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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended September 30, 1998
Commission File No. 0-19207
QUARTERDECK CORPORATION
(Exact name of registrant as specified in its charter)
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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
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.001
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock (based on the last sale
price of such stock as reported on the OTC Bulletin Board) held by non-
affiliates of the registrant as of November 30, 1998 was $15,766,744.
The number of shares of the Registrant's common stock outstanding as of
November 30, 1998 was 89,760,799.
DOCUMENTS INCORPORATED BY REFERENCE
None
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PART I
ITEM 1. BUSINESS
Quarterdeck Corporation ("Quarterdeck" or the "Company") develops and
markets software products that help personal computer ("PC") users manage
information and communications with minimal technical support, reducing the
overhead costs of networked personal computing. The Company markets its products
worldwide through retail distribution, corporate resellers, original equipment
manufacturers ("OEM"), direct marketing, and the Internet, focusing in
particular on customers in "low support" environments, e.g., small offices/home
offices ("SOHO"), small businesses and work groups, and remote/mobile users.
The Company was incorporated in California in 1982 as Quarterdeck Office
Systems. In June 1991, the Company changed its state of incorporation from
California to Delaware and in February 1995 changed its name to Quarterdeck
Corporation.
The principal offices of the Company are located at 13160 Mindanao Way,
Third Floor, Marina del Rey, California, 90292, telephone number (310) 309-3700.
OVERVIEW OF STRATEGY
On October 15, 1998, Quarterdeck, Symantec Corporation ("Symantec"
SYMC:Nasdaq) and Oak Acquisition Corporation, a wholly owned subsidiary of
Symantec, entered into a definitive Merger Agreement (the "Merger Agreement")
whereby Symantec agreed to commence a cash tender offer for all outstanding
shares of the Company at a price of $0.52 per share. The Agreement further
provided for a merger of Oak Acquisition Corporation with and into the Company
in which all remaining outstanding shares of the Company will be converted into
the right to receive $0.52 per share ("Merger"). On November 17, 1998 Symantec
completed its tender offer obtaining approximately 65% of Quarterdeck's
outstanding shares of common stock and common stock equivalents. Upon
consummation of the Merger, which is expected to occur in February 1999, the
Company will become a wholly owned subsidiary of Symantec.
In connection with the Agreement, Quarterdeck and Symantec concurrently
entered into a license agreement (the "License Agreement") under which
Quarterdeck granted Symantec the non-exclusive right to, among other things,
distribute Quarterdeck's CleanSweep product. Symantec's right to distribute
CleanSweep commenced upon consummation of the tender offer.
Following the close of the tender, two members of the Company's Board of
Directors resigned and four members were appointed by Symantec. In addition,
Symantec instituted layoffs of employees as part of its plan to integrate the
operations of the Company and Symantec.
Set forth below is a description of the Company's business and strategy for
fiscal 1998 prior to the consummation of the tender offer. Quarterdeck's
business and strategy for fiscal 1998 is not the same as Symantec's business and
strategy.
PC networking is emerging as the world's standard vehicle for managing most
forms of information and communication. According to IDC, worldwide shipments of
PCs are estimated to be approximately 80,000,000 for 1998 and continue growing
at over 13% per year. PCs are rapidly networking together through the Internet
and corporate intranets. As PC systems continue escalating in power, function,
and storage capacity, and as network usage continues its explosive growth,
performance problems and support costs inevitably multiply. This is because
managing information and communication through networked PC's requires the
flawless interaction of many hardware and software components from diverse
vendors; because these components undergo frequent technological upgrading and
replacement; and because networking itself continuously imports new
applications, viruses, agents, and data types into the networked systems. As a
consequence, annual PC support costs often exceed system acquisition costs.
According to META Group research, the average cost of PC support is
approximately $2,800 per user per year.
Quarterdeck believes the solution lies not in reversing the advance of PC
power, functionality, storage capacity, and networkability but instead in
supplementing these advances with equally smart "helpware" -- new software
technologies that automatically detect, prevent, and resolve personal computer
problems and replace outside technical support with user-friendly self-help and
automatic-help tools.
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Quarterdeck's helpware strategy leverages its long experience in designing
PC utilities, communications software and Internet tools for both retail and
corporate sales to "power users" who demand peak performance. On the product
side, Quarterdeck is using both internal development and technology licenses to
assemble a single, broad portfolio of helpware components that can work
together, in various product configurations, to help make networked personal
computing a "self-supporting" activity. On the sales side, the Company was
building upon its worldwide retail presence and brand equities to expand its
reach through indirect distribution and direct marketing channels, into those
business environments that most need helpware technologies, i.e., SOHO, small
business, departmental, and remote/mobile working environments where onsite MIS
support is thin or absent.
Quarterdeck's goal is to lead the industry in providing comprehensive
helpware solutions for the core performance problems of networked personal
computing for individuals and small to midsize businesses.
PRODUCTS AND TECHNOLOGY
Quarterdeck develops and licenses technology and assembles and sells
products, to provide automatic help and user self-help capabilities in five key
categories of networked PC system management: Conflict Resolution, Storage,
Security, Disk Imaging and Network Access. In these categories, the Company
currently markets the following new or recently upgraded product lines:
<TABLE>
<CAPTION>
Technology category Product lines
------------------- -------------
<S> <C>
. CONFLICT RESOLUTION: preventing, diagnosing, and RealHelp, Crash Defender, Utility Pack
solving problems among diverse software and/or
system hardware elements
. STORAGE: cleaning and optimizing disk space and CleanSweep, Remove-It, Partition-It, Utility Pack
memory
. SECURITY: protecting systems against viruses, rogue ViruSweep, Utility Pack
agents, and intruders
. DISK IMAGING: creating exact copies of disk images DiskClone
for OS migration and new PC deployment
. NETWORK ACCESS: enhancing user access to networked ProComm Plus, Rapid Remote, WebCompass
information and communication resources
</TABLE>
In fiscal 1998, ProComm Plus and Cleansweep -- leaders in their respective
markets -- were the largest revenue producers among these product lines. The
DiskClone product line was launched in mid fiscal 1998, Crash Defender and the
Quarterdeck Utility Pack were launched in late fiscal 1998. During fiscal 1998,
as a result of the Company's restructuring efforts designed to return the
Company to profitability, Quarterdeck pared back the number of categories and
product offerings it markets to emphasize those which it believes have the
highest likelihood for success. These categories included conflict resolution,
storage, disk imaging and network access.
For each of its major product lines, the Company plans to reach a variety
of markets by packaging the underlying technologies -- as shrink-wrapped retail
products and as corporate-controllable intranet products. The current product
lines are available in retail formats and the development and launch of
intranet-deliverable corporate products began in late fiscal 1998.
To accelerate product development across system management categories and
delivery formats, Quarterdeck reimplemented many of its core technologies as
standard, networkable "components". This initiative has already led to
considerable technology sharing among the ViruSweep, CleanSweep, RealHelp, Crash
Defender, WebCompass, RapidRemote, and ProComm product lines. The Company also
emphasized the incorporation in its automatic help and self-help products of
intelligent agent technologies and continuously updatable knowledge-bases,
supplemented by advanced search technologies.
Quarterdeck organizes its research and development resources in a single,
global department, to facilitate technology integration, although most engineers
are dedicated to particular product teams. In 1998, 1997 and 1996, the Company
spent $16,640,000, $16,419,000 and $21,314,000 on research and development,
respectively, or 32.7%, 19.6% and 16.0% of net revenues, respectively.
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MARKETING AND SALES
Quarterdeck sells its products on a worldwide basis via retail distribution,
corporate resellers, and OEM's, direct marketing and the Internet. The Company's
end user customers include corporate and government organizations as well as
small business and individual personal computer users. None of Quarterdeck's
individual end user customers is believed by the Company to account for 5% or
more of Quarterdeck's sales in any fiscal year. Products sold to government
entities are primarily off-the-shelf items sold from inventory and are not
subject to renegotiation of profits or termination of purchase contracts at the
election of the government.
Traditionally, retail sales have dominated the Company's revenues. The
Company sells its products to major software distributors for resale through
software retailers and corporate resellers. Quarterdeck's principal North
American distributors are Ingram Micro, Inc., Merisel, Inc. and Tech Data
Corporation. See Note 15 of the Notes to the Company's Consolidated Financial
Statements. Each of these distributors resells Quarterdeck's products on a
non-exclusive basis. The Company also distributes internationally through
foreign based subsidiaries of Ingram Micro, Inc. and Merisel, Inc. as well as a
variety of other international distributors. In Japan, Quarterdeck's distributor
and marketing partner is Marubeni Corporation. Quarterdeck estimates it has more
than 35,000 distribution outlets selling its products on a worldwide basis,
including computer superstores, office warehouse clubs, software specialty
stores, consumer electronics stores, mass merchants, general warehouse clubs,
value added resellers (VAR's) and corporate resellers.
The Company reaches corporate end-users through a corporate direct telesales
force and through corporate resellers, many of whom purchase the products
through major software distributors. Quarterdeck significantly expanded its
presence in these corporate direct marketing and reseller channels during fiscal
1998 with an increased emphasis on value-added resellers (VAR's) as more of its
products were enabled for corporate controlled intranet implementation.
Quarterdeck also launched its Quarterdeck Enterprise Partner Program (QEPP)
during fiscal 1998 and signed up approximately 300 VAR's and system integrators
to support the sales and service of Quarterdeck's Enterprise products.
The Company also sells its products directly over the Internet, maintaining
an e-commerce store on its website, (www.Quarterdeck.com) and offering internet
download, physical delivery or free "trialware" versions of the Company's
products. Though Internet sales are currently a small portion of the Company's
total revenues, this channel has expanded as individuals and businesses become
accustomed to electronic software distribution. During fiscal 1998, the Company
increased the availability of its products over the Internet through third party
online stores and signed electronic distribution agreements with eight
electronic commerce companies including CNET Buy Direct, NetSales and Digital
River.
Geographically, Quarterdeck increased investments in European and Japanese
markets and engineered its new and upgraded products for rapid localization and
near-simultaneous release on a global basis. The Company's European operations
are headquartered in Dublin, Ireland, with a marketing support office in Slough,
England. Quarterdeck's Dublin office handles order processing, technical
support, localization and production for European and other international sales.
The Company ships international English language versions and translated foreign
language versions of its products from third party fulfillment centers in
Ireland. Quarterdeck also has a sales office in Sydney, Australia, and
agreements with third parties to distribute its products in Japan, Asia Pacific
and Latin America. The Company's international marketing support offices, along
with third party representatives in countries where Quarterdeck does not have
marketing support offices, prepare marketing programs for each local market,
educate end users and support the international distributor and dealer networks.
During fiscal 1998, Quarterdeck began shipping product to Australian customers
from a third party fulfillment center located in Australia. In Japan, the
Company has entered into an exclusive distribution arrangement with Marubeni
Corporation, a large trading company, and established a Quarterdeck marketing
office in Tokyo in the form of a joint venture with Marubeni. Management
believes that the Asian crisis did not have a material adverse effect on the
Company's results of operations.
Sales by the Company to European and other international distributors,
dealers and end users outside of North America represented approximately 25.5%,
21.9% and 18.0% of Quarterdeck's total net revenues for fiscal years 1998, 1997
and 1996, respectively. See Note 15 of the Notes to the Company's Consolidated
Financial Statements for information regarding Quarterdeck's domestic and
foreign operations and export sales.
OPERATIONS, SUPPORT SERVICES, PRODUCTION AND BACKLOG
Quarterdeck's departments are organized by function -- e.g. research and
development, sales, marketing, finance and operations -- with product teams
coordinating across departments. Internationally, regional teams or distribution
partners handle localization,
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marketing and sales. The Company offers various electronic and phone-based
support for its products. During fiscal 1998, the Company began a fee based
support program for its ProComm product line in addition to a paid priority
service for all other product lines. Currently, Quarterdeck offers paid support
via annual maintenance agreements on a per incident basis, and on a per minute
basis via a 900 phone number. Fee-based technical support services did not
generate material revenues in the fiscal periods presented. The Company provides
most free customer support through an outsourced third party and continues to
offer most paid support internally from its Columbia, Missouri facility.
Internationally, support is provided through outsourced third party suppliers.
The principal materials and components used in Quarterdeck's products
include CD-ROM's, diskettes, user manuals and product display boxes, which are
purchased directly from third party vendors. Quarterdeck currently utilizes both
internal and third party contracted resources for the assembly, warehousing and
fulfillment of its products. Outside vendors perform in accordance with
Quarterdeck specifications, and material quality is ensured prior to the
assembly of its products. Capacity shortages for components, assembly,
warehousing and fulfillment are not anticipated due to multiple third party
resources available for contract; however, if such shortages were to occur,
Quarterdeck's operating results could be materially impacted. Quarterdeck
believes there are adequate supplies of and sources for the raw materials used
in its products and that multiple sources are available for CD-ROM and diskette
duplication, manual printing and final packaging.
Customer order turnaround is generally within one week of receipt of the
order, unless such orders are pre-orders for unreleased products. Generally,
Quarterdeck has relatively little, if any, order backlog at any given time and
does not consider backlog to be a significant measure of sales for any future
period.
EMPLOYEES
As of September 30, 1998, Quarterdeck employed 176 people worldwide. None of
the Company's employees are represented by a labor union or subject to a
collective bargaining agreement. Subsequent to the close of Symantec's tender
offer on November 17, 1998, a reduction in workforce occurred that reduced the
Company's employees to 96 as of November 30, 1998. Additional substantial
layoffs are anticipated as the Company's operations are integrated into those of
Symantec.
COMPETITION
The personal computer software market is intensely competitive, subject to
strategic alliances of hardware and software companies and it is characterized
by rapid changes in technology and frequent introductions of new products and
features. The Company's competitors include developers of operating systems,
applications and utility software as well as personal computer manufacturers
that develop their own software products. Quarterdeck has encountered continued
competition both from established companies and from new companies that are now
developing, or may develop, competing products. Many of the Company's existing
and potential competitors have financial, marketing and technological resources
significantly greater than those of Quarterdeck.
Future competitive product releases may cause disruptions in orders for the
Company's products while users and the marketplace evaluate the competitive
products. The extent of the disruption in orders and the impact on future orders
of Quarterdeck's products will depend on various factors that are not fully
known at this time, including the level of functionality, performance and
features included in the final release of these competitive products and the
price thereof and the market's evaluation of competitive products compared to
the then current functionality, performance, features and price of the Company's
products.
Quarterdeck anticipates that the type and level of competition experienced
to date will continue, and may increase, and future sales of its products will
be dependent upon the Company's ability to develop or acquire new products or
enhanced versions of its existing products for Windows 95, Windows 98 and
Windows NT and/or other operating systems that may gain market acceptance.
Throughout 1998, the prices for PC hardware have been falling while power and
performance have increased. As a result, the industry has shifted to "suite
products" which bundle a number of utility products into one package.
Quarterdeck's revenues currently are derived primarily from individual utility
products. The Company will need to obtain or develop additional products in
order to compete in the "suite" market. In addition, Quarterdeck must
demonstrate to the user a need for the Company's products while developers of
operating systems and competitive software products continue to enhance their
products. To the extent that operating system enhancements, competitive products
or bundling of competitive products with operating systems or computer hardware
reduce the number of users who perceive a benefit from Quarterdeck's products,
sales of the Company's products in the future would be adversely impacted.
5
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Quarterdeck believes that the primary competitive factors in the personal
computer software market are product features and performance, time to market,
product reliability, ease of use, product and vendor reputation, price,
timeliness of product upgrades and the quality of customer support and service.
Of these, time to market and price are becoming increasingly significant
factors.
The Company also competes with other companies in the personal computer
software market for distributors and dealers, as well as for alliances with
hardware and software vendors. Quarterdeck competes for distributors and dealers
on the basis of the revenue opportunities presented by the Company's products in
addition to discounts, credit terms and promotional support.
ITEM 2. PROPERTIES
Quarterdeck's principal administrative, production, marketing and product
development facilities occupy approximately 68,000 square feet of leased space,
in Marina del Rey, California. In fiscal 1997, the Company sold its building in
Columbia, Missouri and leased back approximately 50,000 square feet used
primarily for customer service and technical support. Quarterdeck leases
approximately 10,000 square feet of office space in Clearwater, Florida for a
portion of its production and fulfillment functions. In addition, Quarterdeck
leases offices in Dublin, Ireland, Slough, England and Sydney, Australia for
marketing and sales functions. During fiscal 1998, Quarterdeck reduced its
leased space through renegotiating terms and subleasing space as part of its
restructuring program. Due to Symantec's intention to integrate all Quarterdeck
operations into their existing infrastructure as part of the pending Merger,
Quarterdeck is currently working to sublease or renegotiate all remaining lease
obligations during fiscal 1999.
ITEM 3. LEGAL PROCEEDINGS
On July 30, 1998, a class action complaint was filed in the Supreme Court of
the State of New York, County of New York, on behalf of a purported class of
purchasers of the Procomm Plus version 4.0 for Windows product (the "Product").
The complaint purports to assert claims for breach of warranty and violation of
New York's Consumer Protection From Deceptive Acts And Practices Act arising
from the Product's inability to process dates containing the year 2000. The
complaint seeks unspecified damages. Quarterdeck believes these claims to be
without merit and intends to defend itself vigorously.
In October 1997, a complaint was filed in the United States District Court
for the District of Utah on behalf of PowerQuest Corporation against the
Company. The complaint alleges that the Company's partitioning software
(included in Partition-It and Partition-It Extra Strength) violates a patent
held by PowerQuest. In January 1998, PowerQuest obtained a second patent
relating to partitioning and has amended its complaint to allege infringement of
that patent as well. The plaintiff seeks an injunction against distribution of
Partition-It and Partition-It Extra Strength and monetary damages. Although the
Company believes the plaintiff's patents are invalid, there can be no assurance
as to the actual outcome of this matter. The ultimate disposition of this matter
could have a material adverse effect on the Company.
The Company is a defendant in various other pending claims and lawsuits.
Although there can be no assurances, management believes that the disposition of
such matters will not have a material adverse impact on the results of
operations or financial position of the Company. From time to time, the Company
has received communications from third parties asserting that certain Company
trademarks, packaging or advertising materials may infringe upon the
intellectual property rights of others. There can be no assurance that existing
or future infringement claims against the Company with respect to current or
future trademarks, packaging or advertising materials will not result in costly
litigation or require the Company to discontinue use of such trademarks,
packaging or advertising materials.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the last
quarter of fiscal 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS;
RECENT SALES OF UNREGISTERED SECURITIES
The Company's common stock traded on the Nasdaq National Market, under the
symbol QDEK until the close of business on October 15, 1998. The Company
received notification on October 15, 1998 of Nasdaq's decision to delist the
Company's shares from
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the Nasdaq Stock Market effective October 15, 1998 as a result of the failure of
the Company to meet certain continued listing requirements. Shares of the
Company's common stock currently trade on the OTC Bulletin Board.
The following table sets forth, for the periods indicated, the high and low
closing sales prices of the common stock on the Nasdaq National Market as
reported by the National Association of Securities Dealers, Inc.
HIGH LOW
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FISCAL 1997:
First Quarter....... $ 7 1/8 $ 4 1/16
Second Quarter...... $ 6 1/4 $ 2 1/4
Third Quarter....... $ 3 3/8 $ 2 1/4
Fourth Quarter...... $ 3 7/32 $ 2 1/2
FISCAL 1998:
First Quarter....... $ 2 5/6 $ 1 1/4
Second Quarter...... $ 2 1/2 $ 1 3/4
Third Quarter....... $ 2 3/5 $ 2/3
Fourth Quarter...... $ 7/8 $ 1/4
As of November 30, 1998, Quarterdeck had 89,760,799 shares outstanding and
564 shareholders of record. The Company estimates there are more than 5,000
shareholders represented through accounts held by clearing agencies. Symantec
owns approximately 65% of the outstanding shares of common stock.
The Company paid no dividends during fiscal 1998 and does not anticipate
paying any cash dividends in the future. The Company is a party to certain
financing agreements which prohibit the payment of cash dividends.
RECENT SALES OF UNREGISTERED SECURITIES
On October 9, 1998, Quarterdeck entered into a Conversion and Redemption
Agreement and Release (the "Conversion Agreement") with the holders (the
"Securityholders") of the Company's Series C Convertible Preferred Stock (the
"Series C Preferred Stock") and/or warrants to purchase shares of Series C
Preferred Stock (the "Warrants") to modify the terms of conversion of the Series
C Preferred Stock. The Company initially issued the shares of Series C Preferred
Stock and the Warrants between September 30, 1997 and November 4, 1997.
Pursuant to the terms of the Conversion Agreement, the Securityholders have
agreed not to convert any shares of Series C Preferred Stock at a conversion
price of less than $0.2650 for a period of six months commencing on the
effective date of the Conversion Agreement (the "Effective Date"). The
Securityholders and the Company further agreed that, during the first sixty
calendar days from the Effective Date, upon conversion of the shares of Series C
Preferred Stock in accordance with the terms of the Company's Certificate of
Designations of Series C Convertible Preferred Stock, the Company will issue
shares of Common Stock at a conversion price of $0.2650 per share
notwithstanding the actual conversion price then in effect. The Company has
agreed to issue additional shares of Common Stock (or, at the Company's sole
election, cash) to each Securityholder, up to an amount equal to five percent of
the original purchase price of the shares of Series C Preferred Stock owned by
such Securityholder, but only to the extent that the Securityholder does not
realize at least a 50% gross aggregate return upon resale of the shares of
Common Stock received upon conversion of such shares of Series C Preferred
Stock.
During the six month period commencing on the Effective Date, the Company
shall have the right to repurchase all of the shares of Series C Preferred Stock
owned by the Securityholder at a price equal to 110% of the original purchase
price. The Company shall provide Securityholders with ten days prior notice that
the Company is exercising its repurchase right, during which time the
Securityholders may continue to convert their shares of Series C Preferred
Stock. The notice may be made in the form of a press release. The
Securityholders also agreed that upon a "Sales Event", the Company may, at its
election, provide a ten day notice of repurchase of the shares of Series C
Preferred Stock at a price equal to 110% of its original price or require the
Securityholder to convert its shares of Series C Preferred Stock into Common
Stock or effect a combination of the foregoing. A "Sales Event" means (i) the
sale of all or substantially all of the assets of the Company, (ii) a
consolidation or Merger of the Company in which the stockholders of the Company
immediately prior to the event do not retain a majority of the voting power of
the surviving corporation or (iii) the sale of more than 50% of the Common Stock
of the Company. As of November 17, 1998, there were 1,111 shares of Series C
Preferred Stock outstanding.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data are derived from the
Company's consolidated financial statements. Historical results should not be
taken as necessarily indicative of the results that may be expected for any
future period. This consolidated data should be read in conjunction with the
consolidated financial statements and notes thereto. Certain items in the
consolidated financial statements of fiscal 1995 and 1994 have been reclassified
to conform to the 1998 presentation. During fiscal 1996, Quarterdeck acquired
Inset, Datastorm, Futurelabs, and Vertisoft in transactions accounted for as
poolings of interests. During fiscal 1995, Quarterdeck acquired Landmark
Research International, Inc., Internetware, Inc. and StarNine Technologies, Inc.
in transactions accounted for as poolings of interest. All financial information
subsequent to October 1, 1993 has been restated to reflect the combined
operations of Landmark, Datastorm, Inset and Quarterdeck. Starnine and
Internetware's results of operations were immaterial to Quarterdeck's financial
position and, therefore, periods prior to October 1, 1995 were not restated for
these entities. However, the number of shares of the Company's common stock
issued in the Vertisoft acquisition are material and, accordingly, shares
outstanding and earnings per share have been restated to reflect those shares.
All amounts shown are in thousands, except per share data.
<TABLE>
<CAPTION>
Year ended September 30,
------------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net revenues..................... $ 50,861 $ 83,787 $ 133,100 $ 117,606 $ 84,715
Cost of revenues................. 14,587 21,271 49,600 34,884 27,403
--------- --------- --------- --------- ---------
Gross margin................... 36,274 62,516 83,500 82,722 57,312
Operating expenses:
Research and development....... 16,640 16,419 21,314 14,286 7,520
Sales and marketing............ 30,566 29,305 66,355 30,624 27,107
General and administrative..... 9,923 17,227 32,128 20,704 20,908
Acquisition, restructuring and
other charges............... 2,583 11,713 37,789 7,409 12,863
Litigation settlement.......... -- 1,905 -- -- 615
--------- --------- --------- --------- ---------
Total operating expenses....... 59,712 76,569 157,586 73,023 69,013
Operating income (loss).......... (23,438) (14,053) (74,086) 9,699 (11,701)
Other income (expense), net.... 1,264 (2,143) 38 (38) (271)
Interest income (expense), net... (952) (2,072) (105) 1,922 1,365
--------- --------- --------- --------- ---------
Income (loss) before income
taxes....................... (23,126) (18,268) (74,153) 11,583 (10,607)
Provision (benefit) for income
taxes....................... 39 130 806 331 (5,982)
--------- --------- --------- --------- ---------
Net income (loss)................ $ (23,165) $ (18,398) $ (74,959) $ 11,252 $ (4,625)
========= ========= ========= ========= =========
Net income (loss) per share:
Basic.......................... $ (0.45) $ (0.43) $ (2.15) $ 0.33 $ (0.15)
========= ========= ========= ========= =========
Diluted........................ $ (0.45) $ (0.43) $ (2.15) $ 0.32 $ (0.15)
========= ========= ========= ========= =========
Shares used to compute net income
(loss) per share:
Basic.......................... 51,609 43,168 34,894 34,178 31,825
========= ========= ========= ========= =========
Diluted........................ 51,609 43,168 34,894 35,557 31,825
========= ========= ========= ========= =========
Additional unaudited pro forma data:
Income (loss) before income
taxes....................... $ (23,126) $ (18,268) $ (74,153) $ 11,583 $ (10,607)
Pro forma income taxes(1)...... 39 130 806 3,406 576
--------- --------- --------- --------- ---------
Pro forma net income (loss).... $ (23,165) $ (18,398) $ (74,959) $ 8,177 $ (11,183)
========= ========= ========= ========= =========
Pro forma income (loss) per share:
Basic.......................... $ (0.45) $ (0.43) $ (2.15) $ 0.24 $ (0.35)
--------- --------- --------- --------- ---------
Diluted........................ $ (0.45) $ (0.43) $ (2.15) $ 0.23 $ (0.35)
========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
As of September 30,
------------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital / (deficiency)..... $ 1,955 $ 6,917 $ (4,684) $ 29,490 $ 29,147
Total assets....................... 19,525 55,881 76,781 76,699 62,471
Long-term obligations.............. 25,022 25,114 25,108 164 701
Stockholders' equity (deficit)..... (17,933) 1,173 4,425 44,270 36,606
</TABLE>
- ---------------
(1) During fiscal 1996, the Company acquired Datastorm in a transaction
accounted for as a pooling-of-interests. Prior to this transaction,
Datastorm was a subchapter-S corporation. The proforma income taxes have
been adjusted to record income tax expense as if Datastorm was a C-
Corporation for all periods presented prior to the transaction with the
Company.
8
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
This Item should be read in conjunction with the Consolidated Financial
Statements and the notes thereto. The historical results of operations are not
necessarily indicative of results to be expected from future performance.
The Company has sought to identify the most significant risks to its
business. However, the Company cannot predict whether, or to what extent any of
such risks may be realized nor can there be any assurance that the Company has
identified all possible issues which the Company might face.
This Form 10-K contains forward-looking statements which are made pursuant
to the safe-harbor provisions of the Private Securities Litigation Reform Act of
1995. Within this Form 10-K, words such as "believes", "anticipates", "plans",
"designed", "expects", "intends", "designed to" and similar expressions
reflecting something other than historical fact are intended to identify
forward-looking statements, but are not the exclusive means of identifying such
statements. These forward-looking statements involve a number of risks and
uncertainties, including the timely development and market acceptance of
products and technologies, sell-through of products in the sales channel, the
effect of conversion of the Company's convertible preferred stock, the ability
to reduce operating expenses, issues arising from addressing Year 2000
information technology issues and other factors described throughout this Form
10-K and in the Company's other filings with the Securities and Exchange
Commission. The actual results that the Company achieves may differ materially
from any forward-looking statements due to such risks and uncertainties. The
Company undertakes no obligations to revise or update any forward-looking
statements in order to reflect events or circumstances that may arise after the
date of this report.
OVERVIEW
At the end of fiscal 1996, fiscal 1997 and during fiscal 1998, Quarterdeck
implemented comprehensive restructuring programs, which included a significant
reduction in its workforce, the closure of offices, and the divestiture of
non-core assets after acquiring ten companies between fiscal 1995 and 1996. This
resulted in a shift in the Company's strategy from utility, communication and
Internet products to developing and marketing software to help personal
computers operate efficiently without extensive technical or administrative
support. As a result of this change in strategy, non-strategic products and
assets were discontinued or divested during fiscal 1997 and 1998 while products
necessary to pursue the Company's strategy were developed, licensed and/or
acquired. See "Business" for further discussion.
Throughout fiscal 1998, Quarterdeck experienced difficulty competing
effectively with companies having significantly greater financial and marketing
resources than the Company. Quarterdeck continued to experience revenue declines
and operating losses primarily due to the RealHelp and ViruSweep product lines
not performing as planned, as well as a predicted decline in industry segments
in which certain of the Company's other products compete. Quarterdeck's need for
capital adversely impacted its ability to sustain the level of expenditures
necessary to effectively market its products and obtain or develop additional
new products.
Additionally, the industry shift to "suite products", which bundle a number
of utility products into one package, would likely adversely impact revenues
from the Company's products in the future, the majority of which are individual
utility products. Quarterdeck does not currently possess the resources to obtain
or develop the additional products necessary to compete in the "suite" market
environment.
PENDING MERGER
On October 15, 1998, Quarterdeck, Symantec and Oak Acquisition Corporation,
a wholly owned subsidiary of Symantec, entered into the Merger Agreement whereby
Symantec agreed to commence a cash tender offer for all outstanding shares of
the Company at a price of $0.52 per share. The Merger Agreement further provided
for a Merger of Oak Acquisition Corporation with and into the Company in which
all remaining outstanding shares of the Company will be converted into the right
to receive $0.52 per share. On November 17, 1998 Symantec completed its tender
offer obtaining approximately 65% of Quarterdeck's outstanding shares of common
stock and common stock equivalents. Upon consummation of the Merger, which is
expected to occur in February 1999, the Company will become a wholly owned
subsidiary of Symantec.
9
<PAGE>
In connection with the Merger Agreement, Quarterdeck and Symantec
concurrently entered into a License Agreement under which Quarterdeck granted
Symantec the non-exclusive right to, among other things, distribute
Quarterdeck's CleanSweep product. Symantec's right to distribute CleanSweep
commenced upon consummation of the tender offer.
RESULTS OF OPERATIONS
For convenient reference, the following table sets forth, a summary of revenue,
cost, and income data derived from the Company's Consolidated Statements of
Operations:
<TABLE>
<CAPTION>
Year ended September 30,
----------------------------
1998 1997 1996
--------- --------- -------
<S> <C> <C> <C>
Net revenues........................... 100.0% 100.0% 100.0%
Cost of revenues....................... 28.7 25.4 37.3
----- ----- -----
Gross margin......................... 71.3 74.6 62.7
Operating expenses:
Research and development............. 32.7 19.6 16.0
Sales and marketing.................. 60.1 35.0 49.9
General and administrative........... 19.5 20.5 24.1
Acquisition, restructuring and other
charges............................. 5.1 14.0 28.4
Litigation Settlement................ -- 2.3 --
----- ----- -----
Total operating expenses............. 117.4 91.4 118.4
Operating loss......................... (46.1) (16.8) (55.7)
Other income (expense), net............ 2.5 (2.5) --
Interest expense, net.................. (1.9) (2.5) (0.0)
----- ----- -----
Loss before income taxes............... (45.5) (21.8) (55.7)
Provision for income taxes............. 0.1 0.2 0.6
----- ----- -----
Net loss............................... (45.6)% (22.0)% (56.3)%
===== ===== =====
</TABLE>
FISCAL 1998, 1997 AND 1996
The Company's fiscal 1998 operating plan included the introduction of
several new and upgraded PC helpware solutions for retail markets and the
development of small/medium business network versions of its products, primarily
during the fourth quarter of fiscal 1998. The aforementioned networked versions
of Quarterdeck's products were designed to expand the Company's presence in the
corporate marketplace by assisting those business environments that most need
helpware technologies; those where onsite MIS support is thin or absent. During
the past fiscal year, the Company sold non-core assets such as the Hijaak
product line, the Starnine MacIntosh business and Future Labs, a real-time
collaborative technology business while experiencing a continued decline in net
revenues related to certain legacy memory management and communication products.
The Company had expected to offset the revenues lost due to lower sales of these
products with revenues from newly released products in addition to expansion of
its presence in the corporate direct and reseller channels. However, the
recently launched products have either not yet established high sell-through
rates to end users or did not perform in the retail channel as expected.
Net Revenues: The Company's net revenues consist of gross sales of its
products, less provisions for sales returns, exchanges, rebates and price
protection. In the retail and corporate reseller channels, the Company's main
sales vehicles, gross sales are recorded as products are shipped on order to
first-tier distributors, with provisions for returns calculated on the basis of
projected sell-through of new products and demonstrated sell-through experience
of established products. These provisions reflect the industry's practice of
accepting returns from distributors, resellers, and retailers of products not
sold through to final customers. If projected sell-through does not occur,
actual returns may exceed earlier provisions, and net revenues for a period may
suffer significant declines even when distributor orders for new or replacement
products are meeting expectations.
In fiscal 1998, net revenues of $50,861,000 decreased 39.3% or $32,926,000,
from net revenues of $83,787,000 in fiscal 1997. This decline is primarily due
to several factors including: (1) a predicted continued decline in sales for the
Company's legacy products including ProComm, (2) lower than expected revenues
from the Company's 1998 entrance into the PC Security market with ViruSweep, the
Conflict Resolution market with RealHelp and the Disk Imaging market with
DiskClone, (3) increasing pricing pressure from competitors offering aggressive
rebate programs and promotional pricing designed to reduce channel inventory
levels, (4) the introduction of products for the corporate and networked
environments which have not yet contributed significantly to the Company's
revenues and (5) to a lesser extent revenue reductions related to the sale of
the aforementioned non-core assets. During
10
<PAGE>
fiscal 1998, a majority of the Company's revenues were generated by sales of its
ProComm products and its storage management products, especially CleanSweep.
Quarterdeck's provisions for sales returns, exchanges, rebates and price
protection of $21,000,000 increased 25.7% or $4,295,000 from provisions for
sales returns of $16,705,000 in fiscal 1997, while increasing as a percent of
net revenues to 41.3% in fiscal 1998 from 19.9% in fiscal 1997. This increase is
primarily due to the continued decline in sales for the Company's legacy
products and a decline in product sell through rates subsequent to announcement
of the acquisition by Symantec Corporation.
In fiscal 1997, net revenues of $83,787,000 decreased 37.0% or $49,313,000
from net revenues of $133,100,000 in fiscal 1996. This decline reflected reduced
sales for the Company's memory management, Internet utility, and communications
products, the discontinuance during fiscal 1997 of certain non-core product
lines (e.g., Internet utilities and graphic utilities), reduced efforts to sell
third party products through the Company's direct mail and telesales units, and
management concentration on integrating the Company's operations and on
commencing development on new strategic products, rather than on expanding sales
of end-of-life or non strategic product lines.
The majority of Quarterdeck's revenues are derived from US sales, but the
relative contribution from international revenues has grown, representing 25.5%,
21.9% and 18.0% of the Company's net revenues in fiscal 1998, 1997 and 1996,
respectively.
Cost of Revenues: Cost of revenues include product production, packaging,
documentation and media, amortization of capitalized software costs, technical
support and certain license fees paid to third parties. In fiscal 1998, cost of
revenues of $14,587,000 decreased 31.4% or $6,684,000, from cost of revenues of
$21,271,000 in fiscal 1997, while increasing as a percent of net revenues to
28.7% in fiscal 1998 from 25.4% in fiscal 1997. The dollar decrease in cost of
revenues was largely due to reduced sales, continued reduction of technical
support costs and reduced software amortization and royalty expense in the
current year. The increase as a percent of net revenues was primarily due to the
fact that net revenues were reduced by return provisions and cost of revenues
were not reduced proportionately. The Company's policy is to not record a
corresponding reduction to cost of revenues since most returned units are not
resold. Also increasing the cost of revenues as a percent of net revenues was a
write off of approximately $300,000 of previously capitalized software
development costs which, based upon the Company's evaluation of recoverability,
has been deemed to be impaired.
In fiscal 1997, cost of revenues of $21,271,000 decreased 57.1% or
$28,329,000, from cost of revenues of $49,600,000 in fiscal 1996, while
declining as a percent of net revenues to 25.4% in fiscal 1997 from 37.3% in
fiscal 1996. The dollar decrease in cost of revenues was largely due to reduced
sales and to improved efficiency in production and technical support activities.
The reduction as a percent of net revenues was primarily due to a decrease in
the manufacturing cost per unit resulting from a change in the Company's product
mix to the CD-Rom format from higher cost floppy disks, consolidation of the
purchasing function which allowed the Company to obtain volume discounts with
respect to manufacturing, continued reduction of technical support costs and
reduced software amortization and royalty expense in the current year.
Software development and purchased software costs are capitalized once
technological feasibility is achieved and are generally amortized over one to
three year periods, commencing upon initial product release. In fiscal 1998,
1997, and 1996, Quarterdeck did not capitalize any internal software
development, judging that costs incurred after achieving technological
feasibility were immaterial, but did capitalize external software purchases of
$0, $0, and $4,504,000, respectively.
In fiscal 1998, amortization of capitalized software costs of $1,151,000
decreased 31.1% or $519,000, from amortization of capitalized software costs of
$1,670,000 in fiscal 1997, reflecting the winding down of earlier capitalized
amounts. In fiscal 1997, amortization of capitalized software costs of
$1,670,000 decreased 55.0% or $2,041,000, from amortization of capitalized
software costs of $3,711,000 in fiscal 1996, also reflecting the winding down of
earlier capitalized amounts.
OPERATING EXPENSES
In fiscal 1998, total operating expenses of $59,712,000 decreased 22.0% or
$16,857,000, from total operating expenses of $76,569,000 in fiscal 1997, while
increasing as a percent of net revenues to 117.4% in fiscal 1998 from 91.4% in
fiscal 1997. The dollar decline in total operating expenses resulted primarily
from the Company's continued restructuring, consolidation, and downsizing
activities which began late in fiscal 1996 and has continued through fiscal
1998. The percentage increase in operating expenses resulted from the decline in
net revenue in fiscal 1998. In fiscal 1997, total operating expenses of
$76,569,000 decreased
11
<PAGE>
51.4% or $81,017,000, from total operating expenses of $157,586,000 in fiscal
1996, while declining as a percent of net revenues to 91.4% in fiscal 1997 from
118.4% in fiscal 1996. This decline in total operating expenses also resulted
primarily from the Company's restructuring, consolidation, and downsizing
activities.
Research and Development: Research and development expenses consist
primarily of salaries, benefits and consulting fees to support product
development, including product testing and documentation. In fiscal 1998,
research and development expenses of $16,640,000 increased 1.3% or $221,000,
from research and development expenses of $16,419,000 in fiscal 1997, while
increasing as a percent of net revenues to 32.7% in fiscal 1998 from 19.6% in
fiscal 1997. The dollar increase was due in part to increased research and
development to support the Company's entrance into the PC Security market
(ViruSweep), the Conflict Resolution market (RealHelp and Crash Defender)and the
Disk Imaging market (DiskClone), as well as payments to third parties for
contracted product development required to support the Company's product
development efforts for the corporate market. The increased expense as a percent
of net revenues was largely due to a $2,004,000 write off of goodwill in the
third quarter of fiscal 1998 which was deemed to be impaired, and the cost
incurred to develop corporate products which did not generate revenue in
proportion to development spending. The goodwill resulted from the acquisition
of Limbex Corporation. Historically, the amortization of such goodwill has been
charged to research and development because Limbex's primary operations were
related to the development of software products and accordingly, to be
consistent, the write off of goodwill was also charged to research and
development expense. In fiscal 1997, research and development expenses of
$16,419,000 decreased 23.0% or $4,895,000, from research and development
expenses of $21,314,000 in fiscal 1996, while increasing as a percent of net
revenues to 19.6% in fiscal 1997 from 16.0% in fiscal 1996. The decrease in
research and development expenses was largely due to a reduction in the quantity
of products the Company is exploiting or developing. As discussed earlier, the
Company has discontinued or divested non-core products. The research and
development expenditures during fiscal 1997 were primarily focused on the
portfolio of PC "helpware" products which comprised the Company's product
strategy (See page 2). The increase in research and development expenses as a
percent of net revenues was largely due to the reduction in net revenues during
fiscal 1997 as compared to fiscal 1996.
Sales and Marketing: Sales and marketing expenses consist of salaries and
commissions and related costs of sales and marketing and customer service
personnel as well as advertising, trade show and promotional expenses. In fiscal
1998, sales and marketing expenses of $30,566,000 increased 4.3% or $1,261,000,
from sales and marketing expenses of $29,305,000 in fiscal 1997, while
increasing as a percent of net revenues to 60.1% in fiscal 1998 from 35.0% in
fiscal 1997. The fiscal 1998 increase was offset by approximately $1,520,000
related to market development funds reserves established in prior years that
were reversed after a reconciliation of activities committed versus funds spent
and customer claims for reimbursement. The dollar increase in sales and
marketing expense was primarily due to increases in advertising, increases in
marketing headcount, increases in market development funds, increases in package
design and a $500,000 settlement fee paid to terminate the Company's telesales
outsource agreement. Quarterdeck spent significant advertising and market
development funds to launch the aforementioned new products including ViruSweep,
RealHelp and DiskClone. The 1998 increase as a percentage of net revenues was
primarily due to the costs associated with the Company's entrance into new
markets including the PC Security, Conflict Resolution and Disk Imaging which
did not result in a proportionate increase in net revenues. Additional expenses
were also incurred to penetrate the corporate channel which required large
expenditures for advertising, market development funds and other variable sales
and marketing expenditures which were committed based upon expected sales levels
which did not occur. In 1998, Quarterdeck also launched its Quarterdeck
Enterprise Partner Program (QEPP) and signed up approximately 300 VAR's and
system integrators to support the sales and service of Quarterdeck's Enterprise
products. In fiscal 1997, sales and marketing expenses of $29,305,000 decreased
55.8% or $37,050,000, from sales and marketing expenses of $66,355,000 in fiscal
1996, while decreasing as a percent of net revenues to 35.0% in fiscal 1997 from
49.9% in fiscal 1996. These decreases were largely due to headcount reductions
due to the restructuring efforts and reduced advertising and market development
expenditures.
General and Administrative: General and administrative expenses consist of
salaries and related costs of support departments, overhead and facilities. In
fiscal 1998, general and administrative expenses of $9,923,000 decreased 42.4%
or $7,304,000, from general and administrative expenses of $17,227,000 in fiscal
1997, while decreasing as a percent of net revenues to 19.5% in fiscal 1998 from
20.5% in fiscal 1997. This decrease as a percentage of net revenues were largely
due to aggressive reductions in headcount and facility related expenses due to
the restructuring efforts in fiscal 1998 and 1997. In fiscal 1997, general and
administrative expenses of $17,227,000 decreased 46.4% or $14,901,000, from
general and administrative expenses of $32,128,000 in fiscal 1996, while
decreasing as a percent of net revenue to 20.5% in fiscal 1997 from 24.1% in
fiscal 1996. These declines were also primarily due to reductions in headcount
and facility expenses related to the restructuring efforts late in fiscal 1996
and in fiscal 1997.
Acquisition and Other Charges: In fiscal 1998, there were no acquisition and
other charges as compared to acquisition and other charges of $(702,000) in
fiscal 1997. In fiscal 1997, acquisition and other charges of $(702,000)
decreased 102.8% or $25,496,000, from acquisition and other charges of
$24,794,000 in fiscal 1996, while decreasing as a percent of net revenues to
(0.8%) in fiscal
12
<PAGE>
1997 from 18.6% in fiscal 1996. During fiscal 1997, the Company acquired certain
assets of TuneUp.com which resulted in an in-process research and development
charge of approximately $268,000. Additionally, during fiscal 1997 Quarterdeck
reversed over-accrued acquisition costs into income in the amount of $970,000
which related to estimated acquisition integration costs for companies acquired
during fiscal 1995 and 1996, which were determined to be no longer necessary,
based on actual costs incurred. See Note 1 and Note 2 of Notes to Consolidated
Financial Statements for further discussion.
Restructuring Costs: In fiscal 1998, restructuring costs of $2,583,000
decreased 79.2% or $9,832,000, from restructuring costs of $12,415,000 in fiscal
1997 while decreasing as a percent of net revenues to 5.1% in fiscal 1998 from
14.8% in fiscal 1997. In June 1998, the Company implemented a restructuring plan
which was designed to reduce the ongoing level of operating expenses to one
which can be supported by a reduced revenue base. As a result, Quarterdeck
recorded charges totaling $2,980,000 relating to fiscal 1998 and reversed
$201,000 relating to fiscal 1997, and $196,000 relating to fiscal 1996, both of
which were no longer required. The fiscal 1998 charge included a severance
provision for terminated employees, early lease cancellation fees and write
downs of certain fixed assets.
In fiscal 1997, restructuring costs of $12,415,000 decreased 4.5% or
$580,000, from restructuring costs of $12,995,000 in fiscal 1996, while
increasing as a percent of net revenues to 14.8% in fiscal 1997 from 9.8% in
fiscal 1996. During fiscal 1997, the Company recorded a total charge of
$11,051,000 relating to a restructuring program designed to refocus the Company
on a new corporate strategy. This charge included the write off of operating
assets used in divested non-core product lines, a severance provision for
individuals who were terminated, the write down of the value of a building the
Company planned to sell, and other obligations associated with downsizing and
divestiture activities. In addition, the Company recorded an additional charge
of $1,364,000 in fiscal 1997 related to the restructuring in September 1996.
Late in fiscal 1996, Quarterdeck implemented a comprehensive, corporate wide
restructuring plan, designed to focus the Company's development and marketing
efforts on those products and technologies with the most significant growth
opportunities while optimizing profitability on certain of Quarterdeck's
products that had experienced lower demand or were at the end of their product
life cycle.
Litigation Settlement: The Company had no litigation settlement expense for
fiscal 1998. On December 19, 1997, the Company reached an agreement in principle
to settle federal and state shareholder actions for $12,500,000, of which the
Company was required to pay approximately $1,905,000. Accordingly, Quarterdeck
recorded a charge of $1,905,000 for fiscal 1997. The Company had no litigation
settlement expense in fiscal 1996.
Other income (expense): In fiscal 1998, net other income of $1,264,000
increased $3,407,000, from net other expense of $2,143,000 in fiscal 1997. The
increase in net other income primarily represents the gain realized upon the
sale of the Columbia, Missouri building and other fixed assets on December 30,
1997 and a gain on the sale of the assets of the Company's telesales and
Starnine Macintosh businesses as a result of the divestiture of these businesses
in January 1998. In fiscal 1997, net other expense of $2,143,000 increased
$2,181,000, from net other income of $38,000 in fiscal 1996. During fiscal 1997,
net other expense was primarily due to losses of $2,922,000 on the Company's
investments in Infonautics and Intelligence At Large partially offset by gains
on the sales of Lernout & Hauspie stock and warrants of $1,026,000.
Additionally, net losses on disposal of fixed assets were recorded of
approximately $247,000. During fiscal 1996, net other income of $38,000 was
comprised of gains on the sale of short term investments and sales of equipment.
Interest expense: In fiscal 1998, net interest expense of $952,000 decreased
54.1% or $1,120,000, from net interest expense of $2,072,000 in fiscal 1997.
Net interest expense decreased in fiscal 1998 primarily due to higher cash
balances resulting from the Company's financing and divestiture activities and
the sale of the Columbia building and payoff of the related construction loan in
December 1997. In fiscal 1997, net interest expense of $2,072,000 increased
$1,967,000, from net interest expense of $105,000 in fiscal 1996. Interest
expense increased in fiscal 1997 because the convertible bonds issued in March
1996 were outstanding for the full year versus six months in fiscal 1996.
Additionally, larger interest payments were made on its construction loan due to
higher loan balances outstanding in fiscal 1997, and a higher interest rate was
paid on a new revolving line of credit than under the previous line which was
outstanding during fiscal 1996.
Income Taxes: Income tax expenses for fiscal 1998, 1997 and 1996 were
$39,000, $130,000 and $806,000, respectively. A 100% valuation allowance was
applied to Quarterdeck's net deferred tax asset of $39,944,000 at September 30,
1998 (See Note 12 of the Notes to the Consolidated Financial Statements). The
net deferred tax asset (before applying the valuation allowance) is comprised of
the estimated tax effect of (a) expected future reversing temporary differences
relating in part to charges taken for book purposes that are not deductible for
federal income tax purposes until the amounts are paid in the future and (b) tax
net operating loss carryforwards. Management believes that it is not appropriate
to record a deferred tax asset until such time as the Company is able to
establish that it
13
<PAGE>
becomes more likely than not that the Company will realize some or all of the
benefit of the net deferred tax asset. The net deferred tax assets, prior to the
application of valuation allowances, for fiscal 1997 was $32,805,000 and for
fiscal 1996 was $24,858,000.
TRENDS AND UNCERTAINTIES
The computer software industry is subject to rapid technological change
often evidenced by new competing products, new product distribution mechanisms
such as Internet downloads, improvements in existing products and improvements
and/or upgrades to operating systems. The Company depends on the successful
development or acquisition and resulting sales of new products, including
upgrades of existing products, to replace revenues from products introduced in
prior years that have begun to experience reduced revenues or have become
obsolete. If the Company's leading products, such as CleanSweep and ProComm,
become outdated or are rendered obsolete as a result of improvements in
operating systems, hardware or technology, or due to other competitive factors
and lose market share faster than those revenues are replaced by new products or
if new products or existing product upgrades are not introduced in a timely
manner or do not achieve anticipated revenues, the Company's operating results
could be materially adversely affected. Even with normal development cycles, the
market environment can change so quickly that features in certain products can
become outdated soon after market introduction. These events may occur in the
future and may have an adverse effect on future revenues and operating results.
Quarterdeck has focused significant efforts on evolving its core utilities
and communication product lines into a set of products designed to enhance user
performance, simplify system management and reduce the ongoing cost of ownership
for networked personal computing. As part of this effort, the Company has been
developing new products and adapting its current technology into these products.
There is no assurance these efforts will be successful. The Company anticipates
that spending for software development and purchased software will continue as a
significant expense in the future. Other significant risks associated with the
Company's focus on this category of products include the timing of releases in
relation to competitive products and uncertainties surrounding the rate and
extent of development of this new market.
Quarterdeck has devoted substantial efforts to expand its presence in the
corporate marketplace with networked versions of its products. This strategy is
designed to reduce product return risk and improve gross margins, since
corporate customers generally order product based on a specific need. As part of
this effort, the Company has been developing new products and adapting its
current technology into these products. The Company anticipates that spending
for sales, marketing and software development as it relates to the corporate
marketplace will continue as a significant expense in the future. There is no
assurance these efforts will be successful.
The Company has also devoted substantial efforts to the development of
software products that are designed to operate on Microsoft's Windows 95,
Windows 98 and Windows NT. Microsoft Corporation may incorporate advanced
utilities or other features in Windows 95 and/or Windows 98 and/or Windows NT
and/or Windows Plus Packs and/or their successors that may decrease the demand
for certain of the Company's products including those under development. Should
the Company not be able to timely develop and successfully market products that
offer perceived value to users of these operating systems beyond that which is
offered in the base operating system, future revenues would be adversely
affected. In addition, Microsoft may introduce new or upgraded versions of their
operating systems to replace currently available versions. There can be no
assurance these efforts will be successful in achieving their intended results.
Future competitive product releases may cause disruptions in orders for the
Company's products while users and the marketplace evaluate the competitive
products. The extent of the disruption in orders and the impact on future orders
of the Company's products will depend on various factors that are not fully
known at this time, including the level of functionality, performance and
features included in the final release of these competitive products and the
price thereof and the market's evaluation of competitive products compared to
the then current functionality, performance, features and price of the Company's
products.
Channel fill occurs when a product shipped into retail distribution does not
sell-through to end users at expected rates, resulting in larger than expected
product returns from retailers or distributors, in-channel price reductions that
the Company must reimburse, and/or lower than expected future sell-in rates for
these same products, all of which can adversely affect net revenue recognized in
future periods. The Company seeks to take adequate reserves against these
contingencies at the point it sells product into retail distribution, but these
reserves are measured against expected sell-through rates and no assurance can
be given that actual sell-through rates will meet these expectations.
Quarterdeck's return policy generally allows its distributors, subject to
certain limitations, to return
14
<PAGE>
purchased products in exchange for new products or for credit toward future
purchases. However, competitive factors and/or market conditions often require
the Company to offer expanded rights of return for products that distributors or
retailers are unable to sell. The Company also provides price protection rights
to its distributors which generally give distributors credit for price decreases
on products remaining in the distributors' inventory and on products remaining
in retail customers' inventory.
Recruitment of personnel in the computer software industry is highly
competitive. Quarterdeck's success depends to a significant extent upon the
performance of its executive officers and other key personnel. The Company
believes its ability to attract and retain highly qualified personnel has been
adversely affected by the Company's recent restructurings and financial
performance. As a result, there can be no assurance that the Company will be
successful in attracting and retaining such personnel. The 1998 restructuring
was designed to reduce the Company's headcount and other overhead in order to
return to profitability by the quarter ended, December 31, 1998 and to position
the Company to enter the corporate marketplace with its helpware solutions. The
Company replaced much of the senior management team as part of the 1998
restructuring and eliminated many other positions throughout the Company.
Overall, these restructuring efforts reduced the Company's headcount by over
30%. Subsequent to the close of Symantec's tender offer, headcount was further
reduced by approximately 45%. These significant changes to the Company's
management and further loss of the services of key individuals or the inability
to attract and retain highly qualified personnel, including developers, could
have a material adverse effect on the Company.
YEAR 2000 COMPLIANCE
Many existing computer systems and software products, including several used
by the Company, are coded to accept only two digit entries in the date code
field. Beginning in the year 2000, these date code fields will need to accept
four digit entries to distinguish 21st century dates from 20th century dates. As
a result, the Company's date critical functions related to the year 2000 and
beyond, such as sales, distribution, purchasing, inventory control, trade
promotion management, planning and replenishment, facilities and financial
systems may be materially adversely affected unless computer systems and
embedded microchips in manufacturing equipment are or become year 2000
compliant. In addition, certain of the Company's business activities may be
materially adversely affected if critical business partners, including
customers, vendors, suppliers, brokers and others, experience disruptions in
service as a result of year 2000 problems.
The Company currently believes that the year 2000 issue will not pose
significant operational problems for the Company. However, if all year 2000
issues are not properly identified, or assessment, remediation and testing are
not effected timely with respect to year 2000 problems that are identified,
there can be no assurance that the year 2000 issue will not materially adversely
impact the Company's results of operations or adversely affect the Company's
relationships with customers, vendors, suppliers, brokers or others.
Additionally, there can be no assurance that the year 2000 issues of other
entities will not have a material adverse impact on the Company's systems or
results of operations.
Quarterdeck has made an assessment of its systems and operations to
ascertain the cost impact to the Company regarding the Year 2000 issue. Based on
such assessment, the Company's general accounting system, computer servers and
telephone systems are Year 2000 compliant and its customer base systems will be
upgraded in early 1999 to be Year 2000 compliant at no additional cost. However,
there can be no assurances that the Company will not experience unanticipated
negative consequences and/or material costs associated with preparing its
internal systems for the Year 2000 caused by undetected errors or defects in its
internal systems. Substantially all of the current releases of the Company's
software have been designed to be Year 2000 compliant, however, older versions
of certain of the Company's software, including ProComm, may not be fully
compliant. It is the Company's understanding that Symantec intends to release a
Year 2000 compliant version of the older, non-compliant version of ProComm and
to discontinue distribution of non compliant versions. A class action complaint
was filed against the Company on behalf of a purported class of purchasers of
the Procomm Plus version 4.0 for Windows product (the "Product") arising from
the Product's inability to process dates containing the Year 2000. See Item 3
herein and Note 13 of Notes to Consolidated Financial Statements for further
discussion.
The Company has communicated with certain of its critical business partners
(customers, vendors, suppliers, etc.) to assess their readiness and to consider
the potential impact on the Company if these business partners experience
significant year 2000 problems. The Company has assessed and attempted to
mitigate its risks with respect to the failure of these entities to be year 2000
compliant by developing a contingency plan. There can be no assurance that the
systems of the Company's suppliers, distributors and others upon which the
Company's systems and/or personnel rely will be timely converted, or that a
failure to convert or an incompatible conversion by one of these parties would
not have a material adverse effect on the Company.
15
<PAGE>
It is the Company's understanding that it is Symantec's intention to
integrate Quarterdeck's operations into Symantec's current systems after the
Merger is completed. The Company does not expect to incur additional costs or
complete further independent analysis regarding the Year 2000 issue and the
Company's current systems prior to the Merger. As a result, the Company does not
currently expect to develop further contingency plans with respect to Year 2000
issues.
PATENTS, TRADEMARKS AND PRODUCT PROTECTION
The Company relies on a combination of trade secret, patent, copyright and
trademark laws, license agreements and nondisclosure agreements to protect its
rights to its products. The Company provides its products to end users under a
nonexclusive license that by its terms limits the warranties provided by and
liability of the Company. The ability of software companies to enforce such
licenses has not been finally determined by the U.S. Supreme Court. The use and
registration by the Company of its trademarks and servicemarks do not assure
that the Company has superior rights to others that may have registered or used
identical or related marks on related goods or services, nor that such
registrations or uses by others will not be used to attempt to foreclose use of
a particular mark by the Company.
The extent to which U.S. and foreign copyright and patent laws protect
software has not been fully determined. In addition, changes in the
interpretation of copyright and patent laws could expand or reduce the extent to
which the Company or its competitors are able to protect their software and
related intellectual property.
Policing the unauthorized use of computer software is difficult and software
piracy is expected to continue to be a persistent problem for the packaged
software industry, particularly in certain international markets, and therefore
for the Company.
Over the last several years, the number of software-related patents issued
by the United States Patent and Trademark Office has increased dramatically. The
Company does not know all of the patents that have been issued or that may be
pending that could cover any of its products. Accordingly, the Company may not
have, or may at any time lose, the right to develop, use or distribute one or
more of its products. Any patent that precludes the Company from developing,
using or distributing one or more of its products, that forces the Company to
pay substantial royalties or substantial attorneys fees and other litigation
costs, or that casts doubt on the Company's right to develop, use or distribute
any product could have a material adverse effect on the Company.
RECENT ACCOUNTING PRONOUNCEMENTS
SFAS No. 132, Employers' Disclosures about Pensions and Other Postretirement
Benefits, was issued in February 1998. SFAS No. 132 revises the disclosure
requirements for pensions and other postretirement benefits. This statement is
effective for the Company's financial statements for fiscal years beginning
after December 15, 1997 and the adoption of this standard is not expected to
have a material effect on the Company's financial statements.
SFAS No. 130, "Reporting Comprehensive Income" is effective for fiscal years
beginning after December 15, 1997. SFAS No. 130 established standards for the
reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general-purpose financial
statements. The Statement requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. The Company is evaluating the Statement's provisions
to conclude how it will present comprehensive income in its financial
statements, and has not yet determined the amounts to be disclosed. The Company
will adopt SFAS No. 130 effective October 1, 1998.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" is effective for financial statements for periods beginning after
December 15, 1997. SFAS No. 131 establishes standards for the way that public
business enterprises report financial and descriptive information about
reportable operating segments in annual financial statements and interim
financial reports issued to stockholders. SFAS No. 131 supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise," but retains the
requirement to report information about major customers. The Company has not yet
determined the amounts to be disclosed. The Company will adopt SFAS No. 131
effective October 1, 1998.
The AICPA issued Statement of Position 97-2, "Software Revenue Recognition,"
(SOP 97-2) effective for transactions entered into in fiscal years beginning
after December 15, 1997. The Company will adopt SOP 97-2 for transactions
entered into on and after October 1, 1998. The impact of SOP 97-2 will depend on
the terms of future transactions.
16
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased $15,240,000 to $8,411,000 at September
30, 1998 from $23,651,000 at September 30, 1997. Working capital, which is the
excess of current assets over current liabilities, at September 30, 1998 was
$1,955,000 as compared to $6,917,000 at September 30, 1997.
Operating activities: Cash used in operating activities of $(21,729,000) was
primarily due to a net reduction in assets and liabilities of $(4,689,000) which
resulted from net reductions in receivables, inventories, and other assets of
$7,012,000 being offset by net reductions in payables, accrued liabilities,
accrued acquisition, restructuring and other charges, and foreign currency
translation adjustment of $(11,701,000). An additional $(17,040,000) of cash was
used as a result of the Company's net loss of $(23,165,000) offset by non cash
charges of $6,125,000.
The reduction in accounts payable and accrued liabilities was due to
payments made to trade vendors and an overall decline in the level of the
Company's operating expenses as a result of the execution of the restructuring
plans. The reduction in accrued acquisition, restructuring and other charges was
due to payments made during the execution of the fiscal 1997 and 1998
restructuring plan. The reductions in accounts receivable and inventory were due
to aggressive collections and heightened inventory control. The reduction in
other assets was largely due to a write off of the Limbex assets which were
primarily composed of the WebCompass technology.
Investing activities: Net cash provided by investing activities of
$7,798,000 was largely due to the sale of the Columbia, Missouri building and
the divestiture of both the Company's telesales and Macintosh development
businesses which resulted in cash proceeds of $7,700,000 and $1,575,000 ,
respectively, offset by $1,845,000 for capital expenditures primarily related to
computer purchases.
Financing activities: Net cash used in financing activities of $1,309,000
was primarily related to $5,579,000 of debt repayment and $77,000 of net
payments under long term obligations, offset by net proceeds of $2,782,000 from
the sale of Series C convertible preferred stock, $1,521,000 from the exercise
of warrants and $44,000 from the issuance of common stock due to the exercise of
stock options.
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 required to be paid in full upon consummation of
the Merger without any premium. See Note 5 of the Consolidated Financial
Statements for further discussion.
In April 1997, the Company established an asset based line of credit with
Greyrock Business Credit, a division of NationsBank. Maximum borrowings under
the new line are the lesser of $12,000,000 and the sum of 85% of eligible
accounts receivable, 50% of Quarterdeck International Limited (Qil) eligible
receivables plus the value of inventory to a maximum of $2,000,000. The line can
be used for general corporate purposes, including investments and acquisitions,
and bears interest at prime plus 2%. The line is secured by substantially all
assets of Quarterdeck. The Company is obligated to pay a minimum interest charge
of $10,000 per month and comply with certain other non-financial covenants and
restrictions. At September 30, 1998, the Company had $0 outstanding under the
line and the ability to borrow up to a maximum amount of $7,853,000. The current
term of the agreement matures on March 31, 1999. This agreement is automatically
renewable for successive additional one year terms unless advance notification
is provided by either party prior to the next maturity date. It is anticipated
that the line will be terminated upon consummation of the Merger.
Due to the Company's declining revenues, recurring net operating losses,
continued restructurings, negative cash flow and the uncertainty associated with
the impact of the acquisition of the Company by Symantec Corporation, there is
no assurance that Quarterdeck will be able to continue as a going concern for
fiscal 1999.
In September and between October 1997 and April 1998, the Company issued an
aggregate of 30,521 shares of Series C Convertible Preferred Stock, resulting in
net proceeds to the Company of $18,897,000 (after expenses and the repurchase of
$10,000,000 of Series B Preferred Stock). See Part II and Note 6 to the
Consolidated Financial Statements for further discussion.
17
<PAGE>
The Company conducts business in various foreign currencies and is therefore
subject to the transaction exposures that arise from foreign exchange rate
movements between the dates that foreign currency transactions are recorded and
the date that they are consummated. The Company is also subject to certain
exposures arising from the translation and consolidation of the financial
results of its foreign subsidiaries. There can be no assurance that actions
taken to manage such exposures will continue to be successful or that future
changes in currency exchange rates will not have a material impact on the
Company's future operating results. The Company does not hedge either its
translation risk or its economic risk.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's financial statements included with this Form 10-K are set
forth under Item 14 hereof.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS.
THE CURRENT MEMBERS OF THE BOARD OF DIRECTORS
The names of the current directors, their ages as of November 30, 1998 and
certain other information about them are set forth below. As indicated below,
certain of the directors also have positions with Symantec Corporation and/or
Oak Acquisition Corporation which are affiliates of the Company.
<TABLE>
<CAPTION>
Year First
Elected A Position With The Company Or
Name Of Director Age Director Principal Occupation During The Past Five Years
- ---------------- --- -------- -----------------------------------------------
<S> <C> <C> <C>
Gordon E. Eubanks, Jr... 51 1998 Mr. Eubanks became a director of the Company on November 17, 1998. Mr. Eubanks has been
President and Chief Executive Officer of Symantec Corporation since October 1986 and a
member of the Board of Directors of Symantec since November 1983.
Howard A. Bain III...... 52 1998 Mr. Bain has been a director of the Company since November 17, 1998 and Chief Executive
Officer and President of the Company since November 23, 1998. Mr. Bain is Vice
President, Worldwide Operations and Chief Financial Officer of Symantec Corporation.
Mr. Bain joined Symantec in October 1991 as its Vice President, Finance.
Enrique T. Salem........ 32 1998 Mr. Salem has been a director of the Company since November 17, 1998. Mr. Salem is Vice
President, Security and Assistance Business Unit and Chief Technical Officer of
Symantec Corporation. Mr. Salem joined Symantec in April 1990 and has held numerous
positions including Director of Development and General Manager of Advanced Utilities
Group.
Derek Witte............. 41 1998 Mr. Witte has been a director of the Company since November 17, 1998 and Secretary of
the Company since November 23, 1998. Mr. Witte is a director and President, Chief
Financial Officer and Secretary of Oak Acquisition Corporation. Mr. Witte is Vice
President, General Counsel and Secretary of Symantec Corporation. Mr. Witte joined
Symantec in October 1990.
</TABLE>
18
<PAGE>
<TABLE>
<S> <C> <C> <C>
King R. Lee............. 58 1994 Mr. Lee served as the Interim Chief Executive Officer and President of the Company from
July 8, 1998 until November 23, 1998. Mr. Lee also served as a member of the Office of
the President of the Company from August 27, 1996 until February 1997. Mr. Lee also
served as Interim Chief Executive Officer of the Company from December 1994 until
January 1995 and served as Interim Chief Operating Officer of the Company between July
and December 1994. He was elected a director of the Company in July 1994. Mr. Lee
served as the Chief Executive Officer of Wynd Communications Corporation, a two-way
wireless messaging service provider, from October 1995 to January 1997, and has served
as its Chairman since October 1995. Mr. Lee is President of King R. Lee & Associates,
Inc., an executive management consulting firm, which provides consulting services to
the Company. From 1987 to 1993, Mr. Lee was President and Chief Executive Officer of
Xtree Company, a developer of computer systems software. He serves as a director of
Nettech Systems, Inc., Outback Resource Group, Inc., Boss Entertainment, Dover
Pacific, Inc. and Mobile Automation, Inc.
Frank W. T. LaHaye...... 69 1982 Mr. LaHaye has been a director of the Company since 1982 and was the Chairman of the
Board from 1985 until November 1998. Mr. LaHaye was a general partner of the general
partnership of Peregrine Ventures, a venture capital investment partnership, from its
formation in 1981 until its dissolution in 1998. Mr. LaHaye has been a general partner
of the general partnership of Peregrine Ventures II, a venture capital investment
partnership, since its formation in 1983. Mr. LaHaye serves as a director or trustee of
various funds affiliated with the Franklin/Templeton Group of Funds and as a director
of Digital Transmission Systems, Inc.
Dr. Howard L. Morgan.... 52 1983 Dr. Morgan has been a director of the Company since 1983. He is currently President of
Arca Group, Inc., a consulting and investment management firm specializing in the areas
of computer and communications technologies. He serves as a director of Cylink
Corporation, a developer of software for secure communications, Franklin Electronic
Publishers, Inc., a developer of electronic books, Infonautics Corporation, a provider
of online information, Kentek Information Systems, a manufacturer of laser printers,
Neoware Systems, Inc., a provider of network terminals, MetaCreations, Inc., a
developer of computer graphics software, Segue Software, a developer of automated
software systems, and Unitronix Corp., a software supplier.
</TABLE>
Each of the directors has been engaged in the principal occupation(s)
described above during the past five years. There are no family relationships
among any of the directors or executive officers of the Company.
19
<PAGE>
EXECUTIVE OFFICERS
The executive officers and other officers of Quarterdeck as of September 30,
1998 were as set forth below. Upon consummation of the tender offer,
substantially all of such persons resigned or were terminated except, Mr.
Greico, Mr. Navon, Ms. Kaplan-Smith, Mr. Tchamkertenian and Mr. Levinsohn. In
addition, Mr. Howard A. Bain III and Mr. Derek Witte who are the Vice President,
Worldwide Operations and CFO and the Vice President, General Counsel and
Secretary of Symantec, respectively, have been appointed the President and Chief
Executive Officer and the Secretary of Quarterdeck, respectively.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
King R. Lee................ 58 Interim Chief Executive Officer
Frank R. Greico............ 40 Senior Vice President and Chief Financial Officer
Gadi Navon................. 33 Vice President, General Counsel and Secretary
John Strosahl.............. 31 Vice President, International
Suzanne Dickson............ 37 Vice President, Marketing and Product Management
Cheri Kaplan-Smith......... 33 Vice President, Sales, North America
Larry J. Tchamkertenian.... 30 Vice President, Operations
Lori Gray.................. 40 Vice President, Engineering
Larry Levinsohn............ 49 Vice President, Human Resources
</TABLE>
BIOGRAPHIES
Mr. Lee served as the Interim Chief Executive Officer and President of the
Company from July 8, 1998 until November 23, 1998. Mr. Lee also served as a
member of the Office of the President of the Company from August 27, 1996 until
February 1997. Mr. Lee also served as Interim Chief Executive Officer of the
Company from December 1994 until January 1995 and served as Interim Chief
Operating Officer of the Company between July and December 1994. He was elected
a director of the Company in July 1994. Mr. Lee served as the Chief Executive
Officer of Wynd Communications Corporation, a two-way wireless messaging service
provider, from October 1995 to January 1998, and has served as its Chairman
since October 1995. Mr. Lee is President of King R. Lee & Associates, Inc., an
executive management consulting firm, which provides consulting services to the
Company. From 1987 to 1993, Mr. Lee was President and Chief Executive Officer of
Xtree Company, a developer of computer systems software. He serves as a director
of Nettech Systems, Inc., Outback Resource Group, Inc., Boss Entertainment,
Dover Pacific, Inc. and Mobile Automation, Inc.
Mr. Greico joined Quarterdeck in February 1996 and served as Senior Vice
President and Chief Financial Officer through October 9, 1998. Mr. Greico is
currently a consultant to the Company although he continues to serve as Chief
Financial Officer. Prior to joining the Company, Mr. Greico was CFO and Vice
President of Finance and Operations at Knowledge Adventure, Inc., an educational
software publisher. Mr. Greico, a certified public accountant, has held several
MIS and finance positions at W.R. Grace's distributor units, most notably as CFO
and Vice President of Finance for its B&T Software distribution company
(formerly Soft-Kat). He was also a Senior Accountant with Price Waterhouse in
New York.
Mr. Navon was promoted to his current position in July, 1998. Since joining
Quarterdeck in September 1995, Mr. Navon has served as Corporate Counsel as well
as Associate General Counsel. Before joining Quarterdeck, Mr. Navon practiced
law with the law firm of Arter & Hadden.
Mr. Strosahl was appointed to his current position in August 1997, after
serving as the interim Vice President of Worldwide Sales for Quarterdeck since
March 1997. Previously, he had served as Senior Director, Asia-Pacific/Latin
America for Quarterdeck since March 1996. Prior to 1996, Mr. Strosahl worked
with Datastorm Technologies as a director responsible for its international
sales, marketing and business operations. Prior to joining Datastorm, he held
various positions in operations at IBM. He received his BA from Illinois
Wesleyan University and his master's degree from the University of Illinois.
Ms. Dickson was appointed to her current position in July 1998. Ms. Dickson
has over 15 years of experience in the PC utility business for both retail and
corporate market segments. Prior to joining Quarterdeck, she held several
product management and marketing management positions with Symantec. Previously,
Ms. Dickson served as Director of Marketing for the XTree Company in San Luis
Obispo.
20
<PAGE>
Ms. Kaplan-Smith joined Quarterdeck in February 1998 and was appointed to
her current position in July 1998. Prior to joining Quarterdeck, she was Vice
President of Channel Sales and Programs at Novonyx, a Netscape and Novell
company. Before joining Novonyx, she lead the Channel Sales and Marketing
organization for Cheyenne Software, a division of Computer Associates.
Previously Ms. Kaplan-Smith was the Director of Technical Products for Merisel,
where she worked in a variety of functions including product management,
marketing and inventory management. She received her B.A. and B.S. degrees from
Boston University, and her master's degree from Harvard.
Mr. Tchamkertenian joined Quarterdeck in November 1996 and was appointed to
his current position in July 1998. Prior to joining the company, he served as an
Acquisition Integration Consultant for Quarterdeck. Previously, Mr.
Tchamkertenian held positions as Director of Operations and Manager of Financial
Planning and Analysis for Knowledge Adventure, Inc., a leading educational
software publisher, and as Senior Financial Analyst for B & T Software, a former
distribution division of W.R. Grace. He received his B.S. in Finance from
California State University, Northridge.
Ms. Gray joined Quarterdeck in February 1998 and was appointed to her
current position in July 1998. Ms. Gray brings 15 years of experience managing
the development of commercial software products for both the retail and
corporate markets. Her experience includes defining product concepts,
establishing product requirements, creating functional specifications, defining
product architectures, and certifying final product releases. Over the years,
she has developed a reputation for delivering quality products on schedule.
Prior to joining Quarterdeck, Ms. Gray was at Enfish. Previously, she was with
Sterling Software, where she served as a lead architect and project manager for
several large corporate Information Processing products. She received her B.A.
from California State University Northridge and a Computer Systems and
Programming Degree from the Computer Learning Center.
Mr. Levinsohn joined Quarterdeck in April 1998, bringing over 20 years of
experience in human resources. Prior to joining Quarterdeck, he was the Vice
President of Worldwide Human Resources at AST Computer, part of the turnaround
team hired by Samsung. He was also Vice President of Human Resources for Murad
Inc., a start up skin care company where he created the Human Resources
Department from the ground up. Previously Mr. Levinsohn was Vice President of
Human Resources at Packard Bell Electronics and Redken Laboratories.
Mr. Bain has been a director of the Company since November 17, 1998 and
Chief Executive Officer and President of the Company since November 23, 1998.
Mr. Bain is Vice President, Worldwide Operations and Chief Financial Officer of
Symantec Corporation. Mr. Bain joined Symantec in October 1991 as its Vice
President, Finance.
Mr. Witte has been a director of the Company since November 17, 1998 and
Secretary of the Company since November 23, 1998. Mr. Witte is a director and
President, Chief Financial Officer and Secretary of Oak Acquisition Corporation.
Mr. Witte is Vice President, General Counsel and Secretary of Symantec
Corporation. Mr. Witte joined Symantec in October 1990.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's officers and directors, and persons who own more than ten percent
of a registered class of the Company's equity securities, to file with the
Securities and Exchange Commission initial reports of ownership and reports of
changes in ownership of Common Stock and other equity securities of the Company.
To the Company's knowledge, based solely on its review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, the Company believes that all of its officers and
directors and greater than ten percent beneficial owners complied with all
Section 16(a) filing requirements applicable to them with respect to those
transactions during the fiscal year ended September 30, 1998.
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth information concerning the annual and
long-term compensation paid by the Company during the fiscal years ended
September 30, 1998, 1997 and 1996 to (i) the persons who served as Chief
Executive Officer or performed the functions thereof during fiscal year 1998,
(ii) the four most highly compensated executive officers as of the end of fiscal
year 1998, whose total annual salary and bonus exceeded $100,000 and (iii) two
additional individuals who would have been included among the four most highly
compensated executive officers, but for the fact that neither individual was
serving as an executive officer at the end of fiscal year 1998 (each, a "Named
Officer").
21
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-term
Annual Compensation Compensation Awards
------------------- -------------------
Securities
Underlying All Other
Salary Bonus Options/SARs Compensation
Name and Principal Position Year ($) ($) (#) ($)
- --------------------------- ---- ------- ------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Curtis A. Hessler (1) 1998 $380,770 $125,000 150,000 $24,040
Former President and Chief 1997 297,692 0 1,350,000 0
Executive Officer
King R. Lee (2) 1998 170,000 0 207,500 0
Former Interim Chief 1997 101,250 0 122,500 0
Executive Officer and 1996 58,500 0 100,000 0
President
Frank R. Greico (3) 1998 189,909 32,500 75,000 0
Senior Vice President and 1997 187,589 61,250 106,250 0
Chief Financial Officer 1996 129,230 25,000 75,000 0
Joseph Fusco (4) 1998 169,507 20,000 150,000 45,000
Former Senior Vice 1997 145,802 43,531 150,000 0
President - Marketing and
Product Management
Mark Epstein (5) 1998 216,150 60,000 0 55,380
Former Chief Technology 1997 38,769 0 700,000 0
Officer
John Strosahl (6) 1998 188,461 19,026 180,000 0
Vice President-International 1997 138,221 72,320 51,575 0
1996 60,000 30,000 0 0
</TABLE>
- -------------
(1) Mr. Hessler served as the President and Chief Executive Officer of the
Company from February 1997 until July 6, 1998. Mr. Hessler received $24,040
in severance payments during fiscal year ended September 30, 1998.
(2) Mr. Lee served as Interim Chief Executive Officer and President from July
8, 1998 until November 23, 1998. From July until December 1994, Mr. Lee
acted in the capacity of Chief Operating Officer and served as Interim
Chief Executive Officer of the Company from December 1994 until January
1995. Mr. Lee was appointed as a member of the Office of President in
August 1996 and resigned from such position upon the appointment of Mr.
Hessler in February 1997. Mr. Lee is also a director of the Company and
received compensation as a non-employee director. Mr. Lee's salary for
fiscal 1996 includes $33,000 of consulting fees paid to King R. Lee &
Associates and $25,000 of non-employee director fees, Mr. Lee's salary for
fiscal 1997 includes $76,500 of consulting fees paid to King R. Lee &
Associates and approximately $25,000 of non-employee director fees, and Mr.
Lee's salary for fiscal 1998 includes $150,000 of consulting fees paid to
King R. Lee & Associates and $20,000 of non-employee director fees. The
options granted to Mr. Lee during fiscal 1997 include 90,000 options
granted to Mr. Lee in connection with a like value exchange of options
described in the Company's Proxy Statement dated January 5, 1998.
(3) Mr. Greico was an employee of the Company and an executive officer from
February 1996 until October 9, 1998. Mr. Greico is currently a consultant
to the Company although he continues to serve as Chief Financial Officer.
The options granted to Mr. Greico during fiscal 1997 include 56,250 options
granted to Mr. Greico in connection with a like value exchange of options
pursuant to the program that the Company implemented in January 1997
allowing a "like-value exchange" of certain options previously awarded to
employees (including the named executive officers, but excluding
non-employee directors of the Company). Optionees were given the
opportunity to exchange options previously awarded (the "Old Options") with
an option price of more than $6.00 per share for a lesser amount of new
options (the "New Options") which had a value equal to the Old Options,
with an option price equal to the then current stock price $4.6875 per
share. The New Options had the same vesting
22
<PAGE>
schedule (and expiration date) as the Old Options; provided, however, none
of the New Options could be exercised until six months after the date of
grant.
(4) Mr. Fusco was appointed as a Vice President in September 1996 and as Senior
Vice President -- Marketing and Product Management on April 28, 1997. Mr.
Fusco served in these positions until July 15, 1998 when his employment
with the Company terminated. The options granted to Mr. Fusco during fiscal
1997 include 67,500 options granted to Mr. Fusco in connection with a like
value exchange of options as described above. Mr. Fusco received $45,000 in
severance payments during fiscal year ended September 30, 1998.
(5) Mr. Epstein served as Chief Technology Officer of the Company from July
1997 through July 15, 1998. He is no longer employed by the Company. Mr.
Epstein received $55,380 in severance payments during fiscal year ended
September 30, 1998.
(6) Mr. Strosahl was appointed as the Company's Vice President - International
in August 1997. Prior to that, Mr. Strosahl served as Interim Vice
President -- Worldwide Sales from March 1997 to August 1997, and as Senior
Director -- Asia/Pacific and Latin America from March 1996 until March
1997. The bonus amount for Mr. Strosahl in fiscal 1997 includes
reimbursement of relocation and relocation related expenses that he
received from the Company in the amount of $38,722. The options granted to
Mr. Strosahl during fiscal 1997 include 21,575 options granted to Mr.
Strosahl in connection with a like value exchange of options as described
above.
The following two tables set forth information concerning stock options
granted to, exercised by and held by the Named Officers in fiscal year 1998. No
SARs were granted by the Company or exercised by the Named Officers in fiscal
year 1998.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Potential Realizable Value
at Assumed Annual Rates of
Stock Price Appreciation for
Individual Grants Option Term
----------------------- -------------------------
Number of
Securities % of Total
Underlying Options/SARs
Options/SARs Granted to Exercise or
Granted Employees in Base Price Expiration
Name (#) FISCAL YEAR ($/SH) DATE 5% ($) 10% ($)
- ---- ------------ ----------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Curtis A. Hessler 150,000 3.6% $1.8125 12/08/2007 $171,281.25 $432,281.25
King R. Lee 7,500 .18 2.1250 02/05/01 10,040.625 25,340.625
200,000 4.8 0.2810 09/01/08 35,406.00 89,358.00
Frank R. Greico 75,000 1.8 2.3438 11/10/07 110,744.55 279,498.15
Joseph Fusco 150,000 3.6 2.3438 11/07/07 221,489.10 558,996.30
Mark Epstein - - - - - -
John Strosahl 30,000 .72 2.3438 11/07/07 44,297.82 111,799.26
150,000 3.6 .2810 09/01/08 26,554.50 67,018.50
</TABLE>
- -------------
(1) Except as noted below, the options granted to the executive officers listed
above vest in the following manner: one fourth of the options vest on the
first anniversary of the date of grant and 1/48 of the total number of
options vest thereafter on a monthly basis. The 200,000 options granted to
Mr. Lee vested immediately upon grant and the 150,000 options granted to
Mr. Strosahl vest one-third after three months, one-sixth after six months
and the remaining one-half vest thereafter in equal monthly installments
over a six-month period. The employment agreements of certain individuals
also provide for accelerated vesting under certain circumstances generally
related to achievement of certain targets or certain changes-of-control.
See "Executive Compensation -- Employment Agreements." Options generally
remain exercisable for ten years from the date of grant except for 7,500
options granted to King Lee as a non-employee director which remain
exercisable for five years from the date of grant. All options were granted
at a price equal to the fair market value on the date of grant.
23
<PAGE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised In-the-
Options/SARs at Money Options/SARs at
Shares Acquired Value Realized Fiscal Year-End (#) Fiscal Year-End ($)
Name on Exercise (#) ($) Exercisable/Unexercisable Exercisable/Unexercisable
- ---- --------------- -------------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Curtis A. Hessler 0 0 590,625 909,375 $0 $0
King R. Lee 0 0 343,750 43,750 68,800 0
Frank R. Greico 0 0 55,208 0 0 0
Joseph Fusco 0 0 53,596 0 0 0
Mark Epstein 0 0 300,000 0 0 0
John Strosahl 0 0 22,985 208,590 0 51,600
</TABLE>
INFORMATION CONCERNING THE BOARD; DIRECTOR COMPENSATION
The Company's Board of Directors has a standing Audit Committee and
Compensation Committee.
The Audit Committee, currently comprised of Messrs. LaHaye and Morgan (Mr.
Lane resigned on November 17, 1998), advises and assists the Board of Directors
in evaluating the performance of the Company's auditors, including the scope and
adequacy of the auditors' examinations. During fiscal year 1998, the Audit
Committee held two meetings.
The Compensation Committee, currently comprised of Mr. LaHaye (Mr. Lane
resigned on November 17, 1998), oversees the Company's overall executive
compensation program, reviews the Company's employee benefit plans and
administers the Company's stock option plans. The Compensation Committee met six
times during the last fiscal year.
The Company's Board of Directors selects nominees for election as directors.
The Company does not have a standing nominating committee. Stockholder
nominations for election as directors may be voted on at an annual meeting only
if such nominations are made pursuant to written notice timely given to the
Secretary of the Company accompanied by certain information specified in the
Company's bylaws. To be timely, a stockholder's written notice must be delivered
to or mailed and received at the principal executive offices of the Company not
less than 60 days nor more than 90 days prior to the meeting; provided, however,
that, in the event that less than 60 days' notice or prior public disclosure of
the date of the meeting is given or made to stockholders, a stockholder's notice
will be timely if received not later than the tenth day following the day on
which such notice of the date of the meeting is mailed or such public disclosure
is made. Such stockholder's notice must set forth with respect to each director
nominee all of the information relating to such person that is required to be
disclosed in solicitations for elections of directors under the rules of the
Securities and Exchange Commission and such stockholder's name and address, as
they appear on the Company's books, and the number of shares of Common Stock
owned by the stockholder giving the notice.
The Board of Directors held 24 meetings during the fiscal year ended
September 30, 1998. All directors then in office attended at least 75% of the
meetings of the Board of Directors, and all members of the committees of the
Board of Directors attended at least 75% of the meetings of those committees, in
each case, after the election of such individuals to the Board of Directors or
to such committee.
DIRECTORS' COMPENSATION
Non-employee directors receive $6,000 ($12,000 in the case of the Chairman
of the Board) annually, payable quarterly, as compensation for serving on the
Board of Directors, plus $1,500 per meeting for Board or Committee meetings
attended ($500 for telephonic meetings). Non-employee directors are reimbursed
for their reasonable expenses incurred in attending meetings. Non-employee
directors also participate in the 1990 Directors Stock Option Plan which
provides for automatic grants of options to non-employee directors. Under the
1990 Directors Stock Option Plan, each non-employee director is granted an
option to purchase 30,000 shares of the Company's Common Stock three business
days following his or her first election as a director (the "initial grant").
Thereafter, each non-employee director who has been re-elected or who is
continuing as a member of the Board of Directors is granted an option to
purchase 7,500 shares of the Company's Common Stock on the date of the Company's
annual meeting of stockholders (an "annual grant"). Options are granted at 100%
of the fair market value of the Company's Common Stock on the grant date and
have a term of five years. Initial grants vest immediately as to one-third of
the shares and vest an additional one-third of the
24
<PAGE>
shares on each of the first and second anniversaries of the grant date. Annual
grants vest in full on the first anniversary of the grant date. The Board of
Directors or the Compensation Committee may also make discretionary option
grants to non-employee directors. During fiscal 1998, the Board of Directors
made discretionary grants of 670,000 options, in the aggregate, to the non-
employee directors.
On August 27, 1996, when King R. Lee, the Interim President and a director
of the Company, assumed the duties as a member of the Office of the President,
Mr. Lee entered into a consulting agreement (the "Prior Consulting Agreement")
with the Company. Under the terms of the Prior Consulting Agreement, as amended,
King R. Lee & Associates, Inc., of which Mr. Lee is President and sole
stockholder, was paid $1,500 per full day plus expenses in exchange for Mr.
Lee's consulting services to the Company. The Company paid to King R. Lee &
Associates, Inc. $33,000 during fiscal year 1996 and a total of $76,500 during
fiscal year 1997 pursuant to the Prior Consulting Agreement. Mr. Lee provided
consulting services to the Company under the Prior Consulting Agreement through
February 1997. In addition, the Company entered into a new consulting agreement
(the "New Consulting Agreement") with Mr. Lee on July 8, 1998 when Mr. Lee
assumed the duties of Interim President of the Company. Pursuant to the New
Consulting Agreement, King R. Lee & Associates, Inc. was paid $2,500 per full
day, plus expenses and medical benefits, in exchange for consulting services
rendered by Mr. Lee to the Company. During fiscal year 1998, the Company paid
$150,000 to King R. Lee & Associates, Inc. and granted 200,000 options to Mr.
Lee, all of which were fully vested on the grant date. The New Consulting
Agreement provided for severance in the amount of $162,500 in the event that Mr.
Lee's consulting services to the Company are terminated. Mr. Lee's consulting
services were terminated on November 23, 1998.
EMPLOYMENT AGREEMENTS
The Company's former Chief Executive Officer, Curtis A. Hessler, was
employed pursuant to a four-year employment agreement dated as of January 13,
1997. Pursuant to that agreement, Mr. Hessler was entitled to receive a base
salary of $450,000 per year and an annual target bonus of $250,000 based upon
achievement of objectives established by the Board of Directors or the
Compensation Committee. In addition, Mr. Hessler was granted options to purchase
1,350,000 shares of Common Stock. The employment agreement also provided for
accelerated vesting of Mr. Hessler's options upon the occurrence of certain
"change in control" transactions or if certain stock price levels were reached.
Pursuant to the terms of an agreement entered into with Mr. Hessler upon his
resignation in July 1998, Mr. Hessler is entitled to receive severance payments
in an aggregate amount equal to $173,089, payable over 18 months.
As described above, King R. Lee received compensation from the Company
pursuant to the terms of the New Consulting Agreement.
The terms of Mr. Greico's offer letter provided that, as a result of the
termination of his employment, he is entitled to receive an amount equal to six
months' salary plus six months' targeted bonus and accelerated vesting of 50% of
his unvested options. On October 9, 1998, Mr. Greico ceased to be an employee of
the Company and the $33,000 balance of the advance, then outstanding, was
forgiven by the Company as part of Mr. Greico's severance package. In November
1996, Mr. Greico, the Company's Chief Financial Officer, received an advance on
the bonus portion of his compensation in the amount of approximately $74,000,
which advance was made pursuant to the terms of Mr. Greico's employment offer
letter. In connection with Mr. Greico's agreement to serve as the Company's
Chief Financial Officer throughout the pre-Merger period, Mr. Greico will be
paid a retention bonus in the amount of $37,500.
The Company entered into a two-year employment agreement with Joseph Fusco,
its former Senior Vice President -- Marketing and Product Management, dated as
of September 16, 1996. Pursuant to that agreement, Mr. Fusco was entitled to
receive a base salary of $135,000 per year and an annual target bonus of $67,500
determined in accordance with the terms of a management performance bonus plan
of the Company and contingent upon attainment of objectives mutually agreed upon
by Mr. Fusco and the Chief Executive Officer of the Company. In addition, Mr.
Fusco was granted options to purchase 75,000 shares of Common Stock pursuant to
the terms of the employment agreement. Mr. Fusco is entitled to receive $92,500
in severance as a result of the termination of his employment, payable over six
months.
Mr. Epstein, the Company's former Senior Vice President and Chief
Technology Officer, was employed pursuant to an offer letter dated July 11,
1997. Mr. Epstein's offer letter provided for a base salary of $240,000 and an
annual target bonus of $120,000 determined in accordance with the terms of a
management performance bonus plan of the Company and contingent upon attainment
of objectives mutually agreed upon by Mr. Epstein and the Chief Executive
Officer of the Company. In addition, Mr. Epstein was
25
<PAGE>
granted options to purchase 700,000 shares of Common Stock pursuant to the terms
of the employment offer letter. Mr. Epstein is entitled to received $240,000 in
severance as a result of the termination of his employment, payable over twelve
months.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of November 30, 1998 for (i) each person known
to the Company to be the beneficial owner of more than 5% percent of the
outstanding Common Stock, (ii) each director of the Company, (iii) the Named
Officers, and (iv) all current directors and executive officers of the Company
as a group. Except for Oak Acquisition Corporation, Mr. Eubanks, Mr. Bain, Mr.
Witte and Mr. Salem whose address is 10201 Torre Avenue, Cupertino, California
95014, the address of each such person is that of the Company, 13160 Mindanao
Way, Marina del Rey, California 90292.
<TABLE>
<CAPTION>
Number of Percent of
Shares of Shares of
Name Common Stock Common Stock(1)
- ---- ------------ ---------------
<S> <C> <C>
Oak Acquisition Corporation(2)............................. 58,227,311 65%
10201 Torre Avenue
Cupertino, California 95014
Howard A. Bain III......................................... - -
Frank R. Greico(7)......................................... 55,208 *
Gordon Eubanks, Jr......................................... - -
Derek Witte................................................ - -
Enrique T. Salem........................................... - -
Frank W.T. LaHaye(3)....................................... 262,500 *
Howard Morgan(4)........................................... 86,500 *
King R. Lee(5)............................................. 387,500 *
Curtis A. Hessler(6)....................................... 1,500,000 1.6%
Joseph Fusco............................................... - -
Mark Epstein............................................... - -
John Strosahl(8)........................................... 231,575 *
All directors and executive
officers as a group (12
persons)(9).............................................. 2,523,283 2.7%
</TABLE>
- --------------
* Less than one percent
(1) Percent Ownership is based on 89,760,799 shares of Common Stock
outstanding as of November 30, 1998. Unless otherwise indicated below,
the persons and entities named in the table have sole voting and sole
investment power with respect to all shares beneficially owned, subject
to community property laws where applicable. Following the commencement
of the tender offer by Symantec, on November 4, 1998, all outstanding
options became fully vested and as a result, all shares subject to
options are currently exercisable and are deemed to be outstanding and
to be beneficially owned by the person holding such options or warrants
for the purpose of computing the percentage ownership of such person
but are not treated as outstanding for the purpose of computing the
percentage ownership of any other person.
(2) Oak Acquisition Corporation is a wholly owned subsidiary of Symantec
Corporation. Accordingly, Symantec Corporation is deemed to
beneficially own the shares of Common Stock owned by Oak Acquisition
Corporation.
(3) Includes 262,500 shares that may be purchased by Mr. LaHaye upon the
exercise of options that are currently exercisable.
(4) Includes 62,500 shares that may be purchased by Dr. Morgan upon the
exercise of options that are currently exercisable, and includes 24,000
shares of Common Stock held in trust for Dr. Morgan's children with
respect to which Dr. Morgan disclaims beneficial ownership.
26
<PAGE>
(5) Includes 387,500 shares that may be purchased by Mr. Lee upon the
exercise of options that are currently exercisable.
(6) Includes 1,500,000 shares that may be purchased by Mr. Hessler upon
the exercise of options that are currently exercisable.
(7) Includes 55,208 shares that may be purchased by Mr. Greico upon the
exercise of options that are currently exercisable.
(8) Includes 231,575 shares which may be purchased by Mr. Strosahl upon
the exercise of options that are currently exercisable.
(9) Includes 2,523,283 shares which may be purchased upon the exercise of
options granted to the directors and executive officers as a group,
which are currently exercisable.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
See Item 11 Directors' Compensation and Item 11 Employment Agreements.
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, 1998 and 1997
Consolidated Statements of Operations for fiscal years ended September
30, 1998, 1997 and 1996
Consolidated Statements of Stockholders' Equity (Deficit) for fiscal
years ended September 30, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for fiscal years ended September
30, 1998, 1997 and 1996
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
---------
3.1(2) Certificate of Incorporation of the Company.
3.2(11) Certificate of Amendment of Certificate of Incorporation of
the Company.
3.3(10) Certificate of Designations of Series B Convertible
Preferred Stock.
3.4(11) Amended Designations of Series A Junior Participating
Preferred Stock of the Company.
3.5(15) Certificate of Designations of Series C Convertible
Preferred Stock.
3.6(6) Amended and Restated Bylaws of the Company.
3.7(1) Amended Designations of Series A Junior Participating
Preferred Stock of the Company dated September 1, 1998.
4.1(4) Rights Agreement, dated as of August 11, 1992, between
Registrant and Bank of America NT & SA (the "Rights
Agreement").
27
<PAGE>
Exhibit
Number
---------
4.2(10) Form of Amendment to the Rights Agreement dated November 7,
1996.
4.3(15) Form of Amendment to the Rights Agreement dated September
30, 1997.
4.4(8) Note Agreement between the Company and The Northwestern
Mutual Life Insurance Company dated as of March 1, 1996.
4.5(17) Form of Second Amendment to the Rights Agreement dated
October 15,1998.
*10.1(2) Amended and Restated 1990 Stock Plan, as amended to date.
*10.2(3) Form of Option Agreement utilized with 1990 Stock Plan.
*10.3(5) Amended and Restated 1990 Directors Stock Option Plan and
Form of Option Agreement.
*10.4(9) 1996 Acquisition Stock Incentive Plan.
*10.5(11) Consulting Agreement between the Company, King R. Lee &
Associates, Inc., and King R. Lee, dated as of August 27,
1996.
*10.6(2) Form of Indemnification Agreement between the Company and
certain of its officers and directors.
*10.11(12) Employment Agreement between the Company and Curt Hessler,
dated as of January 13, 1997.
*10.14(14) Employment Agreement between the Company and Tom Mackey,
dated as of June 20, 1997.
10.15(7) Lease between the Company and Marina Business Center, dated
as of July 17, 1995, with respect to headquarters property.
10.16(7) Lease between Landmark Research International Corporation, a
subsidiary of the Company, and Chase Federal Bank, dated as
of March 15, 1995, with respect to property used by
Quarterdeck Select.
10.15(2) Domestic (U.S.) Distribution License Agreement between the
Company and Merisel, Inc., dated as of April 4, 1991.
10.17(2) Domestic (U.S.) Distribution License Agreement between the
Company and Ingram Micro, Inc., dated as of May 16, 1991.
10.18(13) Loan and Security Agreement between the Company and Greyrock
Business Credit, a division of NationsCredit Commercial
Corporation, dated as of April 1, 1997.
10.19(14) Asset Purchase Agreement between TOC Holding Company
formerly known as TuneUp.Com, Inc. and the Company, dated as
of May 14, 1997.
10.20(17) Agreement and Plan of Merger by and among Symantec
Corporation, Oak Acquisition Corporation and the Company,
dated October 15, 1998.
10.21(17) License Agreement by and between Symantec Corporation and
the Company dated October 15, 1998.
10.22(18) Form of Conversion and Redemption Agreement and Release
dated October 9, 1998 between the Company and the holders of
the Company's Series C Convertible Preferred Stock and/or
warrants to purchase shares of Series C Convertible
Preferred Stock.
21.1(16) Subsidiaries of the Company.
23.1(1) Consent of KPMG Peat Marwick LLP, independent certified
public accountants.
27.1(1) Financial Data Schedule
* Denotes a compensation plan or other arrangement under which directors or
executive officers may participate.
(1) Filed herewith.
(2) Filed as an exhibit to the Company's Registration Statement on Form S-1,
as amended (File No. 33-40094) and incorporated herein by reference.
(3) Filed as an exhibit to the Company's Form 10-Q for the quarter ended March
31, 1992, and incorporated herein by reference.
(4) Filed as an exhibit to the Company's Current Report on Form 8-K dated
August 11, 1992, and incorporated herein by reference.
(5) Filed as an exhibit to the Company's Form 10-K for the year ended September
30, 1993, and incorporated herein by reference.
28
<PAGE>
(6) Filed as an exhibit to the Company's Form 10-K for the year ended September
30, 1994, and incorporated herein by reference.
(7) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended September 30, 1995, and incorporated herein by reference.
(8) Filed as an exhibit to the Company's Current Report on Form 8-K dated March
28, 1996, and incorporated herein by reference.
(9) Filed as an exhibit to the Company's Registration Statement on Form S-8
(File No. 333-4602), and incorporated herein by reference.
(10) Filed as an exhibit to the Company's Current Report on Form 8-K dated
November 25, 1996, and incorporated herein by reference.
(11) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended September 30, 1996, and incorporated herein by reference.
(12) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended December 31, 1996, and incorporated herein by reference.
(13) Filed as an exhibit to the Company's Current Report on Form 8-K dated April
14, 1997, and incorporated herein by reference.
(14) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1996, and incorporated herein by reference.
(15) Filed as an exhibit to the Company's Current Report on Form 8-K dated
September 30, 1996, and incorporated herein by reference.
(16) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended September 30, 1997, and incorporated herein by reference.
(17) Filed as an exhibit to the Company's Current Report on Form 8-K dated
October 19, 1998, and incorporated herein by reference.
(18) Filed as an exhibit to the Company's Current Report on Form 8-K dated
October 20, 1998, and incorporated herein by reference.
(b) Reports on Form 8-K
A Form 8-K with respect to Symantec Corporation's tender offer for the
Company's common stock and proposed Merger was filed with the Securities
and Exchange Commission on October 19, 1998.
A Form 8-K with respect to the amendment of the Company's agreement with
the holder's of Series C Convertible Preferred Stock was filed with the
Securities and Exchange Commission on October 20, 1998.
A Form 8-K with respect to the completion of Symantec's tender offer of the
Company's common stock was filed with the Securities and Exchange
Commission on November 17, 1998.
29
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
Page
----
<S> <C>
Independent Auditors' Report......................................................................................... 31
Consolidated Balance Sheets at September 30, 1998 and 1997........................................................... 32
Consolidated Statements of Operations for fiscal years ended September 30, 1998, 1997 and 1996....................... 33
Consolidated Statements of Stockholders' Equity (Deficit) for fiscal years ended September 30, 1998, 1997 and 1996... 34
Consolidated Statements of Cash Flows for fiscal years ended September 30, 1998, 1997 and 1996....................... 37
Notes to Consolidated Financial Statements........................................................................... 32
CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
Schedule II-- Valuation and Qualifying Accounts...................................................................... 56
</TABLE>
30
<PAGE>
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, 1998 and 1997 and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for each of the years in the three-year period ended September 30, 1998.
In connection with our audits of the consolidated financial statements, we have
audited the financial statement schedule. These consolidated financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, 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, 1998 and 1997, and the results
of their operations and their cash flows for each of the years in the three-year
period ended September 30, 1998, 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.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 16 to the
consolidated financial statements, the Company has suffered recurring losses
from operations, a reduction in working capital and has a net stockholders'
deficit. These factors coupled with the uncertainty of the impact of the change
in control of the Company and its impact on future operations and current
products as discussed in Note 18 to the consolidated financial statements, raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 16. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ KPMG Peat Marwick LLP
Los Angeles, California November 13, 1998, except for the second and fourth
paragraphs of note 18, which are as of November 17, 1998 and December 8, 1998,
respectively
31
<PAGE>
QUARTERDECK CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share data)
<TABLE>
<CAPTION>
ASSETS
September 30,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents..................................... $ 8,411 $ 23,651
Trade accounts receivable..................................... 2,990 7,028
Inventories................................................... 968 1,177
Other current assets.......................................... 2,022 4,655
--------- ---------
Total current assets.................................. 14,391 36,511
Equipment and leasehold improvements, net....................... 3,640 14,153
Capitalized software costs, net................................. 641 1,790
Other assets.................................................... 853 3,427
--------- ---------
$ 19,525 $ 55,881
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.............................................. $ 2,040 $ 3,792
Accrued liabilities........................................... 7,623 14,196
Accrued acquisition, restructuring and other charges.......... 2,434 5,385
Income tax payable............................................ 309 627
Notes payable to banks........................................ -- 5,579
Current portion of long-term obligations...................... 30 15
--------- ---------
Total current liabilities............................. 12,436 29,594
Convertible notes............................................... 25,000 25,000
Other long-term obligations, less current portion............... 22 114
--------- ---------
Total liabilities..................................... 37,458 54,708
Liquidity and subsequent events
Litigation and commitments
Stockholders' equity (deficit):
Series B Preferred stock (Par value $100, authorized:
2,000,000 shares; issued and outstanding: 0 and 0 shares,
respectively, liquidation preference $0)..................... -- --
Series C Preferred stock (Par value $1,000, authorized:
29,000 shares; issued and outstanding: 4,615 and 26,025
shares, respectively, liquidation preference: $4,615 and
$26,025 respectively)........................................ 4,371 24,594
Common stock (Par value $0.001, authorized: 100,000,000
shares; issued and outstanding: 66,653,000 and 43,339,000
shares, respectively)........................................ 67 43
Additional paid-in capital.................................... 100,176 75,630
Accumulated deficit........................................... (121,329) (98,164)
Foreign currency translation adjustment....................... (389) (281)
Notes receivable from directors for sale of stock............. (18) (18)
Net unrealized loss on marketable securities.................. (252) (72)
Treasury stock, at cost....................................... (559) (559)
--------- ---------
Total stockholders' equity (deficit).................. (17,933) 1,173
--------- ---------
$ 19,525 $ 55,881
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
32
<PAGE>
QUARTERDECK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------------
1998 1997 1996
----------- ----------- --------
<S> <C> <C> <C>
Net revenues................................. $ 50,861 $ 83,787 $133,100
Cost of revenues............................. 14,587 21,271 49,600
--------- -------- --------
Gross profit............................... 36,274 62,516 83,500
Operating expenses:
Research and development................... 16,640 16,419 21,314
Sales and marketing........................ 30,566 29,305 66,355
General and administrative................. 9,923 17,227 32,128
Acquisition, restructuring and other
charges.................................. 2,583 11,713 37,789
Litigation settlement...................... -- 1,905 --
--------- -------- --------
Total operating expenses................... 59,712 76,569 157,586
--------- -------- --------
Operating loss............................... (23,438) (14,053) (74,086)
Other income (expense), net.................. 1,264 (2,143) 38
Interest expense, net........................ (952) (2,072) (105)
--------- -------- --------
Loss before income taxes..................... (23,126) (18,268) (74,153)
Provision for income taxes................... 39 130 806
--------- -------- --------
Net loss..................................... $ (23,165) $(18,398) $(74,959)
========= ======== ========
Net loss per share:
Basic...................................... $ (0.45) $ (0 .43) $ (2.15)
========= ======== ========
Diluted.................................... $ (0.45) $ (0 .43) $ (2.15)
========= ======== ========
Shares used to compute net loss per share:
Basic...................................... 51,609 43,168 34,894
========= ======== ========
Diluted.................................... 51,609 43,168 34,894
========= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
33
<PAGE>
QUARTERDECK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands)
<TABLE>
<CAPTION>
Series B Series C
Preferred Stock Preferred Stock Common Stock Additional
----------------------- ----------------------- ----------------------- Treasury Paid-in
Shares Amount Shares Amount Shares Amount Stock Capital
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1995........ -- $ -- -- $ -- 34,673 $ 35 $(559) $39,873
Adjustment for Datastorm and
Inset poolings of interest........ -- -- -- -- 35 -- -- 385
Adjustment for Vertisoft
pooling of interest................ -- -- -- -- -- -- -- 40
Adjustment for Future Labs
pooling of interest............... -- -- -- -- 664 1 -- 1,987
Duplicate earnings elimination
for Datastorm pooling............. -- -- -- -- -- -- -- --
Purchase of Limbex................. -- -- -- -- 1,310 1 -- 14,370
Stock issuance for purchase
of InterLink...................... -- -- -- -- 205 -- -- 3,000
Stock issuance for purchase
of assets from Pinnacle........... -- -- -- -- 198 -- -- 1,800
Net loss........................... -- -- -- -- -- -- -- --
Undistributed earnings of
subchapter- S- subsidiaries...... -- -- -- -- -- -- -- 8,967
Distribution to shareholders....... -- -- -- -- -- -- -- (7,307)
Net increase in unrealized gain.... -- -- -- -- -- -- -- --
Common stock options exercised..... -- -- -- -- 581 1 -- 2,979
Foreign currency translation
adjustment........................ -- -- -- -- -- -- -- --
Issuance of convertible
preferred........................ 200 20,000 -- -- -- -- -- --
Cost of preferred stock
issuance......................... -- -- -- -- -- -- -- (1,275)
--- ------- -- ---- ------ ---- ----- -------
Balance, September 30, 1996........ 200 $20,000 -- $ -- 37,666 $ 38 $(559) $64,819
=== ======= == ==== ====== ==== ===== =======
<CAPTION>
Notes Net
Receivable Unrealized
from Gain/(Loss) Retained
Foreign Directors on Earnings Total
Currency for Sales Marketable (Accumulated Stockholders'
Translation of Stock Securities deficit) Equity (Deficit)
------------ --------- ---------- ------------ ----------------
<S> <C> <C> <C> <C> <C>
Balance, September 30, 1995........ $(563) $ (70) $ 195 $ 5,359 $ 44,270
Adjustment for Datastorm and
Inset poolings of interest........ 23 -- -- -- 408
Adjustment for Vertisoft
pooling of interest................ -- -- -- 999 1,039
Adjustment for Future Labs
pooling of interest............... -- -- -- (1,481) 507
Duplicate earnings elimination
for Datastorm pooling............. -- -- -- (717) (717)
Purchase of Limbex................. -- -- -- -- 14,371
Stock issuance for purchase
of InterLink...................... -- -- -- -- 3,000
Stock issuance for purchase
of assets from Pinnacle........... -- -- -- -- 1,800
Net loss........................... -- -- -- (74,959) (74,959)
Undistributed earnings of
subchapter- S- subsidiaries...... -- -- -- (8,967) --
Distribution to shareholders....... -- -- -- -- (7,307)
Net increase in unrealized gain.... -- -- 184 -- 184
Common stock options exercised..... -- 52 -- -- 3,032
Foreign currency translation
adjustment........................ 72 -- -- -- 72
Issuance of convertible
preferred........................ -- -- -- -- 20,000
Cost of preferred stock
issuance......................... -- -- -- -- (1,275)
----- ----- ----- --------- ---------
Balance, September 30, 1996........ $(468) $ (18) $ 379 $ (79,766) $ 4,425
===== ===== ===== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
34
<PAGE>
QUARTERDECK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
(in thousands)
<TABLE>
<CAPTION>
Series B Series C
Preferred Stock Preferred Stock Common Stock Additional
----------------------- ----------------------- ----------------------- Treasury Paid-in
Shares Amount Shares Amount Shares Amount Stock Capital
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1996........ 200 $ 20,000 -- $ -- 37,666 $ 38 $ (559) $ 64,819
Common stock options exercised..... -- -- -- -- 334 -- -- 689
Net loss........................... -- -- -- -- -- -- -- --
Other.............................. -- -- -- -- -- -- -- 31
Net decrease in unrealized gain.... -- -- -- -- -- -- -- --
Stock issuance for purchase of
Limbex........................... -- -- -- -- 1,372 1 -- (1)
Amortization of warrants issued.... -- -- -- -- -- -- -- 96
Stock issuance for purchase of
InterLink........................ -- -- -- -- 205 -- -- --
Conversion of Series B preferred
stock............................ (100) (10,000) -- -- 3,762 4 -- 9,996
Issuance of convertible preferred
stock, net....................... -- -- 26 24,594 -- -- -- --
Repurchase of convertible preferred
stock............................ (100) (10,000) -- -- -- -- -- --
Foreign currency translation
adjustment......................... -- -- -- -- -- -- -- --
--- --------- -- ------- ------ ---- ----- -------
Balance, September 30, 1997........ 0 $ 0 26 $24,594 43,339 $ 43 $(559) $75,630
=== ========= == ======= ====== ==== ===== =======
<CAPTION>
Notes Net
Receivable Unrealized
from Gain/(Loss) Retained
Foreign Directors on Earnings Total
Currency for Sales Marketable (Accumulated Stockholders'
Translation of Stock Securities deficit) Equity (Deficit)
------------ --------- ---------- ------------ ----------------
<S> <C> <C> <C> <C> <C>
Balance, September 30, 1996........ $ (468) $ (18) $ 379 $ (79,766) $ 4,425
Common stock options exercised..... -- -- -- -- 689
Net loss........................... -- -- -- (18,398) (18,398)
Other.............................. -- -- -- -- 31
Net decrease in unrealized gain.... -- -- (451) -- (451)
Stock issuance for purchase of
Limbex........................... -- -- -- -- --
Amortization of warrants issued.... -- -- -- -- 96
Stock issuance for purchase of
InterLink........................ -- -- -- -- --
Conversion of Series B preferred
stock............................ -- -- -- -- --
Issuance of convertible preferred
stock, net....................... -- -- -- -- 24,594
Repurchase of convertible preferred
stock............................ -- -- -- -- (10,000)
Foreign currency translation
adjustment......................... 187 -- -- -- 187
------ ----- ----- --------- ---------
Balance, September 30, 1997........ $ (281) $ (18) $ (72) $ (98,164) $ 1,173
====== ===== ===== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
35
<PAGE>
QUARTERDECK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
(in thousands)
<TABLE>
<CAPTION>
Series C
Preferred Stock Common Stock Additional Foreign
--------------- -------------------- Treasury Paid In Currency
Shares Amount Shares Amount Stock Capital Translation
------ -------- --------- -------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1997....... 26 $ 24,594 43,339 $ 43 $ (559) $ 75,630 $ (281)
Common stock options
exercised....................... -- -- 41 -- -- 44 --
Net loss.......................... -- -- -- -- -- -- --
Net decrease in unrealized
gain............................ -- -- -- -- -- -- --
Issuance of convertible
preferred stock, net............ 5 4,303 -- -- -- -- --
Conversion of Series C preferred
stock........................... (26) (24,526) 23,273 24 -- 24,502 --
Foreign currency translation
adjustment...................... -- -- -- -- -- -- (108)
---- -------- ------ ----- ------- -------- ---------
Balance, September 30, 1998....... 5 $ 4,371 66,653 $ 67 $ (559) $100,176 $ (389)
==== ======== ====== ===== ======= ======== =========
<CAPTION>
Notes Net
Receivable Unrealized
from Gain/(Loss) Retained
Directors on Earnings Total
for Sales Marketable (Accumulated Stockholders'
of Stock Securities Deficit) Equity (Deficit)
---------- -------------- -------------- -----------------
<S> <C> <C> <C> <C>
Balance, September 30, 1997....... $ (18) $ (72) $ (98,164) $ 1,173
Common stock options
exercised....................... -- -- -- 44
Net loss.......................... -- -- (23,165) (23,165)
Net decrease in unrealized
gain............................ -- (180) -- (180)
Issuance of convertible
preferred stock, net............ -- -- -- 4,303
Conversion of Series C preferred
stock........................... -- -- -- --
Foreign currency translation
adjustment...................... -- -- -- (108)
------- -------- ------------ -----------
Balance, September 30, 1998....... $ (18) $ (252) $ (121,329) $ (17,933)
======= ======== ============ ===========
</TABLE>
See accompanying notes to consolidated financial statements
36
<PAGE>
QUARTERDECK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents (in thousands)
<TABLE>
<CAPTION>
Year ended September 30,
------------------------------------
1998 1997 1996
----------- ----------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss................................................. $(23,165) $(18,398) $(74,959)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization of equipment and
leasehold improvements............................... 3,873 4,900 6,063
Amortization of capitalized software costs and other
intangibles.......................................... 1,209 1,670 3,770
Write-off of property and equipment.................... -- 6,474 1,409
Write-off of capitalized software costs and other
intangibles........................................... 2,301 77 4,860
Loss on marketable securities.......................... -- 1,666 --
Gain on sales of fixed assets.......................... (1,258) -- --
Elimination of duplicate net income from acquired
entities.............................................. -- -- (717)
Write-off of in-process research and development....... -- 268 14,993
Changes in assets and liabilities:
Trade accounts receivable.............................. 4,038 2,237 4,591
Refundable income taxes................................ 442 -- --
Deferred income taxes.................................. -- -- 3,072
Inventories............................................ 208 974 130
Other current assets................................... 2,012 (511) (3,420)
Other assets........................................... 313 4,424 (4,092)
Accounts payable....................................... (1,752) (6,893) (6,171)
Accrued liabilities.................................... (6,573) (3,036) 68
Income taxes payable................................... (318) 627 --
Accrued acquisition, restructuring and other charges... (2,951) (5,555) 558
Foreign currency translation adjustment................ (108) 187 95
--------- -------- --------
Net cash used in operating activities............. (21,729) (10,889) (49,750)
--------- -------- --------
Cash flows from investing activities:
Proceeds from sales and maturities of short-term
investments........................................... -- -- 34,285
Capital expenditures................................... (1,845) (4,275) (19,669)
Sale of marketable security............................ -- 589 --
Capitalized software costs............................. -- -- (4,504)
Proceeds from sale of building......................... 7,700 -- --
Proceeds from divestitures............................. 1,575 -- --
Advances from affiliates............................... -- -- 52
Opening cash balance of previously unconsolidated
subsidiary............................................ -- -- 5,054
Proceeds from sale of other assets..................... 368 -- --
Acquisition costs, net of cash acquired................ -- -- 6,493
-------- -------- --------
Net cash provided by (used in) investing
activities....................................... 7,798 (3,686) 21,711
-------- -------- --------
Cash flows from financing activities:
Net proceeds from issuance of preferred stock,
Series C.............................................. 2,782 24,594 --
Net proceeds from issuance of preferred stock,
Series B.............................................. -- -- 20,000
Repurchase of preferred stock, series B................ -- (10,000) --
Net proceeds from issuance of common stock............. 44 689 3,529
Principal debt repayments.............................. (5,579) (4,280) --
Proceeds from issuance of long-term convertible notes.. -- -- 25,000
Proceeds from issuance of bank debt.................... 1,579 8,280
Net proceeds (payments) under long-term obligations.... (77) 90 (200)
Notes payable to related parties....................... -- -- (1,093)
Net proceeds from the exercise of warrants............. 1,521 -- --
Distributions to stockholders.......................... -- -- (7,307)
-------- -------- --------
Net cash provided by (used in) financing
activities....................................... (1,309) 12,672 48,209
--------- -------- --------
Net increase (decrease) in cash and cash
equivalents...................................... (15,240) (1,903) 20,170
Cash and cash equivalents at beginning of period........... 23,651 25,554 5,384
-------- -------- --------
Cash and cash equivalents at end of period................. $ 8,411 $ 23,651 $ 25,554
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest............................................... $ 1,509 $ 2,072 $ 468
Income taxes........................................... 39 240 1,993
Non cash issuance of common stock in exchange for Series
C Preferred Stock....................................... 24,526 -- --
</TABLE>
See accompanying notes to consolidated financial statements.
37
<PAGE>
QUARTERDECK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998, 1997 and 1996
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Quarterdeck Corporation (the "Company") commenced operations as a California
corporation on May 26, 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 no significant
obligations remain. The estimated cost to fulfill technical support obligations
to end users arising from the sale of software is accrued upon shipment. The
Company accepts product returns from customers as defined by the Company's
general distributor agreements and as market conditions and other factors
require. The Company establishes allowances for estimated product returns and
exchanges as a reserve against revenues. Additionally, price protection is
generally granted to customers to reduce the customer's cost of inventory, as of
the date of a price reduction, initiated by Quarterdeck. Provisions for sales
returns, exchanges, rebates and price protection were approximately $21,000,000,
$16,705,000 and $31,889,000 in fiscal 1998, 1997 and 1996, respectively. Revenue
from the sale or licensing of intellectual property is recognized when all
significant obligations of the Company have been met and no customer right of
return exists. Revenue from subscription licenses is recognized ratably over the
term of the subscription.
Capitalized Software Costs
Statement of Financial Accounting Standards No. 86, "Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed," requires
the capitalization of certain software development and production costs once
technological feasibility has been achieved. The cost of purchased software is
capitalized when the related product has achieved technological feasibility or
if that product has an alternative future use. For the years ended September 30,
1998 and 1997, the Company did not capitalize any internal software development
costs or any purchased software costs as such costs were immaterial. For the
year ended September 30, 1996, the Company capitalized $4,504,000 of software
development and purchased software costs. Software development costs incurred
prior to achieving technological feasibility and certain licensing costs are
charged to research and development expense as incurred.
Capitalized software development and purchased software costs are reported
at the lower of unamortized cost or net realizable value. Commencing upon
initial product release, these costs are amortized based on the greater of the
straight-line method over the estimated life or revenue recognized compared to
estimated revenue over the life of the product, generally one year for internal
software development costs and twelve to thirty-six months for purchased
software. For the years ended September 30, 1998, 1997 and 1996, the Company
amortized $1,151,000, $1,670,000 and $3,711,000 of capitalized software costs,
respectively. Amortization of capitalized software costs is included in cost of
revenues in the accompanying consolidated statements of operations. In fiscal
1998, the Company wrote off approximately $300,000 of previously capitalized
software development costs which, based upon the Company's evaluation of
recoverability, has been deemed to be impaired.
Inventories
Inventories, consisting primarily of product packaging, documentation and
media, are 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
38
<PAGE>
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. As of September 30,
1998, $8,411,000 of the total cash balance was invested in interest bearing bank
accounts and cash equivalent money market funds.
The Company accounts for short-term investments in accordance with Statement
of Financial Accounting Standards No. 115 (SFAS 115), "Accounting for Certain
Investments in Debt and Equity Securities." Under SFAS 115, the Company has
classified its marketable securities as available-for-sale. Available-for-sale
securities are reported at market value, with unrealized holding gains and
losses, net of the related tax effect, excluded from earnings and reported as a
separate component of stockholders' equity (deficit). A decline in the market
value of the security below cost that is deemed other than temporary is charged
to earnings resulting in the establishment of a new cost basis for the security.
Computation of Net Income (Loss) per Share
Net income (loss) per common share for the years ended September 30, 1998,
1997 and 1996 has been computed using the weighted average number of common
shares outstanding for each year as summarized below:
<TABLE>
<CAPTION>
Year ended September 30,
------------------------------------------
1998 1997 1996
------------- ------------- ------------
<S> <C> <C> <C>
Weighted average common stock outstanding
during the year................................ 51,609,360 43,167,682 34,893,937
Common stock equivalents of stock options and
warrants outstanding........................... -- -- --
------------- ------------ ------------
Shares used in basic EPS calculation............. 51,609,360 43,167,682 34,893,937
============= ============ ============
Shares used in diluted EPS calculation........... 51,609,360 43,167,682 34,893,937
============= ============ ============
</TABLE>
The weighted average number of shares of common stock outstanding during
1996 have been adjusted to reflect the issuance of common stock in connection
with the following acquisitions which were accounted for as poolings of
interest; 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,
held in escrow, as their inclusion would have been anti-dilutive to the loss per
share.
Options to purchase 8,024,140 shares at a weighted average exercise price of
$2.39, 6,091,389 shares at a weighted average exercise price of $3.89 and
6,048,381 shares at a weighted average exercise price of $9.12 were outstanding
as of September 30, 1998, 1997 and 1996, respectively, but were not included in
the computation of diluted net loss per share for either period because the
effect would be anti-dilutive.
Warrants to purchase 904,000, 904,000 and 1,704,000 shares at a weighted
average exercise price of $7.44 were outstanding as of September 30, 1998, 1997
and 1996, respectively, but were not included in the computation of diluted net
loss per share because the effect would be anti-dilutive.
Warrants to purchase 25,000 shares at a weighted average exercise price of
$7.20 were outstanding as of September 30, 1998, 1997 and 1996, but were not
included in the computation of diluted net loss per share because the effect
would be anti-dilutive.
Approximately 1,180,000 shares issuable upon the conversion of convertible
notes were not included in any period as the effect would be anti-dilutive. The
Company had $25,000,000 of convertible notes with a conversion price of $21.18
per share outstanding at September 30, 1998, 1997 and 1996.
39
<PAGE>
Reclassification
Certain items in prior years' consolidated financial statements have been
reclassified to conform to the current year's presentation.
Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities to prepare these financial
statements in conformity with generally accepted accounting principles.
Significant estimates were made in the provisions for sales returns, inventory
reserve, allowance for doubtful accounts, valuation of long-term investments,
and impairment of long lived assets. Actual results could differ from these
estimates.
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of short term investments and
trade accounts receivable. As of September 30, 1998 and 1997, the Company had no
short-term investments. The credit risk associated with trade accounts
receivable is mitigated by the Company's credit evaluation process, reasonably
short collection terms and the geographical dispersion of sales transactions.
Advertising
Advertising costs are expensed as incurred. Advertising expense for fiscal
1998, 1997 and 1996 was approximately $5,220,000, $3,784,000 and $16,501,000
respectively.
Depreciation and Amortization
Equipment and leasehold improvements are stated at cost. Depreciation and
amortization of equipment, leasehold improvements and goodwill is calculated
using the straight-line method over the estimated useful lives of the related
assets as follows:
Building........................................ 40 years
Computer equipment.............................. 3 years
Office furniture and equipment.................. 5 to 7 years
Leasehold improvements.......................... 1 to 5 years
Equipment under capital lease................... 3 to 7 years
Goodwill........................................ 4 to 10 years
Income Taxes
The Company accounts for income taxes in accordance with Financial
Accounting Standards Board Statement No. 109 "Accounting for Income Taxes" (SFAS
109). SFAS 109 requires the assets and liabilities method of accounting for
income taxes. Under SFAS 109, deferred tax assets and liabilities are recognized
with respect to the tax consequences attributable to differences between the
financial statement carrying values and the tax bases of existing assets and
liabilities. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to the taxable income in the years in which these
temporary differences are expected to be recovered or settled. Further, the
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
Stock-Based Compensation
Prior to October 1, 1996, the Company accounted for its stock option plan in
accordance with the provisions of Accounting Principles Board (APB) Opinion No.
25, "Accounting for Stock Issued to Employees," and related interpretations. As
such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. On
October 1, 1996, the Company adopted SFAS No. 123, "Accounting for Stock Based
Compensation," which permits entities to recognize as expense over the vesting
period the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net income and pro forma
net income per share disclosures for employee stock option grants made in 1995
and future years as if the fair-value-based method defined in SFAS No. 123 had
been applied. The Company has elected to continue to apply the provisions of APB
Opinion No. 25 and provide the pro forma disclosure required by SFAS No. 123.
40
<PAGE>
Non-Cash Transactions
The Company has recorded certain significant non-cash transactions relating
to certain Mergers and purchases which included common stock as all or a portion
of the consideration, and has commenced restructuring programs which include the
recording of certain non-cash charges. See also Notes 2 and 11 herein.
Fair Value of Financial Instruments
The fair values of the Company's cash and cash equivalents, trade accounts
receivable, accounts payable, accrued liabilities and accrued acquisition and
restructuring charges approximate their carrying value due to the relatively
short maturities of these instruments. The fair value of the loans payable to
banks approximate the fair value of the instruments due to the stated interest
rates on such notes and the collateral supporting the notes. The fair value of
the convertible debentures approximates face value due to the stated interest
rate on such instruments. The convertible debentures are required to be paid in
full upon consummation of the merger (Note 18) without any premium.
Long-Lived Assets
The Company adopted Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" (SFAS No. 121), during the fiscal year ended September 30, 1997.
This statement requires that long-lived assets be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
the asset may not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset to future net
cash flows expected to be generated by the asset. If such assets are considered
to be impaired, the impairment to be recognized is measured by the amount by
which the carrying amount of the assets exceed the fair value of the assets. In
fiscal 1998, the Company wrote off $2,004,000 of goodwill which was deemed to be
impaired.
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 as a component of
stockholders' equity (deficit). Foreign currency transaction gains and losses
were not material for the years presented and are included in the determination
of net income (loss).
Recent Accounting Pronouncements
SFAS No. 132, Employers' Disclosures about Pensions and Other Postretirement
Benefits, was issued in February 1998. SFAS No. 132 revises the disclosure
requirements for pensions and other postretirement benefits. This statement is
effective for the Company's financial statements for fiscal years beginning
after December 15, 1997 and the adoption of this standard is not expected to
have a material effect on the Company's financial statements.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of general-purpose financial
statements. SFAS No. 130 is effective for financial statements issued for
periods beginning after December 15, 1997. The Company has not determined the
impact of SFAS No. 130 on its consolidated financial statements.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." SFAS No.
131 establishes standards for the reporting of operating segment information in
annual financial statements and in interim financial reports issued to
shareholders. SFAS No. 131 is effective for financial statements issued for
periods beginning after December 15, 1997. Quarterdeck has not determined the
impact of SFAS No. 131 on its consolidated financial statements.
The AICPA issued Statement of Position 97-2, "Software Revenue Recognition,"
(SOP 97-2) effective for transactions entered into in fiscal years beginning
after December 15, 1997. The Company will adopt SOP 97-2 for transactions
entered into on and after October 1, 1998. The impact of SOP 97-2 will depend on
the terms of future transactions.
41
<PAGE>
NOTE 2. ACQUISITIONS AND STRATEGIC INVESTMENTS
POOLINGS OF INTERESTS
Fiscal 1996
On December 29, 1995, the Company merged with Inset, a developer of utility
application software for personal computers. The Company issued 921,218 shares
of common stock in exchange for all of the outstanding common stock of Inset.
This Merger has been accounted for as a pooling of interests combination and
accordingly, the consolidated financial statements for fiscal 1996 have been
restated to reflect the combined operations of the Company and Inset.
On March 28, 1996, the Company merged with Datastorm, the developer and
publisher of Procomm Plus, one of the industry's leading data communications
products. The Company issued 5,200,000 shares of common stock in exchange for
all of the outstanding stock of Datastorm. The Merger has been accounted for as
a pooling of interests and therefore, the consolidated financial statements for
fiscal 1996 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.
Datastorm's S corporation status terminated upon consummation of the Merger.
Datastorm's undistributed earnings at March 28, 1996, and all prior periods,
have been reclassified to additional paid-in-capital in the accompanying
consolidated financial statements in accordance with pooling of interests
accounting. Accordingly, distributions by Datastorm to Datastorm shareholders
have been charged to additional paid-in-capital.
The Company's Datastorm subsidiary leased office and warehouse space from
Three Guys With a Building partnership, a company that was affiliated to
Datastorm through common ownership. The partners of such partnership are now
shareholders and consultants of the Company. The lease expires on December 31,
2001, however, as a result of the acquisition and completion of a new office
building for the Company by the partnership, the existing lease has been
terminated at no cost to the Company. Lease expense for fiscal 1998, 1997 and
1996 totaled $0, $0 and $698,000 respectively.
On May 15, 1996, the Company merged with Future Labs, a developer of
real-time collaborative technology. The Company issued 663,768 shares of common
stock in exchange for all of the outstanding stock of Future Labs. The
transaction was accounted for as a pooling of interests and therefore, the
consolidated financial statements for fiscal 1996 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 a pooling of interests, and therefore, the consolidated
financial statements for fiscal 1996 have been restated to reflect the combined
operations of the Company and Vertisoft.
The following table reflects the Company's acquisition costs relating to the
transactions entered into in fiscal 1996 and activity through September 30, 1997
(in thousands). There was no activity in fiscal 1998.
<TABLE>
<CAPTION>
Inset Datastorm FutureLabs Vertisoft Total
-------- --------- ---------- --------- --------
<S> <C> <C> <C> <C> <C>
Balance, September 30, 1996.... $ 100 $ 879 $ 359 $ 775 $ 2,113
-------- --------- ---------- --------- --------
Reversal of acquisition costs.. (34) (3) (320) (350) (707)
Cash payments.................. (66) (876) (39) (425) (1,406)
-------- --------- ---------- --------- --------
Balance, September 30, 1997.... $ -- $ -- $ -- $ -- $ --
======== ========= ========== ========= ========
</TABLE>
The following table reflects the Company's acquisition costs for fiscal 1995
transactions and activity through September 30, 1998 (in thousands).
42
<PAGE>
<TABLE>
<CAPTION>
Landmark Starnine Total
--------- -------- --------
<S> <C> <C> <C>
Balance, September 30, 1996.... $ 46 $ 186 $ 232
--------- -------- --------
Reversal of acquisition costs.. (27) (131) (158)
Cash payments.................. (19) (5) (24)
--------- -------- --------
Balance, September 30, 1997.... $ -- $ 50 $ 50
--------- -------- --------
Cash payments.................. -- (16) (16)
--------- -------- --------
Balance, September 30, 1998.... $ -- $ 34 $ 34
========= ======== ========
</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
------------------------------
Net Income
Net Revenues (Loss)
------------ ------------
<S> <C> <C>
Quarterdeck.......... $ 92,030 $(86,856)
Inset................ 2,669 424
Datastorm............ 29,413 12,576
Future Labs.......... 1,312 (335)
Vertisoft............ 7,676 (623)
Pooling adjustments.. -- (145)
--------- --------
Restated Quarterdeck. $ 133,100 $(74,959)
========= ========
</TABLE>
Net revenues and net income (loss) for Vertisoft, Future Labs, Datastorm,
and Inset for the year ended September 30, 1996 reflect the results of each
entity for only the period prior to the date of acquisition by the Company.
Results subsequent to the date of the Mergers are included with the Company's
operations. Pooling adjustments were made primarily to conform accounting
policies to those of the Company.
Purchases
Fiscal 1997
On August 12, 1997, the Company consummated the acquisition of certain
assets primarily consisting of software and related intellectual property rights
of TOC Holding Company, formerly known as TuneUp.com, Inc. for an aggregate
purchase price of $250,000 plus acquisition costs of $18,000. The entire amount
has been recorded as in-process research and development expense and is included
in acquisition, restructuring and other charges in the accompanying 1997
consolidated statement of operations. Quarterdeck had managed the assets of
TuneUp.com under a management agreement from May 9, 1997 until the consummation
of the acquisition.
Fiscal 1996
On June 6, 1996, the Company acquired certain software and related
intellectual property rights from Pinnacle in exchange for common stock with a
market value, as defined, of $1,800,000, or 198,000 shares. The entire amount
has been recorded as capitalized software. This transaction has been accounted
for using the purchase method of accounting. The Company is also obligated to
pay certain minimum royalties of $200,000 per year for four years commencing no
later than March 31, 1997. The Company has paid an additional $100,000 and was
obligated for an additional $200,000, as payment for consulting services and a
non-competition agreement with the principal of Pinnacle.
On July 16, 1996, the Company purchased certain assets and technology
relating to remote control software from InterLink. The total consideration for
the Interlink acquisition was $3,155,000. An accrual was established for
estimated acquisition costs in July 1996. As of September 30, 1997, a balance of
$70,000 remained in the accrual. This balance was reversed into income in
September 1997.
On August 14, 1996, the Company acquired the remaining shares of Limbex
which were not already owned by the Company. Prior to such acquisition, the
Company owned approximately 20% of Limbex. The total consideration for the
acquisition was $16,295,000. An accrual was established for estimated
acquisition costs in August 1996. As of September 30, 1997, a balance of $35,000
remained in the accrual. This balance was reversed into income in September
1997.
43
<PAGE>
A purchase price allocation of the assets of both Interlink and Limbex was
performed based on the fair market value of those assets, utilizing the
discounted future cash flows of the technology acquired. In-process research and
development was identified and valued by taking into consideration the
discounted future cash flows of each project, the uncertainties in completing
the projects and reaching technological feasibility, and potential changes in
the target markets for the products.
This allocation resulted in $2,872,000 and $12,121,000 of purchased research
and development from Interlink and Limbex, respectively, related to products
which had yet to reach technological feasibility and did not have alternative
future uses. The $2,872,000 and $12,121,000 of purchased research and
development is included in acquisition, restructuring and other charges in the
accompanying 1996 statement of operations. Using the same methodology, goodwill
was calculated to be $283,000 and $2,546,000, respectively, and is included in
other assets. Goodwill is being amortized over 4 to 10 years. In addition, the
Company allocated $328,000 of the Limbex purchase price to intangible assets
which is being amortized over a period of 24 to 36 months and $396,000 to
capitalized software which is being amortized over 14 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. Prior to March 1997, this investment was accounted for
under the cost method of accounting and the investment was included on the
balance sheet in other assets and carried at lower of cost or market. During the
fiscal year ended September 30, 1996, the Company determined that the market
value of the investment in Infonautics stock was below the Company's cost basis
and that a portion of the reduction in value was due to an other than temporary
decline. Accordingly, the Company recorded a loss of $720,000 to reduce the
carrying value of the investment. In March 1997, subsequent to an initial public
offering by Infonautics and elimination of restrictions on the Company's ability
to sell such stock, the Infonautics investment was reclassified as a marketable
security and is being held as an "available for sale security" under SFAS No.
115. The price of the Infonautics stock continued to decline during fiscal 1997
and, accordingly, the Company recorded a $1,666,000 loss as an other than
temporary reduction to the carrying value of the investment. During fiscal 1998,
the carrying value of this investment has been adjusted to fair value of
$612,000 as of September 30, 1998 and the unrealized loss of $252,000 has been
recorded as a component of stockholders' equity (deficit). The Company sold its
shares in Infonautics stock in November 1998 at a nominal gain.
During fiscal 1996, the Company also recorded a charge in other income
(expense) for $727,000 to write off its investment in Streetwise, a software
development firm.
In June 1995, the Company purchased a minority equity position in LHSP, a
company that develops and licenses speech compression technology. The cash
investment of $1,500,000 was accounted for using the cost method. During fiscal
1995, LHSP completed an initial public offering. During fiscal 1996, the Company
sold a portion of this investment for $2,346,000 and recorded a gain of
$1,435,000 which is included in other income on the statement of operations. As
of September 30, 1996, the Company's remaining investment was carried at
$968,000 in other assets on the balance sheet. In accordance with SFAS 115, the
Company included an unrealized gain in the value of the remaining investment of
$379,000 as a separate component of stockholders' equity at September 30, 1996.
During fiscal 1997, the Company liquidated its remaining investment in LHSP
common stock and sold its LHSP warrants resulting in a realized gain of
$1,026,000 which was included in other income in the 1997 statement of
operations.
In June 1995, the Company agreed to purchase a minority equity position in
Intelligence at Large, Inc. ("IAL"), a company that develops Internet audio
technology. The purchase agreement required the Company to make a total
investment of $1,250,000, payable upon IAL achieving specified development
milestones. The Company accounted for this investment using the cost method. The
investment was made during fiscal 1996 and is included as a component of other
assets. However, during the fiscal year ended September 30, 1997, the Company
determined that the value of this investment had been impaired and, accordingly,
recorded a $1,250,000 charge in other income (expense) to write off the carrying
value of this investment.
44
<PAGE>
NOTE 3. BALANCE SHEET AND INCOME STATEMENT INFORMATION
<TABLE>
<CAPTION>
September 30,
----------------------
1998 1997
--------- ----------
(in thousands)
<S> <C> <C>
Balance Sheet:
Trade accounts receivable:
Receivables................................. $ 12,212 $ 16,274
Less: allowance for doubtful accounts....... (924) (1,761)
Less: allowance for sales returns........... (5,106) (4,243)
Less: allowance for marketing development (2,470) (3,242)
funds.......................................
Less: allowance for rebates................. (722) --
-------- ---------
$ 2,990 $ 7,028
======== ========
Other current assets:
Prepaid royalties........................... $ 203 $ 352
Income tax receivable....................... 79 520
Other prepaid expenses...................... 886 800
Notes receivable............................ 33 51
Advances to employees....................... 2 24
Marketable securities....................... 612 792
Other....................................... 207 2,116
-------- --------
$ 2,022 $ 4,655
======== ========
Equipment and leasehold improvements:
Building (asset held for sale).............. $ -- $ 7,359
Computer equipment.......................... 6,060 7,769
Office furniture and equipment.............. 5,409 6,575
Office furniture and equipment under capital
leases...................................... 30 99
Leasehold improvements...................... 1,944 2,638
-------- --------
13,443 24,440
Less: accumulated depreciation and
amortization............................... (9,803) (10,287)
-------- --------
$ 3,640 $ 14,153
======== ========
Capitalized software costs:
Capitalized software costs.................. $ 5,498 $ 5,498
Less: accumulated amortization.............. (4,857) (3,708)
-------- --------
$ 641 $ 1,790
======== ========
Other assets:
Intangible assets acquired, net............. $ 322 $ 2,683
Other....................................... 531 744
-------- --------
$ 853 $ 3,427
======== ========
Accrued liabilities:
Accrued expenses............................ $ 5,329 $ 10,075
Accrued legal............................... 666 622
Accrued royalties........................... 980 1,138
Accrued technical support................... 648 456
Accrued litigation settlement............... -- 1,905
-------- --------
$ 7,623 $ 14,196
======== ========
Accrued acquisition, restructuring and
other charges:
Acquisition................................. $ 34 $ 50
Restructuring............................... 2,400 5,335
Purchase transaction costs.................. -- --
-------- --------
$ 2,434 $ 5,385
======== ========
</TABLE>
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------
1998 1997 1996
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Income Statement:
Acquisition, restructuring and other
charges (benefit):
Restructuring............................... $ 2,583 $ 12,415 $ 12,995
Acquisition................................. -- (970) 9,801
In-process R&D.............................. -- 268 14,993
-------- -------- --------
$ 2,583 $ 11,713 $ 37,789
======== ======== ========
</TABLE>
45
<PAGE>
NOTE 4. NOTES PAYABLE TO BANKS
In April, 1997, the Company established an asset based line of credit with
Greyrock Business Credit, a division of NationsBank. The Company repaid and
terminated its then existing line with Bank of America with proceeds from the
new line. Maximum borrowings under the new line are the lesser of $12,000,000 or
the sum of 85% of eligible accounts receivable, 50% of Quarterdeck International
Limited (Qil) eligible receivables plus the value of inventory to a maximum of
$2,000,000. Proceeds from the line can be used for general corporate purposes,
including investments and acquisitions, and bear interest at prime plus 2%. The
line is secured by substantially all assets of Quarterdeck. The Company is
obligated to pay a minimum interest charge of $10,000 per month and comply with
certain other non-financial covenants and restrictions. At September 30, 1998
the Company had $0 outstanding under the line and the ability to borrow up to a
maximum amount of $7,853,000. The current term of the agreement matures March
31, 1999 and contains renewal provisions. It is anticipated that the line will
be terminated upon consummation of the Merger.
In April 1996, the Company borrowed $2,000,000 from a bank to partially
finance the completion of the building in Columbia, Missouri. The loan was paid
in full in April 1997.
On August 6, 1996, the Company's Datastorm subsidiary secured construction
financing from a bank of up to $5,000,000 with an interest rate equal to the
bank's commercial base rate, prime plus 2%, secured by the Columbia, Missouri
building. The Columbia, Missouri building was sold on December 30, 1997 and the
principal balance outstanding at the date of sale of $3,500,000 was repaid in
full on December 30, 1997.
NOTE 5. CONVERTIBLE NOTES
On March 28, 1996, the Company issued $25,000,000 principal amount of 6%
Convertible Senior Subordinated Notes, due 2001 ("Notes"), to an institutional
investor in a private placement pursuant to the terms of a Note Agreement, dated
March 1, 1996. The Notes are convertible generally after April 1, 1997, at an
initial conversion price of $21.18 per share. The conversion price is adjustable
for certain below market equity issuances and the Notes contain other customary
anti-dilution provisions. Subject to complying with other certain terms, the
Notes may be prepaid without penalty, subject to conversion, anytime between
April 1997 and April 1999 if the Company's Common Stock had been trading, for 20
of the 30 trading days preceding notice of prepayment, at approximately 18%
above the then current conversion price. The Notes contain certain covenants and
the Company was in compliance with such covenants as of September 30, 1998. The
Notes are required to be paid in full upon consummation of the transaction with
Symantec without any premium. See note 18 to the Company's Consolidated
Financial Statements for further discussion.
NOTE 6. CONVERTIBLE PREFERRED STOCK
On September 30, 1996, the Company issued 200,000 shares of Series B
Convertible Preferred Stock, stated value of $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. During 1997, $10,000,000 of Series B
Preferred Stock was converted into 3,762,000 shares of Common Stock and on
September 30, 1997, for $10,000,000, the Company repurchased, at par, all of the
outstanding shares of Series B Preferred Stock and canceled warrants to purchase
800,000 shares of the Company's Common Stock owned by the holder of the Series B
Preferred Stock. As a result of the conversions and repurchase, no shares of
Series B Preferred Stock remain outstanding as of the date hereof. The Warrants
still outstanding may be exercised from and after March 30, 1998 (or earlier if
certain Mergers, acquisitions or combinations occur prior to that date) for
903,653 shares of Common Stock at an exercise price per share of $7.435.
In September 1997 and between October and November 4, 1997, the Company
issued 26,025 and 2,975 shares, respectively, of Series C Convertible Preferred
Stock, stated value of $1,000 per share (the "Series C Preferred Stock"), for
$26,025,000 and $2,975,000, respectively before expenses. The securities were
issued to various accredited investors in a private placement pursuant to
Regulation D of the Securities Act of 1933, as amended. In addition, Quarterdeck
issued warrants to purchase 2,900 shares of Series C Preferred Stock to the
placement agents of the private placement.
The holders of the Series C Preferred Stock are not entitled to receive
dividends. The shares of Series C Preferred Stock are convertible into shares of
the Company's Common Stock. The shares of Series C Preferred Stock will
automatically convert into Common Stock on September 30, 2002 to the extent any
shares of Series C Preferred Stock remain outstanding at that time. Each share
of Series C Preferred Stock is convertible into the number of shares of Common
Stock equal to the quotient of (i) $1000 divided
46
<PAGE>
by (ii) the Conversion Price. Up until March 1, 1998, the Conversion Price was
$5.00. Thereafter, subject to the maximum Conversion Price specified below, the
Conversion Price will be equal to 101% of the average of the three lowest daily
trading prices for the 22 consecutive trading days immediately preceding the
date of conversion (the "Conversion Date"). If the market price of the Common
Stock was $1.00, $2.00 or $3.00, the aggregate number of shares of Common Stock
issuable upon conversion of the Series C Preferred Stock would be approximately
31,600,000, 15,800,000 or 10,500,000 shares of Common Stock, respectively. The
maximum Conversion Price is $5.125 until March 31, 1999, and thereafter will be
the lesser of (i) $5.125, (i) 101% of the average daily low trade prices of the
Common Stock for all trading days in March 1999, (ii) 101% of the average daily
low trade prices of the Common Stock for all trading days in September 1999 or
(iii) 101% of the average daily low trade prices of the Common Stock for all
trading days in March 2000.
On October 9, 1998, Quarterdeck entered into the Conversion Agreement with
the Securityholders of the Company's Series C Preferred Stock and the Warrants
to modify the terms of conversion of the Series C Preferred Stock. As of
September 30, 1998, there were 4,615 shares of Series C Preferred Stock
outstanding. During fiscal 1998, 1,521 Series C Preferred warrants were
exercised to purchase Series C Preferred Stock. All warrants remaining as of the
fiscal year ended were tendered as a part of the Symantec transaction (see note
18).
NOTE 7. STOCK OPTIONS AND WARRANTS
1996 Acquisition Stock Incentive Plan: In fiscal 1996, the Company adopted
the 1996 Acquisition Stock Incentive Plan. Under the terms of the 1996
Acquisition Stock Incentive Plan, the life of all options granted is limited to
10 years. 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 on the grant
date. During fiscal 1998, the Company granted 360,800 stock options at exercise
prices between $2.75 and $1.44 per share. During fiscal 1997, the Company
granted 690,839 stock options (including grants under the repricing) at exercise
prices between $2.38 and $5.56 per share. During fiscal 1996, the Company
granted 105,610 stock options at exercise prices between $0.00 and $7.75 per
share, 297,600 stock options at an exercise price of $8.81 per share, 665,000
stock options at an exercise price of $13.63 per share, and 67,715 stock options
at exercise prices between $13.94 and $35.50 per share. The number of shares of
stock authorized for issuance under the 1996 Acquisition Stock Incentive Plan is
2,000,000. During fiscal 1998, 20,825 options were exercised and 505,560 options
were canceled. At September 30, 1998, 463,596 options were outstanding. 283,965
options were exercisable as of September 30, 1998 under the 1996 Acquisition
Stock Incentive Plan. During fiscal 1997, 21,902 options were exercised and
1,185,633 options were canceled (including those which were repriced). At
September 30, 1997, 629,181 options were outstanding. 196,401 and 68,154 options
were exercisable as of September 30, 1997 and 1996, respectively.
In January 1997, the Board of Directors approved the repricing of options
granted under this plan to an exercise price of $4.6875 per share for all
optionees. As part of the repricing, 536,381 shares were canceled and 425,999
new shares were granted at the new exercise price.
1990 Stock Plan: In fiscal 1990, the Company adopted the 1990 Stock Plan.
During 1995, the Company's Board of Directors approved an amendment to increase
the number of shares of stock authorized for issuance under the 1990 Stock Plan
from 3,000,000 to 6,000,000 shares. This amendment was approved by the
stockholders on February 2, 1996. During fiscal 1996, the Company's Board of
Directors approved an amendment to increase the number of shares of stock
authorized for issuance under the 1990 Stock Plan from 6,000,000 to 7,500,000
shares. This amendment was approved by the stockholders on February 12, 1997.
During fiscal 1998, 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 7,500,000 to 9,500,000 shares. This amendment was approved by
the stockholders on February 5, 1998. Under the amended terms of the 1990 Stock
Plan, shares of common stock are reserved for issuance to employees and
consultants pursuant to incentive stock options, nonqualified stock options,
stock appreciation rights, restricted stock awards or stock bonuses. The Company
has never issued a stock appreciation right, a restricted stock award or a stock
bonus.
Under the terms of the 1990 Stock Plan, the life of all options granted is
limited to 10 years. Incentive stock options are granted at 100% of fair market
value on the grant date. Non-qualified stock options may not be granted at less
than 85% of fair market value on the grant date. Options outstanding under the
1990 Stock Plan become exercisable in varying increments commencing one year
after the date of grant, and expire five to ten years from date of grant, or
upon earlier termination. During fiscal 1998, the Company granted 4,381,428
stock options at exercise prices between $2.75 and $0.25 per share. During
fiscal 1997, the Company granted 3,841,347 stock options (including grants under
the repricing) at exercise prices between $2.34 and $5.56 per share. During
fiscal 1996, the Company granted 769,500 stock options at exercise prices
between $5.00 and $10.00, 353,500 stock options at exercise prices
47
<PAGE>
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 1998, 20,355 options were exercised and 2,892,737 options were
canceled. During fiscal 1997, 312,118 options were exercised and 3,949,525
options were canceled (including those which were repriced). During fiscal 1996,
516,767 options were exercised and 738,207 options were canceled. 5,848,044
options were outstanding as of September 30, 1998 and 1,830,517, 1,575,191 and
1,077,431 options were exercisable at September 30, 1998, 1997 and 1996,
respectively, under the 1990 Stock Plan.
In January 1997, the Board of Directors approved the repricing of options
granted under this plan to an exercise price of $4.6875 per share for all
optionees. As part of the repricing, 2,021,555 shares were canceled and
1,605,592 new shares were granted at the new exercise price.
1990 Directors' Stock Option Plan: Under the terms of the 1990 Directors'
Stock Option Plan, 500,000 shares are reserved for issuance to non-employee
directors. Options are exercisable in varying increments and expire within five
years or upon earlier directorship termination. During fiscal 1998, 150,000
stock options were granted at exercise prices between $2.13 and $0.28 per share,
zero options were exercised, and zero options were canceled. During fiscal 1997,
130,000 stock options were granted at exercise prices between $3.63 and $4.50
per share, zero options were exercised, and zero options were canceled. During
fiscal 1996, 52,500 stock options were granted at exercise prices between $8.00
and $16.50 per share, zero options were exercised, and zero options were
canceled. 382,500 options were outstanding under the 1990 Directors' Stock
Option Plan as of September 30, 1998 and 197,500, 82,500 and 50,000 options were
exercisable as of September 30, 1998, 1997 and 1996 respectively.
Outside of Plan Compensation Option Agreements. In fiscal 1998, the Company
entered into agreements with four members of the Board of Directors, granting
580,000 options at an exercise price of $0.28, exercisable in varying increments
expiring ten years from the date of grant or upon earlier termination. 312,500
shares were exercisable at September 30, 1998. In fiscal 1997, the Company
entered into employment agreements with two executive officers of the Company,
Mr. Hessler and Mr. Epstein, pursuant to which the Company granted, in addition
to shares granted under the above stock option plans, 750,000 and 100,000
options to Mr. Hessler and Mr. Epstein, respectively. The Company granted Mr.
Hessler's options on January 3, 1997 at an exercise price of $4.44 and granted
Mr. Epstein's options on August 7, 1997 at an exercise price of $2.69. Mr
Hessler's options are exercisable in varying increments commencing one year
after the date of grant and expiring ten years from the date of grant or upon
earlier termination. Mr. Epstein's 100,000 options were canceled in July and
August of fiscal 1998.
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. Due to the losses incurred in the respective years,
no tax benefits were realized or credited to additional paid-in capital in
fiscal 1998, 1997, or 1996.
A summary of all stock option activity in the three-year period ended
September 30, 1998 is as follows:
<TABLE>
<CAPTION>
Weighted Average
Exercise Price Per
Shares Share
--------- ------------------
<S> <C> <C>
Outstanding at September 30, 1995..... 3,432,380 $ 5.81
Options granted..................... 4,099,048 12.71
Options exercised................... (580,803) 18.81
Options canceled.................... (902,244) 10.90
---------
Outstanding at September 30, 1996..... 6,048,381 9.12
Options granted..................... 5,512,186 3.89
Options exercised................... (334,020) 4.54
Options canceled.................... (5,135,158) 10.18
----------
Outstanding at September 30, 1997..... 6,091,389 3.89
----------
Options granted..................... 5,472,228 1.21
Options exercised................... (41,180) 1.01
Options canceled.................... (3,498,297) 3.31
----------
Outstanding at September 30, 1998..... 8,024,140 2.39
==========
</TABLE>
48
<PAGE>
NOTE 8. ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company has adopted the provisions of SFAS No. 123, and elected to
continue to apply Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for its stock option plans. If the Company had
elected to recognize compensation cost based on the fair value of the awards at
the date of grant, consistent with the method prescribed by SFAS No. 123, net
loss and net loss per share would have changed to the pro forma amounts
indicated below (in thousands, except per share data):
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- -------
<S> <C> <C> <C>
Net loss as reported...................... $ (23,165) $ (18,398) $ (74,959)
========= ========= =========
Pro forma net loss........................ $ (25,269) $ (20,215) $ (76,776)
========= ========= =========
Basic and diluted net loss per share as
reported.................................. $ (0.45) $ (0.43) $ (2.15)
========= ========= =========
Pro forma basic and diluted net loss per
share..................................... $ (0.49) $ (0.47) $ (2.20)
========= ========= =========
</TABLE>
The pro forma disclosure of compensation cost under this pronouncement was
based on the Black-Scholes single-option pricing model with the following
weighted average assumptions for 1998, 1997 and 1996: volatility of 188%, 70%
and 70% respectively, risk-free interest rate of 4.600%, 5.875% and 5.875%
respectively, and an expected option life of 4 years.
Pro forma net loss reflects options granted in fiscal 1998, 1997 and 1996.
Therefore the full amount of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the pro forma net loss amounts presented
above because compensation cost for options granted prior to October 1, 1995 is
not considered. The disclosure of compensation cost under this pronouncement may
not be representative of the effects on net income (loss) for future years.
The weighted average fair value of options granted in the periods reported
were $0.58, $1.46 and $0.70, respectively. The following table summarizes
information regarding options outstanding and options exercisable at September
30, 1998:
<TABLE>
<CAPTION>
Options Outstanding
------------------------------------
Weighted Exercisable at
Outstanding at Remaining Average September 30,
Range of Exercise Prices September 30,1998 Contractual Life Exercise Price 1998
- ------------------------ ----------------- ---------------- -------------- ---------------
<S> <C> <C> <C> <C>
$0.25 -- 2.53 4,992,918 9.4 $ 1.11 736,510
2.63 -- 3.63 292,210 8.7 3.15 142,624
4.44 -- 16.63 2,558,074 8.2 4.74 1,567,259
--------- ---- ------- ---------
7,843,202 9.0 $ 2.37 2,446,393
========= ==== ======= =========
</TABLE>
NOTE 9. STOCKHOLDER RIGHTS PLAN
In September 1992, the Company made a dividend distribution of one preferred
share purchase right for each outstanding share of common stock. The rights
trade with the common stock and only become exercisable, or transferable apart
from the common stock, ten business days after a person or group (Acquiring
Person) acquires beneficial ownership of, or commences a tender or exchange
offer for, 15% or more of the Company's common stock. Each right, under certain
circumstances, entitles its holder to acquire one one-hundredth of a share of a
newly created Series A Junior Participating Preferred Stock, par value $0.001
per share, at a price of $35, subject to adjustment. If 15% of the Company's
common stock is acquired, or a tender offer to acquire 15% of the Company's
common stock is made, each right not owned by an Acquiring Person will entitle
the holder to purchase at the exercise price, Company common stock having a
market value of twice the exercise price of the rights. In addition, if the
Company is acquired in a Merger or other business combination, the rights will
entitle a holder to buy a number of shares of common stock of the acquiring
Company having a market value of twice the exercise price of each right. The
rights may be redeemed by the Company at $0.01 per right at any time until a 15%
position has been acquired. The rights expire on August 22, 2002, and at no time
have voting power. The Company amended the Certificate of Designations of Series
A Junior Participating Preferred Stock dated September 1, 1998 increasing the
authorized number of shares from 500,000 to 1,000,000.
In connection with the issuance of the Series C Preferred Stock during
fiscal 1997 (see Note 16), the Company amended the Rights Agreement to provide
that the initial investors that acquired the Series C Preferred Stock will not
be deemed to be an Acquiring Person as a result of its acquisition of the Series
C Preferred Stock or any shares of Common Stock received upon conversion of the
Series C Preferred Stock, subject to compliance by such investors with certain
covenants contained in the Preferred Stock Investment Agreements. On October 15,
1998, the Company amended the Rights Agreement to provide that neither Symantec
nor any of its affiliates will be deemed to be an Acquiring Person as a result
of the acquisition of shares of the Company's common stock.
49
<PAGE>
NOTE 10. EMPLOYEE BENEFIT PLANS
In January 1991, the Company adopted a defined contribution 401(k) plan.
Employees must work a minimum of 1,000 hours per year and be at least 21 years
of age and must have completed at least 3 consecutive months of service to be
eligible for the plan. Participants may contribute 1% to 20% 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 changed to 50% of
employee contributions up to 3% of eligible compensation for calendar 1996. The
Company's matching contributions totaled $360,000, $337,000 and $1,243,000 for
fiscal 1998, 1997 and 1996, respectively.
NOTE 11. RESTRUCTURING AND OTHER CHARGES
During June 1998, the Company implemented a restructuring plan which was
designed to reduce the ongoing level of operating expenses to one which can be
supported by a reduced revenue base, to reduce the Company's cash requirements
over the next two quarters to be either cash neutral or cash positive, to exit
non-core business ventures and operations which do not produce an acceptable
level of profitability for the Company, and to convert from an expense structure
which is mainly "fixed" to one that is more variable in nature. As a result, the
Company recorded charges totaling $2,830,000 in June 1998 of which $2,182,000
were recorded to accrue amounts owed under employee severance agreements and
other consulting arrangements, $377,000 for ongoing lease payments for vacant
facilities and early lease cancellation fees, and $271,000 for write downs of
fixed assets of business units being closed or divested. An additional $150,000
of restructuring charges were recorded in September 1998.
The following is an analysis of the significant components of the fiscal
1998 restructuring and other charges (in thousands):
<TABLE>
<CAPTION>
Discontinuance and Severance Write-off
consolidation of and property and
offices other equipment Total
----------------- --------- ------------- ---------
<S> <C> <C> <C> <C>
Total restructuring and non-recurring
costs................................. $ 377 $2,182 $ 271 $ 2,830
Non cash costs........................ 23 (36) (208) (221)
Cash payments......................... (102) (1,240) - (1,342)
Category reclass...................... (225) 270 (45) -
Additional charges.................... 131 19 - 150
-------- -------- ------ --------
Accrued, September 30, 1998........... $ 204 $ 1,195 $ 18 $ 1,417
======= ========= ====== ========
</TABLE>
During September 1997, the Company implemented a restructuring plan which
was designed to focus the Company on the new corporate strategy which resulted
in charges totaling $11,051,000. The net book value of the building in Columbia,
Missouri was written down by $5,803,000, to $7,000,000, the Company's estimated
fair market value. Other restructuring charges of $2,400,000 were recorded to
write down non performing assets as a result of the restructuring and accrue
amounts owed under consulting agreements for individuals who were terminated,
$569,000 for ongoing lease payments for vacant facilities which have not been
subleased, employee severance and other payments of $2,012,000 related to non-
core business units that are being closed or divested and $267,000 relating to
write downs of fixed assets of business units being closed or divested.
The following is an analysis of the significant components of the
fiscal 1997 restructuring and other charges (in thousands):
<TABLE>
<CAPTION>
Discontinuance and Severance Write-off
Consolidation of and property and
offices other equipment Total
------------------- --------- ------------ -------
<S> <C> <C> <C> <C>
Total restructuring and non-recurring
costs................................. $ 6,372 $4,412 $ 267 $ 11,051
Non cash costs........................ (5,803) (290) (167) (6,260)
------- ------ ------ --------
Accrued, September 30, 1997........... 569 4,122 100 4,791
Non cash costs........................ - - (100) (100)
Cash payments......................... (330) (3,177) - (3,507)
Reversal of restructuring costs....... - (201) - (201)
------- ------ ------ --------
Accrued, September 30, 1998........... $ 239 $ 744 $ - $ 983
======= ====== ====== ========
</TABLE>
50
<PAGE>
The following is an analysis of the significant components of the
fiscal 1996 restructuring (in thousands):
<TABLE>
<CAPTION>
Reduction of Discontinuance and Severance Write-off
non-core Consolidation of and property and
product lines offices other equipment Total
------------- ------------------ --------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Restructuring and
non-recurring costs............ $ 2,754 $ 1,420 $ 6,513 $ 2,308 $ 12,995
Non-cash costs................. (2,754) -- -- (1,240) (3,994)
Cash payments.................. -- -- (550) (413) (963)
------- ------- -------- ------- --------
Accrued, September 30, 1996.... -- 1,420 5,963 655 8,038
Non-cash costs................. -- -- (75) (370) (445)
Cash payments.................. -- (883) (7,530) -- (8,413)
Additional charges............. 67 1,297 -- 1,364
Category reclass............... -- (150) 435 (285) --
------- ------- -------- ------- --------
Accrued, September 30, 1997.... -- 454 90 -- 544
Non-cash costs................. -- (97) (78) -- (175)
Cash payments.................. -- (161) (12) -- (173)
Reversal of restructuring
costs.......................... -- (196) -- -- (196)
------- ------- -------- ------- --------
Accrued, September 30, 1998.... $ -- $ -- $ -- $ -- $ --
======= ======= ======== ======= ========
</TABLE>
NOTE 12. INCOME TAXES
The components of the provision (benefit) for income taxes for the fiscal
years ended September 30, 1998, 1997 and 1996, respectively, are as follows (in
thousands):
<TABLE>
<CAPTION>
Federal State Total
------- ------ --------
<S> <C> <C> <C>
1998:
Current...... $ 39 $ 0 $ 39
Deferred..... 0 0 0
-------- ------ --------
Total..... $ 39 $ 0 $ 39
======== ====== ========
1997:
Current...... $ 130 $ 0 $ 130
Deferred..... 0 0 0
-------- ------ --------
Total..... $ 130 $ 0 $ 130
======== ====== ========
1996:
Current...... $ 201 $ 0 $ 201
Deferred..... 605 0 605
-------- ------ --------
Total..... $ 806 $ 0 $ 806
======== ====== ========
</TABLE>
The actual income tax expense (benefit) differs from the "expected" income
tax expense (benefit) computed by applying the effective Federal income tax rate
of 34% to income (loss) before income taxes as follows (in thousands):
<TABLE>
<CAPTION>
Year ended September 30,
---------------------------------
1998 1997 1996
-------- ---------- --------
<S> <C> <C> <C>
Expected income tax benefit..................... $(7,732) $ (5,563) $(25,212)
Change in valuation allowance................... 7,139 7,947 21,522
State income taxes, net of Federal income
tax benefit................................... 9 (832) (2,393)
Net (income) loss on foreign subsidiary......... (257) (680) 3,005
Net income of Subchapter S subsidiary........... -- -- (3,300)
Tax exempt income benefit....................... -- -- (106)
Alternative minimum tax and other tax credits... 562 150 300
Acquisition costs............................... (6) (416) 9,916
Stock options................................... (18) (174) (3,009)
Other........................................... 342 (302) 83
------- --------- --------
$ 39 $ 130 $ 806
======= ========= ========
</TABLE>
Under SFAS 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):
51
<PAGE>
<TABLE>
<CAPTION>
Year ended September 30,
--------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Accrued restructuring charges....................... $ 881 $ 4,131 $ 2,222
Software development costs recognized as
incurred for tax purposes......................... -- -- (223)
State taxes......................................... 2,656 2,664 2,393
Allowance for sales returns......................... 1,383 1,390 1,819
Depreciation........................................ 1,097 1,097 834
Allowance for doubtful accounts and other reserves.. 1,999 1,995 3,111
Tax net operating losses............................ 32,177 23,044 15,484
Other, net.......................................... (249) (1,516) (782)
Deferred tax assets, valuation allowance.......... (39,944) (32,805) (24,858)
-------- -------- -------
Total net deferred tax assets..................... $ -- $ -- $ --
======== ======== =======
</TABLE>
At September 30, 1998, the Company had net deferred tax assets amounting to
$39,944,000, for which a full valuation allowance was provided. The deferred tax
assets consisted of the tax effect from the expected future reversal of
temporary differences, resulting primarily from restructuring charges in fiscal
1998, which were not deductible for federal income tax purposes until the
amounts are actually paid and tax net operating loss carryforwards. Recognition
of the deferred tax assets is dependent on a number of factors, including the
timing of reversal of the temporary differences and an assessment of the future
realizability of the deferred tax assets. Management has concluded that it is
not more likely than not that the benefit from any deferred tax assets will be
realized.
At September 30, 1997, the Company had deferred tax assets amounting to
$32,805,000, for which a full valuation allowance was provided. The deferred tax
assets consisted of the tax effect from the expected future reversal of
temporary differences, resulting primarily from restructuring charges in fiscal
1997, which were not deductible for federal income tax purposes until the
amounts are actually paid and tax net operating loss carryforwards. 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 Company has Federal tax net operating loss carryforwards of $89,100,000
expiring from fiscal years ended 2008 through 2017.
NOTE 13. LITIGATION
On July 30, 1998, a class action complaint was filed in the Supreme Court of
the State of New York, County of New York, on behalf of a purported class of
purchasers of the Procomm Plus version 4.0 for Windows product (the "Product").
The complaint purports to assert claims for breach of warranty and violation of
New York's Consumer Protection From Deceptive Acts And Practices Act arising
from the Product's inability to process dates containing the year 2000. The
complaint seeks unspecified damages. Quarterdeck believes these claims to be
without merit and intends to defend itself vigorously.
In October 1997, a complaint was filed in the United States District Court
for the District of Utah on behalf of PowerQuest Corporation against the
Company. The complaint alleges that the Company's partitioning software
(included in Partition-It and Partition-It Extra Strength) violates a patent
held by PowerQuest. In January 1998, PowerQuest obtained a second patent
relating to partitioning and has amended its complaint to allege infringement of
that patent as well. The plaintiff seeks an injunction against distribution of
Partition-It and Partition-It Extra Strength and monetary damages. Although the
Company believes the plaintiff's patents are invalid, there can be no assurance
as to the actual outcome of this matter. The ultimate disposition of this matter
could have a material adverse effect on the Company.
The Company is a defendant in various other pending claims and lawsuits.
Although there can be no assurances, management believes that the disposition of
such matters will not have a material adverse impact on the results of
operations or financial position of the Company. From time to time, the Company
has received communications from third parties asserting that certain Company
trademarks, packaging or advertising materials may infringe upon the
intellectual property rights of others. There can be no assurance that existing
or future infringement claims against the Company with respect to current or
future trademarks, packaging or advertising materials will not result in costly
litigation or require the Company to discontinue use of such trademarks,
packaging or advertising materials.
52
<PAGE>
NOTE 14. COMMITMENTS
The Company leases facilities under non-cancelable operating leases that
expire through fiscal 2003. Rental expense for the years ended September 30,
1998, 1997 and 1996 amounted to approximately $2,661,000, $2,506,000 and
$4,367,000, respectively.
Minimum annual rental payments under these leases and sublease income are as
follows (in thousands):
<TABLE>
<CAPTION>
Rental Sublease
Year ending September 30 Payments Income
------------------------ --------- --------
<S> <C> <C>
1999.................. $ 2,147 $ 684
2000.................. 1,444 407
2001.................. 113 --
2002.................. 36 --
2003.................. 36 --
Thereafter............ -- --
--------- --------
Total............ 3,776 1,091
--------- --------
</TABLE>
NOTE 15. MAJOR CUSTOMERS AND SEGMENT INFORMATION
The Company sells its products primarily through distributors and dealers.
Sales to the two largest distributors by the Company individually account for
23% and 17%; 19% and 15%; 20% and 11%; of the Company's consolidated net
revenues for the years ended September 30, 1998, 1997 and 1996, respectively.
The Company is engaged in a single business segment -- the development and
marketing of personal computer software. Geographic information is as follows
(in thousands):
<TABLE>
<CAPTION>
Year ended September 30,
---------------------------------
Net Revenues 1998 1997 1996
-------------------------- -------- ------- ---------
<S> <C> <C> <C>
United States............. $ 37,892 $65,415 $ 109,200
Europe.................... 8,233 11,528 18,700
Other foreign locations... 4,736 6,844 5,200
-------- ------- ---------
$ 50,861 $83,787 $ 133,100
======== ======= =========
</TABLE>
Net revenues from the Company's United States operations includes export
shipments of $4,487,000, $4,899,000 and $1,486,000 respectively during fiscal
1998, 1997 and 1996.
<TABLE>
<S> <C> <C> <C>
Operating income (loss):
United States............. $ (23,857) $ (16,180) $ (65,444)
Europe.................... $ 419 $ 2,127 (8,642)
--------- --------- ---------
$ (23,438) $ (14,053) $ (74,086)
========= ========= =========
Identifiable assets:
United States............. $ 17,843 $ 52,404 $ 73,184
Europe.................... 1,682 3,477 3,597
--------- --------- ---------
$ 19,525 $ 55,881 $ 76,781
========= ========= =========
</TABLE>
NOTE 16. LIQUIDITY
Cash and cash equivalents decreased $15,240,000 to $8,411,000 at September
30, 1998 from $23,651,000 at September 30, 1997. Working capital at September
30, 1998 was $1,955,000 as compared to $6,917,000 at September 30, 1997.
Due to the Company's declining revenues, recurring net operating losses,
continued restructurings, negative cash flow, reductions in working capital, a
stockholders' deficit and the uncertainty associated with the impact on future
operations and current products as a result of the acquisition of the Company by
Symantec Corporation, there is no assurance that Quarterdeck will be able to
continue as a going concern for fiscal 1999. Management's plans primarily relate
to the Company becoming a wholly-owned subsidiary of Symantec upon consummation
of the Merger, as described in Note 18 of the Consolidated Financial Statements.
53
<PAGE>
NOTE 17. VALUATION RESERVE REVERSAL
The market development fund (MDF) is designed to reimburse authorized
Quarterdeck distributors for Quarterdeck related marketing activities.
Quarterdeck's policy is to generally grant marketing funds to customers and
reserve for this expense. During the fourth quarter of fiscal 1998, the Company
reversed $1,520,000 of the allowance for marketing development funds as an
offset to Sales and Marketing expense which was determined to no longer be
necessary.
NOTE 18. SUBSEQUENT EVENT
On October 15, 1998, Quarterdeck, Symantec and Oak Acquisition Corporation,
a wholly owned subsidiary of Symantec, entered into the Merger Agreement whereby
Symantec agreed to commence a cash tender offer for all outstanding shares of
the Company at a price of $0.52 per share. The Merger Agreement further provided
for a Merger of Oak Acquisition Corporation with and into the Company in which
all remaining outstanding shares of the Company will be converted into the right
to receive $0.52 per share ("Merger").
On November 17, 1998 Symantec completed its tender offer obtaining
approximately 65% of Quarterdeck's outstanding shares of common stock and common
stock equivalents. Upon consummation of the Merger, which is expected to occur
in February 1999, the Company will become a wholly-owned subsidiary of Symantec.
In connection with the Merger Agreement, Quarterdeck and Symantec
concurrently entered into a License Agreement under which Quarterdeck granted
Symantec the non-exclusive right to, among other things, distribute
Quarterdeck's CleanSweep product. Symantec's right to distribute CleanSweep
commenced upon consummation of the tender offer.
On December 8, 1998, the Company reevaluated the reserve for sales returns
using all the up to date information available, including the level of sell
through activity subsequent to the announcement of the Symantec transaction
discussed above. The Company is not able to separate the impact of the decline
in sell through in the channel and the effects of the Symantec transaction. The
sell through of the Company's products continued to decline subsequent to year
end and the Company used this information in its decision to increase its
estimate of reserve for returns by $1,225,000 as of September 30, 1998.
54
<PAGE>
QUARTERDECK CORPORATION AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
Year ended September 30, 1998, 1997 and 1996
(in thousands)
<TABLE>
<CAPTION>
Balance Additions
at Charged Balance
Beginning to at End
September 30, Item of the Year Expenses Deductions of the Year
------------- --------------------------------------- ---------- -------- ------------ -----------
<S> <C> <C> <C> <C> <C>
1998 Allowance for doubtful accounts........ $ 1,761 $ 12 $ (849)(1) $ 924
1997 Allowance for doubtful accounts........ 2,032 379 (650)(1) 1,761
1996 Allowance for doubtful accounts........ 870 1,903 (741)(1) 2,032
1998 Inventory obsolescence reserve......... 943 529 (383) 1,089
1997 Inventory obsolescence reserve......... 3,978 2,075 (5,110) 943
1996 Inventory obsolescence reserve......... 676 3,914 (612) 3,978
1998 Sales returns reserve.................. 4,243 16,374 (15,511)(2) 5,106
1997 Sales returns reserve.................. 7,213 16,705 (19,675)(2) 4,243
1996 Sales returns reserve.................. 3,280 31,889 (27,956)(2) 7,213
1998 Marketing development fund reserve..... 3,242 4,562 (5,334) 2,470
1997 Marketing development fund reserve..... 3,774 4,562 (5,094) 3,242
1996 Marketing development fund reserve..... 1,051 11,673 (8,950) 3,774
1998 Allowance for rebates ................. - 4,626 (3,904) 722
</TABLE>
- ----------
(1) Uncollectible accounts written off, net of recoveries.
(2) Products returned.
55
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Marina del Rey, State of California, on December 22, 1998.
QUARTERDECK CORPORATION
By: /s/ HOWARD BAIN III
---------------------------------------
Howard Bain III
Chief Executive Officer, Director
Pursuant to the requirements of the Securities Exchange Act of 1934 this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ HOWARD BAIN III Chief Executive Officer, Director December 22, 1998
- ----------------------------------
Howard Bain III
/s/ FRANK R. GREICO Chief Financial Officer December 22, 1998
- ----------------------------------
Frank R. Greico
/s/ GORDON E. EUBANKS, JR. Director December 22, 1998
- ----------------------------------
Gordon E. Eubanks, Jr
/s/ DEREK WITTE Director December 22, 1998
- ----------------------------------
Derek Witte
/s/ ENRIQUE T. SALEM Director December 22, 1998
- ----------------------------------
Enrique T. Salem
/s/ FRANK W.T. LAHAYE Director December 22, 1998
- ----------------------------------
Frank W.T. LaHaye
/s/ KING R. LEE Director December 22, 1998
- ----------------------------------
King R. Lee
/s/ HOWARD L. MORGAN Director December 22, 1998
- ----------------------------------
Howard L. Morgan
</TABLE>
56
<PAGE>
Exhibit 3.7
AMENDED CERTIFICATE OF DESIGNATIONS
OF
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK OF
QUARTERDECK CORPORATION
(Pursuant to Section 151 of the
Delaware General Corporation Law)
Quarterdeck Corporation, a corporation organized and existing under
the General Corporate Law of the state of Delaware (the "Corporation"), hereby
certifies that the following resolution was adopted by the Board of Directors of
the Corporation as required by Section 151 of the General Corporation Law on
September 1, 1998.
RESOLVED, that pursuant to the authority granted to and vested in the
Board of Directors of this Corporation, in accordance with the provisions of the
Certificate of Incorporation and the Certificate of Designations of Series A
Junior Participating Preferred Stock of the Corporation, the Board of Directors
hereby amends the Certificate of Designations of Series A Junior Participating
Preferred Stock of the Corporation filed with the Secretary of State of the
State of Delaware on August 25, 1992 as follows;
Replace Section 1 with the following:
"Section 1. Designation and Amount. The shares of such series shall be
----------------------
designated as "Series A Junior Participating Preferred Stock" (the "Series A
Preferred Stock") and the number of shares constituting the Series A Preferred
stock shall be 1,000,000. Such number of shares may be increased or decreased by
resolution of the Board of Directors; provided, that no decrease shall reduce
--------
the number of shares of Series A Preferred Stock to a number less than the
number of shares then outstanding plus the number of shares reserved for
issuance upon exercise of outstanding options, rights or warranties or upon the
conversion of any outstanding securities issued by the Corporation convertible
into Series A Preferred Stock."
IN WITNESS WHEREOF, this Amended Certificate of Designations of Series
A Junior Participating Preferred Stock of the Corporation is executed on behalf
of the Corporation by the Interim President of the Corporation this 1/st/ day of
September, 1998.
________________________________________
King R. Lee, Interim President
<PAGE>
Exhibit 23.1
ACCOUNTANTS' CONSENT
The Board of Directors
Quarterdeck Corporation
We Consent to the incorporation by reference in the registration statements
(No. 333-60891, No. 333-52727 and No. 333-38693) on Form S-3 and the
registration statements (No. 333-53033 and No. 333-53073) on Form S-8 of
Quarterdeck Corporation of our report dated November 13, 1998, except for the
second and fourth paragraphs of note 18 which are as of November 17, 1998
and December 8, 1998, respectively, with respect to the consolidated balance
sheets of Quarterdeck Corporation and subsidiaries as of September 30, 1998 and
1997 and the related consolidated statements of operations, stockholders' equity
(deficit) and cash flows for each of the years in the three-year period ended
September 30, 1998, and the related schedule, which report appears in the
September 30, 1998 annual report on Form 10-K of Quarterdeck Corporation.
Los Angeles, California
December 22, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<CASH> 8,411
<SECURITIES> 0
<RECEIVABLES> 12,212
<ALLOWANCES> (9,222)
<INVENTORY> 968
<CURRENT-ASSETS> 14,391
<PP&E> 13,443
<DEPRECIATION> 9,803
<TOTAL-ASSETS> 19,525
<CURRENT-LIABILITIES> 12,436
<BONDS> 25,000
0
4,371
<COMMON> 67
<OTHER-SE> (22,371)
<TOTAL-LIABILITY-AND-EQUITY> 19,525
<SALES> 50,861
<TOTAL-REVENUES> 50,861
<CGS> 14,587
<TOTAL-COSTS> 59,712
<OTHER-EXPENSES> (1,264)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 952
<INCOME-PRETAX> (23,126)
<INCOME-TAX> 39
<INCOME-CONTINUING> (23,165)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (23,165)
<EPS-PRIMARY> (0.45)
<EPS-DILUTED> (0.45)
</TABLE>
