<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
-----------------------
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
COMMISSION FILE NUMBER 0-19207
QUARTERDECK CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 95-4320650
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
13160 MINDANAO WAY, MARINA DEL REY, CALIFORNIA 90292
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (310) 309-3700
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 periods 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
----- -----
The number of shares of the Registrant's common stock, $.001 par value,
outstanding as of April 30, 1998 was 57,635,994
================================================================================
<PAGE> 2
QUARTERDECK CORPORATION AND SUBSIDIARIES
FORM 10-Q
MARCH 31, 1998
INDEX
<TABLE>
<CAPTION>
PAGE NO.
<S> <C> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of March 31, 1998
(unaudited) and September 30, 1997 3
Consolidated Statements of Operations for the three and six
months ended March 31, 1998 and 1997 (unaudited) 4
Consolidated Statements of Cash Flows for the six
months ended March 31, 1998 and 1997 (unaudited) 5
Notes to Consolidated Unaudited Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 11
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 19
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 20
SIGNATURES 21
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
QUARTERDECK CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Amounts in thousands, except for share and per share amounts)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
1998 1997
---- ----
(Unaudited)
<S> <C> <C>
Current assets:
Cash & cash equivalents $ 22,465 $ 23,651
Trade accounts receivable 6,814 7,028
Inventories 968 1,177
Other current assets 3,228 4,655
--------- --------
Total current assets 33,475 36,511
Equipment and leasehold improvements, net 5,089 14,153
Capitalized software costs, net 1,330 1,790
Other assets 3,240 3,427
--------- --------
$ 43,134 $ 55,881
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,720 $ 3,792
Accrued liabilities 12,558 14,196
Accrued acquisition, restructuring and other charges 2,774 5,385
Income tax payable 308 627
Notes payable to bank 1,500 5,579
Current portion of long-term obligations 14 15
--------- --------
Total current liabilities 19,874 29,594
Convertible notes 25,000 25,000
Other long-term obligations, less current portion 64 114
--------- --------
Total liabilities 44,938 54,708
--------- --------
Stockholders' equity:
Series C Preferred stock (Par value $1,000,
authorized: 29,000; issued and outstanding:
28,051 and 26,025 shares, respectively, liquidation
preference $28,051,000) 26,427 24,594
Common stock (Par value $0.001, authorized:
100,000,000 shares; issued and outstanding:
43,860,211 and 43,338,838 shares) 44 43
Additional paid-in capital 76,616 75,630
Accumulated deficit (104,832) (98,164)
Foreign currency translation adjustment (41) (281)
Notes receivable from directors for sale of stock (18) (18)
Net unrealized gain (loss) on marketable securities 559 (72)
Treasury stock (559) (559)
--------- --------
Total stockholders' equity (1,804) 1,173
--------- --------
$ 43,134 $ 55,881
========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated unaudited
condensed financial statements.
3
<PAGE> 4
QUARTERDECK CORPORATION AND SUBSIDIARIES
CONSOLIDATED UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
--------------------- ---------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues $ 13,348 $ 23,097 $ 33,974 $ 47,482
Cost of revenues 4,075 5,304 8,784 12,352
-------- -------- -------- --------
Gross profit 9,273 17,793 25,190 35,130
Operating expenses:
Research and development 4,339 3,601 9,020 7,720
Sales and marketing 9,690 8,065 18,068 15,846
General and administrative 2,711 4,792 5,518 9,714
Acquisition, restructuring and
other charges (92) -- (143) --
-------- -------- -------- --------
Total operating expenses 16,648 16,458 32,463 33,280
-------- -------- -------- --------
Operating income (loss) (7,375) 1,335 (7,273) 1,850
Interest expense, net (169) (501) (436) (993)
Other income (expense), net 560 (1,666) 1,057 (1,666)
-------- -------- -------- --------
Loss before income taxes (6,984) (832) (6,652) (809)
Provision for income taxes -- -- 16 3
-------- -------- -------- --------
Net loss $ (6,984) $ (832) $ (6,668) $ (812)
======== ======== ======== ========
Net loss per share:
Basic $ (0.16) $ (0.02) $ (0.15) $ (0.02)
-------- -------- -------- --------
Diluted $ (0.16) $ (0.02) $ (0.15) $ (0.02)
-------- -------- -------- --------
Shares used to compute net loss per share:
Basic 43,408 38,062 43,385 37,902
-------- -------- -------- --------
Diluted 43,408 38,062 43,385 37,902
-------- -------- -------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated unaudited
condensed financial statements.
4
<PAGE> 5
QUARTERDECK CORPORATION AND SUBSIDIARIES
CONSOLIDATED UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
MARCH 31,
----------------------
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (6,668) $ (812)
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization of equipment and leasehold
improvements 1,872 2,570
Amortization of capitalized software costs
and other intangibles 682 1,082
Write-off of property and equipment 16 176
Gain on sale of assets (1,005) --
Decrease in unrealized gain on marketable securities -- (544)
Changes in assets and liabilities:
Trade accounts receivable 214 (3,733)
Inventories 209 540
Other current assets 2,057 907
Other assets (35) 4,400
Accounts payable (1,072) (4,983)
Accrued liabilities (1,638) (3,182)
Accrued acquisition, restructuring and other charges (2,511) (7,416)
Income tax payable (319) 177
Foreign currency translation adjustment 240 (36)
-------- --------
Net cash used in operating activities (7,958) (10,854)
-------- --------
Cash flows from investing activities:
Capital expenditures (1,194) (3,503)
Proceeds from sale of building 7,700 --
Proceeds from divestitures 1,575 --
Capitalized software costs -- (178)
-------- --------
Net cash provided by (used in) investing activities 8,081 (3,681)
-------- --------
Cash flows from financing activities:
Net proceeds from issuance of Series C Preferred stock 1,833 --
Principal debt repayments (4,079) (2,944)
Proceeds from bank borrowing -- 1,582
Net payments under long-term obligations (50) --
Net proceeds from issuance of common stock 987 578
-------- --------
Net cash used in financing activities (1,309) (784)
-------- --------
Net decrease in cash and cash equivalents (1,186) (15,319)
Cash and cash equivalents at beginning of period 23,651 25,554
-------- --------
Cash and cash equivalents at end of period $ 22,465 $ 10,235
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 918 $ 994
Income taxes $ -- $ 50
</TABLE>
The accompanying notes are an integral part of these consolidated unaudited
condensed financial statements.
5
<PAGE> 6
QUARTERDECK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED UNAUDITED CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements of Quarterdeck
Corporation are unaudited and have been prepared by the Company pursuant to the
rules and regulations of the Securities and Exchange Commission regarding
interim financial reporting. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements and should be read in conjunction with the
consolidated financial statements and notes thereto included in Quarterdeck's
Annual Report on Form 10-K, for the fiscal year ended September 30, 1997. In the
opinion of management, the accompanying consolidated unaudited condensed
financial statements include all adjustments which are necessary for a fair
presentation. The results of operations for the three and six month period ended
March 31, 1998 are not necessarily indicative of results to be expected for the
full fiscal year.
2. GENERAL
Quarterdeck Corporation is a global leader in the development and
marketing of PC helpware -- software designed to prevent and solve PC
performance problems, especially those encountered in networked -- Internet and
intranet -- environments. The Company's goal is to make personal computing
trouble-free for users and network administrators alike, while reducing the need
for live technical support. Quarterdeck's current product line, which addresses
storage management, system conflict resolution, virus protection, system
updating, and enhanced access to networked information and communications
resources, is marketed to both end-users and businesses via retail distribution,
corporate resellers and OEM's, direct marketing channels, and the Internet.
Quarterdeck's products are available in over 14,000 outlets throughout the
United States and Canada, as well as in over 29 countries worldwide.
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.
6
<PAGE> 7
3. BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
1998 1997
-------- --------
(unaudited)
(in thousands)
<S> <C> <C>
Trade accounts receivable:
Receivables $ 19,347 $ 16,274
Less: allowance for doubtful accounts (1,253) (1,761)
Less: allowance for sales returns (6,663) (4,243)
Less: allowance for market development funds (3,894) (3,019)
Less: allowance for rebates (723) (223)
-------- --------
$ 6,814 $ 7,028
======== ========
Other current assets:
Prepaid royalties $ 462 $ 352
Income tax receivable 58 520
Other prepaid expenses 1,039 800
Marketable security - Infonautics 1,423 792
Other 246 2,191
-------- --------
$ 3,228 $ 4,655
======== ========
Equipment and leasehold improvements:
Building (asset held for sale) $ -- $ 7,359
Computer equipment 7,540 7,769
Office furniture and equipment 5,808 6,575
Office furniture and equipment under capital leases 238 99
Leasehold improvements 2,114 2,638
-------- --------
15,700 24,440
Less: accumulated depreciation and amortization (10,611) (10,287)
-------- --------
$ 5,089 $ 14,153
======== ========
Capitalized software costs:
Capitalized software costs $ 5,498 $ 5,498
Less: accumulated amortization (4,168) (3,708)
-------- --------
$ 1,330 $ 1,790
======== ========
Other assets:
Intangible assets acquired, net $ 2,461 $ 2,683
Other 779 744
-------- --------
$ 3,240 $ 3,427
======== ========
Accrued liabilities:
Accrued expenses $ 10,177 $ 11,153
Accrued royalty commission 1,172 1,138
Accrued rebates 1,209 --
Accrued litigation settlement -- 1,905
-------- --------
$ 12,558 $ 14,196
======== ========
Accrued acquisition, restructuring and other charges:
Acquisition $ 50 $ 50
Restructuring 2,724 5,335
-------- --------
$ 2,774 $ 5,385
======== ========
</TABLE>
7
<PAGE> 8
4. CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
5. COMPUTATION OF NET INCOME PER SHARE
In February 1997, the Financial Accounting Standards Board issued SFAS
No. 128, "Earnings Per Share". SFAS No. 128 specifies new standards designed to
improve the earnings per share (EPS) information provided in financial
statements by simplifying the existing computational guidelines, revising the
disclosure requirements and increasing the comparability of EPS data on an
international basis. Some of the changes made to simplify the EPS computations
include: (a) eliminating the presentation of primary EPS and replacing it with
basic EPS, for which common stock equivalents are not considered, (b)
eliminating the modified treasury stock method and the three percent materiality
provision and (c) revising the contingent share provision and the supplemental
EPS data requirements. SFAS No. 128 also makes a number of changes to existing
disclosure statements. The Company adopted SFAS No. 128 for the quarter ended
December 31,1997.
The following table sets forth the computation of basic and diluted net
income per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
-------------------- --------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Numerator:
Net loss, net loss available to common
stockholders and net loss available to
common stockholders after required conversion: $(6,984) $ (832) $(6,668) $ (812)
======= ======= ======= =======
Denominator:
Shares used for basic net loss per share
calculation - weighted average shares outstanding 43,408 38,062 43,385 37,902
------- ------- ------- -------
Shares used for diluted net loss per share calculation 43,408 38,062 43,385 37,902
======= ======= ======= =======
</TABLE>
No adjustment was required in calculating net income available to common
stockholders after assumed conversion as there are no dividend requirements on
the Company's preferred stock.
Options to purchase 6,951,339 shares at a weighted average exercise
price of $3.36 and 5,037,316 shares at a weighted average exercise price of
$4.88 were outstanding during the three months ended March 31, 1998 and 1997,
respectively, but were not included in the computation of diluted net income per
share for either period because the effect would be anti-dilutive.
Warrants to purchase 904,000 shares and 1,704,000 shares at a weighted
average exercise price of $7.44 were outstanding during the three months ended
March 31, 1998 and 1997, respectively, but were not included in the computation
of diluted net income 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 during the three months ended March 31, 1998 and 1997,
but were not included in the computation of diluted net income 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 either 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 March 31, 1998 and 1997.
8
<PAGE> 9
Quarterdeck did not include 14,823,760 shares of Series C Convertible
Preferred Stock issuable upon the conversion of the stock and warrants based
upon the conversion price at March 31, 1998 of $1.91 per share as the effect
would be anti-dilutive. Shareholders are free to convert based upon the price as
of the trailing 22 days. See "Liquidity and Capital Resources" for conversions
during March 1998.
6. RESTRUCTURING CHARGES
During September 1997, the Company implemented a restructuring plan to
focus the Company on its new corporate strategy which resulted in charges
totaling $11,051,000. As part of the restructuring, the net book value of the
Company's building in Columbia, Missouri was written down by $5,803,000, to
$7,000,000, the estimated fair market value. (This building and certain
furniture and fixtures were sold during the quarter ended December 31, 1997
resulting in a net gain of $497,000.)
These are the remaining significant components of the fiscal 1997
restructuring and other charges (in thousands):
<TABLE>
<CAPTION>
DISCONTINUANCE AND SEVERANCE
CONSOLIDATION OF AND
OFFICES OTHER TOTAL
------------------ --------- --------
<S> <C> <C> <C>
Accrued, December 31, 1997..... 474 2,958 3,432
Cash payments.................. (70) (959) (1,029)
---- ------ -------
Accrued, March 31, 1998........ $404 $1,999 $ 2,403
==== ====== =======
</TABLE>
Quarterdeck currently expects the 1997 restructuring accrual to be
utilized, primarily through cash disbursements, through the quarter ending March
31, 1999. The Company anticipates the cash effect of such disbursements to be of
declining significance during this period.
The remaining significant components from fiscal 1996 restructuring
actions (in thousands) are as follows:
<TABLE>
<CAPTION>
DISCONTINUANCE AND SEVERANCE
CONSOLIDATION OF AND
OFFICES OTHER TOTAL
------------------ --------- -----
<S> <C> <C> <C>
Accrued, December 31, 1997..... 397 78 475
Non-cash costs................. (92) (33) (125)
Cash payments.................. (29) -- (29)
----- ----- -----
Accrued, March 31, 1998........ $ 276 $ 45 $ 321
===== ===== =====
</TABLE>
The remainder of the 1996 restructuring accrual primarily relates to
vacant leased facilities. The leases for the facilities extend several years,
but the Company is seeking to obtain subleases for this space.
7. LEGAL PROCEEDINGS
Federal and state shareholder actions were brought against the Company
and one former and one current officer of the Company alleging among other
things, violations of certain provisions of California and Federal securities
laws. On December 19, 1997, the Company reached an agreement in principle to
settle such actions for a total amount of $12,500,000, of which the Company will
be required to pay approximately $1,905,000, with the balance of $10,595,000 to
be paid under the Company's directors' and officers' insurance policy. The
settlement is subject to, among other things, court approval. The Company
recorded a charge of $1,905,000 during its fiscal year ended September 30, 1997.
In March 1997, a purported class action lawsuit brought on behalf of all
licensees of MagnaRAM2 residing in the United States, Jack Abbott, et al. v.
Quarterdeck Corporation, Case No. 00709198, was filed in the Superior Court of
the State of California, County of San Diego. The complaint alleges, among other
things, that MagnaRAM2 fails to increase Random Access Memory significantly or
otherwise help Windows 95 and Windows 3.x users. The plaintiffs seek
compensatory damages and punitive damages in unspecified amounts, injunctive
relief, and attorney fees and costs. Quarterdeck has filed counterclaims and
intends to defend the case vigorously and to oppose any effort to certify the
claims for class resolution. No assurances can be given that the ultimate
disposition of this case will not have a material adverse effect on the
Company's results of operations, financial condition or liquidity.
9
<PAGE> 10
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) violate 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.
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This discussion and analysis of financial condition and results of
operations should be read in conjunction with the consolidated financial
statements, the notes thereto and other information, including information set
forth in the Company's 10-K for the fiscal year ended September 30, 1997, and
all other recent filings Quarterdeck has made with the Securities and Exchange
Commission, before making an investment decision with respect to the Company's
stock.
In addition to an analysis of recent and historical financial results,
this Form 10-Q includes a discussion of certain of Quarterdeck's business risks,
including risks inherent to developing and marketing software as well as
specific trends and uncertainties relating to the competitive environment in
which the Company operates. Though Quarterdeck has sought to identify and
disclose the significant risks to its business,, the Company cannot predict
where or to what extent any of such risks may be realized; nor can there be any
assurance that Quarterdeck has identified all possible issues which the Company
faces now or may face in the future.
This Form 10-Q 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-Q, words such as "believes", "anticipates", "plans",
"expects", "intends", and similar expressions 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, the ability to successfully launch products into the
corporate market, sell-through of products in the sales channel, successful
integration of acquisitions, the effect of conversion of the Company's
convertible preferred stock, the ability to reduce operating expenses and other
factors described throughout this Form 10-Q and in the Company's other filings
with the Securities and Exchange Commission. The actual results that the Company
achieves may differ materially from any forward-looking statements due to such
risks and uncertainties. The Company undertakes no obligations to revise or
update any forward-looking statements in order to reflect events or
circumstances that may arise after the date of this report.
RESULTS OF OPERATIONS
The Company's fiscal 1998 operating plan involves introducing many new
and upgraded PC helpware products for retail markets and developing small/medium
business network versions of its products, mainly for fiscal 1999 introduction.
Operating revenues for the first six months of fiscal 1998 shortfall prior
period results in major part because the many new retail products launched
recently had not yet established high sell-through rates to end users, the chief
criterion the Company uses to estimate net revenues, and had yet to reach retail
outlets internationally in significant volumes. At the same time, expenses for
research and development and sales and marketing ran higher than prior periods
in order to complete and launch the new products. Going forward in fiscal 1998,
the Company anticipates a moderating pace of new retail product launches and a
corollary reduction in operating expenses, along with continued investment in
its business network products and a heightened focus on increasing sell-through
rates for its expanded product portfolio.
Net Revenues: The Company's net revenues consist of gross sales of its
products, less provisions for returns and customer allowances. In the retail and
corporate reseller channels, which are Quarterdeck'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 often 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.
Net revenues for the three and six months ended March 31, 1998 of
$13,348,000 and $33,974,000 decreased 42.2% and 28.4% or $9,749,000 and
$13,508,000, respectively, from net revenues of $23,097,000 and $47,482,000 for
the three and six months ended March 31, 1997. Revenue for the three months
ended March 31, 1998 fell below that for the three months ended March 31, 1997
for several reasons: (1) reduced revenue in the Direct Marketing channel of
approximately $2,500,000 primarily due to a transition of the telesales
operation to an outsource vendor and a reduced number of direct mail campaigns;
(2) customer rebates of approximately
11
<PAGE> 12
$2,700,000 which were offered in order to encourage both the sell-through of
CleanSweep 3.0 prior to the launch of CleanSweep 4.0 and to meet increased price
competition on other products; (3) an additional provision for possible future
returns of approximately $2,400,000 on new product lines - i.e. DiskClone,
RealHelp, RealHelp Extra Strength, ViruSweep, and ViruSweep Extra Strength - for
which high sell-through rates to end users have not yet been established; (4) a
reduction in international revenue of approximately $870,000 primarily related
to delays in the localization of new products in both the European and Japanese
markets; and (5) the decline in sales of certain legacy memory management and
communications products and the discontinuance during fiscal 1997 of certain
non-core product lines.
The majority of Quarterdeck's revenues are derived from US sales, but
the relative contribution from international revenues has grown, representing
31.0% and 26.6% of the Company's net revenues, for the three and six month
periods ended March 31, 1998, respectively, as compared to 20.2% and 18.5% for
the three and six month periods ended March 31, 1997.
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. Cost of
revenues for the three and six months ending March 31, 1998 of $4,075,000 and
$8,784,000, respectively, decreased 23.2% and 28.9% or $1,229,000 and
$3,568,000, respectively, from cost of revenues of $5,304,000 and $12,352,000
for the three and six months ended March 31, 1997, respectively. Cost of
revenues as a percentage of net revenues increased to 30.5% from 23.0% for the
three months ended March 31, 1998 and 1997, respectively but decreased to 25.9%
from 26.0% for the six months ended March 31, 1998 and 1997, respectively. The
dollar decrease in cost of revenues for both the three and six month periods was
largely due to reduced sales and to improved efficiency in production and
technical support activities. The increase in cost of revenues as a percent of
net revenues for the three month period ended March 31, 1998 was primarily due
to the fact that net revenues in that quarter were reduced by return provisions
and customer rebate allowances that did not similarly reduce the cost of goods
shipped into retail distribution channels.
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. For the three and
six months ended March 31, 1998 and 1997, Quarterdeck did not capitalize any
internal software development, judging that costs incurred after achieving
technological feasibility were immaterial. For the three and six months ended
March 31, 1998, amortization of previously capitalized software costs of
$230,000 and $460,000 decreased 45.4% or $191,000 and 57.5% or $622,000 from
amortization of capitalized software costs of $421,000 and $1,082,000 for the
three and six months ended March 31, 1997 reflecting the winding down of earlier
capitalized amounts. No software development costs were capitalized in the March
1998 quarter.
Total Operating Expenses: Operating expenses for the three and six
months ended March 31, 1998 of $16,648,000 and $32,463,000, respectively,
increased by 1.2% or $190,000 and decreased 2.5% or $817,000, from total
operating expenses of $16,458,000 and $33,280,000 for the three and six months
ended March 31, 1997, respectively, increasing as a percent of net revenues to
124.7% and 95.6% for the three and six months ended March 31, 1998,
respectively, from 71.3% and 70.1% for the three and six months ended March 31,
1997 respectively. The comparisons reflect increased expenditures in research
and development and sales and marketing, offset by decreased overhead expenses
accomplished in the fiscal 1996 and 1997 restructurings. The increase as a
percent of net revenues was primarily due to the reduction in net revenues for
the three and six months ended March 31, 1998 as compared to the three and six
months ended March 31, 1997.
Research and Development: Research and development expenses consist
primarily of salaries, benefits and consulting fees to support product
development, including product testing and documentation. For the three and six
months ended March 31, 1998, research and development expenses of $4,339,000 and
$9,020,000, respectively, increased 20.5% and 16.8% or $738,000 and $1,300,000,
respectively, from research and development expenses of $3,601,000 and 7,720,000
for the three and six months ended March 31, 1997, while increasing as a percent
of net revenues to 32.5% and 26.5% for the three and six months ended March 31,
1998 from 15.6% and 16.3% for the three and six months ended March 31, 1997,
respectively. The increase in research and development expenses was largely due
to increased internal research and development headcount and to payments to
third parties for contracted product development required to support the
Company's expanded helpware product development efforts. The Company's increased
research and development reflects development costs for new strategic products
for both the retail and corporate markets.
12
<PAGE> 13
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. For the
three and six months ended March 31, 1998, sales and marketing expenses of
$9,690,000 and $18,068,000 increased 20.1% and 14.0% or $1,625,000 and
$2,222,000, respectively, from sales and marketing expenses of $8,065,000 and
$15,846,000 for the three and six months ended March 31, 1997 while increasing
as a percent of net revenues to 72.6% and 53.2% for the three and six months
ended March 31, 1998 from 34.9% and 33.4% for the three and six months ended
March 31, 1997. This increase was primarily due to an increase in advertising
and promotional activities and consulting expenses, occurring as a result of the
new strategic product launches during the March 1998 quarter.
General and Administrative: General and administrative expenses consist
of salaries and related costs of support departments, overhead and facilities.
For the three and six months ended March 31, 1998, general and administrative
expenses of $2,711,000 and $5,518,000 decreased 43.4% and 43.2% or $2,081,000
and $4,196,000, respectively, from general and administrative expenses of
$4,792,000 and $9,714,000 for the three and six months ended March 31, 1997,
while decreasing as a percent of net revenue to 20.3% and 16.2% for the three
and six months ended March 31, 1998 from 20.7% and 20.5% for the three and six
months ended March 31, 1997. These declines were largely due to reductions in
headcount and consultants. Additionally, facility related expenses declined
significantly due to the restructuring efforts late in fiscal 1996 and fiscal
1997, the closure or consolidation of seven office locations; the sale of the
Columbia, Missouri building, and the sublease of approximately 52,000 square
feet of the Company's current office space to other tenants.
Restructuring Costs: For the three and six months ended March 31, 1998,
the Company reversed $92,000 and $143,000 of accrued restructuring costs which
were no longer required. There were no restructuring costs for the three and six
months ended March 31, 1997.
Other income: For the three and six months ended March 31, 1998, net
other income of $560,000 and $1,057,000 primarily represents the gain realized
upon the sale of the Columbia, Missouri building 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.
See Liquidity and Capital Resources (page 17) for further discussion. The net
other expense for the three and six months ended March 31, 1997 relates to a
$1,666,000 write down of Quarterdeck's investment in Infonautics.
Interest expense: For the three and six months ended March 31, 1998, net
interest expense of $169,000 and $436,000 decreased 66.3% and 56.1% or $332,000
and $557,000, respectively, from net interest expense of $501,000 and $993,000
for both the three and six months ended March 31, 1997, while decreasing as a
percent of net revenues to 1.3% for the three and six months ended March 31,
1998 from 2.2% and 2.1% for the three and six months ended March 31, 1997,
respectively. Net interest expense decreased primarily due to a reduction of the
outstanding bank debt by $5,497,000, from the March 1997 quarter. Also
contributing to the interest expense reduction is a decrease in the interest
rate paid on the Company's new revolving line of credit which was established in
April 1997 and an increase in interest income relating to higher cash balances
maintained in interest bearing accounts as compared to the three and six months
ended March 31, 1997.
Income Taxes: A valuation allowance was recorded for income tax expense
as it relates to foreign operations to offset 100% of the Company's $36,173,000
net deferred tax asset as of March 31, 1998. The net deferred tax asset of
$36,173,000 (before applying the valuation allowance) is comprised of the
estimated tax effect of expected future reversing temporary differences and tax
net operating losses, relating in part to charges taken for book purposes that
are not deductible for federal income tax purposes until the amounts are paid in
the future. Management believes that due to recent financial results it is
appropriate to record a full valuation allowance until such time as it becomes
more likely than not that the Company will realize some or all of the benefit of
the net deferred tax asset.
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
13
<PAGE> 14
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 is focusing significant efforts on evolving its core
utilities and communication product lines into a set of products designed to
enhance user performance, simplify system management and reduce the ongoing cost
of ownership for networked personal computing. As part of this effort, the
Company has been developing new products, such as ViruSweep, RealHelp, and
DiskClone and adapting its current technology into these products and has made
and may make strategic acquisitions and divestitures. 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, uncertainties surrounding the rate and extent of
development of this new market.
The Company is also devoting 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 NT 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. Microsoft is expected to release Windows 98 in
June 1998. Any delay in this release could slow expected PC software sales
during fiscal 1998.
Future competitive product releases may cause disruptions in orders for
the Company's products while users and the marketplace evaluate the competitive
products. The extent of the disruption in orders and the impact on future orders
of the Company's products will depend on various factors that are not fully
known at this time, including the level of functionality, performance and
features included in the final release of these competitive products and the
price thereof and the market's evaluation of competitive products compared to
the then current functionality, performance, features and price of the Company's
products.
Quarterdeck believes that substantial sales and marketing efforts are
essential to achieve revenue growth and to maintain and enhance the Company's
competitive position. Accordingly, Quarterdeck expects the expenses associated
with these efforts to continue to constitute its most significant operating
expense. There can be no assurance that these sales and marketing efforts will
be successful in achieving their intended results.
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 sized against expected sell-through rates
and no assurance is possible that actual sell-through rates will accord with
these expectations. Quarterdeck's return policy generally allows its
distributors, subject to certain limitations, to return purchased products in
exchange for new products or for credit toward future purchases. However,
competitive factors and/or market conditions often require the Company to offer
expanded rights of return for products that distributors or retailers are unable
to sell. The Company also provides price protection rights to its distributors
which generally give distributors credit for price decreases on products
remaining in the 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
14
<PAGE> 15
Company's recent restructurings and financial performance. As a result, there
can be no assurance that the Company will be successful in attracting and
retaining such personnel. The loss of the services of key individuals or the
inability to attract and retain highly qualified personnel, including
developers, could have a material adverse effect on the Company.
The Company's Series C Convertible Preferred Stock (the "Series C
Preferred Stock"), is convertible into shares of Common Stock. The exact number
of shares of Common Stock issuable upon conversion of all of the Series C
Preferred Stock cannot currently be estimated but, generally, such issuances of
Common Stock will vary inversely with the market price of the Common Stock. The
holders of Common Stock may be materially diluted by conversion of the Series C
Preferred Stock which dilution will depend on, among other things, the future
market price of the Common Stock and the decisions by holders of shares of
Series C Preferred Stock as to when to convert such shares. Each share of Series
C Preferred Stock is convertible into the number of shares of Common Stock equal
to the quotient of (i) $1,000.00 divided by (ii) the Conversion Price. 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"). The maximum Conversion Price is $5.125 until March 31, 1999,
and thereafter will be the lesser of (i) $5.125, (ii) 101% of the average daily
low trade prices of the Common Stock for all trading days in March 1999, (ii)
101% of the average daily low trade prices of the Common Stock for all trading
days in September 1999 and (iii) 101% of the average daily low trade prices of
the Common Stock for all trading days in March 2000. The Company's stock has
experienced wide fluctuations in its stock price and stock market volatility,
whether related to the stock market generally or the Company specifically. Such
fluctuations, if coincident in time with conversions of Series C Preferred
Stock, will impact directly the number of shares of Common Stock issuable upon
conversion thereof. The terms of the Series C Preferred Stock do not provide for
any limit on the number of shares of Common Stock which the Company may be
required to issue in respect thereof. There were no conversions of the Company's
Series C Preferred Stock prior to March 1, 1998. Between March 1, 1998 and April
30, 1998, the Company issued 13,865,474 shares of the Company's Common Stock
upon conversion of 18,988 shares, or 61.5% of the outstanding shares of Series C
Preferred Stock (including the conversion of 1,140 shares of Series C Preferred
Stock issued upon exercise of 1,521 warrants). The Series C Preferred Stock and
warrants were initially issued between September 30, 1997 and November 4, 1997
to various accredited investors in a private placement pursuant to Regulation D
of the Securities Act of 1933, as amended (the "Act"). As of April 30, 1998,
11,533 shares of Series C Preferred Stock and 1,379 warrants remain outstanding.
During fiscal 1995 and fiscal 1996, Quarterdeck consummated a number of
acquisitions which broadened the Company's product portfolio and sales
distribution channels. At the end of fiscal 1996 and during fiscal 1997, the
Company implemented a comprehensive, corporate-wide restructuring plan to focus
the Company in the utilities and communications software categories. The
Company's results for fiscal 1996 and fiscal 1997 were negatively impacted by
the costs of integrations and acquisitions, including severance payments and
asset devaluations. Implementation of these strategic transactions could result
in charges and write-downs having a material adverse effect on the Company's
financial results. In addition, there are significant business risks associated
with acquisitions, including the successful integration of the companies in an
efficient and timely manner, the coordination of research and development and
sales efforts, the retention of key personnel, the diversion of management's
attention from day to day matters and the integration of acquired products.
Acquisitions may result in the Company competing with companies and in markets
where the Company had not previously competed. There may also be an adverse
impact on the revenues of acquired companies due to the transition of products
sales and marketing and research and development activities.
The Company has made a preliminary 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 believes its computer servers,
customer base systems and telephone systems are either Year 2000 compliant or
can be upgraded to be Year 2000 compliant at minimal cost. In addition, the
general accounting and operations systems are under evaluation and are expected
to be Year 2000 compliant at minimal 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. In addition,
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. 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
possible that
15
<PAGE> 16
third parties could assert claims against the Company concerning Year 2000
issues relating to its software or otherwise, and that the costs of these claims
could be material.
RECENTLY ISSUED ACCOUNTING STANDARDS
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
per Share," is effective for financial statements issued for periods ending
after December 15, 1997. SFAS No. 128 replaces Accounting Principles Board
Opinion ("APB") No. 18 and simplifies the computation of earnings per share
("EPS") by replacing the presentation of primary EPS with a presentation of
basic EPS. Basic EPS includes no dilution and is computed by dividing income
available to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution from
securities that could share in the earnings of the Company, similar to fully
diluted EPS under APB No. 15. The Statement requires dual presentation of basic
and diluted EPS by entities with complex capital structures. The Company adopted
SFAS No. 128 for the financial statements begininng with the quarter ended
December 31, 1997.
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 SPAS 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. Quarterdeck does not
believe they will be required to make any additional disclosures in its
financial statements. The Company will adopt SFAS No. 131 effective October 1,
1998.
The AICPA recently 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 anticipates adopting SOP 97-2 for
transactions entered into on and after October 1, 1998. While the Company is
still evaluating the impact of this statement, it believes that it is in
substantial compliance with the provisions thereof. In addition, the impact of
SOP 97-2 will depend on the terms of future transactions.
FACTORS AFFECTING QUARTERLY RESULTS AND STOCK PRICE
The Company's future operating results and stock price could be subject
to significant fluctuations and volatility. The Company's revenues and quarterly
operating results may experience significant fluctuations and be unpredictable
as the result of a number of factors including, among others, introduction of
new or enhanced products by the Company or its competitors, rapid technological
changes in the Company's markets, seasonality of revenues, changes in operating
expenses and general economic conditions. The Company's net revenues and net
income (loss) have fluctuated significantly from year to year and from quarter
to quarter since the Company's initial public offering in June 1991.
Quarterdeck has experienced wide fluctuations in its stock price, which
may be subject to significant fluctuations in the future over a short period of
time. The trading price of the Common Stock increased from approximately $3.00
in January 1995 to a high of approximately $39.00 in December 1995 to a low of
approximately $1.31 in April 1998. Fluctuations may be due to factors specific
to the Company, to changes in analysts' estimates or to factors affecting the
computer industry or the securities markets in general. In addition, since
diluted net income per share is calculated using the treasury stock method (see
Note 5 of the Notes to Consolidated Unaudited Condensed Financial Statements),
increases in the price of Quarterdeck's stock can have an adverse impact on the
calculation of diluted net income per share in that period as more outstanding
instruments are included as common shares outstanding. This and other factors,
including the existence or conversion of any outstanding convertible securities,
any decline in revenues or quarterly operating results, or the failure to meet
16
<PAGE> 17
market expectations, could have an immediate and significant effect on the
trading price of the Common Stock in any given period.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents as of March 31, 1998 of $22,465,000 decreased
5.0% or $1,186,000 from $23,651,000 at September 30, 1997. Working capital,
which is the excess of current assets over current liabilities, at March 31,
1998 was $13,601,000 as compared to $6,917,000 at September 30, 1997
representing an increase in working capital of $6,684,000.
Operating activities: Cash used in operating activities of $7,958,000
since September 30, 1997 was dominated by the reported net loss of $6,668,000.
Within that loss, $1,005,000 was a non-operating gain and $2,570,000 consisted
of non-cash charges for depreciation, amortization, and property and equipment
write-offs, leaving a cash operating loss of $5,103,000 before changes in net
operating assets and liabilities. These changes in turn consumed $2,855,000 in
cash, $5,300,000 through reduced operating liabilities offset by a $2,445,000
decline in operating assets. The reduction in liabilities reflected vendor
reimbursements, a generally reduced level of incurred operating expenses, and
one-time payments pursuant to fiscal 1996 and 1997 restructuring plans. The
reduction in operating assets included approximately $1,800,000 relating to
receivables generated from the sale of securities in fiscal 1997 and a modest
reduction in net receivables and inventories. Net receivables declined despite a
$3,073,000 increase in gross receivables because the Company took unusually
large provisions against gross sales to cover customer rebates and possible
future returns on new product lines.
Investing activities: Cash provided by investing activities of
$8,081,000 was due to the sale of the Columbia, Missouri building on December
30, 1997 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 $1,194,000 for capital expenditures
primarily related to computer purchases.
Financing activities: Cash used in financing activities of $1,309,000
was primarily related to the principal repayment of $4,000,000 relating to the
Columbia Missouri construction loan as a result of the sale of the building and
payments for long term financing of $129,000 which was partially offset by
$2,820,000 of net proceeds from the sale of Series C preferred stock and
issuance of common stock.
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.
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 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 March 31, 1998, the Company had
$1,500,000 outstanding under the line and the ability to borrow up to a maximum
amount of $10,500,000. 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.
In September 1997 and between October 1997 and November 4, 1997, the
Company issued 26,025 and 2,975 shares, respectively, of Series C Preferred
Stock, stated value $1,000 per share of the Company for $24,594,000 and
$2,782,000, net of offering fees, respectively. See "Trends and Uncertainties"
for a discussion of the Series C Preferred Stock conversions to the Company's
Common Stock.
On January 12, 1998, the Company completed the divestiture of the
business of StarNine Technologies, Inc., the Company's Berkeley, California
subsidiary specializing in Internet tools for Macintosh users, to Platinum
Equity Holdings. In addition, the Company signed an outsourcing contract with
The Sutherland Group, Ltd., for the Company's Clearwater, Florida consumer and
corporate telesales operations.
17
<PAGE> 18
The Company believes existing working capital and borrowing capacity
under the line of credit will be sufficient to fund the Company's operations for
fiscal 1998. Nevertheless, the Company may explore various financing
alternatives in order to finance an expansion of the business of the Company and
help provide additional working capital for operations or to strengthen the
Company's balance sheet. There is no assurance that additional financing will be
available, or if available, will be available on acceptable terms. Any decision
or ability to obtain financing through debt or equity investment will depend on
various factors, including, among others, revenues, financial market conditions,
strategic acquisition and investment opportunities, and developments in the
Company's markets. The sale of additional equity securities or future conversion
of any convertible debt would result in additional dilution to the Company's
stockholders.
The Company conducts business in various foreign currencies and is
therefore subject to the transaction exposures that arise from foreign exchange
rate movements between the dates that foreign currency transactions are recorded
and the date that they are consummated. The Company is also subject to certain
exposures arising from the translation and consolidation of the financial
results of its foreign subsidiaries. There can be no assurance that actions
taken to manage such exposures will continue to be successful or that 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.
18
<PAGE> 19
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Federal and state shareholder actions were brought against the Company
and one former and one current officer of the Company alleging among other
things, violations of certain provisions of California and Federal securities
laws relating to statements made about Quarterdeck. On December 19, 1997, the
Company reached an agreement in principle to settle such actions for a total
amount of $12,500,000, of which the Company will be required to pay
approximately $1,905,000, with the balance of $10,595,000 to be paid under the
Company's directors' and officers' insurance policy. The settlement is subject
to, among other things, court approval. The Company has recorded a charge of
$1,905,000 for its fiscal year ended September 30, 1997.
In March 1997, a purported class action lawsuit brought on behalf of all
licensees of MagnaRAM2 residing in the United States, Jack Abbott, et al. v.
Quarterdeck Corporation, Case No. 00709198, was filed in the Superior Court of
the State of California, County of San Diego. The complaint alleges, among other
things, that MagnaRAM2 fails to increase Random Access Memory significantly or
otherwise help Windows 95 and Windows 3.x users. The plaintiffs seek
compensatory damages and punitive damages in unspecified amounts, injunctive
relief, and attorney fees and costs. Quarterdeck has filed counterclaims and
intends to defend the case vigorously and to oppose any effort to certify the
claims for class resolution. No assurances can be given that the ultimate
disposition of this case will not have a material adverse effect on the
Company's results of operations, financial condition or liquidity.
In October 1997, a complaint was filed in the United States District
Court for the District of Utah on behalf of PowerQuest Corporation against the
Company. The complaint alleges that the Company's partitioning software
(Partition-It) violates a patent held by PowerQuest. 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 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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Between March 1, 1998 and April 30, 1998, the Company issued 13,865,474
shares of the Company's Common Stock upon conversion of 18,988 shares of the
outstanding shares of Series C Preferred Stock (including the conversion of
1,140 shares of Series C Preferred Stock issued upon exercise of 1,521
warrants). The Series C Preferred Stock and warrants were initially issued
between September 30, 1997 and November 4, 1997 to various accredited investors
in a private placement pursuant to Regulation D of the Act. The Common Stock is
being issued under Section 3a(9) or 4(2) of the Act.
19
<PAGE> 20
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
A Form 8-K with respect to transfers of the Company's Series C
Convertible Preferred Stock by holders thereof was filed with the
Securities and Exchange Commission on March 9, 1998.
A Form 8-K with respect to expected net revenues of the Company
for the quarter was filed with the Securities and Exchange
Commission on April 2, 1998.
20
<PAGE> 21
SIGNATURES
Pursuant to the requirements 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.
QUARTERDECK CORPORATION
(Registrant)
Date: May 14, 1998 /s/ CURTIS A. HESSLER
-------------------------------------
Curtis A. Hessler
President and Chief Executive Officer
Date: May 14, 1998 /s/ FRANK GREICO
-------------------------------------
Frank Greico
Sr. Vice President and
Chief Financial Officer
21
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 22,465
<SECURITIES> 0
<RECEIVABLES> 19,347
<ALLOWANCES> 12,533
<INVENTORY> 968
<CURRENT-ASSETS> 33,475
<PP&E> 15,700
<DEPRECIATION> 10,611
<TOTAL-ASSETS> 43,134
<CURRENT-LIABILITIES> 19,874
<BONDS> 25,000
0
26,427
<COMMON> 44
<OTHER-SE> (28,275)
<TOTAL-LIABILITY-AND-EQUITY> 43,134
<SALES> 13,348
<TOTAL-REVENUES> 13,348
<CGS> 4,075
<TOTAL-COSTS> 16,648
<OTHER-EXPENSES> (560)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 169
<INCOME-PRETAX> (6,984)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,984)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,984)
<EPS-PRIMARY> (0.16)
<EPS-DILUTED> (0.16)
</TABLE>
