-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VdCtFJhaX3tGVZQ1BsrR2tEhLXKTpDCPni0g2skMacRZRCFCYuZrZK7G63HZ3GMh d44Vjv9PoE/Mbt5QSw/8xw== 0000898430-99-000519.txt : 19990215 0000898430-99-000519.hdr.sgml : 19990215 ACCESSION NUMBER: 0000898430-99-000519 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990212 FILER: COMPANY DATA: COMPANY CONFORMED NAME: QUARTERDECK CORP CENTRAL INDEX KEY: 0000707668 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 954320650 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-19207 FILM NUMBER: 99538218 BUSINESS ADDRESS: STREET 1: 13160 MINDANAO WAY CITY: MARINA DEL REY STATE: CA ZIP: 90292 BUSINESS PHONE: 3103093700 MAIL ADDRESS: STREET 1: 13160 MINDANAO WAY CITY: MARINA DEL RAY STATE: CA ZIP: 90292 FORMER COMPANY: FORMER CONFORMED NAME: QUARTERDECK OFFICE SYSTEMS INC DATE OF NAME CHANGE: 19940510 10-Q 1 FORM 10-Q - -------------------------------------------------------------------------------- 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. - -------------------------------------------------------------------------------- QUARTERDECK CORPORATION AND SUBSIDIARIES FORM 10-Q December 31, 1998 INDEX
Page No. -------- Part I. Financial Information Item 1. Financial Statements 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
2 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
December 31, September 30, 1998 1998 ------------ ------------- (Unaudited) 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 ======= ======= LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: 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 ========= =========
The accompanying notes are an integral part of these consolidated unaudited condensed financial statements. 3 QUARTERDECK CORPORATION AND SUBSIDIARIES CONSOLIDATED UNAUDITED CONDENSED STATEMENTS OF OPERATIONS (Amounts in thousands, except per share data)
Three Months Ended December 31, ------------------------------- 1998 1997 ---- ---- 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 -------- -------
The accompanying notes are an integral part of these consolidated unaudited condensed financial statements. 4 QUARTERDECK CORPORATION AND SUBSIDIARIES CONSOLIDATED UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS (Amounts in thousands)
Three Months Ended December 31, ----------------------- 1998 1997 ---------- -------- 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 --
The accompanying notes are an integral part of these consolidated unaudited condensed financial statements. 5 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 3. Balance Sheet Information
December 31, September 30, 1998 1998 ------------- ------------- (in thousands) 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 ======= ========
7 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:
Three Months Ended December 31, ------------------- 1998 1997 -------- ------- 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 ======== =======
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 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):
Discontinuance and Other consolidation of Restructuring offices Severance Costs Total ------------------ ---------- -------------- --------- 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 ====== ======= ===== =======
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):
Discontinuance and Severance Write-off consolidation of and property and offices other equipment Total ------------------- ---------- ------------- -------- 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 ===== ====== ==== =======
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):
Discontinuance and Severance Write-off consolidation of and property and offices other equipment Total ------------------- ---------- ------------ ------- Accrued, September 30, 1998.................... $251 $ 712 $20 $ 983 Non-cash costs................................. -- -- -- -- Cash payments.................................. (67) (596) -- (663) ---- ----- --- ----- Accrued, December 31, 1998..................... $184 $ 116 $20 $ 320 ==== ===== === =====
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 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:
Three Months Ended December 31 -------------------- Quarter Ended 1998 1997 --------- -------- 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 ======== =====
10 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 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 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 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 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 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 EX-27.1 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCES TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS 3-MOS SEP-30-1999 SEP-30-1998 OCT-01-1998 OCT-01-1997 DEC-31-1998 DEC-31-1997 2,539 8,411 0 0 12,571 12,212 9,192 9,222 199 968 7,458 14,391 12,177 13,443 9,359 9,803 10,861 19,525 15,439 12,436 25,022 25,022 0 0 0 4,371 90 67 (29,690) (22,371) 10,861 19,525 5,769 20,626 5,769 20,626 2,859 4,709 2,859 4,709 15,356 15,815 342 (191) 735 267 (13,403) 332 0 16 (13,403) 316 0 0 0 0 0 0 (13,403) 316 (0.16) 0.01 (0.16) 0.00
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