ $ 468 $ 20 $ 34
Income taxes........................................................ 1,993 1,534 --
</TABLE>
See accompanying notes to consolidated financial statements.
- 16 -
<PAGE> 17
QUARTERDECK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996, 1995 AND 1994
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Quarterdeck Corporation ("the Company") commenced operations as a
California corporation on September 16, 1982, and was reincorporated in Delaware
in 1991. The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. See note 2 for a description of
pooling of interests and purchase transactions. All significant intercompany
transactions have been eliminated in consolidation.
Revenue Recognition -- Revenue from the sale of software products is
recognized upon shipment, where collection of the resulting receivable is
probable and there are no significant obligations remaining. The estimated cost
to fulfill technical support obligations to end users arising from the sale of
software is accrued upon shipment. Certain limited rights of return and exchange
from customers exist as defined by the Company's general distributor agreements.
The Company establishes allowances for estimated product returns and exchanges
as a reserve against revenues. Provisions for sales returns and exchanges were
approximately $31,889,000, $9,136,000 and $7,510,000 in fiscal 1996, 1995 and
1994, respectively. Revenue from the sale or licensing of intellectual property
is recognized when all significant obligations of the Company have been met and
no customer right of return exists.
Capitalized Software Costs -- Statement of Financial Accounting Standards
No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed," requires the capitalization of certain software development
and production costs once technological feasibility has been achieved. The cost
of purchased software is capitalized when related to a product which has
achieved technological feasibility or that has an alternative future use. For
the year ended September 30, 1996, the Company did not capitalize any internal
software development costs. Internal software development costs related to new
products reaching technological feasibility during fiscal 1996 were immaterial.
During fiscal 1996, the Company purchased and capitalized software amounting to
$4,504,000. For the years ended September 30, 1995 and 1994, the Company
capitalized $2,564,000 and $3,617,000, respectively, of software development and
purchased software costs. Software development costs incurred prior to achieving
technological feasibility as well as certain licensing costs are charged to
research and development expense as incurred.
Capitalized software development and purchased software costs are reported
at the lower of unamortized cost or net realizable value. Commencing upon
initial product release, these costs are amortized based on the straight-line
method over the estimated life, generally one year for internal software
development costs and twelve to thirty-six months for purchased software. Fully
amortized software costs are removed from the financial records. For the years
ended September 30, 1996, 1995 and 1994, the Company recorded $3,711,000,
$1,575,000 and $3,171,000 of amortization of capitalized software costs,
respectively, based on the straight-line method. Amortization of capitalized
software costs is included in cost of revenues in the accompanying consolidated
statement of operations.
Inventories -- Inventories, consisting primarily of product packaging,
documentation and media, is stated at the lower of cost or market (net
realizable value). Cost is determined by the first-in, first-out (FIFO) method.
Cash Equivalents and Short-Term Investments -- The Company considers all
highly liquid investments purchased with an original maturity of three months or
less to be cash equivalents. Cash and cash equivalents at September 30, 1996 and
1995 amounted to $25,554,000 and $5,384,000, respectively. $20,000,000 of the
September 30, 1996 balance of $25,554,000 was received pursuant to the Series B
Convertible Preferred Stock (note 15) issuance on September 30, 1996.
As of September 30, 1996, $22,226,000 of the total cash and cash equivalent
balance was invested in interest bearing bank accounts and cash equivalent money
funds.
- 17 -
<PAGE> 18
QUARTERDECK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996, 1995 AND 1994
Short-term investments at September 30, 1995 amounted to $34,285,000
consisting of municipal bonds of $31,755,000, U.S. debt securities of $2,375,000
and corporate securities of $155,000. Effective October 1, 1994, the Company
adopted the provisions of Statement of Financial Accounting Standards No. 115
(FAS 115), "Accounting for Certain Investments in Debt and Equity Securities."
Under FAS 115, the Company has classified its short-term investments and
long-term marketable securities as available-for-sale. Available-for-sale
securities are stated at market value and unrealized holding gains and losses,
net of the related tax effect, are excluded from earnings and are reported as a
separate component of stockholders' equity until realized. A decline in the
market value of the security below cost that is deemed other than temporary is
charged to earnings resulting in the establishment of a new cost basis for the
security.
Since the market value of short-term investments at October 1, 1994
approximated cost, the adoption of FAS 115 did not have a material effect on the
Company's consolidated financial statements.
Computation of Net Income (Loss) per Share -- The primary net income (loss)
per common and common equivalent share for the years ended September 30, 1996,
1995 and 1994 has been computed using the weighted average number of common and
dilutive common stock equivalent shares outstanding for each year as summarized
below:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Weighted average common stock outstanding during the
year................................................. 34,893,937 34,112,914 31,824,560
Common stock equivalents of stock options and warrants
outstanding.......................................... -- 1,443,997 --
---------- ---------- ----------
Shares used in primary EPS calculation................. 34,893,937 35,556,911 31,824,560
========== ========== ==========
Shares used in fully diluted EPS calculation........... 34,893,937 36,498,634 31,824,560
========== ========== ==========
</TABLE>
The weighted average number of shares of common stock outstanding during
each of the years has been adjusted to reflect the issuance of common stock in
connection with the following acquisitions which are accounted for as poolings
of interest: 3,500,000 shares for Landmark Research International Corporation
("Landmark") (note 2), 921,218 shares for Inset Systems, Inc. ("Inset") (note
2), 5,200,000 shares for Datastorm Technologies, Inc. and Datastorm Limited
(together "Datastorm") (note 2), and 3,499,999 shares for Vertisoft Systems,
Inc. ("Vertisoft") (note 2). The weighted average number of shares of common
stock outstanding during fiscal 1996 includes 663,768 shares issued in the
Future Labs, Inc. ("Future Labs") pooling of interests as if the shares were
issued at the beginning of fiscal 1996. Additionally the following shares were
issued in connection with purchase acquisitions and are included as of the
respective acquisition dates: 1,309,890 shares for Limbex Corporation
("Limbex"), 205,000 shares for InterLink Technology, Inc. ("InterLink"), and
198,000 shares for the Pinnacle Software, Inc. ("Pinnacle") technology purchase.
The weighted average number of shares of common stock outstanding for the year
ended September 30, 1996 excludes 1,028,000 shares issued in connection with the
above acquisitions, which are held in escrow, as their inclusion would be
anti-dilutive to the loss per share. The weighted average number of shares of
common stock outstanding for the year ended September 30, 1994, excluded 962,000
shares issued in connection with the above acquisitions, which are held in
escrow, as their inclusion would be anti-dilutive.
Additionally, effective October 1, 1994 (fiscal 1995), the weighted average
number of common shares has been adjusted to reflect the issuance of 459,950 and
523,667 shares of common stock issued in connection with the Internetware, Inc.
and a related party (together "Internetware") and StarNine Technologies, Inc.
("StarNine") mergers, accounted for as immaterial pooling of interests,
respectively, and 149,000 shares of common stock issued during the year ended
September 30, 1995 relating to the Company equivalent shares issued on the
exercise of StarNine options.
- 18 -
<PAGE> 19
QUARTERDECK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996, 1995 AND 1994
Reclassification -- Certain items in prior year's consolidated financial
statements have been reclassified to conform to the current year's presentation.
Use of Estimates -- Management of the Company has made a number of
estimates and assumptions relating to the reporting of assets and liabilities to
prepare these financial statements in conformity with generally accepted
accounting principles. Significant estimates are primarily related to provisions
for sales returns, inventory reserve, allowance for doubtful accounts and
valuation of long-term investments. Actual results could differ from these
estimates.
Concentrations of Credit Risk -- Financial instruments which potentially
subject the Company to concentrations of credit risk consist primarily of
short-term investments and trade accounts receivable. As of September 30, 1996,
the Company had no short-term investments. As of September 30, 1995, the
Company's investment portfolio was diversified and consisted of investment grade
securities. The credit risk associated with trade accounts receivable is
mitigated by the Company's credit evaluation process, reasonably short
collection terms and the geographical dispersion of sales transactions.
Depreciation and Amortization -- Depreciation and amortization of equipment
and leasehold improvements is provided by the straight-line method over the
estimated useful lives of the related assets as follows:
<TABLE>
<S> <C>
Building............................. 40 years
Computer equipment................... 3 to 7 years
Office furniture and equipment....... 5 to 7 years
Shorter of lease or useful life of
Leasehold improvements............... asset
Equipment under capital lease........ 3 to 7 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 liability method of
accounting for income taxes. Under SFAS 109, deferred tax assets and liabilities
are recognized with respect to the tax consequences attributable to differences
between the financial statement carrying values and the tax bases of existing
assets and liabilities. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to the taxable income in the years in which
these temporary differences are expected to be recovered or settled. Further,
the effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
Stock-Based Compensation -- In October 1995, the Financial Accounting
Standards Board issued SFAS No. 123, Accounting for Stock-Based Compensation.
SFAS No. 123 will be effective for fiscal years beginning after December 15,
1995, and will require that the Company either recognize in its financial
statements costs related to its employee stock-based compensation plans, such as
stock option and stock purchase plans, or make pro forma disclosures of such
costs in a footnote to the financial statements.
The Company expects to continue to use the intrinsic value-based method of
Accounting Principles Board Opinion No. 25, as allowed under SFAS No. 123, to
account for all of its employee stock-based compensation plans. Therefore, in
its financial statements for fiscal 1997, the Company will make the required pro
forma disclosures in a footnote to the financial statements. SFAS No. 123 is not
expected to have a material effect on the Company's results of operations or
financial position.
Non-Cash Transactions -- The Company has recorded certain significant
non-cash transactions relating to certain mergers and purchases which included
Common Stock as all or a portion of the consideration and has commenced a
restructuring program which includes recording certain non-cash charges. See
also Notes 2 and 4 herein.
- 19 -
<PAGE> 20
QUARTERDECK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996, 1995 AND 1994
Fair Value of Financial Instruments -- The fair values of the Company's
cash and cash equivalents, trade accounts receivable, accounts payable, accrued
liabilities and accrued acquisition and restructuring charges approximate their
carrying value due to the relatively short maturities of these instruments. The
fair value of the loans payable to banks approximate the fair value of the
instruments due to the stated interest rates on such notes and the collateral
supporting the notes. The fair value of the convertible debentures approximates
face value due to the stated interest rate on such instrument and the
indeterminate nature of the value of the convertibility feature of such debt
instrument.
Long-Lived Assets -- In March 1995, Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" (SFAS No. 121), was issued. This statement
provides guidelines for the recognition of impairment losses related to
long-term assets and is effective for fiscal years beginning after December 15,
1995, with earlier application encouraged. The Company will adopt SFAS No. 121
during fiscal 1997. The Company believes that such adoption will not have a
material impact on the consolidated financial statements.
Foreign Currency Translation -- Assets and liabilities denominated in
foreign currencies are translated to U.S. dollars at the exchange rate on the
balance sheet date. Revenues, costs and expenses are translated at average rates
of exchange prevailing during the year. Translation adjustments resulting from
this process are shown separately in stockholders' equity. Foreign currency
transaction gains and losses are not material and are included in the
determination of net income (loss).
NOTE 2. ACQUISITIONS AND STRATEGIC INVESTMENTS
POOLINGS OF INTERESTS
FISCAL 1996:
On December 29, 1995, the Company merged with Inset, a developer of utility
application software for personal computers. The Company issued 921,218 shares
of common stock in exchange for all of the outstanding common stock of Inset.
This merger has been accounted for as a pooling of interests combination and
accordingly, the consolidated financial statements for all periods presented
herein have been restated to include the accounts and results of operations of
Inset.
On March 28, 1996, the Company consummated a merger with Datastorm. 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 earnings during fiscal 1996 to eliminate the duplication of net income
of $717,000 for the three month period ended December 31, 1995. Financial
information related to Datastorm's fiscal years ended December 31, 1994 and 1993
were combined with financial information related to the Company's fiscal years
ended September 30, 1994 and 1993, respectively.
Datastorm's S corporation status terminated upon consummation of the merger
and undistributed earnings at March 28, 1996, and all prior periods, have been
reclassified to additional paid-in-capital.
- 20 -
<PAGE> 21
QUARTERDECK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996, 1995 AND 1994
The Company's Datastorm subsidiary leased office and warehouse space from
Three Guys With a Building partnership, a company that was affiliated to
Datastorm through common ownership. As a result of the acquisition and
completion of a new office building for the Company by the partnership, the
existing lease has been terminated at no cost to the Company (see note 14).
Lease expense for 1996, 1995 and 1994 totaled $698,000, $686,000 and $667,000
respectively.
The Company's Datastorm subsidiary owed Intersoft, Inc., an Interest Charge
Domestic International Sales Corporation ("IC-DISC") affiliated with Datastorm
through common ownership, $1,015,000 and $527,000 as of December 31, 1995 and
1994, respectively, for commission expenses and interest related to
international sales. These amounts are included in notes payable to related
parties.
On May 15, 1996, the Company acquired substantially all of the assets of
Future Labs, a developer of real-time collaborative technology. The Company
issued 663,768 shares of common stock in exchange for all of the outstanding
stock of Future Labs. The transaction was accounted for as an immaterial pooling
of interests and therefore, the consolidated financial statements for all
periods beginning on or after October 1, 1995 have been restated to reflect the
combined operations of the Company and Future Labs.
On July 18, 1996, the Company acquired 100% of the common stock of
Vertisoft in exchange for 3,499,999 shares of Company common stock. This
transaction has been accounted for as an immaterial pooling of interests, and as
a result, the accompanying financial statements are presented as if the
combining companies had been combined commencing October 1, 1995. The number of
shares issued in the Vertisoft pooling of interests is material to the Company
for all periods, and accordingly the number of common shares outstanding and
earnings per share have been restated for all periods after October 1, 1992, to
reflect the 3,499,999 shares issued in such transaction.
FISCAL 1995:
On June 30, 1995, the Company acquired Landmark, a developer of utility
application software for personal computers. The Company issued 3,500,000 shares
of common stock in exchange for all of the outstanding common stock of Landmark.
The transaction was accounted for as a pooling of interests and therefore, the
consolidated financial statements for all periods presented herein reflect the
combined operations of the Company and Landmark.
Landmark's S corporation status terminated upon acquisition by the Company.
Landmark's undistributed earnings at September 30, 1995, and 1994, have been
re-classified to additional paid-in capital. Distributions to Landmark's
stockholders, amounting to $2,114,000, and $587,000 for the years ended
September 30, 1995, and 1994, respectively have been charged to additional
paid-in capital.
On August 28, 1995, the Company issued 459,950 shares of its common stock
in exchange for 100% of the outstanding shares of Internetware. The transaction
was accounted for as an immaterial pooling of interests, and accordingly, the
consolidated financial statements have been prepared as if Internetware had been
combined beginning October 1, 1994. The Company recorded an adjustment to
beginning equity to reflect the 459,950 shares issued in the transaction and
Internetware's stockholders' deficiency of $36,000 at September 30, 1994.
Acquisition costs paid by certain stockholders of Internetware, amounting to
$450,000 have been recorded as acquisition expenses of the combined entities and
a capital contribution.
On September 29, 1995, the Company issued 672,667 shares of its common
stock in exchange for 100% of the outstanding shares of StarNine. This
transaction was accounted for as an immaterial pooling of interests, and
accordingly, the consolidated financial statements have been prepared as if
StarNine had been combined beginning October 1, 1994.
- 21 -
<PAGE> 22
QUARTERDECK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996, 1995 AND 1994
In connection with the 1996 mergers, the following merger transaction costs
and expenses were recorded and have been charged to expense in fiscal 1996.
These merger transaction costs and expenses include the following (in
thousands):
<TABLE>
<CAPTION>
INSET DATASTORM FUTURELABS VERTISOFT TOTAL
------- --------- ---------- --------- -------
<S> <C> <C> <C> <C> <C>
Acquisition costs....................... $ 1,846 $ 4,782 $ 1,417 $ 1,175 $ 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
======= ======= ======== ======= =======
</TABLE>
In connection with the 1995 mergers, the following merger transaction costs
and expenses were recorded and charged to expense in fiscal 1995. These merger
transaction costs and expenses include the following (in thousands):
<TABLE>
<CAPTION>
LANDMARK STARNINE INTERNETWARE TOTAL
-------- -------- ------------ -------
<S> <C> <C> <C> <C>
Acquisition costs................................ $ 3,600 $ 1,200 $ 300 $ 5,100
Non-cash charges................................. -- (450) -- (450)
Cash payments.................................... (1,860) (98) (175) (2,133)
Reversal of acquisition costs.................... (488) -- -- (488)
------- ------- ------ -------
Balance, September 30, 1995...................... 1,252 652 125 2,029
Cash payments.................................... (1,688) (565) (125) (2,378)
Additional acquisition costs..................... 482 99 -- 581
------- ------- ------ -------
Balance, September 30, 1996...................... $ 46 $ 186 $ -- $ 232
======= ======= ====== =======
</TABLE>
The results of operations previously reported by the separate enterprises,
that are discussed above and the combined amounts presented in the accompanying
consolidated financial statements are summarized below (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------------------------------------------
1996 1995 1994
--------------------- -------------------- ---------------------
NET NET NET
NET INCOME NET INCOME NET INCOME
REVENUES (LOSS) REVENUES (LOSS) REVENUES (LOSS)
-------- -------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Quarterdeck................ $ 92,030 $(86,856) $ 54,986 $ 2,744 $ 26,753 $(21,171)
Landmark................... -- -- 11,236 1,309 11,953 2,323
StarNine................... -- -- 3,981 38 -- --
Internetware............... -- -- 444 (202) -- --
Inset...................... 2,669 424 6,394 134 4,022 (1,929)
Datastorm.................. 29,413 12,576 40,499 6,990 42,402 16,242
Future Labs................ 1,312 (335) -- -- -- --
Vertisoft.................. 7,676 (623) -- -- -- --
Pooling Adjustments........ -- (145) 66 239 (415) (90)
-------- -------- -------- ------- -------- --------
Restated Quarterdeck....... $133,100 $(74,959) $117,606 $11,252 $ 84,715 $ (4,625)
======== ======== ======== ======= ======== ========
</TABLE>
Net revenues and net income(loss) for Vertisoft, Future Labs, Datastorm,
Inset, Landmark, StarNine and Internetware for the years ended September 30,
1996 and 1995 reflect the results of each entity for only the period prior to
the date of acquisition by the Company. Results subsequent to the date of the
mergers are included with the Company's operations. Net revenue and net income
(loss) for 1994 reflect the separate
- 22 -
<PAGE> 23
QUARTERDECK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996, 1995 AND 1994
results of Landmark, Inset and Datastorm. Pooling adjustments were made
primarily to conform accounting policies to those of the Company.
PURCHASES
FISCAL 1996:
On June 6, 1996, the Company acquired certain software and related
intellectual property rights from Pinnacle in exchange for common stock with a
market value, as defined, of $1,800,000, or 198,000 shares. The entire amount
has been recorded as capitalized software. This transaction has been accounted
for using the purchase method of accounting. The Company is also obligated to
pay certain minimum royalties of $200,000 per year for four years commencing no
later than March 31, 1997. The Company has paid $100,000 and is obligated for an
additional $200,000, as payment for consulting services and a non-competition
agreement with the principal of Pinnacle.
On July 16, 1996, the Company purchased certain assets and technology
relating to remote control software from InterLink as an essential part of the
Company's communication product line. The Company issued 205,000 shares of
common stock and is obligated to issue approximately $1,381,000 worth of
additional shares, up to a maximum of 205,000 additional shares, on the six
month anniversary of the closing date based on the trading price of the Company
common stock at such time. The acquisition has been accounted for as a purchase.
The total consideration for the InterLink acquisition was $3,155,000, including
the Company's obligation to issue an additional $1,381,000 of Common Stock.
On August 14, 1996, the Company acquired the remaining shares of Limbex not
owned by the Company. Prior to such acquisition the Company owned approximately
20% of Limbex. Limbex is the developer of WebCompass product line. As a result
of the merger, the Company owns 100% of Limbex. The total consideration for the
acquisition was $16,295,000, including approximately $3,300,000 of consideration
to be settled one year from the closing in cash or common stock of the Company,
at the Company's option. The Company's previous investment of 20% was allocated
using the historical cost of the investment.
The purchase price allocation for the acquisitions of InterLink and Limbex
was made among the identifiable tangible and intangible assets, based on the
fair market value of those assets utilizing the discounted cash flow of the
technology acquired, as well as applying a factor incorporating the cost of the
working capital employed. Specifically, purchased in process research and
development was identified and valued through extensive interviews and analysis
of data concerning each InterLink or Limbex development project. Expected future
cash flows of each development project were discounted taking into account risks
associated with the inherent difficulties and uncertainties in completing the
project, and thereby achieving technological feasibility, and risks related to
the viability of and potential changes in future target markets.
This analysis resulted in an allocation of $2,872,000 and $12,121,000 of
purchased research and development for InterLink and Limbex, respectively, which
had not yet reached technological feasibility and did not have alternative
future uses. The $2,872,000 and $12,121,000 of purchased research and
development is included in acquisition, restructuring and other charges in the
accompanying consolidated statements of operations. Using the same methodology,
goodwill for InterLink and Limbex was calculated to be $283,000 and $2,546,000,
respectively, and is included in other assets, to be amortized over 10 years. In
addition, the Company allocated $328,000 of the Limbex purchase price to
intangible assets which will be amortized over a period of 24 to 36 months and
$396,000 to a capitalized software technology which will be amortized over 14
months.
- 23 -
<PAGE> 24
QUARTERDECK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996, 1995 AND 1994
The results of operations of these purchased entities for the periods prior
to the acquisitions were immaterial to the Company and, accordingly, pro forma
disclosures of the effect of such transactions have not been presented.
FISCAL 1995:
On September 28, 1995, the Company acquired the intellectual property
assets of Prospero in exchange for common stock with a market value, as defined,
of $2,950,000, or 154,693 shares, plus the assumption of $60,000 of liabilities,
and transaction costs amounting to approximately $125,000. This transaction has
been accounted for using the purchase method of accounting. At September 30,
1995, accrued transaction costs, assumed liabilities and stock registration fees
amounted to approximately $196,000 and were classified as accrued acquisition
and restructuring charges.
An allocation of the purchase price was made among the identifiable
tangible and intangible assets, using the same methodology previously discussed
for the Limbex and InterLink purchase price allocations. This allocation
resulted in $2,578,000 of purchased research and development which had not yet
reached technological feasibility and did not have alternative future uses.
Therefore, in accordance with generally accepted accounting principles, the
$2,578,000 of purchased research and development is included in acquisition,
restructuring and other charges in the accompanying consolidated statements of
operations.
Using the same methodology, purchased software was identified and valued.
This analysis resulted in $557,000 of purchased software which had reached
technological feasibility, and therefore was capitalized. The purchased software
will be amortized over a period of 24 months.
OTHER INVESTMENTS
On February 7, 1996, the Company acquired, in a private placement of common
stock, less than a 5% interest in Infonautics Corporation ("Infonautics") in
exchange for $3,250,000. This transaction is accounted for under the cost method
of accounting and the investment is included on the balance sheet in other
assets and is carried at lower of cost or market. Infonautics consummated an
initial public offering of its common stock during May of 1996. The Company's
shares in Infonautics were not registered at that time and therefore remain
subject to certain limitations on resale. Infonautics stock has traded at prices
below the Company's cost basis for several months prior to September 30, 1996.
The Company determined that a portion of the reduction in the stock price was
due to an other than temporary decline and accordingly recorded a charge to
other income (expense) of $720,000 to reduce the carrying value of the
investment.
During fiscal 1996, the Company also recorded a charge in other income
(expense) for $727,000 to write off its investment in Streetwise, a software
development firm.
On December 24, 1995, the Company and a Belgian venture capital group
formed a new entity, Quarterdeck Flanders N.V. ("QDF"). The Company entered into
an agreement to purchase 50.002% of QDF in exchange for an agreement to make a
capital contribution of $900,000. In September 1996, the Company transferred its
interest in QDF to a third party who assumed the Company's obligation to make
the capital contribution.
In June 1995, the Company purchased a minority equity position in LHSP, a
company that develops and licenses speech compression technology. The cash
investment of $1,500,000 was accounted for using the cost method. During the
year, LHSP completed an initial public offering. During fiscal 1996, the company
sold a portion of this investment for $2,346,000 and recorded a gain of
$1,435,000 which is included in other income (expense) on the statement of
operations. The Company wrote up the value of the remaining investment by
$379,000 during the period ended September 30, 1996. This increase is recorded
directly to the equity section
- 24 -
<PAGE> 25
QUARTERDECK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996, 1995 AND 1994
of the balance sheet and does not affect net income. Therefore, the Company's
remaining investment is carried at $968,000 and included in other assets on the
balance sheet.
In June 1995, the Company agreed to purchase a minority equity position in
Intelligence at Large, Inc. ("IAL"), a company that develops Internet audio
technology. The agreement required the Company to make a total investment of
$1,250,000, payable upon IAL achieving specified development milestones. The
Company has accounted for this investment using the cost method. As of September
30, 1996, the Company had remitted $1,250,000 to IAL. This investment is carried
at cost and is included in other assets.
NOTE 3. BALANCE SHEET AND INCOME STATEMENT INFORMATION
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Cash and short-term investments:
Cash and cash equivalents............................................ $ 25,554 $ 5,384
Short-term investments............................................... -- 34,285
-------- --------
$ 25,554 $ 39,669
======== ========
Trade accounts receivable:
Receivables.......................................................... $ 22,284 $ 18,822
Less: allowance for doubtful accounts................................ (2,032) (870)
Less: allowance for sales returns and marketing development funds.... (10,987) (4,331)
-------- --------
$ 9,265 $ 13,621
======== ========
Other current assets:
Prepaid royalties.................................................... $ 901 $ 1,427
Income tax receivable................................................ 2,825 --
Other prepaid expenses............................................... 1,150 1,345
Notes receivable..................................................... 1 100
Advances to employees................................................ 26 5
Acquisition costs.................................................... -- 287
Other................................................................ 691 842
-------- --------
$ 5,594 $ 4,006
======== ========
Property, plant and equipment:
Construction in progress (building).................................. $ 11,069 $ --
Computer equipment................................................... 20,406 14,710
Office furniture and equipment....................................... 2,252 3,046
Office furniture and equipment under capital leases.................. 252 26
Leasehold improvements............................................... 1,586 1,696
-------- --------
35,565 19,478
Less: accumulated depreciation and amortization........................ (14,313) (11,143)
-------- --------
$ 21,252 $ 8,335
======== ========
Capitalized software costs:
Capitalized software costs........................................... $ 5,254 $ 4,184
Less: accumulated amortization....................................... (1,806) (1,377)
-------- --------
$ 3,448 $ 2,807
======== ========
</TABLE>
- 25 -
<PAGE> 26
QUARTERDECK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Other assets:
Marketable securities................................................ $ 968 $ --
Other investments.................................................... 3,788 2,700
Notes receivable from employee....................................... 13 125
Goodwill and other intangible assets acquired, net................... 3,125 --
Other................................................................ 1,623 508
-------- --------
$ 9,517 $ 3,333
======== ========
Accrued liabilities:
Accrued expenses..................................................... $ 13,824 $ 7,447
Accrued postcontract customer support................................ 456 584
Accrued vacation..................................................... 1,460 1,877
Accrued advertising.................................................. 1,121 1,608
Deferred revenue..................................................... 273 431
Other................................................................ 98 1,387
Income taxes payable................................................. -- 546
-------- --------
$ 17,232 $ 13,880
======== ========
Accrued acquisition and restructuring charges:
Acquisitions......................................................... $ 2,345 $ 2,029
Restructurings....................................................... 8,280 1,230
Purchase transaction costs........................................... 315 196
-------- --------
$ 10,940 $ 3,455
======== ========
Income Statement:
Acquisition, restructuring and other charges:
Restructuring........................................................ $ 12,995 $ 219
Acquisitions......................................................... 9,801 4,612
In-process research and development.................................. 14,993 2,578
-------- --------
$ 37,789 $ 7,409
======== ========
</TABLE>
NOTE 4. RESTRUCTURING AND OTHER CHARGES
During fiscal 1996, the Company implemented a comprehensive, corporate wide
restructuring plan. As a result of the plan, the Company recorded a charge of
$12,995,000 and reduced its workforce by approximately 40%, eliminating nearly
500 positions. As a component of the restructuring, the Company will also close
offices or reduce the amount of space utilized at its current locations. The
restructuring charge includes an estimate of the impact of the affected lease
obligations (net of estimated sublease income or settlements). The Company also
wrote off excess equipment, furniture and leasehold improvement in connection
with the employee and space reductions. Finally, the charge includes write-offs
of capitalized software and prepaid royalties relating to products which the
Company no longer plans to actively market. This restructuring focuses the
Company around two core business units (utilities and communications and
Internet solutions) and a direct marketing unit. As part of the restructuring,
the Company has centralized operations and eliminated duplicate functions that
resulted from certain acquisitions. The Company believes that these actions
should improve its competitive position.
- 26 -
<PAGE> 27
QUARTERDECK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996, 1995 AND 1994
The following is an analysis of the significant components of the fiscal
1996 restructuring and other charges and 1996 activity (in thousands):
<TABLE>
<CAPTION>
TOTAL CASH PAID
RESTRUCTURING AND NON-CASH IN FISCAL ACCRUED AS OF
NON-RECURRING COSTS COSTS 1996 SEPTEMBER 30, 1996
------------------- -------- --------- ------------------
<S> <C> <C> <C> <C>
Reduction of non-core product lines...... $ 2,754 $2,754 $ -- $ --
Discontinuance and consolidation of
offices................................ 1,420 -- -- 1,420
Severance costs.......................... 6,513 -- 550 5,963
Write-off property and equipment and
other charges.......................... 2,308 1,240 413 655
------- ------ ----- ------
Total.......................... $12,995 $3,994 $ 963 $8,038
======= ====== ===== ======
</TABLE>
During the fourth fiscal quarter of 1994, management adopted a Company-wide
restructuring plan designed to focus the Company's efforts on strategic product
and market opportunities. The results for the fourth quarter and fiscal year
1994 included a pre-tax charge totaling $12,863,000 relating to the
restructuring activities and other non-recurring charges. Of the total,
$7,416,000 were non-cash charges and $741,000 of the remaining charges were paid
prior to September 30, 1994. During fiscal 1995, $219,000 of additional
restructuring charges were recorded and $3,695,000 of the restructuring charges
were paid during fiscal 1995, leaving an accrual as of September 30, 1995 of
$1,230,000. During fiscal 1996, $890,000 of this amount was paid prior to
September 30, 1996, while $98,000 of prior accrual was reversed leaving a
balance of $242,000 at September 30, 1996.
NOTE 5. INCOME TAXES
The components of the provision (benefit) for income taxes for the fiscal
years ended September 30, 1996, 1995 and 1994, respectively, are as follows (in
thousands):
<TABLE>
<CAPTION>
FEDERAL STATE TOTAL
------- ----- -------
<S> <C> <C> <C>
1996:
Current........................................... $ 201 $ 0 $ 201
Deferred.......................................... 605 0 605
------- ----- -------
Total..................................... $ 806 $ 0 $ 806
======= ===== =======
1995:
Current........................................... $ 2,330 $ 179 $ 2,509
Deferred.......................................... (2,021) (157) (2,178)
------- ----- -------
Total..................................... $ 309 $ 22 $ 331
======= ===== =======
1994:
Current........................................... $(5,984) $ 2 $(5,982)
Deferred.......................................... -- -- --
------- ----- -------
Total..................................... $(5,984) $ 2 $(5,982)
======= ===== =======
</TABLE>
- 27 -
<PAGE> 28
QUARTERDECK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996, 1995 AND 1994
The actual income tax expense (benefit) differs from the "expected" income
tax expense (benefit) computed by applying the effective Federal income tax rate
of 34% to income (loss) before income taxes as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------
1996 1995 1994
-------- ------- -------
<S> <C> <C> <C>
Expected income tax expense (benefit).................... $(25,212) $ 3,938 $(3,606)
Change in valuation allowance............................ 20,294 483 2,853
State income taxes, net of Federal income tax benefit.... (2,393) 14 --
Net (income) loss on foreign subsidiary.................. 3,005 (608) 1,510
Net income of Subchapter S subsidiary.................... (3,300) (3,014) (6,444)
Tax exempt income benefit................................ (106) (339) (250)
Alternative minimum tax and other tax credits............ 300 (257) --
Acquisition costs........................................ 9,916 -- --
Other.................................................... (1,698) 114 (45)
-------- ------- -------
$ 806 $ 331 $(5,982)
======== ======= =======
</TABLE>
At September 30, 1994, the Company had deferred tax assets amounting to
$2,853,000, for which a full valuation allowance was provided. The deferred tax
assets consisted of the tax effect from the expected future reversal of
temporary differences, resulting in part from restructuring charges in fiscal
1994, which were not deductible for federal income tax purposes until the
amounts are actually paid. Recognition of the deferred tax assets is dependent
on a number of factors, including the timing of reversal of the temporary
differences and an assessment of the future realizability of the deferred tax
assets.
The net change in the total valuation allowance for the twelve months ended
September 30, 1995 was an increase of $483,000. Of this amount, $2,661,000
resulted from increases in gross deferred tax assets offset by an increase in
the total net deferred assets of $2,178,000. The increase in total net deferred
assets resulted from the Company's revaluation of the realizability of the
future income tax benefit occasioned by various events which occurred during the
third and fourth quarters of fiscal 1995. The acquisition of four new businesses
in the third and fourth quarters of fiscal 1995, which significantly increased
revenues and the occurrence of other events, made it more likely than not that
the various tax benefits would be realized. As a result, the carrying value of
the net deferred tax benefit was increased by $2,178,000, which was recognized
as a current period income tax benefit.
The net change in the total valuation allowance for the twelve months ended
September 30, 1996, was an increase of $20,294,000. Of this amount, $18,116,000
resulted from an increase in gross deferred tax assets and $2,178,000 resulted
from a decrease in net deferred tax assets. Management has concluded that the
future realization of the deferred tax asset is uncertain. Accordingly, a full
valuation allowance has been applied.
- 28 -
<PAGE> 29
QUARTERDECK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996, 1995 AND 1994
Under FAS 109, deferred tax assets and liabilities are recognized for the
expected future tax consequences of differences between the carrying amount of
assets and liabilities and their respective tax bases using enacted tax rates in
effect for the year in which the differences are expected to reverse. Deferred
tax assets (liabilities) consist of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------
1996 1995 1994
-------- ------- -------
<S> <C> <C> <C>
Accrued restructuring charges........................ $ 2,222 $ 311 $ 684
Software development costs recognized as incurred for
tax purposes....................................... (223) 12 (401)
State taxes.......................................... 2,393 7 486
Allowance for sales returns.......................... 1,819 837 669
Depreciation......................................... 834 825 563
Allowance for doubtful accounts and other reserves... 3,111 997 879
Acquisition costs.................................... -- 1,591 --
Tax net operating losses............................. 17,265 -- --
Other, net........................................... (782) 934 (27)
Deferred tax assets, valuation allowance............. (26,639) (3,336) (2,853)
-------- ------- -------
Total net deferred tax assets...................... $ -- $ 2,178 $ --
======== ======= =======
</TABLE>
The valuation allowance at September 30, 1996 of $26,639,000 includes
$3,009,000 of tax benefits related to stock options exercised. These tax
benefits will be credited to equity when realized.
Prior to June 30, 1995, Landmark elected to be taxed as an S corporation
whereby the income tax effects of Landmark's activities accrued directly to its
shareholders. Landmark's S corporation election terminated on June 30, 1995, at
the time of the acquisition. Prior to being acquired by the Company, Datastorm
elected to be taxed as an S corporation whereby the income tax effects of
Datastorm's activities accrued directly to the shareholders. Datastorm's S
corporation election terminated at the time of acquisition. As a result,
deferred income taxes for both Landmark and Datastorm, under the provisions of
FAS 109 were established and the effects are included in the accompanying
consolidated financial statements.
The Company has a Federal tax net operating loss of $50,779,000 expiring in
2011.
NOTE 6. STOCK OPTIONS AND WARRANTS
In fiscal 1990, the Company adopted two stock option plans, the 1990
Directors' Stock Option Plan and the 1990 Stock Plan. Both plans have
subsequently been amended. During 1995, the Company's Board of Directors
approved an amendment to increase the number of shares of stock authorized for
issuance under the 1990 Stock Plan from 3,000,000 to 6,000,000 shares, which
amendment was approved by the shareholders on February 2, 1996. Under the
amended terms of the 1990 Stock Plan, shares of common stock are reserved for
issuance to employees and consultants pursuant to incentive stock options,
nonqualified stock options, stock appreciation rights, restricted stock awards
or stock bonuses. The Company has never issued a stock appreciation right, a
restricted stock award or a stock bonus. Under the terms of the 1990 Directors'
Stock Option Plan, 300,000 shares are reserved for issuance to non-employee
directors. In fiscal 1996, the Company adopted the 1996 Acquisition Stock
Incentive Plan.
1996 Acquisition Stock Incentive Plan -- Under the terms of the 1996
Acquisition Stock Incentive Plan, options may not exceed 10 years in length. All
grants under this plan must be non-qualified stock options. These options may
not be granted at less than 85% of fair market value at the time the option is
granted, unless utilized in exchange for options previously issued by a
combining company in conjunction with a
- 29 -
<PAGE> 30
QUARTERDECK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996, 1995 AND 1994
pooling transaction. During fiscal 1996, the Company granted 105,610 stock
options at exercise prices between $0.00 and $7.75 per share, 297,600 stock
options at an exercise price of $8.81 per share, 665,000 stock options at an
exercise price of $13.63 per share, and 67,715 stock options at exercise prices
between $13.94 and $35.50 per share. During fiscal 1996, 64,036 options were
exercised and 164,037 options were cancelled. At September 30, 1996, 1,117,844
options were outstanding and 68,154 options were exercisable under the 1996
Acquisition Stock Incentive Plan.
1990 Stock Plan -- Under the terms of the 1990 Stock Plan, options may not
exceed 10 years in length. Incentive stock options are granted at 100% of fair
market value. Non-qualified stock options may not be granted at less than 85% of
fair market value. Options outstanding under the 1990 Stock Plan are exercisable
in varying increments commencing one year after date of grant and expire five to
ten years from date of grant or upon earlier termination. During fiscal 1996,
the Company granted 769,500 stock options at exercise prices between $5.00 and
$10.00, 353,500 stock options at exercise prices between $10.01 and $15.00,
756,641 stock options at exercise prices between $15.01 and $20.00, and 181,946
stock options at exercise prices between $20.01 and $34.63. During fiscal 1995,
the Company granted 522,772 stock options at exercise prices between $2.50 and
$5.00 per share, 40,000 stock options at exercise prices between $5.01 and
$10.37 per share, and 1,639,583 stock options at exercise prices between $10.38
and $17.50 per share. During fiscal 1994, the Company granted 10,000 stock
options at an exercise price of $2.50, 485,700 stock options at an exercise
price of $2.00 per share and 503,600 stock options at an exercise price of $2.25
per share.
During fiscal 1996, 516,767 options were exercised and 738,207 options were
cancelled. During fiscal 1995, 205,650 options were exercised and 268,550
options were cancelled. During fiscal 1994, 7,501 options were exercised and
481,399 options were cancelled. At September 30, 1996, 4,828,037 options were
outstanding and 1,077,431 options were exercisable under the 1990 Stock Plan.
1990 Directors' Stock Option Plan -- Under the terms of the 1990 Directors'
Stock Option Plan, options are exercisable in varying increments and expire
within five years or upon earlier directorship termination. During fiscal 1996,
52,500 stock options were granted at exercise prices between $8.00 and $16.50
per share, zero options were exercised, and zero options were cancelled. During
fiscal 1995, 15,000 stock options were granted at an exercise price of $4.00 per
share, 52,500 options were exercised, and no options were cancelled. During
fiscal 1994, 30,000 options were granted at an exercise price of $2.625 per
share and 15,000 options were granted at an exercise price of $2.25 per share.
During fiscal 1994, 2,500 options were exercised and no options were cancelled.
At September 30, 1996, 102,500 options were outstanding under the 1990
Directors' Stock Option Plan and 50,000 options were exercisable.
1989 Non-Qualified Stock Plan -- In October 1989, the Company adopted its
1989 Non-Qualified Stock Plan pursuant to which options were granted at prices
determined by the Board of Directors. The options were exercisable in varying
increments and expire five years from date of grant or upon earlier termination
of employment. No additional options may be granted under this plan. A total of
385,000 option shares at an option price of $0.10 per share have been granted
pursuant to the plan, all of which were granted in October 1989. During fiscal
1995, 93,125 options were exercised and no options were cancelled. During fiscal
1994, 20,250 options were exercised and no options were cancelled. At September
30, 1995, no options were outstanding and exercisable under the 1989
Non-Qualified Stock Plan and accordingly, the plan was terminated.
To the extent the Company derives a tax benefit from options exercised by
employees, such benefit is credited to paid-in capital when realized on the
Company's income tax return. Tax benefits realized totaling $0, $59,000 and
$16,000 were credited to additional paid-in capital in fiscal 1996, 1995 and
1994, respectively.
- 30 -
<PAGE> 31
QUARTERDECK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996, 1995 AND 1994
A summary of all stock option and warrant activity in the three-year period
ended September 30, 1996 is as follows:
<TABLE>
<CAPTION>
SHARES OPTION RANGE
--------- -----------------
<S> <C> <C> <C> <C>
Outstanding at September 30, 1993.......................... 1,302,200 $0.10 - $17.50
Options granted.......................................... 1,044,300 2.00 - 2.63
Options exercised........................................ (30,251) 0.10 - 3.56
Options cancelled........................................ (481,399) 0.62 - 17.50
---------
Outstanding at September 30, 1994.......................... 1,834,850 $0.10 - $17.50
Options granted.......................................... 2,217,355 2.50 - 17.50
Options exercised........................................ (351,275) 0.10 - 17.50
Options cancelled........................................ (268,550) 2.00 - 17.50
---------
Outstanding at September 30, 1995.......................... 3,432,380 $2.00 - $17.50
Options granted.......................................... 4,099,048 0.00 - 35.50
Options exercised........................................ (580,803) 6.25 - 39.00
Options cancelled........................................ (902,244) 0.25 - 27.50
---------
Outstanding at September 30, 1996.......................... 6,048,381 $0.25 - $34.63
========= ===== ======
</TABLE>
NOTE 7. COMMITMENTS
The Company leases facilities under operating leases that expire through
fiscal 2016. Rental expense for the years ended September 30, 1996, 1995 and
1994 amounted to approximately $4,367,000, $3,076,000, and $3,468,000
respectively.
Minimum annual rental payments under these leases are as follows (in
thousands):
Year ending September 30:
<TABLE>
<S> <C>
1997....................................................... $ 2,421
1998....................................................... 2,367
1999....................................................... 2,257
2000....................................................... 1,954
2001....................................................... 408
Thereafter................................................. 4,643
-------
Total............................................ $14,050
=======
</TABLE>
Accumulated depreciation related to equipment under capital leases was
$143,000 at September 30, 1994. The Company has no equipment under capital
leases as of September 30, 1996 and 1995.
NOTE 8. STOCKHOLDER RIGHTS PLAN
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
- 31 -
<PAGE> 32
QUARTERDECK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996, 1995 AND 1994
will entitle the holder to purchase at the exercise price, Company common stock
having a market value of twice the exercise price of the rights. In addition, if
the Company is acquired in a merger or other business combination, the rights
will entitle a holder to buy a number of shares of common stock of the acquiring
Company having a market value of twice the exercise price of each right. The
rights may be redeemed by the Company at $0.01 per right at any time until a 15%
position has been acquired. The rights expire on August 22, 2002, and at no time
have voting power.
In connection with the issuance of the Series B Preferred Stock and the
Warrant during fiscal 1996, (see Note 15), the Company amended the Rights
Agreement dated August 11, 1992 (the "Rights Agreement") between the Company and
Bank of America, National Trust and Savings Association, as rights agent, to
provide that the institutional investor that acquired the Series B Preferred
Stock and Warrant will not be deemed to be an Acquiring Person (as defined in
the Rights Agreement) as a result of its acquisition of the Series B Preferred
Stock, the Warrant or any shares of Common Stock received upon conversion of the
Series B Preferred Stock or exercise of the Warrants; provided, however, if the
institutional investor becomes the Beneficial Owner (as defined in the Rights
Agreement) of any additional number of shares of Common Stock in excess of 5% of
the outstanding shares of Common Stock other than as a result of the conversion
of the Series B Preferred Stock and/or exercise of the Warrant, then the
institutional investor will be deemed to be an Acquiring Person.
NOTE 9. EMPLOYEE BENEFIT PLANS
In January 1991, the Company adopted a defined contribution 401(k) plan.
Employees must work a minimum of 1,000 hours per year and be at least 21 years
of age and must have completed at least 12 consecutive months of service to be
eligible for the plan. Participants may contribute 1% to 15% of their
compensation. During fiscal 1993, the Board of Directors approved a Company
match of 25% of employee contributions up to 5% of eligible compensation. The
Company match was increased to 50% of employee contributions up to 5% of
eligible compensation for calendar 1995. As of January 1996, the plan was
amended to allow employee participation in the plan after at least 3 consecutive
months of service. Additionally, the Company matching was increased to 50% of
employee contributions up to 6% of eligible compensation for calendar 1996. The
Company's matching contributions totaled $1,243,000, $112,000 and $96,000 for
fiscal 1996, 1995 and 1994, respectively.
Employees of the Company's Datastorm subsidiary participated in the
Datastorm Technologies, Inc., Integrated Profit Sharing Plan and Trust ("Plan").
Annually, Datastorm contributed to the Plan an amount determined by the
Datastorm Board of Directors at its discretion. Profit sharing expense totaled
$713,000 and $451,000 for the years ended September 30, 1995 and 1994,
respectively. To participate in the Plan, an employee must have completed six
months of service with Datastorm and attain the age of 20.5 years. To qualify
for the Employer Contribution to the Plan, participants must complete 1,000
hours of service during a Plan year and be employed by the Company on the last
day of the Plan year. For each Plan year the Employer contributes to the Plan,
the Trustees will allocate this contribution to the separate accounts maintained
for participants. An employee-participant may (but is not required to)
contribute to the Plan. Participant accounts are invested among five investment
funds as directed by the participant. As of March 29, 1996 the Datastorm Plan
was suspended and all Datastorm employees became eligible to participate in the
Company's 401k plan as of June 1, 1996.
Subsequent to the acquisition of Datastorm, the Plan has been modified and
merged with the Company plan discussed above.
- 32 -
<PAGE> 33
QUARTERDECK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996, 1995 AND 1994
NOTE 10. LITIGATION
On May 26, 1995, a Final Judgment and Order of Dismissal was entered in the
In Re Quarterdeck Office Systems, Inc. securities litigation in the United
States District Court, Central District of California. The judgment approved the
settlement of the litigation. The settlement involved a payment of $3,900,000 of
which approximately $585,000 was paid by the Company in 1995 and the balance was
paid directly by the Company's insurance carrier.
The Company was a defendant in an action initially commenced on June 29,
1995 by Corum Group Ltd., in King County (Washington) Superior Court against
Landmark. On July 7, 1995, Corum filed an amended complaint asserting tort and
breach of contract claims against the Company and two former shareholders of
Landmark. The lawsuit arose from the Company's acquisition of Landmark on June
30, 1995. Corum claimed that it acted as a "broker" in the transaction and
sought approximately $2,900,000 it claimed it was owed a commission with respect
to the acquisition. The Company removed the action to U.S. District Court (Case
No. 95-1126WD, United States District Court, Western District of Washington) and
asserted affirmative defenses, counter claims and third-party claims. During
fiscal 1996, the Company settled the case. The settlement of this matter did not
have a material impact on the results of operations of the Company.
On or about September 3, 1996, a class action lawsuit, Marjorie Williams,
et al. v. Quarterdeck Corporation, was filed in the Circuit Court of the Eighth
Judicial Circuit, Alachua County, Florida (Case No. 96-3041), by Marjorie
William's and Penelope Claire Satterwhite on behalf of all licensees of
MagnaRAM2 residing in the United States. The complaint alleged that MagnaRaAM2
fails to significantly increase Random Access Memory or otherwise help Windows
95 and Windows 3.x users. Plaintiffs asserted the following causes of action:
breach of express contract; breach of implied contract; breach of express
warranties; breach of implied warranty of merchantability; breach of implied
warranty of fitness for particular purpose; fraudulent misrepresentation;
negligence; and gross negligence. Plaintiffs sought compensatory damages in an
unspecified amount, injunctive relief, and attorney fees and costs.
On October 10, 1996, the Company filed a motion seeking dismissal of the
entire action pursuant to the forum non conveniens doctrine and, in the
alternative, dismissal of certain allegations and causes of action for failure
to state a claim. On November 25, 1996 (the date upon which the Company's motion
was scheduled to be heard), counsel for plaintiffs agreed to dismiss the entire
action, without prejudice. A stipulation to this effect was entered on the
record before the Court. Pursuant to Florida law, plaintiffs may, within 120
days of November 25, 1996, refile the action in California and have the
complaint "relate back" to the original September 3, 1996 filing date. Counsel
for the Company has received no communication from plaintiffs' counsel since the
dismissal and cannot determine whether plaintiffs intend to refile in
California. If a new class action complaint is filed, the Company intends to
defend the case vigorously and to oppose any effort to certify the claims for
class resolution.
Shareholder complaints were filed in November and December 1996 in the
Superior Court of the State of California, County of Los Angeles, against the
Company and one former and one current officer of the Company alleging, among
other things, violations of certain provisions of California securities laws
relating to statements made about the Company. The suits are purportedly brought
on behalf of all persons who purchased the Company's common stock during the
period January 26, 1996 through June 13, 1996 and seeks damages in an
unspecified amount and other relief. The Company intends to vigorously defend
against these actions.
The Company is a defendant in various other pending claims and lawsuits.
Management believes that the disposition of such matters will not have a
material adverse impact on the results of operation or financial position of the
Company.
- 33 -
<PAGE> 34
QUARTERDECK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996, 1995 AND 1994
NOTE 11. MAJOR CUSTOMERS AND SEGMENT INFORMATION
The Company sells its products primarily through distributors and dealers.
Sales to the two largest distributors by the Company individually account for
20% and 11%; 31% and 14%; and 39% and 19% of the Company's consolidated net
revenues for the years ended September 30, 1996, 1995 and 1994, respectively.
The Company is engaged in a single business segment - the development and
marketing of personal computer software.
Geographic information is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------
1996 1995 1994
-------- -------- -------
<S> <C> <C> <C>
Net revenues:
United States................................. $109,200 $ 98,591 $75,425
Europe........................................ 18,700 13,809 5,833
Other......................................... 5,200 5,206 3,457
-------- -------- -------
$133,100 $117,606 $84,715
======== ======== =======
</TABLE>
Net revenues from all foreign locations are attributable to export
shipments from the Company's United States operations of $1,486,000, $4,968,000
and $3,184,000, respectively, and $22,414,000, $14,047,000, and $6,106,000,
respectively of shipments from the Company's European operations based in
Ireland during fiscal 1996, 1995 and 1994.
<TABLE>
<S> <C> <C> <C>
Operating income (loss):
United States................................. $(65,444) $ 7,342 $ (7,589)
Europe........................................ (8,642) 2,357 (4,112)
-------- ------- --------
$(74,086) $ 9,699 $(11,701)
======== ======= ========
Identifiable assets:
United States................................. $ 73,184 $71,130 $ 60,215
Europe........................................ 3,597 5,569 2,256
-------- ------- --------
$ 76,781 $76,699 $ 62,471
======== ======= ========
</TABLE>
NOTE 12. CONVERTIBLE NOTES
On March 28, 1996, the Company issued $25,000,000 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.
- 34 -
<PAGE> 35
QUARTERDECK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996, 1995 AND 1994
NOTE 13. NOTES PAYABLE TO BANKS
Notes payable to banks at September 30, 1996 was comprised of:
<TABLE>
<S> <C>
Revolving credit facility........................ $3,550,000
Building loan.................................... 2,000,000
Secured construction financing................... 2,730,000
----------
$8,280,000
==========
</TABLE>
As of September 30, 1996, the maximum borrowing the Company was eligible
for under this line was approximately $4,100,000. The line is secured by the
Company's domestic accounts receivable and inventory. The current term of the
line of credit matures June 30, 1997. The line can be used for general corporate
purposes, including investments and acquisitions, and bears interest, at the
bank's reference (prime) interest rate plus 0.50%. The line is subject to the
Company complying with certain customary financial covenants and restrictions,
including a compensating balance of $3,000,000, the prohibition of the payment
of dividends, other than those payable solely in capital stock, and a
prohibition of any stock repurchase activity.
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 is
secured by Datastorm's equipment and bears interest, at a rate of 4.5% per
annum. The rate was subsidized, in part, by the State of Missouri in exchange
for certain local employment targets. As part of the Company's restructuring,
the Company has revised downward the personnel complement at this location. This
loan will not be renewed upon maturity. The Company has agreed with the bank to
repay $750,000 between January 1997 and March 1997, and to repay the remainder
by April 7, 1997.
On August 6, 1996, the Company's Datastorm subsidiary secured construction
financing from a bank of up to $5,000,000 with an interest rate equal to the
bank's commercial base rate, currently 8.25%, secured by the Columbia, Missouri
building and guaranteed by the Company. The principal amount plus any unpaid
interest is due February 7, 1997.
On December 19, 1996, the Company's revolving credit facility with Bank of
America was amended, and the bank waived the Company's non-compliance with
certain financial covenants therein for the quarter ended September 30, 1996.
The Company may borrow the lesser of 65% of Eligible Accounts Receivable or
$15,000,000.
NOTE 14. BUILDING AND NOTE RECEIVABLE FROM RELATED PARTY
Prior to merging with the Company, Datastorm loaned to a partnership, whose
partners were Datastorm shareholders, funds which the partnership used to
commence the construction of a new building which now houses Datastorm. At
September 30, 1995, the partnership owned the building. The note bore interest
at the applicable federal midterm rate and was payable on demand. The advances
were carried in note receivable from related party on the balance sheet. The
partners are now shareholders and consultants of the Company. In connection with
the acquisition, the Company was obligated to acquire the building from the
partnership. During the quarter ended June 30, 1996, the Company completed the
acquisition of the building in exchange for, among other things, cancellation of
the note receivable.
NOTE 15. CONVERTIBLE PREFERRED STOCK
On September 30, 1996, the Company issued 200,000 shares of Series B
Convertible Preferred Stock, stated value $100 per share (the "Series B
Preferred Stock"), and a warrant (the "Warrant") to acquire shares of Common
Stock of the Company for $20,000,000 in cash. The securities were issued to an
- 35 -
<PAGE> 36
QUARTERDECK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996, 1995 AND 1994
institutional investor in an overseas offering pursuant to Regulation S of the
Securities Act of 1933, as amended.
The Series B Preferred Stock is convertible into shares of Common Stock on
or after November 15, 1996 and will automatically convert into Common Stock on
September 30, 2002 to the extent any shares of Series B Preferred Stock remain
outstanding at that time. Each share of Series B Preferred Stock is convertible
into the number of shares of Common Stock equal to the quotient of (i) $100.00
divided by (ii) the Conversion Price. The Conversion Price is the lesser of (i)
101% of the average of the daily volume-weighted average prices of the Common
Stock on the Nasdaq National Market System (the "Market Price") during the 40
trading day period ending two trading days before the date on which the Company
receives a notice of conversion from a holder of the Series B Preferred Stock
(the "Conversion Date"), and (ii) 125% of the average of the Market Price of the
Common Stock during the first five trading days of the 40 trading day period
ending two trading days before the Conversion Date. Assuming a Conversion Price
of $5.3365 (based on 101% of the average of the Market Price for the 40 trading
day period ending on December 12, 1996), each share of Series B Preferred Stock
would be convertible into 18.74 shares of Common Stock, or an aggregate of
3,747,802 shares of Common Stock upon conversion of all shares of Series B
Preferred Stock.
If stockholder approval of the issuance of Common Stock pursuant to the
conversion of the Series B Preferred Stock and exercise of the Warrant is
required either because the number of shares so issuable would equal or exceed
20% of the number of shares of Common Stock outstanding on September 30, 1996,
or the number of shares issuable pursuant to conversion or exercise notices
received would exceed the number of then authorized but unissued shares of
Common Stock not reserved for other issuances, the Series B Preferred Stock will
not be convertible with respect to the number of shares of Common Stock that
would cause either (a) the 20% threshold to be exceeded or (b) the number of
authorized but unissued shares to be exceeded, and the Company will be required
to seek the necessary stockholder approval. If such stockholder approval is not
obtained within specified periods of time, the Company will be required, to the
extent permitted by applicable law, to redeem the number of shares of Series B
Preferred Stock that could not be converted for a redemption price of $100.00
per share as soon as practicable, but in no event no later than September 30,
2001. Although the Preferred Stock was not convertible at September 30, 1996,
the Company would have had adequate shares to satisfy a conversion, based upon
the closing stock price at that date. In the event the Company does not have
adequate shares, the amount of Preferred Stock which could not be converted
would be reclassified to redeemable Preferred Stock.
The Warrant may be exercised from and after March 30, 1998 (or earlier if
certain mergers, acquisitions or combinations (a "Combination") occur prior to
that date) for a number of shares of Common Stock determined by dividing (i)
12,666,667 by (ii) the Exercise Price; provided that the number of shares of
Common Stock issuable upon exercise in full of the Warrant shall not be less
than 567,885 nor greater than 1,703,653. The Exercise Price per share will be
equal to 150% of the daily volume-weighted average prices of the Common Stock
for the period from, and including September 30, 1996, to, and including, April
30, 1997, but in any event shall not be less than $7.435 per share nor greater
than $22.305 per share. Notwithstanding the foregoing, if the Warrant becomes
exercisable prior to April 30, 1997 as a result of the occurrence of a
Combination, the Exercise Price shall be $10.037 and the number of shares of
Common Stock to be issued upon exercise of the Warrant shall be 1,200,000
shares.
In connection with the issuance of the Series B Preferred Stock and the
Warrant, the Company amended the Rights Agreement dated August 11, 1992 (the
"Rights Agreement") (Note 8) between the Company and Bank of America, National
Trust and Savings Association, as rights agent, to provide that the
institutional investor that acquired the Series B Preferred Stock and Warrant
will not be deemed to be an Acquiring Person (as defined in the Rights
Agreement) as a result of its acquisition of the Series B Preferred Stock, the
Warrant or any shares of Common Stock received upon conversion of the Series B
Preferred Stock or exercise
- 36 -
<PAGE> 37
QUARTERDECK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996, 1995 AND 1994
of the Warrants; provided, however, if the institutional investor becomes the
Beneficial Owner (as defined in the Rights Agreement) of any additional number
of shares of Common Stock in excess of 5% of the outstanding shares of Common
Stock other than as a result of the conversion of the Series B Preferred Stock
and/or exercise of this Warrant, then the institutional investor will be deemed
to be an Acquiring Person.
NOTE 16. LIQUIDITY
At September 30, 1996, the Company's cash and short-term investments
totaled $25,554,000, compared to $39,669,000 at September 30, 1995. In addition,
working capital at September 30, 1996 amounted to a deficit of $4,684,000, a
decrease of $34,174,000 as compared to $29,490,000 at September 30, 1995.
During 1996, the Company utilized $49,750,000 of cash in operating
activities. In addition, approximately $24,173,000 of cash was utilized relating
to fixed asset and software additions. This was financed by sales of marketable
securities of $34,285,000, the issuance of $25,000,000 of convertible notes,
$20,000,000 of Series B preferred stock and notes payable to banks of
$8,280,000.
Although the Company has negative working capital at September 30, 1996,
and has incurred significant operating losses, the Company believes existing
cash and cash equivalents, plus funds provided by operations, borrowing capacity
under the line of credit and projected borrowing against, or sale of, real
estate should be sufficient to fund operations for the coming twelve months.
Nevertheless, the Company is presently exploring various financing alternatives,
including equipment financing, secured debt, convertible debt, additional sales
of equity securities and the sale of certain of its prior investments in order
to finance the core business of the Company and help provide adequate working
capital for operations. In addition, the expense reductions resulting from the
restructuring are anticipated to provide additional funds from operations in
future quarters. However, there is no assurance that increased sales will occur
or that any such increase will result in adequate operating funds, or that such
additional financing will be available, or if available, will be available on
acceptable terms. Should product shipments be delayed or should the Company
experience significant shortfalls in planned revenues, or not achieve sufficient
cost savings as a result of the restructuring, or experience unforeseen fixed
expenses, the Company believes it has the ability to make additional reductions
to variable expenses to extend its capital. Accordingly, the Company believes it
has sufficient capital to fund operations through Fiscal 1997. Any decision or
ability to obtain financing through debt or through equity investment will
depend on various factors, including, among others, financial market conditions,
strategic acquisition and investment opportunities, and developments in the
Company's markets. The sale of additional equity securities or future conversion
of any convertible debt would result in additional dilution to the Company's
stockholders.
- 37 -
<PAGE> 38
QUARTERDECK CORPORATION AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
YEAR ENDED SEPTEMBER 30, 1996, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE ADDITIONS
AT CHARGED BALANCE
BEGINNING TO AT END
SEPTEMBER 30, ITEM OF THE YEAR EXPENSES DEDUCTIONS OF THE YEAR
- ------------- ---------------------------------------- ----------- --------- ---------- -----------
<C> <S> <C> <C> <C> <C>
1996 Allowance for doubtful accounts......... $ 870 $ 1,903 $ (741)(1) $ 2,032
1995 Allowance for doubtful accounts......... 803 333 (266)(1) 870
1994 Allowance for doubtful accounts......... 724 265 (186)(1) 803
1996 Inventory obsolescence reserve.......... 676 3,914 (612) 3,978
1995 Inventory obsolescence reserve.......... 1,086 119 (529) 676
1994 Inventory obsolescence reserve.......... 633 453 -- 1,086
1996 Sales returns and marketing development
fund reserve.......................... 4,331 43,562 (36,906)(2) 10,987
1995 Sales returns and marketing development
fund reserve.......................... 2,823 8,205 (6,697)(2) 4,331
1994 Sales returns and marketing development
fund reserve.......................... 3,941 7,510 (8,628)(2) 2,823
</TABLE>
- ---------------
(1) Uncollectible accounts written off, net of recoveries.
(2) Products returned and reduction of reserve.
- 38 -
<PAGE> 39
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT DESCRIPTION PAGE NUMBER
- ------- ----------- -----------
<S> <C> <C>
23.1 Consent of KPMG Peat Marwick LLP, independent certified accountants.
23.2 Consent of Arthur Andersen LLP, independent certified accountants.
</TABLE>
<PAGE> 1
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Quarterdeck Corporation
We consent to incorporation by reference in the registration statements (Nos.
33-96064, 333-04606 and 333-10269) on Form S-3, the registration statement (No.
33-98456) on Form S-4 and the registration statements (Nos. 33-43238, 33-89824,
333-01766, 333-04602, 333-26107 and 333-26105) on Form S-8 of Quarterdeck
Corporation of our report dated November 22, 1996, except as to the last
paragraph of Note 13, which is as of December 19, 1996, relating to the
consolidated balance sheets of Quarterdeck Corporation and subsidiaries as of
September 30, 1996 and 1995, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the years in the
three-year period ended September 30, 1996, and the related schedule, which
report appears in the September 30, 1996 annual report on Form 10-K/A of
Quarterdeck Corporation.
/s/ KPMG Peat Marwick LLP
Los Angeles, California
August 11 1997
<PAGE> 1
Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in the registration statements (Nos. 33-96064, 333-04606 and
333-10269) on Form S-3, the registration statement (No. 33-98456) on Form S-4
and the registration statements (Nos. 33-43238, 33-89824, 333-01766, 333-04602,
333-26105 and 333-26107) on Form S-8 of Quarterdeck Corporation of our report
dated March 1, 1996, relating to the balance sheet of DATASTORM Technologies,
Inc. as of December 31, 1995, and the related statements of income and changes
in retained earnings, and cash flows for the years ended December 31, 1995 and
1994, included in the form 10-K/A of Quarterdeck Corporation dated August 14,
1997.
St. Louis, Missouri,
August 14, 1997
