<PAGE>
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
_______________________
For the Quarterly Period Ended December 31, 1998
Commission File Number 0-19207
QUARTERDECK CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 95-4320650
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
13160 Mindanao Way, Marina del Rey, California 90292
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (310) 309-3700
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter periods that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
--- ---
The number of shares of the Registrant's common stock, $.001 par value,
outstanding as of January 29, 1999 was 89,760,799.
- --------------------------------------------------------------------------------
<PAGE>
QUARTERDECK CORPORATION AND SUBSIDIARIES
FORM 10-Q
December 31, 1998
INDEX
<TABLE>
<CAPTION>
Page No.
--------
Part I. Financial Information
Item 1. Financial Statements
<S> <C>
Consolidated Balance Sheets as of December 31, 1998
(unaudited) and September 30, 1998 3
Consolidated Statements of Operations for the three
months ended December 31, 1998 and 1997 (unaudited) 4
Consolidated Statements of Cash Flows for the three
months ended December 31, 1998 and 1997 (unaudited) 5
Notes to Consolidated Unaudited Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Part II. Other Information
Item 1. Legal Proceedings 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
QUARTERDECK CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Amounts in thousands, except for share and per share amounts)
ASSETS
<TABLE>
<CAPTION>
December 31, September 30,
1998 1998
------------ -------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,539 $ 8,411
Trade accounts receivable 3,379 2,990
Inventories 199 968
Other current assets 1,341 2,022
------- -------
Total current assets 7,458 14,391
Equipment and leasehold improvements, net 2,818 3,640
Capitalized software costs, net 450 641
Other assets 135 853
------- -------
Total assets $10,861 $19,525
======= =======
<CAPTION>
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
<S> <C> <C>
Accounts payable $ 13 $ 2,040
Accrued liabilities 8,036 7,623
Accrued acquisition 142 34
Accrued restructuring 6,735 2,400
Income tax payable 491 309
Current portion of long-term obligations 22 30
--------- ---------
Total current liabilities 15,439 12,436
Convertible notes 25,000 25,000
Long-term obligations, less current portion 22 22
--------- ---------
Total liabilities 40,461 37,458
--------- ---------
Stockholders' deficit:
Series C Preferred stock (par value $1,000, authorized: 29,000;
issued and outstanding: 0 and 4,615 shares, respectively,
liquidation preference $0 and $4,615, respectively) -- 4,371
Common stock (100,000,000 shares; issued
and outstanding: 89,761,000 and 66,653,000 shares, respectively) 90 67
Additional paid-in capital 105,941 100,176
Accumulated deficit (134,732) (121,329)
Foreign currency translation adjustment (340) (389)
Note receivable from directors for sale of stock -- (18)
Net unrealized loss on marketable securities -- (252)
Treasury stock (559) (559)
--------- ---------
Total stockholders' deficit (29,600) (17,933)
--------- ---------
Total liabilities and stockholders' deficit $ 10,861 $ 19,525
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated unaudited
condensed financial statements.
3
<PAGE>
QUARTERDECK CORPORATION AND SUBSIDIARIES
CONSOLIDATED UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
-------------------------------
1998 1997
---- ----
<S> <C> <C>
Net revenues $ 5,769 $20,626
Cost of revenues 2,859 4,709
-------- -------
Gross profit 2,910 15,917
Operating expenses:
Research and development 1,167 4,681
Sales and marketing 3,214 8,378
General and administrative 2,029 2,807
Acquisition costs 1,272 --
Restructuring charges 7,674 (51)
-------- -------
Total operating expenses 15,356 15,815
-------- -------
Operating income (loss) (12,446) 102
Interest expense, net (735) (267)
Other income (expense) (222) 497
-------- -------
Income (loss) before income taxes (13,403) 332
Provision for income taxes 0 16
-------- -------
Net income (loss) $(13,403) $ 316
======== =======
Net income (loss) per share:
Basic $(0.16) $0.01
-------- -------
Diluted $(0.16) $0.00
-------- -------
Shares used to compute net income (loss) per share:
Basic 84,002 43,363
-------- -------
Diluted 84,002 67,628
-------- -------
</TABLE>
The accompanying notes are an integral part of these consolidated unaudited
condensed financial statements.
4
<PAGE>
QUARTERDECK CORPORATION AND SUBSIDIARIES
CONSOLIDATED UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
-----------------------
1998 1997
---------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (13,403) $ 316
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization of equipment and leasehold improvements 594 1,010
Amortization of capitalized software costs 156 230
Write-off of capitalized software costs and other intangibles 345 --
Write-off of property and equipment 58 --
Loss on sales of fixed assets 101 --
Gain on sale of building -- (497)
Loss on sale of Infonautics 63 --
Changes in assets and liabilities:
Trade accounts receivable (389) (2,957)
Inventories 769 (75)
Other current assets 69 1,879
Other assets 408 183
Accounts payable (2,027) (809)
Accrued liabilities 413 (511)
Accrued acquisition and restructuring 4,443 (1,328)
Income tax payable 182 (55)
Foreign currency translation adjustment 49 18
---------- -------
Net cash used in operating activities (8,169) (2,596)
---------- -------
Cash flows from investing activities:
Capital expenditures (42) (692)
Proceeds from sale of building -- 7,700
Proceeds from sale of investment in Infonautics 801 --
Proceeds from sale of fixed assets 111 --
---------- -------
Net cash provided by investing activities 870 7,008
---------- -------
Cash flows from financing activities:
Net proceeds from issuance of Series C Preferred stock -- 2,782
Principal debt repayments -- (3,954)
Notes payable to banks -- --
Net payments under long-term obligations (8) (25)
Net proceeds from issuance of common stock 56 37
Net proceeds from the exercise of warrants 1,379 --
---------- -------
Net cash provided by (used in) financing activities 1,427 (1,160)
---------- -------
Net increase (decrease) in cash and cash equivalents (5,872) 3,252
Cash and cash equivalents at beginning of period 8,411 23,651
---------- -------
Cash and cash equivalents at end of period $ 2,539 $26,903
========== =======
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 789 $ 263
Income taxes $ -- $ --
---------- -------
Non cash issuance of common stock in exchange
for Series C Preferred stock 5,750 --
</TABLE>
The accompanying notes are an integral part of these consolidated unaudited
condensed financial statements.
5
<PAGE>
QUARTERDECK CORPORATION AND SUBSIDIARIES
Notes to Consolidated Unaudited Condensed Financial Statements
1. Basis of Presentation
The accompanying consolidated financial statements of Quarterdeck
Corporation are unaudited (except for the Balance Sheet as of September 30,
1998) and have been prepared by the Company pursuant to the rules and
regulations of the Securities and Exchange Commission regarding interim
financial reporting. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements and should be read in conjunction with the consolidated
financial statements and notes thereto included in Quarterdeck's Annual Report
on Form 10-K for the fiscal year ended September 30, 1998. In the opinion of
management, the accompanying consolidated unaudited financial statements include
all adjustments which are necessary for a fair presentation. The results of
operations for the three-month period ended December 31, 1998 are not
necessarily indicative of results to be expected for the full fiscal year.
2. General
Quarterdeck Corporation develops and markets PC helpware -- software
designed to prevent and solve PC performance problems, especially those
encountered in networked -- Internet and Intranet -- environments. The
Company's goal is to make personal computing trouble-free for users and network
administrators alike, while reducing the need for live technical support.
Quarterdeck's current product line, which addresses storage management, system
conflict resolution, virus protection, system updating, and enhanced access to
networked information and communications resources, is marketed to both end-
users and businesses via retail distribution, corporate resellers and OEM,
direct marketing channels, and the Internet.
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.
On October 15, 1998, Quarterdeck, Symantec Corporation and Oak Acquisition
Corporation, a wholly-owned subsidiary of Symantec, entered into a merger
agreement whereby Symantec agreed to commence a cash tender offer for all
outstanding shares of the Company's common stock including the associated
Preferred stock purchase rights at a price of $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.
The Company incurred and expensed approximately $1.3 million in broker and legal
fees relating to this transaction. The merger agreement further provided for a
merger of Oak Acquisition Corporation with and into the Company (the "merger")
in which all remaining outstanding shares of the Company will be converted into
the right to receive $0.52 per share. 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. The CleanSweep license
agreement generated $33,000 in royalty revenue for the quarter ended December
31, 1998.
The principal offices of the Company are currently located at 13160
Mindanao Way, Third Floor, Marina del Rey, California 90292, telephone number
(310) 309-3700.
6
<PAGE>
3. Balance Sheet Information
<TABLE>
<CAPTION>
December 31, September 30,
1998 1998
------------- -------------
(in thousands)
<S> <C> <C>
Trade accounts receivable:
Receivables.................................................................. $12,571 $12,212
Less: allowance for doubtful accounts....................................... (1,238) (924)
Less: allowance for sales returns........................................... (5,078) (5,106)
Less: allowance for market development funds................................ (2,309) (2,470)
Less: allowance for rebates................................................. (567) (722)
------- -------
$ 3,379 $ 2,990
======= =======
Other current assets:
Prepaid royalties............................................................ $ 295 $ 203
Income tax receivable........................................................ 79 79
Other prepaid expenses....................................................... 819 886
Notes receivable............................................................. -- 33
Advances to employees........................................................ -- 2
Marketable security - Infonautics............................................ -- 612
Other........................................................................ 148 207
------- -------
$ 1,341 $ 2,022
======= =======
Equipment and leasehold improvements:
Computer equipment........................................................... $ 6,066 $ 6,060
Office furniture and equipment............................................... 4,157 5,409
Office furniture and equipment under capital
leases...................................................................... -- 30
Leasehold improvements....................................................... 1,954 1,944
------- -------
12,177 13,443
Less: accumulated depreciation and amortization............................. (9,359) (9,803)
$ 2,818 $ 3,640
======= ========
Capitalized software costs:
Capitalized software costs................................................... $ 5,498 $ 5,498
Less: accumulated amortization.............................................. (5,048) (4,857)
------- -------
$ 450 $ 641
======= ========
Other assets:
Intangible assets acquired, net.............................................. $ -- $ 322
Other........................................................................ 135 531
------- -------
$ 135 $ 853
======= =======
Accrued liabilities:
Accrued expenses............................................................. $ 6,736 $ 5,329
Accrued legal................................................................ 360 666
Accrued royalties............................................................ 290 980
Accrued technical support.................................................... 650 648
------- -------
$ 8,036 $ 7,623
======= ========
</TABLE>
7
<PAGE>
4. Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. Cash and cash
equivalents at December 31, 1998 amounted to $2,539,000.
5. Computation of Net Income per Share
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share." SFAS No. 128 specifies new standards designed to
improve the earnings per share ("EPS") information provided in financial
statements by simplifying the existing computational guidelines, revising the
disclosure requirements and increasing the comparability of EPS data on an
international basis. Some of the changes made to simplify the EPS computations
include: (a) eliminating the presentation of primary EPS and replacing it with
basic EPS, for which common stock equivalents are not considered, (b)
eliminating the modified treasury stock method and the three percent materiality
provision and (c) revising the contingent share provision and the supplemental
EPS data requirements. SFAS No. 128 also makes a number of changes to existing
disclosure statements. The Company adopted SFAS No. 128 as of the quarter ended
December 31, 1997. All prior periods were restated.
The following table sets forth the computation of basic and diluted net
income per share:
<TABLE>
<CAPTION>
Three Months Ended
December 31,
-------------------
1998 1997
-------- -------
<S> <C> <C>
Numerator:
Net income; net income available to common stockholders
and net income available to common stockholders after
required conversion: $(13,403) $ 316
======== =======
Denominator:
Shares used for basic net income
per share calculation weighted average shares outstanding 84,002 43,363
Effect of dilutive securities:
Series C convertible Preferred stock and warrants -- 24,234
Stock options -- 31
-------- -------
Shares used for diluted net income per share calculation 84,002 67,628
======== =======
</TABLE>
No adjustment was required in calculating net income available to common
stockholders after assumed conversion, as there are no dividend requirements on
the Company's Series C Preferred stock.
Options to purchase 6,893,000 shares at a weighted average exercise price
of $2.35 were outstanding during the three months ended December 31 1998, but
were not included because their effect would be anti-dilutive. Options to
purchase 6,873,000 shares at a weighted average exercise price of $3.52 were
outstanding during the three months ended December 31, 1997, but were not
included because their effect would also be anti-dilutive.
Warrants to purchase 904,000 shares at a weighted average exercise price of
$7.44 were outstanding during the three months ended December 31, 1998, and
1997, but were not included in the computation of diluted net income per share
because the effect would be anti-dilutive.
Warrants to purchase 25,000 shares at a weighted average exercise price of
$7.20 were outstanding during the three months ended December 31, 1998, and
1997, but were not included in the computation of diluted net income per share
because the effect would be anti-dilutive.
Approximately 1,180,000 shares issuable upon the conversion of convertible
notes were not included in either period as the effect would be anti-dilutive.
The Company had $25,000,000 of convertible notes outstanding at December 31,
1998, and 1997.
8
<PAGE>
6. Restructuring Charges
During November 1998, the Company implemented a restructuring plan designed
to integrate Quarterdeck's operations into those of Symantec's. Restructuring
charges totaling $7,674,000 included $3,647,000 to close down operations and
consolidate offices, $3,420,000 for severance payments to terminated employees
and $607,000 of other restructuring costs relating to the write-off of impaired
assets.
The following is an analysis of the significant components of the fiscal
1999 restructuring and other charges (in thousands):
<TABLE>
<CAPTION>
Discontinuance and Other
consolidation of Restructuring
offices Severance Costs Total
------------------ ---------- -------------- ---------
<S> <C> <C> <C> <C>
Accrued, November 30, 1998..................... $3,647 $ 3,420 $ 607 $ 7,674
Non-cash costs................................. -- -- (482) (482)
Cash payments.................................. -- (1,152) -- (1,152)
------ ------- ----- -------
Accrued, December 31, 1998..................... $3,647 $ 2,268 $ 125 $ 6,040
====== ======= ===== =======
</TABLE>
During June 1998, the Company implemented a restructuring plan which was
designed to reduce the ongoing level of operating expenses to one which could be
supported by a reduced revenue base, to reduce the Company's cash requirements
over the following two quarters to be either cash neutral or cash positive, to
exit non-core business ventures and operations which did not produce an
acceptable level of profitability for the Company, and to convert from an
expense structure which is mainly "fixed" to one that is more variable in
nature. As a result, the Company recorded charges totaling $2,830,000 in June
1998 of which $2,182,000 were recorded to accrue amounts owed under employee
severance agreements and other consulting arrangements, $377,000 for ongoing
lease payments for vacant facilities and early lease cancellation fees, and
$271,000 for write downs of fixed assets of business units being closed or
divested. An additional $150,000 of restructuring charges were recorded in
September 1998.
The following is an analysis of the significant components of the fiscal
1998 restructuring and other charges (in thousands):
<TABLE>
<CAPTION>
Discontinuance and Severance Write-off
consolidation of and property and
offices other equipment Total
------------------- ---------- ------------- --------
<S> <C> <C> <C> <C>
Accrued, September 30, 1998.................... $ 204 $1,195 $ 18 $ 1,417
Non-cash costs................................. (13) -- -- (13)
Category reclass............................... 60 (60) -- --
Cash payments.................................. (174) (855) -- (1,029)
----- ------ ---- -------
Accrued, December 31, 1998..................... $ 77 $ 280 $ 18 $ 375
===== ====== ==== =======
</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. As part of the restructuring, 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. This building and
certain furniture and fixtures were sold during the quarter ended December 31,
1997 resulting in a net gain of $497,000. See subsequent event footnote 8 for
further discussion of business units closed or divested.
The following is an analysis of the significant components of the fiscal
1997 restructuring and other charges (in thousands):
<TABLE>
<CAPTION>
Discontinuance and Severance Write-off
consolidation of and property and
offices other equipment Total
------------------- ---------- ------------ -------
<S> <C> <C> <C> <C>
Accrued, September 30, 1998.................... $251 $ 712 $20 $ 983
Non-cash costs................................. -- -- -- --
Cash payments.................................. (67) (596) -- (663)
---- ----- --- -----
Accrued, December 31, 1998..................... $184 $ 116 $20 $ 320
==== ===== === =====
</TABLE>
Quarterdeck currently expects this restructuring accrual to be utilized,
primarily through cash disbursements, through the quarter ending March 31, 1999.
The Company anticipates the cash effect of such disbursements to be of declining
significance until this time.
7. 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
9
<PAGE>
product (the "Product"). The complaint purports to assert claims for breach of
warranty and violation of New York's Consumer Protection From Deceptive Acts and
Practices Act arising from the Product's inability to process dates containing
the year 2000. The complaint seeks unspecified damages. Quarterdeck believes
these claims to be without merit and intends to defend itself vigorously.
In October 1997, a complaint was filed in the United States District Court
for the District of Utah on behalf of PowerQuest Corporation against the
Company. The complaint alleges that the Company's partitioning software
(included in Partition-It and Partition-It Extra Strength) violate a patent held
by PowerQuest. In January 1998, PowerQuest obtained a second patent relating to
partitioning and has amended its complaint to allege infringement of that patent
as well. The plaintiff seeks an injunction against distribution of Partition-It
and Partition-It Extra Strength and monetary damages. The Company believes this
action has no merit and intends to defend the lawsuit vigorously, however, 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.
8. Comprehensive Income (Loss)
Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income, was adopted as of October 1, 1998. This Statement
requires reporting of changes in shareholders' equity that do not result
directly from transactions with shareholders. An analysis of these changes
follows:
<TABLE>
<CAPTION>
Three Months Ended
December 31
--------------------
Quarter Ended 1998 1997
--------- --------
<S> <C> <C>
Net income (loss) $(13,403) $ 316
Foreign currency translation adjustments 49 18
Realization of unrealized loss on marketable securities 252 --
Change in unrealized loss on marketable securities -- (216)
-------- -----
Comprehensive net income (loss) $(13,102) $ 118
======== =====
</TABLE>
10
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This discussion and analysis of financial condition and results of operations
should be read in conjunction with the consolidated financial statements, the
notes thereto and other information, including information set forth in the
Company's Form 10-K for the fiscal year ended September 30, 1998, and all other
recent filings Quarterdeck has made with the Securities and Exchange Commission,
before making an investment decision with respect to the Company's stock.
In addition to an analysis of recent and historical financial results, this
Form 10-Q includes a discussion of certain of Quarterdeck's business risks,
including risks which are inherent to software development. Quarterdeck has
sought to identify and disclose the significant risks to its business. However,
the Company cannot predict where or to what extent any of such risks may be
realized nor can there be any assurance that Quarterdeck has identified all
possible issues, which the Company faces now or may face in the future.
This Form 10-Q contains forward-looking statements which are made pursuant to
the safe-harbor provisions of the Private Securities Litigation Reform Act of
1995. Within this Form 10-Q, words such as "believes", "anticipates", "plans",
"expects", "intends", and similar expressions are intended to identify forward-
looking statements, but are not the exclusive means of identifying such
statements. These forward-looking statements involve a number of risks and
uncertainties, including the timely development and market acceptance of
products and technologies, sell-through of products in the sales channel,
successful completion of the integration into Symantec, the ability to reduce
operating expenses and other factors described throughout this Form 10-Q and in
the Company's other filings with the Securities and Exchange Commission. The
actual results that the Company achieves may differ materially from any forward-
looking statements due to such risks and uncertainties. The Company undertakes
no obligations to revise or update any forward-looking statements in order to
reflect events or circumstances that may arise after the date of this report.
Pending Merger
On October 15, 1998, Quarterdeck, Symantec Corporation and Oak Acquisition
Corporation, a wholly-owned subsidiary of Symantec, entered into a merger
agreement whereby Symantec agreed to commence a cash tender offer for all
outstanding shares of the Company's common stock including the associated
Preferred stock purchase rights at a price of $0.52 per share. The merger
agreement further provided for the merger of Oak Acquisition Corporation with
and into the Company in which all remaining outstanding shares of the Company's
common stock 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. The CleanSweep license agreement generated $33,000 in
royalties for the quarter ended December 31, 1998.
After the closing of the tender offer, Quarterdeck's operations were
substantially integrated into those of Symantec and the number of Quarterdeck
employees was reduced from approximately 176 persons as of October 1, 1998 to
approximately 73 as of December 31, 1998, and approximately 10 as of January 31,
1999. Such activities had a material effect on the Company's operations and
financial results for the quarter ended December 31, 1998. As a consequence, any
comparisons to prior periods are not meaningful and additional explanations of
variations in results of operations between the corresponding prior year periods
generally have not been included in this Form 10-Q.
Results of Operations
Net Revenues: The Company's net revenues consist of gross sales of its
products, less provisions for returns and customer allowances. In the retail and
corporate reseller channels, the Company's main sales vehicles, gross sales are
recorded as products are shipped on order to first-tier distributors, with
provisions for returns. These provisions reflect the industry's practice of
often accepting returns from distributors, resellers, and retailers of products
not sold through to final customers. If projected sell-through does not occur,
actual returns may exceed earlier provisions, and net revenues for a period may
suffer significant declines even when distributor orders for new or replacement
products are meeting expectations.
11
<PAGE>
Net revenues for the three months ended December 31, 1998 of $5,769,000
decreased 72.0% or $14,857,000 from net revenues of $20,626,000 for the three
months ended December 31, 1997. Net revenues for the quarter ended December 31,
1998 primarily consisted of ProComm and CleanSweep sales. In addition to the
negative sales impact related to the integration of Quarterdeck's operations
into those of Symantec, the Company experienced a continued decline in sales of
ProComm. CleanSweep sales were also negatively impacted by the industry shift
to "suite products" which bundle a number of utility products into one package.
The majority of Quarterdeck's revenues are derived from US sales. The
relative contribution from international revenues was approximately 13.1% and
24.1% of the Company's net revenues for the three month periods ended December
31, 1998 and 1997, respectively.
Cost of Revenues: Cost of revenues include materials, production,
packaging, documentation and media, amortization of capitalized software costs,
technical support and certain license fees paid to third parties. For the three
months ended December 31, 1998, cost of revenues of $2,859,000 decreased 39.3%
or $1,850,000 from cost of revenues of $4,709,000 for the three months ended
December 31, 1997, while increasing as a percent of net revenues to 49.6% from
22.8% for the three months ended December 31, 1998 and 1997, respectively. The
increase as a percent of revenues was primarily related to production costs of
$1,554,000 and technical support costs of $526,000, which in the aggregate
represent 72.8% of total cost of revenue and do not vary in proportion to sales.
In addition, royalty fees of $624,000 also increased as a percent of revenues
due to the fact that products that carry a high royalty rate such as ProComm
represented the majority of net revenues.
Software development and purchased software costs are capitalized once
technological feasibility is achieved and are generally amortized over one to
three year periods, commencing upon initial product release. For the three
months ended December 31, 1998 and 1997, Quarterdeck did not capitalize any
internal software development costs. For the three months ended December 31,
1998, amortization of previously capitalized software costs of $156,000
decreased 32.2% or $74,000 from amortization of capitalized software costs of
$230,000 for the three months ended December 31, 1997 due to some previously
capitalized costs having been fully amortized or written off.
Operating Expenses
Operating expenses for the three months ended December 31, 1998 of
$15,356,000 decreased 2.9% or $459,000 from total operating expenses of
$15,815,000 for the three months ended December 31, 1997, but increased as a
percent of net revenues to 266.2% from 76.7% for the three months ended December
31, 1998, and 1997 respectively. The dollar decline in total operating expenses
primarily resulted from the integration of the Company's operations into
Symantec's. During this time, the number of Quarterdeck employees was reduced
from 176 as of September 30, 1998 to 73 as of December 31, 1998 and
approximately 10 as of January 31, 1999. The increase as a percentage of net
revenues was due to the decline in net revenues. See net revenues discussion for
more details.
Research and Development: Research and development expenses consist
primarily of salaries, benefits and consulting fees to support product
development, including product testing and documentation. For the three months
ended December 31, 1998, research and development expenses of $1,167,000
decreased 75.1% or $3,514,000 from research and development expenses of
$4,681,000 for the three months ended December 31, 1997, while decreasing as a
percent of net revenues to 20.2% from 22.7% for the three months ended December
31, 1998 and 1997, respectively. Research and development spending for the
quarter ended December 31, 1998 was significantly reduced for all products
other than CleanSweep and ProComm.
Sales and Marketing: Sales and marketing expenses consist of salaries and
commissions and related costs of sales and marketing and customer service
personnel as well as advertising, trade show and promotional expenses. For the
three months ended December 31, 1998, sales and marketing expenses of $3,214,000
decreased 61.6% or $5,164,000 from sales and marketing expenses of $8,378,000
for the three months ended December 31, 1997 while increasing as a percent of
net revenues to 55.7% from 40.6% for the three months ended December 31, 1998
and 1997, respectively. The increase as a percent of revenues was primarily due
to sales and marketing spending related to products that were de-emphasized
subsequent to the acquisition by Symantec.
General and Administrative: General and administrative expenses consist of
salaries and related costs of support departments, overhead and facilities. For
the three months ended December 31, 1998, general and administrative expenses of
$2,029,000 decreased 27.7% or $778,000 from general and administrative expenses
of $2,807,000 for the three months ended December 31, 1997, while increasing as
a percent of net revenue to 35.2% from 13.6% for the three months ended December
31, 1998 and 1997, respectively. The increase as a percent of
12
<PAGE>
revenues is primarily due to the fact that general and administrative expenses
do not vary in proportion with revenues. In addition, a charge of $342,000 to
the bad debt reserve also contributed to the increase.
Acquisition Costs: During November 1998, the Company incurred merger costs
totaling $1,272,000 relating to the transaction with Symantec Corporation. These
costs consist primarily of investment banking and legal fees.
Restructuring: During November 1998, the Company implemented a
restructuring plan to merge Quarterdeck's operations into Symantec's operations.
The restructuring charges totaling $7,674,000 included $3,647,000 to close down
operations and consolidate offices, $3,420,000 for severance payments to
terminated employees, and $607,000 of other restructuring costs relating to the
write-off of impaired assets.
Other income/expense: For the three months ended December 31, 1998, net
other expense of $222,000 related to losses resulting from the sales and write
off of fixed assets of $159,000 and a loss of $63,000 on the sale of Infonautics
securities. For the three months ended December 31, 1997, net other income of
$497,000 primarily represents the gain realized upon the sale of the Columbia,
Missouri building on December 30, 1997.
Net Interest expense: For the three months ended December 31, 1998, net
interest expense of $735,000 increased 175.8% or $468,000 from net interest
expense of $267,000 for the three months ended December 31, 1997, while
increasing as a percent of net revenues to 12.7% from 1.3% for the three months
ended December 31, 1998 and 1997, respectively. Included in interest expense is
$370,000 of convertible note issuance cost written off pursuant to the
acquisition. For the three months ended December 31, 1998, interest income of
$84,000 decreased 72.2% or $218,000 from interest income of $302,000 for the
three months ended December 31, 1997, while remaining constant as a percent of
net revenues of 1.5% for the three months ended December 31, 1998 and 1997
respectively.
Income Taxes: A valuation allowance was recorded for income tax expense as
it relates to foreign operations to offset 100% of the Company's $43,173,000 net
deferred tax asset as of December 31, 1998. The net deferred tax asset of
$43,173,000 (before applying the valuation allowance) is comprised of the
estimated tax effect of expected future reversing temporary differences and tax
net operating losses, relating in part to charges taken for book purposes that
are not deductible for federal income tax purposes until the amounts are paid in
the future. Management believes that due to recent financial results it is
appropriate to record a full valuation allowance until such time as it becomes
more likely than not that the Company will realize some or all of the benefit of
the net deferred tax asset.
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 has adopted 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
adopted 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 has adopted SOP 97-2 for transactions
entered into on and after October 1, 1998. The adoption of SOP 97-2 did not
have a material impact on the operating results of the Company for the quarter
ending December 31, 1998.
13
<PAGE>
Liquidity and Capital Resources
Cash and cash equivalents decreased $5,872,000 to $2,539,000 at December
31, 1998, from $8,411,000 at September 30, 1998. The Company had a working
capital deficit of $7,981,000 at December 31, 1998, as compared to working
capital of $1,955,000 at September 30, 1998, representing a decrease in working
capital of $9,936,000.
Operating activities: Cash used in operating activities of $8,169,000 was
primarily due to the net loss of $13,403,000 plus $2,416,000 of increases in
accounts receivable and decreases in accounts payable, offset by non-cash
charges of $1,317,000 and reductions in inventory, other current assets, other
assets along with increases in accrued liabilities, accrued acquisition and
restructuring, income tax payable, and foreign currency translation of
$6,333,000.
The reduction in accounts payable 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 increase in accrued
acquisition and restructuring charges was due to the restructuring accrual
recorded in the quarter ended December 31, 1998. The increase in accounts
receivable was due to sales of newly released products for which invoices were
not due for payment prior to the end of the quarter. The reduction in other
current assets was largely due to cash receipts resulting from the sale of the
Infonautics investment.
Financing Activities: 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 Company is currently in
default of covenants under its convertible bond agreement. However, Symantec
has reached agreement with the bondholders such that the Notes are required to
be paid in full upon the earlier of consummation of the merger, or March 31,
1999, without any premium.
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 December 31, 1998, the Company had no borrowings under the
line. 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.
In September 1997, and between October 1997 and November 1998, the Company
issued an aggregate of 31,900 shares of Series C Convertible Preferred Stock and
Warrants, resulting in net proceeds to the Company of $18,897,000 (after
expenses and the repurchase of $10,000,000 of Series B Preferred Stock).
Due to the Company's declining revenues, recurring net operating losses,
continued restructuring, 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.
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.
14
<PAGE>
PART II. OTHER INFORMATION
Item 1. 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
Quarterdeck. The complaint alleges that Quarterdeck'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. The Company
believes this action has no merit and intends to defend the lawsuit vigorously,
however, 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 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
QUARTERDECK CORPORATION
(Registrant)
Date: February 12, 1998 /s/ Arthur F. Courville
-------------------------
Arthur F. Courville
Vice President
(duly authorized officer)
Date: February 12, 1998 /s/ Andrew D. McCormac
-------------------------
Andrew D. McCormac
Sr. Vice President of Finance
(Chief Accounting Officer)
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCES TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> SEP-30-1999 SEP-30-1998
<PERIOD-START> OCT-01-1998 OCT-01-1997
<PERIOD-END> DEC-31-1998 DEC-31-1997
<CASH> 2,539 8,411
<SECURITIES> 0 0
<RECEIVABLES> 12,571 12,212
<ALLOWANCES> 9,192 9,222
<INVENTORY> 199 968
<CURRENT-ASSETS> 7,458 14,391
<PP&E> 12,177 13,443
<DEPRECIATION> 9,359 9,803
<TOTAL-ASSETS> 10,861 19,525
<CURRENT-LIABILITIES> 15,439 12,436
<BONDS> 25,022 25,022
0 0
0 4,371
<COMMON> 90 67
<OTHER-SE> (29,690) (22,371)
<TOTAL-LIABILITY-AND-EQUITY> 10,861 19,525
<SALES> 5,769 20,626
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<OTHER-EXPENSES> 15,356 15,815
<LOSS-PROVISION> 342 (191)
<INTEREST-EXPENSE> 735 267
<INCOME-PRETAX> (13,403) 332
<INCOME-TAX> 0 16
<INCOME-CONTINUING> (13,403) 316
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