-----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, D2beL3a/BJmifXuduP89N9bwISTxYtrQZbwTfYN+dtJyT9HVpVqB2yQuNUHvaoDr OICrfWoPMqUMVR6n7Hw9lQ== 0000950148-97-002137.txt : 19970815 0000950148-97-002137.hdr.sgml : 19970815 ACCESSION NUMBER: 0000950148-97-002137 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970814 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: 97662623 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, 1997 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, 1997 was 40,125,448. ================================================================================ 2 QUARTERDECK CORPORATION AND SUBSIDIARIES FORM 10-Q June 30, 1997 INDEX
PAGE NO. -------- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Consolidated Condensed Balance Sheets as of June 30, 1997 (unaudited) and September 30, 1996 3 Consolidated Unaudited Condensed Statements of Operations for the three and nine months ended June 30, 1997 and 1996 4 Consolidated Unaudited Condensed Statements of Cash Flows for the nine months ended June 30, 1997 and 1996 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 20 SIGNATURES 21
PAGE 2 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS QUARTERDECK CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (Amounts in thousands)
ASSETS June 30, September 30, 1997 1996 ----------- ------------- (Unaudited) Current assets: Cash and cash equivalents $10,883 $25,554 Trade accounts receivable, net 9,411 9,265 Inventories 1,953 2,151 Other current assets 5,191 5,594 ------- ------- Total current assets 27,438 42,564 Property, plant and equipment, net 21,087 21,252 Capitalized software costs, net 2,543 3,448 Other assets 4,940 9,517 ------- ------- $56,008 $76,781 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Trade accounts payable $ 4,497 $10,685 Notes payable to banks 5,480 8,280 Accrued liabilities 13,872 17,232 Accrued acquisition, restructuring and other charges 1,731 10,940 Current portion of long-term obligations 16 111 ------- ------- Total current liabilities 25,596 47,248 Convertible notes 25,000 25,000 Long-term obligations, less current portion 67 108 ------- ------- Total liabilities 50,663 72,356 Litigation (Note 7) Stockholders' equity: Series B preferred stock (authorized: 2,000 shares; issued and outstanding: 150 shares, liquidation preference $15,000) 15,000 20,000 Common stock (authorized: 70,000 shares; issued and outstanding: 40,109 and 37,666 shares) 40 38 Treasury stock (559) (559) Additional paid-in-capital 70,620 64,819 Retained earnings (accumulated deficit) (79,525) (79,766) Foreign currency translation adjustment (429) (468) Note receivable from directors for sale of stock (18) (18) Net unrealized gain (loss) on marketable securities 216 379 ------- ------- Total stockholders' equity 5,345 4,425 ------- ------- $56,008 $76,781 ======= =======
The accompanying notes are an integral part of these consolidated unaudited condensed financial statements. PAGE 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, 1997 1996 1997 1996 ----- ----- ----- ----- Net revenues $21,056 $ 19,607 $68,538 $113,359 Cost of revenues 5,153 12,519 17,505 38,331 ------- -------- ------- -------- Gross margin 15,903 7,088 51,033 75,028 ------- -------- ------- -------- Operating expenses: Research and development 3,760 5,410 11,480 15,951 Sales and marketing 7,169 18,993 23,015 52,496 General and administrative 3,689 10,200 13,403 23,302 Acquisition and restructuring -- 1,660 -- 9,131 ------- -------- ------- -------- Total operating expenses 14,618 36,263 47,898 100,880 ------- -------- ------- -------- Operating income 1,285 (29,175) 3,135 (25,852) Interest income (expense), net (498) (130) (1,491) 278 Other income (expense) 266 1,435 (1,400) 1,485 ------- -------- ------- -------- Income (loss) before income taxes 1,053 (27,870) 244 (24,089) Provision (benefit) for income taxes -- (4,553) 3 (3,938) ------- -------- ------- -------- Net income (loss) $ 1,053 $(23,317) $ 241 $(20,151) ======= ======== ======= ======== Net income (loss) per share $ 0.02 $ (0.67) $ 0.01 $ (0.58) ======= ======== ======= ======== Shares used to compute net income (loss) per share 47,130 35,047 47,644 34,921 ======= ======== ======= ========
The accompanying notes are an integral part of these consolidated unaudited condensed financial statements PAGE 4 5 QUARTERDECK CORPORATION AND SUBSIDIARIES CONSOLIDATED UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS (Amounts in thousands)
Nine months ended June 30, 1997 1996 ------- -------- Cash flows from operating activities: Net income (loss) $ 241 $(20,151) Adjustments to reconcile net income/(loss) to net cash used in operating activities: Depreciation and amortization of equipment and leasehold improvements 3,702 4,410 Amortization of capitalized software costs 1,385 3,341 Write-off of property and equipment 213 -- Elimination of duplicate net income from acquired entities -- (717) Realized gain on sale of marketable securities (231) (1,435) Decrease in unrealized gain on marketable securities -- (195) Changes in assets and liabilities: Trade accounts receivable (146) 1,143 Deferred tax asset -- (1,658) Income tax receivable -- (3,065) Inventories 198 (799) Other current assets (328) (1,383) Other assets 4,577 (3,136) Accounts payable (6,188) (7,661) Accrued liabilities (2,860) (459) Income taxes payable (324) -- Accrued acquisition, restructuring and other charges (9,130) (75) Foreign currency translation adjustment (75) (43) -------- -------- Net cash used in operating activities (8,966) (31,883) -------- -------- Cash flows from investing activities: Sales of marketable securities 820 34,285 Loan to related party for Note receivable - Building -- -- Capital expenditures (3,814) (16,113) Capitalized software costs (480) (3,169) Cash acquired in acquisitions -- 5,094 -------- -------- Net cash provided by (used in) investing activities (3,474) 20,097 -------- -------- Cash flows from financing activities: Proceeds from issuance of Convertible Notes -- 25,000 Principal debt repayments (4,494) (238) Proceeds from bank borrowing 1,582 2,000 Dividends to shareholders of acquired entity -- (7,307) Net proceeds from issuance of common stock 681 4,182 -------- -------- Net cash provided by (used in) financing activities (2,231) 23,637 -------- -------- Net increase (decrease) in cash and cash equivalents (14,671) 11,851 Cash and cash equivalents at beginning of period 25,554 5,384 -------- -------- Cash and cash equivalents at end of period $ 10,883 $ 17,235 ======== ======== Supplemental disclosure of cash flow information: Cash paid during the period for: Interest $ 1,671 $ 63 Income taxes $ 50 $ 2,340 -------- -------- Non-cash transaction: Tax benefits arising from exercise of non-qualified stock options and warrants $ -- $ 1,100 -------- --------
The accompanying notes are an integral part of these consolidated unaudited condensed financial statements PAGE 5 6 QUARTERDECK CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED UNAUDITED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The accompanying consolidated financial statements of Quarterdeck Corporation are unaudited (except for the Balance Sheet as of September 30, 1996) 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, 1996. In the opinion of management, the accompanying consolidated unaudited financial statements include all adjustments which are necessary for a fair presentation. The results of operations for the three and nine month periods ended June 30, 1997 are not necessarily indicative of results to be expected for the full fiscal year. 2. GENERAL Quarterdeck Corporation develops, markets, and supports software that enhances the performance, user productivity, and cost-effectiveness of personal computing in standalone and networked environments. The Company provides its software solutions to individual, business, and government/education users through retail distribution, resellers, direct marketing operations and Internet downloads. Its worldwide headquarters are in Marina del Rey, California, with Dublin, Ireland serving as its European headquarters. The Company was incorporated in California in 1982 as Quarterdeck Office Systems, Inc. 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. The Company's principal offices are located at 13160 Mindanao Way, Marina del Rey, California, 90292; its telephone number is (310) 309-3700. Quarterdeck's Internet home page is 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. PAGE 6 7 3. BALANCE SHEET INFORMATION
JUNE 30, SEPTEMBER 30, 1997 1996 -------- ------------- (IN THOUSANDS) Trade accounts receivable: Receivables.......................................................... $ 19,555 $ 22,284 Less: allowance for doubtful accounts............................... (2,125) (2,032) Less: allowance for sales returns................................... (3,849) (7,213) Less: allowance for market development funds........................ (4,170) (3,774) -------- -------- $ 9,411 $ 9,265 ======== ======== Other current assets: Prepaid royalties.................................................... $ 800 $ 901 Income tax receivable................................................ 1,736 2,825 Other prepaid expenses............................................... 914 1,150 Notes receivable..................................................... 51 1 Advances to employees................................................ 20 26 Marketable securities................................................ 1,080 -- Other................................................................ 590 691 -------- -------- $ 5,191 $ 5,594 ======== ======== Equipment and leasehold improvements: Building (C.I.P.) .................................................. $ 12,954 $ 11,069 Computer equipment................................................... 13,462 12,748 Office furniture and equipment....................................... 9,596 9,910 Office furniture and equipment under capital leases.................. 138 252 Leasehold improvements............................................... 1,507 1,586 -------- -------- 37,657 35,565 Less: accumulated depreciation and amortization..................... (16,570) (14,313) -------- -------- $ 21,087 $ 21,252 ======== ======== Capitalized software costs: Capitalized software costs........................................... $ 5,999 $ 5,607 Less: accumulated amortization...................................... (3,456) (2,159) -------- -------- $ 2,543 $ 3,448 ======== ======== Other assets: Marketable securities................................................ $ -- $ 968 Other investments.................................................... 1,257 3,788 Notes receivable from employee ...................................... -- 13 Intangible assets acquired, net...................................... 2,810 3,125 Other................................................................ 873 1,623 -------- -------- $ 4,940 $ 9,517 ======== ======== Accrued expenses: Accrued expenses, general............................................ $ 10,211 $ 15,084 Accrued royalties.................................................... 2,163 688 Accrued vacation..................................................... 1,498 1,460 -------- -------- $ 13,872 $ 17,232 ======== ======== Accrued acquisition, restructuring and other charges: Acquisition - pooling transactions................................... $ 916 $ 2,345 Acquisition - purchase transactions.................................. 108 315 Restructuring........................................................ 707 8,280 -------- -------- $ 1,731 $ 10,940 ======== ========
PAGE 7 8
THREE MONTHS ENDED NINE MONTHS ENDED STATEMENT OF OPERATIONS JUNE 30, JUNE 30, SUPPLEMENTAL DATA 1997 1996 1997 1996 ---- ---- ------ ---- Acquisition, restructuring and other charges: Restructuring $ -- $ (7) $ -- $ 442 Acquisition -- 1,667 -- $8,689 In-process R&D -- -- -- -- ----- ------ ----- ------ $ -- $1,660 $ -- $9,131 ===== ====== ===== ======
4. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments purchased with an original maturity to the Company of three months or less to be cash equivalents. Cash and cash equivalents at June 30, 1997 amounted to $10,883,000. 5. COMPUTATION OF NET INCOME PER SHARE The net income (loss) per share for the three and nine month periods ended June 30, 1997 and 1996 have been computed using the weighted average number of common shares and also includes common stock equivalents unless their inclusion would be anti-dilutive. The shares outstanding for each period are summarized below:
Three months ended Nine months ended June 30, June 30, 1997 1996 1997 1996 ---- ----- ---- ----- Weighted average common stock outstanding during period 40,083 35,047 39,904 34,921 Common stock equivalents: Limbex purchase transaction 1,422 -- 1,422 -- Convertible Series B Preferred Stock 5,513 -- 5,513 -- Stock options outstanding 112 -- 805 -- ------ ------ ------ ------ Shares used in primary net income per share calculation 47,130 35,047 47,644 34,921 ====== ====== ====== ======
During the three months ended June 30, 1997, 50,000 shares of Series B Preferred Stock were converted into approximately 1,910,000 shares of common stock which have been included in the weighted average number of common shares outstanding. See Part II, Item 2 "Changes in Securities" for a further discussion of this transaction. For the three and nine months ended June 30, 1997, shares used to compute net income per share include certain outstanding stock options, the dilutive effect of the 150,000 outstanding shares of Series B Preferred Stock which may be converted into approximately 5,513,000 shares of common stock, based upon the conversion rate as of June 30, 1997, and approximately 1,422,000 shares of common stock to be issued in August 1997 in conjunction with the acquisition of Limbex Corporation. The shares will be valued, and the exact number of shares to be issued will be determined, at the time of issuance. PAGE 8 9 For the three and nine months ended June 30, 1996, common stock equivalents and other securities have not been included as their effect would be anti-dilutive. 6. RESTRUCTURING CHARGES During fiscal 1996, Quarterdeck implemented a comprehensive, corporate-wide restructuring plan. As a result of the plan, the Company recorded a restructuring charge and reduced its workforce by approximately 40%, eliminating in excess of 500 positions. As part of the restructuring, Quarterdeck has centralized operations and eliminated many duplicate functions that resulted from a series of acquisitions during fiscal 1996 and 1995. This restructuring has also focused the Company in the utilities and communications software categories. Quarterdeck is currently attempting to evolve its core utilities and communication product lines into a set of products designed to enhance user performance, simplify system management and reduce the ongoing cost of ownership for networked personal computing. As part of this effort, the Company has made and may continue to make strategic acquisitions and divestitures. In connection with the implementation of these strategic transactions and the restructuring generally, Quarterdeck may take additional charges and write-downs which could have a material adverse effect on the Company's financial results. The following is an analysis of the significant components of the fiscal 1996 restructuring and other charges and activity during the quarter ended June 30, 1997 (in thousands):
ACTIVITY ---------------------------------------- Restructuring and Non-Cash Cash Paid Reallocation Accrued as Non-recurring Costs in Fiscal of of June 30, Costs Accrued at 1997 accrual 1997 September 30, 1996 ------------------- -------- --------- ------------ ----------- Discontinuance and $1,420 $ -- $ (745) $(185) $490 consolidation of offices Severance costs/other charges 5,963 (75) (6,254) 477 111 Write-off of property and 655 (299) -- (292) 64 equipment ------ ----- ------- ----- ---- Total $8,038 $(374) $(6,999) $ 0 $665 ====== ===== ======= ===== ====
Quarterdeck currently expects the restructuring accrual to be utilized, primarily through cash disbursements, by the end of calendar year 1997. The Company anticipates the cash effect of such disbursements to be of declining significance throughout the remainder of the 1997 calendar year. Funding for these disbursements is expected to come from the Company's working capital. PAGE 9 10 7. LEGAL PROCEEDINGS Shareholder complaints were filed in November and December 1996 and January 1997 in the Superior Court of the State of California, County of Los Angeles, against the Company and one former and one current officer of Quarterdeck alleging, among other things, violations of certain provisions of California securities laws relating to statements made about Quarterdeck. A shareholder complaint was filed in June 1997 in the United States District Court for the Central District of California against the Company and one former and one current officer of Quarterdeck alleging, among other things, violations of certain provisions of federal securities laws relating to statements made about Quarterdeck. The suits are purportedly brought on behalf of all persons who purchased the Company's common stock during the period January 26, 1996 through June 13, 1996 and seek damages in an unspecified amount and other relief. To date Quarterdeck has not filed a response to the complaints. Due to the early stage of the litigation and the uncertainty inherent in litigation, management is unable to estimate the impact on the Company's results of operations, financial condition, or liquidity, if any. Accordingly, no provision for any liability that may result from these suits has been made in Quarterdeck's consolidated financial statements (other than with respect to the $250,000 deductible under the Company's directors and officers insurance policy which has been utilized for costs relating to the defense). However, no assurances can be given that the ultimate disposition of these cases will not have a material adverse effect on Quarterdeck's results of operations and financial condition or liquidity. In March 1997, a purported class action lawsuit brought on behalf of all licensees of MagnaRAM2 residing in the United States, Jack Abbott, et al. v. Quarterdeck Corporation, Case No. 00709198, was filed in the Superior Court of the State of California, County of San Diego. The complaint alleges, among other things, that MagnaRAM2 fails to significantly increase Random Access Memory or otherwise help Windows 95 and Windows 3.x users. The plaintiffs seek compensatory damages and punitive damages in unspecified amounts, injunctive relief, and attorney fees and costs. Due to the early stage of the litigation and the uncertainty inherent in litigation, management is unable to estimate the impact on Quarterdeck's results of operations, financial condition, or liquidity, if any. Quarterdeck is a defendant in various other 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. 8. SUBSEQUENT EVENT On August 12, 1997, the Company consummated the acquisition of certain assets of TOC Holding Company, formerly known as TuneUp.com, Inc., for an aggregate purchase price of $250,000. Quarterdeck had managed the assets of TuneUp.com under a management agreement from May 9, 1997 until the consummation of the acquisition. PAGE 10 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This discussion and analysis of financial condition and results of operations should be read in conjunction with the consolidated financial statements, the notes thereto and other information, including information set forth in the Company's 10-K for the fiscal year ended September 30, 1996, and all other recent filings Quarterdeck has made with the Securities and Exchange Commission, before making an investment decision with respect to the Company's stock. In addition to an analysis of recent and historical financial results, this Form 10-Q includes a discussion of certain of Quarterdeck's business risks, including risks which are inherent to software development as well as specific trends and uncertainties relating to the competitive environment in which the Company operates. Quarterdeck has sought to identify and disclose the significant risks to its business. However, the Company cannot predict where or to what extent any of such risks may be realized nor can there be any assurance that Quarterdeck has identified all possible issues which the Company faces now or may face in the future. In particular, Quarterdeck has completed a number of acquisitions over the past two years and made investments in certain companies and is in the process of restructuring its operations to eliminate redundancies and divest certain non-core assets in an attempt to maximize the benefit of such acquisitions (see trends and uncertainties for further discussion). There can be no guarantee that the restructuring or such divestitures will ultimately be beneficial. 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 and divestitures of non-core assets, 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 Quarterdeck achieves may differ materially from any forward-looking statements due to such risks and uncertainties. The Company undertakes no obligation to revise or update any forward-looking statements in order to reflect events or circumstances that may arise after the date of this report. RESULTS OF OPERATIONS Net Revenues: Net revenues during the three months ended June 30, 1997 primarily consist of revenues from sales of core products, especially Cleansweep and Procomm, the new release of QEMM 9.0, the license of the HiJaak product line, and international releases of Procomm 4.5, Webcompass 2.0 and the Italian version of Cleansweep 3.0. Net revenues for the three months ended June 30, 1997 increased by $1,449,000 or 7.4% while net revenues for the nine months ended June 30, 1997 decreased by $44,821,000 or 39.5% in relation to the comparative periods of the prior year. The increase in net revenues for the three month period primarily resulted from a decrease in the returns provision during the three months ended June 30, 1997 as compared to that recorded during the three months ended June 30, 1996. The higher returns provision in the prior year resulted primarily from a decline in sell-through of memory management and communication products which resulted in higher channel inventory and necessitated the recording of higher returns reserves for the three months ended June 30, 1996. Also contributing to the net revenue increase was a non-refundable royalty advance relating to the exclusive licensing of Quarterdeck's HiJaak product line to a third party. The net revenue increase was offset by a significant reduction of direct marketing revenues which was primarily caused by the reduced flow of product releases and upgrades during the quarter. The nine month decrease versus the prior year primarily relates to a significant restructuring of the Company's business at the end of fiscal 1996 and a reduction in revenue from certain memory management products including QEMM and MagnaRAM and certain other communication, internet and utility products including Procomm, WebTalk and HiJaak. Most notably, version 3.0 of Procomm was released in the March 1996 quarter and had large initial shipments into the retail channel which have not continued at that level. A significant portion of Quarterdeck's US retail sales are concentrated in CompUSA, Best Buy, Computer City, Office Depot and Egghead. PAGE 11 12 Although Quarterdeck has broadened its distribution through mass merchandisers and discount and club stores such as WalMart, Price-Costco and Sam's Club, store closures and/or restructurings by the major retail chains could have a material adverse effect on the Company's future revenues. Domestic net revenue increased by $1,668,000 or 10.6% for the three months ended June 30, 1997 while net revenues from European and other international distributors, dealers and end-users outside of the United States ("international revenue") for the three months ended June 30, 1997 decreased by $219,000 or 5.6% versus the comparative prior year period. International revenue as a percentage of net revenues for the three months ended June 30, 1997 decreased to 17.6% as compared to 20.0% for the comparative prior year period. Cost of Revenues: The Company's cost of revenues includes product packaging, documentation and media, manufacturing expenses, amortization of capitalized software costs, technical support and production costs as well as translation costs and royalties paid to third parties. Cost of revenues as a percentage of net revenue for the three months ended June 30, 1997 decreased to 24.5% while cost of revenue as a percentage of net revenue for the nine months ended June 30, 1997 decreased to 25.5% as compared to 63.8% and 33.8% for the comparative prior year periods. The reduced cost percentage during the three and nine month periods are primarily due to an increased proportion of corporate licensing revenues, the shift toward lower-cost CD-ROM versus diskette versions of Quarterdeck's core products, further consolidation and centralization of the production and purchasing functions which have enabled the Company to leverage volume pricing agreements and improved inventory management. Quarterdeck did not capitalize any internal software development costs during the reported periods in 1997 and 1996. However, third party software development and purchased software costs are generally capitalized and amortized over one to three year periods, commencing upon initial product release. Amortization of capitalized software costs of $303,000 and $1,385,000 for the three and nine months ended June 30, 1997, respectively, decreased by $733,000 and $1,476,000 in relation to the comparative periods of the prior fiscal year. The decrease in amortization expense for the three and nine month period ended June 30, 1997 as compared to the prior fiscal year primarily relates to a decrease in the amount of software costs incurred and capitalized for particular software products and their respective release dates. Future cost of revenues as a percentage of net revenues will depend primarily on total sales, the mix of sales by product, domestic versus international, and by single unit versus multiple license packages and the proportion of revenues provided by corporate licensing. Research and Development: Research and development expenses consist primarily of salaries, benefits and consulting fees to support product development, including product testing and documentation. Research and development expense as a percentage of net revenue for the three months ended June 30, 1997 decreased to 17.9% (while decreasing by $1,650,000 or 30.5%) while research and development expense as a percentage of net revenue for the nine months ended June 30, 1997 increased to 16.7% (while decreasing by $4,471,000 or 28.0%) as compared to 27.6% and 14.1%, respectively, for the comparative prior year periods. The decrease in research and development expenses for the three and nine month periods are primarily due to reduced research and development staffing levels relating primarily to the HiJaak, Webcompass, and Procomm product lines, a simplified management structure and benefits from acquisition integration. However, the overall decrease in expenses for this period was partially offset by approximately $500,000 of product development and related expenses which were incurred as a result of the Company assuming the management of TuneUp.com. The percentage increase for the nine month period is primarily due to the revenue reduction as compared to the comparative period in the prior year. Capitalized software for the three months ended June 30, 1997 of $338,000 decreased by $1,779,000 or 84.0% while capitalized software for the nine months ended June 30, 1997 of $480,000 decreased by $3,191,000 or 86.9% in relation to the comparative periods of the prior year. See Cost of Revenues for further discussion. PAGE 12 13 Sales and Marketing: Sales and marketing expenses consist of salaries and commissions and related costs of sales and marketing and customer service personnel as well as advertising, trade show and promotional expenses. Sales and marketing expense as a percentage of net revenue for the three months ended June 30, 1997 decreased to 34.0% (decreasing by $11,824,000 or 62.3%) while sales and marketing expense as a percentage of net revenues for the nine months ended June 30, 1997 decreased to 33.6% (decreasing by $29,481,000 or 56.2%) as compared to 96.9% and 46.3% for the comparative prior year periods. This decline in expenses is primarily attributable to a reduction in the number of new product releases during the period and Quarterdeck's efforts to bring variable spending in line with the underlying sell-through of the Company's products. General and Administrative: General and administrative expense consists of salaries and related costs of support departments, overhead and facilities. General and administrative expense as a percentage of net revenue for the three months ended June 30, 1997 decreased to 17.5% (decreasing by $6,511,000 or 63.8%) while general and administrative expense as a percentage of net revenues for the nine months ended June 30, 1997 decreased to 19.6% (decreasing by $9,899,000 or 42.5%) as compared to 52.0% and 20.6% for the comparative prior year periods. During the three months ended June 30, 1997, Quarterdeck closed three US facilities and is continuing to explore additional actions to further reduce general and administrative expenses as a percentage of revenue, including further facilities consolidation and the sale or lease of the Columbia, Missouri facility. Acquisition and Other Charges: There were no acquisition and other charges incurred for the three and nine months ended June 30, 1997. The Company incurred acquisition charges of $1,667,000 and $8,689,000, respectively, for the three and nine months ended June 30, 1996 primarily for costs incurred in connection with the acquisitions of Inset Systems, Inc., Datastorm Technologies, Inc, and FutureLabs, Inc. These expenses included fees for financial advisory, legal and accounting services, personnel severance and benefits, and other related expenses. Restructuring Charges: No material restructuring expenses were incurred during the reported periods in 1997 and 1996. The Company is seeking to reduce certain ongoing obligations by pursuing subleases for office space which has been vacated as a result of the restructuring. See Note 6 of the Notes to the Consolidated Condensed Unaudited Financial Statements for a table and a detailed explanation of the activity during the current quarter and the balances remaining. Primarily as a result of restructuring, Quarterdeck reduced operating expenses, excluding one time charges, for the three months ended June 30, 1997 by approximately $19,985,000 or 57.8% and for the nine months ended June 30, 1997 by approximately $43,851,000 or 47.8% in relation to the comparative periods of the prior year. The Company is currently conducting a further review of its operations. Such review may result in further consolidation and integration of its business as well as additional restructuring charges. See page 14 under "Trends and Uncertainties" for further discussion. Other income/expense: During the three months ended June 30, 1997 the Company realized a gain on the sale of its remaining investment in Lernout & Hauspie, Inc. of approximately $231,000. For the nine month period ended June 30, 1997, the Company recorded a charge of $1,400,000 to the Statement of Operations which represents a write down of the Company's investment in Infonautics, Inc. of $1,666,000 due a decline in the fair market value below Quarterdeck's carrying value which was partially offset by the current quarter's $266,000 gains. See page 15 under "Trends and Uncertainties" for further discussion of the Infonautics, Inc. investment. During the three and nine months ended June 30, 1996, Quarterdeck recorded income of $1,435,000 and $1,485,000, respectively, which primarily related to a gain on the sale of a portion of the Company's investment in Lernout & Hauspie. Income Taxes: A valuation allowance was recorded to offset 100% of the Company's $26,098,000 net deferred tax asset as of June 30, 1997. The net deferred tax asset of $26,098,000 (before applying the valuation allowance) is comprised of the estimated tax effect of expected future temporary timing differences between Generally Accepted Accounting Principles and tax basis net operating losses, relating to charges taken for book purposes that are not deductible for federal income tax purposes until the amounts are paid in the future. Management believes that due to the fiscal 1997 financial results it is appropriate to record a full valuation allowance until such time as it becomes more likely than not that the Company will realize some or all of the benefit of the net deferred tax asset. Net Income: The net income for the three and nine month periods ended June 30, 1997 was $1,053,000 and $241,000, respectively, or $0.02 per share and $0.01 per share as compared to a net loss of $(23,317,000) and PAGE 13 14 $(20,151,000) or $(0.67) per share and $(0.58) per share, respectively, for the comparative periods in the prior fiscal year. The net income improvement primarily reflects greater expense control, more focused product offerings, and continued operations integration and restructuring. Trends and Uncertainties: The computer software industry is subject to rapid technological changes often evidenced by new competing products, improvements in existing products, and improvements and/or upgrades to operating systems. The Company anticipates that spending for software development and purchased software will continue as a significant expense in the future. 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 Cleansweep or Procomm product lines or other core products become outdated or are rendered obsolete as a result of improvements in operating systems, hardware or technology generally, 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 the Company, 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 or the products themselves 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. Since June 1995, the Company has consummated a number of acquisitions. Quarterdeck may make additional acquisitions in the future. While these acquisitions have broadened the Company's product portfolio and sales distribution channels, the acquisitions have resulted in Quarterdeck competing with companies and in markets where it had not previously competed. There are significant business risks associated with acquisitions, including the successful integration of the companies in an efficient and timely manner, the coordination of research and development and sales efforts, the retention of key personnel, the diversion of management's attention from day to day matters and the integration of acquired products. Additionally, there may be an adverse impact on the revenues of acquired companies due to the transition of products, sales, marketing and research and development activities. The Company's results for fiscal 1996 were negatively impacted by slower than anticipated integration including slower elimination of redundancies resulting from acquisitions. Quarterdeck's future success will depend, in part, on its ability to integrate the operations of acquired companies and effectively utilize the acquired intellectual property. The Company is devoting significant efforts toward evolving its core utilities and communication product lines into a set of products designed to enhance user performance and simplify system management for networked personal computing. As part of this effort, Quarterdeck is developing new products, integrating its current technology into these products and has made and may continue to make strategic acquisitions and divestitures. Although Quarterdeck expects to release several of these new products during the remainder of calendar year 1997, there is no assurance these efforts will be successful. In addition, sales and marketing expenses generally increase in conjunction with new product releases which may have an adverse effect on operating results. Significant risks associated with the Company's focus on this category of products, include the timing of releases in relation to competitive products and uncertainties surrounding the rate and extent of development of this new market, the continued growth and usage of the Internet, and one-time losses and charges that may result from divestitures of non-core assets. Quarterdeck is focusing software product development efforts on products that are designed to operate on Windows 95 and Windows NT. Microsoft Corporation 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 develop and market products that function under PAGE 14 15 Windows 95 and Windows NT, and offer value to Windows 95 and Windows NT users beyond that which is offered in the base operating systems, future revenues would be adversely affected. Future competitive product releases may cause disruptions in orders and lengthen sales cycles for the Company's products while users and the marketplace evaluate the competitive products. The extent of the disruption in orders and the impact on future orders of Quarterdeck's products will depend on various factors that are not fully known at this time. 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. Quarterdeck has also made investments in certain companies and technologies. The Company liquidated its remaining investment in Lernout & Hauspie during the three months ended June 30, 1997 and realized a gain of approximately $231,000. During the June quarter, Quarterdeck increased the carrying value of the Infonautics, Inc. investment by approximately $540,000 to $1,080,000, with a corresponding increase to equity, reflecting the increased market value of the Infonautics stock. The Company continues to monitor its investment in Infonautics, Inc., and Intelligence at Large, carried at $1,250,000. Quarterdeck also owns a building in Columbia, Missouri which has a net book value of $12,691,000 and is currently listed for sale. Future write-downs, losses, or charges recorded on the sale or divestiture of these assets, if necessitated by market or other conditions, could have a material adverse effect on the Company's financial results. 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 average unit selling prices and corresponding reduced margins. In addition, the industry has been subject to rapid changes that can be expected to continue. The introduction of new or upgraded operating systems and future technology or market changes may cause certain products to become obsolete more quickly than expected and thus may result in capitalized software write-offs and an increase in required inventory reserves and, reduced gross margins and net income. Quarterdeck'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 Quarterdeck. 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 Quarterdeck's competitors, over which the Company has no control and which it cannot predict. There can be no assurance that Quarterdeck will negotiate successfully with resellers to obtain shelf space and other terms needed to sell the Company's products at the levels currently anticipated. Quarterdeck's pattern of revenues and earnings were affected during the third and fourth quarters of fiscal 1996, 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 a product 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 channel inventories will not adversely impact the sales in 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 may cause material fluctuations in revenues from one quarter to the next. Net revenues may be materially affected favorably or adversely by these effects. Quarterdeck 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 Quarterdeck's operating results. Like other manufacturers of packaged software products, the Company is exposed to the risk of product returns from distributors, resellers and individual customers. Quarterdeck's return policy generally allows its distributors, subject to certain limitations, to return purchased products in exchange for new products or for credit toward future purchases. However, competitive factors and/or market conditions often require the Company to offer expanded rights of return for products that distributors or retailers are unable to sell. Quarterdeck also provides price protection rights to its distributors which generally give distributors credit for price decreases on products remaining in the distributors' inventory and on products remaining in retail customer inventory. Product returns occur as a result of the introduction of upgrades and new versions of products or when distributors order excessive product. The Company estimates and maintains reserves for product returns. In addition to detailed historical return rates, Quarterdeck's estimate of return reserves takes into account future PAGE 15 16 product upgrades and new releases, current market conditions and customer inventories, as well as any other known factors that could impact anticipated returns. However, there can be no assurance that future returns will not exceed the reserves established by the Company or that future returns will not have a material adverse effect on the operating results of the Company. FACTORS AFFECTING QUARTERLY RESULTS AND STOCK PRICE Quarterdeck 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, the factors noted above, including the introduction of new or enhanced products by the Company or its competitors, rapid technological changes in Quarterdeck's markets, seasonality of revenues, changes in operating expenses and general economic and market conditions. As of July 31, 1997, there are 40,125,448 shares of common stock and 150,000 shares of Series B Preferred Stock issued and outstanding. Each share of Series B Preferred Stock is convertible as discussed in Part II, Item 2. "Changes in Securities". To date, 50,000 shares of Series B Preferred Stock have been converted into approximately 1,910,000 shares of common stock. No prediction can be made as to the effect, if any, that future sales of common stock, or the availability of shares for future sale, will have on the market price of common stock prevailing from time to time. Sales or issuances of substantial amounts of common stock (including shares issued upon conversion of Series B Preferred Stock, or upon the exercise or conversion of stock options or any warrants or debt securities), or the perception that such sales or issuances could occur, could adversely affect prevailing market prices for the common stock. Net income per share is calculated using the treasury stock method (see Note 5 of Notes to Consolidated Financial Statements for a discussion of the calculation of the weighted average shares outstanding). 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 Quarterdeck, to changes in analysts' earnings estimates, or to factors affecting the computer industry or the securities markets in general. In addition, the existence or conversion of any outstanding convertible securities, any shortfalls in revenues or quarterly results, or failure to meet market expectations could have an immediate and significant adverse effect on the trading price of the Company's common stock in any given period. LIQUIDITY AND CAPITAL RESOURCES At June 30, 1997, cash and cash equivalents totaled $10,883,000 as compared to $25,554,000 at September 30, 1996. Cash and cash equivalents decreased by $14,671,000 during the nine months ended June 30, 1997, primarily relating to the payment of accrued acquisition and restructuring costs, a significant paydown of accounts payable and accrued liabilities, and approximately $3,814,000 paid for capital additions associated primarily with the construction of the Datastorm building in Columbia, Missouri. Working capital at June 30, 1997 amounted to $1,842,000, an improvement of $6,526,000 as compared to the deficit of $4,684,000 at September 30, 1996. Current assets increased by approximately $2,425,000 due to transfers from Other Assets contributing to the working capital improvement. See Other Assets discussion below for further discussion. Operating Activities: At June 30, 1997, trade accounts receivable totaled $9,411,000, compared to $9,265,000 at September 30, 1996. Trade accounts receivable balances at June 30, 1997 primarily reflect stronger net revenues in the current quarter of $21,056,000 as compared to $19,740,000 for the quarter ended September 30, 1996. Accounts receivable days sales outstanding (DSO) were approximately 41 and 43 days at June 30, 1997 and September 30, 1996, respectively. These DSO figures reflect the sell-through of Quarterdeck's core products PAGE 16 17 and low channel inventory levels of existing products which are nearing the end of the product life cycles, in preparation for new product releases and upgrades. Other assets decreased by $4,577,000 from $9,517,000 as of September 30, 1996 to $4,940,000 as of June 30, 1997, primarily due to a write-down of $1,666,000 and a reclassification of $865,000 (before temporary adjustment due to market valuation changes) relating to the Company's investment in Infonautics, Inc. to other current assets, the sale of Quarterdeck's investment in Lernout & Hauspie, and a reclassification of certain deposits to other current assets. The Company reduced its trade accounts payable by $6,188,000 from $10,685,000 at September 30, 1996 to $4,497,000 at June 30, 1997 and reduced its accrued liabilities by $3,360,000 from $17,232,000 at September 30, 1996 to $13,872,000 at June 30, 1997. This reduction is primarily due to an overall reduction in the level of operating expenses which result in reduced ongoing liabilities. Investing Activities: The Company purchased property, plant and equipment, and capitalized software in the amounts of $3,814,000 and $480,000, respectively, during the nine months ended June 30, 1997. The capital expenditures were primarily incurred for construction of the Columbia, Missouri building and related furniture and fixtures, in addition to the purchase of a predictive dialing system for the Clearwater, Florida direct sales division. Financing Activities: On August 6, 1996, the Company's Datastorm subsidiary secured construction financing for a new facility from a bank for up to $5,000,000 with an interest rate equal to the bank's commercial base rate, currently prime plus 2%, secured by the newly constructed Columbia, Missouri building. The principal amount outstanding as of June 30, 1997 was $4,000,000. The principal amount plus any unpaid interest was originally due February 7, 1997, and has been extended until October 5, 1997 with the maximum borrowings reduced to $4,000,000. No additional borrowings were made under the construction loan during the three months ended June 30, 1997. Management is pursuing the sale and/or lease of the facility and other long-term take-out financing options. There can be no assurance that the Company will be successful in achieving a sale on favorable terms or in obtaining such long-term financing with acceptable terms and conditions. In the event the building is sold for a price lower than Quarterdeck's net book value at the time of the sale, the Company would realize a loss which may be material to Quarterdeck's financial results. During April 1997, the Company established an asset based line of credit with Greyrock Business Credit, a division of NationsBank. The Company repaid and terminated the then existing line with Bank of America with proceeds from the new line. Maximum borrowings under the line are $12,000,000. The Company may borrow 85% of eligible accounts receivable plus the value of inventory to a maximum of $2,000,000 up to the maximum borrowing amount. The line can be used for general corporate purposes, including investments and acquisitions, and bears interest at prime plus 2%. The line is secured by substantially all assets of Quarterdeck. The Company is obligated to pay a minimum interest charge of $10,000 per month and comply with certain other non-financial covenants and restrictions. At June 30, 1997 the Company had $1,536,000 outstanding under the line and the ability to borrow up to approximately $11,200,000. The current term of the agreement matures March 31, 1998 and contains renewal provisions. Divestitures of Products and Assets: As part of its restructuring, the Company intends to dispose of certain non-core products, technologies and operations, through sale or license, which do not fit into the Company's ongoing strategy. There can be no assurance that such divestitures will be successfully completed. 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 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. Liquidity: The Company believes existing cash and cash equivalents, borrowing capacity, plus funds provided by operations and the potential proceeds from the divestiture of non-core products and technologies, as well as anticipated proceeds from the sale of, or other take-out financing arrangements with respect to, the Columbia, Missouri facility and divestiture of non-core assets should be sufficient to fund operations for the coming twelve months. Although the expense reductions resulting from the restructuring are anticipated to PAGE 17 18 provide additional funds from operations in future quarters, there is no assurance that such anticipated savings will occur or that any such increase will result in adequate operating funds, or that sales will occur at anticipated levels or that potential proceeds from divestitures and/or the Columbia facility sale or take-out financing will occur, or that such additional financing will be available, or if available, will be available on acceptable terms. Should product orders or shipments be delayed or should the Company experience significant shortfalls in planned revenues or collections, or not achieve sufficient cost savings as a result of the restructuring, or experience unforeseen fixed expenses, the Company believes it has the ability to make additional reductions to variable expenses to extend its capital. The Company is actively exploring other financing alternatives, including additional sales of equity securities and/or the divestiture of non-core products and assets. Any decision or ability to obtain financing 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 security would result in additional dilution to the Company's stockholders. PAGE 18 19 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Shareholder complaints were filed in November and December 1996 and January 1997 in the Superior Court of the State of California, County of Los Angeles, against the Company and one former and one current officer of the Company alleging, among other things, violations of certain provisions of California securities laws relating to statements made about the Company. A shareholder complaint was filed in June 1997 in the United States District Court for the Central District of California against the Company and one former and one current officer of Quarterdeck alleging, among other things, violations of certain provisions of federal securities laws relating to statements made about the Company. The suits are purportedly brought on behalf of all persons who purchased the Company's common stock during the period January 26, 1996 through June 13, 1996 and seeks damages in an unspecified amount and other relief. To date the Company has not filed a response to the complaints. Due to the early stage of the litigation and the uncertainty inherent in litigation, management is unable to estimate the impact on the Company's results of operations, financial condition, or liquidity, if any. Accordingly, no provision for any liability that may result from these suits has been made in the Company's consolidated financial statements (other than with respect to the $250,000 deductible under the Company's directors and officers insurance policy which has been utilized for costs relating to the defense). However, no assurances can be given that the ultimate disposition of these cases will not have a material adverse effect on the Company's results of operations and financial condition, or liquidity. In March 1997, a purported class action lawsuit brought on behalf of all licenses of MagnaRAM2 residing in the United States, Jack Abbott, et al. v. Quarterdeck Corporation, Case No. 00709198, was filed in the Superior Court of the State of California, County of San Diego. The complaint alleges, among other things that MagnaRAM2 fails to significantly increase Random Access Memory or otherwise help Windows 95 and Windows 3.x users. The plaintiffs seek compensatory damages and punitive damages in unspecified amounts, injunctive relief, and attorney fees and costs. Due to the early stage of the litigation and the uncertainty inherent in litigation, management is unable to estimate the impact on Quarterdeck's results of operations, financial condition, or liquidity, if any. Quarterdeck is a defendant in various other 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 On May 23, 1997, Quarterdeck received a conversion notice from the holder of its Series B Convertible Preferred Stock, stated value $100 per share (the "Series B Preferred Stock"), exercising the right to convert 10,000 shares of the Series B Preferred Stock at a Conversion Price of $2.5973 into 385,017 shares of the Company's common stock. In addition, on June 5, 1997, Quarterdeck received a conversion notice from such holder exercising the right to convert 40,000 shares of Series B Preferred Stock at a conversion price of $2.6232 into 1,524,852 shares of common stock. Such conversions have been effected by the Company pursuant Section 3(a)(9) of the Securities Act of 1933, as amended (the "Act"), in that such converted shares of Series B Preferred Stock were exchanged by the issuer with its existing security-holders exclusively where no commission or other remuneration was paid or given directly or indirectly for soliciting such exchange, and/or Regulation S of the Act. As previously reported in Quarterdeck's Current Report on Form 8-K dated November 25, 1996, on September 30, 1996, the Company issued 200,000 shares of Series B Preferred Stock and a warrant in exchange for $20,000,000. The securities were issued to an institutional investor in an overseas offering pursuant to Regulation S. Hambrecht & Quist served as Quarterdeck's placement agent in connection with the Regulation S offering. Each share of Series B Preferred Stock is convertible into the number of shares of common stock equal to the quotient of (i) $100.00 divided by (ii) the Conversion Price. The Conversion Price is the lesser of (A) 101% of the average of the daily volume-weighted average prices of the common stock on the Nasdaq National Market System (or such national securities exchange or other interdealer quotation system on which the common stock is PAGE 19 20 then listed or quoted) (the "Market Price") during the 40 trading day period ending two trading days before the date on which the Company receives a notice of conversion from a holder of the Series B Preferred Stock (the "Conversion Date"), and (B) 125% of the average of the Market Price of the common stock during the first five trading days of the 40 trading day period ending two trading days before the Conversion Date. The Series B Preferred Stock will automatically convert into common stock on September 30, 2002 to the extent any shares of Series B Preferred Stock remain outstanding at that time. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.1 Asset Purchase Agreement dated as of May 14, 1997 between TOC Holding Company formerly known as TuneUp.Com, Inc., a Delaware Corporation, and Quarterdeck Corporation. 10.2 Employment Agreement between Ron Ben-Yehuda and Quarterdeck Corporation dated as of May 1, 1996, as amended. 10.3 Employment Agreement between Marc Epstein and Quarterdeck Corporation dated as of July 11, 1997. 10.4 Employment Agreement between Tom Mackey and Quarterdeck Corporation dated as of June 20, 1997. (b) Reports on Form 8-K A Form 8-K with respect to a press release issued April 3, 1997, which announced the new chief executive officer's initial review of the Company's operations was filed with the Securities and Exchange Commission on April 8, 1997. A Form 8-K with respect to a press release issued April 14, 1997, which announced the closing of a credit facility, was filed with the Securities and Exchange Commission on April 30, 1997. A Form 8-K with respect to the conversion of securities that were issued pursuant to Regulation S was filed with the Securities and Exchange Commission on June 16, 1997. PAGE 20 21 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. QUARTERDECK CORPORATION (Registrant) Date: August 12, 1997 /s/ CURTIS A. HESSLER ------------------------------------ Curtis A. Hessler President and Chief Executive Officer Date: August 12, 1997 /s/ FRANK GREICO ------------------------------------ Frank Greico Sr. Vice President and Chief Financial Officer PAGE 21 EX-10.1 2 EXHIBIT 10.1 1 Exhibit 10.1 ASSET PURCHASE AGREEMENT dated as of May 14, 1997 (this "Agreement"), between TOC HOLDING COMPANY formerly known as TUNEUP.COM, INC., a Delaware corporation ("Seller"), and QUARTERDECK CORPORATION, a Delaware corporation ("Purchaser"). WHEREAS, Seller is engaged in the business (the "Business") of operating an Internet site that provides certain services to subscribers and developing software that will provide similar services to end users; WHEREAS, Seller is unable to continue operating the Business and intends to commence a case under Chapter 11 of the Bankruptcy Code by filing a voluntary petition with the U.S. Bankruptcy Court for the Northern District of California (the "Bankruptcy Court"); WHEREAS, Seller wishes to sell to Purchaser, and Purchaser wishes to purchase from Seller, certain of the assets relating to the Business, upon the terms and subject to the conditions of this Agreement, and subject to the entry of an order of the Bankruptcy Court authorizing the transactions contemplated hereby; and WHEREAS, pursuant to a letter agreement dated April 29, 1997 by and between Seller and Purchaser (the "Letter Agreement"), Seller and Purchaser have executed and delivered (i) a License Agreement (the "License Agreement"), (ii) a Reimbursement Agreement (the "Reimbursement Agreement") and (iii) a Management Agreement (the "Management Agreement" and collectively with the License Agreement, the Reimbursement Agreement and this Agreement, the "Transaction Documents"), each dated as of May 9, 1997. NOW, THEREFORE, in consideration of the mutual covenants herein contained, the parties agree as follows: ARTICLE I Purchase and Sale of Acquired Assets SECTION 1.1. Purchase and Sale. Upon the terms and subject to the conditions of this Agreement, Seller hereby sells, assigns, transfers, conveys and delivers to Purchaser effective as of the Closing (as hereinafter defined), and Purchaser hereby purchases, effective as of the Closing, all of Seller's right, title and interest in, to and under the Acquired Assets (as hereinafter defined). SECTION 1.2. ACQUIRED ASSETS AND EXCLUDED ASSETS. (a) The term "Acquired Assets," when used in this Agreement, means the business, properties, assets, goodwill and rights of Seller as described below: (i) all trade secrets, discoveries, inventions, know-how, formulae, processes, procedures, drawings, plans, designs, features, data, research, records of 2 inventions, computer software, source code, test information, market surveys, marketing know-how, patents, patent applications, patent rights and copyrights (whether registered or unregistered) owned by Seller or any rights Seller may have in such intellectual property, whether protected, created or arising underthe laws of the United States or any other jurisdiction (all of the foregoing, "Technology"), including without limitation the following: (x) any and all software products marketed or under development by or for Seller, including without limitation TuneUpdate, PCTuneUp and DataGarage, and all updates, upgrades or other modifications thereof (collectively, the "Products"), together with any and all patents, patent applications, patent rights, copyrights and trade secret rights of Seller in or relating to any of the foregoing (whether or not subject to statutory registration or protection and whether protected, created or arising under the laws of the United States or any other jurisdiction); and (y) any and all proprietary content utilized by Seller in connection with the Seller's existing website at the Internet address www.tuneup.com and any website developed by Seller that will succeed to such Internet address and to deal in all respects with subscribers of the services offered through Seller's existing or successor website (the "Website"), and any and all software (in addition to the Products) directly or indirectly utilized by Seller in connection with the Website, including without limitation any and all patents, patent applications, patent rights, copyrights, and trade secret rights of Seller in or relating to any of the foregoing (whether or not subject to statutory registration or protection and whether protected, created or arising under the laws of the United States or any other jurisdiction); (ii) any and all trademarks and servicemarks (whether registered or unregistered) and tradenames of Seller, including without limitation any registered or unregistered trademark or servicemark rights of Seller with respect to TuneUp.com, TuneUpdate, Subscriberware, and DataGarage; and (iii) Seller's rights and interest under (A) the Assigned Agreements (as defined in Section 4.1(d)) and (B) the lease of the premises located at 795 San Antonio Road, Palo Alto, California, including without limitation any deposits made by Seller thereunder (the "Palo Alto Office Lease" together with the Assigned Agreements and with any other agreements that may become Acquired Assets pursuant to Section 1.2(c)), the "Contracts"). (iv) all permits, concessions, licenses, franchises, approvals and authorizations by governmental or regulatory authorities or bodies (all of the foregoing, "Permits") held by Seller that relate to the Business; (v) all rights of Seller, subject to any conditions to which such rights are subject, in, to or under all covenants, conditions, warranties, representations and guarantees made or given by suppliers, manufacturers and contractors in connection with the Business and the Acquired Assets; and 3 (vi) copies of all books of account, general, financial and accounting records, and all files, invoices, customers' and suppliers' lists, technical documents, manuals, management software tools, databases, computer tapes and other data owned by Seller on the Closing Date. (b) Notwithstanding anything to the contrary herein, the Acquired Assets shall not be deemed to include the following "Excluded Assets": (i) cash on hand or on deposit with banks on the Closing Date; (ii) any accounts receivable; (iii) the following agreements, contracts or understandings: (A) any agreements with Persimmon; (B) any and all development or other agreements with Software Kinetics Ltd.; (C) the Authorized Electronic Reseller Agreement with Symantec Limited and Symantec Corporation; (D) the lease of the premises located at 12755 Leander Drive, Los Altos Hills, California; (E) the lease of the premises located at 1211 Semoran Drive, Suite 115, Casselberry, Florida; and (F) the lease of the premises located at 2030 Eastwood Road, Suite 10-B, Wilmington, N.C.; (iv) any computer equipment, office equipment and furniture and any leases of any of the foregoing; (v) all rights of Seller under this Agreement and the agreements, instruments and certificates delivered in connection with this Agreement; and (vi) all rights relating to the Excluded Liabilities (as hereinafter defined). (c) Notwithstanding anything to the contrary herein, Purchaser, in its sole discretion, by written notice to Seller no later than ten days before the Closing, may re-designate as an Excluded Asset that shall not acquired by Purchaser at the Closing any agreement, lease or other asset that is included in the Acquired Assets. Any such redesignation of any of the Acquired Assets or Excluded Assets shall not result in any adjustment to the Purchase Price (as hereinafter defined). 4 SECTION 1.3. NO ASSUMPTION OF LIABILITIES. (a) Except with respect to obligations and liabilities accruing after the Closing under any of the Contracts (the "Assumed Liabilities"), Purchaser is not assuming any liabilities of Seller ("Excluded Liabilities"). (b) Pursuant to Section 363(f) of the Bankruptcy Code, Purchaser shall acquire the Acquired Assets free and clear of all Liens (as hereinafter defined), obligations, liabilities and interests whatsoever except as expressly provided in Section 1.3(a). (c) For purposes of this Agreement, "Taxes" shall mean all income, franchise, excise, real and personal property, sales, use, payroll and withholding and other taxes imposed by any governmental entity, whether in the form of assessments which are in the nature of taxes or otherwise, together with all interest, penalties and additions imposed with respect to such amounts. In the case of any taxable period that includes (but does not end on) the Closing Date (a "Straddle Period"), real, personal and intangible property Taxes ("Property Taxes") incurred with respect to the portion of a Straddle Period ending on or prior to the Closing Date shall constitute Excluded Liabilities and shall be equal to the amount of such Property Taxes incurred with respect to the entire Straddle Period multiplied by a fraction, the numerator of which is the number of days in such portion and the denominator of which is the number of days in the Straddle Period. SECTION 1.4. Purchase Price. The purchase price for the Acquired Assets (the "Purchase Price") shall be $250,000. As a good-faith deposit against the Purchase Price, pursuant to the terms of the Letter Agreement Purchaser has advanced to Seller the sum of $50,000 (the "Deposit"). ARTICLE II THE CLOSING SECTION 2.1. CLOSING DATE. The closing of the sale and transfer of the Acquired Assets (hereinafter called the "Closing") shall take place at 13160 Mindanao Way, Marina del Rey, California 90292, on the first business day after the expiration of ten calendar days after the Bankruptcy Court enters the Approval Order, unless Purchaser has waived the finality of the Approval Order, or such fewer number of days after entry of the Approval Order as the Purchaser may determine in its sole discretion, or at such other time, date and place as shall be fixed by agreement among the parties hereto (such date of the Closing hereinafter referred to as the "Closing Date"). SECTION 2.2. TRANSACTIONS TO BE EFFECTED AT THE CLOSING. At the Closing: 5 (a) Seller shall deliver to Purchaser (i) such appropriately executed bills of sale, assignments and other instruments of transfer relating to the Acquired Assets in form and substance reasonably satisfactory to Purchaser and its counsel, (ii) true and complete lists as of the Closing Date of all Acquired Assets, including all deferred revenues and any other prepaid amounts or amounts paid on account with respect to the Acquired Assets and (iii) such other documents as Purchaser or its counsel may reasonably request to demonstrate satisfaction of the conditions and compliance with the agreements set forth in this Agreement; and (b) Purchaser shall deliver to Seller (i) the Purchase Price less the Deposit by certified or official bank check payable in next day funds and (ii) such other documents as Seller or its counsel may reasonably request to demonstrate satisfaction of the conditions and compliance with the agreements set forth in this Agreement. ARTICLE III CLOSING CONDITION STATEMENTS The obligations of Purchaser to purchase the Acquired Assets is subject to the following statements being true and correct as of the Closing: (a) Organization, Standing and Power. Seller is a corporation duly organized and validly existing under the laws of the jurisdiction in which it is incorporated and has the requisite power and authority to own the Acquired Assets and to carry on the Business. Seller has heretofore delivered to Purchaser true and complete copies of its certificate of incorporation and by-laws, as amended through the date of this Agreement. (b) Authority. Seller has the requisite corporate power and authority to execute this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all necessary corporation action on the part of Seller and the shareholders of the Seller. This Agreement has been duly executed and delivered by Seller and will constitute a legal, valid and binding obligation of Seller enforceable in accordance with its terms. (c) No Violation. Subject to the entry of the Approval Order (and except to the extent that such Approval Order removes or resolves or cures any violation, conflict, default, adverse right, loss or requirement referred to in (i), (ii), (iii) or (iv) below), the execution and delivery of this Agreement do not, and the consummation of the transactions contemplated hereby and the compliance with the terms hereof will not, (i) violate any law, judgment, order, decree, statute, ordinance, rule or regulation applicable to Seller, the Business or the Acquired Assets, (ii) conflict with any provision of the certificate of incorporation or by-laws of Seller or result in a creation of any Lien upon any of the Acquired Assets pursuant to any mortgage, indenture, lease, agreement or other instrument to which it is a party or by which it or any of its property or assets is bound or (iii) result in a default (with or without notice or lapse of time or both) or give rise to a right of termination, cancellation or acceleration or to loss of a benefit under any of the Contracts or any permit, concession, franchise, authorization or license included 6 in the Acquired Assets or (iv) require any consent, approval, order or authorization of, or the registration, declaration of filing with, any court, administrative agency or commission or other governmental authority or instrumentality, domestic or foreign (a "Governmental Entity"), or any other individual, corporation, partnership, joint venture, trust, business association or other entity (hereinafter, a "Person", which term shall include a Governmental Entity). (d) No Judgment or Order. Seller is not otherwise a party to, subject or bound by any judgment, order, writ, prohibition, injunction or decree of any court, governmental body or arbitrator and no action or proceeding is pending against Seller which would prevent the execution, delivery or performance of this Agreement by Seller to Purchaser. (e) Compliance with Applicable Laws. Seller has complied in all respects with all laws, statutes, ordinances, regulations, rules and orders of all Governmental Entities applicable to the Seller, the Business or to the Acquired Assets; and has not received any oral or written notification of any asserted violation of the foregoing or commencement of any governmental investigation or review with respect thereto. The Seller has all Permits required for the operation of the Business, and will assign all such Permits as part of the Acquired Assets, to the extent such assignment is permitted by law. (f) Litigation; Decrees. Except as set forth in Schedule 3.1(g), there is no suit, action, investigation or proceeding which is pending or, to the knowledge of Seller, threatened against or affecting Seller relating to or which could adversely affect the Acquired Assets, the Business or the transactions contemplated by this Agreement. Except as set forth in Schedule 3.1(g), there is no judgment, decree, injunction, rule or order of any governmental entity or body outstanding relating to the Acquired Assets, the Business or the transactions contemplated hereby. (g) Title to Acquired Assets. Seller can pursuant to, and to the extent provided by, the Approval Order, deliver good, clear, valid and marketable title to all the Acquired Assets free and clear of all mortgages, claims, charges, liens, security interests, pledges, of any nature whatsoever (collectively, "Liens"). (h) Technology. Seller is the sole and exclusive owner of all of the Technology included in the Acquired Assets ("Owned Technology"), except with respect to Technology for which it has a license ("Licensed Technology"), and has received no oral or written notice from any other Person alleging Seller's use or exploitation of any Technology (including the use or distribution of any Products) infringes such Person's intellectual property rights or otherwise, pertaining to or challenging the right of Seller to use any of the Technology or any rights thereunder or to distribute any of the Products, and, with respect to Owned Technology, has the full and unrestricted right to use, execute, reproduce, display, perform, modify, enhance, distribute, prepare derivative works of and sublicense, without the consent of or any payment to any other Person, all Products and all other Technology included in the Acquired Assets, and, with respect to Licensed Technology, has the right to use, execute, reproduce, display, perform, modify, enhance, distribute, prepare derivative works of and sublicense all Products and all other Technology included in the Acquired Assets. There are no 7 interferences or other contested proceedings, either pending or, to the knowledge of Seller, threatened, in the United States Copyright Office, the United States Patent and Trademark Office or any federal, state or local court or before any other governmental agency or tribunal, relating to any of the Technology. (i) Contracts. Each Contract is a valid and binding obligation of the parties thereto enforceable in accordance with its terms and in full force and effect. Except as disclosed in schedule 3.1(m), Seller is not (with or without the lapse of time or the giving of notice, or both) in breach or default in any respect under any Contract, none of the other parties to any such Contract is (with or without the lapse of time or the giving of notice, or both) in breach or default in any respect thereunder and Seller has not received any notice of the intention of any party to terminate any such Contract. Complete and correct copies of all Contracts, together with all modifications and amendments thereto, have been delivered or made available to Purchaser. (j) Taxes. Seller has timely filed or will timely file all Tax returns required to be filed with respect to all Taxes. (k) Disclosure. Seller is not aware of any fact of material adverse significance to seller or its business, assets, condition (financial or otherwise), results of operations or prospects which is not disclosed in this Agreement or the schedules hereto. SECTION 3.2. REPRESENTATIONS AND WARRANTIES OF PURCHASER. Purchaser hereby represents and warrants to Seller as follows: (a) Organization, Standing and Power. It is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction in which it is incorporated and has the requisite corporate power and authority to carry on its business as now being conducted. (b) Authority. It has all requisite corporate power and authority to execute this Agreement and to consummate the transactions contemplated hereby (subject to the entry of the Approval Order). The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of Purchaser. This Agreement has been duly executed and delivered by Purchaser and (subject to the entry of the Approval Order) constitutes a legal, valid and binding obligation of Purchaser enforceable in accordance with its terms except as enforcement thereof may be limited by bankruptcy, insolvency or other similar laws affecting the enforcement of creditors' rights generally and except that the availability of equitable remedies, including specific performance, is subject to the discretion of the court before which any proceeding therefor may be brought. (c) No Violation; Consents. The execution and delivery of this Agreement do not, and the consummation of the transactions contemplated hereby will not, (i) violate any law, judgment, order, decree, statute, ordinance, rule or regulation applicable to Purchaser, (ii) conflict with any provision of the certificate of incorporation or by-laws of Purchaser or 8 (iii) require any consent, approval, order or authorization of, or the registration, declaration or filing with, any Governmental Entity or other Person. ARTICLE IV COVENANTS SECTION 4.1. MOTIONS FOR APPROVAL AND OTHER ORDERS. (a) Seller shall commence a Chapter 11 case (the "Chapter 11 Case") under the Bankruptcy Code within five days after the date hereof. (b) Seller shall file with the Bankruptcy Court within one (1) business day of the day that the Chapter 11 Case is commenced (the "Petition Date"): (i) an emergency motion seeking an order granting interim approval of the Management Agreement pending receipt of final approval (the "Interim MA Approval Order") and an order granting final approval of the Management Agreement at a subsequent hearing held on shortened notice to creditors (the "Final MA Approval Order"); (ii) an emergency motion seeking an order (the "Overbid Procedures Order") which will provide for the payment of the Reimbursable Expenses (as defined in the Reimbursement Agreement) to Purchaser pursuant to the terms of the Reimbursement Agreement, as an administrative expense under Bankruptcy Code Section 503, in the event that a competing bid for all or a substantial part of the Acquired Assets is approved by the Bankruptcy Court, and will establish overbid and related procedures to be followed in connection with the conduct of the hearing at which entry of the Approval Order would be considered; and (iii) a motion seeking entry by the Bankruptcy Court of an order (the "Approval Order"), among other things, (A) approving this Agreement and the transactions contemplated hereby, including without limitation the transactions contemplated by the Management Agreement, (B) providing that the Acquired Assets shall be transferred by Seller to Purchaser free and clear of all liens, claims or interests of any kind or nature and (C) finding that Purchaser acted in good faith in connection with its purchase of the Acquired Assets, as provided in Bankruptcy Code Section 363(m). Seller shall give notice of such motion and the hearing thereon in the manner and to the parties required under the Bankruptcy Rules or the order of the Bankruptcy Court. (c) Seller shall use its best efforts to obtain the following orders from the Bankruptcy Court in the Chapter 11 Case by the following dates: (i) the Interim MA Approval Order, in form and substance satisfactory to Purchaser, within 10 days after the Petition Date; (ii) the Final MA Approval Order, in form and substance satisfactory to Purchaser, within 30 days after entry of the Interim MA Approval Order; 9 (iii) the Overbid Procedures Order, in form and substance satisfactory to Purchaser, within 10 days after the Petition Date; and (iv) the Approval Order, in form and substance satisfactory to Purchaser, within 30 days after entry of the Interim MA Approval Order. (d) Seller shall file with the Bankruptcy Court within one (1) business day of the Petition Date a motion seeking approval of the assumption and assignment to Purchaser pursuant to Bankruptcy Code Section 365, and shall use its reasonable best efforts to so assume and assign, the following executory contracts (the "Assigned Agreements"); provided that Seller shall not be liable for any amounts necessary to cure defaults and the failure to obtain court approval of such assumption and assignment shall not constitute a breach or default of Seller's obligations to Purchaser: (i) any other license or distribution agreement relating to third party software that is made available by Seller through, or utilized by Seller in connection with, the Website; (ii) any and all agreements or arrangements with subscribers of services offered by Seller through the Website; (iii) any and all agreements with OEMs, Internet Service Providers and Regional Bell Operating Companies under which the services and products of Seller offered through the Website are made available to customers or subscribers thereof; (iv) the License, Consulting Services and Revenue Sharing Agreement with BF Communications, Inc. and any and all other revenue sharing agreements into which Seller has entered; (v) any and all website service agreements or other agreements with vendors pursuant to which vendor materials are advertised on the Website; and (vi) any and all marketing representative agreements relating to the Website into which Seller has entered SECTION 4.2. EXPENSES. Except to the extent provided in the Reimbursement Agreement, whether or not the Closing takes place, all costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such expense. Any sales or transfer Taxes applicable to the sale, assignment, transfer, assignment, transfer, conveyance or delivery from Seller to Purchaser of the Acquired Assets and any other transfer or documentary Taxes or any filing or recording fees applicable to such sale, assignment, transfer, conveyance or delivery shall be paid by Seller. SECTION 4.3. BROKERS OR FINDERS. 10 Each of Purchaser and Seller represent, as to itself and its Affiliates, that no agent, broker, investment banker or other firm or person is or will be entitled to any broker's or finder's fee or any other commission or similar fee in connection with any of the transactions contemplated by this Agreement. SECTION 4.4. LICENSED TECHNOLOGY. Seller shall use its reasonable best efforts to provide a list of Licensed Technology to Purchaser as soon as possible and in any case by June 1, 1997 and to obtain any and all consents necessary to sublicense to Purchaser any and all Licensed Technology in accordance with the terms of the License Agreement as soon as possible. SECTION 4.5. LEGAL CONDITIONS TO CLOSING. Each of Purchaser and Seller will take all reasonable actions necessary to comply promptly with all legal requirements which may be imposed on it with respect to the Closing and will promptly cooperate with and furnish information to each other and to other parties in connection with any such legal requirements. Each of Purchaser and Seller will take all reasonable actions necessary to obtain (and will cooperate with each other in obtaining) any consent, authorization, order or approval of, or any exemption by, any Person required to be obtained or made by it in connection with any of the transactions contemplated by this Agreement. SECTION 4.6. ADDITIONAL AGREEMENTS. Seller will use its best efforts to facilitate and effect the implementation of the transfer of the Acquired Assets to Purchaser and, for such purpose but without limitation, Seller promptly will at and after the Closing Date execute and deliver to Purchaser such assignments, bills of sale, consents and other instruments, including a power of attorney appointing Purchaser as the lawful attorney-in- fact of Seller to take all actions necessary to effect the transfer of the Acquired Assets to Purchaser as contemplated hereby, as Purchaser or its counsel may reasonably request as necessary or desirable for such purpose. If, in order properly to prepare its Tax returns, other documents or reports required to be filed with Governmental Entities or its financial statements, it is necessary that Purchaser be furnished with additional information relating to the Acquired Assets or Seller and such information is in the Seller's possession, Seller will promptly furnish such information to Purchaser upon request by Purchaser. SECTION 4.7. PURCHASE PRICE ALLOCATION. On or prior to the Closing Date, Seller and Purchaser shall mutually agree, and shall be bound in all respect thereby, on an allocation of the Purchase Price among the Acquired Assets according to the relative fair market values of such assets on the Closing Date. If Seller and Purchaser are unable to agree on such fair market values, Seller and Purchaser shall elect an independent appraisal firm to determine such values. The conclusions of such appraisal firm shall be conclusive and binding in all respects. The fees and expenses of such appraisal firm shall be shared equally by Seller and Purchaser. Neither party shall take a position inconsistent 11 with any allocation determined in accordance with this Section 4.9 in any document or filing, including any Tax return, report or form. SECTION 4.8. COOPERATION IN OBTAINING BANKRUPTCY COURT APPROVAL AND RELATED MATTERS. Seller will fully cooperate with Purchaser in connection with seeking the orders of the Bankruptcy Court contemplated to obtained pursuant to Section 4.1 and in connection with any litigation or proceeding which may be instituted hereafter against or by Seller which may affect the approval of any of the Transaction Documents or satisfaction of the conditions precedent to the occurrence of the Closing under this Agreement. SECTION 4.9. NOTICE OF ACTIONS AND PROCEEDINGS. From and after the date hereof until the Closing Date, Seller shall promptly notify Purchaser of any written notice received by Seller with respect to actions or proceedings commenced or, to its knowledge, threatened, involving or affecting Seller or the Business or the Acquired Assets and which could have a material adverse affect on the business, assets, condition (financial or otherwise), results of operations or prospects of the Business. SECTION 4.11. BANKRUPTCY FILINGS. From and after the date hereof until the Closing Date, Seller shall deliver to Purchaser (i) copies of all pleadings, motions, statements, schedules, applications, reports and other papers that Seller files in the Chapter 11 case within a reasonable time after filing, but with respect to any such papers that relate, in whole or in part, to this Agreement or any of the other Transaction Documents, the transactions contemplated hereby or thereby or Purchaser, Seller shall use all reasonable efforts to provide such prior notice as may be reasonable under the circumstances before the filing of such papers and (ii) copies of all pleadings, motions, notices, statements, schedules, applications, reports and other papers filed in the Chapter 11 Case. ARTICLE V CONDITIONS PRECEDENT SECTION 5.1. CONDITIONS TO EACH PARTY'S OBLIGATION. The obligation of Purchaser to purchase the Acquired Assets and the obligation of Seller to sell, assign, convey and deliver the Acquired Assets to Purchaser shall be subject to the satisfaction prior to the Closing of the following condition: (a) Approvals. All authorizations, consents, orders or approvals of, or declarations or filings with, any Governmental Entity or any other Person necessary for the consummation of the transactions contemplated by this Agreement shall have been obtained or filed or shall have occurred. 12 (b) No Litigation, Injunctions, or Restraints. There shall be no suit, action, or other proceeding pending before any Governmental Entity in which it is sought to directly or indirectly restrain, prohibit, invalidate, delay or set aside in whole or in part the consummation of the transactions contemplated by this Agreement or to obtain material damages in connection therewith. No temporary restraining order, preliminary or permanent injunction or other legal restraint or prohibition preventing the consummation of the transactions contemplated by this Agreement shall be in effect. (c) Order. The orders referenced in Section 4.1 shall have been obtained by the respective time periods set forth below, in form and substance satisfactory to Purchaser, shall have become final and unappealable (unless Purchase waives the requirement of finality) and shall not be subject to any stay on the first business day after the expiration of ten calendar days after the entry thereof or such other date as may be fixed for the Closing Date in accordance with Section 2.1 hereof. The Interim MA Approval order shall have been entered within 30 days after the Petition Date, the Final MA Approval Order shall have been entered within 25 days after entry of the Interim MA Approval Order, the Overbid Procedures Order shall have been entered within 30 days after the Petition Date and the Approval Order shall been entered within 25 days after the Interim MA Approval Order. SECTION 5.2. CONDITIONS TO OBLIGATIONS OF PURCHASER. The obligations of Purchaser to purchase the Acquired Assets is subject to the satisfaction on and as of the Closing of each of the following conditions: (a) Closing Condition Statements. The closing condition statements of Seller set forth in this Agreement shall be true and correct in all material respects as of the Closing Date as though made on and as of the Closing Date, except as otherwise contemplated by this Agreement, and Purchaser shall have received a certificate signed on behalf of Seller by the chief executive officer of Seller to such effect. (b) Performance of Obligations of Seller. Seller shall have performed or complied in all material respects with all obligations, conditions and covenants required to be performed by it under this Agreement at or prior to the Closing, and Purchaser shall have received a certificate signed on behalf of Seller by the chief executive officer of Seller to such effect. (c) Required Consents. Seller shall have delivered to Purchaser duly executed assignments and consents as are required in respect of the Acquired Assets. (d) Bills of Sale. Seller shall have delivered to Purchaser the duly executed instruments referred to in Section 2.2(a), together with such evidence of due authorization and execution thereof as Purchaser or its counsel may reasonably request. (e) Other Documents. Seller shall have delivered to Purchaser such other documents relating to Seller's corporate existence and authority (including copies of resolutions 13 and consents of the board of directors and shareholders of Seller), and such other matters as Purchaser or its counsel may reasonably request. (e) Acceptance by Purchaser's Counsel. The form and substance of all legal matters contemplated hereby and all documents delivered hereunder shall be reasonably acceptable to counsel to Purchaser. (f) Monetary Defaults. The aggregate amount required to cure any monetary defaults under any executory contracts or unexpired leases that are included in the Acquired Assets shall not exceed $100,000. SECTION 5.3. CONDITIONS TO THE OBLIGATION OF SELLER. The obligation of Seller to sell, assign, convey, and deliver the Acquired Assets is subject to the satisfaction on and as of the Closing Date of each of the following conditions: (a) Representations and Warranties. The representations and warranties of Purchaser set forth in this Agreement shall be true end correct in all material respects as of the date of this Agreement and as of the Closing Date as though made on and as of the Closing Date, except a otherwise contemplated by this Agreement, and Seller shall have received a certificate signed on Purchaser's behalf by a responsible officer of Purchaser to such effect. (b) Performance of Obligations of Purchaser. Purchaser shall have performed or complied in all material respects with all obligations and conditions required to be performed by it under this Agreement prior to the Closing Date, and Seller shall have received a certificate to such effect signed on behalf of Purchaser by a responsible officer of Purchaser authorized to do so. ARTICLE VII TERMINATION, AMENDMENT AND WAIVER SECTION 6.1. TERMINATION. (a) This Agreement maybe terminated and the transactions contemplated hereby abandoned at any time prior to the closing: (i) by mutual written consent of Seller and Purchaser; (ii) by Purchaser if (A) Seller has breached any of its obligations, representations or warranties under this Agreement, (B) such breach would have a material adverse affect on the business, assets, condition (financial or otherwise), results of operations or prospects of the Business and (C) such breach is curable, after notice of such breach Seller shall not have cured such breach to the satisfaction of Purchaser after fifteen business days from the date of such notice; and 14 (iii) by Purchaser (x) if the Closing does not occur on or before August 14, 1997 or (y) if the Bankruptcy Court does not enter the orders referenced in Section 4.1 within the respective time periods set forth in Section 5.1 and on the terms and conditions specified in Section 4.1. (b) In the event of termination by Seller or Purchaser pursuant to this Section 6.1, written notice thereof shall forthwith be given to the other party and the transactions contemplated by this Agreement shall be terminated, without further action by any party. SECTION 6.2. AMENDMENTS AND WAIVERS. This Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties hereto. By an instrument in writing, Purchaser or Seller, as the case may be, may waive compliance by the other party with any term or provision of this Agreement that such other party was or is obligated to comply with or perform. ARTICLE VII GENERAL PROVISIONS SECTION 7.1. NOTICES. All notices and other communications hereunder shall be in writing (including wire, telex, telecopy or similar writing) and shall he sent, delivered or mailed, addressed, telexed or telecopied: (a) if to Purchaser, to Quarterdeck Corporation 13160 Mindanao Way Marina del Rey, California 90292 Attention: Chief Financial Officer with a copy to: Gibson, Dunn & Crutcher LLP 525 University Avenue, Suite 220 Palo Alto, California 94301 Attention: David Kennedy (b) if to Seller, to TuneUp.com, Inc. P.O. Box 5500 Alamo, California 94507 Attention: Richard G. Couch 15 with a copy to: Murray & Murray 3030 Hansen Way Suite 200 Palo Alto, CA 94304 Attention: Patrick M. Costello Each such notice, request or other communication shall be given (i) by hand delivery, (ii) by nationally recognized courier service or (iii) by telecopy, receipt confirmed. Each such notice, request or communication shall be effective (i) if delivered by hand or by nationally recognized courier service, when delivered at the address specified in this Section 7.1 (or in accordance with the latest written direction from such party) and (ii) if given by telecopy, when such telecopy is transmitted to the telecopy number specified in this Section 7.1 (or in accordance with the latest written direction from such party), and the appropriate answerback or confirmation is received. SECTION 7.2. INTERPRETATION. When a reference is made in this Agreement to a Section, Schedule or Exhibit, such reference shall be to a Section, Schedule or Exhibit of this Agreement unless otherwise indicated. The table of contents and headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Whenever the words "included", "includes" or "including" are used in this Agreement, they shall be deemed to be followed by the words "without limitation". References to a Person are also to its successors and assigns and references to any statute are also to all rules, regulations and orders promulgated thereunder. All accounting terms not defined in this Agreement shall have the meanings determined by generally accepted accounting principles. "Affiliate" of any Person means any other Person controlling, controlled by or under common control with the first Person. SECTION 7.3. SEVERABILITY. If any provision of this Agreement (or any portion thereof), or the application of any such provision (or any portion thereof), to any person, place or circumstances, shall be held by a court of competent jurisdiction to be invalid, illegal, unenforceable or void, the remainder of this Agreement and such provisions as applied to other persons, places and circumstances shall remain in full force and effect. SECTION 7.4. COUNTERPARTS. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each of the parties and delivered to the other parties, it being understood that all parties need not sign the same counterpart. SECTION 7.5. ENTIRE AGREEMENT; NO THIRD PARTY BENEFICIARIES. 16 This Agreement (including the documents and instruments referred to herein) (i) constitutes the entire agreement and supersedes all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof and (ii) is not intended to confer upon any person other than the parties hereto any rights or remedies hereunder. SECTION 7.6. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA, REGARDLESS OF THE LAWS THAT MIGHT OTHERWISE GOVERN UNDER APPLICABLE PRINCIPLES OF CONFLICTS OF LAW. SECTION 7.7. PUBLICITY. Except in connection with seeking the orders referenced in Section 1.4, so long as this Agreement is in effect, Seller shall not issue or cause the publication of any press release or other public announcement with respect to the transactions contemplated by this Agreement without the consent of the Purchaser. SECTION 7.8. ASSIGNMENT. Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any party hereto without the prior written consent of the other party, except that Purchaser may assign any part of or all its rights and obligations to one or more corporations or other entities all or substantially all the capital stock or equity interests in which are owned by Purchaser or any Affiliate of Purchaser in which event all the rights and powers of Purchaser hereunder shall extend to and be enforceable by each such corporation or other entity; provided, however, that any such assignment shall not release Purchaser from its obligations hereunder. Subject to the preceding sentence, this Agreement will be binding upon, inure to the benefit of and be enforceable by the parties and their respective successors and assigns. 17 IN WITNESS WHEREOF, Purchaser and Seller have caused this Agreement to be signed by their respective officers thereunto duly authorized, all as of the date first written above. TOC HOLDING COMPANY formerly known as TUNEUP.COM, INC. By: /s/ Richard G. Couch _____________________________________ Name: Richard G. Couch Title: Chief Executive Officer QUARTERDECK CORPORATION By: /s/ Frank R. Greico _____________________________________ Name: Frank R. Greico Title: Chief Financial Officer EX-10.2 3 EXHIBIT 10.2 1 Exhibit 10.2 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT entered into as of the 1st day of May, 1996 by and between QUARTERDECK CORPORATION, a Delaware Corporation (hereinafter referred to as "Company"), and RON BEN-YEHUDA (hereinafter referred to as "Employee"). 1. EMPLOYMENT 1.1 Company hereby employs Employee to render services during the term of this Agreement as Associate General Counsel of the Company and the head of intellectual property and Employee hereby accepts such employment and agrees to perform his obligations and agreements herein set forth. During the term of this Agreement, Employee shall be a full-time employee of the Company and shall devote all of his business time and attention to the performance of his duties hereunder. Notwithstanding the foregoing, Employee will be permitted to engage in other business activities and charitable activities that do not materially interfere with his duties to the Company. In addition, Employee will be permitted to wind down his affairs as a partner of the law firm of Blanc Williams Johnston & Kronstadt for a reasonable period of time. 2. COMPENSATION 2.1 Company shall pay to Employee a base salary ("Salary") of $125,000 per annum. Salary shall be payable in equal bi-weekly installments, less applicable withholdings and deductions, in accordance with Company's normal payroll practice. 2.2 In addition to the Salary, Employee shall be entitled to a bonus ("Bonus") of $55,000 multiplied by a "Multiplier." The Multiplier will be based upon achievement of certain reasonable individual and department goals and the Bonus shall be paid on a quarterly basis. 3. TERM 3.1 This Agreement shall commence as of the date of this Agreement set forth above and shall continue until terminated by either the Company or the Employee as provided below. 4. STOCK OPTIONS 4.1 Company has granted to Employee options (the "Options") to purchase 30,000 shares of common stock of the Company, $.001 par value per share ("Common Stock"). The Options vest 25% per year over a four year period. 2 5. BENEFITS 5.1 Employee shall be entitled to participate in any benefit plan generally available to employees of the Company at Employee's level including, by way of example, medical and dental plans for Employee and his family, vacation, the Company's 401(k) Plan and the like. 5.2 Company agrees to pay or reimburse Employee for reasonable business, travel and entertainment expenses in accordance with Company's policy for employees upon the presentation of itemized statements of such expenses. 5.3 Company shall provide Employee a reasonable allowance for legal books and publications, seminars, memberships in organizations, bar dues and similar fees. 6. TERMINATION 6.1 Employee's employment shall be deemed to have terminated upon (i) Employee's death or Disability, (ii) Employee's termination by the Company for Cause, or (iii) after six months from the date hereof upon 60 days written notice of Employee's election to terminate his employment. "Disability" for purpose of this paragraph 7.1 shall mean Employee's inability to perform the essential functions of his position, with reasonable accommodation, due to physical or mental disability, resulting in Employee's absence from his duties hereunder on a full time basis for twenty-six (26) consecutive weeks. "Cause" for purposes of this paragraph shall mean a termination on the grounds of the Employee's repeated personal gross neglect of duties after notification of such neglect and reasonable opportunity to cure, willful misconduct or willful violation of any law which subjects the Company or Employee to a felony conviction. The Company has the right to terminate for Cause at any time. In the event of termination pursuant to this paragraph 6.1, Salary and Bonus due Employee hereunder shall be prorated so that only that portion due for services rendered prior to termination shall be payable hereunder. 6.2 The Company shall have the right to terminate this Agreement and Employee's employment hereunder at any time with or without Cause. Employee may terminate his employment at any time with or without cause upon 45 days prior written notice. In the event Company terminates this Agreement without Cause or Employee terminates his employment for Good Reason, Employee shall be entitled to six months salary plus bonus. "Good Reason" shall mean (i) the Company materially breaches this Agreement, or (ii) Employee is assigned duties by the Company which constitutes a substantial diminution of his duties hereunder. 7. GENERAL PROVISIONS 7.1 Employee shall execute and deliver with this Agreement, the Company's Standard Employee Confidentiality Agreement. 3 7.2 All notices and demands shall be in writing and shall be served personally, telegraphically or via facsimile or by certified mail. Service shall be deemed conclusively made at the time of service if personally served, at the time the telegraph agency confirms to the sender delivery thereof to the addressee if served telegraphically, at time of confirmation of receipt if via facsimile, and twenty-four hours after deposit thereof properly addressed and postage prepaid in the United States mail, if served by certified mail. All notices or demands shall be given at the respective addresses of the parties hereto as set forth in this Agreement. Any party may, by written notice in compliance with this paragraph, alter or change the address or the identity of the person to whom notice, or copy thereof, is to be sent. 7.3 A waiver in writing by either party of any of the terms and conditions of this Agreement in any one instance shall not be deemed or construed to be a waiver of such term or condition for the future, or of any subsequent breach hereof. All remedies, rights, undertakings, obligations and agreements contained in this Agreement shall be cumulative and none of them shall be in limitation of any other remedy, right, undertaking, obligation or agreement of either party. 7.4 All provisions of this Agreement which either expressly or by implication survive any termination or expiration hereof shall continue in full force and effect subsequent to said termination or expiration. 7.5 This Agreement shall be governed by and construed in accordance with the laws of the State of California applicable to contracts entered into and fully to be performed therein. 7.6 If any provision of this Agreement, as applied to any party or to any circumstance, shall be adjudged by a court to be void, invalid or unenforceable, the same shall in no way affect any other provision of this Agreement, the application of any such provision in any other circumstance, or the validity or enforceability of this Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. QUARTERDECK CORPORATION By: /s/ Gaston Bastians --------------------------- EMPLOYEE By:/s/ Ron Ben-Yehuda --------------------------- Ron Ben-Yehuda 18218 Wakecrest Drive Malibu, California 90265 4 May 1, 1996 Bradley Schwartz, General Counsel Quarterdeck Corporation 13160 Mindanao Way Marina del Rey, California 90292 Dear Brad: As we discussed, we intend this letter to set forth the agreement between Quarterdeck Corporation ("Quarterdeck") and me regarding the bonus that Quarterdeck will pay me pursuant to Section 2.2 of the employment agreement of even date herewith between Quarterdeck and me (the "Employment Agreement"). 1. AMOUNT OF BONUS TO BE PAID (a) The target bonus is $13,750 per calendar quarter, prorated for partial quarters worked. Of this amount, I will earn and receive not less than $7,500 (the "Discount Based Portion") for any quarter during which I obtain or maintain in place an agreement or understanding with the law firm of Blanc Williams Johnston & Kronstadt LLP (or any other firm having intellectual property expertise) to discount their Fees (as defined below) to Quarterdeck for all matters that are not related to litigation by 10%. "Fees" means charges for outside attorney or paralegal time. (Although they will not be considered in determining the bonus, I expect to negotiate competitive rates for items such as faxes, copies and secretarial overtime.) (b) In addition to the Discount Based Portion, I shall receive not less than $6,250 per quarter (the "Budget Based Portion") if Fees billed during that quarter for intellectual property matters ("IP Fees") are within 10% of the legal department budget for intellectual property matters (the "IP Budget"). Otherwise, the Budget Based Portion may be reduced by a percentage equal to the percentage by which such IP Fees exceed such IP Budget. Thus, for example, if such IP Fees exceed such IP Budget by 25%, then the Budget Based Portion may be reduced by 25%. 5 (c) We intend that I will receive the entire annual Budget Based Portion if the average of the quarterly IP Fees over any fiscal year equals the quarterly IP Budget. Accordingly, if the IP Budget exceeds the IP Fees for any quarter (other than the last quarter of any fiscal year), then the IP Budget for the following quarter shall be increased by the amount of such excess. Thus, for example, if the IP Budget for each quarter of any fiscal year is originally set at $50,000 and the IP Fees for the first quarter of such year are $40,000, then the IP Budget for the second quarter shall be $60,000. If the IP Fees for the second quarter of such year are then $55,000, then the IP Budget for the third quarter shall be $55,000. Further, If the Budget Based Portion is decreased for one or more quarters of any fiscal year because of a failure to meet the IP Budget for that quarter, then my bonus for the last quarter of such year will be adjusted so that the aggregate bonus I receive for such year will equal the bonus I would have otherwise been entitled to receive had the IP Fees for each quarter of such year equalled the average of the quarterly IP Fees over such year. (d) For purposes of this letter agreement, intellectual property matters shall not include matters relating to (i) litigation, (ii) acquisitions or other matters that may have intellectual property components but are primarily not intellectual property transactions, and (iii) special projects approved by the General Counsel. 2. SETTING AND ADJUSTING BUDGET The IP Budget will be sufficient to meet Quarterdeck's reasonably anticipated needs for outside counsel services relating to intellectual property matters, as reasonably determined by Quarterdeck in consultation with you and me. If during any year or quarter, it appears that the IP Budget is insufficient in light of Quarterdeck's needs and its internal resources, then the IP Budget shall be increased (retroactively and prospectively) in good faith to the extent reasonably required to meet such needs; provided that, should it be impracticable to increase the IP Budget to such extent, then my bonus shall nevertheless be determined as if the IP Budget had been increased to that extent. 3. OTHER ADJUSTMENTS (a) If, in any quarter, IP Fees exceed one hundred ten percent (110%) of the IP Budget for reasons beyond my reasonable control (such as a very substantial, unexpected transaction requiring substantial support from outside counsel or the loss of an in-house attorney or paralegal), as reasonably agreed by you and me, then I shall receive the full Budget Based Portion for that quarter. (b) The ratio of the Discount Based Portion to the Budget Based Portion shall not change, even if my target bonus is increased. 4. TRANSITION You understand that it may not be possible for me to bring legal fees under control while I am transitioning to Quarterdeck. Notwithstanding any other provision hereof, therefore, I will receive the full target bonus for the April - - June, 1996 quarter (prorated in light of my May 1 start date), regardless of the IP Fees for that quarter. 6 5. INCORPORATION This letter agreement is incorporated into and made a part of the Employment Agreement. In the event of any conflict between the provisions of this letter agreement and the provisions in the body of the Employment Agreement, this letter agreement shall control. * * * If the foregoing correctly reflects the agreement between Quarterdeck and me relating to my bonus, please so indicate by signing where indicated below. Sincerely, /s/ Ron Ben-Yehuda Ron Ben-Yehuda AGREED:QUARTERDECK CORPORATION By:/s/ Bradley Schwartz --------------------------------- Bradley Schwartz, General Counsel cc: Gaston Bastiaens 7 interoffice memo Date: 06/06/97 To: Curt Hessler From: Ron Ben-Yehuda RE: My New Position I believe that the following sets forth our understanding regarding my new position: 1. My title is Vice President, Secretary and General Counsel. 2. My annual base salary is $155,000. 3. My target quarterly bonus is $17,500 ($70,000 annually). Of this amount, $3,750 per quarter is to be based on corporate performance. The remaining $13,750 per quarter is to be based on personal performance. As we discussed, the performance level required to obtain the $13,750 payment will be easily and routinely achievable. This is consistent with my current arrangement under the letter agreement dated May 1, 1996, between Quarterdeck and me. In accordance with that letter agreement, I will get this portion of my bonus in each quarter, whether or not any bonus is paid generally under Quarterdeck's discretionary executive bonus plan, provided that I satisfy the requirements described above. 4. I was issued 50,000 non-qualified options as of May 21, 1997. 5. If Quarterdeck terminates my employment without Cause (as defined in my employment agreement), half of the total number of unvested options that I then hold, if any, will immediately vest. 6. This supplements (and amends) my existing employment agreement. Except as stated in this memorandum, that agreement remains unchanged and in full force and effect. If this correctly reflects our understanding, please sign below and return a copy to me. Agreed: Quarterdeck Corporation /s/ Curt Hessler By: Curt Hessler, CEO EX-10.3 4 EXHIBIT 10.3 1 Exhibit 10.3 Page 1 July 11, 1997 Marc Epstein 56 Fillmer Avenue Los Gatos, California 95030 Dear Marc: I am pleased to confirm our offer of employment as Senior Vice President and Chief Technology Officer. Your duties will include strategic planning, business development, and product development. Your compensation will be as follows: 1. A starting base salary at the rate of $9,230.77 paid bi-weekly, which equates to $240,000 annually. (Quarterdeck expects to convert to a semi-monthly payroll schedule soon.) 2. A target bonus under Quarterdeck's discretionary management bonus plan of $30,000 per quarter, with an actual payment in any quarter of between $0 and $45,000 (except as provided below). Payment of the bonus will be determined based on Quarterdeck's then current applicable policies. Currently, such policies provide that half of your bonus will depend on company performance and the other half will depend upon your accomplishment of goals established by the CEO in consultation with you. Notwithstanding the foregoing, your bonus will not average less than $15,000 per quarter (prorated for partial quarters) during the first six quarters of your employment by Quarterdeck. 3. Subject to the approval of Quarterdeck's Board of Directors, a grant of non-qualified options to purchase 700,000 shares of Quarterdeck common stock ("Stock"), subject to the following: (a) 500,000 of these options will vest as follows: (i) 125,000 will vest if you continue to be employed by Quarterdeck for one year; (ii) the remaining 375,000 options will vest in equal monthly installments over the following three years so long as you remain employed by Quarterdeck; (iii) if, at any time while you remain employed by Quarterdeck, the closing price of the Stock is $10.00 or more for forty-five consecutive trading days, half of the options described in this paragraph 3(a) which are then unvested will immediately vest; and (iv) in the event of a Change of Control (as defined below) while you remain employed by Quarterdeck, or if you are terminated without Cause (as defined below) or your duties and responsibilities are substantially diminished without Cause, half of the options described in this paragraph 3(a) which are then unvested will immediately vest. Accelerated vesting may occur pursuant to both clause (iii) and clause (iv) above, provided that accelerated vesting pursuant to each such clause may occur only once. (b) The remaining 200,000 options will vest as provided in this paragraph 3(b). If, at any time while you remain employed by Quarterdeck, the closing price of the Stock for 45 consecutive trading days reaches or exceeds: (i) $7.50, 2 Page 2 then a total of 50,000 of these options will be vested, (ii) $10.00, then a total of 100,000 of these options will be vested, (iii) $12.50, then a total of 150,000 of these options will be vested, and (iv) $15.00, then all 200,000 of these options will be vested. (c) In the event of changes in the outstanding Stock or in the capital structure of Quarterdeck by reason of any stock dividend, stock split, exchange of shares, recapitalization, reorganization, subdivision or consolidation of shares, or other similar transaction causing a proportional adjustment in the number of options and the exercise price of each option, the Stock prices specified in paragraphs 3(a) and 3(b) will also be proportionately adjusted. (d) 600,000 of the options granted hereunder shall be granted under Quarterdeck's Amended and Restated 1990 Stock Plan (the "Plan"). The remaining 100,000 options shall be granted outside of the Plan. The options granted outside of the Plan shall be subject to terms, conditions and restrictions substantially similar to those contained in the Plan. Notwithstanding any other provision hereof, the grant of options outside of the Plan is subject to the approval of the National Association of Securities Dealers. (e) The exercise price of each of your options will be the closing market price on the grant date. (f) "Change of Control" means any consolidation or merger of Quarterdeck with or into any other corporation or corporations in which the stockholders of Quarterdeck immediately prior to the consolidation or merger do not retain a majority of the voting power of the surviving corporation or a sale of all or substantially all of the assets of Quarterdeck. 4. Your base salary and standard benefits will continue for one year if you are terminated without Cause or if you resign as the result of a substantial diminution of your duties without Cause; provided that salary and benefits will immediately terminate should you commence to be employed by or engaged to provide any services to any competitor of Quarterdeck. You agree to immediately notify us of any such employment or engagement. 5. Commencing on the first full calendar month following 30 days of employment, health, dental, vision, life and long term disability benefits subject to the terms, conditions, and limitations contained in the applicable plan documents which may be modified by Quarterdeck in the future. A benefits summary is enclosed for your review. 6. You will receive a relocation package as described in the enclosed domestic relocation guidelines (the "Guidelines"), subject to the following: (a) Relocation benefits will be provided if you relocate within 18 months of your employment start date, unless Quarterdeck determines that relocation is not necessary or you cease to be employed by Quarterdeck for any reason before you relocate. 3 Page 3 (b) Quarterdeck will pay transaction costs associated with the sale and purchase of your home, including broker's commissions paid on the sale of your home and escrow costs and appraisal fees paid with respect to the sale or purchase of your home, but excluding points paid for any loan. (c) Moving of household goods as described in the Guidelines and temporary storage of such goods. (d) House hunting trips to the Los Angeles area pursuant to Section 3.1 of the Guidelines. (e) Temporary living arrangements for you and your family for up to 60 days pursuant to Section 3.2 of the Guidelines. (f) Any income tax liability resulting from the benefits described in this Section 6 will be offset as described in Section 6.2 of the Guidelines. 7. You will receive reasonable lodging and car expenses in Southern California and reasonable round trips to Northern California until the earlier of (i) one year from your employment start date and (ii) the completion of your relocation. 8. "Cause" means that you have (i) engaged in acts or omissions with respect to Quarterdeck or any subsidiary of Quarterdeck which constitute intentional misconduct, fraud or dishonesty; (ii) committed willful or intentional acts constituting a material breach of this agreement; (iii) been convicted of a crime of moral turpitude or any felony; (iv) committed other acts constituting intentional misconduct or dishonesty that in the reasonable discretion of Quarterdeck's board of directors are likely to have a material adverse effect on Quarterdeck; (v) consistently failed to perform at a level commensurate with your position and compensation level or habitually neglected your duties and failed to cure within 30 days of notice; or (vi) disregarded the policies of Quarterdeck causing material loss or damage to Quarterdeck. Your employment with Quarterdeck is at will and is for no specified term. While Quarterdeck has every hope that our employment relationship will be mutually beneficial and rewarding, you and Quarterdeck each retains the right to terminate the employment relationship at any time, with or without cause, upon notice. No other provision of this offer is intended or should be construed to modify either party's right to terminate the employment relationship. You and Quarterdeck agree that all disputes or claims relating to or arising out of our employment relationship shall be fully and finally resolved by binding arbitration conducted by the American Arbitration Association in Los Angeles, California. However, we agree that Quarterdeck retains the right to bring any claims for infringement or misappropriation of any copyright, patent, trademark, trade secret or other intellectual property right in any court of competent jurisdiction and to have all legal and factual questions relating to such claim resolved by such courts. You will be required to sign Quarterdeck's standard agreement regarding confidentiality and assignment of intellectual property rights as a condition of employment. Further, under federal law, you must produce original documentation 4 Page 4 establishing your identity and right to work in the United States, and complete the INS form I-9, swearing that you have the right to work in the United States. The appropriate documentation must be produced within three business days of hire. A list of acceptable documents is enclosed. Between the date hereof and your employment start date, you will be reasonably available to provide consulting services requested by Quarterdeck in writing. You will be compensated for any such services at the rate of $200 per hour. If any provision of this Agreement is to any extent invalid or unenforceable under applicable law, that provision shall be stricken from this agreement, and the remainder of this agreement shall remain valid and enforceable in accordance with its terms. This letter (including the other documents referenced herein) set forth our entire agreement regarding the terms of your employment with Quarterdeck and supersede any prior or contemporaneous representations or agreements, whether written or oral, all of which are merged into this agreement. No amendments to this agreement will be effective unless they are in writing and signed by the Chief Executive Officer of Quarterdeck Corporation. Please acknowledge acceptance of this offer by signing, dating, and returning this original letter for your personnel file. If you wish, a copy of this letter will be provided to you at orientation. Please call me if you have any questions or comments. Sincerely, /s/ Curt Hessler - -------------------------------- Curt Hessler, CEO This will acknowledge my acceptance of this offer of employment. /s/ Marc Epstein July 13, 1997 - -------------------------------- ------------------------------------- Signature Date EX-10.4 5 EXHIBIT 10.4 1 Exhibit 10.4 June 20, 1997 Mr. Tom Mackey 13711 Parker Circle Omaha, NE 68154 Dear Tom, We are extremely pleased to confirm our offer of employment as Vice President Sales North America at Quarterdeck Corporation in Marina del Rey, CA reporting to Curt Hessler, President and CEO. Your starting base salary will be at a rate of $6,730.76 paid bi-weekly. Your proposed start date is August 1, 1997. This offer is contingent upon your acceptance by June 25, 1997. Your target bonus is equal to 50% of base salary or $87,500 and will be paid in full at the time your contract is signed by both Quarterdeck and yourself. You will be eligible to receive an option to purchase 100,000 shares of Quarterdeck Corporation common stock subject to approval of the Compensation Committee of the Board of Directors. The options will have an exercise price equal to the fair market value of the common stock of the date of such approval and shall vest 25% per year over four years. You will be provided with a copy of the Quarterdeck Stock Option Plan. If termination should occur for any reason other than for cause during a period of two years from your date of hire, Quarterdeck will provide you with a six months severance package at your then current base pay rate paid biweekly over the term of your severance. Additionally, 50% of your then unvested Quarterdeck stock options will become immediately vested. Quarterdeck will reimburse you up to $50,000 towards costs associated with the selling of your house in Nebraska and the buying of a house in the Los Angeles area. In addition you will be reimbursed for usual, customary and reasonable costs of moving and for temporary housing for period of up to three months. Reimbursements will be issued upon documentation of said costs submitted to the Company. You will be required to utilize our contracted relocation provider Personalized Relocation Management in order to receive reimbursement for relocation expenses. Quarterdeck's Relocation Policy is enclosed. Please contact Personalized Relocation Management at (800) 522-6863 or (818) 241-2900 as soon as possible to begin the arrangements for your move. 2 Mr. Tom Mackey Page two June 20, 1997 On the first of the month following 30 days of employment, you will be eligible for health, dental, vision, life and long term disability benefits subject to the terms, conditions, and limitations contained in the applicable plan documents which may be modified by Quarterdeck in the future. A benefits summary is enclosed for your review. Every new employee has a three month introductory period which enables both Quarterdeck and you to determine if the hire decision was appropriate. Under federal law, you must produce original documentation establishing your identity and right to work in the United States, and complete the INS form I-9, swearing that you have the right to work in the United States. The appropriate documentation must be produced within three business days of hire. A list of acceptable documents is enclosed. Your employment with Quarterdeck is at will and is for no specified term. While Quarterdeck has every hope that our employment relationship will be mutually beneficial and rewarding, you and Quarterdeck each retains the right to terminate the employment relationship at any time, with or without cause, upon notice. In the event of any dispute or claim relating to or arising out of our employment relationship, you and Quarterdeck agree that all such disputes shall be fully and finally resolved by binding arbitration conducted by the American Arbitration Association in Los Angeles, California. However, we agree Quarterdeck retains the right to bring any claims for infringement or misappropriation of any copyright, patent, trademark, trade secret or other intellectual property right in any court of competent jurisdiction and to have all legal and factual questions relating to such claim resolved by such courts. You will also be required to sign Quarterdeck's "Confidentiality Agreement" as a condition of employment. This letter sets forth the terms of your employment with Quarterdeck and supersedes any prior representations or agreements, whether written or oral. There can be no oral or implied amendments to this agreement unless in writing and signed by the President of Quarterdeck Corporation. This offer is contingent upon the completion of a reference check. 3 Mr. Tom Mackey Page three June 20, 1997 Please feel free to contact me if you have any questions. We request that you acknowledge receipt of this offer by signing, dating, and returning this original letter for your personnel file immediately. Should you need a copy, one will be provided to you at orientation. Sincerely, /s/ RITA L. DAVIS - ------------------------- Rita L. Davis Director, Human Resources RLD/sp copy to: Curt Hessler, President and CEO Enclosures:Benefits summary Relocation policy List of acceptable documents for I-9 This will acknowledge my acceptance of this offer of employment. By: /s/ TOM MACKEY Date: June 24, 1997 EX-27 6 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS SEP-30-1997 APR-01-1997 JUN-30-1997 10,883 0 19,555 10,144 1,953 27,438 37,657 16,570 21,087 25,596 25,000 0 15,000 40 (9,695) 56,008 21,056 21,056 5,153 14,618 (266) 0 498 1,053 0 0 0 0 0 1,053 0.02 0.02
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