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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K/A
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended September 30, 1998
Commission File No. 0-19207
QUARTERDECK CORPORATION
(Exact name of registrant as specified in its charter)
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<TABLE>
<S> <C>
Delaware 95-4320650
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
<TABLE>
<S> <C>
13160 Mindanao Way, Marina del Rey,
California 90292
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (310) 309-3700
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.001
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of the voting stock (based on the last sale price
of such stock as reported on the OTC Bulletin Board) held by non-affiliates of
the registrant as of November 30, 1998 was $15,766,744.
The number of shares of the Registrant's common stock outstanding as of
November 30, 1998 was 89,760,799.
DOCUMENTS INCORPORATED BY REFERENCE
None
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PART I
ITEM 1. BUSINESS
Quarterdeck Corporation ("Quarterdeck" or the "Company") develops and
markets software products that help personal computer ("PC") users manage
information and communications with minimal technical support, reducing the
overhead costs of networked personal computing. The Company markets its
products worldwide through retail distribution, corporate resellers, original
equipment manufacturers ("OEM"), direct marketing, and the Internet, focusing
in particular on customers in "low support" environments, e.g., small
offices/home offices ("SOHO"), small businesses and work groups, and
remote/mobile users.
The Company was incorporated in California in 1982 as Quarterdeck Office
Systems. In June 1991, the Company changed its state of incorporation from
California to Delaware and in February 1995 changed its name to Quarterdeck
Corporation.
The principal offices of the Company are located at 13160 Mindanao Way,
Third Floor, Marina del Rey, California, 90292, telephone number (310) 309-
3700.
Overview of Strategy
On October 15, 1998, Quarterdeck, Symantec Corporation ("Symantec"
SYMC:Nasdaq) and Oak Acquisition Corporation, a wholly owned subsidiary of
Symantec, entered into a definitive Merger Agreement (the "Merger Agreement")
whereby Symantec agreed to commence a cash tender offer for all outstanding
shares of the Company at a price of $0.52 per share. The Agreement further
provided for a merger of Oak Acquisition Corporation with and into the Company
in which all remaining outstanding shares of the Company will be converted
into the right to receive $0.52 per share ("Merger"). On November 17, 1998
Symantec completed its tender offer obtaining approximately 65% of
Quarterdeck's outstanding shares of common stock and common stock equivalents.
Upon consummation of the Merger, which is expected to occur in February 1999,
the Company will become a wholly owned subsidiary of Symantec.
In connection with the Agreement, Quarterdeck and Symantec concurrently
entered into a license agreement (the "License Agreement") under which
Quarterdeck granted Symantec the non-exclusive right to, among other things,
distribute Quarterdeck's CleanSweep product. Symantec's right to distribute
CleanSweep commenced upon consummation of the tender offer.
Following the close of the tender, two members of the Company's Board of
Directors resigned and four members were appointed by Symantec. In addition,
Symantec instituted layoffs of employees as part of its plan to integrate the
operations of the Company and Symantec.
Set forth below is a description of the Company's business and strategy for
fiscal 1998 prior to the consummation of the tender offer. Quarterdeck's
business and strategy for fiscal 1998 is not the same as Symantec's business
and strategy.
PC networking is emerging as the world's standard vehicle for managing most
forms of information and communication. According to IDC, worldwide shipments
of PCs are estimated to be approximately 80,000,000 for 1998 and continue
growing at over 13% per year. PCs are rapidly networking together through the
Internet and corporate intranets. As PC systems continue escalating in power,
function, and storage capacity, and as network usage continues its explosive
growth, performance problems and support costs inevitably multiply. This is
because managing information and communication through networked PC's requires
the flawless interaction of many hardware and software components from diverse
vendors; because these components undergo frequent technological upgrading and
replacement; and because networking itself continuously imports new
applications, viruses, agents, and data types into the networked systems. As a
consequence, annual PC support costs often exceed system acquisition costs.
According to META Group research, the average cost of PC support is
approximately $2,800 per user per year.
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Quarterdeck believes the solution lies not in reversing the advance of PC
power, functionality, storage capacity, and networkability but instead in
supplementing these advances with equally smart "helpware"--new software
technologies that automatically detect, prevent, and resolve personal computer
problems and replace outside technical support with user-friendly self-help
and automatic-help tools.
Quarterdeck's helpware strategy leverages its long experience in designing
PC utilities, communications software and Internet tools for both retail and
corporate sales to "power users" who demand peak performance. On the product
side, Quarterdeck is using both internal development and technology licenses
to assemble a single, broad portfolio of helpware components that can work
together, in various product configurations, to help make networked personal
computing a "self-supporting" activity. On the sales side, the Company was
building upon its worldwide retail presence and brand equities to expand its
reach through indirect distribution and direct marketing channels, into those
business environments that most need helpware technologies, i.e., SOHO, small
business, departmental, and remote/mobile working environments where onsite
MIS support is thin or absent.
Quarterdeck's goal is to lead the industry in providing comprehensive
helpware solutions for the core performance problems of networked personal
computing for individuals and small to midsize businesses.
Products and Technology
Quarterdeck develops and licenses technology and assembles and sells
products, to provide automatic help and user self-help capabilities in five
key categories of networked PC system management: Conflict Resolution,
Storage, Security, Disk Imaging and Network Access. In these categories, the
Company currently markets the following new or recently upgraded product
lines:
<TABLE>
<CAPTION>
Technology category Product lines
------------------- -------------
<S> <C>
. Conflict Resolution: RealHelp, Crash Defender, Utility Pack
preventing, diagnosing,
and solving problems
among diverse software
and/or system hardware
elements
. Storage: cleaning and CleanSweep, Remove-It, Partition-It, Utility Pack
optimizing disk space and
memory
. Security: protecting ViruSweep, Utility Pack
systems against viruses,
rogue agents, and
intruders
. Disk Imaging: creating DiskClone
exact copies of disk
images for OS migration
and new PC deployment
. Network Access: enhancing ProComm Plus, Rapid Remote, WebCompass
user access to networked
information and
communication resources
</TABLE>
In fiscal 1998, ProComm Plus and Cleansweep--leaders in their respective
markets--were the largest revenue producers among these product lines. The
Company expects to release a new version of CleanSweep during the quarter
ending March 31, 1999. The DiskClone product line was launched in mid fiscal
1998, Crash Defender and the Quarterdeck Utility Pack were launched in late
fiscal 1998. During fiscal 1998, as a result of the Company's restructuring
efforts designed to return the Company to profitability, Quarterdeck pared
back the number of categories and product offerings it markets to emphasize
those which it believes have the highest likelihood for success. These
categories included conflict resolution, storage, disk imaging and network
access.
For each of its major product lines, the Company plans to reach a variety of
markets by packaging the underlying technologies--as shrink-wrapped retail
products and as corporate-controllable intranet products. The current product
lines are available in retail formats and the development and launch of
intranet-deliverable corporate products began in late fiscal 1998.
To accelerate product development across system management categories and
delivery formats, Quarterdeck reimplemented many of its core technologies as
standard, networkable "components". This initiative has already
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led to considerable technology sharing among the ViruSweep, CleanSweep,
RealHelp, Crash Defender, WebCompass, RapidRemote, and ProComm product lines.
The Company also emphasized the incorporation in its automatic help and self-
help products of intelligent agent technologies and continuously updatable
knowledge-bases, supplemented by advanced search technologies.
Quarterdeck organizes its research and development resources in a single,
global department, to facilitate technology integration, although most
engineers are dedicated to particular product teams. In 1998, 1997 and 1996,
the Company spent $16,640,000, $16,419,000 and $21,314,000 on research and
development, respectively, or 32.7%, 19.6% and 16.0% of net revenues,
respectively.
Marketing and Sales
Quarterdeck sells its products on a worldwide basis via retail distribution,
corporate resellers, and OEMs, direct marketing and the Internet. The
Company's end user customers include corporate and government organizations as
well as small business and individual personal computer users. None of
Quarterdeck's individual end user customers is believed by the Company to
account for 5% or more of Quarterdeck's sales in any fiscal year. Products
sold to government entities are primarily off-the-shelf items sold from
inventory and are not subject to renegotiation of profits or termination of
purchase contracts at the election of the government.
Traditionally, retail sales have dominated the Company's revenues. The
Company sells its products to major software distributors for resale through
software retailers and corporate resellers. Quarterdeck's principal North
American distributors are Ingram Micro, Inc., Merisel, Inc. and Tech Data
Corporation. See Note 15 of the Notes to the Company's Consolidated Financial
Statements. Each of these distributors resells Quarterdeck's products on a
non-exclusive basis. The Company also distributes internationally through
foreign based subsidiaries of Ingram Micro, Inc. and Merisel, Inc. as well as
a variety of other international distributors. In Japan, Quarterdeck's
distributor and marketing partner is Marubeni Corporation. Quarterdeck
estimates it has more than 35,000 distribution outlets selling its products on
a worldwide basis, including computer superstores, office warehouse clubs,
software specialty stores, consumer electronics stores, mass merchants,
general warehouse clubs, value added resellers (VARs) and corporate resellers.
The Company reaches corporate end-users through a corporate direct telesales
force and through corporate resellers, many of whom purchase the products
through major software distributors. Quarterdeck significantly expanded its
presence in these corporate direct marketing and reseller channels during
fiscal 1998 with an increased emphasis on VARs as more of its products were
enabled for corporate controlled intranet implementation. Quarterdeck also
launched its Quarterdeck Enterprise Partner Program (QEPP) during fiscal 1998
and signed up approximately 300 VAR's and system integrators to support the
sales and service of Quarterdeck's Enterprise products.
The Company also sells its products directly over the Internet, maintaining
an e-commerce store on its website, (www.Quarterdeck.com) and offering
internet download, physical delivery or free "trialware" versions of the
Company's products. Though Internet sales are currently a small portion of the
Company's total revenues, this channel has expanded as individuals and
businesses become accustomed to electronic software distribution. During
fiscal 1998, the Company increased the availability of its products over the
Internet through third party online stores and signed electronic distribution
agreements with eight electronic commerce companies including CNET Buy Direct,
NetSales and Digital River.
Geographically, Quarterdeck increased investments in European and Japanese
markets and engineered its new and upgraded products for rapid localization
and near-simultaneous release on a global basis. The Company's European
operations are headquartered in Dublin, Ireland, with a marketing support
office in Slough, England. Quarterdeck's Dublin office handles order
processing, technical support, localization and production for European and
other international sales. The Company ships international English language
versions and translated foreign language versions of its products from third
party fulfillment centers in Ireland. Quarterdeck also has a sales office in
Sydney, Australia, and agreements with third parties to distribute its
products in Japan,
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Asia Pacific and Latin America. The Company's international marketing support
offices, along with third party representatives in countries where Quarterdeck
does not have marketing support offices, prepare marketing programs for each
local market, educate end users and support the international distributor and
dealer networks. During fiscal 1998, Quarterdeck began shipping product to
Australian customers from a third party fulfillment center located in
Australia. In Japan, the Company has entered into an exclusive distribution
arrangement with Marubeni Corporation, a large trading company, and
established a Quarterdeck marketing office in Tokyo in the form of a joint
venture with Marubeni. Management believes that the Asian crisis did not have
a material adverse effect on the Company's results of operations.
Sales by the Company to European and other international distributors,
dealers and end users outside of North America represented approximately
25.5%, 21.9% and 18.0% of Quarterdeck's total net revenues for fiscal years
1998, 1997 and 1996, respectively. See Note 15 of the Notes to the Company's
Consolidated Financial Statements for information regarding Quarterdeck's
domestic and foreign operations and export sales.
Operations, Support Services, Production and Backlog
Quarterdeck's departments are organized by function--e.g. research and
development, sales, marketing, finance and operations--with product teams
coordinating across departments. Internationally, regional teams or
distribution partners handle localization, marketing and sales. The Company
offers various electronic and phone-based support for its products. During
fiscal 1998, the Company began a fee based support program for its ProComm
product line in addition to a paid priority service for all other product
lines. Currently, Quarterdeck offers paid support via annual maintenance
agreements on a per incident basis, and on a per minute basis via a 900 phone
number. Fee-based technical support services did not generate material
revenues in the fiscal periods presented. The Company provides most free
customer support through an outsourced third party and continues to offer most
paid support internally from its Columbia, Missouri facility. Internationally,
support is provided through outsourced third party suppliers.
The principal materials and components used in Quarterdeck's products
include CD-ROM's, diskettes, user manuals and product display boxes, which are
purchased directly from third party vendors. Quarterdeck currently utilizes
both internal and third party contracted resources for the assembly,
warehousing and fulfillment of its products. Outside vendors perform in
accordance with Quarterdeck specifications, and material quality is ensured
prior to the assembly of its products. Capacity shortages for components,
assembly, warehousing and fulfillment are not anticipated due to multiple
third party resources available for contract; however, if such shortages were
to occur, Quarterdeck's operating results could be materially impacted.
Quarterdeck believes there are adequate supplies of and sources for the raw
materials used in its products and that multiple sources are available for CD-
ROM and diskette duplication, manual printing and final packaging.
Customer order turnaround is generally within one week of receipt of the
order, unless such orders are pre-orders for unreleased products. Generally,
Quarterdeck has relatively little, if any, order backlog at any given time and
does not consider backlog to be a significant measure of sales for any future
period.
Employees
As of September 30, 1998, Quarterdeck employed 176 people worldwide. None of
the Company's employees are represented by a labor union or subject to a
collective bargaining agreement. Subsequent to the close of Symantec's tender
offer on November 17, 1998, a reduction in workforce occurred that reduced the
Company's employees to 96 as of November 30, 1998. Additional substantial
layoffs are anticipated as the Company's operations are integrated into those
of Symantec.
Competition
The personal computer software market is intensely competitive, subject to
strategic alliances of hardware and software companies and it is characterized
by rapid changes in technology and frequent introductions of new
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products and features. The Company's competitors include developers of
operating systems, applications and utility software such as Network
Associates and Symantec as well as personal computer manufacturers that
develop their own software products. Quarterdeck has encountered continued
competition both from established companies and from new companies that are
now developing, or may develop, competing products.
Consolidation in the software industry continues to occur, with competing
companies, including Network Associates and Symantec, among others, acquiring
other companies in order to capture market share or expand product lines. As
this consolidation occurs, the nature of the utilities market may change as a
result of fewer players dominating particular markets, potentially providing
customers with fewer choices. Many of Quarterdeck's competitors have merged
with or been acquired by these consolidators who have financial, marketing and
technological resources significantly greater than those of the Company. Also
certain of these companies offer a broader range of utility products, ranging
from desktop to enterprise solutions, than Quarterdeck. As a consequence, the
Company may not be able to compete effectively against certain competitors.
Any or all of these changes may have a significant adverse effect on
Quarterdeck's future revenues and operating results.
The communications software market within which Quarterdeck's Procomm
product line competes has been and is in a period of predicted decline due to
the shift from mainframe to PC-based networks. Although there is minimal
competition to Procomm in the terminal emulation market, revenues have been
falling and are predicted to continue to decline as the market continues to
shrink. At present the Company has been unable to develop, license or acquire
a product in this market that would offset this decline.
Future competitive product releases may cause disruptions in orders for the
Company's products while users and the marketplace evaluate the competitive
products. The extent of the disruption in orders and the impact on future
orders of Quarterdeck's products will depend on various factors that are not
fully known at this time, including the level of functionality, performance
and features included in the final release of these competitive products and
the price thereof and the market's evaluation of competitive products compared
to the then current functionality, performance, features and price of the
Company's products.
Quarterdeck anticipates that the type and level of competition experienced
to date will continue, and may increase, and future sales of its products will
be dependent upon the Company's ability to develop or acquire new products or
enhanced versions of its existing products for Windows 95, Windows 98 and
Windows NT and/or other operating systems that may gain market acceptance.
Throughout 1998, the prices for PC hardware have been falling while power and
performance have increased. As a result, the industry has shifted to "suite
products" which bundle a number of utility products into one package.
Quarterdeck's revenues currently are derived primarily from individual utility
products. With the shift to integrated utility suites, price competition is
likely to be intense and cannibalization of Quarterdeck's existing utility
products is likely to occur. Since the price of integrated utility suites is
significantly less than the total price of the individual products included in
the suite when they are sold separately, there may be a negative impact to the
Company's revenues and operating income from competing in the suite
environment. The Company will need to obtain or develop additional products in
order to compete in the "suite" market. In addition, Quarterdeck must
demonstrate to the user a need for the Company's products while developers of
operating systems and competitive software products continue to enhance their
products. To the extent that operating system enhancements, competitive
products or bundling of competitive products with operating systems or
computer hardware reduce the number of users who perceive a benefit from
Quarterdeck's products, sales of the Company's products in the future would be
adversely impacted.
Quarterdeck believes that the primary competitive factors in the personal
computer software market are product features and performance, time to market,
product reliability, ease of use, product and vendor reputation, price,
timeliness of product upgrades and the quality of customer support and
service. Of these, time to market and price are becoming increasingly
significant factors.
The Company also competes with other companies in the personal computer
software market for distributors and dealers, as well as for alliances with
hardware and software vendors. Quarterdeck competes for distributors
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and dealers on the basis of the revenue opportunities presented by the
Company's products in addition to discounts, credit terms and promotional
support.
ITEM 2. PROPERTIES
Quarterdeck's principal administrative, production, marketing and product
development facilities occupy approximately 68,000 square feet of leased
space, in Marina del Rey, California. In fiscal 1997, the Company sold its
building in Columbia, Missouri and leased back approximately 50,000 square
feet used primarily for customer service and technical support. Quarterdeck
leases approximately 10,000 square feet of office space in Clearwater, Florida
for a portion of its production and fulfillment functions. In addition,
Quarterdeck leases offices in Dublin, Ireland, Slough, England and Sydney,
Australia for marketing and sales functions. During fiscal 1998, Quarterdeck
reduced its leased space through renegotiating terms and subleasing space as
part of its restructuring program. Due to Symantec's intention to integrate
all Quarterdeck operations into their existing infrastructure as part of the
pending Merger, Quarterdeck is currently working to sublease or renegotiate
all remaining lease obligations during fiscal 1999.
ITEM 3. LEGAL PROCEEDINGS
On July 30, 1998, a class action complaint was filed in the Supreme Court of
the State of New York, County of New York, on behalf of a purported class of
purchasers of the Procomm Plus version 4.0 for Windows product (the
"Product"). The complaint purports to assert claims for breach of warranty and
violation of New York's Consumer Protection From Deceptive Acts And Practices
Act arising from the Product's inability to process dates containing the year
2000. The complaint seeks unspecified damages. Quarterdeck believes these
claims to be without merit and intends to defend itself vigorously.
In October 1997, a complaint was filed in the United States District Court
for the District of Utah on behalf of PowerQuest Corporation against the
Company. The complaint alleges that the Company's partitioning software
(included in Partition-It and Partition-It Extra Strength) violates a patent
held by PowerQuest. In January 1998, PowerQuest obtained a second patent
relating to partitioning and has amended its complaint to allege infringement
of that patent as well. The plaintiff seeks an injunction against distribution
of Partition-It and Partition-It Extra Strength and monetary damages. Although
the Company believes the plaintiff's patents are invalid, there can be no
assurance as to the actual outcome of this matter. The ultimate disposition of
this matter could have a material adverse effect on the Company.
The Company is a defendant in various other pending claims and lawsuits.
Although there can be no assurances, management believes that the disposition
of such matters will not have a material adverse impact on the results of
operations or financial position of the Company. From time to time, the
Company has received communications from third parties asserting that certain
Company trademarks, packaging or advertising materials may infringe upon the
intellectual property rights of others. There can be no assurance that
existing or future infringement claims against the Company with respect to
current or future trademarks, packaging or advertising materials will not
result in costly litigation or require the Company to discontinue use of such
trademarks, packaging or advertising materials.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the last
quarter of fiscal 1998.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS;
RECENT SALES OF UNREGISTERED SECURITIES
The Company's common stock traded on the Nasdaq National Market, under the
symbol QDEK until the close of business on October 15, 1998. The Company
received notification on October 15, 1998 of Nasdaq's decision to delist the
Company's shares from the Nasdaq Stock Market effective October 15, 1998 as a
result of the failure of the Company to meet certain continued listing
requirements. Shares of the Company's common stock currently trade on the OTC
Bulletin Board.
The following table sets forth, for the periods indicated, the high and low
closing sales prices of the common stock on the Nasdaq National Market as
reported by the National Association of Securities Dealers, Inc.
<TABLE>
<CAPTION>
High Low
------- -------
<S> <C> <C>
Fiscal 1997:
First Quarter.............................................. $7 1/8 $4 1/16
Second Quarter............................................. $6 1/4 $2 1/4
Third Quarter.............................................. $3 3/8 $2 1/4
Fourth Quarter............................................. $3 7/32 $2 1/2
Fiscal 1998:
First Quarter.............................................. $2 5/6 $1 1/4
Second Quarter............................................. $2 1/2 $1 3/4
Third Quarter.............................................. $2 3/5 $ 2/3
Fourth Quarter............................................. $ 7/8 $ 1/4
</TABLE>
As of November 30, 1998, Quarterdeck had 89,760,799 shares outstanding and
564 shareholders of record. The Company estimates there are more than 5,000
shareholders represented through accounts held by clearing agencies. Symantec
owns approximately 65% of the outstanding shares of common stock.
The Company paid no dividends during fiscal 1998 and does not anticipate
paying any cash dividends in the future. The Company is a party to certain
financing agreements which prohibit the payment of cash dividends.
Recent Sales of Unregistered Securities
On October 9, 1998, Quarterdeck entered into a Conversion and Redemption
Agreement and Release (the "Conversion Agreement") with the holders (the
"Securityholders") of the Company's Series C Convertible Preferred Stock (the
"Series C Preferred Stock") and/or warrants to purchase shares of Series C
Preferred Stock (the "Warrants") to modify the terms of conversion of the
Series C Preferred Stock. The Company initially issued the shares of Series C
Preferred Stock and the Warrants between September 30, 1997 and
November 4, 1997.
Pursuant to the terms of the Conversion Agreement, the Securityholders have
agreed not to convert any shares of Series C Preferred Stock at a conversion
price of less than $0.2650 for a period of six months commencing on the
effective date of the Conversion Agreement (the "Effective Date"). The
Securityholders and the Company further agreed that, during the first sixty
calendar days from the Effective Date, upon conversion of the shares of Series
C Preferred Stock in accordance with the terms of the Company's Certificate of
Designations of Series C Convertible Preferred Stock, the Company will issue
shares of Common Stock at a conversion price of $0.2650 per share
notwithstanding the actual conversion price then in effect. The Company has
agreed to issue additional shares of Common Stock (or, at the Company's sole
election, cash) to each Securityholder, up to an amount equal to five percent
of the original purchase price of the shares of Series C Preferred Stock owned
by such Securityholder, but only to the extent that the Securityholder does
not realize at least a 50% gross aggregate return upon resale of the shares of
Common Stock received upon conversion of such shares of Series C Preferred
Stock.
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During the six month period commencing on the Effective Date, the Company
shall have the right to repurchase all of the shares of Series C Preferred
Stock owned by the Securityholder at a price equal to 110% of the original
purchase price. The Company shall provide Securityholders with ten days prior
notice that the Company is exercising its repurchase right, during which time
the Securityholders may continue to convert their shares of Series C Preferred
Stock. The notice may be made in the form of a press release. The
Securityholders also agreed that upon a "Sales Event", the Company may, at its
election, provide a ten day notice of repurchase of the shares of Series C
Preferred Stock at a price equal to 110% of its original price or require the
Securityholder to convert its shares of Series C Preferred Stock into Common
Stock or effect a combination of the foregoing. A "Sales Event" means (i) the
sale of all or substantially all of the assets of the Company, (ii) a
consolidation or Merger of the Company in which the stockholders of the
Company immediately prior to the event do not retain a majority of the voting
power of the surviving corporation or (iii) the sale of more than 50% of the
Common Stock of the Company. As of November 17, 1998, there were no shares of
Series C Preferred Stock outstanding.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data are derived from the
Company's consolidated financial statements. Historical results should not be
taken as necessarily indicative of the results that may be expected for any
future period. This consolidated data should be read in conjunction with the
consolidated financial statements and notes thereto. Certain items in the
consolidated financial statements of fiscal 1995 and 1994 have been
reclassified to conform to the 1998 presentation. During fiscal 1996,
Quarterdeck acquired Inset, Datastorm, Futurelabs, and Vertisoft in
transactions accounted for as poolings of interests. During fiscal 1995,
Quarterdeck acquired Landmark Research International, Inc., Internetware, Inc.
and StarNine Technologies, Inc. in transactions accounted for as poolings of
interest. All financial information subsequent to October 1, 1993 has been
restated to reflect the combined operations of Landmark, Datastorm, Inset and
Quarterdeck. Starnine and Internetware's results of operations were immaterial
to Quarterdeck's financial position and, therefore, periods prior to October
1, 1995 were not restated for these entities. However, the number of shares of
the Company's common stock issued in the Vertisoft acquisition are material
and, accordingly, shares outstanding and earnings per share have been restated
to reflect those shares. All amounts shown are in thousands, except per share
data.
<TABLE>
<CAPTION>
Year ended September 30,
------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Statements of Operations
Data:
Net revenues................ $ 50,861 $ 83,787 $133,100 $117,606 $ 84,715
Cost of revenues............ 14,587 21,271 49,600 34,884 27,403
-------- -------- -------- -------- --------
Gross margin................ 36,274 62,516 83,500 82,722 57,312
Operating expenses:
Research and development.. 16,640 16,419 21,314 14,286 7,520
Sales and marketing....... 30,566 29,305 66,355 30,624 27,107
General and
administrative........... 9,923 17,227 32,128 20,704 20,908
Acquisition, restructuring
and other charges........ 2,583 11,713 37,789 7,409 12,863
Litigation settlement..... -- 1,905 -- -- 615
-------- -------- -------- -------- --------
Total operating
expenses............... 59,712 76,569 157,586 73,023 69,013
Operating income (loss)..... (23,438) (14,053) (74,086) 9,699 (11,701)
Other income (expense),
net........................ 1,264 (2,143) 38 (38) (271)
Interest income (expense),
net........................ (952) (2,072) (105) 1,922 1,365
-------- -------- -------- -------- --------
Income (loss) before income
taxes...................... (23,126) (18,268) (74,153) 11,583 (10,607)
Provision (benefit) for
income taxes............... 39 130 806 331 (5,982)
-------- -------- -------- -------- --------
Net income (loss)........... $(23,165) $(18,398) $(74,959) $ 11,252 $ (4,625)
======== ======== ======== ======== ========
Net income (loss) per share:
Basic..................... $ (0.45) $ (0.43) $ (2.15) $ 0.33 $ (0.15)
======== ======== ======== ======== ========
Diluted................... $ (0.45) $ (0.43) $ (2.15) $ 0.32 $ (0.15)
======== ======== ======== ======== ========
Shares used to compute net
income (loss) per share:
Basic..................... 51,609 43,168 34,894 34,178 31,825
======== ======== ======== ======== ========
Diluted................... 51,609 43,168 34,894 35,557 31,825
======== ======== ======== ======== ========
Additional unaudited pro
forma data:
Income (loss) before
income taxes............. $(23,126) $(18,268) $(74,153) $ 11,583 $(10,607)
Pro forma income
taxes(1)................. 39 130 806 3,406 576
-------- -------- -------- -------- --------
Pro forma net income
(loss)................... $(23,165) $(18,398) $(74,959) $ 8,177 $(11,183)
======== ======== ======== ======== ========
Pro forma income (loss) per
share:
Basic..................... $ (0.45) $ (0.43) $ (2.15) $ 0.24 $ (0.35)
-------- -------- -------- -------- --------
Diluted................... $ (0.45) $ (0.43) $ (2.15) $ 0.23 $ (0.35)
======== ======== ======== ======== ========
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
As of September 30,
------------------------------------------
1998 1997 1996 1995 1994
-------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital/(deficiency)........ $ 1,955 $ 6,917 $(4,684) $29,490 $29,147
Total assets........................ 19,525 55,881 76,781 76,699 62,471
Long-term obligations............... 25,022 25,114 25,108 164 701
Stockholders' equity (deficit)...... (17,933) 1,173 4,425 44,270 36,606
</TABLE>
- --------
(1) During fiscal 1996, the Company acquired Datastorm in a transaction
accounted for as a pooling-of-interests. Prior to this transaction,
Datastorm was a subchapter-S corporation. The proforma income taxes have
been adjusted to record income tax expense as if Datastorm was a C-
Corporation for all periods presented prior to the transaction with the
Company.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
This Item should be read in conjunction with the Consolidated Financial
Statements and the notes thereto. The historical results of operations are not
necessarily indicative of results to be expected from future performance.
The Company has sought to identify the most significant risks to its
business. However, the Company cannot predict whether, or to what extent any
of such risks may be realized nor can there be any assurance that the Company
has identified all possible issues which the Company might face.
This Form 10-K contains forward-looking statements which are made pursuant
to the safe-harbor provisions of the Private Securities Litigation Reform Act
of 1995. Within this Form 10-K, words such as "believes", "anticipates",
"plans", "designed", "expects", "intends", "designed to" and similar
expressions reflecting something other than historical fact are intended to
identify forward-looking statements, but are not the exclusive means of
identifying such statements. These forward-looking statements involve a number
of risks and uncertainties, including the timely development and market
acceptance of products and technologies, sell-through of products in the sales
channel, the effect of conversion of the Company's convertible preferred
stock, the ability to reduce operating expenses, issues arising from
addressing Year 2000 information technology issues and other factors described
throughout this Form 10-K and in the Company's other filings with the
Securities and Exchange Commission. The actual results that the Company
achieves may differ materially from any forward-looking statements due to such
risks and uncertainties. The Company undertakes no obligations to revise or
update any forward-looking statements in order to reflect events or
circumstances that may arise after the date of this report.
Overview
At the end of fiscal 1996, fiscal 1997 and during fiscal 1998, Quarterdeck
implemented comprehensive restructuring programs, which included a significant
reduction in its workforce, the closure of offices, and the divestiture of
non-core assets after acquiring ten companies between fiscal 1995 and 1996.
This resulted in a shift in the Company's strategy from utility, communication
and Internet products to developing and marketing software to help personal
computers operate efficiently without extensive technical or administrative
support. The shift in Quarterdeck's strategy was necessitated due to its
inability to sustain the operating losses generated by the Internet businesses
whose markets were still forming, the continued decline in revenues generated
from the Procomm product line as businesses shifted from mainframe to PC based
networks and the opportunity presented by addressing the rising costs of PC
support in small business environments where MIS support is thin or absent. As
a result of this change in strategy, non-strategic products and assets were
discontinued or divested during fiscal 1997 and 1998 including Internet
infrastructure products such as Quarterdeck Mosaic, and Webtalk, web tool
products such as WebAuthor, Total Web and the Starnine Apple webtools
including WebStar, graphics
11
<PAGE>
utilities such as the Hijaak product line, the Company's telesales operation
Quarterdeck Select, and the Datastorm building in Columbia, Missouri. The
Company's Hijaak product line, Starnine and Quarterdeck Select businesses
generated approximately $1,700,000, $4,900,000 and $14,800,000 of gross
revenue in fiscal 1997, respectively and were divested during fiscal 1998
amidst shrinking markets and declining sales. These activities were completed
while products necessary to pursue the Company's strategy were developed,
licensed and/or acquired. See "Business" for further discussion.
Throughout fiscal 1998, Quarterdeck experienced difficulty competing
effectively with companies having significantly greater financial and
marketing resources than the Company. Quarterdeck continued to experience
revenue declines and operating losses primarily due to the RealHelp and
ViruSweep product lines not performing as planned, as well as a predicted
decline in industry segments in which certain of the Company's other products
compete. From fiscal 1997 to fiscal 1998, the Company's gross revenues from
memory management products declined by approximately $7.1 million while the
gross revenue generated by the Procomm product line declined by approximately
$7.2 million. Quarterdeck's need for capital adversely impacted its ability to
sustain the level of expenditures necessary to effectively market its new
products and obtain or develop additional new products.
Additionally, the industry shift to "suite products", which bundle a number
of utility products into one package, would likely adversely impact revenues
from the Company's products in the future, the majority of which are
individual utility products. Quarterdeck does not currently possess the
resources to obtain or develop the additional products necessary to compete in
the "suite" market environment.
Pending Merger
On October 15, 1998, Quarterdeck, Symantec and Oak Acquisition Corporation,
a wholly owned subsidiary of Symantec, entered into the Merger Agreement
whereby Symantec agreed to commence a cash tender offer for all outstanding
shares of the Company at a price of $0.52 per share. The Merger Agreement
further provided for a Merger of Oak Acquisition Corporation with and into the
Company in which all remaining outstanding shares of the Company will be
converted into the right to receive $0.52 per share. On November 17, 1998
Symantec completed its tender offer obtaining approximately 65% of
Quarterdeck's outstanding shares of common stock and common stock equivalents.
Upon consummation of the Merger, which is expected to occur in March 1999, the
Company will become a wholly owned subsidiary of Symantec.
In connection with the Merger Agreement, Quarterdeck and Symantec
concurrently entered into a License Agreement under which Quarterdeck granted
Symantec the non-exclusive right to, among other things, distribute
Quarterdeck's CleanSweep product. Symantec's right to distribute CleanSweep
commenced upon consummation of the tender offer.
12
<PAGE>
Results of Operations
For convenient reference, the following table sets forth, a summary of
revenue, cost, and income data derived from the Company's Consolidated
Statements of Operations:
<TABLE>
<CAPTION>
Year ended
September 30,
---------------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Net revenues................ 100.0 % 100.0 % 100.0 %
Cost of revenues............ 28.7 25.4 37.3
Gross margin.............. 71.3 74.6 62.7
Operating expenses:
Research and development.. 32.7 19.6 16.0
Sales and marketing....... 60.1 35.0 49.9
General and
administrative........... 19.5 20.5 24.1
Acquisition, restructuring
and other charges........ 5.1 14.0 28.4
Litigation Settlement..... -- 2.3 --
----- ----- -----
Total operating
expenses............... 117.4 91.4 118.4
Operating loss.............. (46.1) (16.8) (55.7)
Other income (expense),
net........................ 2.5 (2.5) --
Interest expense, net....... (1.9) (2.5) (0.0)
----- ----- -----
Loss before income taxes.... (45.5) (21.8) (55.7)
Provision for income taxes.. 0.1 0.2 0.6
----- ----- -----
Net loss.................... (45.6)% (22.0)% (56.3)%
===== ===== =====
</TABLE>
Fiscal 1998, 1997 and 1996
The Company's fiscal 1998 operating plan included the introduction of
several new and upgraded PC helpware solutions for retail markets and the
development of small/medium business network versions of its products,
primarily during the fourth quarter of fiscal 1998. The aforementioned
networked versions of Quarterdeck's products were designed to expand the
Company's presence in the corporate marketplace by assisting those business
environments that most need helpware technologies; those where onsite MIS
support is thin or absent. During the past fiscal year, the Company sold non-
core assets such as the Hijaak product line, the Starnine MacIntosh business
and Future Labs, a real-time collaborative technology business while
experiencing a continued decline in net revenues related to certain legacy
memory management and communication products. The Company had expected to
offset the revenues lost due to lower sales of these products with revenues
from newly released products in addition to expansion of its presence in the
corporate direct and reseller channels.
Net Revenues: The Company's net revenues consist of gross sales of its
products, less provisions for sales returns, exchanges, rebates and price
protection. In the retail and corporate reseller channels, the Company's main
sales vehicles, gross sales are recorded as products are shipped on order to
first-tier distributors, with provisions for returns calculated based upon the
Company's estimates of returns which may be in excess of contractual amounts.
If projected sell-through does not occur, actual returns, exchanges or price
protection 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. (See further discussion below
in "--Trends and Uncertainties")
In fiscal 1998, net revenues of $50,861,000 decreased 39.3% or $32,926,000,
from net revenues of $83,787,000 in fiscal 1997. This decline is primarily due
to several factors including: (1) a predicted continued decline in gross
revenues for the Company's legacy products including ProComm, QEMM and
MagnaRAM of approximately $14,335,000, (2) reduced gross revenue of
approximately $10,000,000 relating to the sale of the Company's non-core
assets including Graphics utilities (Hijaak), Starnine (Apple/MacIntosh) and
the Quarterdeck Select telesales operation, (3) increased pricing pressure
from competitors offering aggressive rebate
13
<PAGE>
programs and promotional pricing designed to reduce channel inventory levels
resulting in increased rebates, sales returns reserves and price protection of
approximately $4,295,000, and (4) lower than expected revenues from the
Company's 1998 entrance into the PC Security market with ViruSweep, the
Conflict Resolution market with RealHelp and the Disk Imaging market with
DiskClone. During fiscal 1998, a majority of the Company's revenues were
generated by sales of its Procomm products and its storage management
products, especially CleanSweep.
Quarterdeck's provisions for sales returns, exchanges, rebates and price
protection of $21,000,000 increased 25.7% or $4,295,000 from provisions for
sales returns of $16,705,000 in fiscal 1997, while increasing as a percent of
net revenues to 41.3% in fiscal 1998 from 19.9% in fiscal 1997. This increase
is primarily due to the continued decline in sales for the Company's legacy
products and a decline in product sell through rates subsequent to
announcement of the acquisition by Symantec Corporation.
In fiscal 1997, net revenues of $83,787,000 decreased 37.0% or $49,313,000
from net revenues of $133,100,000 in fiscal 1996. This decline reflected
reduced sales for the Company's memory management, Internet utility, and
communications products, the discontinuance during fiscal 1997 of certain non-
core product lines (e.g., Internet utilities and graphic utilities), reduced
efforts to sell third party products through the Company's direct mail and
telesales units, and management concentration on integrating the Company's
operations and on commencing development on new strategic products, rather
than on expanding sales of end-of-life or non strategic product lines.
The majority of Quarterdeck's revenues are derived from US sales, but the
relative contribution from international revenues has grown, representing
25.5%, 21.9% and 18.0% of the Company's net revenues in fiscal 1998, 1997 and
1996, respectively.
Cost of Revenues: Cost of revenues include product production, packaging,
documentation and media, amortization of capitalized software costs, technical
support and certain license fees paid to third parties. In fiscal 1998, cost
of revenues of $14,587,000 decreased 31.4% or $6,684,000, from cost of
revenues of $21,271,000 in fiscal 1997, while increasing as a percent of net
revenues to 28.7% in fiscal 1998 from 25.4% in fiscal 1997. The dollar
decrease in cost of revenues was primarily due to reduced materials costs of
$2,925,000 relating to reduced revenues, approximately $1,308,000 relating to
reductions in technical support costs, approximately $857,000 in reduced
royalty expenses and approximately $519,000 in reduced software amortization.
The increase as a percent of net revenues was primarily due to the fact that
net revenues were reduced by return provisions and cost of revenues were not
reduced proportionately. The Company's policy is to not record a corresponding
reduction to cost of revenues since most returned units are not resold. Also
increasing the cost of revenues as a percent of net revenues was a write off
of approximately $300,000 of previously capitalized software development costs
which, based upon the Company's evaluation of recoverability, has been deemed
to be impaired.
In fiscal 1997, cost of revenues of $21,271,000 decreased 57.1% or
$28,329,000, from cost of revenues of $49,600,000 in fiscal 1996, while
declining as a percent of net revenues to 25.4% in fiscal 1997 from 37.3% in
fiscal 1996. The dollar decrease in cost of revenues was primarily due to
reduced materials costs of $16,704,000 relating to reduced sales and
$6,882,000 relating to reduced technical support costs. The reduction as a
percent of net revenues was primarily due to a decrease in the manufacturing
cost per unit resulting from a change in the Company's product mix to the CD-
Rom format from higher cost floppy disks, consolidation of the purchasing
function which allowed the Company to obtain volume discounts with respect to
manufacturing, continued reduction of technical support costs and reduced
software amortization and royalty expense in the current year.
Software development and purchased software costs are capitalized once
technological feasibility is achieved and are generally amortized over one to
three year periods, commencing upon initial product release. In fiscal 1998,
1997, and 1996, Quarterdeck did not capitalize any internal software
development, judging that costs incurred after achieving technological
feasibility were immaterial, but did capitalize external software purchases of
$0, $0, and $4,504,000, respectively.
14
<PAGE>
In fiscal 1998, amortization of capitalized software costs of $1,151,000
decreased 31.1% or $519,000, from amortization of capitalized software costs
of $1,670,000 in fiscal 1997, reflecting the winding down of earlier
capitalized amounts. In fiscal 1997, amortization of capitalized software
costs of $1,670,000 decreased 55.0% or $2,041,000, from amortization of
capitalized software costs of $3,711,000 in fiscal 1996, also reflecting the
winding down of earlier capitalized amounts.
Operating Expenses
In fiscal 1998, total operating expenses of $59,712,000 decreased 22.0% or
$16,857,000, from total operating expenses of $76,569,000 in fiscal 1997,
while increasing as a percent of net revenues to 117.4% in fiscal 1998 from
91.4% in fiscal 1997. The dollar decline in total operating expenses resulted
primarily from the Company's continued restructuring, consolidation, and
downsizing activities which began late in fiscal 1996 and has continued
through fiscal 1998. The percentage increase in operating expenses resulted
from the decline in net revenue in fiscal 1998. In fiscal 1997, total
operating expenses of $76,569,000 decreased 51.4% or $81,017,000, from total
operating expenses of $157,586,000 in fiscal 1996, while declining as a
percent of net revenues to 91.4% in fiscal 1997 from 118.4% in fiscal 1996.
This decline in total operating expenses also resulted primarily from the
Company's restructuring, consolidation, and downsizing activities.
Research and Development: Research and development expenses consist
primarily of salaries, benefits and consulting fees to support product
development, including product testing and documentation. In fiscal 1998,
research and development expenses of $16,640,000 increased 1.3% or $221,000,
from research and development expenses of $16,419,000 in fiscal 1997, while
increasing as a percent of net revenues to 32.7% in fiscal 1998 from 19.6% in
fiscal 1997. The dollar increase was largely due to a $2,004,000 write off of
goodwill in the third quarter of fiscal 1998 which was deemed to be impaired.
The goodwill resulted from the acquisition of Limbex Corporation.
Historically, the amortization of such goodwill has been charged to research
and development because Limbex's primary operations were related to the
development of software products and to be consistent, the write off of
goodwill was also charged to research and development expense. Additionally,
the Company increased research and development spending to support its
entrance into the PC Security market (ViruSweep), the Conflict Resolution
market (RealHelp and Crash Defender) and the contracted product development
required to support Quarterdeck's development efforts for the corporate
market. These increases were more than offset by reduced development spending
relating to discontinuance of certain non-core product lines including
Internet utilities, graphics utilities, T120 product development, and the
Starnine Apple/MacIntosh products line. Additionally, during 1998 Quarterdeck
reduced the development expense related to its ProComm product line, which has
entered a predicted sales decline. Primarily as a result of reducing the
amount of products under development, the Company's development expenses
decreased by approximately $2,300,000. The Company further reduced its
expenses by $6,188 per month by terminating its lease of the Palo Alto office.
The increased expense as a percent of net revenue, is primarily due to the
aforementioned goodwill write off for which there was no corresponding net
revenue increase.
In fiscal 1997, research and development expenses of $16,419,000 decreased
23.0% or $4,895,000, from research and development expenses of $21,314,000 in
fiscal 1996, while increasing as a percent of net revenues to 19.6% in fiscal
1997 from 16.0% in fiscal 1996. The decrease in research and development
expenses was largely due to a reduction in the quantity of products the
Company is exploiting or developing. As discussed earlier, the Company has
discontinued or divested non-core products. The research and development
expenditures during fiscal 1997 were primarily focused on the portfolio of PC
"helpware" products which comprised the Company's product strategy (See page
2). The increase in research and development expenses as a percent of net
revenues was largely due to the reduction in net revenues during fiscal 1997
as compared to fiscal 1996.
Sales and Marketing: Sales and marketing expenses consist of salaries and
commissions and related costs of sales and marketing and customer service
personnel as well as advertising, trade show and promotional expenses. In
fiscal 1998, sales and marketing expenses of $30,566,000 increased 4.3% or
$1,261,000, from sales and marketing expenses of $29,305,000 in fiscal 1997,
while increasing as a percent of net revenues to 60.1%
15
<PAGE>
in fiscal 1998 from 35.0% in fiscal 1997. The dollar increase in sales and
marketing expense was primarily due to $4,093,000 in increased consulting
costs relating to the outsourcing of the Company's telemarketing sales force
including a $500,000 settlement fee paid to terminate the outsourcing
agreement, an increase of $1,951,000 in market development funds, $1,436,000
relating to increases in advertising and an increase of $280,000 in public
relations expense. These increases were offset by decreases of $2,909,000 of
selling and printing expenses relating to reduced direct marketing campaigns,
$2,070,000 of employee and employee related expenses, and $1,520,000 related
to a reversal of market development fund reserves which were determined to no
longer be necessary. Quarterdeck spent significant advertising and market
development funds to launch the aforementioned new products including
ViruSweep, RealHelp and DiskClone. The 1998 increase as a percentage of net
revenues was primarily due to the costs associated with the Company's entrance
into new markets including the PC Security, Conflict Resolution and Disk
Imaging which did not result in a proportionate increase in net revenues.
Additional expenses were also incurred to penetrate the corporate channel
which required large expenditures for advertising, market development funds
and other variable sales and marketing expenditures which were committed based
upon expected sales levels which did not occur. In 1998, Quarterdeck also
launched its Quarterdeck Enterprise Partner Program (QEPP) and signed up
approximately 300 VAR's and system integrators to support the sales and
service of Quarterdeck's Enterprise products. In fiscal 1997, sales and
marketing expenses of $29,305,000 decreased 55.8% or $37,050,000, from sales
and marketing expenses of $66,355,000 in fiscal 1996, while decreasing as a
percent of net revenues to 35.0% in fiscal 1997 from 49.9% in fiscal 1996.
These decreases were largely due to reduced advertising of $12,717,000,
reduced salaries expense of $9,080,000 and a reduction in market development
funds of $7,512,000.
General and Administrative: General and administrative expenses consist of
salaries and related costs of support departments, overhead and facilities. In
fiscal 1998, general and administrative expenses of $9,923,000 decreased 42.4%
or $7,304,000, from general and administrative expenses of $17,227,000 in
fiscal 1997, while decreasing as a percent of net revenues to 19.5% in fiscal
1998 from 20.5% in fiscal 1997, the dollar decrease in general and
administrative is primarily due to approximately $4,607,000 of facility
related reductions and $1,878,000 of headcount related reductions. This
decrease as a percentage of net revenues were largely due to aggressive
reductions in headcount and facility related expenses due to the restructuring
efforts in fiscal 1998 and 1997. In fiscal 1997, general and administrative
expenses of $17,227,000 decreased 46.4% or $14,901,000, from general and
administrative expenses of $32,128,000 in fiscal 1996, while decreasing as a
percent of net revenue to 20.5% in fiscal 1997 from 24.1% in fiscal 1996.
These declines were also primarily due to reductions in headcount and facility
expenses of $8,735,000 and $4,729,000 respectively, related to the
restructuring efforts late in fiscal 1996 and in fiscal 1997.
Acquisition and Other Charges: In fiscal 1998, there were no acquisition and
other charges as compared to acquisition and other charges of $(702,000) in
fiscal 1997. In fiscal 1997, acquisition and other charges of $(702,000)
decreased 102.8% or $25,496,000, from acquisition and other charges of
$24,794,000 in fiscal 1996, while decreasing as a percent of net revenues to
(0.8%) in fiscal 1997 from 18.6% in fiscal 1996. During fiscal 1997, the
Company acquired certain assets of TuneUp.com which resulted in an in-process
research and development charge of approximately $268,000. Additionally,
during fiscal 1997 Quarterdeck reversed over-accrued acquisition costs into
income in the amount of $970,000 which related to estimated acquisition
integration costs for companies acquired during fiscal 1995 and 1996, which
were determined to be no longer necessary, based on actual costs incurred. See
Note 1 and Note 2 of Notes to Consolidated Financial Statements for further
discussion.
Restructuring Costs: In fiscal 1998, restructuring costs of $2,583,000
decreased 79.2% or $9,832,000, from restructuring costs of $12,415,000 in
fiscal 1997 while decreasing as a percent of net revenues to 5.1% in fiscal
1998 from 14.8% in fiscal 1997. In June 1998, the Company implemented a
restructuring plan which was designed to reduce the ongoing level of operating
expenses to one which can be supported by a reduced revenue base. As a result,
Quarterdeck recorded charges totaling $2,980,000 relating to fiscal 1998 and
reversed $201,000 relating to fiscal 1997, and $196,000 relating to fiscal
1996, both of which were no longer required. The fiscal 1998 charge included a
severance provision for terminated employees in the amount of $2,182,000, on-
going
16
<PAGE>
lease obligations in the amount of $377,000 and write downs of property and
equipment in the amount of $271,000.
In fiscal 1997, restructuring costs of $12,415,000 decreased 4.5% or
$580,000, from restructuring costs of $12,995,000 in fiscal 1996, while
increasing as a percent of net revenues to 14.8% in fiscal 1997 from 9.8% in
fiscal 1996. During fiscal 1997, the Company recorded a total charge of
$11,051,000 relating to a restructuring program designed to refocus the
Company on a new corporate strategy. This charge primarily included: (i) the
write off of operating assets used in divested non-core product lines in the
amount of $569,000; (ii) a severance provision for individuals who were
terminated in the amount of $3,252,000; (iii) the write down of the value of a
building the Company planned to sell in the amount of $5,803,000; and (iv)
other obligations associated with downsizing and divestiture activities in the
amount of $1,038,000. In addition, the Company recorded an additional charge
of $1,364,000 in fiscal 1997 related to the restructuring in September 1996.
These actions were taken in order to continue to eliminate redundant
administrative activities related to the Company's acquisitions of Datastorm
and Starnine, to centralize administrative activities at the Company's Marina
del Rey facility, and to further reduce costs to a level supportable by
revenues, the Company eliminated several positions at its Columbia, Missouri
facility and its Los Altos, California facility. These cost reduction efforts
will mainly result in lower general and administrative costs in the upcoming
fiscal years when compared to prior years. Although the Company is downsizing
its Columbia, Missouri operations, the Company will continue to support the
development and sale of its Procomm product line.
Late in fiscal 1996, Quarterdeck implemented a comprehensive, corporate wide
restructuring plan, designed to focus the Company's development and marketing
efforts on those products and technologies with the most significant growth
opportunities while optimizing profitability on certain of Quarterdeck's
products that had experienced lower demand or were at the end of their product
life cycle. The Company's restructuring plan included involuntarily
terminating approximately 40% of the workforce and discontinuing the Internet
product lines, specifically Web Talk. In accordance with the restructuring
plan, the Company experienced restructuring charges totaling $12,995,000
related to: (i) severance obligations to involuntarily terminated employees in
the amount of $6,513,000; (ii) write-offs of capitalized software and prepaid
royalties in the amount of $2,754,000, as these costs related to discontinued
product lines; (iii) write-off of property and equipment in the amount of
$2,308,000 deemed permanently impaired; and (iv) lease obligations and
cancellation fees related to the discontinuance and consolidation of offices
in the amount of $1,420,000.
Litigation Settlement: The Company had no litigation settlement expense for
fiscal 1998. On December 19, 1997, the Company reached an agreement in
principle to settle federal and state shareholder actions for $12,500,000, of
which the Company was required to pay approximately $1,905,000. Accordingly,
Quarterdeck recorded a charge of $1,905,000 for fiscal 1997. The Company had
no litigation settlement expense in fiscal 1996.
Other Income (Expense): In fiscal 1998, net other income of $1,264,000
increased $3,407,000, from net other expense of $2,143,000 in fiscal 1997. The
increase in net other income primarily represents the gain realized upon the
sale of the Columbia, Missouri building and other fixed assets on December 30,
1997 of $497,000, $1,666,000 related to the 1997 write down of the Company's
investment in Infonautics, and $560,000 from the sale of the assets of the
Company's telesales and Starnine Macintosh businesses as a result of the
divestiture of these businesses in January 1998. In fiscal 1997, net other
expense of $2,143,000 increased $2,181,000, from net other income of $38,000
in fiscal 1996. During fiscal 1997, net other expense was primarily due to
losses of $2,922,000 on the Company's investments in Infonautics and
Intelligence At Large partially offset by gains on the sales of Lernout &
Hauspie stock and warrants of $1,026,000. Additionally, net losses on disposal
of fixed assets were recorded of approximately $247,000. During fiscal 1996,
net other income of $38,000 was comprised of gains on the sale of short term
investments and sales of equipment.
Interest Expense: In fiscal 1998, net interest expense of $952,000 decreased
54.1% or $1,120,000, from net interest expense of $2,072,000 in fiscal 1997.
Net interest expense decreased in fiscal 1998 primarily due to increased
interest income of $540,000 related to cash balances resulting from the
Company's financing and
17
<PAGE>
divestiture activities, and a decreased interest expense of approximately
$561,000 relating to the sale of the Columbia building and payoff of the
related construction loan in December 1997. In fiscal 1997, net interest
expense of $2,072,000 increased $1,967,000, from net interest expense of
$105,000 in fiscal 1996. Interest expense increased in fiscal 1997 because the
convertible bonds issued in March 1996 were outstanding for the full year
versus six months in fiscal 1996. Additionally, larger interest payments were
made on its construction loan due to higher loan balances outstanding in
fiscal 1997, and a higher interest rate was paid on a new revolving line of
credit than under the previous line which was outstanding during fiscal 1996.
Income Taxes: Income tax expenses for fiscal 1998, 1997 and 1996 were
$39,000, $130,000 and $806,000, respectively. A 100% valuation allowance was
applied to Quarterdeck's net deferred tax asset of $39,944,000 at September
30, 1998 (See Note 12 of the Notes to the Consolidated Financial Statements).
The net deferred tax asset (before applying the valuation allowance) is
comprised of the estimated tax effect of (a) expected future reversing
temporary differences relating in part to charges taken for book purposes that
are not deductible for federal income tax purposes until the amounts are paid
in the future and (b) tax net operating loss carryforwards. Management
believes that it is not appropriate to record a deferred tax asset until such
time as the Company is able to establish that it becomes more likely than not
that the Company will realize some or all of the benefit of the net deferred
tax asset. The net deferred tax assets, prior to the application of valuation
allowances, for fiscal 1997 was $32,805,000 and for fiscal 1996 was
$24,858,000.
Trends and Uncertainties
The computer software industry is subject to rapid technological change
often evidenced by new competing products, new product distribution mechanisms
such as Internet downloads, improvements in existing products and improvements
and/or upgrades to operating systems. The Company depends on the successful
development or acquisition and resulting sales of new products, including
upgrades of existing products, to replace revenues from products introduced in
prior years that have begun to experience reduced revenues or have become
obsolete. If the Company's leading products, such as CleanSweep and ProComm,
become outdated or are rendered obsolete as a result of improvements in
operating systems, hardware or technology, or due to other competitive factors
and lose market share faster than those revenues are replaced by new products
or if new products or existing product upgrades are not introduced in a timely
manner or do not achieve anticipated revenues, the Company's operating results
could be materially adversely affected. Even with normal development cycles,
the market environment can change so quickly that features in certain products
can become outdated soon after market introduction. These events may occur in
the future and may have an adverse effect on future revenues and operating
results.
Quarterdeck has focused significant efforts on evolving its core utilities
and communication product lines into a set of products designed to enhance
user performance, simplify system management and reduce the ongoing cost of
ownership for networked personal computing. As part of this effort, the
Company has been developing new products and adapting its current technology
into these products. There is no assurance these efforts will be successful.
The Company anticipates that spending for software development and purchased
software will continue as a significant expense in the future. Other
significant risks associated with the Company's focus on this category of
products include the timing of releases in relation to competitive products
and uncertainties surrounding the rate and extent of development of this new
market.
Quarterdeck has devoted substantial efforts to expand its presence in the
corporate marketplace with networked versions of its products. This strategy
is designed to reduce product return risk and improve gross margins, since
corporate customers generally order product based on a specific need. As part
of this effort, the Company has been developing new products and adapting its
current technology into these products. The Company anticipates that spending
for sales, marketing and software development as it relates to the corporate
marketplace will continue as a significant expense in the future. There is no
assurance these efforts will be successful.
18
<PAGE>
The Company has also devoted substantial efforts to the development of
software products that are designed to operate on Microsoft's Windows 95,
Windows 98 and Windows NT. Microsoft Corporation may incorporate advanced
utilities or other features in Windows 95 and/or Windows 98 and/or Windows NT
and/or Windows Plus Packs and/or their successors that may decrease the demand
for certain of the Company's products including those under development.
Should the Company not be able to timely develop and successfully market
products that offer perceived value to users of these operating systems beyond
that which is offered in the base operating system, future revenues would be
adversely affected. In addition, Microsoft may introduce new or upgraded
versions of their operating systems to replace currently available versions.
There can be no assurance these efforts will be successful in achieving their
intended results.
Future competitive product releases may cause disruptions in orders for the
Company's products while users and the marketplace evaluate the competitive
products. The extent of the disruption in orders and the impact on future
orders of the Company's products will depend on various factors that are not
fully known at this time, including the level of functionality, performance
and features included in the final release of these competitive products and
the price thereof and the market's evaluation of competitive products compared
to the then current functionality, performance, features and price of the
Company's products.
Channel fill occurs when a product shipped into retail distribution does not
sell-through to end users at expected rates, resulting in larger than expected
product returns from retailers or distributors, in-channel price reductions
that the Company must reimburse, and/or lower than expected future sell-in
rates for these same products, all of which can adversely affect net revenue
recognized in future periods. In the third quarter of fiscal 1996, the Company
experienced channel fill following the release of QEMM and MagnaRam in the
fall of 1995 due to a decrease in the cost of memory, controversy surrounding
a competitor's memory management product, sell- through levels of one product
in the second quarter were not sustained in the second half of Fiscal 1996 and
the fact that the then current versions of the memory management products were
nearing the end of their respective life cycles. In the same quarter, the
Company experienced channel fill following the release of ProComm in March of
1996 due to a decline in demand for the product.
Revenue is recognized upon shipment at the time of sale. The Company
estimates reserves for returns and exchanges at the point it sells product
into retail distribution using expected sell-through rates and no assurance
can be given that actual sell-through rates will meet these expectations.
Quarterdeck's return policy generally allows its distributors, subject to
certain limitations, to return 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 may provide 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 which helps to minimize the possibility of product returns. The
maximum portion of net revenues that were reported in fiscal 1998 that could
be subject to return at year end would be the total amount of channel
inventories at September 30, 1998 which was approximately $10 million, less
the amount of return and price protection reserves established at that date of
$5.5 million.
Recruitment of personnel in the computer software industry is highly
competitive. Quarterdeck's success depends to a significant extent upon the
performance of its executive officers and other key personnel. The Company
believes its ability to attract and retain highly qualified personnel has been
adversely affected by the Company's recent restructurings and financial
performance. As a result, there can be no assurance that the Company will be
successful in attracting and retaining such personnel. The 1998 restructuring
was designed to reduce the Company's headcount and other overhead in order to
return to profitability by the quarter ended, December 31, 1998 and to
position the Company to enter the corporate marketplace with its helpware
solutions. The Company replaced much of the senior management team as part of
the 1998 restructuring and eliminated many other positions throughout the
Company. Overall, these restructuring efforts reduced the Company's headcount
by over 30%. Subsequent to the close of Symantec's tender offer, headcount was
further reduced by approximately 45%. These significant changes to the
Company's management and further loss of the services of
19
<PAGE>
key individuals or the inability to attract and retain highly qualified
personnel, including developers, could have a material adverse effect on the
Company.
Year 2000 Compliance
Many existing computer systems and software products, including several used
by the Company, are coded to accept only two digit entries in the date code
field. Beginning in the year 2000, these date code fields will need to accept
four digit entries to distinguish 21st century dates from 20th century dates.
As a result, the Company's date critical functions related to the year 2000
and beyond, such as sales, distribution, purchasing, inventory control, trade
promotion management, planning and replenishment, facilities and financial
systems may be materially adversely affected unless computer systems and
embedded microchips in manufacturing equipment are or become year 2000
compliant. In addition, certain of the Company's business activities may be
materially adversely affected if critical business partners, including
customers, vendors, suppliers, brokers and others, experience disruptions in
service as a result of year 2000 problems.
The Company currently believes that the year 2000 issue will not pose
significant operational problems for the Company. However, if all year 2000
issues are not properly identified, or assessment, remediation and testing are
not effected timely with respect to year 2000 problems that are identified,
there can be no assurance that the year 2000 issue will not materially
adversely impact the Company's results of operations or adversely affect the
Company's relationships with customers, vendors, suppliers, brokers or others.
Additionally, there can be no assurance that the year 2000 issues of other
entities will not have a material adverse impact on the Company's systems or
results of operations.
Quarterdeck has made an assessment of its information technology ("IT") and
non-IT systems and operations to ascertain the cost impact to the Company
regarding the Year 2000 issue. Based on such assessment, the Company's general
accounting system, computer servers and telephone systems are Year 2000
compliant, its customer base systems and any other non-IT systems will be
upgraded in early 1999 to be Year 2000 compliant at no additional cost.
However, there can be no assurances that the Company will not experience
unanticipated negative consequences and/or material costs associated with
preparing its internal IT and non-IT systems for the Year 2000 caused by
undetected errors or defects in its internal systems. Substantially all of the
current releases of the Company's software have been designed to be Year 2000
compliant, however, older versions of certain of the Company's software,
including ProComm, may not be fully compliant. It is the Company's
understanding that Symantec intends to release a Year 2000 compliant version
of the older, non-compliant version of ProComm incurring ongoing ProComm
development costs and to discontinue distribution of non compliant versions. A
class action complaint was filed against the Company on behalf of a purported
class of purchasers of the Procomm Plus version 4.0 for Windows product (the
"Product") arising from the Product's inability to process dates containing
the Year 2000. See Item 3 herein and Note 13 of Notes to Consolidated
Financial Statements for further discussion.
The Company has communicated with certain of its critical business partners
(customers, vendors, suppliers, etc.) to assess their readiness and to
consider the potential impact on the Company if these business partners
experience significant year 2000 problems. The Company has assessed and
attempted to mitigate its risks with respect to the failure of these entities
to be year 2000 compliant by developing a contingency plan. There can be no
assurance that the systems of the Company's suppliers, distributors and others
upon which the Company's systems and/or personnel rely will be timely
converted, or that a failure to convert or an incompatible conversion by one
of these parties would not have a material adverse effect on the Company.
The Company has not developed contingency plans as it is the Company's
understanding that Symantec intends to integrate Quarterdeck's operations into
Symantec's current systems after the Merger is completed. The most reasonably
likely worst case scenario would be the failure of Symantec's systems which
would necessarily result in a failure of Quarterdeck's systems. The Company
does not expect to incur additional costs or complete further independent
analysis regarding the Year 2000 issue and the Company's current systems prior
to the Merger. As a result, the Company does not currently expect to develop
further contingency plans with respect to Year 2000 issues.
20
<PAGE>
Patents, Trademarks and Product Protection
The Company relies on a combination of trade secret, patent, copyright and
trademark laws, license agreements and nondisclosure agreements to protect its
rights to its products. The Company provides its products to end users under a
nonexclusive license that by its terms limits the warranties provided by and
liability of the Company. The ability of software companies to enforce such
licenses has not been finally determined by the U.S. Supreme Court. The use
and registration by the Company of its trademarks and servicemarks do not
assure that the Company has superior rights to others that may have registered
or used identical or related marks on related goods or services, nor that such
registrations or uses by others will not be used to attempt to foreclose use
of a particular mark by the Company.
The extent to which U.S. and foreign copyright and patent laws protect
software has not been fully determined. In addition, changes in the
interpretation of copyright and patent laws could expand or reduce the extent
to which the Company or its competitors are able to protect their software and
related intellectual property.
Policing the unauthorized use of computer software is difficult and software
piracy is expected to continue to be a persistent problem for the packaged
software industry, particularly in certain international markets, and
therefore for the Company.
Over the last several years, the number of software-related patents issued
by the United States Patent and Trademark Office has increased dramatically.
The Company does not know all of the patents that have been issued or that may
be pending that could cover any of its products. Accordingly, the Company may
not have, or may at any time lose, the right to develop, use or distribute one
or more of its products. Any patent that precludes the Company from
developing, using or distributing one or more of its products, that forces the
Company to pay substantial royalties or substantial attorneys fees and other
litigation costs, or that casts doubt on the Company's right to develop, use
or distribute any product could have a material adverse effect on the Company.
Recent Accounting Pronouncements
SFAS No. 132, Employers' Disclosures about Pensions and Other Postretirement
Benefits, was issued in February 1998. SFAS No. 132 revises the disclosure
requirements for pensions and other postretirement benefits. This statement is
effective for the Company's financial statements for fiscal years beginning
after December 15, 1997 and the adoption of this standard is not expected to
have a material effect on the Company's financial statements.
SFAS No. 130, "Reporting Comprehensive Income" is effective for fiscal years
beginning after December 15, 1997. SFAS No. 130 established standards for the
reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general-purpose financial
statements. The Statement requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence
as other financial statements. The Company is evaluating the Statement's
provisions to conclude how it will present comprehensive income in its
financial statements, and has not yet determined the amounts to be disclosed.
The Company will adopt SFAS No. 130 effective October 1, 1998.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" is effective for financial statements for periods beginning after
December 15, 1997. SFAS No. 131 establishes standards for the way that public
business enterprises report financial and descriptive information about
reportable operating segments in annual financial statements and interim
financial reports issued to stockholders. SFAS No. 131 supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise," but retains the
requirement to report information about major customers. The Company has not
yet determined the amounts to be disclosed. The Company will adopt SFAS No.
131 effective October 1, 1998.
The AICPA issued Statement of Position 97-2, "Software Revenue Recognition,"
(SOP 97-2) effective for transactions entered into in fiscal years beginning
after December 15, 1997. The Company will adopt SOP 97-2 for transactions
entered into on and after October 1, 1998. The impact of SOP 97-2 will depend
on the terms of future transactions.
21
<PAGE>
Liquidity and Capital Resources
Cash and cash equivalents decreased $15,240,000 to $8,411,000 at September
30, 1998 from $23,651,000 at September 30, 1997. Working capital, which is the
excess of current assets over current liabilities, at September 30, 1998 was
$1,955,000 as compared to $6,917,000 at September 30, 1997.
Operating Activities: Cash used in operating activities of $(21,729,000) was
primarily due to a net reduction in assets and liabilities of $(4,689,000)
which resulted from net reductions in receivables, inventories, and other
assets of $7,012,000 being offset by net reductions in payables, accrued
liabilities, accrued acquisition, restructuring and other charges, and foreign
currency translation adjustment of $(11,701,000). An additional $(17,040,000)
of cash was used as a result of the Company's net loss of $(23,165,000) offset
by non cash charges of $6,125,000.
The reduction in accounts payable and accrued liabilities was due to
payments made to trade vendors and an overall decline in the level of the
Company's operating expenses as a result of the execution of the restructuring
plans. The reduction in accrued acquisition, restructuring and other charges
was due to payments made during the execution of the fiscal 1997 and 1998
restructuring plan. The reductions in accounts receivable and inventory were
due to aggressive collections and heightened inventory control. The reduction
in other assets was largely due to a write off of the Limbex assets which were
primarily composed of the WebCompass technology.
Investing Activities: Net cash provided by investing activities of
$7,798,000 was largely due to the sale of the Columbia, Missouri building and
the divestiture of both the Company's telesales and Macintosh development
businesses which resulted in cash proceeds of $7,700,000 and $1,575,000,
respectively, offset by $1,845,000 for capital expenditures primarily related
to computer purchases.
Financing Activities: Net cash used in financing activities of $1,309,000
was primarily related to $5,579,000 of debt repayment and $77,000 of net
payments under long term obligations, offset by net proceeds of $2,782,000
from the sale of Series C convertible preferred stock, $1,521,000 from the
exercise of warrants and $44,000 from the issuance of common stock due to the
exercise of stock options.
On March 28, 1996, the Company issued $25,000,000 principal amount of 6%
Convertible Senior Subordinated Notes, due 2001 ("Notes"), to an institutional
investor in a private placement pursuant to the terms of a Note Agreement,
dated March 1, 1996. The Notes are required to be paid in full upon
consummation of the Merger without any premium. See Note 5 of the Consolidated
Financial Statements for further discussion.
In April 1997, the Company established an asset based line of credit with
Greyrock Business Credit, a division of NationsBank. Maximum borrowings under
the new line are the lesser of $12,000,000 and the sum of 85% of eligible
accounts receivable, 50% of Quarterdeck International Limited (Qil) eligible
receivables plus the value of inventory to a maximum of $2,000,000. The line
can be used for general corporate purposes, including investments and
acquisitions, and bears interest at prime plus 2%. The line is secured by
substantially all assets of Quarterdeck. The Company is obligated to pay a
minimum interest charge of $10,000 per month and comply with certain other
non-financial covenants and restrictions. At September 30, 1998, the Company
had $0 outstanding under the line and the ability to borrow up to a maximum
amount of $7,853,000. The current term of the agreement matures on March 31,
1999. This agreement is automatically renewable for successive additional one
year terms unless advance notification is provided by either party prior to
the next maturity date. It is anticipated that the line will be terminated
upon consummation of the Merger.
Due to the Company's declining revenues, recurring net operating losses,
continued restructurings, negative cash flow and the uncertainty associated
with the impact of the acquisition of the Company by Symantec Corporation,
there is no assurance that Quarterdeck will be able to continue as a going
concern for fiscal 1999.
In September and between October 1997 and April 1998, the Company issued an
aggregate of 30,521 shares of Series C Convertible Preferred Stock, resulting
in net proceeds to the Company of $18,897,000 (after expenses
22
<PAGE>
and the repurchase of $10,000,000 of Series B Preferred Stock). See Part II
and Note 6 to the Consolidated Financial Statements for further discussion.
The Company conducts business in various foreign currencies and is therefore
subject to the transaction exposures that arise from foreign exchange rate
movements between the dates that foreign currency transactions are recorded
and the date that they are consummated. The Company is also subject to certain
exposures arising from the translation and consolidation of the financial
results of its foreign subsidiaries. There can be no assurance that actions
taken to manage such exposures will continue to be successful or that future
changes in currency exchange rates will not have a material impact on the
Company's future operating results. The Company does not hedge either its
translation risk or its economic risk.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's financial statements included with this Form 10-K are set
forth under Item 14 hereof.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
23
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS.
The Current Members of the Board of Directors
The names of the current directors, their ages as of November 30, 1998 and
certain other information about them are set forth below. As indicated below,
certain of the directors also have positions with Symantec Corporation and/or
Oak Acquisition Corporation which are affiliates of the Company.
<TABLE>
<CAPTION>
Year Position with the Company or
First Elected Principal Occupation During the
Name of Director Age a Director Last Five Years
---------------- --- ------------- -------------------------------
<C> <C> <C> <S>
Gordon E. Eubanks, Jr. .. 51 1998 Mr. Eubanks became a director of
the Company on November 17, 1998.
Mr. Eubanks has been President
and Chief Executive Officer of
Symantec Corporation since
October 1986 and a member of the
Board of Directors of Symantec
since November 1983.
Howard A. Bain III....... 52 1998 Mr. Bain has been a director of
the Company since November 17,
1998 and Chief Executive Officer
and President of the Company
since November 23, 1998. Mr. Bain
is Vice President, Worldwide
Operations and Chief Financial
Officer of Symantec Corporation.
Mr. Bain joined Symantec in
October 1991 as its Vice
President, Finance.
Enrique T. Salem......... 32 1998 Mr. Salem has been a director of
the Company since November 17,
1998. Mr. Salem is Vice
President, Security and
Assistance Business Unit and
Chief Technical Officer
of Symantec Corporation. Mr.
Salem joined Symantec in April
1990 and has held numerous
positions including Director
of Development and General
Manager of Advanced
Utilities Group.
Derek Witte.............. 41 1998 Mr. Witte has been a director of
the Company since November 17,
1998 and Secretary of the Company
since November 23, 1998. Mr.
Witte is a director and
President, Chief Financial
Officer and Secretary of Oak
Acquisition Corporation. Mr.
Witte is Vice President, General
Counsel and Secretary of Symantec
Corporation. Mr. Witte joined
Symantec in October 1990.
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
Year Position with the Company or
First Elected Principal Occupation During the Last
Name of Director Age a Director Five Years
---------------- --- ------------- ------------------------------------
<C> <C> <C> <S>
King R. Lee........... 58 1994 Mr. Lee served as the Interim Chief
Executive Officer and President of
the Company from July 8, 1998 until
November 23, 1998. Mr. Lee also
served as a member of the Office of
the President of the Company from
August 27, 1996 until February 1997.
Mr. Lee also served as Interim Chief
Executive Officer of the Company
from December 1994 until January
1995 and served as Interim Chief
Operating Officer of the Company
between July and December 1994. He
was elected a director of the
Company in July 1994. Mr. Lee served
as the Chief Executive Officer of
Wynd Communications Corporation, a
two-way wireless messaging service
provider, from October 1995 to
January 1997, and has served as its
Chairman since October 1995. Mr. Lee
is President of King R. Lee &
Associates, Inc., an executive
management consulting firm, which
provides consulting services to the
Company. From 1987 to 1993, Mr. Lee
was President and Chief Executive
Officer of Xtree Company, a
developer of computer systems
software. He serves as a director of
Nettech Systems, Inc., Outback
Resource Group, Inc., Boss
Entertainment, Dover Pacific, Inc.
and Mobile Automation, Inc.
Frank W. T. LaHaye.... 69 1982 Mr. LaHaye has been a director of the
Company since 1982 and was the
Chairman of the Board from 1985
until November 1998. Mr. LaHaye was
a general partner of the general
partnership of Peregrine Ventures, a
venture capital investment
partnership, from its formation in
1981 until its dissolution in 1998.
Mr. LaHaye has been a general
partner of the general partnership
of Peregrine Ventures II, a venture
capital investment partnership,
since its formation in 1983.
Mr. LaHaye serves as a director or
trustee of various funds affiliated
with the Franklin/Templeton Group of
Funds and as a director of Digital
Transmission Systems, Inc.
Dr. Howard L. Morgan.. 52 1983 Dr. Morgan has been a director of the
Company since 1983. He is currently
President of Arca Group, Inc., a
consulting and investment management
firm specializing in the areas of
computer and communications
technologies. He serves as a
director of Cylink Corporation, a
developer of software for secure
communications, Franklin Electronic
Publishers, Inc., a developer of
electronic books, Infonautics
Corporation, a provider of online
information, Kentek Information
Systems, a manufacturer of laser
printers, Neoware Systems, Inc., a
provider of network terminals,
MetaCreations, Inc., a developer of
computer graphics software, Segue
Software, a developer of automated
software systems, and Unitronix
Corp., a software supplier.
</TABLE>
Each of the directors has been engaged in the principal occupation(s)
described above during the past five years. There are no family relationships
among any of the directors or executive officers of the Company.
25
<PAGE>
Executive Officers
The executive officers and other officers of Quarterdeck as of September 30,
1998 were as set forth below. Upon consummation of the tender offer,
substantially all of such persons resigned or were terminated except, Mr.
Greico, Mr. Navon, Ms. Kaplan-Smith, Mr. Tchamkertenian and Mr. Levinsohn. In
addition, Mr. Howard A. Bain III and Mr. Derek Witte who are the Vice
President, Worldwide Operations and CFO and the Vice President, General
Counsel and Secretary of Symantec, respectively, have been appointed the
President and Chief Executive Officer and the Secretary of Quarterdeck,
respectively.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
King R. Lee............. 58 Interim Chief Executive Officer
Frank R. Greico......... 40 Senior Vice President and Chief Financial Officer
Gadi Navon.............. 33 Vice President, General Counsel and Secretary
John Strosahl........... 31 Vice President, International
Suzanne Dickson......... 37 Vice President, Marketing and Product Management
Cheri Kaplan-Smith...... 33 Vice President, Sales, North America
Larry J.
Tchamkertenian......... 30 Vice President, Operations
Lori Gray............... 40 Vice President, Engineering
Larry Levinsohn......... 49 Vice President, Human Resources
</TABLE>
Biographies
Mr. Lee served as the Interim Chief Executive Officer and President of the
Company from July 8, 1998 until November 23, 1998. Mr. Lee also served as a
member of the Office of the President of the Company from August 27, 1996
until February 1997. Mr. Lee also served as Interim Chief Executive Officer of
the Company from December 1994 until January 1995 and served as Interim Chief
Operating Officer of the Company between July and December 1994. He was
elected a director of the Company in July 1994. Mr. Lee served as the Chief
Executive Officer of Wynd Communications Corporation, a two-way wireless
messaging service provider, from October 1995 to January 1998, and has served
as its Chairman since October 1995. Mr. Lee is President of King R. Lee &
Associates, Inc., an executive management consulting firm, which provides
consulting services to the Company. From 1987 to 1993, Mr. Lee was President
and Chief Executive Officer of Xtree Company, a developer of computer systems
software. He serves as a director of Nettech Systems, Inc., Outback Resource
Group, Inc., Boss Entertainment, Dover Pacific, Inc. and Mobile Automation,
Inc.
Mr. Greico joined Quarterdeck in February 1996 and served as Senior Vice
President and Chief Financial Officer through October 9, 1998. Mr. Greico is
currently a consultant to the Company although he continues to serve as Chief
Financial Officer. Prior to joining the Company, Mr. Greico was CFO and Vice
President of Finance and Operations at Knowledge Adventure, Inc., an
educational software publisher. Mr. Greico, a certified public accountant, has
held several MIS and finance positions at W.R. Grace's distributor units, most
notably as CFO and Vice President of Finance for its B&T Software distribution
company (formerly Soft-Kat). He was also a Senior Accountant with Price
Waterhouse in New York.
Mr. Navon was promoted to his current position in July, 1998. Since joining
Quarterdeck in September 1995, Mr. Navon has served as Corporate Counsel as
well as Associate General Counsel. Before joining Quarterdeck, Mr. Navon
practiced law with the law firm of Arter & Hadden.
Mr. Strosahl was appointed to his current position in August 1997, after
serving as the interim Vice President of Worldwide Sales for Quarterdeck since
March 1997. Previously, he had served as Senior Director, Asia-Pacific/Latin
America for Quarterdeck since March 1996. Prior to 1996, Mr. Strosahl worked
with Datastorm Technologies as a director responsible for its international
sales, marketing and business operations.
26
<PAGE>
Prior to joining Datastorm, he held various positions in operations at IBM. He
received his BA from Illinois Wesleyan University and his master's degree from
the University of Illinois.
Ms. Dickson was appointed to her current position in July 1998. Ms. Dickson
has over 15 years of experience in the PC utility business for both retail and
corporate market segments. Prior to joining Quarterdeck, she held several
product management and marketing management positions with Symantec.
Previously, Ms. Dickson served as Director of Marketing for the XTree Company
in San Luis Obispo.
Ms. Kaplan-Smith joined Quarterdeck in February 1998 and was appointed to
her current position in July 1998. Prior to joining Quarterdeck, she was Vice
President of Channel Sales and Programs at Novonyx, a Netscape and Novell
company. Before joining Novonyx, she lead the Channel Sales and Marketing
organization for Cheyenne Software, a division of Computer Associates.
Previously Ms. Kaplan-Smith was the Director of Technical Products for
Merisel, where she worked in a variety of functions including product
management, marketing and inventory management. She received her B.A. and B.S.
degrees from Boston University, and her master's degree from Harvard.
Mr. Tchamkertenian joined Quarterdeck in November 1996 and was appointed to
his current position in July 1998. Prior to joining the company, he served as
an Acquisition Integration Consultant for Quarterdeck. Previously, Mr.
Tchamkertenian held positions as Director of Operations and Manager of
Financial Planning and Analysis for Knowledge Adventure, Inc., a leading
educational software publisher, and as Senior Financial Analyst for B & T
Software, a former distribution division of W.R. Grace. He received his B.S.
in Finance from California State University, Northridge.
Ms. Gray joined Quarterdeck in February 1998 and was appointed to her
current position in July 1998. Ms. Gray brings 15 years of experience managing
the development of commercial software products for both the retail and
corporate markets. Her experience includes defining product concepts,
establishing product requirements, creating functional specifications,
defining product architectures, and certifying final product releases. Over
the years, she has developed a reputation for delivering quality products on
schedule. Prior to joining Quarterdeck, Ms. Gray was at Enfish. Previously,
she was with Sterling Software, where she served as a lead architect and
project manager for several large corporate Information Processing products.
She received her B.A. from California State University Northridge and a
Computer Systems and Programming Degree from the Computer Learning Center.
Mr. Levinsohn joined Quarterdeck in April 1998, bringing over 20 years of
experience in human resources. Prior to joining Quarterdeck, he was the Vice
President of Worldwide Human Resources at AST Computer, part of the turnaround
team hired by Samsung. He was also Vice President of Human Resources for Murad
Inc., a start up skin care company where he created the Human Resources
Department from the ground up. Previously Mr. Levinsohn was Vice President of
Human Resources at Packard Bell Electronics and Redken Laboratories.
Mr. Bain has been a director of the Company since November 17, 1998 and
Chief Executive Officer and President of the Company since November 23, 1998.
Mr. Bain is Vice President, Worldwide Operations and Chief Financial Officer
of Symantec Corporation. Mr. Bain joined Symantec in October 1991 as its Vice
President, Finance.
Mr. Witte has been a director of the Company since November 17, 1998 and
Secretary of the Company since November 23, 1998. Mr. Witte is a director and
President, Chief Financial Officer and Secretary of Oak Acquisition
Corporation. Mr. Witte is Vice President, General Counsel and Secretary of
Symantec Corporation. Mr. Witte joined Symantec in October 1990.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's officers and directors, and persons who own more than ten
percent of a registered class of the Company's equity securities,
27
<PAGE>
to file with the Securities and Exchange Commission initial reports of
ownership and reports of changes in ownership of Common Stock and other equity
securities of the Company. To the Company's knowledge, based solely on its
review of the copies of such reports furnished to the Company and written
representations that no other reports were required, the Company believes that
all of its officers and directors and greater than ten percent beneficial
owners complied with all Section 16(a) filing requirements applicable to them
with respect to those transactions during the fiscal year ended September 30,
1998.
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth information concerning the annual and long-
term compensation paid by the Company during the fiscal years ended September
30, 1998, 1997 and 1996 to (i) the persons who served as Chief Executive
Officer or performed the functions thereof during fiscal year 1998, (ii) the
four most highly compensated executive officers as of the end of fiscal year
1998, whose total annual salary and bonus exceeded $100,000 and (iii) two
additional individuals who would have been included among the four most highly
compensated executive officers, but for the fact that neither individual was
serving as an executive officer at the end of fiscal year 1998 (each, a "Named
Officer").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation Awards
------------------- -------------------------
Securities
Underlying All Other
Salary Options/SARs Compensation
Name and Principal Position Year ($) Bonus ($) (#) ($)
- --------------------------- ---- ------------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Curtis A. Hessler(1)........ 1998 $ 380,770 $ 125,000 150,000 $24,040
Former President and 1997 297,692 0 1,350,000 0
Chief Executive Officer
King R. Lee(2).............. 1998 170,000 0 207,500 0
Former Interim Chief 1997 101,250 0 122,500 0
Executive Officer and
President 1996 58,500 0 100,000 0
Frank R. Greico(3).......... 1998 189,909 32,500 75,000 0
Senior Vice President and 1997 187,589 61,250 106,250 0
Chief Financial Officer 1996 129,230 25,000 75,000 0
Joseph Fusco(4)............. 1998 169,507 20,000 150,000 45,000
Former Senior Vice
President-- 1997 145,802 43,531 150,000 0
Marketing and Product
Management
Mark Epstein(5)............. 1998 216,150 60,000 0 55,380
Former Chief Technology
Officer 1997 38,769 0 700,000 0
John Strosahl(6)............ 1998 188,461 19,026 180,000 0
Vice President--
International 1997 138,221 72,320 51,575 0
1996 60,000 30,000 0 0
</TABLE>
- --------
(1) Mr. Hessler served as the President and Chief Executive Officer of the
Company from February 1997 until July 6, 1998. Mr. Hessler received
$24,040 in severance payments during fiscal year ended September 30, 1998.
(2) Mr. Lee served as Interim Chief Executive Officer and President from July
8, 1998 until November 23, 1998. From July until December 1994, Mr. Lee
acted in the capacity of Chief Operating Officer and served as Interim
Chief Executive Officer of the Company from December 1994 until January
1995. Mr. Lee was appointed as a member of the Office of President in
August 1996 and resigned from such position upon the appointment of Mr.
Hessler in February 1997. Mr. Lee is also a director of the Company and
received compensation as a non-employee director. Mr. Lee's salary for
fiscal 1996 includes $33,000 of consulting
28
<PAGE>
fees paid to King R. Lee & Associates and $25,000 of non-employee director
fees, Mr. Lee's salary for fiscal 1997 includes $76,500 of consulting fees
paid to King R. Lee & Associates and approximately $25,000 of non-employee
director fees, and Mr. Lee's salary for fiscal 1998 includes $150,000 of
consulting fees paid to King R. Lee & Associates and $20,000 of non-
employee director fees. The options granted to Mr. Lee during fiscal 1997
include 90,000 options granted to Mr. Lee in connection with a like value
exchange of options described in the Company's Proxy Statement dated
January 5, 1998.
(3) Mr. Greico was an employee of the Company and an executive officer from
February 1996 until October 9, 1998. Mr. Greico is currently a consultant
to the Company although he continues to serve as Chief Financial Officer.
The options granted to Mr. Greico during fiscal 1997 include 56,250
options granted to Mr. Greico in connection with a like value exchange of
options pursuant to the program that the Company implemented in January
1997 allowing a "like-value exchange" of certain options previously
awarded to employees (including the named executive officers, but
excluding non-employee directors of the Company). Optionees were given the
opportunity to exchange options previously awarded (the "Old Options")
with an option price of more than $6.00 per share for a lesser amount of
new options (the "New Options") which had a value equal to the Old
Options, with an option price equal to the then current stock price
$4.6875 per share. The New Options had the same vesting schedule (and
expiration date) as the Old Options; provided, however, none of the New
Options could be exercised until six months after the date of grant.
(4) Mr. Fusco was appointed as a Vice President in September 1996 and as
Senior Vice President--Marketing and Product Management on April 28, 1997.
Mr. Fusco served in these positions until July 15, 1998 when his
employment with the Company terminated. The options granted to Mr. Fusco
during fiscal 1997 include 67,500 options granted to Mr. Fusco in
connection with a like value exchange of options as described above. Mr.
Fusco received $45,000 in severance payments during fiscal year ended
September 30, 1998.
(5) Mr. Epstein served as Chief Technology Officer of the Company from July
1997 through July 15, 1998. He is no longer employed by the Company. Mr.
Epstein received $55,380 in severance payments during fiscal year ended
September 30, 1998.
(6) Mr. Strosahl was appointed as the Company's Vice President--International
in August 1997. Prior to that, Mr. Strosahl served as Interim Vice
President--Worldwide Sales from March 1997 to August 1997, and as Senior
Director--Asia/Pacific and Latin America from March 1996 until March 1997.
The bonus amount for Mr. Strosahl in fiscal 1997 includes reimbursement of
relocation and relocation related expenses that he received from the
Company in the amount of $38,722. The options granted to Mr. Strosahl
during fiscal 1997 include 21,575 options granted to Mr. Strosahl in
connection with a like value exchange of options as described above.
29
<PAGE>
The following two tables set forth information concerning stock options
granted to, exercised by and held by the Named Officers in fiscal year 1998.
No SARs were granted by the Company or exercised by the Named Officers in
fiscal year 1998.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants
-------------------------
Potential Realizable Value
Number of % of Total at Assumed Annual Rates of
Securities Options/SARs Excercise Stock Price Appreciation for
Underlying Granted to or Base Option Term
Options/SARs Employees in Price Expiration -----------------------------
Name Granted (#) Fiscal Year ($/Sh) Date 5% ($) 10% ($)
- ---- ------------ ------------ --------- ---------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Curtis A. Hessler....... 150,000 3.6% $1.8125 12/08/2007 $ 171,281.25 $ 432,281.25
King R. Lee............. 7,500 .18 2.1250 02/05/01 10,040.625 25,340.625
200,000 4.8 0.2810 09/01/08 35,406.00 89,358.00
Frank R. Greico......... 75,000 1.8 2.3438 11/10/07 110,744.55 279,498.15
Joseph Fusco............ 150,000 3.6 2.3438 11/07/07 221,489.10 558,996.30
Mark Epstein............ -- -- -- -- -- --
John Strosahl........... 30,000 .72 2.3438 11/07/07 44,297.82 111,799.26
150,000 3.6 .2810 09/01/08 26,554.50 67,018.50
</TABLE>
- --------
(1) Except as noted below, the options granted to the executive officers
listed above vest in the following manner: one fourth of the options vest
on the first anniversary of the date of grant and 1/48 of the total number
of options vest thereafter on a monthly basis. The 200,000 options granted
to Mr. Lee vested immediately upon grant and the 150,000 options granted
to Mr. Strosahl vest one-third after three months, one-sixth after six
months and the remaining one-half vest thereafter in equal monthly
installments over a six-month period. The employment agreements of certain
individuals also provide for accelerated vesting under certain
circumstances generally related to achievement of certain targets or
certain changes-of-control. See "Executive Compensation--Employment
Agreements." Options generally remain exercisable for ten years from the
date of grant except for 7,500 options granted to King Lee as a non-
employee director which remain exercisable for five years from the date of
grant. All options were granted at a price equal to the fair market value
on the date of grant.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Shares Acquired Options/SARs at Fiscal In-the-Money Options/SARs
on Exercise Value Realized Year-End (#) at Fiscal Year-End ($)
Name (#) ($) Exercisable/Unexercisable Exercisable/Unexercisable
---- --------------- -------------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Curtis A. Hessler....... 0 0 590,625/909,375 $ 0/$ 0
King R. Lee............. 0 0 343,750/ 43,750 68,800/ 0
Frank R. Greico......... 0 0 55,208/ 0 0/ 0
Joseph Fusco............ 0 0 53,596/ 0 0/ 0
Mark Epstein............ 0 0 300,000/ 0 0/ 0
John Strosahl........... 0 0 22,985/208,590 0/ 51,600
</TABLE>
Information Concerning the Board; Director Compensation
The Company's Board of Directors has a standing Audit Committee and
Compensation Committee.
The Audit Committee, currently comprised of Messrs. LaHaye and Morgan (Mr.
Lane resigned on November 17, 1998), advises and assists the Board of
Directors in evaluating the performance of the Company's auditors, including
the scope and adequacy of the auditors' examinations. During fiscal year 1998,
the Audit Committee held two meetings.
30
<PAGE>
The Compensation Committee, currently comprised of Mr. LaHaye (Mr. Lane
resigned on November 17, 1998), oversees the Company's overall executive
compensation program, reviews the Company's employee benefit plans and
administers the Company's stock option plans. The Compensation Committee met
six times during the last fiscal year.
The Company's Board of Directors selects nominees for election as directors.
The Company does not have a standing nominating committee. Stockholder
nominations for election as directors may be voted on at an annual meeting
only if such nominations are made pursuant to written notice timely given to
the Secretary of the Company accompanied by certain information specified in
the Company's bylaws. To be timely, a stockholder's written notice must be
delivered to or mailed and received at the principal executive offices of the
Company not less than 60 days nor more than 90 days prior to the meeting;
provided, however, that, in the event that less than 60 days' notice or prior
public disclosure of the date of the meeting is given or made to stockholders,
a stockholder's notice will be timely if received not later than the tenth day
following the day on which such notice of the date of the meeting is mailed or
such public disclosure is made. Such stockholder's notice must set forth with
respect to each director nominee all of the information relating to such
person that is required to be disclosed in solicitations for elections of
directors under the rules of the Securities and Exchange Commission and such
stockholder's name and address, as they appear on the Company's books, and the
number of shares of Common Stock owned by the stockholder giving the notice.
The Board of Directors held 24 meetings during the fiscal year ended
September 30, 1998. All directors then in office attended at least 75% of the
meetings of the Board of Directors, and all members of the committees of the
Board of Directors attended at least 75% of the meetings of those committees,
in each case, after the election of such individuals to the Board of Directors
or to such committee.
Directors' Compensation
Non-employee directors receive $6,000 ($12,000 in the case of the Chairman
of the Board) annually, payable quarterly, as compensation for serving on the
Board of Directors, plus $1,500 per meeting for Board or Committee meetings
attended ($500 for telephonic meetings). Non-employee directors are reimbursed
for their reasonable expenses incurred in attending meetings. Non-employee
directors also participate in the 1990 Directors Stock Option Plan which
provides for automatic grants of options to non-employee directors. Under the
1990 Directors Stock Option Plan, each non-employee director is granted an
option to purchase 30,000 shares of the Company's Common Stock three business
days following his or her first election as a director (the "initial grant").
Thereafter, each non-employee director who has been re-elected or who is
continuing as a member of the Board of Directors is granted an option to
purchase 7,500 shares of the Company's Common Stock on the date of the
Company's annual meeting of stockholders (an "annual grant"). Options are
granted at 100% of the fair market value of the Company's Common Stock on the
grant date and have a term of five years. Initial grants vest immediately as
to one-third of the shares and vest an additional one-third of the shares on
each of the first and second anniversaries of the grant date. Annual grants
vest in full on the first anniversary of the grant date. The Board of
Directors or the Compensation Committee may also make discretionary option
grants to non-employee directors. During fiscal 1998, the Board of Directors
made discretionary grants of 670,000 options, in the aggregate, to the non-
employee directors.
On August 27, 1996, when King R. Lee, the Interim President and a director
of the Company, assumed the duties as a member of the Office of the President,
Mr. Lee entered into a consulting agreement (the "Prior Consulting Agreement")
with the Company. Under the terms of the Prior Consulting Agreement, as
amended, King R. Lee & Associates, Inc., of which Mr. Lee is President and
sole stockholder, was paid $1,500 per full day plus expenses in exchange for
Mr. Lee's consulting services to the Company. The Company paid to King R. Lee
& Associates, Inc. $33,000 during fiscal year 1996 and a total of $76,500
during fiscal year 1997 pursuant to the Prior Consulting Agreement. Mr. Lee
provided consulting services to the Company under the Prior Consulting
Agreement through February 1997. In addition, the Company entered into a new
consulting agreement (the "New Consulting Agreement") with Mr. Lee on July 8,
1998 when Mr. Lee assumed the duties of Interim President of the Company.
Pursuant to the New Consulting Agreement, King R. Lee & Associates,
31
<PAGE>
Inc. was paid $2,500 per full day, plus expenses and medical benefits, in
exchange for consulting services rendered by Mr. Lee to the Company. During
fiscal year 1998, the Company paid $150,000 to King R. Lee & Associates, Inc.
and granted 200,000 options to Mr. Lee, all of which were fully vested on the
grant date. The New Consulting Agreement provided for severance in the amount
of $162,500 in the event that Mr. Lee's consulting services to the Company are
terminated. Mr. Lee's consulting services were terminated on November 23,
1998.
Employment Agreements
The Company's former Chief Executive Officer, Curtis A. Hessler, was
employed pursuant to a four-year employment agreement dated as of January 13,
1997. Pursuant to that agreement, Mr. Hessler was entitled to receive a base
salary of $450,000 per year and an annual target bonus of $250,000 based upon
achievement of objectives established by the Board of Directors or the
Compensation Committee. In addition, Mr. Hessler was granted options to
purchase 1,350,000 shares of Common Stock. The employment agreement also
provided for accelerated vesting of Mr. Hessler's options upon the occurrence
of certain "change in control" transactions or if certain stock price levels
were reached. Pursuant to the terms of an agreement entered into with Mr.
Hessler upon his resignation in July 1998, Mr. Hessler is entitled to receive
severance payments in an aggregate amount equal to $173,089, payable over 18
months.
As described above, King R. Lee received compensation from the Company
pursuant to the terms of the New Consulting Agreement.
The terms of Mr. Greico's offer letter provided that, as a result of the
termination of his employment, he is entitled to receive an amount equal to
six months' salary plus six months' targeted bonus and accelerated vesting of
50% of his unvested options. On October 9, 1998, Mr. Greico ceased to be an
employee of the Company and the $33,000 balance of the advance, then
outstanding, was forgiven by the Company as part of Mr. Greico's severance
package. In November 1996, Mr. Greico, the Company's Chief Financial Officer,
received an advance on the bonus portion of his compensation in the amount of
approximately $74,000, which advance was made pursuant to the terms of Mr.
Greico's employment offer letter. In connection with Mr. Greico's agreement to
serve as the Company's Chief Financial Officer throughout the pre-Merger
period, Mr. Greico will be paid a retention bonus in the amount of $37,500.
The Company entered into a two-year employment agreement with Joseph Fusco,
its former Senior Vice President--Marketing and Product Management, dated as
of September 16, 1996. Pursuant to that agreement, Mr. Fusco was entitled to
receive a base salary of $135,000 per year and an annual target bonus of
$67,500 determined in accordance with the terms of a management performance
bonus plan of the Company and contingent upon attainment of objectives
mutually agreed upon by Mr. Fusco and the Chief Executive Officer of the
Company. In addition, Mr. Fusco was granted options to purchase 75,000 shares
of Common Stock pursuant to the terms of the employment agreement. Mr. Fusco
is entitled to receive $92,500 in severance as a result of the termination of
his employment, payable over six months.
Mr. Epstein, the Company's former Senior Vice President and Chief Technology
Officer, was employed pursuant to an offer letter dated July 11, 1997. Mr.
Epstein's offer letter provided for a base salary of $240,000 and an annual
target bonus of $120,000 determined in accordance with the terms of a
management performance bonus plan of the Company and contingent upon
attainment of objectives mutually agreed upon by Mr. Epstein and the Chief
Executive Officer of the Company. In addition, Mr. Epstein was granted options
to purchase 700,000 shares of Common Stock pursuant to the terms of the
employment offer letter. Mr. Epstein is entitled to received $240,000 in
severance as a result of the termination of his employment, payable over
twelve months.
32
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of November 30, 1998 for (i) each person
known to the Company to be the beneficial owner of more than 5% percent of the
outstanding Common Stock, (ii) each director of the Company, (iii) the Named
Officers, and (iv) all current directors and executive officers of the Company
as a group. Except for Oak Acquisition Corporation, Mr. Eubanks, Mr. Bain, Mr.
Witte and Mr. Salem whose address is 10201 Torre Avenue, Cupertino, California
95014, the address of each such person is that of the Company, 13160 Mindanao
Way, Marina del Rey, California 90292.
<TABLE>
<CAPTION>
Number of Percent of
Shares of Shares of
Common Common
Name Stock Stock(1)
---- ---------- ----------
<S> <C> <C>
Oak Acquisition Corporation(2).......................... 58,227,311 65%
10201 Torre Avenue
Cupertino, California 95014
Howard A. Bain III...................................... -- --
Frank R. Greico(7)...................................... 55,208 *
Gordon Eubanks, Jr. .................................... -- --
Derek Witte............................................. -- --
Enrique T. Salem........................................ -- --
Frank W.T. LaHaye(3).................................... 262,500 *
Howard Morgan(4)........................................ 86,500 *
King R. Lee(5).......................................... 387,500 *
Curtis A. Hessler(6).................................... 1,500,000 1.6%
Joseph Fusco............................................ -- --
Mark Epstein............................................ -- --
John Strosahl(8)........................................ 231,575 *
All directors and executive officers as a group (12
persons)(9)............................................ 2,523,283 2.7%
</TABLE>
- --------
* Less than one percent
(1) Percent Ownership is based on 89,760,799 shares of Common Stock
outstanding as of November 30, 1998. Unless otherwise indicated below, the
persons and entities named in the table have sole voting and sole
investment power with respect to all shares beneficially owned, subject to
community property laws where applicable. Following the commencement of
the tender offer by Symantec, on November 4, 1998, all outstanding options
became fully vested and as a result, all shares subject to options are
currently exercisable and are deemed to be outstanding and to be
beneficially owned by the person holding such options or warrants for the
purpose of computing the percentage ownership of such person but are not
treated as outstanding for the purpose of computing the percentage
ownership of any other person.
(2) Oak Acquisition Corporation is a wholly owned subsidiary of Symantec
Corporation. Accordingly, Symantec Corporation is deemed to beneficially
own the shares of Common Stock owned by Oak Acquisition Corporation.
(3) Includes 262,500 shares that may be purchased by Mr. LaHaye upon the
exercise of options that are currently exercisable.
(4) Includes 62,500 shares that may be purchased by Dr. Morgan upon the
exercise of options that are currently exercisable, and includes 24,000
shares of Common Stock held in trust for Dr. Morgan's children with
respect to which Dr. Morgan disclaims beneficial ownership.
(5) Includes 387,500 shares that may be purchased by Mr. Lee upon the exercise
of options that are currently exercisable.
(6) Includes 1,500,000 shares that may be purchased by Mr. Hessler upon the
exercise of options that are currently exercisable.
33
<PAGE>
(7) Includes 55,208 shares that may be purchased by Mr. Greico upon the
exercise of options that are currently exercisable.
(8) Includes 231,575 shares which may be purchased by Mr. Strosahl upon the
exercise of options that are currently exercisable.
(9) Includes 2,523,283 shares which may be purchased upon the exercise of
options granted to the directors and executive officers as a group, which
are currently exercisable.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
See Item 11 Directors' Compensation and Item 11 Employment Agreements.
34
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. Consolidated Financial Statements
Consolidated Balance Sheets at September 30, 1998 and 1997
Consolidated Statements of Operations for fiscal years ended
September 30, 1998, 1997 and 1996
Consolidated Statements of Stockholders' Equity (Deficit) for fiscal
years ended September 30, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for fiscal years ended
September 30, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
2. Consolidated Financial Statement Schedule
Schedule II--Valuation and Qualifying Accounts
All other schedules are omitted because they are not required, or are not
applicable, or because the required information is included in Item 8.
3. Exhibits
<TABLE>
<CAPTION>
Exhibit
Number
-------
<C> <S>
3.1(2) Certificate of Incorporation of the Company.
3.2(11) Certificate of Amendment of Certificate of Incorporation of the
Company.
3.3(10) Certificate of Designations of Series B Convertible Preferred Stock.
3.4(11) Amended Designations of Series A Junior Participating Preferred
Stock of the Company.
3.5(15) Certificate of Designations of Series C Convertible Preferred Stock.
3.6(6) Amended and Restated Bylaws of the Company.
3.7(1) Amended Designations of Series A Junior Participating Preferred
Stock of the Company dated September 1, 1998.
4.1(4) Rights Agreement, dated as of August 11, 1992, between Registrant
and Bank of America NT & SA (the "Rights Agreement").
4.2(10) Form of Amendment to the Rights Agreement dated November 7, 1996.
4.3(15) Form of Amendment to the Rights Agreement dated September 30, 1997.
4.4(8) Note Agreement between the Company and The Northwestern Mutual Life
Insurance Company dated as of March 1, 1996.
4.5(17) Form of Second Amendment to the Rights Agreement dated October
15,1998.
*10.1(2) Amended and Restated 1990 Stock Plan, as amended to date.
*10.2(3) Form of Option Agreement utilized with 1990 Stock Plan.
*10.3(5) Amended and Restated 1990 Directors Stock Option Plan and Form of
Option Agreement.
*10.4(9) 1996 Acquisition Stock Incentive Plan.
*10.5(11) Consulting Agreement between the Company, King R. Lee & Associates,
Inc., and King R. Lee, dated as of August 27, 1996.
*10.6(2) Form of Indemnification Agreement between the Company and certain of
its officers and directors.
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number
-------
<C> <S>
*10.11(12) Employment Agreement between the Company and Curt Hessler, dated as
of January 13, 1997.
*10.14(14) Employment Agreement between the Company and Tom Mackey, dated as
of June 20, 1997.
10.15(7) Lease between the Company and Marina Business Center, dated as of
July 17, 1995, with respect to headquarters property.
10.16(7) Lease between Landmark Research International Corporation, a
subsidiary of the Company, and Chase Federal Bank, dated as of
March 15, 1995, with respect to property used by
Quarterdeck Select.
10.15(2) Domestic (U.S.) Distribution License Agreement between the Company
and Merisel, Inc., dated as of April 4, 1991.
10.17(2) Domestic (U.S.) Distribution License Agreement between the Company
and Ingram Micro, Inc., dated as of May 16, 1991.
10.18(13) Loan and Security Agreement between the Company and Greyrock
Business Credit, a division of NationsCredit Commercial
Corporation, dated as of April 1, 1997.
10.19(14) Asset Purchase Agreement between TOC Holding Company formerly known
as TuneUp.Com, Inc. and the Company, dated as of May 14, 1997.
10.20(17) Agreement and Plan of Merger by and among Symantec Corporation, Oak
Acquisition Corporation and the Company, dated October 15, 1998.
10.21(17) License Agreement by and between Symantec Corporation and the
Company dated October 15, 1998.
10.22(18) Form of Conversion and Redemption Agreement and Release dated
October 9, 1998 between the Company and the holders of the
Company's Series C Convertible Preferred Stock and/or warrants to
purchase shares of Series C Convertible Preferred Stock.
21.1(16) Subsidiaries of the Company.
23.1(1) Consent of KPMG Peat Marwick LLP, independent certified public
accountants.
27.1(1) Financial Data Schedule
</TABLE>
- --------
* Denotes a compensation plan or other arrangement under which directors or
executive officers may participate.
(1) Filed herewith.
(2) Filed as an exhibit to the Company's Registration Statement on Form S-1,
as amended (File No. 33-40094) and incorporated herein by reference.
(3) Filed as an exhibit to the Company's Form 10-Q for the quarter ended
March 31, 1992, and incorporated herein by reference.
(4) Filed as an exhibit to the Company's Current Report on Form 8-K dated
August 11, 1992, and incorporated herein by reference.
(5) Filed as an exhibit to the Company's Form 10-K for the year ended
September 30, 1993, and incorporated herein by reference.
(6) Filed as an exhibit to the Company's Form 10-K for the year ended
September 30, 1994, and incorporated herein by reference.
(7) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended September 30, 1995, and incorporated herein by reference.
(8) Filed as an exhibit to the Company's Current Report on Form 8-K dated
March 28, 1996, and incorporated herein by reference.
(9) Filed as an exhibit to the Company's Registration Statement on Form S-8
(File No. 333-4602), and incorporated herein by reference.
36
<PAGE>
(10) Filed as an exhibit to the Company's Current Report on Form 8-K dated
November 25, 1996, and incorporated herein by reference.
(11) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended September 30, 1996, and incorporated herein by reference.
(12) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended December 31, 1996, and incorporated herein by
reference.
(13) Filed as an exhibit to the Company's Current Report on Form 8-K dated
April 14, 1997, and incorporated herein by reference.
(14) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1996, and incorporated herein by reference.
(15) Filed as an exhibit to the Company's Current Report on Form 8-K dated
September 30, 1996, and incorporated herein by reference.
(16) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended September 30, 1997, and incorporated herein by reference.
(17) Filed as an exhibit to the Company's Current Report on Form 8-K dated
October 19, 1998, and incorporated herein by reference.
(18) Filed as an exhibit to the Company's Current Report on Form 8-K dated
October 20, 1998, and incorporated herein by reference.
(b) Reports on Form 8-K
A Form 8-K with respect to Symantec Corporation's tender offer for the
Company's common stock and proposed Merger was filed with the Securities
and Exchange Commission on October 19, 1998.
A Form 8-K with respect to the amendment of the Company's agreement with
the holder's of Series C Convertible Preferred Stock was filed with the
Securities and Exchange Commission on October 20, 1998.
A Form 8-K with respect to the completion of Symantec's tender offer of
the Company's common stock was filed with the Securities and Exchange
Commission on November 17, 1998.
37
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report............................................. 39
Consolidated Balance Sheets at September 30, 1998 and 1997............... 40
Consolidated Statements of Operations for fiscal years ended September
30, 1998, 1997 and 1996................................................. 41
Consolidated Statements of Stockholders' Equity (Deficit) for fiscal
years ended September 30, 1998, 1997 and 1996........................... 42
Consolidated Statements of Cash Flows for fiscal years ended September
30, 1998, 1997 and 1996................................................. 45
Notes to Consolidated Financial Statements............................... 46
Consolidated Financial Statement Schedule
Schedule II--Valuation and Qualifying Accounts........................... 68
</TABLE>
38
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Quarterdeck Corporation:
We have audited the consolidated financial statements of Quarterdeck
Corporation and subsidiaries as of September 30, 1998 and 1997 and the related
consolidated statements of operations, stockholders' equity (deficit), and
cash flows for each of the years in the three-year period ended September 30,
1998. In connection with our audits of the consolidated financial statements,
we have also audited the financial statement schedule. These consolidated
financial statements and financial statement schedule are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements and financial statement schedule based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Quarterdeck Corporation and subsidiaries as of September 30, 1998 and 1997,
and the results of their operations and their cash flows for each of the years
in the three-year period ended September 30, 1998, in conformity with
generally accepted accounting principles. Also in our opinion, the related
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 16 to the
consolidated financial statements, the Company has suffered recurring losses
from operations, a reduction in working capital and has a net stockholders'
deficit. These factors coupled with the uncertainty of the impact of the
change in control of the Company and its impact on future operations and
current products as discussed in Note 18 to the consolidated financial
statements, raise substantial doubt about the Company's ability to continue as
a going concern. Management's plans in regard to these matters are also
described in Note 16. The consolidated financial statements and financial
statement schedule do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ KPMG LLP
Los Angeles, California
November 13, 1998, except for
the second and fourth
paragraphs of note 18, which
are as of November 17, 1998 and
December 8, 1998, respectively
39
<PAGE>
QUARTERDECK CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share data)
<TABLE>
<CAPTION>
September 30,
-------------------
1998 1997
--------- --------
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents............................... $ 8,411 $ 23,651
Trade accounts receivable............................... 2,990 7,028
Inventories............................................. 968 1,177
Other current assets.................................... 2,022 4,655
--------- --------
Total current assets.................................. 14,391 36,511
Equipment and leasehold improvements, net................. 3,640 14,153
Capitalized software costs, net........................... 641 1,790
Other assets.............................................. 853 3,427
--------- --------
$ 19,525 $ 55,881
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
Current liabilities:
Accounts payable........................................ $ 2,040 $ 3,792
Accrued liabilities..................................... 7,623 14,196
Accrued acquisition, restructuring and other charges.... 2,434 5,385
Income tax payable...................................... 309 627
Notes payable to banks.................................. -- 5,579
Current portion of long-term obligations................ 30 15
--------- --------
Total current liabilities............................. 12,436 29,594
Convertible notes......................................... 25,000 25,000
Other long-term obligations, less current portion......... 22 114
--------- --------
Total liabilities..................................... 37,458 54,708
Liquidity and subsequent events
Litigation and commitments
Stockholders' equity (deficit):
Series B Preferred stock (Par value $100, authorized:
2,000,000 shares; issued and outstanding: 0 and 0
shares, respectively, liquidation preference $0)....... -- --
Series C Preferred stock (Par value $1,000, authorized:
29,000 shares; issued and outstanding: 4,615 and 26,025
shares, respectively, liquidation preference: $4,615
and $26,025 respectively).............................. 4,371 24,594
Common stock (Par value $0.001, authorized: 100,000,000
shares; issued and outstanding: 66,653,000 and
43,339,000 shares, respectively)....................... 67 43
Additional paid-in capital.............................. 100,176 75,630
Accumulated deficit..................................... (121,329) (98,164)
Foreign currency translation adjustment................. (389) (281)
Notes receivable from directors for sale of stock....... (18) (18)
Net unrealized loss on marketable securities............ (252) (72)
Treasury stock, at cost................................. (559) (559)
--------- --------
Total stockholders' equity (deficit).................. (17,933) 1,173
--------- --------
$ 19,525 $ 55,881
========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
40
<PAGE>
QUARTERDECK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------
1998 1997 1996
-------- -------- ---------
<S> <C> <C> <C>
Net revenues..................................... $ 50,861 $ 83,787 $133,100
Cost of revenues................................. 14,587 21,271 49,600
-------- -------- ---------
Gross profit................................... 36,274 62,516 83,500
Operating expenses:
Research and development....................... 16,640 16,419 21,314
Sales and marketing............................ 30,566 29,305 66,355
General and administrative..................... 9,923 17,227 32,128
Acquisition, restructuring and other charges... 2,583 11,713 37,789
Litigation settlement.......................... -- 1,905 --
-------- -------- ---------
Total operating expenses..................... 59,712 76,569 157,586
-------- -------- ---------
Operating loss................................... (23,438) (14,053) (74,086)
Other income (expense), net...................... 1,264 (2,143) 38
Interest expense, net............................ (952) (2,072) (105)
-------- -------- ---------
Loss before income taxes......................... (23,126) (18,268) (74,153)
Provision for income taxes....................... 39 130 806
-------- -------- ---------
Net loss......................................... $(23,165) $(18,398) $ (74,959)
======== ======== =========
Net loss per share:
Basic.......................................... $ (0.45) $ (0 .43) $ (2.15)
======== ======== =========
Diluted........................................ $ (0.45) $ (0 .43) $ (2.15)
======== ======== =========
Shares used to compute net loss per share:
Basic.......................................... 51,609 43,168 34,894
======== ======== =========
Diluted........................................ 51,609 43,168 34,894
======== ======== =========
</TABLE>
See accompanying notes to consolidated financial statements
41
<PAGE>
QUARTERDECK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands)
<TABLE>
<CAPTION>
Series B Series C
Preferred Preferred Notes Receivable Net Unrealized
Stock Stock Common Stock Additional Foreign from Directors Gain/(Loss) on
-------------- ------------- ------------- Treasury Paid-in Currency for Sales of Marketable
Shares Amount Shares Amount Shares Amount Stock Capital Translation Stock Securities
------ ------- ------ ------ ------ ------ -------- ---------- ----------- ---------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
September 30,
1995............ -- $ -- -- $ -- 34,673 $35 $(559) $39,873 $(563) $(70) $195
Adjustment for
Datastorm and
Inset poolings
of interest..... -- -- -- -- 35 -- -- 385 23 -- --
Adjustment for
Vertisoft
pooling of
interest........ -- -- -- -- -- -- -- 40 -- -- --
Adjustment for
Future Labs
pooling of
interest........ -- -- -- -- 664 1 -- 1,987 -- -- --
Duplicate
earnings
elimination for
Datastorm
pooling......... -- -- -- -- -- -- -- -- -- -- --
Purchase of
Limbex.......... -- -- -- -- 1,310 1 -- 14,370 -- -- --
Stock issuance
for purchase of
InterLink....... -- -- -- -- 205 -- -- 3,000 -- -- --
Stock issuance
for purchase of
assets from
Pinnacle........ -- -- -- -- 198 -- -- 1,800 -- -- --
Net loss........ -- -- -- -- -- -- -- -- -- -- --
Undistributed
earnings of
subchapter- S-
subsidiaries.... -- -- -- -- -- -- -- 8,967 -- -- --
Distribution to
shareholders.... -- -- -- -- -- -- -- (7,307) -- -- --
Net increase in
unrealized
gain............ -- -- -- -- -- -- -- -- -- -- 184
Common stock
options
exercised....... -- -- -- -- 581 1 -- 2,979 -- 52 --
Foreign currency
translation
adjustment...... -- -- -- -- -- -- -- -- 72 -- --
Issuance of
convertible
preferred....... 200 20,000 -- -- -- -- -- -- -- -- --
Cost of
preferred stock
issuance........ -- -- -- -- -- -- -- (1,275) -- -- --
--- ------- --- ---- ------ --- ----- ------- ----- ---- ----
Balance,
September 30,
1996............ 200 $20,000 -- $-- 37,666 $38 $(559) $64,819 $(468) $(18) $379
=== ======= === ==== ====== === ===== ======= ===== ==== ====
<CAPTION>
Retained Total
Earnings Stockholders'
(Accumulated Equity
deficit) (Deficit)
------------ -------------
<S> <C> <C>
Balance,
September 30,
1995............ $ 5,359 $ 44,270
Adjustment for
Datastorm and
Inset poolings
of interest..... -- 408
Adjustment for
Vertisoft
pooling of
interest........ 999 1,039
Adjustment for
Future Labs
pooling of
interest........ (1,481) 507
Duplicate
earnings
elimination for
Datastorm
pooling......... (717) (717)
Purchase of
Limbex.......... -- 14,371
Stock issuance
for purchase of
InterLink....... -- 3,000
Stock issuance
for purchase of
assets from
Pinnacle........ -- 1,800
Net loss........ (74,959) (74,959)
Undistributed
earnings of
subchapter- S-
subsidiaries.... (8,967) --
Distribution to
shareholders.... -- (7,307)
Net increase in
unrealized
gain............ -- 184
Common stock
options
exercised....... -- 3,032
Foreign currency
translation
adjustment...... -- 72
Issuance of
convertible
preferred....... -- 20,000
Cost of
preferred stock
issuance........ -- (1,275)
------------ -------------
Balance,
September 30,
1996............ $(79,766) $ 4,425
============ =============
</TABLE>
See accompanying notes to consolidated financial statements.
42
<PAGE>
QUARTERDECK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)--(Continued)
(in thousands)
<TABLE>
<CAPTION>
Series B Series C Notes Receivable Net Unrealized
Preferred Stock Preferred Stock Common Stock Additional Foreign from Directors Gain/(Loss) on
--------------- ----------------- ------------- Treasury Paid-in Currency for Sales of Marketable
Shares Amount Shares Amount Shares Amount Stock Capital Translation Stock Securities
------ -------- ------- --------- ------ ------ -------- ---------- ----------- ---------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
September 30,
1996............ 200 $ 20,000 -- $ -- 37,666 $38 $(559) $64,819 $(468) $(18) $ 379
Common stock
options
exercised....... -- -- -- -- 334 -- -- 689 -- -- --
Net loss........ -- -- -- -- -- -- -- -- -- -- --
Other........... -- -- -- -- -- -- -- 31 -- -- --
Net decrease in
unrealized
gain............ -- -- -- -- -- -- -- -- -- -- (451)
Stock issuance
for purchase of
Limbex.......... -- -- -- -- 1,372 1 -- (1) -- -- --
Amortization of
warrants
issued.......... -- -- -- -- -- -- -- 96 -- -- --
Stock issuance
for purchase of
InterLink....... -- -- -- -- 205 -- -- -- -- -- --
Conversion of
Series B
preferred
stock........... (100) (10,000) -- -- 3,762 4 -- 9,996 -- -- --
Issuance of
convertible
preferred stock,
net............. -- -- 26 24,594 -- -- -- -- -- -- --
Repurchase of
convertible
preferred
stock........... (100) (10,000) -- -- -- -- -- -- -- -- --
Foreign currency
translation
adjustment...... -- -- -- -- -- -- -- -- 187 -- --
---- -------- ----- --------- ------ --- ----- ------- ----- ---- -----
Balance,
September 30,
1997............ 0 $ 0 26 $ 24,594 43,339 $43 $(559) $75,630 $(281) $(18) $ (72)
==== ======== ===== ========= ====== === ===== ======= ===== ==== =====
<CAPTION>
Retained Total
Earnings Stockholders'
(Accumulated Equity
deficit) (Deficit)
------------ -------------
<S> <C> <C>
Balance,
September 30,
1996............ $(79,766) $ 4,425
Common stock
options
exercised....... -- 689
Net loss........ (18,398) (18,398)
Other........... -- 31
Net decrease in
unrealized
gain............ -- (451)
Stock issuance
for purchase of
Limbex.......... -- --
Amortization of
warrants
issued.......... -- 96
Stock issuance
for purchase of
InterLink....... -- --
Conversion of
Series B
preferred
stock........... -- --
Issuance of
convertible
preferred stock,
net............. -- 24,594
Repurchase of
convertible
preferred
stock........... -- (10,000)
Foreign currency
translation
adjustment...... -- 187
------------ -------------
Balance,
September 30,
1997............ $(98,164) $ 1,173
============ =============
</TABLE>
See accompanying notes to consolidated financial statements.
43
<PAGE>
QUARTERDECK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)--(Continued)
(in thousands)
<TABLE>
<CAPTION>
Series C Notes Receivable Net Unrealized Retained
Preferred Stock Common Stock Additional Foreign from Directors Gain/(Loss) on Earnings
--------------- ------------- Treasury Paid-in Currency for Sales of Marketable (Accumulated
Shares Amount Shares Amount Stock Capital Translation Stock Securities deficit)
------ -------- ------ ------ -------- ---------- ----------- ---------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
September 30,
1997............ 26 $ 24,594 43,339 $43 $(559) $ 75,630 $(281) $(18) $ (72) $ (98,164)
Common stock
options
exercised....... -- -- 41 -- -- 44 -- -- -- --
Net loss........ -- -- -- -- -- -- -- -- -- (23,165)
Net decrease in
unrealized
gain............ -- -- -- -- -- -- -- -- (180) --
Issuance of
convertible
preferred stock,
net............. 5 4,303 -- -- -- -- -- -- -- --
Conversion of
Series C
preferred
stock........... (26) (24,526) 23,273 24 -- 24,502 -- -- -- --
Foreign currency
translation
adjustment...... -- -- -- -- -- -- (108) -- -- --
--- -------- ------ --- ----- -------- ----- ---- ----- ---------
Balance,
September 30,
1998............ 5 $ 4,371 66,653 $67 $(559) $100,176 $(389) $(18) $(252) $(121,329)
=== ======== ====== === ===== ======== ===== ==== ===== =========
<CAPTION>
Total
Stockholders'
Equity
(Deficit)
-------------
<S> <C>
Balance,
September 30,
1997............ $ 1,173
Common stock
options
exercised....... 44
Net loss........ (23,165)
Net decrease in
unrealized
gain............ (180)
Issuance of
convertible
preferred stock,
net............. 4,303
Conversion of
Series C
preferred
stock........... --
Foreign currency
translation
adjustment...... (108)
-------------
Balance,
September 30,
1998............ $(17,933)
=============
</TABLE>
See accompanying notes to consolidated financial statements
44
<PAGE>
QUARTERDECK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents (in thousands)
<TABLE>
<CAPTION>
Year ended September 30,
----------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss........................................ $(23,165) $(18,398) $(74,959)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization of equipment and
leasehold improvements....................... 3,873 4,900 6,063
Amortization of capitalized software costs and
other intangibles............................ 1,209 1,670 3,770
Write-off of property and equipment........... -- 6,474 1,409
Write-off of capitalized software costs and
other intangibles............................ 2,301 77 4,860
Loss on marketable securities................. -- 1,666 --
Gain on sales of fixed assets................. (1,258) -- --
Elimination of duplicate net income from
acquired entities............................ -- -- (717)
Write-off of in-process research and
development.................................. -- 268 14,993
Changes in assets and liabilities:
Trade accounts receivable....................... 4,038 2,237 4,591
Refundable income taxes......................... 442 -- --
Deferred income taxes........................... -- -- 3,072
Inventories..................................... 208 974 130
Other current assets............................ 2,012 (511) (3,420)
Other assets.................................... 313 4,424 (4,092)
Accounts payable................................ (1,752) (6,893) (6,171)
Accrued liabilities............................. (6,573) (3,036) 68
Income taxes payable............................ (318) 627 --
Accrued acquisition, restructuring and other
charges........................................ (2,951) (5,555) 558
Foreign currency translation adjustment......... (108) 187 95
-------- -------- --------
Net cash used in operating activities....... (21,729) (10,889) (49,750)
-------- -------- --------
Cash flows from investing activities:
Proceeds from sales and maturities of short-
term investments............................... -- -- 34,285
Capital expenditures............................ (1,845) (4,275) (19,669)
Sale of marketable security..................... -- 589 --
Capitalized software costs...................... -- -- (4,504)
Proceeds from sale of building.................. 7,700 -- --
Proceeds from divestitures...................... 1,575 -- --
Advances from affiliates........................ -- -- 52
Opening cash balance of previously
unconsolidated subsidiary...................... -- -- 5,054
Proceeds from sale of other assets.............. 368 -- --
Acquisition costs, net of cash acquired......... -- -- 6,493
-------- -------- --------
Net cash provided by (used in) investing
activities................................. 7,798 (3,686) 21,711
-------- -------- --------
Cash flows from financing activities:
Net proceeds from issuance of preferred stock,
Series C....................................... 2,782 24,594 --
Net proceeds from issuance of preferred stock,
Series B....................................... -- -- 20,000
Repurchase of preferred stock, series B......... -- (10,000) --
Net proceeds from issuance of common stock...... 44 689 3,529
Principal debt repayments....................... (5,579) (4,280) --
Proceeds from issuance of long-term convertible
notes.......................................... -- -- 25,000
Proceeds from issuance of bank debt............. 1,579 8,280
Net proceeds (payments) under long-term
obligations.................................... (77) 90 (200)
Notes payable to related parties................ -- -- (1,093)
Net proceeds from the exercise of warrants...... 1,521 -- --
Distributions to stockholders................... -- -- (7,307)
-------- -------- --------
Net cash provided by (used in) financing
activities................................. (1,309) 12,672 48,209
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents................................ (15,240) (1,903) 20,170
Cash and cash equivalents at beginning of
period.......................................... 23,651 25,554 5,384
-------- -------- --------
Cash and cash equivalents at end of period....... $ 8,411 $ 23,651 $ 25,554
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest...................................... $ 1,509 $ 2,072 $ 468
Income taxes.................................. 39 240 1,993
Non cash issuance of common stock in exchange
for Series C Preferred Stock................. 24,526 -- --
</TABLE>
See accompanying notes to consolidated financial statements.
45
<PAGE>
QUARTERDECK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998, 1997 and 1996
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Quarterdeck Corporation (the "Company") commenced operations as a California
corporation on May 26, 1982, and was reincorporated in Delaware in 1991. The
consolidated financial statements include the accounts of the Company and its
wholly owned subsidiaries. See Note 2 for a description of pooling of
interests and purchase transactions. All significant intercompany transactions
have been eliminated in consolidation.
Revenue Recognition
Revenue from the sale of software products is recognized upon shipment,
where collection of the resulting receivable is probable and no significant
obligations remain. The estimated cost to fulfill technical support
obligations to end users arising from the sale of software is accrued upon
shipment. The Company accepts product returns from customers as defined by the
Company's general distributor agreements and as market conditions and other
factors require. The Company establishes allowances for estimated product
returns and exchanges as a reserve against revenues. Additionally, price
protection is generally granted to customers to reduce the customer's cost of
inventory, as of the date of a price reduction, initiated by Quarterdeck.
Provisions for sales returns, exchanges, rebates and price protection were
approximately $21,000,000, $16,705,000 and $31,889,000 in fiscal 1998, 1997
and 1996, respectively. Revenue from the sale or licensing of intellectual
property is recognized when all significant obligations of the Company have
been met and no customer right of return exists. Revenue from subscription
licenses is recognized ratably over the term of the subscription.
Capitalized Software Costs
Statement of Financial Accounting Standards No. 86, "Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed," requires
the capitalization of certain software development and production costs once
technological feasibility has been achieved. The cost of purchased software is
capitalized when the related product has achieved technological feasibility or
if that product has an alternative future use. For the years ended September
30, 1998 and 1997, the Company did not capitalize any internal software
development costs or any purchased software costs as such costs were
immaterial. For the year ended September 30, 1996, the Company capitalized
$4,504,000 of software development and purchased software costs. Software
development costs incurred prior to achieving technological feasibility and
certain licensing costs are charged to research and development expense as
incurred.
Capitalized software development and purchased software costs are reported
at the lower of unamortized cost or net realizable value. Commencing upon
initial product release, these costs are amortized based on the greater of the
straight-line method over the estimated life or revenue recognized compared to
estimated revenue over the life of the product, generally one year for
internal software development costs and twelve to thirty-six months for
purchased software. For the years ended September 30, 1998, 1997 and 1996, the
Company amortized $1,151,000, $1,670,000 and $3,711,000 of capitalized
software costs, respectively. Amortization of capitalized software costs is
included in cost of revenues in the accompanying consolidated statements of
operations. In fiscal 1998, the Company wrote off approximately $300,000 of
previously capitalized software development costs which, based upon the
Company's evaluation of recoverability, has been deemed to be impaired.
Inventories
Inventories, consisting primarily of product packaging, documentation and
media, are stated at the lower of cost or market (net realizable value). Cost
is determined by the first-in, first-out (FIFO) method.
46
<PAGE>
QUARTERDECK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Cash Equivalents and Short-Term Investments
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. As of September 30,
1998, $8,411,000 of the total cash balance was invested in interest bearing
bank accounts and cash equivalent money market funds.
The Company accounts for short-term investments in accordance with Statement
of Financial Accounting Standards No. 115 (SFAS 115), "Accounting for Certain
Investments in Debt and Equity Securities." Under SFAS 115, the Company has
classified its marketable securities as available-for-sale. Available-for-sale
securities are reported at market value, with unrealized holding gains and
losses, net of the related tax effect, excluded from earnings and reported as
a separate component of stockholders' equity (deficit). A decline in the
market value of the security below cost that is deemed other than temporary is
charged to earnings resulting in the establishment of a new cost basis for the
security.
Computation of Net Income (Loss) per Share
Net income (loss) per common share for the years ended September 30, 1998,
1997 and 1996 has been computed using the weighted average number of common
shares outstanding for each year as summarized below:
<TABLE>
<CAPTION>
Year ended September 30,
--------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Weighted average common stock outstanding
during the year.......................... 51,609,360 43,167,682 34,893,937
Common stock equivalents of stock options
and warrants outstanding................. -- -- --
---------- ---------- ----------
Shares used in basic EPS calculation...... 51,609,360 43,167,682 34,893,937
========== ========== ==========
Shares used in diluted EPS calculation.... 51,609,360 43,167,682 34,893,937
========== ========== ==========
</TABLE>
The weighted average number of shares of common stock outstanding during
1996 have been adjusted to reflect the issuance of common stock in connection
with the following acquisitions which were accounted for as poolings of
interest; 921,218 shares for Inset Systems, Inc. ("Inset") (Note 2), 5,200,000
shares for Datastorm Technologies, Inc. and Datastorm Limited (together
"Datastorm") (Note 2), and 3,499,999 shares for Vertisoft Systems, Inc.
("Vertisoft") (Note 2). The weighted average number of shares of common stock
outstanding during fiscal 1996 includes 663,768 shares issued in the Future
Labs, Inc. ("Future Labs") pooling of interests as if the shares were issued
at the beginning of fiscal 1996. Additionally the following shares were issued
in connection with purchase acquisitions and are included as of the respective
acquisition dates; 1,309,890 shares for Limbex Corporation ("Limbex"), 205,000
shares for InterLink Technology, Inc. ("InterLink"), and 198,000 shares for
the Pinnacle Software, Inc. ("Pinnacle") technology purchase. The weighted
average number of shares of common stock outstanding for the year ended
September 30, 1996 excludes 1,028,000 shares issued in connection with the
above acquisitions, held in escrow, as their inclusion would have been anti-
dilutive to the loss per share.
Options to purchase 8,024,140 shares at a weighted average exercise price of
$2.39, 6,091,389 shares at a weighted average exercise price of $3.89 and
6,048,381 shares at a weighted average exercise price of $9.12 were
outstanding as of September 30, 1998, 1997 and 1996, respectively, but were
not included in the computation of diluted net loss per share for either
period because the effect would be anti-dilutive.
Warrants to purchase 904,000, 904,000 and 1,704,000 shares at a weighted
average exercise price of $7.44 were outstanding as of September 30, 1998,
1997 and 1996, respectively, but were not included in the computation of
diluted net loss per share because the effect would be anti-dilutive.
47
<PAGE>
QUARTERDECK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Warrants to purchase 25,000 shares at a weighted average exercise price of
$7.20 were outstanding as of September 30, 1998, 1997 and 1996, but were not
included in the computation of diluted net loss per share because the effect
would be anti-dilutive.
Approximately 1,180,000 shares issuable upon the conversion of convertible
notes were not included in any period as the effect would be anti-dilutive.
The Company had $25,000,000 of convertible notes with a conversion price of
$21.18 per share outstanding at September 30, 1998, 1997 and 1996.
Reclassification
Certain items in prior years' consolidated financial statements have been
reclassified to conform to the current year's presentation.
Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities to prepare these financial
statements in conformity with generally accepted accounting principles.
Significant estimates were made in the provisions for sales returns, inventory
reserve, allowance for doubtful accounts, valuation of long-term investments,
and impairment of long lived assets. Actual results could differ from these
estimates.
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of short term investments and
trade accounts receivable. As of September 30, 1998 and 1997, the Company had
no short-term investments. The credit risk associated with trade accounts
receivable is mitigated by the Company's credit evaluation process, reasonably
short collection terms and the geographical dispersion of sales transactions.
Advertising
Advertising costs are expensed as incurred. Advertising expense for fiscal
1998, 1997 and 1996 was approximately $5,220,000, $3,784,000 and $16,501,000
respectively.
Depreciation and Amortization
Equipment and leasehold improvements are stated at cost. Depreciation and
amortization of equipment, leasehold improvements and goodwill is calculated
using the straight-line method over the estimated useful lives of the related
assets as follows:
<TABLE>
<S> <C>
Building................................................... 40 years
Computer equipment......................................... 3 years
Office furniture and equipment............................. 5 to 7 years
Leasehold improvements..................................... 1 to 5 years
Equipment under capital lease.............................. 3 to 7 years
Goodwill................................................... 4 to 10 years
</TABLE>
Income Taxes
The Company accounts for income taxes in accordance with Financial
Accounting Standards Board Statement No. 109 "Accounting for Income Taxes"
(SFAS 109). SFAS 109 requires the assets and liabilities
48
<PAGE>
QUARTERDECK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
method of accounting for income taxes. Under SFAS 109, deferred tax assets and
liabilities are recognized with respect to the tax consequences attributable
to differences between the financial statement carrying values and the tax
bases of existing assets and liabilities. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to the taxable income
in the years in which these temporary differences are expected to be recovered
or settled. Further, the effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Stock-Based Compensation
Prior to October 1, 1996, the Company accounted for its stock option plan in
accordance with the provisions of Accounting Principles Board (APB) Opinion
No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. As such, compensation expense would be recorded on the date
of grant only if the current market price of the underlying stock exceeded the
exercise price. On October 1, 1996, the Company adopted SFAS No. 123,
"Accounting for Stock Based Compensation," which permits entities to recognize
as expense over the vesting period the fair value of all stock-based awards on
the date of grant. Alternatively, SFAS No. 123 also allows entities to
continue to apply the provisions of APB Opinion No. 25 and provide pro forma
net income and pro forma net income per share disclosures for employee stock
option grants made in 1995 and future years as if the fair-value-based method
defined in SFAS No. 123 had been applied. The Company has elected to continue
to apply the provisions of APB Opinion No. 25 and provide the pro forma
disclosure required by SFAS No. 123.
Non-Cash Transactions
The Company has recorded certain significant non-cash transactions relating
to certain Mergers and purchases which included common stock as all or a
portion of the consideration, and has commenced restructuring programs which
include the recording of certain non-cash charges. See also Notes 2 and 11
herein.
Fair Value of Financial Instruments
The fair values of the Company's cash and cash equivalents, trade accounts
receivable, accounts payable, accrued liabilities and accrued acquisition and
restructuring charges approximate their carrying value due to the relatively
short maturities of these instruments. The fair value of the loans payable to
banks approximate the fair value of the instruments due to the stated interest
rates on such notes and the collateral supporting the notes. The fair value of
the convertible debentures approximates face value due to the stated interest
rate on such instruments. The convertible debentures are required to be paid
in full upon consummation of the merger (Note 18) without any premium.
Long-Lived Assets
The Company adopted Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of" (SFAS No. 121), during the fiscal year ended September 30,
1997. This statement requires that long-lived assets be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of the asset may not be recoverable. Recoverability of assets
to be held and used is measured by a comparison of the carrying amount of an
asset to future net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceed the
fair value of the assets. In fiscal 1998, the Company wrote off $2,004,000 of
goodwill which was deemed to be impaired.
49
<PAGE>
QUARTERDECK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Foreign Currency Translation
Assets and liabilities denominated in foreign currencies are translated to
U.S. dollars at the exchange rate on the balance sheet date. Revenues, costs
and expenses are translated at average rates of exchange prevailing during the
year. Translation adjustments resulting from this process are shown as a
component of stockholders' equity (deficit). Foreign currency transaction
gains and losses were not material for the years presented and are included in
the determination of net income (loss).
Recent Accounting Pronouncements
SFAS No. 132, Employers' Disclosures about Pensions and Other Postretirement
Benefits, was issued in February 1998. SFAS No. 132 revises the disclosure
requirements for pensions and other postretirement benefits. This statement is
effective for the Company's financial statements for fiscal years beginning
after December 15, 1997 and the adoption of this standard is not expected to
have a material effect on the Company's financial statements.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of general-purpose financial
statements. SFAS No. 130 is effective for financial statements issued for
periods beginning after December 15, 1997. The Company has not determined the
impact of SFAS No. 130 on its consolidated financial statements.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." SFAS
No. 131 establishes standards for the reporting of operating segment
information in annual financial statements and in interim financial reports
issued to shareholders. SFAS No. 131 is effective for financial statements
issued for periods beginning after December 15, 1997. Quarterdeck has not
determined the impact of SFAS No. 131 on its consolidated financial
statements.
The AICPA issued Statement of Position 97-2, "Software Revenue Recognition,"
(SOP 97-2) effective for transactions entered into in fiscal years beginning
after December 15, 1997. The Company will adopt SOP 97-2 for transactions
entered into on and after October 1, 1998. The impact of SOP 97-2 will depend
on the terms of future transactions.
NOTE 2. ACQUISITIONS AND STRATEGIC INVESTMENTS
Poolings of Interests
Fiscal 1996
On December 29, 1995, the Company merged with Inset, a developer of utility
application software for personal computers. The Company issued 921,218 shares
of common stock in exchange for all of the outstanding common stock of Inset.
This Merger has been accounted for as a pooling of interests combination and
accordingly, the consolidated financial statements for fiscal 1996 have been
restated to reflect the combined operations of the Company and Inset.
On March 28, 1996, the Company merged with Datastorm, the developer and
publisher of Procomm Plus, one of the industry's leading data communications
products. The Company issued 5,200,000 shares of common stock in exchange for
all of the outstanding stock of Datastorm. The Merger has been accounted for
as a pooling of interests and therefore, the consolidated financial statements
for fiscal 1996 have been restated to reflect the combined operations of the
Company and Datastorm.
50
<PAGE>
QUARTERDECK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Datastorm had a calendar year end and accordingly, the Datastorm statement
of operations for the year ended December 31, 1995, was restated and combined
with the Company's statement of operations for the fiscal year ended September
30, 1995. In order to conform Datastorm's year end to the Company's fiscal
year end, the consolidated statement of operations for the year ended
September 30, 1996, includes three months (October 1995 through December 1995)
for Datastorm, which are included in the consolidated statement of operations
for the fiscal year ended September 30, 1995. Accordingly an adjustment has
been made to retained earnings during fiscal 1996 to eliminate the duplication
of net income of $717,000 for the three month period ended December 31, 1995.
Datastorm's S corporation status terminated upon consummation of the Merger.
Datastorm's undistributed earnings at March 28, 1996, and all prior periods,
have been reclassified to additional paid-in-capital in the accompanying
consolidated financial statements in accordance with pooling of interests
accounting. Accordingly, distributions by Datastorm to Datastorm shareholders
have been charged to additional paid-in-capital.
The Company's Datastorm subsidiary leased office and warehouse space from
Three Guys With a Building partnership, a company that was affiliated to
Datastorm through common ownership. The partners of such partnership are now
shareholders and consultants of the Company. The lease expires on December 31,
2001, however, as a result of the acquisition and completion of a new office
building for the Company by the partnership, the existing lease has been
terminated at no cost to the Company. Lease expense for fiscal 1998, 1997 and
1996 totaled $0, $0 and $698,000 respectively.
On May 15, 1996, the Company merged with Future Labs, a developer of real-
time collaborative technology. The Company issued 663,768 shares of common
stock in exchange for all of the outstanding stock of Future Labs. The
transaction was accounted for as a pooling of interests and therefore, the
consolidated financial statements for fiscal 1996 have been restated to
reflect the combined operations of the Company and Future Labs.
On July 18, 1996, the Company acquired 100% of the common stock of Vertisoft
in exchange for 3,499,999 shares of Company common stock. This transaction has
been accounted for as a pooling of interests, and therefore, the consolidated
financial statements for fiscal 1996 have been restated to reflect the
combined operations of the Company and Vertisoft.
The following table reflects the Company's acquisition costs relating to the
transactions entered into in fiscal 1996 and activity through September 30,
1997 (in thousands). There was no activity in fiscal 1998.
<TABLE>
<CAPTION>
Inset Datastorm FutureLabs Vertisoft Total
----- --------- ---------- --------- -------
<S> <C> <C> <C> <C> <C>
Balance, September 30,
1996..................... $100 $ 879 $ 359 $ 775 $ 2,113
---- ----- ----- ----- -------
Reversal of acquisition
costs.................... (34) (3) (320) (350) (707)
Cash payments............. (66) (876) (39) (425) (1,406)
---- ----- ----- ----- -------
Balance, September 30,
1997..................... $-- $ -- $ -- $ -- $ --
==== ===== ===== ===== =======
</TABLE>
51
<PAGE>
QUARTERDECK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table reflects the Company's acquisition costs for fiscal 1995
transactions and activity through September 30, 1998 (in thousands).
<TABLE>
<CAPTION>
Landmark Starnine Total
-------- -------- -----
<S> <C> <C> <C>
Balance, September 30, 1996....................... $ 46 $ 186 $ 232
---- ----- -----
Reversal of acquisition costs..................... (27) (131) (158)
Cash payments..................................... (19) (5) (24)
---- ----- -----
Balance, September 30, 1997....................... $-- $ 50 $ 50
---- ----- -----
Cash payments..................................... -- (16) (16)
---- ----- -----
Balance, September 30, 1998....................... $-- $ 34 $ 34
==== ===== =====
</TABLE>
The results of operations previously reported by the separate enterprises,
that are discussed above and the combined amounts presented in the
accompanying consolidated financial statements are summarized below (in
thousands):
<TABLE>
<CAPTION>
Year Ended
September 30, 1996
-------------------
Net Net Income
Revenues (Loss)
-------- ----------
<S> <C> <C>
Quarterdeck............................................ $ 92,030 $(86,856)
Inset.................................................. 2,669 424
Datastorm.............................................. 29,413 12,576
Future Labs............................................ 1,312 (335)
Vertisoft.............................................. 7,676 (623)
Pooling adjustments.................................... -- (145)
-------- --------
Restated Quarterdeck................................... $133,100 $(74,959)
======== ========
</TABLE>
Net revenues and net income (loss) for Vertisoft, Future Labs, Datastorm,
and Inset for the year ended September 30, 1996 reflect the results of each
entity for only the period prior to the date of acquisition by the Company.
Results subsequent to the date of the Mergers are included with the Company's
operations. Pooling adjustments were made primarily to conform accounting
policies to those of the Company.
Purchases
Fiscal 1997
On August 12, 1997, the Company consummated the acquisition of certain
assets primarily consisting of software and related intellectual property
rights of TOC Holding Company, formerly known as TuneUp.com, Inc. for an
aggregate purchase price of $250,000 plus acquisition costs of $18,000. The
entire amount has been recorded as in-process research and development expense
and is included in acquisition, restructuring and other charges in the
accompanying 1997 consolidated statement of operations. Quarterdeck had
managed the assets of TuneUp.com under a management agreement from May 9, 1997
until the consummation of the acquisition.
Fiscal 1996
On June 6, 1996, the Company acquired certain software and related
intellectual property rights from Pinnacle in exchange for common stock with a
market value, as defined, of $1,800,000, or 198,000 shares. The entire amount
has been recorded as capitalized software. This transaction has been accounted
for using the
52
<PAGE>
QUARTERDECK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
purchase method of accounting. The Company is also obligated to pay certain
minimum royalties of $200,000 per year for four years commencing no later than
March 31, 1997. The Company has paid an additional $100,000 and was obligated
for an additional $200,000, as payment for consulting services and a non-
competition agreement with the principal of Pinnacle.
On July 16, 1996, the Company purchased certain assets and technology
relating to remote control software from InterLink. The total consideration
for the Interlink acquisition was $3,155,000. An accrual was established for
estimated acquisition costs in July 1996. As of September 30, 1997, a balance
of $70,000 remained in the accrual. This balance was reversed into income in
September 1997.
On August 14, 1996, the Company acquired the remaining shares of Limbex
which were not already owned by the Company. Prior to such acquisition, the
Company owned approximately 20% of Limbex. The total consideration for the
acquisition was $16,295,000. An accrual was established for estimated
acquisition costs in August 1996. As of September 30, 1997, a balance of
$35,000 remained in the accrual. This balance was reversed into income in
September 1997.
A purchase price allocation of the assets of both Interlink and Limbex was
performed based on the fair market value of those assets, utilizing the
discounted future cash flows of the technology acquired. In-process research
and development was identified and valued by taking into consideration the
discounted future cash flows of each project, the uncertainties in completing
the projects and reaching technological feasibility, and potential changes in
the target markets for the products.
This allocation resulted in $2,872,000 and $12,121,000 of purchased research
and development from Interlink and Limbex, respectively, related to products
which had yet to reach technological feasibility and did not have alternative
future uses. The $2,872,000 and $12,121,000 of purchased research and
development is included in acquisition, restructuring and other charges in the
accompanying 1996 statement of operations. Using the same methodology,
goodwill was calculated to be $283,000 and $2,546,000, respectively, and is
included in other assets. Goodwill is being amortized over 4 to 10 years. In
addition, the Company allocated $328,000 of the Limbex purchase price to
intangible assets which is being amortized over a period of 24 to 36 months
and $396,000 to capitalized software which is being amortized over 14 months.
Other Investments
On February 7, 1996, the Company acquired, in a private placement of common
stock, less than a 5% interest in Infonautics Corporation ("Infonautics") in
exchange for $3,250,000. Prior to March 1997, this investment was accounted
for under the cost method of accounting and the investment was included on the
balance sheet in other assets and carried at lower of cost or market. During
the fiscal year ended September 30, 1996, the Company determined that the
market value of the investment in Infonautics stock was below the Company's
cost basis and that a portion of the reduction in value was due to an other
than temporary decline. Accordingly, the Company recorded a loss of $720,000
to reduce the carrying value of the investment. In March 1997, subsequent to
an initial public offering by Infonautics and elimination of restrictions on
the Company's ability to sell such stock, the Infonautics investment was
reclassified as a marketable security and is being held as an "available for
sale security" under SFAS No. 115. The price of the Infonautics stock
continued to decline during fiscal 1997 and, accordingly, the Company recorded
a $1,666,000 loss as an other than temporary reduction to the carrying value
of the investment. During fiscal 1998, the carrying value of this investment
has been adjusted to fair value of $612,000 as of September 30, 1998 and the
unrealized loss of $252,000 has been recorded as a component of stockholders'
equity (deficit). The Company sold its shares in Infonautics stock in November
1998 at a nominal gain.
53
<PAGE>
QUARTERDECK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During fiscal 1996, the Company also recorded a charge in other income
(expense) for $727,000 to write off its investment in Streetwise, a software
development firm.
In June 1995, the Company purchased a minority equity position in LHSP, a
company that develops and licenses speech compression technology. The cash
investment of $1,500,000 was accounted for using the cost method. During
fiscal 1995, LHSP completed an initial public offering. During fiscal 1996,
the Company sold a portion of this investment for $2,346,000 and recorded a
gain of $1,435,000 which is included in other income on the statement of
operations. As of September 30, 1996, the Company's remaining investment was
carried at $968,000 in other assets on the balance sheet. In accordance with
SFAS 115, the Company included an unrealized gain in the value of the
remaining investment of $379,000 as a separate component of stockholders'
equity at September 30, 1996. During fiscal 1997, the Company liquidated its
remaining investment in LHSP common stock and sold its LHSP warrants resulting
in a realized gain of $1,026,000 which was included in other income in the
1997 statement of operations.
In June 1995, the Company agreed to purchase a minority equity position in
Intelligence at Large, Inc. ("IAL"), a company that develops Internet audio
technology. The purchase agreement required the Company to make a total
investment of $1,250,000, payable upon IAL achieving specified development
milestones. The Company accounted for this investment using the cost method.
The investment was made during fiscal 1996 and is included as a component of
other assets. However, during the fiscal year ended September 30, 1997, the
Company determined that the value of this investment had been impaired and,
accordingly, recorded a $1,250,000 charge in other income (expense) to write
off the carrying value of this investment.
54
<PAGE>
QUARTERDECK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 3. BALANCE SHEET AND INCOME STATEMENT INFORMATION
<TABLE>
<CAPTION>
September 30,
-----------------
1998 1997
------- --------
(in thousands)
<S> <C> <C>
Balance Sheet:
Trade accounts receivable:
Receivables................................................ $12,212 $ 16,274
Less: allowance for doubtful accounts...................... (924) (1,761)
Less: allowance for sales returns.......................... (5,106) (4,243)
Less: allowance for marketing development funds............ (2,470) (3,242)
Less: allowance for rebates................................ (722) --
------- --------
$ 2,990 $ 7,028
======= ========
Other current assets:
Prepaid royalties.......................................... $ 203 $ 352
Income tax receivable...................................... 79 520
Other prepaid expenses..................................... 886 800
Notes receivable........................................... 33 51
Advances to employees...................................... 2 24
Marketable securities...................................... 612 792
Other...................................................... 207 2,116
------- --------
$ 2,022 $ 4,655
======= ========
Equipment and leasehold improvements:
Building (asset held for sale)............................. $ -- $ 7,359
Computer equipment......................................... 6,060 7,769
Office furniture and equipment............................. 5,409 6,575
Office furniture and equipment under capital leases........ 30 99
Leasehold improvements..................................... 1,944 2,638
------- --------
13,443 24,440
Less: accumulated depreciation and amortization............ (9,803) (10,287)
------- --------
$ 3,640 $ 14,153
======= ========
Capitalized software costs:
Capitalized software costs................................. $ 5,498 $ 5,498
Less: accumulated amortization............................. (4,857) (3,708)
------- --------
$ 641 $ 1,790
======= ========
Other assets:
Intangible assets acquired, net............................ $ 322 $ 2,683
Other...................................................... 531 744
------- --------
$ 853 $ 3,427
======= ========
Accrued liabilities:
Accrued expenses........................................... $ 5,329 $ 10,075
Accrued legal.............................................. 666 622
Accrued royalties.......................................... 980 1,138
Accrued technical support.................................. 648 456
Accrued litigation settlement.............................. -- 1,905
------- --------
$ 7,623 $ 14,196
======= ========
Accrued acquisition, restructuring and other charges:
Acquisition................................................ $ 34 $ 50
Restructuring.............................................. 2,400 5,335
Purchase transaction costs................................. -- --
------- --------
$ 2,434 $ 5,385
======= ========
</TABLE>
55
<PAGE>
QUARTERDECK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Year Ended September
30,
-----------------------
1998 1997 1996
------ ------- -------
(in thousands)
Income Statement:
<S> <C> <C> <C>
Acquisition, restructuring and other charges (bene-
fit):
Restructuring....................................... $2,583 $12,415 $12,995
Acquisition......................................... -- (970) 9,801
In-process R&D...................................... -- 268 14,993
------ ------- -------
$2,583 $11,713 $37,789
====== ======= =======
</TABLE>
NOTE 4. NOTES PAYABLE TO BANKS
In April, 1997, the Company established an asset based line of credit with
Greyrock Business Credit, a division of NationsBank. The Company repaid and
terminated its then existing line with Bank of America with proceeds from the
new line. Maximum borrowings under the new line are the lesser of $12,000,000
or the sum of 85% of eligible accounts receivable, 50% of Quarterdeck
International Limited (Qil) eligible receivables plus the value of inventory
to a maximum of $2,000,000. Proceeds from the line can be used for general
corporate purposes, including investments and acquisitions, and bear interest
at prime plus 2%. The line is secured by substantially all assets of
Quarterdeck. The Company is obligated to pay a minimum interest charge of
$10,000 per month and comply with certain other non-financial covenants and
restrictions. At September 30, 1998 the Company had $0 outstanding under the
line and the ability to borrow up to a maximum amount of $7,853,000. The
current term of the agreement matures March 31, 1999 and contains renewal
provisions. It is anticipated that the line will be terminated upon
consummation of the Merger.
In April 1996, the Company borrowed $2,000,000 from a bank to partially
finance the completion of the building in Columbia, Missouri. The loan was
paid in full in April 1997.
On August 6, 1996, the Company's Datastorm subsidiary secured construction
financing from a bank of up to $5,000,000 with an interest rate equal to the
bank's commercial base rate, prime plus 2%, secured by the Columbia, Missouri
building. The Columbia, Missouri building was sold on December 30, 1997 and
the principal balance outstanding at the date of sale of $3,500,000 was repaid
in full on December 30, 1997.
NOTE 5. CONVERTIBLE NOTES
On March 28, 1996, the Company issued $25,000,000 principal amount of 6%
Convertible Senior Subordinated Notes, due 2001 ("Notes"), to an institutional
investor in a private placement pursuant to the terms of a Note Agreement,
dated March 1, 1996. The Notes are convertible generally after April 1, 1997,
at an initial conversion price of $21.18 per share. The conversion price is
adjustable for certain below market equity issuances and the Notes contain
other customary anti-dilution provisions. Subject to complying with other
certain terms, the Notes may be prepaid without penalty, subject to
conversion, anytime between April 1997 and April 1999 if the Company's Common
Stock had been trading, for 20 of the 30 trading days preceding notice of
prepayment, at approximately 18% above the then current conversion price. The
Notes contain certain covenants and the Company was in compliance with such
covenants as of September 30, 1998. The Notes are required to be paid in full
upon consummation of the transaction with Symantec without any premium. See
note 18 to the Company's Consolidated Financial Statements for further
discussion.
56
<PAGE>
QUARTERDECK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 6. CONVERTIBLE PREFERRED STOCK
On September 30, 1996, the Company issued 200,000 shares of Series B
Convertible Preferred Stock, stated value of $100 per share (the "Series B
Preferred Stock"), and a warrant (the "Warrant") to acquire shares of Common
Stock of the Company for $20,000,000. During 1997, $10,000,000 of Series B
Preferred Stock was converted into 3,762,000 shares of Common Stock and on
September 30, 1997, for $10,000,000, the Company repurchased, at par, all of
the outstanding shares of Series B Preferred Stock and canceled warrants to
purchase 800,000 shares of the Company's Common Stock owned by the holder of
the Series B Preferred Stock. As a result of the conversions and repurchase,
no shares of Series B Preferred Stock remain outstanding as of the date
hereof. The Warrants still outstanding may be exercised from and after March
30, 1998 (or earlier if certain Mergers, acquisitions or combinations occur
prior to that date) for 903,653 shares of Common Stock at an exercise price
per share of $7.435.
In September 1997 and between October and November 4, 1997, the Company
issued 26,025 and 2,975 shares, respectively, of Series C Convertible
Preferred Stock, stated value of $1,000 per share (the "Series C Preferred
Stock"), for $26,025,000 and $2,975,000, respectively before expenses. The
securities were issued to various accredited investors in a private placement
pursuant to Regulation D of the Securities Act of 1933, as amended. In
addition, Quarterdeck issued warrants to purchase 2,900 shares of Series C
Preferred Stock to the placement agents of the private placement.
The holders of the Series C Preferred Stock are not entitled to receive
dividends. The shares of Series C Preferred Stock are convertible into shares
of the Company's Common Stock. The shares of Series C Preferred Stock will
automatically convert into Common Stock on September 30, 2002 to the extent
any shares of Series C Preferred Stock remain outstanding at that time. Each
share of Series C Preferred Stock is convertible into the number of shares of
Common Stock equal to the quotient of (i) $1000 divided by (ii) the Conversion
Price. Up until March 1, 1998, the Conversion Price was $5.00. Thereafter,
subject to the maximum Conversion Price specified below, the Conversion Price
will be equal to 101% of the average of the three lowest daily trading prices
for the 22 consecutive trading days immediately preceding the date of
conversion (the "Conversion Date"). If the market price of the Common Stock
was $1.00, $2.00 or $3.00, the aggregate number of shares of Common Stock
issuable upon conversion of the Series C Preferred Stock would be
approximately 31,600,000, 15,800,000 or 10,500,000 shares of Common Stock,
respectively. The maximum Conversion Price is $5.125 until March 31, 1999, and
thereafter will be the lesser of (i) $5.125, (i) 101% of the average daily low
trade prices of the Common Stock for all trading days in March 1999, (ii) 101%
of the average daily low trade prices of the Common Stock for all trading days
in September 1999 or (iii) 101% of the average daily low trade prices of the
Common Stock for all trading days in March 2000.
On October 9, 1998, Quarterdeck entered into the Conversion Agreement with
the Securityholders of the Company's Series C Preferred Stock and the Warrants
to modify the terms of conversion of the Series C Preferred Stock. As of
September 30, 1998, there were 4,615 shares of Series C Preferred Stock
outstanding. During fiscal 1998, 1,521 Series C Preferred warrants were
exercised to purchase Series C Preferred Stock. All warrants remaining as of
the fiscal year ended were tendered as a part of the Symantec transaction (see
note 18).
NOTE 7. STOCK OPTIONS AND WARRANTS
1996 Acquisition Stock Incentive Plan: In fiscal 1996, the Company adopted
the 1996 Acquisition Stock Incentive Plan. Under the terms of the 1996
Acquisition Stock Incentive Plan, the life of all options granted is limited
to 10 years. All grants under this plan must be non-qualified stock options.
These options may not be granted at less than 85% of fair market value on the
grant date. During fiscal 1998, the Company granted 360,800
57
<PAGE>
QUARTERDECK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
stock options at exercise prices between $2.75 and $1.44 per share. During
fiscal 1997, the Company granted 690,839 stock options (including grants under
the repricing) at exercise prices between $2.38 and $5.56 per share. During
fiscal 1996, the Company granted 105,610 stock options at exercise prices
between $0.00 and $7.75 per share, 297,600 stock options at an exercise price
of $8.81 per share, 665,000 stock options at an exercise price of $13.63 per
share, and 67,715 stock options at exercise prices between $13.94 and $35.50
per share. The number of shares of stock authorized for issuance under the
1996 Acquisition Stock Incentive Plan is 2,000,000. During fiscal 1998, 20,825
options were exercised and 505,560 options were canceled. At September 30,
1998, 463,596 options were outstanding. 283,965 options were exercisable as of
September 30, 1998 under the 1996 Acquisition Stock Incentive Plan. During
fiscal 1997, 21,902 options were exercised and 1,185,633 options were canceled
(including those which were repriced). At September 30, 1997, 629,181 options
were outstanding. 196,401 and 68,154 options were exercisable as of September
30, 1997 and 1996, respectively.
In January 1997, the Board of Directors approved the repricing of options
granted under this plan to an exercise price of $4.6875 per share for all
optionees. As part of the repricing, 536,381 shares were canceled and 425,999
new shares were granted at the new exercise price.
1990 Stock Plan: In fiscal 1990, the Company adopted the 1990 Stock Plan.
During 1995, the Company's Board of Directors approved an amendment to
increase the number of shares of stock authorized for issuance under the 1990
Stock Plan from 3,000,000 to 6,000,000 shares. This amendment was approved by
the stockholders on February 2, 1996. During fiscal 1996, the Company's Board
of Directors approved an amendment to increase the number of shares of stock
authorized for issuance under the 1990 Stock Plan from 6,000,000 to 7,500,000
shares. This amendment was approved by the stockholders on February 12, 1997.
During fiscal 1998, the Company's Board of Directors approved an amendment to
increase the number of shares of stock authorized for issuance under the 1990
Stock Plan from 7,500,000 to 9,500,000 shares. This amendment was approved by
the stockholders on February 5, 1998. Under the amended terms of the 1990
Stock Plan, shares of common stock are reserved for issuance to employees and
consultants pursuant to incentive stock options, nonqualified stock options,
stock appreciation rights, restricted stock awards or stock bonuses. The
Company has never issued a stock appreciation right, a restricted stock award
or a stock bonus.
Under the terms of the 1990 Stock Plan, the life of all options granted is
limited to 10 years. Incentive stock options are granted at 100% of fair
market value on the grant date. Non-qualified stock options may not be granted
at less than 85% of fair market value on the grant date. Options outstanding
under the 1990 Stock Plan become exercisable in varying increments commencing
one year after the date of grant, and expire five to ten years from date of
grant, or upon earlier termination. During fiscal 1998, the Company granted
4,381,428 stock options at exercise prices between $2.75 and $0.25 per share.
During fiscal 1997, the Company granted 3,841,347 stock options (including
grants under the repricing) at exercise prices between $2.34 and $5.56 per
share. During fiscal 1996, the Company granted 769,500 stock options at
exercise prices between $5.00 and $10.00, 353,500 stock options at exercise
prices between $10.01 and $15.00, 756,641 stock options at exercise prices
between $15.01 and $20.00, and 181,946 stock options at exercise prices
between $20.01 and $34.63.
During fiscal 1998, 20,355 options were exercised and 2,892,737 options were
canceled. During fiscal 1997, 312,118 options were exercised and 3,949,525
options were canceled (including those which were repriced). During fiscal
1996, 516,767 options were exercised and 738,207 options were canceled.
5,848,044 options were outstanding as of September 30, 1998 and 1,830,517,
1,575,191 and 1,077,431 options were exercisable at September 30, 1998, 1997
and 1996, respectively, under the 1990 Stock Plan.
In January 1997, the Board of Directors approved the repricing of options
granted under this plan to an exercise price of $4.6875 per share for all
optionees. As part of the repricing, 2,021,555 shares were canceled and
1,605,592 new shares were granted at the new exercise price.
58
<PAGE>
QUARTERDECK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1990 Directors' Stock Option Plan: Under the terms of the 1990 Directors'
Stock Option Plan, 500,000 shares are reserved for issuance to non-employee
directors. Options are exercisable in varying increments and expire within
five years or upon earlier directorship termination. During fiscal 1998,
150,000 stock options were granted at exercise prices between $2.13 and $0.28
per share, zero options were exercised, and zero options were canceled. During
fiscal 1997, 130,000 stock options were granted at exercise prices between
$3.63 and $4.50 per share, zero options were exercised, and zero options were
canceled. During fiscal 1996, 52,500 stock options were granted at exercise
prices between $8.00 and $16.50 per share, zero options were exercised, and
zero options were canceled. 382,500 options were outstanding under the 1990
Directors' Stock Option Plan as of September 30, 1998 and 197,500, 82,500 and
50,000 options were exercisable as of September 30, 1998, 1997 and 1996
respectively.
Outside of Plan Compensation Option Agreements. In fiscal 1998, the Company
entered into agreements with four members of the Board of Directors, granting
580,000 options at an exercise price of $0.28, exercisable in varying
increments expiring ten years from the date of grant or upon earlier
termination. 312,500 shares were exercisable at September 30, 1998. In fiscal
1997, the Company entered into employment agreements with two executive
officers of the Company, Mr. Hessler and Mr. Epstein, pursuant to which the
Company granted, in addition to shares granted under the above stock option
plans, 750,000 and 100,000 options to Mr. Hessler and Mr. Epstein,
respectively. The Company granted Mr. Hessler's options on January 3, 1997 at
an exercise price of $4.44 and granted Mr. Epstein's options on August 7, 1997
at an exercise price of $2.69. Mr Hessler's options are exercisable in varying
increments commencing one year after the date of grant and expiring ten years
from the date of grant or upon earlier termination. Mr. Epstein's 100,000
options were canceled in July and August of fiscal 1998.
To the extent the Company derives a tax benefit from options exercised by
employees, such benefit is credited to paid-in capital when realized on the
Company's income tax return. Due to the losses incurred in the respective
years, no tax benefits were realized or credited to additional paid-in capital
in fiscal 1998, 1997, or 1996.
A summary of all stock option activity in the three-year period ended
September 30, 1998 is as follows:
<TABLE>
<CAPTION>
Weighted Average
Exercise Price
Shares Per Share
---------- ----------------
<S> <C> <C>
Outstanding at September 30, 1995............... 3,432,380 $ 5.81
Options granted............................... 4,099,048 12.71
Options exercised............................. (580,803) 18.81
Options canceled.............................. (902,244) 10.90
----------
Outstanding at September 30, 1996............... 6,048,381 9.12
Options granted............................... 5,512,186 3.89
Options exercised............................. (334,020) 4.54
Options canceled.............................. (5,135,158) 10.18
----------
Outstanding at September 30, 1997............... 6,091,389 3.89
----------
Options granted............................... 5,472,228 1.21
Options exercised............................. (41,180) 1.01
Options canceled.............................. (3,498,297) 3.31
----------
Outstanding at September 30, 1998............... 8,024,140 $ 2.39
==========
</TABLE>
59
<PAGE>
QUARTERDECK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 8. ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company has adopted the provisions of SFAS No. 123, and elected to
continue to apply Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for its stock option plans. If the Company had
elected to recognize compensation cost based on the fair value of the awards
at the date of grant, consistent with the method prescribed by SFAS No. 123,
net loss and net loss per share would have changed to the pro forma amounts
indicated below (in thousands, except per share data):
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Net loss as reported......................... $(23,165) $(18,398) $(74,959)
======== ======== ========
Pro forma net loss........................... $(25,269) $(20,215) $(76,776)
======== ======== ========
Basic and diluted net loss per share as
reported.................................... $ (0.45) $ (0.43) $ (2.15)
======== ======== ========
Pro forma basic and diluted net loss per
share....................................... $ (0.49) $ (0.47) $ (2.20)
======== ======== ========
</TABLE>
The pro forma disclosure of compensation cost under this pronouncement was
based on the Black-Scholes single-option pricing model with the following
weighted average assumptions for 1998, 1997 and 1996: volatility of 188%, 70%
and 70% respectively, risk-free interest rate of 4.600%, 5.875% and 5.875%
respectively, and an expected option life of 4 years.
Pro forma net loss reflects options granted in fiscal 1998, 1997 and 1996.
Therefore the full amount of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the pro forma net loss amounts
presented above because compensation cost for options granted prior to October
1, 1995 is not considered. The disclosure of compensation cost under this
pronouncement may not be representative of the effects on net income (loss)
for future years.
The weighted average fair value of options granted in the periods reported
were $0.58, $1.46 and $0.70, respectively. The following table summarizes
information regarding options outstanding and options exercisable at September
30, 1998:
<TABLE>
<CAPTION>
Options Outstanding
-------------------------- Weighted
Outstanding at Remaining Average Exercisable at
Range of Exercise Prices September 30, Contractual Exercise September 30,
------------------------ 1998 Life Price 1998
-------------- ----------- -------- --------------
<S> <C> <C> <C> <C>
$0.25-2.53............ 4,992,918 9.4 $1.11 736,510
2.63-3.63............ 292,210 8.7 3.15 142,624
4.44-16.63........... 2,558,074 8.2 4.74 1,567,259
--------- --- ----- ---------
7,843,202 9.0 $2.37 2,446,393
========= === ===== =========
</TABLE>
NOTE 9. STOCKHOLDER RIGHTS PLAN
In September 1992, the Company made a dividend distribution of one preferred
share purchase right for each outstanding share of common stock. The rights
trade with the common stock and only become exercisable, or transferable apart
from the common stock, ten business days after a person or group (Acquiring
Person) acquires beneficial ownership of, or commences a tender or exchange
offer for, 15% or more of the Company's common stock. Each right, under
certain circumstances, entitles its holder to acquire one one-hundredth of a
share of a newly created Series A Junior Participating Preferred Stock, par
value $0.001 per share, at a price of
60
<PAGE>
QUARTERDECK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
$35, subject to adjustment. If 15% of the Company's common stock is acquired,
or a tender offer to acquire 15% of the Company's common stock is made, each
right not owned by an Acquiring Person will entitle the holder to purchase at
the exercise price, Company common stock having a market value of twice the
exercise price of the rights. In addition, if the Company is acquired in a
Merger or other business combination, the rights will entitle a holder to buy
a number of shares of common stock of the acquiring Company having a market
value of twice the exercise price of each right. The rights may be redeemed by
the Company at $0.01 per right at any time until a 15% position has been
acquired. The rights expire on August 22, 2002, and at no time have voting
power. The Company amended the Certificate of Designations of Series A Junior
Participating Preferred Stock dated September 1, 1998 increasing the
authorized number of shares from 500,000 to 1,000,000.
In connection with the issuance of the Series C Preferred Stock during
fiscal 1997 (see Note 16), the Company amended the Rights Agreement to provide
that the initial investors that acquired the Series C Preferred Stock will not
be deemed to be an Acquiring Person as a result of its acquisition of the
Series C Preferred Stock or any shares of Common Stock received upon
conversion of the Series C Preferred Stock, subject to compliance by such
investors with certain covenants contained in the Preferred Stock Investment
Agreements. On October 15, 1998, the Company amended the Rights Agreement to
provide that neither Symantec nor any of its affiliates will be deemed to be
an Acquiring Person as a result of the acquisition of shares of the Company's
common stock.
NOTE 10. EMPLOYEE BENEFIT PLANS
In January 1991, the Company adopted a defined contribution 401(k) plan.
Employees must work a minimum of 1,000 hours per year and be at least 21 years
of age and must have completed at least 3 consecutive months of service to be
eligible for the plan. Participants may contribute 1% to 20% of their
compensation. During fiscal 1993, the Board of Directors approved a Company
match of 25% of employee contributions up to 5% of eligible compensation. The
Company match was increased to 50% of employee contributions up to 5% of
eligible compensation for calendar 1995. As of January 1996, the plan was
amended to allow employee participation in the plan after at least 3
consecutive months of service. Additionally, the Company matching was changed
to 50% of employee contributions up to 3% of eligible compensation for
calendar 1996. The Company's matching contributions totaled $360,000, $337,000
and $1,243,000 for fiscal 1998, 1997 and 1996, respectively.
NOTE 11. RESTRUCTURING AND OTHER CHARGES
During June 1998, the Company implemented a restructuring plan which was
designed to reduce the ongoing level of operating expenses to one which can be
supported by a reduced revenue base, to reduce the Company's cash requirements
over the next two quarters to be either cash neutral or cash positive, to exit
non-core business ventures and operations which do not produce an acceptable
level of profitability for the Company, and to convert from an expense
structure which is mainly "fixed" to one that is more variable in nature. As a
result, the Company recorded charges totaling $2,830,000 in June 1998 of which
$2,182,000 were recorded to accrue amounts owed under employee severance
agreements and other consulting arrangements, $377,000 for ongoing lease
payments for vacant facilities and early lease cancellation fees, and $271,000
for write downs of fixed assets of business units being closed or divested. An
additional $150,000 of restructuring charges were recorded in September 1998.
61
<PAGE>
QUARTERDECK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following is an analysis of the significant components of the fiscal
1998 restructuring and other charges (in thousands):
<TABLE>
<CAPTION>
Discontinuance and Write-off
consolidation of Severance property and
offices and other equipment Total
------------------ --------- ------------ -------
<S> <C> <C> <C> <C>
Total restructuring and
non-recurring costs.... $ 377 $ 2,182 $ 271 $ 2,830
Non cash costs.......... 23 (36) (208) (221)
Cash payments........... (102) (1,240) -- (1,342)
Category reclass........ (225) 270 (45) --
Additional charges...... 131 19 -- 150
----- ------- ----- -------
Accrued, September 30,
1998................... $ 204 $ 1,195 $ 18 $ 1,417
===== ======= ===== =======
</TABLE>
During September 1997, the Company implemented a restructuring plan which was
designed to focus the Company on the new corporate strategy which resulted in
charges totaling $11,051,000. The net book value of the building in Columbia,
Missouri was written down by $5,803,000, to $7,000,000, the Company's
estimated fair market value. Additional facility related charges of $350,000
represent commissions on the sale of the Columbia, Missouri building and
approximately $675,000 relates to ongoing lease obligations for vacant
facilities which have not been subleased. Severance charges of $3,252,000 were
recorded to accrue employee severance and amounts owed under consulting
agreements for individuals who were involuntarily terminated. An asset
impairment accrual of $748,000 relates to the write down of assets for non-
core business units that are being closed or divested, and other exit costs of
$223,000 primarily relate to fulfillment of customer obligations for a
discontinued product line that will not generate future revenue for the
company.
The following is an analysis of the significant components of the fiscal
1997 restructuring and other charges (in thousands):
<TABLE>
<CAPTION>
Discontinuance and
consolidation of Severance Asset Impairment
offices and other and other Total
------------------ --------- ---------------- -------
<S> <C> <C> <C> <C>
Total restructuring and
non-recurring costs.... $ 6,828 $ 3,252 $ 971 $11,051
Non cash costs.......... (5,803) -- (457) (6,260)
------- ------- ----- -------
Accrued, September 30,
1997................... 1,025 3,252 514 4,791
Non cash costs.......... -- -- (100) (100)
Cash payments........... (680) (2,540) (287) (3,507)
Reversal of
restructuring costs.... (94) -- (107) (201)
------- ------- ----- -------
Accrued, September 30,
1998................... $ 251 $ 712 $ 20 $ 983
======= ======= ===== =======
</TABLE>
62
<PAGE>
QUARTERDECK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following is an analysis of the significant components of the fiscal 1996
restructuring (in thousands):
<TABLE>
<CAPTION>
Reduction of Discontinuance and
non-core consolidation of Severance Write-off property
product lines offices and other and equipment Total
------------- ------------------ --------- ------------------ -------
<S> <C> <C> <C> <C> <C>
Restructuring and non-
recurring costs........ $ 2,754 $1,420 $ 6,513 $ 2,308 $12,995
Non-cash costs.......... (2,754) -- -- (1,240) (3,994)
Cash payments........... -- -- (550) (413) (963)
------- ------ ------- ------- -------
Accrued, September 30,
1996................... -- 1,420 5,963 655 8,038
Non-cash costs.......... -- -- (75) (370) (445)
Cash payments........... -- (883) (7,530) -- (8,413)
Additional charges...... 67 1,297 -- 1,364
Category reclass........ -- (150) 435 (285) --
------- ------ ------- ------- -------
Accrued, September 30,
1997................... -- 454 90 -- 544
Non-cash costs.......... -- (97) (78) -- (175)
Cash payments........... -- (161) (12) -- (173)
Reversal of
restructuring costs.... -- (196) -- -- (196)
------- ------ ------- ------- -------
Accrued, September 30,
1998................... $ -- $ -- $ -- $ -- $ --
======= ====== ======= ======= =======
</TABLE>
NOTE 12. INCOME TAXES
The components of the provision (benefit) for income taxes for the fiscal
years ended September 30, 1998, 1997 and 1996, respectively, are as follows (in
thousands):
<TABLE>
<CAPTION>
Federal State Total
------- ----- -----
<S> <C> <C> <C>
1998:
Current.............................................. $ 39 $ 0 $ 39
Deferred............................................. 0 0 0
---- --- ----
Total.............................................. $ 39 $ 0 $ 39
==== === ====
1997:
Current.............................................. $130 $ 0 $130
Deferred............................................. 0 0 0
---- --- ----
Total.............................................. $130 $ 0 $130
==== === ====
1996:
Current.............................................. $201 $ 0 $201
Deferred............................................. 605 0 605
---- --- ----
Total.............................................. $806 $ 0 $806
==== === ====
</TABLE>
63
<PAGE>
QUARTERDECK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The actual income tax expense (benefit) differs from the "expected" income
tax expense (benefit) computed by applying the effective Federal income tax
rate of 34% to income (loss) before income taxes as follows (in thousands):
<TABLE>
<CAPTION>
Year ended September 30,
--------------------------
1998 1997 1996
------- ------- --------
<S> <C> <C> <C>
Expected income tax benefit.................. $(7,732) $(5,563) $(25,212)
Change in valuation allowance................ 7,139 7,947 21,522
State income taxes, net of Federal income tax
benefit..................................... 9 (832) (2,393)
Net (income) loss on foreign subsidiary...... (257) (680) 3,005
Net income of Subchapter S subsidiary........ -- -- (3,300)
Tax exempt income benefit.................... -- -- (106)
Alternative minimum tax and other tax
credits..................................... 562 150 300
Acquisition costs............................ (6) (416) 9,916
Stock options................................ (18) (174) (3,009)
Other........................................ 342 (302) 83
------- ------- --------
$ 39 $ 130 $ 806
======= ======= ========
</TABLE>
Under SFAS 109, deferred tax assets and liabilities are recognized for the
expected future tax consequences of differences between the carrying amount of
assets and liabilities and their respective tax bases using enacted tax rates
in effect for the year in which the differences are expected to reverse.
Deferred tax assets (liabilities) consist of the following (in thousands):
<TABLE>
<CAPTION>
Year ended September 30,
----------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Accrued restructuring charges.............. $ 881 $ 4,131 $ 2,222
Software development costs recognized as
incurred for tax purposes................. -- -- (223)
State taxes................................ 2,656 2,664 2,393
Allowance for sales returns................ 1,383 1,390 1,819
Depreciation............................... 1,097 1,097 834
Allowance for doubtful accounts and other
reserves.................................. 1,999 1,995 3,111
Tax net operating losses................... 32,177 23,044 15,484
Other, net................................. (249) (1,516) (782)
Deferred tax assets, valuation allowance... (39,944) (32,805) (24,858)
-------- -------- --------
Total net deferred tax assets............ $ -- $ -- $ --
======== ======== ========
</TABLE>
At September 30, 1998, the Company had net deferred tax assets amounting to
$39,944,000, for which a full valuation allowance was provided. The deferred
tax assets consisted of the tax effect from the expected future reversal of
temporary differences, resulting primarily from restructuring charges in
fiscal 1998, which were not deductible for federal income tax purposes until
the amounts are actually paid and tax net operating loss carryforwards.
Recognition of the deferred tax assets is dependent on a number of factors,
including the timing of reversal of the temporary differences and an
assessment of the future realizability of the deferred tax assets. Management
has concluded that it is not more likely than not that the benefit from any
deferred tax assets will be realized.
At September 30, 1997, the Company had deferred tax assets amounting to
$32,805,000, for which a full valuation allowance was provided. The deferred
tax assets consisted of the tax effect from the expected future
64
<PAGE>
QUARTERDECK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
reversal of temporary differences, resulting primarily from restructuring
charges in fiscal 1997, which were not deductible for federal income tax
purposes until the amounts are actually paid and tax net operating loss
carryforwards. Recognition of the deferred tax assets is dependent on a number
of factors, including the timing of reversal of the temporary differences and
an assessment of the future realizability of the deferred tax assets.
The Company has Federal tax net operating loss carryforwards of $89,100,000
expiring from fiscal years ended 2008 through 2017.
NOTE 13. LITIGATION
On July 30, 1998, a class action complaint was filed in the Supreme Court of
the State of New York, County of New York, on behalf of a purported class of
purchasers of the Procomm Plus version 4.0 for Windows product (the
"Product"). The complaint purports to assert claims for breach of warranty and
violation of New York's Consumer Protection From Deceptive Acts And Practices
Act arising from the Product's inability to process dates containing the year
2000. The complaint seeks unspecified damages. Quarterdeck believes these
claims to be without merit and intends to defend itself vigorously.
In October 1997, a complaint was filed in the United States District Court
for the District of Utah on behalf of PowerQuest Corporation against the
Company. The complaint alleges that the Company's partitioning software
(included in Partition-It and Partition-It Extra Strength) violates a patent
held by PowerQuest. In January 1998, PowerQuest obtained a second patent
relating to partitioning and has amended its complaint to allege infringement
of that patent as well. The plaintiff seeks an injunction against distribution
of Partition-It and Partition-It Extra Strength and monetary damages. Although
the Company believes the plaintiff's patents are invalid, there can be no
assurance as to the actual outcome of this matter. The ultimate disposition of
this matter could have a material adverse effect on the Company.
The Company is a defendant in various other pending claims and lawsuits.
Although there can be no assurances, management believes that the disposition
of such matters will not have a material adverse impact on the results of
operations or financial position of the Company. From time to time, the
Company has received communications from third parties asserting that certain
Company trademarks, packaging or advertising materials may infringe upon the
intellectual property rights of others. There can be no assurance that
existing or future infringement claims against the Company with respect to
current or future trademarks, packaging or advertising materials will not
result in costly litigation or require the Company to discontinue use of such
trademarks, packaging or advertising materials.
65
<PAGE>
QUARTERDECK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 14. COMMITMENTS
The Company leases facilities under non-cancelable operating leases that
expire through fiscal 2003. Rental expense for the years ended September 30,
1998, 1997 and 1996 amounted to approximately $2,661,000, $2,506,000 and
$4,367,000, respectively.
Minimum annual rental payments under these leases and sublease income are as
follows (in thousands):
<TABLE>
<CAPTION>
Year ending Rental Sublease
September 30 Payments Income
------------ -------- --------
<S> <C> <C>
1999....................................................... $2,147 $ 684
2000....................................................... 1,444 407
2001....................................................... 113 --
2002....................................................... 36 --
2003....................................................... 36 --
Thereafter................................................. -- --
------ ------
Total.................................................... $3,776 $1,091
====== ======
</TABLE>
NOTE 15. MAJOR CUSTOMERS AND SEGMENT INFORMATION
The Company sells its products primarily through distributors and dealers.
Sales to the two largest distributors by the Company individually account for
23% and 17%; 19% and 15%; 20% and 11%; of the Company's consolidated net
revenues for the years ended September 30, 1998, 1997 and 1996, respectively.
The Company is engaged in a single business segment--the development and
marketing of personal computer software. Geographic information is as follows
(in thousands):
<TABLE>
<CAPTION>
Year ended September 30,
------------------------
Net Revenues 1998 1997 1996
------------ ------- ------- --------
<S> <C> <C> <C>
United States...................................... $37,892 $65,415 $109,200
Europe............................................. 8,233 11,528 18,700
Other foreign locations............................ 4,736 6,844 5,200
------- ------- --------
$50,861 $83,787 $133,100
======= ======= ========
</TABLE>
Net revenues from the Company's United States operations includes export
shipments of $4,487,000, $4,899,000 and $1,486,000 respectively during fiscal
1998, 1997 and 1996.
<TABLE>
<S> <C> <C> <C>
Operating income (loss):
United States................................ $(23,857) $(16,180) $(65,444)
Europe....................................... $ 419 $ 2,127 (8,642)
-------- -------- --------
$(23,438) $(14,053) $(74,086)
======== ======== ========
Identifiable assets:
United States................................ $ 17,843 $ 52,404 $ 73,184
Europe....................................... 1,682 3,477 3,597
-------- -------- --------
$ 19,525 $ 55,881 $ 76,781
======== ======== ========
</TABLE>
66
<PAGE>
QUARTERDECK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 16. LIQUIDITY
Cash and cash equivalents decreased $15,240,000 to $8,411,000 at September
30, 1998 from $23,651,000 at September 30, 1997. Working capital at September
30, 1998 was $1,955,000 as compared to $6,917,000 at September 30, 1997.
Due to the Company's declining revenues, recurring net operating losses,
continued restructurings, negative cash flow, reductions in working capital, a
stockholders' deficit and the uncertainty associated with the impact on future
operations and current products as a result of the acquisition of the Company
by Symantec Corporation, there is no assurance that Quarterdeck will be able
to continue as a going concern for fiscal 1999. Management's plans primarily
relate to the Company becoming a wholly-owned subsidiary of Symantec upon
consummation of the Merger, as described in Note 18 of the Consolidated
Financial Statements.
NOTE 17. VALUATION RESERVE REVERSAL
The market development fund (MDF) is designed to reimburse authorized
Quarterdeck distributors for Quarterdeck related marketing activities.
Quarterdeck's policy is to generally grant marketing funds to customers and
reserve for this expense. During the fourth quarter of fiscal 1998, the
Company reversed $1,520,000 of the allowance for marketing development funds
as an offset to Sales and Marketing expense which was determined to no longer
be necessary.
NOTE 18. SUBSEQUENT EVENT
On October 15, 1998, Quarterdeck, Symantec and Oak Acquisition Corporation,
a wholly owned subsidiary of Symantec, entered into the Merger Agreement
whereby Symantec agreed to commence a cash tender offer for all outstanding
shares of the Company at a price of $0.52 per share. The Merger Agreement
further provided for a Merger of Oak Acquisition Corporation with and into the
Company in which all remaining outstanding shares of the Company will be
converted into the right to receive $0.52 per share ("Merger").
On November 17, 1998 Symantec completed its tender offer obtaining
approximately 65% of Quarterdeck's outstanding shares of common stock and
common stock equivalents. Upon consummation of the Merger, which is expected
to occur in February 1999, the Company will become a wholly-owned subsidiary
of Symantec.
In connection with the Merger Agreement, Quarterdeck and Symantec
concurrently entered into a License Agreement under which Quarterdeck granted
Symantec the non-exclusive right to, among other things, distribute
Quarterdeck's CleanSweep product. Symantec's right to distribute CleanSweep
commenced upon consummation of the tender offer.
On December 8, 1998, the Company reevaluated the reserve for sales returns
using all the up to date information available, including the level of sell
through activity subsequent to the announcement of the Symantec transaction
discussed above. The Company is not able to separate the impact of the decline
in sell through in the channel and the effects of the Symantec transaction.
The sell through of the Company's products continued to decline subsequent to
year end and the Company used this information in its decision to increase its
estimate of reserve for returns by $1,225,000 as of September 30, 1998.
67
<PAGE>
QUARTERDECK CORPORATION AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
Year ended September 30, 1998, 1997 and 1996
(in thousands)
<TABLE>
<CAPTION>
Balance at Additions Balance at
Beginning Charged to End
September 30, Item of the Year Expenses Deductions of the Year
------------- ---- ----------- ---------- ---------- -----------
<C> <S> <C> <C> <C> <C>
Allowance for doubtful
1998 accounts................ $1,761 $ 12 $ (849)(1) $ 924
Allowance for doubtful
1997 accounts................ 2,032 379 (650)(1) 1,761
Allowance for doubtful
1996 accounts................ 870 1,903 (741)(1) 2,032
Inventory obsolescence
1998 reserve................. 943 529 (383) 1,089
Inventory obsolescence
1997 reserve................. 3,978 2,075 (5,110) 943
Inventory obsolescence
1996 reserve................. 676 3,914 (612) 3,978
Sales returns and price
1998 protection reserve...... 4,243 16,374 (15,511)(2) 5,106
Sales returns and price
1997 protection reserve...... 7,213 16,705 (19,675)(2) 4,243
Sales returns and price
1996 protection reserve...... 3,280 31,889 (27,956)(2) 7,213
Marketing development
1998 fund reserve............ 3,242 4,562 (5,334) 2,470
Marketing development
1997 fund reserve............ 3,774 4,562 (5,094) 3,242
Marketing development
1996 fund reserve............ 1,051 11,673 (8,950) 3,774
1998 Allowance for rebates .. -- 4,626 (3,904) 722
</TABLE>
- --------
(1) Uncollectible accounts written off, net of recoveries.
(2)Products returned.
68
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this amended
report to be signed on its behalf by the undersigned, thereunto duly
authorized, on February 22, 1999.
QUARTERDECK CORPORATION
/s/ Arthur F. Courville
By: _________________________________
Arthur F. Courville
Vice President
69
<PAGE>
EXHIBIT 23.1
ACCOUNTANT'S CONSENT
The Board of Directors
Quarterdeck Corporation
We consent to the incorporation by reference in the registration statements
(No. 333-60891, No. 333-52727 and No. 333-38693) on Form S-3 and the
registration statements (No. 333-53033 and No. 333-53073) on Form S-8 of
Quarterdeck Corporation of our report dated November 13, 1998, except for the
second and fourth paragraphs of note 18 which are as of November 17, 1998 and
December 8, 1998, respectively, with respect to the consolidated balance
sheets of Quarterdeck Corporation and subsidiaries as of September 30, 1998
and 1997 and the related consolidated statements of operations, stockholder's
equity (deficit) and cash flows for each of the years in the three-year period
ended September 30, 1998, and the related schedule, which report appears in
the September 30, 1998 annual report on Form 10-K/A of Quarterdeck
Corporation.
Our report dated November 13, 1998, except for the second and fourth
paragraphs of note 18 which are as of November 17, 1998 and December 8, 1998,
respectively, contained an explanatory paragraph which stated that the Company
has suffered recurring losses from operations, a reduction in working capital
and has a net stockholders' deficit. These factors coupled with the
uncertainty of the impact of the change in control of the Company and its
impact on future operations and current products raise substantial doubt about
the Company's ability to continue as a going concern. The consolidated
financial statements and financial statement schedule do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ KPMG LLP
Los Angeles, California
February 22, 1999
