-----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, LIQAMeq+Y+VGmjUoNp/26jMma6D0SaxkQfKB9E7pgBueMW34MqUM1HTsh2DNG/Zi jilUNPNtz421lCHUmqCitQ== 0000950148-96-001732.txt : 19960816 0000950148-96-001732.hdr.sgml : 19960816 ACCESSION NUMBER: 0000950148-96-001732 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960814 SROS: NASD 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: 1934 Act SEC FILE NUMBER: 000-19207 FILM NUMBER: 96614577 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 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996 COMMISSION FILE NUMBER 0-19207 QUARTERDECK CORPORATION (Exact name of Registrant as specified in its charter) DELAWARE 95-4320650 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 13160 MINDANAO WAY, MARINA DEL REY, CALIFORNIA 90292 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (310) 309-3700 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- The number of shares of the Registrant's common stock, $.001 par value, outstanding as of July 31, 1996 was 36,205,788 2 QUARTERDECK CORPORATION AND SUBSIDIARIES FORM 10-Q JUNE 30, 1996 INDEX
PART I. FINANCIAL INFORMATION PAGE NO. -------- ITEM 1. FINANCIAL STATEMENTS Consolidated Unaudited Condensed Balance Sheets as of June 30, 1996 and September 30, 1995 3 Consolidated Unaudited Condensed Statements of Operations for the three months and nine months ended June 30, 1996 and 1995 4 Consolidated Unaudited Condensed Statements of Cash Flows for the nine months ended June 30, 1996 and 1995 5 Notes to Consolidated Unaudited Condensed Financial Statements 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 11 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS 19 ITEM 2. CHANGES IN SECURITIES 19 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 19 SIGNATURES 20
2 3 PART 1. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS QUARTERDECK CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (AMOUNTS IN THOUSANDS) ASSETS
(Unaudited) JUNE 30, SEPTEMBER 30, 1996 1995 ---------- ------- Current assets: Cash and short-term investments $ 14,409 $39,669 Trade accounts receivable 12,623 13,621 Deferred tax asset 4,515 2,178 Refundable income taxes 3,284 - Inventories 3,376 2,281 Other current assets 5,021 4,006 ---------- ------- Total current assets 43,228 61,755 Building 8,720 - Note Receivable from Related Party - Building - 469 Equipment and leasehold improvements 11,897 8,335 Capitalized software costs 4,433 2,807 Other assets 8,795 3,333 ---------- ------- $ 77,073 $76,699 ========== ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 7,855 $13,582 Accrued liabilities 15,331 14,973 Current portion of long-term obligations 17 255 Loan payable to bank 2,000 - Accrued acquisition, restructuring and other charges 3,380 3,455 ---------- ------- Total current liabilities 28,583 32,265 6% Convertible notes, due March 31, 2001 25,000 - Long-term obligations, less current portion 114 164 ---------- ------- Total liabilities 53,697 32,429 Stockholders' equity: Preferred stock (authorized: 2,000 shares; issued and outstanding: none) - - Common stock (authorized: 50,000 shares; issued and outstanding: 32,414 and 31,173 shares) 31 31 Treasury stock (559) (559) Additional paid-in-capital 49,673 40,002 Retained earnings (Accumulated deficit) (25,185) 5,359 Foreign currency translation adjustment (584) (563) ---------- ------- Total stockholders' equity 23,376 44,270 ---------- ------- $ 77,073 $76,699 ========== =======
The accompanying notes are an integral part of these consolidated unaudited condensed financial statements. 3 4 QUARTERDECK CORPORATION AND SUBSIDIARIES CONSOLIDATED UNAUDITED CONDENSED STATEMENTS OF OPERATIONS (Amounts in thousands, except per share data)
THREE MONTHS ENDED NINE MONTHS ENDED JUNE 30, JUNE 30, 1996 1995 1996 1995 --------- --------- --------- -------- Net revenues $ 16,022 $ 28,091 $ 105,683 $ 86,302 Cost of revenues 11,252 8,120 36,045 25,008 --------- --------- --------- -------- Gross margin 4,770 19,971 69,638 61,294 Operating expenses: Research and development 5,365 3,937 15,875 10,540 Sales and marketing 17,089 7,699 48,253 21,320 General and administrative 9,216 4,913 20,907 15,780 Acquisition and restructuring 1,660 3,459 9,130 3,603 --------- --------- --------- -------- Total operating expenses 33,330 20,008 94,165 51,243 Operating income, (loss) (28,560) (37) (24,527) 10,051 Other income, net 1,305 600 1,718 1,279 --------- --------- --------- -------- Income, (loss) before income taxes (27,255) 563 (22,809) 11,330 Provision (benefit) for income taxes (4,307) 33 (3,431) 355 --------- --------- --------- -------- Net income (loss) $ (22,948) $ 530 $ (19,378) $ 10,975 ========= ========= ========= ======== Net income, (loss) per share $ (0.73) $ 0.02 $ (0.62) $ 0.34 ========= ========= ========= ======== Shares used to compute net income, (loss) per share 31,547 32,383 31,421 31,820 ========= ========= ========= ======== Additional unaudited pro forma data: Income, (loss) before income taxes $ (27,255) $ 563 $ (22,810) $ 11,330 Pro forma income taxes (4,307) 648 3,432 3,163 --------- --------- --------- -------- Pro forma net income (loss) $ (22,948) $ (85) $ (19,378) $ 8,167 ========= ========= ========= ======== Pro forma net income (loss) per share $ (0.73) $ 0.00 $ (0.62) $ 0.26 ========= ========= ========= ======== Shares used to compute pro forma net income (loss) per share 31,547 31,771 31,421 31,820 ========= ========= ========= ========
The accompanying notes are an integral part of these consolidated unaudited condensed financial statements 4 5 QUARTERDECK CORPORATION AND SUBSIDIARIES CONSOLIDATED UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS (Amounts in thousands)
NINE MONTHS ENDED JUNE 30, 1996 1995 --------- ------- Cash flows from operating activities: Net income $(19,378) $10,975 Adjustments to reconcile net income to net cash (used) provided by operating activities: Depreciation and amortization of equipment and leasehold improvements 4,406 2,838 Amortization of capitalized software costs 3,341 1,206 Stock compensation - 42 Elimination of duplicate net income from acquired entities (717) (384) Loss on sale and abandonment of assets - 34 Changes in assets and liabilities, net of acquisitions: Trade accounts receivable 1,230 (3,396) Refundable income taxes (3,065) 6,301 Inventories (689) (882) Other current assets (1,359) (470) Deferred tax asset (2,202) (1,344) Other assets (4,571) (45) Accounts payable (5,759) (3,514) Accrued liabilities (716) 3,843 Accrued acquisition, restructuring and other charges (75) 2,245 Foreign currency translation adjustment (43) 285 -------- ------- Total adjustments (10,219) 6,759 -------- ------- Net cash (used) provided by operating activities (29,597) 17,734 -------- ------- Cash flows from investing activities: Purchases of marketable securities - (85,630) Sales of marketable securities 34,285 80,092 (Decrease) increase in unrealized gain, marketable securities (195) - Capital expenditures (16,113) (2,111) Capitalized software costs (3,169) (865) Proceeds from sale of assets - 2 Advances to affiliates - (1,100) Cash acquired in acquisitions 177 559 Purchases of minority interest of other companies - (1,700) -------- ------- Net cash provided (used) by investing activities 14,985 (10,753) -------- ------- Cash flows from financing activities: Principal payments under long-term obligations (238) (74) Dividends to shareholders of acquired entity (7,307) (7,904) Notes payable to related parties - 891 Net proceeds from issuance of common stock 4,182 348 Proceeds from issuance of Convertible Notes 25,000 - Proceeds from bank construction loan 2,000 - -------- ------- Net cash provided (used) by financing activities 23,637 (6,739) -------- ------- Net increase in cash and cash equivalents 9,025 242 Cash and cash equivalents at beginning of period 5,384 9,879 -------- ------- Cash and cash equivalents at end of period $ 14,409 $10,121 ======== ======= Supplemental disclosure of cash flow information: Cash paid during the period for: Interest 39 10 Income tax 1,594 50 Non-cash transaction: Tax benefits arising from exercise of non-qualified stock options 1,100 42
The accompanying notes are an integral part of these consolidated unaudited condensed financial statements. 5 6 QUARTERDECK CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED UNAUDITED CONDENSED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The accompanying consolidated condensed financial statements of Quarterdeck Corporation are unaudited (except for the Balance Sheet as of September 30, 1995) 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, 1995, and in the Company's Form S-4 and Form 8-K regarding the Company's acquisition of Inset Systems, Inc. ("Inset"), and in the Company's Form S-3 and Form 8-K regarding the Company's acquisition of Datastorm Technologies, Inc. ("Datastorm") and in the Company's Form 8-K regarding the Company's acquisition of Future Labs, Inc. ("Future Labs") In the opinion of management, the accompanying consolidated unaudited condensed financial statements include all adjustments (consisting only of normal recurring adjustments) which are necessary for a fair presentation. The results of operations for the three and nine month periods ended June 30, 1996 are not necessarily indicative of results to be expected for the full fiscal year. 2. GENERAL Quarterdeck Corporation develops, markets and supports computer software products and offers services in two strategic business areas: utilities and Internet solutions. Quarterdeck is a leader in bringing utilities solutions to the Windows 3.x, Windows 95, Windows NT and DOS environments. The company also offers a line of Internet applications and telecommunications and collaborative computing products for corporate, small business and individual users. The company's diverse customer base includes government, education, corporate, small business and individual users (SOHO). The company has offices in England, France, Germany and Australia, with its European headquarters based in Dublin, Ireland. 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. In February 1995, the Company changed its name to Quarterdeck Corporation. In September 1995, the Company moved its principal offices to 13160 Mindanao Way, Marina del Rey, California, 90292; its telephone number is (310) 309-3700. Quarterdeck's Internet home page can be located on the World Wide Web at http://www.quarterdeck.com/. Unless the context otherwise indicates, the "Company" and "Quarterdeck" refer to Quarterdeck Corporation, its predecessor and its subsidiaries. 3. RECLASSIFICATIONS In order to conform to evolving financial reporting practices by the software industry, the Company is reporting the amortization of capitalized software and technical support costs as costs of revenues for all periods presented. The Company had previously reported amortization of capitalized software as research and development expense, and technical support costs as sales and marketing expense. Certain other amounts have been reclassified to provide consistent presentation. In combining the financial results of the Company with the results from the acquired entities that were previously Subchapter S Corporations, Datastorm and Landmark, and in compliance with the specific guidelines for pooling of interests accounting, the Undistributed Retained Earnings of these entities have been combined with Quarterdeck's Additional paid-in-capital for all periods presented. 6 7 4. ACQUISITIONS AND STRATEGIC INVESTMENTS On July 18, 1996 Quarterdeck completed the acquisition of Vertisoft Systems, Inc., ("Vertisoft") a developer and publisher of utility software. Quarterdeck issued 3.5 million shares of common stock in exchange for all of the outstanding stock of Vertisoft. Since the transaction closed subsequent to the periods reported on herein, the results of Vertisoft are not included in the accompanying financial statements. The transaction will be accounted for as an immaterial pooling of interests and therefore, the consolidated financial statements that will be issued covering the fourth quarter of 1996 and later, will be restated to include Vertisoft for all periods beginning on or after October 1, 1995. On May 15, 1996, Quarterdeck consummated the acquisition of Future Labs, Inc., a developer of real-time collaborative technology. Quarterdeck issued 663,768 shares of common stock in exchange for all of the outstanding stock of Future Labs. The transaction was accounted for as an immaterial pooling of interests and therefore, the consolidated financial statements for all periods beginning on or after October 1, 1995 have been restated to reflect the combined operations of Quarterdeck and Future Labs. On March 28, 1996, Quarterdeck consummated the acquisition of Datastorm, the developer and publisher of Procomm Plus, one of the industry's leading data communications products. Quarterdeck issued 5.2 million shares of common stock in exchange for all of the outstanding stock of Datastorm. The transaction was accounted for as a pooling of interests and therefore, the consolidated financial statements for all periods presented herein have been restated to reflect the combined operations of Quarterdeck and Datastorm. Datastorm had a calendar year end and accordingly, the Datastorm statement of operations for the year ended December 31, 1995, was restated and combined with the Quarterdeck statement of operations for the fiscal year ended September 30, 1995. In order to conform Datastorm's year end to Quarterdeck's fiscal year end, the consolidated unaudited condensed statement of operations for the nine months ended June 30, 1996 includes three months (October, November, December 1995) for Datastorm, which are included in the consolidated statement of operations for the fiscal year ended September 30, 1995. Accordingly, an adjustment has been made to Retained earnings during the nine months ended June 30, 1996 for the duplication of net income of $717,000 for the three month period ended December 31, 1995. Other results for such three month period of Datastorm include net sales of $9,283,000 and a gross margin of $5,146,000. The consolidated financial statement for the nine months ended June 30, 1995 combines Quarterdeck's financial statements for the nine months ended June 30, 1995 with Datastorm's financial statements for the nine months ended September 30, 1995. Datastorm's S corporation status terminated upon acquisition by Quarterdeck. Datastorm's undistributed earnings for all periods prior to the merger have been reclassified to Additional paid-in-capital in the combined financial statements in accordance with pooling of interests accounting. On December 29, 1995, Quarterdeck acquired Inset, a developer of graphics utility and application software for personal computers. Quarterdeck issued 921,218 shares of common stock in exchange for all of the outstanding common stock of Inset. This transaction was also accounted for as a pooling of interests and therefore, the consolidated financial statements for all periods presented herein have been restated to reflect the combined operations of Quarterdeck and Inset. On December 24, 1995, the Company and a Belgian venture capital group, formed a new entity, Quarterdeck Flanders N.V. ("QDF"), for the purpose of the development, integration and commercialization of advanced software products utilizing certain advanced speech technologies. These products will be designed to complement the Company's existing and future products. The Company has entered into a five year renewable exclusive license with QDF for publishing its products. QDF has entered into a three year exclusive license with Lernout & Hauspie Speech Products N.V. ("LHSP") covering certain product types and applications. The Company has also made an equity investment in LHSP. LHSP is a developer and licensor of advanced speech technologies. The Company purchased 50.002% of QDF in exchange for an agreement to make a capital contribution of $900,000. Such contribution has not been made as of the date of this report. The financial position and results of operations, from inception, approximately January 1, 1996, of QDF are wholly immaterial to the attached financial statements and are therefore not included in the financial statements presented herein. 7 8 On February 7, 1996 the Company acquired, in a private placement of common stock, a less than 5% interest in Infonautics Corporation in exchange for $3,250,000. Infonautics has certain Internet software products that are planned to be integrated with certain Internet products of Quarterdeck. This transaction is accounted for under the cost method of accounting and the investment is included on the Balance sheet in Other assets and is carried at lower of cost or market. Infonautics consummated an initial public offering of its common stock during May of 1996. Quarterdeck's shares in Infonautics were not registered at that time and therefore remain subject to certain limitations on resale. Quarterdeck has entered into an agreement to purchase approximately 80% of the outstanding shares of capital stock of Limbex Corporation ("Limbex") that it currently does not own. The acquisition is expected to close on or before August 16, 1996. The purchase price is based on a formula but is expected to result in Quarterdeck's payment of approximately, 1.3 million shares of its common stock during the quarter ending September 30, 1996 in exchange for all of the shares of Limbex Corporation common stock. In addition, Quarterdeck will be obligated to pay on the one year anniversary of the closing of the acquisition approximately $3.6 million in cash or shares of Quarterdeck common stock as valued at such time, or a combination thereof (all at Quarterdeck's election) in consideration for the outstanding shares of Limbex preferred stock. Limbex is responsible for providing much of the intelligent agent search technology that is incorporated into the Company's WebCompass product. This investment is also accounted for under the cost method of accounting, but will be consolidated after the acquisition is completed. During the quarter ended June 30, 1996, Quarterdeck issued 198,165 shares of common stock in exchange for Pinnacle's right, title, and interest in the Company's CleanSweep utility software. Quarterdeck is also obligated to pay certain minimum royalties of $200,000 per year for four years commencing no later than March 31, 1997. The Company has paid an additional $100,000 and is obligated for an additional $200,000, as payment for consulting services and a non-competition agreement with the principal of Pinnacle. On July 16, 1996 the Company purchased certain assets and technology relating to remote control software from Interlink Technology Co. ("Interlink") as an essential part of the Company's communication product line. Quarterdeck issued 205,000 shares of common stock and is obligated to issue approximately $1,381,000 worth of additional shares, up to a maximum of 205,000 additional shares, on the six month anniversary of the closing date based on the trading price of Quarterdeck common stock at such time. The acquisition will be accounted for as a purchase. 5. CONVERTIBLE NOTES On March 28, 1996, the Company issued $25 million principal amount of 6% Convertible Senior Subordinated Notes, due 2001 ("Notes"), to an institutional investor in a private placement pursuant to the terms of a Note Agreement, dated March 1, 1996. The Notes are convertible generally after April 1, 1997, at an initial conversion price of $21.18 per share. The conversion price is adjustable for certain below market equity issuances and the Notes contain other customary anti-dilution provisions. Subject to complying with other certain terms, the Notes may be prepaid without penalty, subject to conversion, anytime between April 1997 and April 1999 if the Company's Common Stock had been trading, for 20 of the 30 trading days preceding notice of prepayment, approximately 18% above the then current conversion price. 6. INCOME TAXES Income taxes are computed in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Quarterdeck provides for income taxes during interim reporting periods based upon an estimate of its annual effective tax rate. This estimate includes all anticipated federal, state and foreign income taxes. 7. REVENUE RECOGNITION Revenue from the sale of software products is recognized upon shipment, where collection of the resulting receivable is probable and there are no significant obligations remaining. The estimated costs to fulfill technical support obligations to end users arising from the sale of software are accrued upon shipment. Certain limited rights of return and exchange from customers exist as defined by the Company's general distributor agreements. The Company establishes allowances for estimated product returns and exchanges as a reserve against gross revenues. 8 9 8. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS 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 June 30, 1996 amounted to $14,409,000. 9. COMPUTATION OF NET INCOME PER SHARE The income (loss) per common and common equivalent share for the three and nine month periods ended June 30, 1996 and 1995 have been computed using the weighted average number of common and common stock equivalent (unless anti-dilutive), shares outstanding for each period as summarized below (000's omitted):
THREE MONTHS ENDED NINE MONTHS ENDED JUNE 30, JUNE 30, 1996 1995 1996 1995 ------ ------ ------ ------ Weighted average common stock outstanding during period 31,547 30,970 31,421 30,909 Common stock equivalents of stock options outstanding - 1,413 - 911 ------ ------ ------ ------ Shares used in net income (loss) per share calculation 31,547 32,383 31,421 31,820 ====== ====== ====== ======
Common stock equivalents generally consist of outstanding stock options and shares of common stock held in escrow. The weighted average number of shares of common stock outstanding during each of the periods has been adjusted to reflect the issuance of 921,218 shares of common stock issued in connection with the Inset acquisition and to reflect the issuance of 5.2 million shares of common stock issued in connection with the Datastorm acquisition. The weighted average number of shares of common stock outstanding during the periods beginning on or after October 1, 1995 have been adjusted to reflect the issuance of 663,768 shares of common stock issued in connection with the Future Labs acquisition. Primary and fully diluted net income per share are the same amounts for each of the periods presented. For those periods the Company incurred a net loss, the share amounts exclude 678,000 shares, which are anti-dilutive, that are in escrow, in connection with the Inset, Datastorm, and Future Labs acquisitions. 10. ACQUISITION AND RESTRUCTURING CHARGES Acquisition and other similar charges incurred amounted to $1.7 million and $9.1 million, for an after-tax per share cost of $0.05 and $0.25 respectively, for the three and nine months ended June 30, 1996. These charges relate primarily restructuring charges and acquisition costs incurred in connection with the acquisitions of Future Labs in June of 1996, Datastorm in March of 1996 and Inset in December 1995. These expenses principally include fees for financial advisory, legal and accounting services, personnel severance and benefits, and other related expenses. The remaining portion of the acquisition and other charges relate to additional restructuring charges and acquisition costs incurred during those periods. Accrued acquisition, restructuring and other charges decreased from $3,455,000 at September 30, 1995 to $3,380,000 at June 30, 1996. Payments made against accrued balances during the three and nine months ended June 30, 1996 amounted to $2,864,000 and $9,205,000 respectively. Additional accruals for the current quarter were related to restructuring charges and the Future Labs acquisition and amounted to $1,660,000. Accruals during the first two quarters amounted to $6,349,000 and related to the acquisitions of Datastorm and Inset. 9 10 11. BANK CREDIT LINE On August 13, 1996, the Company's revolving credit facility with Bank of America was amended, and the bank waived the Company's non-compliance with certain financial covenants therein for the quarter ended June 30, 1996. The Company may borrow the lesser of 75% of Eligible Accounts Receivable or $15.0 million. As of July 31, 1996 the maximum available borrowing the Company could be eligible for under this line was approximately $7.5 million. The line is secured by Quarterdeck's domestic accounts receivable and inventory. The current term of the line of credit matures June 30, 1997. The line can be used for general corporate purposes, including investments and acquisitions, and bears interest, at the Company's option, at either the bank's reference (prime) interest rate plus 0.50% or the U.S. offshore rate plus a margin of 2.00%. The line is subject to the Company complying with certain customary financial covenants and restrictions, including a prohibition of the payment of dividends, other than those payable solely in capital stock, and a prohibition of any stock repurchase activity. At June 30, 1996 the Company did not have any borrowings outstanding under the line. In April of 1996, the Company borrowed $2.0 million from a bank to partially finance the completion of the building which is under construction in Columbia, Missouri. The loan is a renewable one year loan with principal and all accrued interest, at a rate of 4.5% per annum, due April 5, 1997. It is the Company's intention to renew the loan when due. The loan is secured by all equipment owned by the Datastorm subsidiary. On August 6, 1996, the Company's Datastorm subsidiary secured construction financing from a bank of up to $5.0 million with an interest rate equal to the bank's commercial base rate, currently 8.25%, which is secured by the Columbia, Missouri building which is under construction. The loan is guaranteed by Quarterdeck and is believed to be sufficient to complete construction. The principal amount plus any unpaid interest is due February 7, 1997. 12. PRO FORMA DATA The consolidated unaudited condensed statements of operations includes a pro forma presentation for an estimate of the amount of income taxes which would have been recorded if Datastorm and Landmark (the entities newly pooled with Quarterdeck) had been C Corporations for all periods presented. 13. BUILDING Prior to being acquired by Quarterdeck, Datastorm loaned to a partnership, whose partners were Datastorm shareholders, funds the partnership used to commence the construction of a new building which is planned to house Datastorm. In connection with the acquisition, the Company was obligated to acquire the building from the partnership. The advances were carried in Note receivable from related party on the Balance sheet. During the quarter ended June 30, 1996 the Company completed the acquisition of the building in exchange for, among other things, cancellation of the Note receivable. 10 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's discussion and analysis of financial condition and results of operations focuses primarily on the results of the Company's operations, liquidity, and capital resources. This item 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, 1995 and in the Company's Forms S-4, S-3 and Forms 8-K regarding the Company's acquisitions of Future Labs, Datastorm and Inset filed with the Securities and Exchange Commission. In addition to an analysis of recent and historical financial results, the Form 10-K includes an analysis of certain of the Company's business risks, including risks which are inherent to software development as well as specific trends and uncertainties relating to the competitive environment in which the Company operates. The Company 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 the Company has identified all possible issues which the Company faces now or may face in the future. In particular, the Company has recently completed a number of acquisitions and made investments in certain companies and may make additional acquisitions. Investors should carefully read the Form 10-K together with this Form 10-Q and all other recent filings the Company has made with the Securities and Exchange Commission, and consider all such risks before making an investment decision with respect to the Company's stock 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 integration of acquisitions, the ability to secure additional sources of financing, 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 obligation to revise any forward-looking statements in order to reflect events or circumstances that may arise after the date of this report. RESULTS OF OPERATIONS As a result of the numerous strategic acquisitions the Company has completed in the past 18 months, management is focusing significant effort on the effective integration of all operations. The Company is in the process of eliminating redundant functions and processes including certain production, technical support and administrative functions. The slower than anticipated integration of the acquired companies has directly contributed to generally higher operating expenses for the Company as a whole. While the Company has recently taken significant steps as part of its overall restructuring plan, there can be no assurance that the Company will succeed in reducing expenses and returning to profitability. Net Revenues: Net revenues for the three months ended June 30, 1996 decreased by $12,069,000 or 43.0% while net revenues for the nine months ended June 30, 1996 increased by $19,381,000 or 22.5%, in relation to the comparative periods of the prior year. The current quarter's sales decrease is due in large part to a significant decline in sell-through levels for memory management products that the Company is about to update; a decline in the historic rates of sell-through of PROCOMM PLUS data communications software following unusually high sell-through after the new product launch in the March quarter; and slower than planned integration of the Company's acquisitions. 11 12 The decline in sell-through of memory management products is primarily attributed to the continuing decrease in the cost of memory (DRAM) together with the fact that current versions of the Company's memory management products are nearing the end of their product life-cycle. The Company plans to release new and updated versions of these products in the coming months. The delayed release of PROCOMM from the Fall of 1995 to February of 1996 led to unusually high initial sell-through levels due to pent up demand. Consequently, a return to normal sales levels led to reduced sell-through as compared to the quarter ended March 31, 1996. Continued weakness in sales of the Company's memory management and/or communications products would have a material adverse effect on future revenues. The reduction in sell-through of the Company's memory management and communication products resulted in higher than anticipated channel inventory levels. In order to bring inventory levels in line with current and anticipated sell-through levels the Company decided to reduce shipments of these products. In addition to these revenue reductions, the Company recorded an additional reserve for sales returns to provide for future returns as well as actual returns during the June quarter. This additional reserve further reduced net revenues for the three months ended June 30, 1996 to approximately $16 million. The increase in nine month net revenues compared with the prior year period result primarily from an increasingly diversified product portfolio resulting from internal product development and the sales increases of acquired products, particularly Datastorm's PROCOMM PLUS. The Company has also broadened its distribution capabilities through expansion of its distribution network and acquisition of a direct sales organization. Net revenues from European and other international distributors, dealers and end-users outside of the United States for the three and nine months ended June 30, 1996 amounted to $3,927,000 and $20,464,000, representing 24.5% and 19.4% of the Company's net revenues. Comparative amounts from the prior year three and nine month periods were $5,060,000 and $11,705,000 or 18.0% and 13.6% of net revenues. The increased proportion of sales to foreign markets compared to prior periods illustrate a present trend toward increased business from outside the US as a percentage of its total revenue. There can be no assurance that this trend will continue, or that foreign operations and sales will continue to be successful. However, it is management's present belief that growth in the industry is a worldwide phenomenon and that the Company should make attempts to position itself to generate sales in both foreign and domestic markets. Due to the inherent uncertainties in software development and in the microcomputer software industry, the Company is unable to predict whether the net revenue trends noted above will continue. Cost of Revenues: The Company's cost of revenues includes product packaging, documentation and diskettes, manufacturing expenses, amortization of capitalized software costs, technical support costs as well as translation costs and royalties paid to third parties. The cost of revenues as a percentage of net revenues increased to 70.2% for the three month period ended June 30, 1996 compared to 28.9% for the three month period ended June 30, 1995. The nine month comparative figures also show an increase in cost of revenues as a percentage of net revenues to 34.1% for the nine month period ended June 30, 1996 compared to 29.0% for the nine month period ended June 30, 1995. The three month percentage increase results largely from decreased revenues over which to spread indirect, or semi-fixed costs of revenues, including production and technical support costs. Certain of these production and support costs were higher than the Company anticipated as a result of slower than expected integration of acquired operations. As a result of focusing the internet business unit towards information management and collaboration/communications products, the Company recorded charges during the June quarter related to the write-off of third party capitalized software costs and prepaid royalties. In addition, the Company increased reserves for obsolete or slow-moving inventory resulting from the current level of product sell-through with respect to Internet products the Company no longer plans to actively market. In order to conform to evolving financial reporting practices by the software industry, the Company is reporting the amortization of capitalized software and technical support costs, including salaries, as costs of revenues for all periods presented. Such costs were previously classified as research and development and sales and marketing expenses, respectively. Capitalized software development and purchased software costs are amortized over a period of one to three years, commencing upon initial product release. Fluctuations in amortization expense between periods may arise depending on the amount of software costs incurred and capitalized for particular software products and their respective release dates and amortization periods. Amortization of capitalized software costs increased from 12 13 $285,000 for the three month period ended June 30, 1995 to $1,036,000 for the three month period ended June 30, 1996. This expense also increased for the nine months ended June 30, 1996 to $2,861,000 from $1,206,000 for the comparative period of the prior year. The increase in amortization of software development costs is consistent with the growth of fiscal year to date revenues and the increased product offerings by the Company together with the aforementioned charges. Future cost of revenues as a percentage of net revenues will depend, in addition to the amount of amortization of capitalized software, on total sales, the mix of sales by product, by domestic versus international, and by single unit versus multiple license packages, among other things. The microcomputer software industry has experienced increased price competition in recent years. The Company anticipates that increased price competition will continue in the future and may result in reduced margins. Research and Development: Research and development expenses consist primarily of salaries and benefits and consulting fees to support product development, including product testing and documentation. Research and development expense for the three months ended June 30, 1996 increased to $5,365,000 or 33.5% of net revenues from $3,937,000 or 14.0% of net revenues for the comparable period of the prior year. For the nine month periods these expenses also increased to $15,875,000 or 15.0% of net revenues from $10,540,000 or 12.2% of net revenues. The increase in research and development expense is due to increased research and development staffing levels and to increases in payments to third parties for contracted product development required to support the Company's expanding internet and utilities product development efforts. The Company capitalized $2,117,000 of purchased software costs during the three months ended June 30, 1996. The Company did not capitalize any internal software development costs, since the majority of development efforts incurred during the periods related to new products for which technological feasibility had not yet been established. The Company believes that to remain competitive it is necessary to continue to invest in software development efforts while at the same time considering the acquisition of complementary software products. The Company anticipates that spending for software development and purchased software will increase in the future. However, because of the inherent uncertainties of software development projects and the software market in general, there can be no assurance that increased software development efforts or additional purchased software will result in successful product introductions or increased sales. Sales and Marketing, and General and Administrative: Sales and marketing, and general and administrative expenses consist of salaries and commissions and related costs of administrative, sales and marketing, and customer service personnel as well as advertising, trade show and promotional expenses and facilities costs. For the three and nine months ended June 30, 1996, Sales and marketing expenses increased by $9,390,000 and $26,933,000 respectively over comparable periods of the prior year, while increasing as a percentage of net revenues from 27.4% to 106.7% and from 24.7% to 45.7% for the three and nine months ended June 30, 1996, respectively. Due to the lead times required for the commitment of marketing programs, the Company was unable to reduce these expenses commensurate with the reduction in revenues. The increase in expense over the comparative period of the prior year includes an increase in cooperative sales expenses of $2.5 million, in advertising and direct marketing costs of $2.2 million, and in personnel costs of $2.3 million. Expenditures were also incurred for the expansion of the Company's direct sales organization. Quarterdeck believes substantial sales and marketing efforts are essential to successfully introduce new products, to achieve revenue growth and to maintain and enhance the Company's competitive position. However, as a result of competitive pressure, the international and direct sales operations, as well as the introduction of new and upgraded products, Quarterdeck does expect the expenses associated with these efforts to continue to constitute its most significant operating expense. There can be no assurance that these increased sales and marketing efforts will be successful or that management will be successful in effectively reducing these costs. 13 14 For the three and nine months ended June 30, 1996, General and administrative expenses increased by $4,303,000 and $5,127,000 respectively over the comparative periods of the prior year, while increasing as a percentage of net revenues, from 17.5% to 57.5% for the three months ended, and from 18.3% to 19.8% for the nine months ended June 30, 1995 and 1996, respectively. The current quarter increase includes an increase in facilities costs, including depreciation, of $1.8 million and an increase in numerous other miscellaneous categories totaling nearly $2.0 million. By the end of the quarter the Company had eliminated approximately sixty employees on its way to the planned eleven percent reduction of its workforce. The elimination of redundant positions, consolidation of facilities and the restructuring of the Company into two core business units, Utilities and Internet, has resulted in a reduction in operating expenses expected to result in annual cost savings in excess of $20.0 million annually. Other Income: Other income for the three and nine months ended June 30, 1996, includes approximately $1,435,000 of gain on the sale of a portion of the Company's investment in the common stock of Lernout & Hauspie. Acquisition, Restructuring, and Other Charges: These charges incurred amounted to $1.7 million and $9.1 million, for an after-tax per share cost of $0.05 and $0.25 respectively, for the three and nine months ended June 30, 1996. These charges relate primarily to acquisition and subsequent restructuring costs. Such restructuring costs were incurred in order to take advantage of economies of scale, eliminate redundant functions and in an attempt to reduce overall operating costs in connection with the acquisitions of Datastorm in March 1996, and Inset in December 1995. Acquisition expenses include fees for financial advisory, legal and accounting services, and other related expenses. The Company expects to incur significant acquisition and related charges in the future quarter ending September 30, 1996 in connection with the Vertisoft and Limbex acquisitions. Income Taxes: The Company's estimated current effective tax rate of 16% (benefit) reflects the amount of tax benefit the Company believes it will realize over the remainder of the year. Prior to March 28, 1996, Datastorm, which was acquired during the second quarter, was an S corporation whereby the income tax effects of Datastorm's activities accrued directly to its shareholders. Similarly, the income tax effects of Landmark's activities accrued to it's shareholders prior to it having been acquired by Quarterdeck in June of 1995. At June 30, 1996, the Company had a net deferred tax asset of $4,515,000, net of a valuation allowance of $8,386,000. This net deferred tax asset is comprised of the estimated tax effect of expected future reversing temporary differences, relating in part to tax losses and to charges taken for book purposes that are not deductible for federal income tax purposes until the amounts are paid in the future, net of the valuation allowance. Management believes that it is more likely than not that the Company will realize benefit of the net deferred tax asset. Further reduction of the valuation allowance is dependent on a number of factors including the timing of reversal of the temporary differences, and an assessment of the future realization of the deferred tax assets. Net Income: Net income for the three and nine months ended June 30, 1996 decreased to a loss of $22,948,000 or $0.73 per share and $19,378,000 or $0.62 per share from $530,000 or $0.02 per share and $10,975,000 or $0.35 per share, respectively as compared to the comparable periods of the prior year. Trends and Uncertainties: The computer software industry is subject to rapid technological changes often evidenced by new competing products and improvements in existing products. Quarterdeck depends on the successful development or acquisition and resulting sales of new products, including upgrades of existing products, to replace revenues from products introduced in prior periods that may have begun to experience reduced revenues. If Quarterdeck's current leading products become outdated and lose market share faster than those revenues are replaced by new products, or if new products or existing product upgrades are not introduced when planned or do not achieve the revenues anticipated by Quarterdeck, Quarterdeck's operating results could be materially adversely affected. Even with normal development cycles, the market environment can change so quickly that features in products can become outdated soon after market introduction. These events may occur in the future and may have an adverse effect on future revenues and operating results. 14 15 While Quarterdeck expects that memory management will continue to add value to Windows 95 and legacy systems, the Company has expanded its focus from a sole reliance on memory management to a broader base of desktop utilities. In September 1995, Quarterdeck released the first of several new system utility products for Windows 95, including: WinProbe (a system and hardware diagnostic), CleanSweep (a disk management utillity) and MagnaRAM (a memory compression utility). QEMM, Quarterdeck's leading memory management product, was upgraded to version 8.0 with the inclusion of several new technologies and is targeted to provide solutions for Windows 95 as well as new enhanced support for Windows 3.1 and continued support for DOS. In July 1996, Quarterdeck released the second wave of new system utilities for Windows 95 with the release of Fix-IT (a pacesetting software configuration diagnostic and correction tool), Zip-IT (a drag-and-drop utility for creating and maintaining compressed files), Name-IT (a utility to allow Windows 95 long filenames in 16-bit applications) and Remove-IT (a windows uninstallation utility). The combination of Remove-IT and CleanSweep give Quarterdeck an unprecedented leading position in the Windows uninstaller market. While Quarterdeck has diluted its reliance on memory management with the introduction of new utility products, like WinProbe, CleanSweep and Fix-IT, there can be no assurance that any of these technologies will continue to provide sufficient benefit to the user over and above what the base operating systems, applications and hardware can provide. Quarterdeck is devoting substantial efforts to the development of software products that are designed to operate on Microsoft's Windows 95 and Windows NT. Microsoft may incorporate advanced utilities or other features in Windows 95 or Windows NT that may decrease the demand for certain of the Company's products, including those under development. If Quarterdeck is not able to continue to successfully, and timely develop and market products that function under Windows 95 and Windows NT, and offer value to Windows 95 and Windows NT users, future revenues would be adversely affected. Future competitive product releases may cause disruptions in orders for the Company's products while users and the marketplace evaluate the competitive products. The extent of the disruption in orders and the impact on future orders of the Company's products will depend on various factors that are not fully known at this time. Among those factors are the level of functionality, performance and features included in the final release of competitive products and the market's evaluation of those products as compared to the then current functionality, performance and features of the Company's products. The Company's Internet-related products compete with Internet access, creation and server tools from a variety of companies, including Microsoft Corporation, Netscape Communications Corporation and other connectivity, networking and Internet software application developers, Internet access providers and other on-line service providers, as well as operating system vendors, including Microsoft Corporation and IBM. The original Mosaic browser developed by the National Center for Supercomputing Applications is available for download in electronic format for free from the Internet. Certain competitors have also made versions of their Internet access, creation and server products available on the Internet for users to download at no charge or for extended evaluation. In addition, the market for Internet products may be adversely impacted to the extent that vendors of PC hardware or PC operating systems incorporate Internet tools, functions or capabilities within their operating systems or PC hardware and thereby reduce the market for stand-alone Internet products. Quarterdeck is dedicating substantial efforts on products and services for the telecommunications and collaborative computing and Internet markets and expects that a significant portion of future revenues will come from these products and services. The revenues from such new products and services may be less than Quarterdeck anticipates due to various factors including the timing of release in relation to competitive products and services, and uncertainties surrounding the rate and extent of development of these new and emerging markets. Quarterdeck's Internet-related products and services are dependent on the viability and continued growth of the Internet, and its expanded use by businesses and individuals for networking and communications. 15 16 There are currently few laws or regulations directly applicable to access or to commerce on the Internet. However, due to the increasing popularity and use of the Internet, it is possible that a number of laws and regulations may be adopted with respect to the Internet. Such laws and regulations may cover issues such as user privacy, pricing and characteristics and quality of products and services. The Telecommunications Act of 1996 (the "1996 Act"), which was recently enacted and the judicial interpretation of which is uncertain, imposes criminal penalties for transmission of or allowing access to certain obscene communications over the Internet and other computer services and contains additional provisions intended to protect minors. In addition, America's Carriers Telecommunication Association ("ACTA") recently filed a Petition for Declaratory Ruling Special Relief, and Institution of Rulemaking (the "ACTA Petition") before the Federal Communications Commission ("FCC"), arguing that the FCC has authority to regulate the Internet and, as such, should regulate, as they do the telecommunications carriers, the providers of computer software products (such as the Company) which enable voice transmission over the Internet. The ACTA Petition requests the FCC to declare its authority over interstate and international telecommunications services using the Internet, to order providers of the aforementioned software to cease the sale of such software pending a rulemaking, and to institute a rulemaking body to govern the use of the Internet as a means for providing telecommunications services. The enactment of the 1996 Act, and of any similar laws or regulations in the future, may decrease the growth or use of the Internet, which could in turn decrease the demand for the Company's services and products and increase the Company's cost of doing business or otherwise have an adverse effect on the Company's business, operating results and financial condition. While the acquisition of Future Labs, Datastorm, Inset, and other acquisitions previously completed during fiscal 1995 have broadened the Company's product portfolio and sales distribution channels, the acquisitions have resulted in the Company competing with other companies and in markets where it has not previously competed. The Company has also made investments in certain companies, and anticipates that it may make additional synergistic acquisitions and investments in the future. There are significant business risks associated with acquisitions, including the successful combination of the companies in an efficient and timely manner, the coordination of research and development and sales efforts, the retention of key personnel, diversion of management's attention away from day-to-day matters and the integration of the acquired products. Additionally, there may be an adverse impact on revenues of acquired companies due to the transition of products' sales and marketing and research and development activities. The Company's success will depend, in part, on its ability to integrate the operations of acquired companies and effectively utilize the acquired intellectual property. The Company's distributor and reseller customers also carry the products of Microsoft Corporation and other of the Company's competitors, many of whom have substantially greater financial resources than the Company. The distributors and resellers have limited capital to invest in inventory and their decisions to purchase the Company's products and in the case of resellers, to give them critical shelf space, is partly a function of pricing, terms and special promotions offered by the Company's competitors, over which the Company has no control and which it cannot predict. The Company's pattern of revenues and earnings were affected during the third quarter, and may be affected in the future by the phenomenon known as "channel fill." Channel fill occurs following the introduction of a new product or a new version of products as distributors buy significant quantities of the new product or version in anticipation of sales of such product or version. Following such purchases, the rate of distributors' purchases often declines, depending on the rates of purchases by end users or "sell-through." The phenomenon of "channel fill" may also occur in anticipation of price increases or in response to sales promotions or incentives, some of which may be designed to encourage customers to accelerate purchases that might otherwise occur in later periods. Channels may also become filled simply because the distributors are unable to, or do not, sell their inventories to retail distribution or end users as anticipated. If sell-through does not occur at a sufficient rate, distributors will delay purchases or cancel orders in later periods or return prior purchases in order to reduce their inventories. Consequently, there can be no assurance that existing inventories will not adversely impact the sales of future periods. In addition, between the date the Company announces a new version or new product and the date of release, distributors, dealers and end users often delay purchases, cancel orders or return products in anticipation of the availability of the new version or new product. Such order delays or cancellations can cause material fluctuations in revenues from one quarter to the next. Net revenues may be materially affected favorably or adversely by these effects. 16 17 The Company operates with relatively little order backlog; therefore, if near-term demand for the Company's products weaken in a given quarter, there could be a material adverse effect on revenues and on the Company's operating results. Like other manufacturers of packaged software products, Quarterdeck is exposed to the risk of product returns from distributors and reseller customers. There can be no assurance that actual returns in excess of recorded allowances will not result in a material adverse effect on business, operating results and financial condition. FACTORS AFFECTING QUARTERLY RESULTS AND STOCK PRICE The Company has in the past experienced wide fluctuations in its operating results and stock price, and the Company's future operating results and stock price could be subject to significant volatility, particularly on a quarterly basis. The Company's revenues and quarterly operating results may experience significant fluctuations and be unpredictable as the result of a number of factors including, among others, introduction of new or enhanced products by the Company or its competitors, rapid technological changes in the Company's markets, seasonality of revenues, changes in operating expenses and general economic conditions. Any shortfalls in revenues or quarterly results could have an immediate and significant adverse effect on the trading price of the Company's common stock in any given period. Net income per share is calculated using the treasury stock method (see Note 9 of Notes to Consolidated Unaudited Financial Statements). Increases in the price of Quarterdeck's stock can have an adverse impact on the calculation of net income per share in that period as more outstanding instruments are included as common shares outstanding. As a result of the foregoing factors and other factors that may arise in the future, the market price of the Company's common stock may be subject to significant fluctuations over a short period of time. These fluctuations may be due to factors specific to the Company, to changes in analysts' earnings estimates, or to factors affecting the computer industry or the securities markets in general. LIQUIDITY AND CAPITAL RESOURCES At June 30, 1996, Quarterdeck's cash and cash equivalents totaled $14,409,000 and has further declined to approximately $10,000,000 as of July 31, 1996, as compared to cash and cash equivalents of $5,384,000 and short term investments of $34,285,000 at September 30, 1995. During the nine months ended June 30, 1996 the Company's total cash and short term investments has declined by $25,260,000. The decrease in cash and short-term investment balances result primarily from the Company's year to date losses, payment of dividends by acquired companies prior to acquisition, approximately $5.9 million of investments made by the Company in strategic technologies, including the stock of certain companies possessing such technology, and $13.4 million in capital investments, including $8.2 million for the construction of a new facility in Columbia, Missouri, that will house Datastorm. On August 6, 1996, the Company's Datastorm subsidiary secured construction financing from a bank of up to $5.0 million with an interest rate equal to the bank's commercial base rate, currently 8.25%, which is secured by the Columbia, Missouri building which is under construction. The loan is guaranteed by Quarterdeck and is believed to be sufficient to complete construction. The principal amount plus any unpaid interest is due February 7, 1997. In addition, management is presently exploring the potential of a sale-leaseback transaction and other long-term financing options with respect to the building. There can be no assurance that the Company will be successful in obtaining such long-term financing with acceptable terms and conditions. Working capital at June 30, 1996 amounted to $14,645,000, a decrease of $14,845,000, as compared to $29,490,000 at September 30, 1995. On March 28, 1996, the Company issued $25.0 million principal amount of 6% Convertible Senior Subordinated Notes, due 2001, to a single institutional investor in a private placement pursuant to the terms of a Note Agreement, dated March 1, 1996 (the "Note Agreement"). The Notes are convertible generally after April 1, 1997, at an initial conversion price of $21.18 per share. The conversion price is adjustable for certain below market equity issuances and the Notes contain other customary anti-dilution provisions. The Notes may be prepaid without penalty, subject to conversion, anytime between April 1997 and April 1999 if the Company's Common Stock had been trading, for 20 of the 30 trading days preceding notice of prepayment, approximately 18% above the then current conversion price. The Note Agreement limits the Company's indebtedness for borrowed funds, other than the Notes, to 50% of Consolidated Net Worth (as defined in the Note Agreement.) 17 18 On August 13, 1996, the Company's revolving credit facility with Bank of America was amended, and the bank waived the Company's non-compliance with certain financial covenants therein for the quarter ended June 30, 1996. The Company may borrow the lesser of 75% of Eligible Accounts Receivable or $15.0 million. As of July 31, 1996 the maximum available borrowing the Company could be eligible for under this line was approximately $7.5 million. The line is secured by Quarterdeck's domestic accounts receivable and inventory. The current term of the line of credit matures June 30, 1997. The line can be used for general corporate purposes, including investments and acquisitions, and bears interest, at the Company's option, at either the bank's reference (prime) interest rate plus 0.50% or the U.S. offshore rate plus a margin of 2.00%. The line is subject to the Company complying with certain customary financial covenants and restrictions, including a prohibition of the payment of dividends, other than those payable solely in capital stock, and a prohibition of any stock repurchase activity. At June 30, 1996 the Company did not have any borrowings outstanding under the line. As of July 31, 1996, the Company had borrowings of $1.25 million outstanding under the line. The Company believes existing cash and cash equivalents, plus funds provided by operations, borrowing capacity under the line of credit and projected borrowing against the Datastorm facility should be sufficient to fund operations for the coming twelve months. Nevertheless, the Company is presently exploring various financing alternatives, including equipment financing, secured debt, convertible debt, additional sales of equity securities and the sale of certain of its prior investments in order to finance the core business of the Company and help provide adequate working capital for operations. Over the short term, the Company expects to increase its borrowings under its credit facility and that anticipated increases in sales (as compared to the June quarter) will increase the Company's borrowing base under the facility. In addition, the expense reductions resulting from the restructuring should provide additional funds from operations in future quarters. However, there is no guarantee that increased sales will occur or that any such increase will result in adequate operating funds, or that such additional financing will be available, or if available, will be available on acceptable terms. Should product shipments be delayed, or should construction of the Datastorm facility not be completed as planned, or should the Company experience significant shortfalls in planned revenues, or experience unforeseen expenses, the Company might not be able to fund operations for the coming twelve months. Any decision to obtain financing through debt or through equity investment will depend on various factors, including, among others, financial market conditions, strategic acquisition and investment opportunities, and developments in the Company's markets. The sale of additional equity securities or future conversion of any convertible debt would result in additional dilution to the Company's stockholders. The Company conducts business in various foreign currencies and is therefore subject to the transaction exposures that arise from foreign exchange rate movements between the dates that foreign currency transactions are recorded and the date that they are consummated. The Company is also subject to certain exposures arising from the translation and consolidation of the financial results of its foreign subsidiaries. There can be no assurance that actions taken to manage such exposures will continue to be successful or that future changes in currency exchange rates will not have a material impact on the Company's future operating results. The Company does not hedge either its translation risk or its economic risk. 18 19 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is a defendant in various pending claims and lawsuits. 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. ITEM 2. CHANGES IN SECURITIES The Credit Facility and the Note Agreement both contain prohibitions from the payment of cash dividends by the Company. See notes 5 and 11 to the accompanying Condensed Consolidated Unaudited Financial Statements. The Company's prior and present intention was to retain any earnings to finance the operations, growth and possible additional acquisitions. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a)(1) Exhibits 10.1 Waiver and Second amendment to Credit Agreement dated as of August 13, 1996, between Quarterdeck Corporation and Bank of America N.T. & S.A. 10.2 Registration Rights Agreement among Quarterdeck Corporation and the shareholders of Vertisoft Systems, Inc., dated as of July 18, 1996. (Which supercedes the version of such agreement filed with the Form 8-K with respect to the Vertisoft acquisition listed below.) (b) Reports on Form 8-K: A Form 8-K, restating for certain material acquisitions, the financial information contained in the Company's report on Form 10-K for the year ended September 30, 1995 was filed with the Securities and Exchange Commission on June 25, 1996. A Form 8-K/A with respect to the Company's acquisitions of Datastorm and Inset was filed with the Securities and Exchange Commission on May 24, 1996. A Form 8-K, with respect to the Company's May 15, 1996 acquisition of Future Labs. was filed with the Securities and Exchange Commission. A Form 8-K with respect to the Company's acquisition of Datastorm Technologies, Inc. was filed with the Securities and Exchange Commission on April 12, 1996. A Form 8-K with respect to the Company's July 18, 1996 acquisition of Vertisoft was filed with the Securities and Exchange Commission. 19 20 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. QUARTERDECK CORPORATION (REGISTRANT) Date: August 14, 1996 \s\ Gaston Bastiaens -------------------- Gaston Bastiaens President and Chief Executive Officer Date: August 14, 1996 \s\ Frank Greico ---------------- Frank Greico Sr. Vice President and Chief Financial Officer 20 EX-10.1 2 EXHIBIT 10.1 1 EXHIBIT 10.1 WAIVER AND SECOND AMENDMENT TO CREDIT AGREEMENT THIS WAIVER AND SECOND AMENDMENT TO CREDIT AGREEMENT ("Waiver and Amendment"), dated as of August 13, 1996, is entered into by and between QUARTERDECK CORPORATION (the "Borrower") and BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION (the "Bank"). RECITALS A. The Bank and the Borrower are parties to a Credit Agreement dated as of February 14, 1996, as amended by that First Amendment to Credit Agreement dated as of March 28, 1996 (the "Credit Agreement"), pursuant to which the Bank has extended certain credit facilities to the Borrower and its Acceptable Subsidiaries. B. The Borrower has reported to the Bank the existence of certain Events of Default under the Credit Agreement. The Borrower has requested that the Bank waive certain Events of Default and agree to certain amendments to the Credit Agreement. C. The Bank is willing to waive certain Events of Default under the Credit Agreement, and to amend the Credit Agreement, subject to the terms and conditions of this Waiver and Amendment. NOW, THEREFORE, for valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. Defined Terms. Unless otherwise defined herein, capitalized terms used herein shall have the meanings, if any, assigned to them in the Credit Agreement. 2. Defaults and Waiver. (a) For purposes of this Waiver and Amendment, the "Existing Defaults" shall mean: (i) the Event of Default existing on this date under Section 8.01(c) of the Credit Agreement as a consequence of a breach of the negative covenant set forth at Section 7.12 of the Credit Agreement solely for the quarter ended June 30, 1996 through the Effective Date; (ii) the Event of Default existing on this date under Section 8.01(c) of the Credit Agreement as a consequence of a breach of the negative covenant set 2 forth at Section 7.14 of the Credit Agreement solely for the quarter ended June 30, 1996 through the Effective Date; and (iii) the Event of Default existing on this date under Section 8.01(c) of the Credit Agreement as a consequence of a breach of the negative covenant set forth at Section 7.15 of the Credit Agreement solely for the quarter ended June 30, 1996 through the Effective Date. (b) Subject to and upon the terms and conditions hereof, the Bank hereby waives the Existing Defaults. (c) Nothing contained herein shall be deemed a waiver of (or otherwise affect the Bank's ability to enforce) any other default or Event of Default, including without limitation (i) any default or Event of Default as may now or hereafter exist and arise from or otherwise be related to the Existing Defaults (including without limitation any cross-default arising under the Credit Agreement by virtue of any matters resulting from the Existing Defaults), and (ii) any default or Event of Default arising at any time after the Effective Date and which arises under the same provisions of the Credit Agreement as those implicated by any of the Existing Defaults. 3. Amendments to Credit Agreement. (a) Section 1.01 of the Credit Agreement shall be amended at the defined term "Applicable Margin" by amending and restating such defined term in its entirety as follows: "'Applicable Margin': (a) with respect to Offshore Rate Advances, 2.00% per annum, and (b) with respect to Reference Rate Advances, 0.50% per annum." (b) Section 1.01 of the Credit Agreement shall be amended at the defined term "Availability Period" by amending and restating such defined term in its entirety as follows: "'Availability Period': the period commencing on the date of this Agreement and ending on the date that is the earlier to occur of (a) June 30, 1997, and (b) the date on which the Bank's commitment to extend credit hereunder terminates." (c) Section 1.01 of the Credit Agreement shall be amended at the defined term "Borrowing Base" by 2 3 amending and restating such defined term in its entirety as follows: "'Borrowing Base': as of any date of determination thereof, an amount equal to 75% of the value of all Eligible Accounts (net of all bad debt reserves, reserves for returns, discounts and marketing funds, or similar reserves applicable thereto) outstanding at such date." (d) Section 1.01 of the Credit Agreement shall be amended at the defined term "Credit Documents" by adding the phrase ",the Collateral Documents" after "this Agreement". (e) Section 1.01 of the Credit Agreement shall be amended at the defined term "Credit Limit" by amending and restating such defined term in its entirety as follows: "'Credit Limit': the amount $15,000,000 or the Equivalent Amount thereof, as the same may be reduced pursuant to Section 2.08." (f) Section 1.01 of the Credit Agreement shall be amended at the defined term "Eligible Account" by amending and restating such defined term in its entirety as follows: "'Eligible Account': at the time of any determination thereof, any Account of the Borrower as to which each of the following requirements has been met to the satisfaction of the Bank: (a) The Borrower has lawful and absolute title to such Account and such Account is, in the Borrower's reasonable judgment, collectible in the ordinary course of business; (b) Such Account is not subject to a bona fide dispute, setoff, counterclaim or other claim or defense on the part of any Person (including the Account Debtor of the Account) denying liability under such Account; (c) Such Account is not subject to any lien, encumbrance, security interest or similar charge in favor of any Person, except Liens permitted by Section 7.02 (other than subsection (k) thereof); (d) Such Account is a bona fide Account (which with respect to an Account arising from a sale of goods, was created as a result of a sale on an absolute basis and 3 4 not on consignment, approval, or sale-and-return basis, it being understood that (i) Accounts subject to "re-balancing", i.e. where the Account Debtor has the right to return certain products in exchange for other products then stocked by such Account Debtor, and (ii) Accounts where the Account Debtor has the right to return certain products in exchange for newer versions of the same, but, in each case, the amount of the Account is not reduced as a result thereof shall not be considered to be Accounts created as a result of a sale on a sale-and-return basis) of the Borrower arising in the ordinary course of the Borrower's business and which: (i) if an Account arising from the sale of goods, covers goods which have been shipped or delivered and on which have been taken all other actions necessary to create a binding obligation on the part of the Account Debtor on such Account; (ii) if an Account relating to the furnishing of services, covers services which have been performed and completed and on which have been taken all other actions necessary to create a binding obligation on the part of the Account Debtor on such Account; (e) The Account Debtor on such Account is not: (i) an employee, affiliate (including a partnership, joint venture, limited liability company, joint stock company or other Person in which the Borrower has a direct or indirect ownership interest), parent, or Subsidiary of the Borrower; (ii) the federal government or a political subdivision thereof unless the Bank has agreed to the contrary in writing and the Borrower has complied with the Federal Assignment of Claims Act of 1940, as amended, and the rules and regulations promulgated thereunder as from time to time in effect; or (iii) any state of the United States or any city, town, municipality or division thereof, or located in a foreign country; (f) Such Account is not in default. An Account shall be deemed to be in default if any of the following have occurred with respect to such Account: 4 5 (i) the Account is outstanding more than 90 days past its original due date; or (ii) the Account Debtor on such Account is the subject of any reorganization, bankruptcy, receivership, custodianship, insolvency, or other proceeding analogous to those described in subsections 8.01(f) or (g); (g) Such Account is not the obligation of an Account Debtor who is in default (as defined in subparagraph (f) of this definition) on 25% or more of the Accounts upon which such Account Debtor is obligated to the Borrower; (h) Such Account is the subject of a first priority perfected security interest in favor of the Bank securing the respective obligations of the Borrower and the Acceptable Subsidiaries under this Agreement and the other Credit Documents; and (i) The Account is otherwise reasonably acceptable to the Bank. In addition to the foregoing limitations, the dollar amount of Eligible Accounts included in the Borrowing Base which are obligations of a single Account Debtor shall not exceed the concentration limit established for that Account Debtor. To the extent the total of such Eligible Accounts exceeds an Account Debtor's concentration limits, the amount of any such excess shall not be Eligible Accounts. The concentration limit for each Account Debtor other than Ingram Micro and Tech Data Corporation shall be equal to 10% of the Borrower's Accounts as of the time in question. The concentration limit for Ingram Micro shall be the greater of (1) 35% of the Accounts of the Borrower or (2) $6,000,000, and the concentration limit for Tech Data Corporation shall be 25% of the Accounts of Borrower." (g) Section 1.01 of the Credit Agreement shall be amended at the defined term "Final Maturity Date" by amending and restating such defined term in its entirety as follows: "'Final Maturity Date': (a) in respect of any Advances, June 30, 1997; (b) in respect of any 5 6 commercial letters of credit, June 30, 1997; and (c) in respect of any standby letters of credit, June 30, 1997." (h) Section 1.01 of the Credit Agreement shall be amended at the defined term "Material Adverse Effect" by deleting the word "or" before clause (c) thereof and adding the following at the end of clause (c) thereof: ";or (d) a material adverse effect upon the perfection or priority of any lien granted under any of the Collateral Documents". (i) Section 1.01 of the Credit Agreement shall be amended by adding the following new defined terms in the appropriate alphabetical order: "Collateral": all property and interests in property and proceeds thereof now owned or hereafter acquired by the Borrower and its Subsidiaries in or upon which a lien now or hereafter exists in favor of the Bank, whether under this Agreement or under any other documents executed by any such Person and delivered to the Bank. "Collateral Documents" : collectively, (i) the Security Agreement and all other security agreements, mortgages, deeds of trust, patent and trademark assignments, lease assignments, guarantees and other similar agreements between the Borrower or any Subsidiary and the Bank now or hereafter delivered to the Bank pursuant to or in connection with the transactions contemplated hereby, and all financing statements (or comparable documents now or hereafter filed in accordance with the UCC or comparable law) against the Borrower or any Subsidiary as debtor in favor of the Bank and (ii) any amendments, supplements, modifications, renewals, replacements, consolidations, substitutions and extensions of any of the foregoing. "Datastorm": Datastorm Technologies, Inc., a Missouri corporation and a Subsidiary of the Borrower. "Datastorm Property": the real property owned by Datastorm and located at 2401 LeMone Industrial Boulevard, Columbia, MO 65205. "Security Agreement": the Security Agreement dated as of August 13, 1996 delivered by the Borrower in favor of the Bank, and any other security agreement 6 7 delivered by a Subsidiary in favor of the Bank pursuant to Section 2.10. "UCC": the Uniform Commercial Code as in effect in the State of California. (j) Each of (i) the first sentence of subsection 2.02(a) of the Credit Agreement, (ii) the last line of subsection 2.03(d) of the Credit Agreement, (iii) the last line of subsection 2.04(d) of the Credit Agreement, and (iv) the first sentence of Section 3.06 of the Credit Agreement, shall be amended by adding "plus the Applicable Margin" after the words "Reference Rate". (k) Subsection 2.04(c) of the Credit Agreement shall be amended by deleting the words "the Applicable Margin" in the first sentence thereof and inserting "2.00% per annum" in lieu thereof. (l) Subsection 2.04(f) of the Credit Agreement shall be amended and restated in its entirety as follows: "(f) The aggregate of the L/C Outstanding Amounts in respect of standby letters of credit and commercial letters of credit may not exceed at any time $2,000,000 or the Borrowing Base." (m) The following shall be added as Section 2.10 of the Credit Agreement: "2.10 Security. All obligations of the Borrower and the Acceptable Subsidiaries under this Agreement and all other Credit Documents shall be secured by all Accounts and inventory of the Borrower in accordance with the Collateral Documents. The Borrower shall cause its Subsidiaries to pledge their respective inventory, if necessary, so that, no later than September 15, 1996 and at all times thereafter, no less than 75% of the domestic inventory of the Borrower and its Subsidiaries, on a consolidated basis, is subject to a perfected first priority lien (subject only to liens permitted under Section 7.02) in favor of the Bank. In connection therewith, the Borrower shall cause the applicable Subsidiaries to deliver such security agreements, lien searches, certificates, financing statements, opinions and other documents as the Bank may reasonably request in connection with the granting and perfection of such liens." 7 8 (n) The following are added as Section 5.15 and Section 5.16, respectively, of the Credit Agreement: "5.15 Collateral Documents. (a) The provisions of each of the Collateral Documents are effective to create in favor of the Bank, a legal, valid and enforceable first priority security interest in all right, title and interest of the Borrower or the Subsidiary party thereto in the collateral described therein, subject only to liens permitted under Section 7.02; and financing statements have been filed in the offices in all of the jurisdictions listed in the schedule to the Security Agreement. (b) All representations and warranties of the Borrower and any Subsidiary party to a Security Agreement contained in the Collateral Documents are true and correct. 5.16 Solvency. The Borrower and each Subsidiary party to a Security Agreement is solvent. As used in this Section, "solvent" means, at any time, with respect to a Person, that (a) the fair value of the property of the Person is greater than the amount of the Person's liabilities (including disputed, contingent and unliquidated liabilities) as such value is established and liabilities evaluated for purposes of Section 101(31) of the U.S. Bankruptcy Code and, in the alternative, for purposes of the California Uniform Fraudulent Transfer Act; (b) the present fair saleable value of the property of the Person is not less than the amount that will be required to pay the probable liability of the Person on its debts as they become absolute and matured; (c) the Person is able to realize upon its property and pay its debts and other liabilities (including disputed, contingent and unliquidated liabilities) as they mature in the normal course of business; (d) the Person does not intend to, and does not believe that it will, incur debts or liabilities beyond the Person's ability to pay as such debts and liabilities mature; and (e) the Person is not engaged in business or a transaction, and is not about to engage in business or a transaction, for which the Person's property would constitute unreasonably small capital." (o) Subsection 6.02(d) of the Credit Agreement shall be amended and restated in its entirety as follows: 8 9 "(d) within 25 days after the end of each calendar month (or, if there exists an Event of Default, more frequently as may be required by the Bank), (i) a Borrowing Base Certificate, and (ii) a detailed aging of all accounts receivable outstanding as of such last day in form and substance reasonably requested by the Bank; and" (p) Subsection 6.02(f) of the Credit Agreement shall be amended and restated in its entirety as follows: "(f) Promptly upon request, such other materials and information relating to the Borrower, its Subsidiaries or the Collateral as the Bank may reasonably request." (q) Subsection 6.03 of the Credit Agreement shall be amended and restated in its entirety as follows: "6.03 Books, Records, Audits and Inspections. The Borrower shall, and shall cause its Subsidiaries to, maintain adequate books, accounts and records, and prepare all financial statements required hereunder in accordance with generally accepted accounting principles consistently applied, and in compliance in all material respects with the regulations of any governmental regulatory body having jurisdiction over the Borrower or its Subsidiaries, or the Borrower's or its Subsidiaries' businesses, and permit employees or agents of the Bank at any reasonable time to inspect the Collateral and the Borrower's and its Subsidiaries' properties, to conduct appraisals of the Collateral, and to examine or audit the Borrower's and its Subsidiaries' books, accounts, and records and make copies and memoranda thereof. Unless there shall have occurred and be continuing an Event of Default (in which case the foregoing shall be at the Borrower's expense), the foregoing shall be at the Bank's expense; provided that, notwithstanding that no Event of Default shall have occurred and be continuing, the Borrower shall pay for the Bank's reasonable costs (including the allocated cost of internal audits or appraisals) for conducting audits and appraisals of the Collateral, but no more than four times each calendar year unless an Event of Default shall have occurred and be continuing. In the event any Collateral, properties, books, accounts or records are in the possession of or under the control of a third party, the Borrower shall direct and hereby authorizes such third party to permit 9 10 access to the Bank's employees or agents for the purpose of performing the inspections, appraisals, examinations or audits permitted under this Section and to respond to any requests from the Bank for information concerning the amount, status or condition of any Collateral in such third party's possession or control. The Borrower shall cause its officers and employees to give full cooperation and assistance in connection with any such inspection, appraisal, examination or audit." (r) Section 6.05 of the Credit Agreement shall be amended and restated in its entirety as follows: "6.05 Insurance. In addition to insurance requirements set forth in the Collateral Documents, the Borrower shall, and shall cause its Subsidiaries to, maintain and keep in force insurance of the types and in amounts customarily carried in lines of businesses similar to those of the Borrower or the applicable Subsidiary, including fire, extended coverage, public liability (including, in the case of the Borrower and Datastorm, coverage for contractual liability), property damage (including, in the case of the Borrower and Datastorm, use and occupance) and workers' compensation, all carried by responsible insurers, and, in the case of fire and property damage insurance, naming the Bank as loss payee and as additional insured, as its interests may appear, and deliver to the Bank from time to time, at the Bank's request, a copy of each insurance policy, or if permitted by the Bank, a certificate of insurance setting forth all insurance then in effect." (s) The following shall be added as new Section 6.09 to the Credit Agreement: 10 11 "6.09 Further Assurances. Promptly upon request by the Bank, the Borrower shall (and shall cause any of its Subsidiaries to) do, execute, acknowledge, deliver, record, re-record, file, re-file, register and re-register, any and all such further acts, deeds, conveyances, security agreements, mortgages, assignments, estoppel certificates, financing statements and continuations thereof, termination statements, notices of assignment, transfers, certificates, assurances and other instruments the Bank may reasonably require from time to time in order (a) to carry out more effectively the purposes of this Agreement or any other Credit Document, (b) to subject to the liens created by any of the Collateral Documents any of the properties, rights or interests covered by any of the Collateral Documents, (iii) to perfect and maintain the validity, effectiveness and priority of any of the Collateral Documents and the liens intended to be created thereby, and (iv) to better assure, convey, grant, assign, transfer, preserve, protect and confirm to the Bank the rights granted or now or hereafter intended to be granted to the Bank under any Credit Document or under any other document executed in connection therewith." (t) Subsection 7.01(d) of the Credit Agreement shall be amended and restated in its entirety to read as follows: "(d) indebtedness secured by liens permitted by subsections 7.02(f), (n), (o) and (p)." (u) Section 7.02 of the Credit Agreement shall be amended and restated in its entirety as follows: "7.02 Liens. The Borrower shall not, and shall not suffer or permit any of its Subsidiaries to, create, assume, or suffer to exist any security interest, deed of trust, mortgage, lien (including the lien of an attachment, judgment, or execution), or encumbrance, securing a charge or obligation, on or of any of its or their property, real or personal, whether now owned or hereafter acquired, except: (a) security interests and deeds of trust in favor of the Bank; (b) liens, security interests, and encumbrances in existence as of the date of this Agreement and listed on Schedule 7.02; (c) liens for current taxes, assessments, or other governmental charges which are not delinquent or remain payable without any penalty or which are being contested in good faith and by 11 12 appropriate proceedings, and as to which to no foreclosure or forfeiture proceeding has been commenced, or, if commenced, which has been stayed; (d) liens (other than any lien imposed by ERISA or any lien on the Collateral) in connection with workers' compensation, unemployment insurance, or other social security obligations; (e) mechanics', worker's, materialmen's, landlords', carriers', or other like liens arising in the ordinary and normal course of business with respect to obligations which are not due or which are being contested in good faith and by appropriate proceedings, and as to which no foreclosure or forfeiture proceeding has been commenced, or, if commenced, which has been stayed; (f) purchase money security interests in personal or real property hereafter acquired when the security interest does not extend beyond the property purchased; (g) liens (other than any such lien on the Collateral) incurred and deposits made in the ordinary course of business to secure the performance (including by way of surety bonds or appeal bonds) of tenders, bids, leases, contracts, statutory obligations or similar obligations or arising as a result of progress payments under contracts, in each case in the ordinary course of business and not relating to the repayment of indebtedness for borrowed money; (h) easements, rights-of-way, covenants, consents, reservations, encroachments, variations and other restrictions, charges or encumbrances (whether or not recorded) that do not materially interfere with the ordinary conduct of business, materially detract from the value of the asset to which they attach or materially impair the use thereof; (i) building restrictions, zoning laws and other statutes, laws, rules, regulations, ordinances and restrictions; (j) leases, subleases or easements (other than, in each case, in respect of the Collateral) granted in the ordinary course of business to others not materially interfering with the business of, and consistent with past practices of, the Borrower or the relevant Subsidiary; (k) any attachment or judgement lien, not otherwise constituting an Event of Default, in existence less than 30 days after the entry thereof or with respect to which (i) execution has been stayed, (ii) payment is covered in full by insurance, or (iii) the Borrower or Subsidiary is in good faith prosecuting an appeal or other appropriate proceedings for review and has set aside on its books such reserves as may be required by GAAP with respect to such judgment or award; (l) liens or other encumbrances 12 13 existing on assets of any Person at the time such Person becomes a Subsidiary and not created in anticipation thereof; (m) other liens (other than any such lien on the Collateral) incidental to the conduct of the business or the ownership of the assets of the Borrower or any Subsidiary that (i) were not incurred in connection with borrowed money, (ii) do not in the aggregate materially detract from the value of the assets subject thereto or materially impair the use thereof in the operation of such business and (iii) do not secure obligations aggregating in excess of $250,000; (n) liens on personal property (other than the Collateral) securing indebtedness (including arising out of a sale and leaseback transaction) not to exceed in aggregate principal amount outstanding at any one time the amount of $7,500,000; (o) liens on the Datastorm Property, securing indebtedness not to exceed in aggregate principal amount outstanding at any one time the value of the Datastorm Property, or arising out of a sale and leaseback transaction of the Datastorm Property; (p) liens on property of Datastorm (other than the Collateral), securing existing indebtedness not to exceed in aggregate principal amount outstanding at any one time the amount of $2,000,000; and (q) any lien, security interest or other encumbrance constituting a renewal, extension or replacement of any lien, security interest or encumbrance permitted under this Section; provided (i) the principal amount of indebtedness or other obligation secured by such renewal, extension or replacement lien or encumbrance does not exceed the principal amount of the indebtedness or other obligation renewed, extended or replaced unless such excess is otherwise permitted hereby at the time of the extension, renewal or replacement, and (ii) such lien or encumbrance is limited to all or a part of the property subject to the lien or encumbrance extended, renewed or replaced." (v) Section 7.07 of the Credit Agreement shall be amended and restated in its entirety as follows: "7.07 Sale of Assets. The Borrower shall not, and shall not suffer or permit any Subsidiary to, (a) sell, lease, or otherwise dispose of its business or assets as a whole or such as constitutes a substantial portion of the consolidated business or assets of the Borrower and its Subsidiaries; (b) sell or otherwise dispose of any of its accounts receivable except in 13 14 connection with the collection of same in the ordinary course of business; (c) sell or otherwise dispose of any of its assets except for full, fair and reasonable consideration; or (d) enter into any sale and leaseback agreement covering any of its fixed or capital assets (other than in respect of a sale and leaseback transaction permitted under subsection 7.02(n) or in respect of the Datastorm Property, in each case whether a "true sale" or a financing transaction)." (w) Section 7.12 of the Credit Agreement shall be amended and restated in its entirety as follows: "7.12 Quick Ratio. The Borrower shall not permit at any time on a consolidated basis the sum of cash, short-term cash investments, marketable securities not classified as long-term investments and accounts receivable (net of any bad debt reserve) to be less than 1.00 times current liabilities (which shall include all outstanding Advances (or the Equivalent Amount thereof) and the L/C Outstanding Amount)." (x) Section 7.13 of the Credit Agreement shall be amended and restated in its entirety as follows: "7.13 Total Liabilities to Tangible Net Worth. The Borrower shall not permit at any time on a consolidated basis the Borrower's total liabilities (which shall include all outstanding Advances (or the Equivalent Amount thereof) and the L/C Outstanding Amount, and exclude the outstanding principal amount of the Subordinated Notes) to exceed 1.15 times Tangible Net Worth. For purposes of this covenant only, Tangible Net Worth shall include the outstanding principal amount of the Subordinated Notes." (y) Section 7.14 of the Credit Agreement shall be amended and restated in its entirety as follows: "7.14 Tangible Net Worth. The Borrower shall not permit at any time on a consolidated basis its Tangible Net Worth to be less (i) than 85% of its Tangible Net Worth as of June 30, 1996 plus (ii) the net proceeds from any equity securities issued after June 30, 1996, plus (iii) any increase in stockholders' equity resulting from the conversion of debt securities to equity securities after the date of this Agreement, less (iv) Permitted Acquisition Charges less (v) goodwill or other intangible assets acquired in 14 15 connection with an acquisition (provided that such acquisition is not prohibited hereunder and such goodwill or other intangible assets are acquired and recognized in the consolidated financial statements of the Borrower in the same fiscal quarter as the related acquisition)." (z) Section 7.15 of the Credit Agreement shall be amended and restated in its entirety as follows: "7.15 Profitability. The Borrower shall not permit as of the last day of any fiscal quarter for the fiscal quarter then ending on a consolidated basis (i) a negative net operating income, which shall be defined as income before any deduction for interest expense, taxes, or extraordinary items, and without giving effect to any interest or other non-operating income or (ii) a negative net income, which shall be defined as net income after tax (excluding extraordinary items); provided, that net operating income and net income shall be calculated without reduction for any Permitted Acquisition Charges; and provided, further, that solely for the quarter ending September 30, 1996, the Borrower may have such a negative net operating income or net income provided that the absolute negative amount of each is not greater than $2,000,000." (aa) The following shall be added as new Section 7.16 to the Credit Agreement: "7.16 Subordinated Indebtedness. The Borrower shall not, and shall not permit any Subsidiary to, amend, modify, supplement, or amend and restate any documents evidencing or given in connection with any subordinated indebtedness (including the Subordinated Notes) or make any prepayments on any such subordinated indebtedness (including the Subordinated Notes). (bb) Subsection 8.01(j) of the Credit Agreement shall be amended and restated in its entirety as follows: "(j) Collateral. (i) any provision of any Collateral Document shall for any reason cease to be valid and binding on or enforceable against the Borrower or any Subsidiary party thereto or the Borrower or any Subsidiary shall so state in writing or bring an 15 16 action to limit its obligations or liabilities thereunder; or (ii) any Collateral Document shall for any reason (other than pursuant to the terms thereof) cease to create a valid security interest in the Collateral purported to be covered thereby or such security interest shall for any reason cease to be a perfected and first priority security interest subject only to liens permitted under Section 7.02." (cc) Section 9.04 of the Credit Agreement shall be amended by adding the following sentence at the end thereof: "The Borrower shall also pay or reimburse the Bank upon demand for all appraisal (including the allocated cost of internal appraisal services), audit (including the allocated cost of internal audit services), search and filing costs, fees and expenses, incurred or sustained by the Bank in connection with the matters referred to in the preceding sentence." (dd) The following shall be added as Section 9.15 to the Credit Agreement: "9.15 Marshalling. The Bank shall be under no obligation to marshall any assets in favor of the Borrower or any other Person or against or in payment of any or all of Borrower's or the Acceptable Subsidiaries' obligations hereunder or under any other Credit Document." (ee) Exhibit A to the Credit Agreement shall be amended and restated in its entirety in the form of Exhibit A attached hereto. (ff) Exhibit B to the Credit Agreement shall be amended and restated in its entirety in the form of Exhibit B attached hereto. 4. Representations and Warranties. The Borrower hereby represents and warrants to the Bank as follows: (a) Other than the Existing Defaults, no Default or Event of Default has occurred and is continuing. (b) The execution, delivery and performance by the Borrower of this Waiver and Amendment have been duly 16 17 authorized by all necessary corporate and other action and do not and will not require any registration with, consent or approval of, notice to or action by, any Person (including any governmental authority) in order to be effective and enforceable. The Credit Agreement as amended by this Waiver and Amendment constitutes the legal, valid and binding obligations of the Borrower, enforceable against it in accordance with its respective terms, without defense, counterclaim or offset. (c) Subject to the Existing Defaults, all representations and warranties of the Borrower contained in the Credit Agreement are true and correct. (d) The Borrower is entering into this Waiver and Amendment on the basis of its own investigation and for its own reasons, without reliance upon the Bank or any other Person. 5. Effective Date. This Waiver and Amendment will become effective as of the date first above written (the "Effective Date"), provided that each of the following conditions precedent are satisfied: (a) The Bank has received from the Borrower a duly executed original (or, if elected by the Bank, an executed facsimile copy) of this Waiver and Amendment. (b) The Bank has received from the Borrower a copy of a resolution passed by the board of directors of such corporation, certified by the Secretary or an Assistant Secretary of such corporation as being in full force and effect on the date hereof, authorizing the execution, delivery and performance of this Waiver and Amendment. (c) All representations and warranties contained herein are true and correct as of the Effective Date. (d) The Bank has received the Security Agreement, in the form of Exhibit C attached hereto, executed by the Borrower, together with: (i) executed copies of all UCC-l financing statements required to be filed, registered or recorded to perfect the security interests of the Bank in accordance with applicable law; (ii) written advice relating to such lien, tax, litigation and judgment searches as the Bank shall have 17 18 requested, and such termination statements or other documents as may be necessary to confirm that the Collateral is subject to no other liens in favor of any Persons (other than liens permitted under Section 7.02 of the Credit Agreement); (iii) evidence that all other actions necessary or, in the opinion of the Bank, desirable to perfect and protect the first priority security interest, subject only to liens permitted under Section 7.02 of the Credit Agreement, created by the Collateral Documents have been taken; (iv) such consents, estoppels, subordination agreements and other documents and instruments executed by landlords, tenants and other Persons party to material contracts relating to any Collateral as to which the Bank shall be granted a lien, as requested by the Bank; and (vi) evidence that all other actions necessary or, in the opinion of the Bank, desirable to perfect and protect the first priority lien, subject only to liens permitted under Section 7.02 of the Credit Agreement, created by the Collateral Documents, and to enhance the Bank's ability to preserve and protect its interests in and access to the Collateral, have been taken. (e) The Bank has received standard lenders' payable endorsements with respect to the insurance policies or other instruments or documents evidencing insurance coverage on the properties of the Borrower in accordance with Section 6.05 of the Credit Agreement, as amended hereby. (f) The Bank has received a legal opinion from Gibson Dunn & Crutcher, counsel to the Borrower, in the form of Exhibit D attached hereto. (g) The Bank has received from the Borrower the amount of $10,000, representing payment in full of a non-refundable amendment fee which amount the Borrower hereby covenants to pay to the Bank on demand. 6. Consent of Guarantor. The Borrower, as guarantor with respect to the obligations of the Acceptable Subsidiaries to the Bank under the Credit Agreement, as amended by this Waiver and Amendment, hereby reaffirms and agrees that each Guaranty to which the Borrower is party, and all other documents and agreements executed and delivered by the Borrower to the Bank in 18 19 connection therewith, are in full force and effect, without defense, offset or counterclaim. 7. Reservation of Rights. The Borrower acknowledges and agrees that neither the Bank's forbearance in exercising its rights and remedies in connection with the Existing Defaults, nor the execution and delivery by the Bank of this Waiver and Amendment, shall be deemed to create a course of dealing or otherwise obligate the Bank to forbear or execute similar waivers under the same or similar circumstances in the future. 8. Miscellaneous. (a) Except as herein expressly amended, all terms, covenants and provisions of the Credit Agreement are and shall remain in full force and effect and all references therein to such Credit Agreement shall henceforth refer to the Credit Agreement as amended by this Waiver and Amendment. This Waiver and Amendment shall be deemed incorporated into, and a part of, the Credit Agreement. (b) This Waiver and Amendment shall be binding upon and inure to the benefit of the parties hereto and thereto and their respective successors and assigns. No third party beneficiaries are intended in connection with this Waiver and Amendment. (c) This Waiver and Amendment shall be governed by and construed in accordance with the law of the State of California. (d) This Waiver and Amendment may be executed in any number of counterparts, each of which shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument. Each of the parties hereto understands and agrees that this document (and any other document required herein) may be delivered by any party thereto either in the form of an executed original or an executed original sent by facsimile transmission to be followed promptly by mailing of a hard copy original, and that receipt by the Bank of a facsimile transmitted document purportedly bearing the signature of the Borrower shall bind the Borrower, with the same force and effect as the delivery of a hard copy original. Any failure by the Bank to receive the hard copy executed original of such document shall not diminish the binding effect of receipt of the facsimile transmitted executed original of such document which hard copy page was not received by the Bank. 19 20 (e) This Waiver and Amendment, together with the Credit Agreement, contains the entire and exclusive agreement of the parties hereto with reference to the matters discussed herein and therein. This Waiver and Amendment supersedes all prior drafts and communications with respect thereto. This Waiver and Amendment may not be amended except in accordance with the provisions of Section 9.05 of the Credit Agreement. (f) If any term or provision of this Waiver and Amendment shall be deemed prohibited by or invalid under any applicable law, such provision shall be invalidated without affecting the remaining provisions of this Waiver and Amendment or the Credit Agreement, respectively. (g) The Borrower covenants to pay to or reimburse the Bank, upon demand, for all reasonable costs and expenses (including reasonable allocated costs of in-house counsel) incurred in connection with the development, preparation, negotiation, execution and delivery of this Waiver and Amendment and the administration of the Existing Defaults, including without limitation appraisal, audit, search and filing fees incurred in connection therewith. IN WITNESS WHEREOF, the parties hereto have executed and delivered this Waiver and Amendment as of the date first above written. QUARTERDECK CORPORATION By: /s/ Frank R. Greico -------------------------- Title: Chief Financial Officer ----------------------- By: /s/ Bradley D. Schwartz -------------------------- Title: Senior Vice President ----------------------- BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION By: /s/ John Cinderey ------------------------- Title: Managing Director 20 21 EXHIBIT A QUARTERDECK CORPORATION BORROWING BASE CERTIFICATE Date: ________________, 199_ Reference is made to that certain Credit Agreement dated as of February 14, 1996 among Quarterdeck Corporation (the "Borrower") and Bank of America National Trust and Savings Association, a national banking association, as amended. Unless otherwise defined herein, capitalized terms used herein have the respective meanings assigned to them in the Credit Agreement. The undersigned hereby certifies as of the date hereof that he/she is the [chief financial officer] [controller] of the Borrower, and that, as such, he/she is authorized to execute and deliver this Certificate to the Bank on the behalf of the Borrower, and not as an individual, and that: 1. The following computation of the Borrowing Base is true and accurate on and as of _____________________ [last day of month immediately preceding date of certificate]. A. Total Accounts(1): $__________________ Less the following: (a) Unpledged or Liened Accounts (__________________) (b) Contingent Accounts(2) (__________________) (c) Contra Accounts (offsetting obligations) (__________________)
__________________________________ (1) Gross accounts receivable according to the Borrower's aging for the period referred to in 1. above that represent all accounts resulting from the sale of goods (including software) or the performance of services by the Borrower in the normal course of the Borrower's business. (2) Receivables upon which the Borrower's right to receive payment is not absolute or is contingent upon the fulfillment of any condition whatever (other than receivables subject to "re-balancing" or exchange of inventory for updated versions as provided in clause (d) of the definition of Eligible Receivables in the Credit Agreement). A-1 22 (d) Employee/Affiliate/ Intercompany Accounts (__________________) (e) City/State Accounts (__________________) (f) U.S. Government Accounts (__________________) (g) Foreign Accounts (__________________) (h) Over 10% Concentration (other than Ingram Micro and Tech Data) (__________________) (i) Over 35% (or $6,000,000) Concentration (Ingram Micro) (__________________) (j) Over 25% Concentration (Tech Data) (__________________) (k) 90 Days Past Due Accounts (__________________) (l) Bankrupt Accounts (__________________) (b) Cross Aging (25% Past Due over 90 Days) (__________________) (n) Disputed or Uncollectible Accounts/other (__________________) (o) Bad Debt and Other Reserves (__________________) B. Eligible Accounts (Net): $ ------------------- C. Eligible Accounts X 75% $ ------------------- D. Borrowing Base (Lesser of $15,000,000 or amount from C above) $ ------------------- E. Current outstandings under line of credit (or Equivalent Amount thereof) $( ) ------------------- F. Amount remaining available for credit extensions as of _____________, 199___ (D-E) $ ===================
2. The undersigned has not permitted, and will not permit, the total credit extensions at any time outstanding under the Credit Agreement to exceed the Borrowing Base then in effect. 3. Attached hereto is a detailed aging of all accounts receivable outstanding as of _____________ [last day of month immediately preceding date of certificate], which aging is true, correct and complete in all material respects. A-2 23 IN WITNESS WHEREOF, the undersigned has executed this Certificate as of __________________, 199__. QUARTERDECK CORPORATION By: ------------------------------ Title: --------------------------- BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION Reviewed by: ------------------------------ Title: ------------------------------------ Dated , 19 ------------------------------ ---
A-3 24 EXHIBIT B QUARTERDECK CORPORATION COMPLIANCE CERTIFICATE Date: ____________, 199_ Pursuant to that Credit Agreement dated as of February 14, 1996 (as amended, modified or supplemented from time to time, the "Credit Agreement"; capitalized terms not otherwise defined herein being used herein as defined in the Credit Agreement) between Quarterdeck Corporation (the "Company") and Bank of America National Trust and Savings Association (the "Bank"), the undersigned certifies that he/she is the [chief financial officer] [controller] of the Company, and that, as such, he/she is authorized to execute and deliver this Certificate, and that: [Use this paragraph if this Certificate is delivered in connection with the financial statements required by subsection 6.02(a) of the Credit Agreement.] 1. Attached as Schedule 1 hereto is a true and correct copy of the Company's audited consolidated balance sheet as at the end of the fiscal year ended _____________, 199_ and the related consolidated statements of income, retained earnings and cash flow for such fiscal year, setting forth in each case in comparative form the figures for the previous fiscal year, and accompanied by the unqualified opinion of ________________ [nationally-recognized independent public accounting firm]. or [Use this paragraph if this Certificate is delivered in connection with the financial statements required by subsection 6.02(b) of the Credit Agreement.] 1. Attached as Schedule 1 hereto is a true and correct copy of the unaudited consolidated balance sheet of the Company for the fiscal quarter ended ______________, 199_ and the related consolidated statements of income, retained earnings and cash flows for the period commencing on the first day and ending on the last day of such quarter and for the portion of the fiscal year ending on the last day of such quarter. 2. The attached financial statements are complete and correct and fairly present, in accordance with GAAP, the financial position and results of operations of the Company and the Company's consolidated Subsidiaries. B-1 25 3. The undersigned has reviewed and is familiar with the terms of the Credit Agreement and has made, or has caused to be made under his/her supervision, a detailed review of the transactions and conditions of the Company during the accounting period covered by the attached financial statements. 4. To the best of the undersigned's knowledge, the Company, during such period, has observed, performed or satisfied all of its covenants and other agreements, and satisfied every condition in the Credit Agreement to be observed, performed or satisfied by the Company, and the undersigned has no knowledge of any Default or Event of Default (both as defined in the Credit Agreement). 5. The following financial covenant analyses and information set forth on Schedule 2 attached hereto are true and accurate on and as of the date of this Certificate. All amounts and ratios in Schedule 2 refer to the financial statements attached as Schedule 1 hereto and are determined in accordance with the specifications set forth in the Credit Agreement. IN WITNESS WHEREOF, the undersigned has executed this Certificate as of ___________________, 199_. QUARTERDECK CORPORATION By: --------------------------- Name: ------------------------- Title: ------------------------ B-2 26 Date: ______________, 199__ For the fiscal quarter/year ended ______________, 199__ SCHEDULE 2 to the Compliance Certificate ($ in 000's)(1)
Actual Required/Permitted ------ ------------------ 1. Section 7.12 Quick Ratio. ------------------------ The ratio of: A. the sum of: (i) cash __________ plus ---- (ii) short-term cash investments ---------- plus ---- (iii) marketable securities not classified as long-term investments plus __________ ---- (iv) current accounts receivable (net of bad debt reserves) __________ (i)+(ii)+(iii)+(iv) = __________ B. Current Liabilities(2) __________ A --- B = Not less than 1.00 to 1.00. ========== 2. Section 7.13 Total Liabilities ------------------------------ to Tangible Net Worth. --------------------- The ratio of: A. Total Liabilities(3) __________
__________________________________ (1) Determined on a consolidated basis, in accordance with GAAP. (2) Including, without duplication, principal amount of Advances (or Equivalent Amount thereof) and the L/C Outstanding Amount. (3) Including, without duplication, principal amount of Advances (or Equivalent Amount thereof) and the L/C Outstanding Amount, but excluding the outstanding principal amount of the Subordinated Notes. B-3 27
Actual Required/Permitted ------ ------------------ B. Tangible Net Worth: (i) Total Assets __________ less ---- (ii) goodwill, patents, trademarks, trade names, organization expense, treasury stock, unamortized debt discount and expense, deferred charges and other like intangibles __________ less ---- (iii) Monies due from affiliates, officers, directors or shareholders __________ less ---- (iv) reserves applicable to assets __________ less ---- (v) all liabilities (including accrued and deferred income taxes and subordinated indebtedness) __________ plus ---- (vi) the outstanding principal amount of the Subordinated Notes __________ (i)-(ii)-(iii)-(iv)-(v)+(vi) = __________ A --- B Not greater than 1.15 to 1.00 ========== 3. Section 7.14 Minimum Tangible ----------------------------- Net Worth. --------- (i) Tangible Net Worth (from 2B. above) __________ Not to be less than the sum of: less A. Tangible Net Worth as of ---- 6/30/96: (ii) The outstanding principal amount of the (i) Total Assets __________ Subordinated Notes (from 2B(vi) above) __________ less ---- (i) + (ii) = ========= (ii) goodwill, patents, trademarks, trade names, organization expense, treasury stock, unamor- tized debt discount
B-4 28
Actual Required/Permitted ------ ------------------ and expense, deferred charges and other like intangibles __________ less ---- (iii) Monies due from affiliates, officers, directors or share- holders __________ less ---- (iv) reserves appli- cable to assets __________ less ---- (v) all liabilities (including accrued and deferred income taxes and subordi- nated indebtedness) __________ (i)-(ii)-(iii)- (iv)-(v) = __________ x 85% __________ (4) ========== plus ---- B. 100% of the net pro- ceeds from the issu- ance of equity securities after June 30, 1996 __________ plus ---- C. Increase in stockhold- ers' equity arising from the conversion of debt securities to equity securities after February 14, 1996 __________ less ---- D. Permitted Acquisition Charges __________ less ---- E. Goodwill or other intangible assets acquired in connection
__________________________________ (4) Calculation will need to be done for first compliance certificate only; thereafter, this number will be inserted. B-5 29
Actual Required/Permitted ------ ------------------ with a permitted acqui- sion and acquired and recognized in the same fiscal quarter as the related acquisition __________ A + B + C - D - E = ========== 4. Section 7.15 Profitability. -------------------------- A. (i) Operating income for fiscal quarter __________ plus ---- (ii) Permitted Acquisition Charges(5) __________ (i) + (ii) = For quarter ended 9/30/96 only, loss not to exceed ========== $2,000,000; thereafter, (i)+(ii) not to be less than 0 B. (i) Net income for fiscal quarter __________ plus ---- (ii) Permitted Acquisition Charges(5) __________ (i) + (ii) = For quarter ended 9/30/96 only, loss not to exceed ========== $2,000,000; thereafter, (i)+(ii) not to be less than 0
__________________________________ (5) To the extent deducted in determining operating income or net income, as applicable. B-6 30 EXHIBIT C FORM OF SECURITY AGREEMENT THIS SECURITY AGREEMENT (this "Agreement"), dated as of August 13, 1996, is made between QUARTERDECK CORPORATION, a Delaware corporation (the "Borrower"), and BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION (together with any Offshore Credit Provider, the "Bank"). The Borrower and the Bank are parties to a Credit Agreement dated as of February 14, 1996 (as amended by a First Amendment to Credit Agreement dated as of March 28, 1996 and a Waiver and Second Amendment to Credit Agreement dated as of August 13, 1996 (the "Waiver and Second Amendment"), and as further amended, modified, renewed or extended from time to time, the "Credit Agreement"). It is a condition precedent to the effectiveness of the Waiver and Second Amendment that the Borrower enter into this Agreement and grant to the Bank the security interests hereinafter provided to secure the obligations of the Borrower and its Subsidiaries described below. Accordingly, the parties hereto agree as follows: 1 Definitions; Interpretation. (a) Terms Defined in Credit Agreement. All capitalized terms used in this Agreement and not otherwise defined herein shall have the meanings assigned to them in the Credit Agreement. (b) Certain Defined Terms. As used in this Agreement, the following terms shall have the following meanings: "Accounts" means any and all accounts of the Borrower, whether now existing or hereafter acquired or arising, and in any event includes all accounts receivable, contract rights, rights to payment and other obligations of any kind owed to the Borrower arising out of or in connection with the sale or lease of merchandise, goods or commodities or the rendering of services, however evidenced, and whether or not earned by performance, all guaranties, indemnities and security with respect to the foregoing, and all letters of credit relating thereto, in each case whether now existing or hereafter acquired or arising. "Books" means all books, records and other written, electronic or other documentation in whatever form maintained now or hereafter by or for the Borrower in connection with the ownership of, or evidencing or containing information relating to, the Collateral, including, to the extent relating to or C-1 31 evidencing the Collateral: (i) ledgers; (ii) records indicating, summarizing, or evidencing the Collateral (including Inventory and Rights to Payment); (iii) computer programs and software; (iv) computer discs, tapes, files, manuals, spreadsheets; (v) computer printouts and output of whatever kind; (vi) any other computer prepared or electronically stored, collected or reported information and equipment of any kind; and (vii) any and all other rights now or hereafter arising out of any contract or agreement between the Borrower and any service bureau, computer or data processing company or other person or entity charged with preparing or maintaining any of the Borrower's books or records or with credit reporting, including with regard to the Borrower's Accounts. "Chattel Paper" means all writings of whatever sort which evidence a monetary obligation and a security interest in or lease of specific Inventory, whether now existing or hereafter arising. "Collateral" has the meaning set forth in Section 2. "Documents" means any and all documents of title, bills of lading, dock warrants, dock receipts, warehouse receipts and other documents of the Borrower relating to the Inventory, whether or not negotiable, and includes all other documents which purport to be issued by a bailee or agent and purport to cover Inventory in any bailee's or agent's possession which are either identified or are fungible portions of an identified mass, including such documents of title made available to the Borrower for the purpose of ultimate sale or exchange of Inventory or for the purpose of loading, unloading, storing, shipping, transshipping, manufacturing, processing or otherwise dealing with Inventory in a manner preliminary to their sale or exchange, in each case whether now existing or hereafter acquired or arising. "Financing Statements" has the meaning set forth in Section 3. "Instruments" means any and all negotiable instruments and every other writing which evidences a right to the payment of money, in each case arising from the sale or lease of Inventory or the rendering of services, and in each case whether now existing or hereafter acquired. "Inventory" means any and all of the Borrower's inventory in all of its forms, wherever located, whether now owned or hereafter acquired, and in any event includes all goods (including goods in transit) which are held for sale, lease or other disposition, including those held for display or demonstration or out on lease or consignment or to be furnished under a contract of service, or which are raw materials, work in process, finished C-2 32 goods or materials used or consumed in the Borrower's business, and the resulting product or mass, and all repossessed, returned, rejected, reclaimed and replevied goods, together with all parts, components, supplies, packing and other materials used or usable in connection with the manufacture, production, packing, shipping, advertising, selling or furnishing of such goods; and all other items hereafter acquired by the Borrower by way of substitution, replacement, return, repossession or otherwise, and all additions and accessions thereto, and any Document representing or relating to any of the foregoing at any time. "Proceeds" means whatever is receivable or received from or upon the sale, lease, license, collection, use, exchange or other disposition, whether voluntary or involuntary, of any Collateral, including "proceeds" as defined at UCC Section 9306, any and all proceeds of any insurance, indemnity, warranty or guaranty payable to or for the account of the Borrower from time to time with respect to any of the Collateral, any and all payments (in any form whatsoever) made or due and payable to the Borrower from time to time in connection with any requisition, confiscation, condemnation, seizure or forfeiture of all or any part of the Collateral by any governmental authority (or any person or entity acting under color of governmental authority), any and all other amounts from time to time paid or payable under or in connection with any of the Collateral or for or on account of any damage or injury to or conversion of any Collateral by any person or entity, any and all other tangible or intangible property received upon the sale or disposition of Collateral, and all proceeds of proceeds. "Rights to Payment" means all Accounts, and any and all rights and claims to the payment or receipt of money or other forms of consideration of any kind in, to and under all Chattel Paper, Documents, Instruments and Proceeds. "Secured Obligations" means the indebtedness, liabilities and other obligations of the Borrower and its Subsidiaries to the Bank under or in connection with the Credit Agreement and the other Credit Documents, all interest accrued thereon, all fees due under the Credit Documents and all other amounts payable by the Borrower and its Subsidiaries to the Bank thereunder or in connection therewith, whether now existing or hereafter arising, and whether due or to become due, absolute or contingent, liquidated or unliquidated, determined or undetermined. "UCC" means the Uniform Commercial Code as the same may, from time to time, be in effect in the State of California; provided, however, in the event that, by reason of mandatory provisions of law, any or all of the attachment, perfection or priority of the security interest in any Collateral is governed by the Uniform Commercial Code as in effect in a jurisdiction C-3 33 other than the State of California, the term "UCC" shall mean the Uniform Commercial Code as in effect in such other jurisdiction for purposes of the provisions hereof relating to such attachment, perfection or priority and for purposes of definitions related to such provisions. (c) Terms Defined in UCC. Where applicable and except as otherwise defined herein, terms used in this Agreement shall have the meanings assigned to them in the UCC. 2 Security Interest. (a) Grant of Security Interest. As security for the payment and performance of the Secured Obligations, the Borrower hereby pledges, assigns, transfers, hypothecates and sets over to the Bank, and hereby grants to the Bank a security interest in, all of the Borrower's right, title and interest in, to and under the following property, wherever located and whether now existing or owned or hereafter acquired or arising (collectively, the "Collateral"): (i) all Accounts; (ii) all Chattel Paper; (iii) all Documents; (iv) all Instruments; (v) all Inventory; (vi) all Books; and (vii) all products and Proceeds of any and all of the foregoing (but not including in each case any Collateral that is or is related to the obligation of an account debtor located outside the United States of America). (b) Borrower Remains Liable. Anything herein to the contrary notwithstanding, (i) the Borrower shall remain liable under any contracts, agreements and other documents included in the Collateral, to the extent set forth therein, to perform all of its duties and obligations thereunder to the same extent as if this Agreement had not been executed, (ii) the exercise by the Bank of any of the rights hereunder shall not release the Borrower from any of its duties or obligations under such contracts, agreements and other documents included in the Collateral, and (iii) the Bank shall not have any obligation or liability under any contracts, agreements and other documents included in the Collateral by reason of this Agreement, nor shall the Bank be obligated to perform any of the obligations or duties of the Borrower thereunder or to take any action to collect or enforce any such contract, agreement or other document included in the Collateral hereunder. (c) Continuing Security Interest. The Borrower agrees that this Agreement shall create a continuing security interest in the Collateral which shall remain in effect until terminated in accordance with Section 22. 3 Financing Statements, Etc. C-4 34 The Borrower shall execute and deliver to the Bank concurrently with the execution of this Agreement, and at any time and from time to time thereafter, all financing statements, continuation financing statements, termination statements, warehouse receipts, documents of title, affidavits, reports, notices, schedules of account, letters of authority and all other documents and instruments, in form reasonably satisfactory to the Bank (the "Financing Statements"), and take all other action, as the Bank may reasonably request, to perfect and continue perfected, maintain the priority of or provide notice of the Bank's security interest in the Collateral and to accomplish the purposes of this Agreement. 4 Representations and Warranties. In addition to the representations and warranties of the Borrower set forth in the Credit Agreement, which are incorporated herein by this reference, the Borrower represents and warrants to the Bank that: (a) Location of Chief Executive Office and Collateral. As of the date hereof, the Borrower's chief executive office and principal place of business is located at the address set forth in Schedule 1, and all other locations where the Borrower conducts business in the United States or Collateral is kept are set forth in Schedule 1. (b) Locations of Books. As of the date hereof, all locations where Books pertaining to the Rights to Payment are kept, including all equipment necessary for accessing such Books and the names and addresses of all service bureaus, computer or data processing companies and other persons or entities keeping any Books or collecting Rights to Payment for the Borrower, are set forth in Schedule 1. (c) Trade Names and Trade Styles; Retail Merchant. As of the date hereof, all trade names and trade styles under which the Borrower presently conducts its business operations are set forth in Schedule 1, and, except as set forth in Schedule 1, the Borrower has not, at any time during the preceding five years: (i) been known as or used any other corporate, trade or fictitious name; (ii) changed its name; (iii) been the surviving or resulting corporation in a merger or consolidation; or (iv) acquired through asset purchase or otherwise any business of any person or entity. The sales of the Borrower for resale equaled or exceeded 75% in dollar volume of the total sales of the Borrower during the twelve-month period preceding the date hereof. (d) Ownership of Collateral. The Borrower is, and, except as permitted by Section 5(i), will continue to be, the C-5 35 sole and complete owner of the Collateral (or, in the case of after-acquired Collateral, at the time the Borrower acquires rights in such Collateral, will be the sole and complete owner thereof), free from any lien other than liens permitted under Section 7.02 of the Credit Agreement, but subject, in each case, to any ownership interest any Subsidiary may have therein, provided such Subsidiary has the right to a credit (in the form of an intercompany receivable from the Borrower) for the amount of the cost-of-goods sold of Inventory to the extent of such Subsidiary's input of labor or raw materials into such Inventory. (e) Enforceability; Priority of Security Interest. (i) This Agreement creates a security interest which is enforceable against the Collateral in which the Borrower now has rights and will create a security interest which is enforceable against the Collateral in which the Borrower hereafter acquires rights at the time the Borrower acquires any such rights; and (ii) the Bank has a perfected and first priority security interest in the Collateral (subject only to liens permitted by Section 7.02 of the Credit Agreement), in which the Borrower now has rights, and will have a perfected and first priority security interest (subject only to liens permitted by Section 7.02 of the Credit Agreement) in the Collateral in which the Borrower hereafter acquires rights at the time the Borrower acquires any such rights, in each case securing the payment and performance of the Secured Obligations. (f) Other Financing Statements. Other than (i) Financing Statements disclosed to the Bank and (ii) Financing Statements in favor of the Bank, no effective Financing Statement naming the Borrower as debtor, assignor, grantor, mortgagor, pledgor or the like and covering all or any part of the Collateral is on file in any filing or recording office in any jurisdiction. (g) Rights to Payment. (i) The Rights to Payment represent valid, binding and enforceable obligations of the account debtors or other persons or entities obligated thereon, representing undisputed, bona fide transactions completed in accordance with the terms and provisions contained in any documents related thereto, and are and will be genuine, free from liens (other than liens permitted by Section 7.02 of the Credit Agreement), and not subject to any adverse claims, counterclaims, setoffs, defaults, disputes, defenses, discounts, retainages, holdbacks or conditions precedent of any kind of character, except, in each case, to the extent reflected by the Borrower's reserves for uncollectible Rights to Payment or to the extent, if any, that such account debtors or other persons or entities may be entitled to normal and ordinary course trade discounts, returns, adjustments and C-6 36 allowances in accordance with Section 5(m), or as otherwise disclosed to the Bank in writing; (ii) the Borrower has not assigned any of its rights under the Rights to Payment except as provided in this Agreement or as set forth in the other Credit Documents; (iii) with respect to the Rights to Payment constituting Eligible Accounts, except as disclosed in writing to the Bank, the Borrower has no knowledge that any of the criteria for eligibility are not or are no longer satisfied; and (iv) all statements made, all unpaid balances and all other information in the Books and other documentation relating to the Rights to Payment are in all material respects true and correct and what they purport to be. (h) Inventory. As of the date hereof, no Inventory is stored with any bailee, warehouseman or similar person or entity or on any premises leased to the Borrower, nor has any Inventory been consigned to the Borrower or consigned by the Borrower to any person or entity or is held by the Borrower for any person or entity under any "bill and hold" or other arrangement, except as set forth in Schedule 1. All Inventory has been produced in compliance with the Federal Fair Labor Standards Act. 5 Covenants. In addition to the covenants of the Borrower set forth in the Credit Agreement, which are incorporated herein by this reference, so long as any of the Secured Obligations remain unsatisfied or the Bank shall have any commitment to extend credit under the Credit Agreement, the Borrower agrees that: (a) Defense of Collateral. The Borrower will appear in and defend any action, suit or proceeding which may affect to a material extent its title to, or right or interest in, or the Bank's right or interest in, the Collateral. (b) Preservation of Collateral. The Borrower will do and perform all reasonable acts that may be necessary and appropriate to maintain, preserve and protect the Collateral. (c) Compliance with Laws, Etc. The Borrower will comply in all material respects with all laws, regulations and ordinances, and all policies of insurance, relating in a material way to the possession, operation, maintenance and control of the Collateral. (d) Location of Books and Chief Executive Office. The Borrower will: give prior written notice to the Bank of (A) any C-7 37 changes in any location where Books pertaining to the Rights to Payment are kept, including any change of name or address of any service bureau, computer or data processing company or other person or entity preparing or maintaining any Books or collecting Rights to Payment for the Borrower and (B) any changes in the location of the Borrower's chief executive office or principal place of business. (e) Location of Collateral. The Borrower will: (i) keep the Collateral at the locations set forth in Schedule 1 and not remove the Collateral from such locations (other than disposals of Collateral permitted by subsection (i) below) except upon prior written notice of any removal to the Bank; and (ii) give the Bank prior written notice of any change in the locations set forth in Schedule 1. (f) Change in Name, Identity or Structure. The Borrower will give prior written notice of (i) any change in name, (ii) any changes in, additions to or other modifications of its trade names and trade styles set forth in Schedule 1, and (iii) any changes in its identity or structure in any manner which might make any Financing Statement filed hereunder incorrect or misleading. (g) Maintenance of Records. The Borrower will keep accurate and complete Books with respect to the Collateral, disclosing the Bank's security interest hereunder. (h) Invoicing of Sales. The Borrower will invoice all of its sales upon forms customary in the industry and to maintain customary proof of delivery and customer acceptance of goods. (i) Disposition of Collateral. The Borrower will not surrender or lose possession of (other than to the Bank), sell, lease, rent, or otherwise dispose of or transfer any of the Collateral or any right or interest therein, except to the extent permitted by the Credit Agreement. (j) Liens. Other than liens in favor of the Bank, the Borrower will keep the Collateral free of all liens and security interests of any kind, other than liens and security interests permitted under Section 7.02 of the Credit Agreement. (k) Expenses. The Borrower will pay all expenses of protecting, storing, warehousing, insuring, handling and shipping the Collateral. (l) Leased Premises. At the Bank's request, the Borrower will obtain from each person or entity from whom the Borrower leases any premises at which any Collateral is at any time present such subordination, waiver, consent and estoppel C-8 38 agreements as the Bank may require, in form and substance reasonably satisfactory to the Bank. (m) Rights to Payment. The Borrower will: (i) with such frequency as the Bank may reasonably require, furnish to the Bank (A) customer listings, including all names and addresses, together with copies of customer statements and repayment histories relating to the Accounts; (B) accurate records and summaries of Accounts, including detailed agings specifying the name, face value and date of each invoice, and listings of Accounts that are disputed or have been cancelled; and (C) such other matters and information relating to the Accounts as the Bank shall reasonably request; (ii) give only normal discounts, allowances and credits as to Accounts and other Rights to Payment, in the ordinary course of business, according to normal trade practices utilized by the Borrower in the past, and enforce all Accounts and other Rights to Payment strictly in accordance with their terms, except that the Borrower may, unless an Event of Default exists, grant any extension of the time for payment consistent with commercially reasonable practices, and, while an Event of Default Exists, will take all such action to such end as may from time to time be reasonably requested by the Bank; (iii) in accordance with its sound business judgment perform and comply in all material respects with its obligations in respect of the Accounts and other Rights to Payment; (iv) while an Event of Default exists, upon the request of the Bank, (A) notify all or any designated portion of the account debtors and other obligors on the Rights to Payment of the security interest hereunder, and (B) notify the account debtors and other obligors on the Rights to Payment or any designated portion thereof that payment shall be made directly to the Bank or to such other person, entity or location as the Bank shall specify; and (v) while an Event of Default exists, establish such lockbox or similar arrangements for the payment of the Accounts and other Rights to Payment as the Bank shall require. (n) Documents, Etc. Upon the request of the Bank (which shall not be made with respect to any Document, Instrument, Chattel Paper or other instrument that has a face and fair market value of less than $100,000 unless the aggregate of all such items exceeds $100,000), the Borrower will (i) immediately deliver to the Bank, or an agent designated by it, appropriately endorsed or accompanied by appropriate instruments of transfer or assignment, all Documents, Instruments C-9 39 and Chattel Paper, and all other Rights to Payment at any time evidenced by promissory notes, trade acceptances or other instruments, and (ii) mark all Documents and Chattel Paper with such legends as the Bank shall reasonably specify. (o) Inventory. The Borrower will: (i) at such times as the Bank shall request, prepare and deliver to the Bank a report of all Inventory, in form and substance reasonably satisfactory to the Bank; (ii) while an Event of Default exists, upon the request of the Bank, take a physical listing of the Inventory and promptly deliver a copy of such physical listing to the Bank; and (iii) not store any Inventory with a bailee, warehouseman or similar person or entity or on premises leased to the Borrower, nor dispose of any Inventory on a bill-and-hold, guaranteed sale, sale and return, sale on approval, consignment or similar basis, nor acquire any Inventory from any person or entity on any such basis, without in each case giving the Bank prior written notice thereof. (r) Notices, Reports and Information. The Borrower will (i) notify the Bank of any material claim made or asserted against the Collateral by any person or entity and of any change in the composition of the Collateral or other event which is likely to materially adversely affect the value of the Collateral as a whole or the Bank's lien thereon; and (ii) upon the reasonable request of the Bank make such demands and requests for information and reports as the Borrower is entitled to make in respect of the Collateral. 6 Collection of Rights to Payment. Until the Bank exercises its rights hereunder to collect Rights to Payment, the Borrower shall endeavor in the first instance diligently to collect all amounts due or to become due on or with respect to the Rights to Payment consistent with commercially reasonable practices. At the request of the Bank, while any Event of Default exists, all remittances received by the Borrower shall be held in trust for the Bank and, in accordance with the Bank's instructions, remitted to the Bank or deposited to an account with the Bank in the form received (with any necessary endorsements or instruments of assignment or transfer). C-10 40 7 Authorization; Bank Appointed Attorney-in-Fact. So long as an Event of Default exists or, in the case of clause (i) below, if the Borrower shall have failed to do so for in excess of 5 Business Days following the Bank's written request therefor, the Bank shall have the right to, in the name of the Borrower, or in the name of the Bank or otherwise, without notice to or assent by the Borrower, and the Borrower hereby constitutes and appoints the Bank (and any of the Bank's officers, employees or agents designated by the Bank) as the Borrower's true and lawful attorney-in-fact, with full power and authority to: (i) sign any of the Financing Statements which must be executed or filed to perfect or continue perfected, maintain the priority of or provide notice of the Bank's security interest in the Collateral and file any such Financing Statements by electronic means with or without a signature as authorized or required by applicable law or filing procedures; (ii) take possession of and endorse any notes, acceptances, checks, drafts, money orders or other forms of payment or security constituting Collateral and collect any Proceeds of any Collateral; (iii) to the extent relating to any of the Collateral, sign and endorse any invoice or bill of lading, warehouse or storage receipts, drafts against customers or other obligors, assignments, notices of assignment, verifications and notices to customers or other obligors; (iv) notify the Postal Service authorities to change the address for delivery of mail addressed to the Borrower to such address as the Bank may designate and, without limiting the generality of the foregoing, establish with any person or entity lockbox or similar arrangements for the payment of the Rights to Payment; (v) receive, open and return to the Borrower all mail addressed to the Borrower; (vi) send requests for verification of Rights to Payment to the customers or other obligors of the Borrower; (vii) contact, or direct the Borrower to contact, all account debtors and other obligors on the Rights to Payment and instruct such account debtors and other obligors to make all payments directly to the Bank; (viii) assert, adjust, sue for, compromise or release any claims under any policies of insurance of Collateral; C-11 41 (ix) notify each person or entity maintaining lockbox or similar arrangements for the payment of the Rights to Payment to remit all amounts representing collections on the Rights to Payment directly to the Bank; (x) ask, demand, collect, receive and give acquittances and receipts for any and all Rights to Payment, enforce payment or any other rights in respect of the Rights to Payment and other Collateral, grant consents, agree to any amendments, modifications or waivers of the agreements and documents governing the Rights to Payment and other Collateral, and otherwise file any claims, take any action or institute, defend, settle or adjust any actions, suits or proceedings with respect to the Collateral, as the Bank may deem necessary or desirable to maintain, preserve and protect the Collateral, to collect the Collateral or to enforce the rights of the Bank with respect to the Collateral; (xi) execute any and all endorsements, assignments or other documents and instruments necessary to sell, lease, assign, convey or otherwise transfer title in or dispose of the Collateral; and (xii) execute any and all such other documents and instruments, and do any and all acts and things for and on behalf of the Borrower, which the Bank may deem necessary to maintain, protect, realize upon and preserve the Collateral and the Bank's security interest therein. The foregoing power of attorney is coupled with an interest and irrevocable so long as the Bank has any commitment to extend credit under the Credit Agreement or the Secured Obligations have not been paid and performed in full. The Borrower hereby ratifies, to the extent permitted by law, all that the Bank shall lawfully and in good faith do or cause to be done by virtue of and in compliance with this Section 7. 8 Bank Performance of Borrower Obligations. If an Event of Default then exists or if the Borrower shall have failed to perform or pay such obligation for an excess of 10 Business Days following the Bank's written request therefor (unless the Bank in good faith determines that immediate action is necessary for the preservation or protection of the Collateral), the Bank may perform or pay any obligation which the Borrower has agreed to perform or pay under or in connection with this Agreement, and the Borrower shall reimburse the Bank on demand for any amounts paid by the Bank pursuant to this Section 8. C-12 42 9 Bank's Duties. Notwithstanding any provision contained in this Agreement, the Bank shall have no duty to exercise any of the rights, privileges or powers afforded to it and shall not be responsible to the Borrower or any other person or entity for any failure to do so or delay in doing so. Beyond the exercise of reasonable care to assure the safe custody of Collateral in the Bank's possession and the accounting for moneys actually received by the Bank hereunder, the Bank shall have no duty or liability to exercise or preserve any rights, privileges or powers pertaining to the Collateral. 10 Remedies. (a) Remedies. While an Event of Default exists, the Bank shall have, in addition to all other rights and remedies granted to it in this Agreement, the Credit Agreement or any other Loan Document, all rights and remedies of a secured party under the UCC and other applicable laws. Without limiting the generality of the foregoing, the Borrower agrees that: (i) The Bank may peaceably and without notice enter any premises of the Borrower, take possession of any the Collateral, remove or dispose of all or part of the Collateral on any premises or elsewhere, and otherwise collect, receive, appropriate and realize upon all or any part of the Collateral, and demand, give receipt for, settle, renew, extend, exchange, compromise, adjust, or sue for all or any part of the Collateral, as the Bank may determine. (ii) The Bank may require the Borrower to assemble all or any part of the Collateral and make it available to the Bank at any place and time designated by the Bank. (iii) The Bank may secure the appointment of a receiver of the Collateral or any part thereof to the extent and in the manner provided by applicable law. (iv) The Bank may sell, resell, lease, use, assign, transfer or otherwise dispose of any or all of the Collateral in its then condition or following any commercially reasonable preparation or processing (utilizing in connection therewith any of the Borrower's assets, without charge or liability to the Bank therefor) at public or private sale, by one or more contracts, in one or more parcels, at the same or different times, for cash or credit, or for future delivery without assumption of any credit risk, all as the Bank deems advisable; provided, however, that the Borrower shall be credited with the net proceeds of sale only when such proceeds are finally collected by the Bank. The Bank C-13 43 shall have the right upon any such public sale, and, to the extent permitted by law, upon any such private sale, to purchase the whole or any part of the Collateral so sold, free of any right or equity of redemption, which right or equity of redemption the Borrower hereby releases, to the extent permitted by law. The Borrower hereby agrees that the sending of notice by ordinary mail, postage prepaid, and by concurrent facsimile transmission, to the address of the Borrower set forth in the Credit Agreement, of the place and time of any public sale or of the time after which any private sale or other intended disposition is to be made, shall be deemed reasonable notice thereof if such notice is sent ten days prior to the date of such sale or other disposition or the date on or after which such sale or other disposition may occur, provided that the Bank may provide the Borrower shorter notice or no notice, to the extent permitted by the UCC or other applicable law. (b) Proceeds Account. To the extent that any of the Secured Obligations may be contingent, unmatured or unliquidated (including with respect to undrawn amounts under any letters of credit) at such time as there may exist an Event of Default, the Bank may, at its election, (i) retain the proceeds of any sale, collection, disposition or other realization upon the Collateral (or any portion thereof) in a special purpose restricted deposit account (the "Proceeds Account") created and maintained by the Bank for such purpose (the Borrower hereby granting a lien in the Proceeds Account to the Bank for the purposes of securing the Secured Obligations, and agreeing that the Proceeds Account shall be included within the Collateral hereunder) until such time as the contingent, unmatured or unliquidated Secured Obligations become non-contingent, mature, or are liquidated, as the case may be, at which time Bank shall apply such proceeds to such Secured Obligations pursuant to subsection (c) below, and the Borrower agrees that such retention of such proceeds by the Bank shall not be deemed strict foreclosure with respect thereto; (ii) in any reasonable manner elected by the Bank, estimate the liquidated amount of any such contingent, unmatured or unliquidated claims and apply the proceeds of the Collateral against such amount; or (iii) otherwise proceed in any manner permitted by applicable law. The Borrower agrees that the Proceeds Account shall be a blocked account and that upon the irrevocable deposit of funds into the Proceeds Account, the Borrower shall not have any right of withdrawal with respect to such funds. Accordingly, the Borrower irrevocably waives until the termination of this Agreement in accordance with Section 22 the right to make any withdrawal from the Proceeds Account and the right to instruct the Bank to honor drafts against the Proceeds Account. (c) Application of Proceeds. Subject to subsection (b) immediately above, the cash proceeds actually received from the sale or other disposition or collection of Collateral, and C-14 44 any other amounts received in respect of the Collateral the application of which is not otherwise provided for herein, shall be applied to the Secured Obligations in the order as the Bank may determine in its sole discretion. Any surplus thereof which exists after payment and performance in full of the Secured Obligations shall be promptly paid over to the Borrower or otherwise disposed of in accordance with the UCC or other applicable law. The Borrower shall remain liable to the Bank for any deficiency which exists after any sale or other disposition or collection of Collateral. 11 Certain Waivers. The Borrower waives, to the fullest extent permitted by law, (i) any right of redemption with respect to the Collateral, whether before or after sale hereunder, and all rights, if any, of marshalling of the Collateral or other collateral or security for the Secured Obligations; (ii) any right to require the Bank (A) to proceed against any person or entity, (B) to exhaust any other collateral or security for any of the Secured Obligations, (C) to pursue any remedy in the Bank's power, or (D) to make or give any presentments, demands for performance, notices of nonperformance, protests, notices of protests or notices of dishonor in connection with any of the Collateral; and (iii) all claims, damages, and demands against the Bank arising out of the repossession, retention, sale or application of the proceeds of any sale of the Collateral 12 Notices. (i) if delivered by hand, when delivered; (ii) if sent by mail, upon the earlier of the date of receipt or five Business Days after deposit in the mail, first class, postage prepaid; (iii) if sent by telex, upon receipt by the sender of an appropriate answerback; and (iv) if sent by facsimile transmission, when sent. 13 No Waiver; Cumulative Remedies. No failure on the part of the Bank to exercise, and no delay in exercising, any right, remedy, power or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, remedy, power or privilege preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. The rights and remedies under this Agreement are cumulative and not exclusive of any rights, remedies, powers and privileges that may otherwise be available to the Bank. C-15 45 14 Costs and Expenses; Indemnification; Other Charges. (a) Costs and Expenses. The Borrower agrees to pay within 10 days after demand: (i) the reasonable out-of-pocket costs and expenses of the Bank and any of its affiliates, and the reasonable fees and disbursements of counsel to the Bank (including allocated costs of internal counsel), in connection with the negotiation, preparation, execution, delivery and administration of this Agreement, and any amendments, modifications or waivers of the terms thereof, and the custody of the Collateral; (ii) all reasonable title, appraisal (including the allocated costs of internal appraisal services), survey, audit (including the allocated costs of internal audit services), consulting, search, recording, filing and similar costs, fees and expenses incurred or sustained by the Bank or any of its affiliates in connection with this Agreement or the Collateral; and (iii) all costs and expenses of the Bank and the fees and disbursements of counsel (including the allocated costs of internal counsel), in connection with the enforcement or attempted enforcement of, and preservation of any rights or interests under, this Agreement, including in any out-of-court workout or other refinancing or restructuring or in any bankruptcy case, and the protection, sale or collection of, or other realization upon, any of the Collateral, including all expenses of taking, collecting, holding, sorting, handling, preparing for sale, selling, or the like, and other such expenses of sales and collections of Collateral. (b) Indemnification. The Borrower hereby agrees to indemnify the Bank, any affiliate thereof, and their respective directors, officers, employees, agents, counsel and other advisors (each an "Indemnified Person") against, and hold each of them harmless from, any and all liabilities, obligations, losses, claims, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever, including the reasonable fees and disbursements of counsel to an Indemnified Person (including allocated costs of internal counsel), which may be imposed on, incurred by, or asserted against any Indemnified Person, in any way relating to or arising out of this Agreement or the transactions contemplated hereby or any action taken or omitted to be taken by it hereunder (the "Indemnified Liabilities"); provided that the Borrower shall not be liable to any Indemnified Person for any portion of such C-16 46 Indemnified Liabilities to the extent they are found by a final decision of a court of competent jurisdiction to have resulted from such Indemnified Person's gross negligence or willful misconduct. If and to the extent that the foregoing indemnification is for any reason held unenforceable, the Borrower agrees to make the maximum contribution to the payment and satisfaction of each of the Indemnified Liabilities which is permissible under applicable law. (c) Other Charges. The Borrower agrees to indemnify the Bank against and hold it harmless from any and all present and future stamp, transfer, documentary and other such taxes, levies, fees, assessments and other charges made by any jurisdiction by reason of the execution, delivery, performance and enforcement of this Agreement. (d) Interest. Any amounts payable to the Bank under this Section 14 or otherwise under this Agreement if not paid when due shall bear interest from the date of such demand until paid in full, at the rate of interest set forth in Section 3.06 of the Credit Agreement. 15 Binding Effect. This Agreement shall be binding upon, inure to the benefit of and be enforceable by the Borrower, the Bank and their respective successors and assigns. 16 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF CALIFORNIA, EXCEPT AS REQUIRED BY MANDATORY PROVISIONS OF LAW AND TO THE EXTENT THE VALIDITY OR PERFECTION OF THE SECURITY INTERESTS HEREUNDER, OR THE REMEDIES HEREUNDER, IN RESPECT OF ANY COLLATERAL ARE GOVERNED BY THE LAW OF A JURISDICTION OTHER THAN CALIFORNIA. 17 Entire Agreement; Amendment. This Agreement contains the entire agreement of the parties with respect to the subject matter hereof and shall not be amended except by the written agreement of the parties as provided in the Credit Agreement. C-17 47 18 Severability. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under all applicable laws and regulations. If, however, any provision of this Agreement shall be prohibited by or invalid under any such law or regulation in any jurisdiction, it shall, as to such jurisdiction, be deemed modified to conform to the minimum requirements of such law or regulation, or, if for any reason it is not deemed so modified, it shall be ineffective and invalid only to the extent of such prohibition or invalidity without affecting the remaining provisions of this Agreement, or the validity or effectiveness of such provision in any other jurisdiction. 19 Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute but one and the same agreement. 20 Incorporation of Provisions of the Credit Agreement. To the extent the Credit Agreement contains provisions of general applicability to the Credit Documents, including any such provisions contained in Article IX thereof, such provisions are incorporated herein by this reference. 21 No Inconsistent Requirements. The Borrower acknowledges that this Agreement and the other Credit Documents may contain covenants and other terms and provisions variously stated regarding the same or similar matters, and agrees that all such covenants, terms and provisions are cumulative and all shall be performed and satisfied in accordance with their respective terms. C-18 48 22 Termination. Upon termination of the commitments of the Bank under the Credit Documents, the surrender of any letters of credit issued by the Bank for the account of the Borrower or any Acceptable Subsidiaries and payment and performance in full of all Secured Obligations, this Agreement shall terminate and the Bank shall promptly execute and deliver to the Borrower such documents and instruments reasonably requested by the Borrower as shall be necessary to evidence termination of all security interests given by the Borrower to the Bank hereunder; provided, however, that the obligations of the Borrower under Section 14 shall survive such termination. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement, as of the date first above written. THE BORROWER ------------ QUARTERDECK CORPORATION By /s/ Frank Greico _____________________________ Title: Chief Financial Officer By /s/ Bradley Schwartz ____________________________ Title: Senior Vice President THE BANK -------- BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION By /s/ John Cinderey ____________________________ Title: Managing Director C-19 49 SCHEDULE 1 to the Security Agreement 23 LOCATIONS OF CHIEF EXECUTIVE OFFICE AND OTHER LOCATIONS, INCLUDING OF COLLATERAL a. Chief Executive Office and Principal Place of Business: b. Other locations where Borrower conducts business or Collateral is kept: 24 LOCATIONS OF BOOKS PERTAINING TO RIGHTS TO PAYMENT 25 TRADE NAMES AND TRADE STYLES; OTHER CORPORATE, TRADE OR FICTITIOUS NAMES, ETC. 26 INVENTORY STORED WITH WAREHOUSEMEN OR ON LEASED PREMISES, ETC. S-1. EX-10.2 3 EXHIBIT 10.2 1 EXHIBIT 10.2 FINAL FORM OF REGISTRATION RIGHTS AGREEMENT This Registration Rights Agreement (this "Agreement") is made and entered into as of July 18, 1996, by and among Quarterdeck Corporation, a Delaware corporation (the "Company"), Anatoly Tikhman, an individual, Philip Johnson, an individual, and Jacob Graudenz, an individual (Messrs. Tikhman, Johnson and Graudenz are hereinafter referred to as the "Holders"). WHEREAS, each Holder is or will become the owner of Shares (as defined below) in connection with the acquisition of Vertisoft Systems, Inc., California corporation ("Vertisoft") and Vertisoft Direct, Inc., a California corporation ("Vertisoft Direct"), by the Company, by way of (i) the merger of Vertisoft Direct and Vertisoft, Inc. into Vertisoft, and (ii) the subsequent merger (the "Merger") of VSI Acquisition Corporation, a California corporation ("VSI"), into Vertisoft, pursuant to the terms of the Agreement and Plan of Reorganization, dated as of July 15, 1996 (the "Acquisition Agreement"), by and among the Company, Vertisoft, Vertisoft Direct, VSI and the Holders; and WHEREAS, pursuant to the terms of the Acquisition Agreement, the Company has agreed to grant to the Holders the registration rights provided for below. NOW, THEREFORE, the parties hereto, in consideration of the foregoing, the mutual covenants and agreements set forth in the Acquisition Agreement and hereinafter set forth, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, agree as follows: 1. CERTAIN DEFINITIONS. As used in this Agreement, the following capitalized defined terms shall have the following meanings: "Common Shares" shall mean shares of common stock, par value $.001 per share, of the Company. "Demand Registration Statement" shall mean a registration statement filed by the Company pursuant to Section 2(c) of this Agreement. "Person" shall mean an individual or a corporation, partnership, limited liability company, association, trust, or any other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. "Piggyback Registration Statement" shall mean a registration statement filed by the Company on its own behalf or on behalf of another shareholder under which a Holder includes Shares pursuant to Section 2(b) of this Agreement. "Prospectus" shall mean any prospectus included in the Registration Statement, including any resale prospectus and any preliminary prospectus, and any amendment or supplement thereto, and in each case including all material incorporated by reference therein. "Registration Expenses" shall mean any and all expenses incident to 2 performance of or compliance with this Agreement, including, without limitation: (i) all applicable registration and filing fees imposed by the SEC and such securities exchange or exchanges on which Common Shares are then listed or the National Association of Securities Dealers, Inc. (the "NASD"); (ii) all fees and expenses incurred in connection with compliance with state securities or "blue sky" laws (including reasonable fees and disbursements of counsel for the Company in connection with qualification of any of the Shares under any state securities or blue sky laws and the preparation of a blue sky memorandum) and compliance with the rules of the NASD; (iii) all expenses of any Persons in preparing or assisting in preparing, printing and distributing the Registration Statement, any Prospectus, certificates and other documents relating to the performance of and compliance with this Agreement; (iv) all fees and expenses incurred in connection with the listing, if any, of any of the Shares on any securities exchange or exchanges pursuant to Section 3(i) hereof; and (v) the fees and disbursements of counsel for the Company and of the independent public accountants of the Company, including the expenses relating to any special audits or "cold comfort" letters required by or incident to such performance and compliance. Registration Expenses shall specifically exclude underwriting discounts and commissions, the fees and disbursements of counsel representing a Holder and transfer taxes, if any, relating to the sale or disposition of Shares by a Holder. "Registration Statement" shall mean the Demand Registration Statement, a Piggyback Registration Statement or a Shelf Registration Statement, as applicable. "SEC" shall mean the Securities and Exchange Commission or any successor entity. "Securities Act" shall mean the Securities Act of 1933, as amended from time to time. "Shares" shall mean the Common Shares issued to the Holders in the Merger and any equity securities issued or issuable directly or indirectly with respect to the Common Shares issued to the Holders in the Merger by way of stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization. "Shelf Registration Statement" shall mean the registration statement filed by the Company pursuant to Section 2(a) of this Agreement. 2. REGISTRATION UNDER THE SECURITIES ACT. (a) Shelf Registration. (i) Subject to Section 6(b) below, the Company shall file a registration statement on Form S-3 or an amendment to an existing registration statement on Form S-3 (the "Shelf Registration Statement"), within 30 days following the closing of the Merger, registering the resale by the Holders of any or all of the Shares, and shall use its best efforts to cause such Shelf Registration Statement to be declared effective by the SEC as soon as practicable thereafter. The Company agrees to use its best efforts to keep the Registration 2 3 Statement continuously effective (and to include a Prospectus at all times meeting the requirements of the Securities Act) through the Shelf Period (as defined below). (ii) The Shelf Period shall be the period commencing on the effective date of the Shelf Registration Statement and ending on July 18, 1998; provided, however, that if the holding period referred to in Rule 144(d)(1) of the rules and regulations promulgated under the Securities Act is reduced from two years to one year (a "Rule 144 Change"), then the Company shall be required to maintain such registration in effect only through July 18, 1997 or through such later date as the Rule 144 Change becomes effective prior to the expiration of the Shelf Period; provided, further, that if the four-week period described in Rule 144(e)(1)(ii) would not have allowed the sale of at least 2,442,000 Common Shares (adjusted for stock splits, combinations and the like) (an "Allowed Sale Under Rule 144") as of the later of July 18, 1997 and the date of the Rule 144 Change, then the Shelf Period shall terminate on August 31, 1997 and not on July 18, 1997 (the "Shelf Period"). (iii) Notwithstanding the foregoing, (A) if a Suspension Event or Events of the type described in clause (ii) of the definition of Suspension Event in Section 6(b) has or have occurred for a period of more than 60 days in the period from July 18, 1996 through July 18, 1997, and the Shelf Period would otherwise terminate on July 18, 1997, the date on which the Shelf Period terminates shall be extended by the number of days that a Holder is disallowed from effecting any sales of Shares pursuant to Section 6(a) hereof, but in any event not beyond August 31, 1997; and (B) if a Suspension Event of the type described in clause (i) of Section 6(b) occurs during the Shelf Period, which Suspension Event ceases to exist during the Shelf Period, the Company shall file a new Shelf Registration Statement within 30 days of the date on which such Suspension Event ceases to exist if there is a reasonable likelihood that Anatoly Tikhman would be entitled to sell Common Shares under such Registration Statement for a period of at least 30 days prior to the expiration of the Shelf Period, taking into account the Company's policies with respect to trading in the Common Shares. (iv) If the Holders desire different methods of distribution of the Shares included in the Registration Statement, the method of distribution shall be determined by the Holders of a majority of the Shares to be included in such Registration Statement. (b) Piggyback Registration. (i) If at any time during the four-year period following the consummation of the Acquisition, the Company proposes to file a registration statement under the Securities Act with respect to an offering of Common Shares (i) for its own account (other than a registration statement (A) on Form S-8 or any successor form to such Form or in connection with any employee or director welfare, benefit or compensation plan, (B) on Form S-4 or any successor form to such Form or in connection with an exchange offer or merger transaction, (C) in connection with a rights offering exclusively to existing holders of Common Shares, (D) in connection with an offering solely to employees of the Company or its subsidiaries, (E) relating to 3 4 a transaction pursuant to Rule 145 of the Securities Act, or (F) which is a shelf registration pursuant to Rule 415 or any successor rule), or (ii) for the account of any other shareholders of the Company (other than a shelf registration pursuant to Rule 415 or any successor rule) pursuant to demand registration rights that do not prohibit the inclusion of Common Shares held by other shareholders in the registration, and the Holders continue to own Shares, the Company shall give prompt written notice of such proposed filing to the Holders. Subject to the limitations set forth below, the notice referred to in the preceding sentence shall offer the Holders the opportunity to register such amount of Shares as each may request (a "Piggyback Registration"). (ii) Subject to the limitations set forth below, the Company shall include in such Piggyback Registration all Shares for which the Company has received written requests for inclusion therein within fifteen (15) calendar days after the notice referred to above has been received by the Holders. Notwithstanding the foregoing, (A) if a Piggyback Registration is an underwritten primary registration on behalf of the Company and the managing underwriter advises the Company that the total number of Common Shares requested to be included in such registration exceeds the number of Common Shares which can be sold in such offering, the Company will include Common Shares in such registration in the following priority: (1) first, Common Shares the Company proposes to sell, and (2) second, the number of Shares requested to be included in such registration by the Holders (and other holders of Common Shares with similar rights) that in the opinion of such managing underwriter can be sold without adversely affecting the price or probability of success of such offering, pro rata among such persons on the basis of the aggregate number of Common Shares requested to be registered by such persons subject to senior rights granted to any holder of Common Shares on or prior to the date hereof, and (B) if a Piggyback Registration is an underwritten registration demanded by other shareholders (the "Demand Holders") pursuant to demand registration rights and the managing underwriter advises the Demand Holders that the total number of Common Shares requested to be included in such registration exceeds the number of Common Shares which can be sold in such offering, the Common Shares will be included in such registration in the following priority: (1) first, Common Shares the Demand Holders propose to sell, and, (2) second, the number of Shares requested to be included in such registration by the Holders (and other holders of Common Shares with similar rights) that in the opinion of such managing underwriter can be sold without adversely affecting the price or probability of success of such offering, pro rata among such persons on the basis of the aggregate number of Common Shares requested to be registered by such persons subject to senior rights granted to any holder of Common Shares on or prior to the date hereof. (iii) The right of any Holder to registration pursuant to this Section 2(b) if such is an underwritten public offering shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Shares in the underwriting to the extent provided herein. All participating Holders and other persons proposing to distribute their securities through such underwriting shall enter into an underwriting agreement in customary form with the representative of the underwriter or underwriters selected for such underwriting by the Company, in the case of a Company initiated offering, and by the Demand Holders, in the case of an underwriting resulting from demand registration rights. 4 5 (iv) The Holders acknowledge that they shall not be entitled to participate in a registration requested pursuant to Section 10.3(a) of that certain Note Agreement dated as of March 1, 1996 among the Company and the purchasers named therein (the "Note Agreement") pursuant to which $25 million principal amount of the Company's 6% Convertible Senior Subordinated Notes due March 31, 2001 (the "Notes") were issued, but may participate in any registration requested pursuant to Section 10.3(b) of the Note Agreement in the manner set forth in (ii) above. (c) Demand Registration. The Holders representing a majority of the Shares ("Majority Holders") may on one occasion request through written notification to the Company that the Company effect a registration with respect to all or a part of the Shares (A) at any time after the Shelf Period but prior to the July 18, 1999, provided, however, that the right to so request a registration shall cease if the Holders are entitled to participate in a Piggyback Registration under Section 2(b) hereof during such period without any cutbacks and provided further that the Company shall not be required to honor any such request unless it relates to the resale of at least an aggregate of least $2,000,000 or more in fair market value in Shares (determined as provided below), and (B) if a Suspension Event of the type described in clause (i) of the definition thereof in Section 6(b) occurs during the Shelf Period, the Majority Holders shall be entitled to exercise their right to request a single demand registration prior to expiration of the Shelf Period and during the continuation of such Suspension Event, provided, however, that the Company shall not be required to honor any such request unless it relates to the resale of a number of Common Shares that is equal to the greater of (X) the number of Common Shares with a fair market value of at least $5,000,000, based on the average closing sales price of the Common Shares as reported on the Nasdaq National Market System during the five trading days prior to the date on which the Holders request such registration statement, and (Y) 735,000 shares of Common Shares (or such lesser number of Common Shares then held by the Holders). The Company will promptly give written notice of the proposed registration to all other Holders and as soon as practicable, use its best efforts to effect such registration (including, without limitation, filing post-effective amendments, appropriate qualifications under applicable blue sky or other state securities laws, and appropriate compliance with the Securities Act) as would permit or facilitate the sale and distribution of all or such portion of such Shares as are specified in such request, together with all or such portion of the Shares of any Holder or Holders joining in such request as are specified in a written request received by the Company within twenty (20) days after such written notice from the Company is mailed or delivered. The Company shall file a registration statement covering the Shares so requested to be registered as soon as practicable after receipt of the request or requests of the Holders. (i) The right of any Holder to registration pursuant to this Section 2(c) if such is an underwritten public offering shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Shares in the underwriting to the extent provided herein. A Holder may elect to include in such underwriting all or a part of the Shares he holds. (ii) The Company shall (together with all Holders and other persons proposing to distribute their securities through such underwriting) enter into an underwriting agreement in customary form with the representative of the underwriter or 5 6 underwriters selected for such underwriting by a majority in interest of the Holders, which underwriters shall be reasonably acceptable to the Company. (iii) The Holders acknowledge that the holders of shares of Common Stock issuable and issued upon conversion of the Notes shall be entitled to participate in the registration requested pursuant to this Section 2(c), subordinate to the rights of the Holders to participate therein, but pro rata with all other holders of shares of Common Stock to be included in any such Registration, if such registration statement relates to an underwritten offering and if, in the opinion of the managing underwriter of any such underwritten registration such shares may be included in such registration without having an adverse effect on the marketability or the price of any shares of Common Stock proposed to be offered by the Holders in such underwritten registration. (d) Expenses. The Company shall pay all Registration Expenses in connection with a registration pursuant to this Agreement. Each Holder shall pay all underwriting discounts and commissions relating to such Holder's Shares, the fees and disbursements of counsel representing such Holder and transfer taxes, if any, relating to the sale or disposition of Shares by such Holder. 3. REGISTRATION PROCEDURES. In connection with the obligations of the Company under Section 2 hereof, the Company shall: (a) prepare and file with the SEC, within the time period set forth in Section 2 hereof, and use its best efforts to have declared effective by the SEC, the Registration Statement, which shall (i) be available for public resale of the Shares by the selling Holders, and (ii) comply as to form in all material respects with the requirements of the applicable form and include all financial statements required by the SEC to be filed therewith; (b) (i) prepare and file with the SEC such amendments to the Registration Statement as may be necessary to keep it effective for the applicable period; (ii) cause any Prospectus to be amended or supplemented as required and to be filed as required by Rule 424 or any similar rule that may be adopted under the Securities Act; (iii) respond as promptly as practicable to any comments received from the SEC with respect to the Registration Statement or any amendment thereto; and (iv) comply with the provisions of the Securities Act with respect to the disposition of all securities covered by the Registration Statement during the applicable period in accordance with the intended method or methods of distribution by the selling Holders; (c) furnish to each Holder, upon request and without charge, as many copies of any Prospectus and any amendment or supplement thereto as such Holder may request in order to facilitate the public sale or other disposition of the Shares; (d) use its best efforts to register or qualify the Shares under all applicable state securities or blue sky laws of such jurisdictions in the United States and its territories and possessions as any Holder may reasonably request in writing and keep such registration or qualification effective during the period the Registration Statement is required to be kept effective; provided, however, that in connection therewith, the Company shall not be 6 7 required to (i) qualify as a foreign corporation to do business or to register as a broker or dealer in any such jurisdiction where it would not otherwise be required to qualify or register but for this Section 3(d), (ii) subject itself to taxation in any such jurisdiction with respect to such registration or qualification, or (iii) file a general consent to service of process in any such jurisdiction; (e) notify each Holder promptly and, if requested by a Holder, confirm in writing, (i) when the Registration Statement and any post-effective amendments thereto have become effective, (ii) when any amendment or supplement to a Prospectus has been filed with the SEC, (iii) of the issuance by the SEC or any state securities authority of any stop order suspending the effectiveness of the Registration Statement or any part thereof or the initiation of any proceedings for that purpose, (iv) if the Company receives any notification with respect to the suspension of the qualification of the Shares for offer or sale in any jurisdiction or the initiation of any proceeding for such purpose, and (v) of the happening of any event during the period the Registration Statement is effective as a result of which (A) the Registration Statement contains any untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading or (B) a Prospectus as then amended or supplemented contains any untrue statement of a material fact or omits to state any material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading; (f) use best efforts to obtain the withdrawal of any order suspending the effectiveness of the Registration Statement by the SEC or any state securities authority as promptly as possible; (g) furnish to each Holder upon request, without charge, at least one conformed copy of the Registration Statement and any post-effective amendment thereto (without documents incorporated therein by reference or exhibits thereto, unless requested); (h) cooperate with the Holders to facilitate the timely preparation and delivery of certificates representing Shares to be sold and not bearing any Securities Act legend and enable certificates for such Shares to be issued for such numbers of Shares and registered in such names as the Holders may reasonably request; and (i) use its best efforts to cause all Shares to be listed on any securities exchange on which the Common Shares are then listed, or included on the NASDAQ National Market if the Common Shares are then so included. 4. CERTAIN AGREEMENTS OF HOLDERS. (a) Each Holder agrees to furnish to the Company in writing such information regarding the Holder and his proposed distribution of Shares as the Company may from time to time reasonably request in connection with the preparation of the Registration Statement or the registration or qualification of the Shares under state securities or blue sky laws, and report to the Company within fifteen (15) days after the end of each month all sales or other dispositions of Shares made by such Holder during such month. 7 8 (b) Each Holder who executes this Agreement agrees, if requested by the Company in the case of a Company initiated nonunderwritten offering or if requested by the managing underwriter or underwriters in an underwritten offering initiated by the Company or by a shareholder of the Company pursuant to demand registration rights, not to effect any public sale or distribution of any Shares (including a sale pursuant to Rule 144 under the Securities Act), except as part of such Company initiated registration, during the ten (10) day period prior to, and during the sixty (60) day period beginning on, the date of effectiveness of each Company initiated offering made pursuant to a registration statement, to the extent timely notified in writing by the Company or the managing underwriters. 5. INDEMNIFICATION, CONTRIBUTION. (a) Indemnification by the Company. The Company agrees to indemnify and hold harmless each Holder and its officers and directors and partners and each Person, if any, who controls any Holder within the meaning of Section 15 of the Securities Act, as follows: (i) subject to Section 5(a)(iii), against any and all loss, liability, claim, damage and expense whatsoever, as incurred, to which such Holder, partner, officer, director or controlling Person may become subject under the Securities Act or otherwise (A) that arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in a Registration Statement or any amendment thereto, or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading or (B) that arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in any Prospectus or any amendment or supplement thereto, or the omission or alleged omission to state therein a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; (ii) subject to Section 5(a)(iii), against any and all loss, liability, claim, damage and expense whatsoever, as incurred, to the extent of the aggregate amount paid in settlement of any litigation, investigation or proceeding by any governmental agency or body, commenced or threatened, or of any claim whatsoever based upon any such untrue statement or alleged untrue statement, any omission or alleged omission, if such settlement is effected with the written consent of the Company; and (iii) subject to the limitations set forth in Section 5(c), against any and all expense (including reasonable fees and disbursements of counsel) reasonably incurred in investigating, preparing or defending against any litigation, investigation or proceeding by any governmental agency or body, commenced or threatened, in each case whether or not a party, or any claim whatsoever based upon any such untrue statement or alleged untrue statement, omission or alleged omission that relates to the sale by a Holder of Shares under a Registration Statement, to the extent that any such expense is not paid under subparagraph (i) or (ii) above; provided, however, that the indemnity provided pursuant to this Section 5(a)(i), (ii) and (iii) shall not apply to any Holder with respect to any loss, liability, claim, damage or expense that arises out 8 9 of or is based upon (1) any untrue statement or alleged untrue statement or omission or alleged omission made in reliance upon and in conformity with written information furnished to the Company by such Holder expressly for use in the Registration Statement or any amendment thereto or a Prospectus or any amendment or supplement thereto or (2) trades made by such Holder in violation of Section 6(a) below. (b) Indemnification by Holders. Each Holder severally, in proportion of the number of Shares sold and to be sold by the Holder pursuant to such Registration Statement, agrees to indemnify and hold harmless the Company and the other Holders, and each of their respective directors, officers and partners (including each director of the Company and each officer of the Company who signed any Registration Statement), and each Person, if any, who controls the Company or any other Holder within the meaning of Section 15 of the Securities Act, to the same extent as the indemnity contained in Section 5(a) hereof, but only insofar as such loss, liability, claim, damage or expense arises out of or is based upon (i) any untrue statement or alleged untrue statement or omission or alleged omission made in the Registration Statement or any amendment thereto or a Prospectus or any amendment or supplement thereto in reliance upon and in conformity with written information prepared and furnished to the Company by the indemnifying Holder expressly for use therein or (ii) trades made by the indemnifying Holder in violation of Section 6(a) below; provided, that, in the case of the indemnifying Holder's obligation set forth in this Section 5(b) relating to Section 5(b)(ii) above, such settlement must be effected with the written consent of such Holder. (c) Conduct of Indemnification Proceedings. Each indemnified party shall give reasonably prompt notice to each indemnifying party of any action or proceeding commenced against it in respect of which indemnity may be sought hereunder, but failure to so notify an indemnifying party (i) shall not relieve it from any liability that it may have under the indemnity agreement provided in Section 5(a) or (b) above, unless and to the extent it did not otherwise learn of such action and the lack of notice by the indemnified party materially prejudices the indemnifying party or results in the forfeiture by the indemnifying party of substantial rights and defenses and (ii) shall not, in any event, relieve the indemnifying party from any obligations to any indemnified party other than the indemnification obligation provided under Section 5(a) or (b) above. After receipt of such notice, the indemnifying party shall be entitled to participate in and, at its option, jointly with any other indemnifying party so notified, to assume the defense of such action or proceeding at such indemnifying party's own expense with counsel chosen by such indemnifying party and approved by the indemnified party or parties, which approval shall not be unreasonably withheld; provided, however, that, if the defendants in any such action or proceeding include both an indemnified party and an indemnifying party and the indemnified party reasonably determines, upon advice of counsel, that a conflict of interest exists or that there may be legal defenses available to it or other indemnified parties that are different from or in addition to those available to the indemnifying parties, then the indemnified parties shall be entitled to counsel (which shall be limited to a single law firm for all indemnified parties) the reasonable fees and expenses of which shall be paid by the indemnifying parties. If none of the indemnifying parties assumes the defense of any such action or proceeding, after having received the notice referred to in the first sentence of this paragraph, the indemnifying parties will pay the reasonable fees and expenses of counsel (which shall be limited to a single law firm for all indemnified parties) for the indemnified parties. In such event, however, no indemnifying party will be liable 9 10 for any settlement effected without the written consent of such indemnifying party, which consent shall not be unreasonably withheld. If one or more of the indemnifying parties assumes the defense of any such action or proceeding in accordance with this paragraph, such indemnifying party shall not be liable for any fees and expenses of counsel for the indemnified parties incurred thereafter in connection with such action or proceeding except as set forth in the proviso in the second sentence of this Section 5(c). (d) Contribution. (i) In order to provide for just and equitable contribution in circumstances in which the indemnity agreement provided for in this Section 5 is for any reason held to be unenforceable although applicable in accordance with its terms, the indemnifying parties shall contribute to the aggregate losses, liabilities, claims, damages and expenses of the nature contemplated by such indemnity agreement incurred by the indemnified party, in such proportion as is appropriate to reflect the relative fault of and benefits to each indemnifying party and each indemnified party in connection with the statements or omissions that resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The relative benefits to the indemnifying parties and indemnified parties shall be determined by reference to, among other things, the total proceeds received and to be received by each indemnifying party and indemnified party in connection with the offering to which such losses, claims, damages, liabilities or expenses relate. The relative fault of each indemnifying party and indemnified party shall be determined by reference to, among other things, whether the action in question, including any untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact, has been made by, or relates to information supplied by, such indemnifying party or indemnified party, and the parties' relative intent, access to information and opportunity to correct or prevent such action. (ii) The parties hereto agree that it would not be just or equitable if contribution pursuant to this Section 5(d) were determined by pro rata allocation or by any other method of allocation that does not take account of the equitable considerations referred to in Section 5(d)(i) above. (iii) Notwithstanding the foregoing, no Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 5(d), each Person, if any, who controls a Holder within the meaning of Section 15 of the Securities Act and directors, officers and partners of a Holder shall have the same rights to contribution as such Holder, and each director of the Company, each officer of the Company who signed the Registration Statement and each Person, if any, who controls the Company within the meaning of Section 15 of the Securities Act shall have the same rights to contribution as the Company. (e) Notwithstanding any term or condition to the contrary, the liability of any Holder pursuant to this Section 5 shall be limited to the gross proceeds received by such Holder as a result of the sale giving rise to the liability. 10 11 (f) The obligations of the Company and the Holders under this Section 5 shall survive the completion of any offering of the Shares pursuant to any Registration Statement. 6. SUSPENSION OF REGISTRATION REQUIREMENT. (a) Each Holder agrees that he, she or it will not effect any sales of Shares pursuant to a Registration Statement after such Holder has received notice from the Company to suspend sales as a result of the occurrence or existence of any Suspension Event (as defined in Section 6(b) below) until the Company provides notice to such Holder that all Suspension Events have ceased to exist. In addition, each Holder agrees that he, she or it will not effect any sales of Shares pursuant to the Registration Statement after such Holder has received notice from the Company to suspend sales because the Registration Statement, any Prospectus or any supplement thereto contains an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, until the Company notifies such Holder that the misstatement or omission has been corrected. (b) Notwithstanding anything to the contrary set forth in this Agreement, the Company's obligation to file a Registration Statement and make any filings with any state securities authority, to use its best efforts to cause a Registration Statement or any state securities filings to become effective, or to amend or supplement a Registration Statement or any state securities filings shall be temporarily suspended in the event of and during a Suspension Event. A "Suspension Event" shall exist at such times (i) that the Company is not eligible to use Form S-3 for the registration contemplated by Section 2(a) hereof, (ii) as circumstances exist that the Company determines make it impractical or inadvisable for the Company to file, amend or supplement a Registration Statement or such filings or to cause a Registration Statement or such filings to become effective (such circumstances to include, without limitation, (A) the Company conducting an underwritten primary offering and being advised by the underwriters that sale of Common Shares under the Shelf Registration Statement would have a material adverse effect on the Company's offering or (B) pending negotiations relating to, or consummation of, a transaction or the occurrence of some other event (x) where any of the foregoing would require disclosure under applicable securities laws of material information in a Registration Statement (or any other document incorporated into a Registration Statement by reference) or such state securities filings and (y) as to which the Company has a bona fide business purpose for preserving confidentiality or which renders the Company unable to comply with SEC requirements). Suspension of the Company's obligations pursuant to this Section 6(b) shall continue only for so long as a Suspension Event or its effect is continuing. The Company shall notify each Holder promptly after any Suspension Event occurs or ceases to exist. 7. MISCELLANEOUS. (a) Amendments and Waivers. The provisions of this Agreement, including the provisions of this sentence, may not be amended, modified, supplemented or waived, nor may consent to departures therefrom be given, without the written consent of the Company and the Holders of 50% of the Shares then held by the Holders. 11 12 (b) Notices. All notices and other communications provided for or permitted hereunder shall be made in writing by hand delivery, registered first-class mail, telex, telecopier, or any courier guaranteeing overnight delivery, (i) if to a Holder, at such Holder's registered address appearing on the share register of the Company or (ii) if to the Company, at 13160 Mindanao Way, 3rd Floor, Marina del Rey, California, Attention: Law Department. All such notices and communications shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; five (5) business days after being deposited in the mail, postage prepaid, if mailed; when answered back, if telexed; when receipt is acknowledged, if telecopied; or at the time delivered if delivered by an air courier guaranteeing overnight delivery. (c) Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successors, assigns and personal representatives. This Agreement and the registration rights granted hereunder may not be assigned by a Holder without the consent of the Company which consent shall not be unreasonably withheld and unless the assignee agrees in writing to be bound by the provisions of this Agreement. In particular, (A) the Company will be under no obligation to give its consent to such an assignment by a Holder of any rights under Section 2(a) unless the Company is otherwise filing an amendment to the Registration Statement which provides it with an opportunity to modify the selling stockholder information contained in the Registration Statement to reflect such assignment in which case such consent to assignment, will not be unreasonably withheld, and (B) the Company will not unreasonably withhold its consent to the transfer by Anatoly Tikhman of the rights granted under Section 2(c) on one occasion to one Person in which case such Person shall have the right to participate with the Holders. (d) Counterparts. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. (e) Headings and Interpretation. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. In construing the meaning of this Agreement, no party hereto shall be deemed the drafter of this Agreement and this Agreement shall be construed according to its fair meaning and not strictly against any person as the drafter hereof. (f) Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California without giving effect to the conflicts of law provisions thereof. (g) Entire Agreement. This Agreement is intended by the parties as a final expression of their agreement and intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein. This Agreement supersedes all prior oral and written agreements and understandings and all contemporaneous written agreements and understandings between the parties with respect to such subject matter. 12 13 (h) Attorneys' Fees. In the event of any suit or other proceeding to construe or enforce any provision of this Agreement, or otherwise in connection with this Agreement, the prevailing party's or parties' reasonable attorneys' fees and costs (in addition to all other amounts and relief to which such party or parties may be entitled) shall be paid by the other party or parties. (i) Rule 144. The Company covenants that it will file the reports required to be filed by it under the Exchange Act and the rules and regulations adopted by the SEC thereunder and will take such further action as any Holder may reasonably request, all to the extent required from time to time to enable such Holder to sell Shares without registration under the Securities Act pursuant to the exemption provided by Rule 144 under the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the SEC. Upon the request of any Holder, Quarterdeck will deliver to such holder a written statement as to whether it has complied with such requirements. (j) Default Specific Performance. The parties hereto acknowledge that there would be no adequate remedy at law. If, because of the Company's breach or default, the registration of the Shares is not completed and/or continued pursuant to the provisions hereof and accordingly agree that the Holders shall have all remedies at law or in equity, including, without limitation, specific performance of the Company's obligations under this Agreement. 13 14 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. QUARTERDECK CORPORATION By: /s/ Bradley D. Schwartz --------------------------------- HOLDERS: /s/ Anatoly Tikhman ------------------------------------- Anatoly Tikhman /s/ Philip Johnson ------------------------------------- Philip Johnson /s/ Jacob Graudenz ------------------------------------- Jacob Graudenz 14 EX-27 4 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE CONSOLIDATED UNAUDITED CONDENSED BALANCE SHEETS AND THE CONSOLIDATED UNAUDITED CONDENSED STATEMENTS OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) FINANCIAL STATEMENTS INCLUDING THE ACCOMPANYING FOOTNOTES. 1,000 9-MOS SEP-30-1996 OCT-01-1995 JUN-30-1996 14,409 0 12,623 594 3,376 43,228 20,617 12,913 77,073 28,583 25,114 0 0 31 23,345 77,073 105,683 105,683 36,045 36,045 85,035 1,399 1,718 (13,679) (2,058) (11,621) 0 (7,757) 0 (19,378) (0.62) (0.62)
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