<PAGE> 1
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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 JUNE 30, 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 July 31, 1998 was 63,909,405.
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<PAGE> 2
QUARTERDECK CORPORATION AND SUBSIDIARIES
FORM 10-Q
JUNE 30, 1998
INDEX
<TABLE>
<CAPTION>
PAGE NO.
<S> <C> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of June 30, 1998
(unaudited) and September 30, 1997 3
Consolidated Statements of Operations for the three and nine
months ended June 30, 1998 and 1997 (unaudited) 4
Consolidated Statements of Cash Flows for the nine
months ended June 30, 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 5. OTHER INFORMATION 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)
<TABLE>
<CAPTION>
ASSETS
JUNE 30, SEPTEMBER 30,
1998 1997
--------- ---------
(Unaudited)
<S> <C> <C>
Current assets:
Cash & cash equivalents $ 15,197 $ 23,651
Trade accounts receivable 1,429 7,028
Inventories 895 1,177
Other current assets 2,850 4,655
--------- ---------
Total current assets 20,371 36,511
Equipment and leasehold improvements, net 4,739 14,153
Capitalized software costs, net 803 1,790
Other assets 919 3,427
--------- ---------
$ 26,832 $ 55,881
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,586 $ 3,792
Accrued liabilities 8,339 14,196
Accrued acquisition, restructuring and other charges 4,574 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 17,321 29,594
Convertible notes 25,000 25,000
Other long-term obligations, less current portion 57 114
--------- ---------
Total liabilities 42,378 54,708
--------- ---------
Stockholders' equity:
Series C Preferred stock (Par value $1,000, authorized: 40,000;
issued and outstanding: 7,801 and 26,025 shares,
respectively, liquidation preference $7,801,000) 7,385 24,594
Common stock (Par value $0.001, authorized: 100,000,000 shares;
issued and outstanding: 60,243,393 and 43,338,838 shares) 60 43
Additional paid-in capital 97,169 75,630
Accumulated deficit (119,578) (98,164)
Foreign currency translation adjustment (113) (281)
Notes receivable from directors for sale of stock (18) (18)
Net unrealized gain (loss) on marketable securities 108 (72)
Treasury stock (559) (559)
--------- ---------
Total stockholders' equity (15,546) 1,173
--------- ---------
$ 26,832 $ 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 NINE MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenues $ 8,035 $ 21,056 $ 42,009 $ 68,538
Cost of revenues 3,560 5,153 12,344 17,505
-------- -------- -------- --------
Gross profit 4,475 15,903 29,665 51,033
Operating expenses:
Research and development 5,785 3,760 14,805 11,480
Sales and marketing 8,109 7,169 26,177 23,015
General and administrative 2,441 3,689 7,959 13,403
Acquisition, restructuring and other charges 2,726 -- 2,583 --
-------- -------- -------- --------
Total operating expenses 19,061 14,618 51,524 47,898
-------- -------- -------- --------
Operating income (loss) (14,586) 1,285 (21,859) 3,135
Interest expense, net (219) (498) (655) (1,491)
Other income (expense), net 59 266 1,116 (1,400)
-------- -------- -------- --------
Income (loss) before income taxes (14,746) 1,053 (21,398) 244
Provision for income taxes -- -- 16 3
-------- -------- -------- --------
Net income (loss) $(14,746) $ 1,053 $(21,414) $ 241
======== ======== ======== ========
Net income (loss) per share:
Basic $ (0.27) $ 0.02 $ (0.45) $ 0.01
-------- -------- -------- --------
Diluted $ (0.27) $ 0.02 $ (0.45) $ 0.01
-------- -------- -------- --------
Shares used to compute net loss per share:
Basic 55,609 47,130 47,490 47,644
-------- -------- -------- --------
Diluted 55,609 47,130 47,490 47,644
-------- -------- -------- --------
</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>
Nine Months Ended
June 30,
--------------------
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(21,414) $ 241
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization of equipment and leasehold improvements 2,748 3,702
Amortization of capitalized software costs and other intangibles 1,023 1,385
Write-off of capitalized software costs and other intangibles 2,301 --
Write-off of property and equipment 606 213
Gain on sale of assets (1,110) --
Decrease in unrealized gain on marketable securities -- (231)
Changes in assets and liabilities:
Trade accounts receivable 5,599 (146)
Inventories 282 198
Other current assets 1,985 (328)
Other assets 172 4,577
Accounts payable (1,206) (6,188)
Accrued liabilities (5,857) (2,860)
Accrued acquisition, restructuring and other charges (711) (9,130)
Income tax payable (319) (324)
Foreign currency translation adjustment 168 (75)
-------- --------
Net cash used in operating activities (15,733) (8,966)
-------- --------
Cash flows from investing activities:
Sale of marketing securities -- 820
Capital expenditures (2,205) (3,814)
Proceeds from sale of building 7,700 --
Proceeds from divestitures 1,575 --
Capitalized software costs -- (480)
-------- --------
Net cash provided by (used in) investing activities 7,070 (3,474)
-------- --------
Cash flows from financing activities:
Net proceeds from the exercise of warrants 1,521 --
Principal debt repayments (4,079) (4,494)
Proceeds from bank borrowing -- 1,582
Net payments under long-term obligations (57) --
Net proceeds from issuance of common stock 42 681
Net proceeds from issuance of Series C Preferred stock 2,782 --
-------- --------
Net cash provided by (used in) financing activities 209 (2,231)
-------- --------
Net decrease in cash and cash equivalents (8,454) (14,671)
Cash and cash equivalents at beginning of period 23,651 25,554
-------- --------
Cash and cash equivalents at end of period $ 15,197 $ 10,883
======== ========
Supplemental disclosure of cash flow information: Cash paid during the
period for:
Interest $ 1,466 $ 1,671
Income taxes $ 16 $ 50
Non cash transaction - issuance of common stock $ 19,991 $ --
</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 nine month period
ended June 30, 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>
June 30, September 30,
1998 1997
-------- --------
(unaudited)
(in thousands)
<S> <C> <C>
Trade accounts receivable:
Receivables $ 15,062 $ 16,274
Less: allowance for doubtful accounts (983) (1,761)
Less: allowance for sales returns (7,343) (4,243)
Less: allowance for market development funds (4,152) (3,019)
Less: allowance for rebates (1,155) (223)
-------- --------
$ 1,429 $ 7,028
======== ========
Other current assets:
Prepaid royalties $ 299 $ 352
Income tax receivable 80 520
Other prepaid expenses 1,348 800
Marketable security - Infonautics 972 792
Other 151 2,191
-------- --------
$ 2,850 $ 4,655
======== ========
Equipment and leasehold improvements:
Building (asset held for sale) $ -- $ 7,359
Computer equipment 7,786 7,769
Office furniture and equipment 6,281 6,575
Office furniture and equipment under capital leases 71 99
Leasehold improvements 2,125 2,638
-------- --------
16,263 24,440
Less: accumulated depreciation and amortization (11,524) (10,287)
-------- --------
$ 4,739 $ 14,153
======== ========
Capitalized software costs:
Capitalized software costs $ 5,498 $ 5,498
Less: accumulated amortization (4,695) (3,708)
-------- --------
$ 803 $ 1,790
======== ========
Other assets:
Intangible assets acquired, net $ 347 $ 2,683
Other 572 744
-------- --------
$ 919 $ 3,427
======== ========
Accrued liabilities:
Accrued expenses $ 7,235 $ 11,153
Accrued royalty commission 1,104 1,138
Accrued litigation settlement -- 1,905
-------- --------
$ 8,339 $ 14,196
======== ========
Accrued acquisition, restructuring and other charges:
Acquisition $ 38 $ 50
Restructuring 4,536 5,335
-------- --------
$ 4,574 $ 5,385
======== ========
</TABLE>
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<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 Nine months ended
June 30, June 30,
-------------------- --------------------
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: $(14,746) $ 1,053 $(21,414) $ 241
======== ======== ======== ========
Denominator:
Shares used for basic net loss per share
calculation - weighted average shares outstanding 55,609 47,130 47,490 47,644
-------- -------- -------- --------
Shares used for diluted net loss per share calculation 55,609 47,130 47,490 47,644
======== ======== ======== ========
</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 6,581,125 shares at a weighted average exercise
price of $3.37 and 5,489,665 shares at a weighted average exercise price of
$4.37 were outstanding as of June 30, 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 and 1,704,000 shares at a weighted
average exercise price of $7.44 were outstanding as of June 30, 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 as of June 30, 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 June 30, 1998 and 1997.
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<PAGE> 9
Quarterdeck did not include 10,756,252 shares of Series C Convertible
Preferred Stock issuable upon the conversion of the stock and warrants based
upon the conversion price at June 30, 1998 of $0.65 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 June 1998.
6. RESTRUCTURING CHARGES
During June 1998, the Company implemented a restructuring plan
designed to reduce the ongoing level of operating expenses to one which can be
supported by a reduced revenue base and 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.
The following is an analysis of the significant components of the
fiscal 1998 restructuring (in thousands):
<TABLE>
<CAPTION>
DISCONTINUANCE AND SEVERANCE WRITE-OFF
CONSOLIDATION OF AND PROPERTY AND
OFFICES OTHER EQUIPMENT TOTAL
------------------ ---------- ------------ -------
<S> <C> <C> <C> <C>
Restructuring and non-recurring costs ... $ 377 $ 2,182 $ 271 $ 2,830
Non cash payments ....................... -- -- -- --
Cash payments ........................... (9) (44) -- (53)
------- ------- ------- -------
Accrued, June 30, 1998 .................. $ 368 $ 2,138 $ 271 $ 2,777
======= ======= ======= =======
</TABLE>
The Company expects the 1998 restructuring accrual to be utilized,
primarily through cash disbursements, through the quarter ending December 31,
1999. The Company anticipates the cash effect of such disbursements to be of
declining significance during this period.
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.
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, March 31, 1998 404 1,999 2,403
Cash payments ......... (41) (608) (649)
------- ------- -------
Accrued, June 30, 1998 $ 363 $ 1,391 $ 1,754
======= ======= =======
</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, March 31, 1998 ....... $ 276 $ 45 $ 321
Non-cash costs ................ (92) (45) (137)
Reversal of restructuring costs (104) -- (104)
Cash payments ................. (75) -- (75)
----- ----- -----
Accrued, June 30, 1998 ........ $ 5 $ 0 $ 5
===== ===== =====
</TABLE>
9
<PAGE> 10
7. LEGAL PROCEEDINGS
In June 1998, the Company obtained court approval of the settlement
of Federal and state shareholder actions that 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 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) 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.
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.
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.
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<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. Although 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 that 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", "designed",
"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, the effect of conversion of the Company's convertible preferred stock,
and 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 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 and fiscal 1999. Based upon available
data for the three months ended June 30, 1998, approximately 40% of the
Company's net revenues were generated through direct and indirect sales to
corporate accounts. The aforementioned networked versions of Quarterdeck's
products are 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
year, the Company has sold non-core assets such as the Hijaak product line and
the Starnine MacIntosh business and has experienced 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 the sale of these
products with revenues from newly released products. However, the recently
launched retail products have not established high sell-through rates to end
users and have yet to reach retail outlets internationally in significant
volumes. The Company anticipates a continued moderate pace of new retail product
launches, a reduction in operating expenses, and a focus on increasing
sell-through rates for its 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 nine months ended June 30, 1998 of
$8,035,000 and $42,009,000 decreased 61.8% and 38.7% or $13,021,000 and
$26,529,000, respectively, from net revenues of $21,056,000 and $68,538,000 for
the three and nine months ended June 30, 1997. Revenue for the three months
ended June 30, 1998 fell below that for the three months ended June 30, 1997 for
several reasons including: (1) An industry-wide slowdown in software sales which
is believed to be related to the market's anticipation of the Windows 98 launch
11
<PAGE> 12
and recent weakness in personal computer retail sales; (2) an additional
provision for possible future returns of approximately $4,800,000 to establish a
reserve for the previously noted slowdown in software sales and for new products
and product bundles for which high sell-through rates to end-users have not yet
been established; (3) fewer new product releases during the three months ended
June 30, 1998 versus the prior year; and (4) 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 Company is continuing on its strategy of entering the corporate
marketplace with products that provide helpware solutions for the networked
environment. Quarterdeck launched the first two products in the corporate line
in July 1998; CleanSweep for Administrators and DiskClone Corporate. Additional
products in the corporate line are expected to be released in fiscal 1999.
International revenues for the three and nine months ended June 30,
1998 of $2,801,000 and $11,026,000, respectively, decreased 31.8% and 15.2% or
$1,305,000 and $1,971,000, respectively, from international revenues of
$4,106,000 and $12,997,000 for the three and nine month periods ended June 30,
1997, respectively, while increasing as a percent of total net revenues to 34.9%
and 26.2% for the three and nine months ended June 30, 1998, respectively, from
19.5% and 19.0% for the three and nine months ended June 30, 1997, respectively.
Internationally, the Company has experienced similar trends as in the US with
regard to the industry slowdown in sales and fewer product releases, while also
weathering foreign currency fluctuations. However, the decline in sales of
certain legacy products internationally has been slower than in the US
marketplace resulting in increased international revenues as a percentage of
total revenues. During the fourth quarter ending September 30, 1998, the Company
expects to release over 25 localized versions of its titles in international
markets.
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 nine months ending June 30, 1998 of $3,560,000 and
$12,344,000, respectively, decreased 30.9% and 29.5% or $1,593,000 and
$5,161,000, respectively, from cost of revenues of $5,153,000 and $17,505,000
for the three and nine months ended June 30, 1997, respectively. Cost of
revenues as a percentage of net revenues increased to 44.3% and 29.4% for the
three and nine months ended June 30, 1998, respectively, from 24.5% and 25.5%
for the three and nine months ended June 30, 1997, respectively. The dollar
decrease in cost of revenues for both the three and nine 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 June 30, 1998 was primarily due to
the fact that net revenues in that quarter 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 for the three months ended June 30, 1998 was a write off of previously
capitalized software development costs which, based upon the Company's
evaluation of recoverability, has been deemed to be impaired, and an increase in
royalty expense as a percentage of net revenues due to a shift in product sales
toward products with higher royalties.
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 nine months ended June 30, 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 nine months ended
June 30, 1998, amortization of previously capitalized software costs of $529,000
and $989,000, respectively, increased by 74.6% or $226,000 and decreased by
28.6% or $396,000, from amortization of capitalized software costs of $303,000
and $1,385,000 for the three and nine months ended June 30, 1997. The increase
for the three months ended June 30, 1998 reflects a $273,000 write off of
previously capitalized software development costs which, based upon the
Company's evaluation of recoverability, has been deemed to be impaired. The
decrease for the nine month period reflects the winding down of earlier
capitalized amounts. No software development costs were capitalized in the June
1998 quarter.
Total Operating Expenses: Operating expenses for the three and nine
months ended June 30, 1998 of $19,061,000 and $51,524,000, respectively,
increased by 30.4% and 7.6% or $4,443,000 and $3,626,000, from total operating
expenses of $14,618,000 and $47,898,000 for the three and nine months ended June
30, 1997, respectively. Operating expenses increased as a percent of net
revenues to 237.2% and 122.6% for the three and nine months ended June 30, 1998,
respectively, from 69.4% and 69.9% for the three and nine months ended June 30,
1997, respectively. The comparisons primarily reflect (1) a $2,004,000 write off
of goodwill which, based upon the Company's evaluation that recoverability has
been impaired; (2) increased sales and marketing expenditures
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and (3) the effect of restructuring activities undertaken by the Company
as discussed in Note 6 to the Consolidated Unaudited Condensed Financial
Statements. The increase as a percent of net revenues was also due to the
reduction in net revenues for the three and nine months ended June 30, 1998 as
compared to the three and nine months ended June 30, 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 nine
months ended June 30, 1998, research and development expenses of $5,785,000 and
$14,805,000, respectively, increased 53.9% and 29.0% or $2,025,000 and
$3,325,000, respectively, from research and development expenses of $3,760,000
and $11,480,000 for the three and nine months ended June 30, 1997, respectively,
while increasing as a percent of net revenues to 72.0% and 35.2% for the three
and nine months ended June 30, 1998, respectively, from 17.9% and 16.7% for the
three and nine months ended June 30, 1997, respectively. The increase in
research and development expenses was largely due to a $2,004,000 write off of
goodwill which was deemed to be impaired and to payments to third parties for
contracted product development required to support the Company's product
development efforts.
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 nine months ended June 30, 1998, sales and marketing expenses of
$8,109,000 and $26,177,000 increased 13.1% and 13.7% or $940,000 and $3,162,000,
respectively, from sales and marketing expenses of $7,169,000 and $23,015,000
for the three and nine months ended June 30, 1997, respectively, while
increasing as a percent of net revenues to 100.9% and 62.3% for the three and
nine months ended June 30, 1998, respectively, from 34.0% and 33.6% for the
three and nine months ended June 30, 1997, respectively. 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 June 1998 quarter, which to date, has not resulted in significant
additional revenues.
General and Administrative: General and administrative expenses
consist of salaries and related costs of support departments, overhead and
facilities. For the three and nine months ended June 30, 1998, general and
administrative expenses of $2,441,000 and $7,959,000 decreased 33.8% and 40.6%
or $1,248,000 and $5,444,000, respectively, from general and administrative
expenses of $3,689,000 and $13,403,000 for the three and nine months ended June
30, 1997, while increasing as a percent of net revenue to 30.4% for the three
months ended June 30, 1998 and decreasing to 18.9% for the nine months ended
June 30, 1998, from 17.5% and 19.6% for the three and nine months ended June 30,
1997, respectively. The increase in percentage for the three month period
reflects the reduced level of revenues. The decline for the nine month period is
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 profitable
sublease of approximately 52,000 square feet of the Company's office space to
other tenants.
Restructuring Costs: For the three and nine months ended June 30,
1998, restructuring costs of $2,726,000 and $2,583,000, respectively, primarily
reflect costs associated with the Company's restructuring efforts in June 1998.
See Note 6 to the Notes to Consolidated Unaudited Condensed Financial Statements
and Trends and Uncertainties (page 15) for further discussion surrounding the
1998 restructuring. There were no restructuring costs during the three and nine
months ended June 30, 1997.
Other income: For the three and nine months ended June 30, 1998, net
other income of $59,000 and $1,116,000 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.
The net other income of $266,000 for the three months ended June 30, 1997
relates to the sale of investments held for sale. For the nine months ended June
30, 1997, the net other expense of $1,400,000 relates to a $1,666,000 write down
of Quarterdeck's investment in Infonautics offset by $266,000 of net other
income from the aforementioned investment sale.
Interest expense: For the three and nine months ended June 30, 1998,
net interest expense of $219,000 and $655,000 decreased 56.0% and 56.1% or
$279,000 and $836,000, respectively, from net interest expense of $498,000 and
$1,491,000 for the three and nine months ended June 30, 1997, respectively. Net
interest expense decreased primarily due to a reduction of the outstanding bank
debt by $4,000,000 from the June 1997 quarter. Also contributing to the net
interest expense reduction is an increase in interest income relating to higher
cash balances maintained in interest bearing accounts as compared to the three
and nine months ended June 30, 1997.
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Income Taxes: A valuation allowance was recorded to offset 100% of
the Company's $40,485,000 net deferred tax asset as of June 30, 1998. The net
deferred tax asset of $40,485,000 (before applying the valuation allowance) is
comprised of the estimated tax effect of expected future temporary differences
relating to charges taken for book purposes that are not deductible for federal
income tax purposes until the amounts are paid in the future and tax basis net
operating losses. 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 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 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 and uncertainties
surrounding the rate and extent of development of this new market.
Quarterdeck is devoting 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 and has made and may make strategic
acquisitions and divestitures. The Company anticipates that spending for
sales, marketing and software development as it relates to the corporate
marketplace will continue as a significant expense for that segment in the
future but within industry norms. There is no assurance these efforts will
be successful.
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 98 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.
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
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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 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 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 are expected to reduce the Company's headcount by over
30%. 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.
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 June
30, 1998 and in July 1998, the Company issued 16,854,299 and 3,666,012 shares of
the Company's Common Stock, respectively, upon conversion of 22,720 and 2,276
shares, or 81.9% of the outstanding shares of Series C Preferred Stock
(including the conversion of 1,153 and 54 shares of Series C Preferred Stock,
respectively, 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 July
31, 1998, 5,518 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
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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 was advised by Nasdaq on July 13, 1998 that it was
not convinced that the Company could achieve and sustain compliance with the
minimum bid price requirement of $5.00 per share required for continued
inclusion of the Common Stock on the Nasdaq National Market and scheduled the
Common Stock to be delisted. The Company has requested an oral hearing to
discuss the Staff's decision and in the meantime, the delisting is stayed
pending resolution of the Nasdaq hearing or subsequent appeals. The Company is
exploring different steps it may take, including a reverse stock split, to
achieve and sustain compliance with such requirements or to meet the listing
requirements for and maintain a listing on the Nasdaq SmallCap Market. There can
be no assurance that the Company will succeed in convincing Nasdaq that it will
be able to meet or continue to meet the listing requirements for the Nasdaq
National Market or the Nasdaq SmallCap Market. In the event that the Company's
Common Stock is delisted from the Nasdaq National Market and is ineligible to be
listed on the Nasdaq SmallCap Market, sales of the Company's Common Stock would
likely only be conducted in the over-the-counter market or potentially in
regional exchanges. This may negatively impact the liquidity and price of the
Common Stock and investors may find it more difficult to purchase or dispose of,
or to obtain accurate quotations as to the market value of, the Company's Common
Stock.
Quarterdeck 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. A
class action complaint was recently 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 Legal Proceedings (page 19) for further
discussion.
RECENTLY ISSUED ACCOUNTING STANDARDS
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 it will be required to make any additional disclosures in its financial
statements. The Company will adopt SFAS No. 131 effective October 1, 1998.
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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 $0.50 in August 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 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 June 30, 1998 of $15,197,000
decreased 35.7% or $8,454,000 from $23,651,000 at September 30, 1997. Working
capital, which is the excess of current assets over current liabilities, at June
30, 1998 was $3,050,000 as compared to $6,917,000 at September 30, 1997
representing a decrease in working capital of $3,867,000.
Operating activities: Cash used in operating activities of
$15,733,000 since September 30, 1997 was primarily due to the reported net loss
of $21,414,000. Within that loss, $1,110,000 was a non-operating gain and
$6,678,000 consisted of non-cash charges for depreciation, amortization,
property and equipment write-offs, and write-offs of capitalized software and
other intangibles. The changes in net operating assets and liabilities, in turn
provided $113,000 in cash, $7,925,000 through reduced liabilities offset by a
$8,038,000 decline in 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 and the
settlement of Shareholder litigation in December 1997. The reduction in assets
included a $5,499,000 decrease in net receivables which was primarily due to
large provisions against gross sales to cover customer rebates and possible
future returns on inventory in the retail sales channel. Additionally, a decline
in other current assets was due to the collection of approximately $1,800,000 of
receivables generated from the sale of securities in fiscal 1997 and a modest
reduction in inventories.
Investing activities: Cash provided by investing activities of
$7,070,000 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 $2,205,000 for capital expenditures
primarily related to computer purchases.
Financing activities: Cash provided by financing activities of
$209,000 was primarily related to the net proceeds from the issuance of common
stock of Series Preferred C stock, warrants and common stock of $4,345,000
offset by a 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 $136,000.
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In April 1997, the Company established an asset based line of credit
with Greyrock Business Credit, a division of NationsBank. Maximum borrowings
under this 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 June 30, 1998, the Company had
$1,500,000 outstanding under the line and the ability to borrow up to a maximum
amount of $9,300,000. 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.
The Company believes existing working capital and borrowing capacity
under the line of credit will be sufficient to fund the Company's operations for
the coming months. The Company's restructuring efforts during and subsequent to
the period ended June 30, 1998 are designed to reduce the Company's operating
cash requirements over the two quarters ending December 31, 1998 to be either
cash neutral or cash positive and return the Company to profitability. There is
no assurance, however, that these efforts will produce the desired results. Over
the longer term, the Company may explore the sale of its investments and other
various financing alternatives in order to 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, Company revenues, financial market conditions, strategic
acquisition and investment opportunities, and developments in the Company's
markets. Should product shipments be delayed or should the Company experience
significant shortfalls in planned revenues, or not achieve sufficient cost
savings as a result of restructuring efforts, or experience unforeseen fixed
expenses, the Company believes it has the ability to make additional reductions
to variable expenses to extend its capital. Any decision to obtain financing
through debt or through equity investment will depend on various factors,
including, among others, financial market conditions, strategic acquisition and
investment opportunities, and developments in the Company's markets. The sale of
additional equity securities or future conversion of any convertible debt would
result in additional dilution to the Company's stockholders.
The Company conducts business in various foreign currencies and is
therefore subject to the transaction exposures that arise from foreign exchange
rate movements between the dates that foreign currency transactions are recorded
and the date that they are consummated. The Company is also subject to certain
exposures arising from the translation and consolidation of the financial
results of its foreign subsidiaries. There can be no assurance that actions
taken to manage such exposures will continue to be successful or that future
changes in currency exchange rates will not have a material impact on the
Company's future cash collections and operating results. The Company does not
hedge either its translation risk or its economic risk.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In June 1998, the Company obtained court approval of the settlement
of Federal and state shareholder actions that 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 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) 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.
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.
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 July 31, 1998, the Company issued
20,520,311 shares of the Company's Common Stock upon conversion of 24,996 shares
of the outstanding shares of Series C Preferred Stock (including the conversion
of 1,207 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) and/or 4(2) of the Act.
ITEM 5. OTHER INFORMATION
Under SEC Rule 14a-4, as recently amended, the Company may exercise
discretionary voting authority at its next Annual Meeting of stockholders under
proxies it solicits to vote on a proposal made by a stockholder that the
stockholder does not seek to include in the Company's proxy statement pursuant
to Rule 14a-8, unless the Company is notified about the proposal by November 21,
1998 and the stockholder satisfies the other requirements of Rule 14a-4(c).
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 the Company's results for 1998
was filed with the Securities and Exchange Commission on
August 4, 1998.
A Form 8-K with respect to the resignation of the Company's
chief executive officer was filed with the Securities and
Exchange Commission on July 8, 1998.
A Form 8-K with respect to the Company's cost reductions
was filed with the Securities and Exchange Commission on
June 25, 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: August 14, 1998 /s/ KING R. LEE
--------------------------------------
King R. Lee
Interim President
Date: August 14, 1998 /s/ FRANK GREICO
--------------------------------------
Frank Greico
Sr. Vice President and
Chief Financial Officer
21
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