-----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, WRv/LarjhF5jrdkGT/jnWxrvgp5UuD0Ck/VBvpec57+ZnVb1WFYADC4450QpYyPq Ap4kIjp57NPg+g/qcnUZbg== 0000950148-98-000294.txt : 19980218 0000950148-98-000294.hdr.sgml : 19980218 ACCESSION NUMBER: 0000950148-98-000294 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980213 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: SEC FILE NUMBER: 000-19207 FILM NUMBER: 98539859 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 DECEMBER 31, 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 January 30, 1998 was 43,370,265. ================================================================================ 2 QUARTERDECK CORPORATION AND SUBSIDIARIES FORM 10-Q DECEMBER 31, 1997 INDEX
PAGE NO. -------- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Consolidated Balance Sheets as of December 31, 1997 (unaudited) and September 30, 1997 3 Consolidated Statements of Operations for the three months ended December 31, 1997 and 1996 (unaudited) 4 Consolidated Statements of Cash Flows for the three months ended December 31, 1997 and 1996 (unaudited) 5 Notes to Consolidated Unaudited Financial Statements 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 11 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS 19 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 19 ITEM 5. OTHER INFORMATION 20 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 22 SIGNATURES 23
2 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS QUARTERDECK CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (Amounts in thousands, except for share and per share amounts) ASSETS
DECEMBER 31, SEPTEMBER 30, 1997 1997 ------------ ------------- (UNAUDITED) Current assets: Cash and cash equivalents $ 26,903 $ 23,651 Trade accounts receivable 9,985 7,028 Inventories 1,252 1,177 Other current assets 2,560 4,655 ---------- ---------- Total current assets 40,700 36,511 Equipment and leasehold improvements, net 6,532 14,153 Capitalized software costs, net 1,560 1,790 Other assets 3,244 3,427 ---------- ---------- $ 52,036 $ 55,881 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 2,983 $ 3,792 Accrued liabilities 13,685 14,196 Accrued acquisition, restructuring and other charges 3,957 5,385 Income tax payable 572 627 Notes payable to bank 1,625 5,579 Current portion of long-term obligations 15 15 ---------- ---------- Total current liabilities 22,837 29,594 Convertible notes 25,000 25,000 Long-term obligations, less current portion 89 114 ---------- ---------- Total liabilities 47,926 54,708 ---------- ---------- Stockholders' equity: Series C Preferred stock (Par value $1,000, authorized: 29,000; issued and outstanding: 29,000 and 26,025 shares, respectively, liquidation preference $29,000,000) 27,376 24,594 Common stock (authorized: 70,000,000 shares; issued and outstanding: 43,370,265 and 43,338,838 shares) 43 43 Additional paid-in capital 75,667 75,630 Accumulated deficit (97,848) (98,164) Foreign currency translation adjustment (263) (281) Note receivable from directors for sale of stock (18) (18) Net unrealized loss on marketable securities (288) (72) Treasury stock (559) (559) ---------- ---------- Total stockholders' equity 4,110 1,173 ---------- ---------- $ 52,036 $ 55,881 ========== ==========
The accompanying notes are an integral part of these consolidated unaudited condensed financial statements. 3 4 QUARTERDECK CORPORATION AND SUBSIDIARIES CONSOLIDATED UNAUDITED CONDENSED STATEMENTS OF OPERATIONS (Amounts in thousands, except per share data)
THREE MONTHS ENDED DECEMBER 31, ------------------------- 1997 1996 -------- -------- Net revenues $ 20,626 $ 24,385 Cost of revenues 4,709 7,048 -------- -------- Gross profit 15,917 17,337 Operating expenses: Research and development 4,681 4,119 Sales and marketing 8,378 7,782 General and administrative 2,807 4,922 Acquisition, restructuring and other charges (51) -- -------- -------- Total operating expenses 15,815 16,823 -------- -------- Operating income 102 514 Interest expense, net (267) (491) Other income 497 -- -------- -------- Income before income taxes 332 23 Provision for income taxes 16 3 -------- -------- Net income $ 316 $ 20 ======== ======== Net income per share: Basic $ 0.01 $ 0.00 -------- -------- Diluted $ 0.00 $ 0.00 -------- -------- Shares used to compute net income per share: Basic 43,363 37,738 -------- -------- Diluted 67,628 39,938 -------- --------
The accompanying notes are an integral part of these consolidated unaudited condensed financial statements. 4 5 QUARTERDECK CORPORATION AND SUBSIDIARIES CONSOLIDATED UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS (AMOUNTS IN THOUSANDS)
THREE MONTHS ENDED DECEMBER 31, ------------------------- 1997 1996 -------- -------- Cash flows from operating activities: Net income $ 316 $ 20 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization of equipment and leasehold improvements 1,010 1,275 Amortization of capitalized software costs 230 662 Write-off of property and equipment -- 48 Gain on sale of building (497) -- Changes in assets and liabilities: Trade accounts receivable (2,957) (2,889) Inventories (75) 802 Other current assets 1,879 2,017 Other assets 183 790 Accounts payable (809) (6,729) Accrued liabilities (511) (1,831) Accrued acquisition, restructuring and other charges (1,328) (5,599) Income tax payable (55) 175 Foreign currency translation adjustment 18 (196) -------- -------- Net cash used in operating activities (2,596) (11,455) -------- -------- Cash flows from investing activities: Capital expenditures (692) (2,675) Proceeds from sale of building 7,700 -- Capitalized software costs -- (68) -------- -------- Net cash provided by (used in) investing activities 7,008 (2,743) -------- -------- Cash flows from financing activities: Net proceeds from issuance of preferred stock, Series C 2,782 -- Principal debt repayments (3,954) -- Notes payable to banks -- 168 Net payments under long-term obligations (25) -- Net proceeds from issuance of common stock 37 349 -------- -------- Net cash provided by (used in) financing activities (1,160) 517 -------- -------- Net increase (decrease) in cash and cash equivalents 3,252 (13,681) Cash and cash equivalents at beginning of period 23,651 25,554 -------- -------- Cash and cash equivalents at end of period $ 26,903 $ 11,873 ======== ======== Supplemental disclosure of cash flow information: Cash paid during the period for: Interest $ 263 $ 472 Income taxes $ -- $ --
The accompanying notes are an integral part of these consolidated unaudited condensed financial statements. 5 6 QUARTERDECK CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED UNAUDITED CONDENSED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The accompanying consolidated financial statements of Quarterdeck Corporation are unaudited (except for the Balance Sheet as of September 30, 1997) 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, 1997. In the opinion of management, the accompanying consolidated unaudited financial statements include all adjustments which are necessary for a fair presentation. The results of operations for the three month period ended December 31, 1997 are not necessarily indicative of results to be expected for the full fiscal year. 2. GENERAL Quarterdeck Corporation is a global leader in the development and marketing of PC helpware -- software designed to prevent and solve PC performance problems, especially those encountered in networked -- Internet and Intranet -- environments. The Company's goal is to make personal computing trouble-free for users and network administrators alike, while reducing the need for live technical support. Quarterdeck's current product line, which addresses storage management, system conflict resolution, virus protection, system updating, and enhanced access to networked information and communications resources, is marketed to both end-users and businesses via retail distribution, corporate resellers and OEM's, direct marketing channels, and the Internet. Quarterdeck's products are available in over 14,000 outlets throughout the United States and Canada, as well as in over 29 countries worldwide. The Company was incorporated in California in 1982 as Quarterdeck Office Systems. In June 1991, the Company changed its state of incorporation from California to Delaware and in February 1995 changed its name to Quarterdeck Corporation. The principal offices of the Company are located at 13160 Mindanao Way, Third Floor, Marina del Rey, California, 90292, telephone number (310) 309-3700. 6 7 3. BALANCE SHEET INFORMATION
DECEMBER 31, SEPTEMBER 30, 1997 1997 ------------ ------------- (in thousands) Trade accounts receivable: Receivables ................................................... $ 20,114 $ 16,274 Less: allowance for doubtful accounts ......................... (1,484) (1,761) Less: allowance for sales returns ............................. (4,497) (4,243) Less: allowance for market development funds .................. (4,148) (3,242) -------- -------- $ 9,985 $ 7,028 ======== ======== Other current assets: Prepaid royalties ............................................. $ 386 $ 352 Income tax receivable ......................................... 526 520 Other prepaid expenses ........................................ 831 800 Notes receivable .............................................. 40 51 Advances to employees ......................................... 23 24 Marketable security - Infonautics ............................. 576 792 Other ......................................................... 178 2,116 -------- -------- $ 2,560 $ 4,655 ======== ======== Equipment and leasehold improvements: Building (asset held for sale) ................................ $ -- $ 7,359 Computer equipment ............................................ 7,999 7,769 Office furniture and equipment ................................ 6,479 6,575 Office furniture and equipment under capital leases ........... 99 99 Leasehold improvements ........................................ 2,641 2,638 -------- -------- 17,218 24,440 Less: accumulated depreciation and amortization ............... (10,686) (10,287) -------- -------- $ 6,532 $ 14,153 ======== ======== Capitalized software costs: Capitalized software costs .................................... $ 5,498 $ 5,498 Less: accumulated amortization ................................ (3,938) (3,708) -------- -------- $ 1,560 $ 1,790 ======== ======== Other assets: Intangible assets acquired, net ............................... 2,572 2,683 Other ......................................................... 672 744 -------- -------- $ 3,244 $ 3,427 ======== ======== Accrued expenses: Accrued expenses, ............................................. $ 11,780 $ 12,291 Accrued litigation settlement ................................. 1,905 1,905 -------- -------- $ 13,685 $ 14,196 ======== ======== Accrued acquisition, restructuring and other charges: Acquisition .................................................... $ 50 $ 50 Restructuring .................................................. 3,907 5,335 -------- -------- $ 3,957 $ 5,385 ======== ========
7 8 4. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents at December 31, 1997 amounted to $26,903,000. 5. COMPUTATION OF NET INCOME PER SHARE In February 1997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings Per Share." SFAS No. 128 specifies new standards designed to improve the earnings per share (EPS) information provided in financial statements by simplifying the existing computational guidelines, revising the disclosure requirements and increasing the comparability of EPS data on an international basis. Some of the changes made to simplify the EPS computations include: (a) eliminating the presentation of primary EPS and replacing it with basic EPS, for which common stock equivalents are not considered, (b) eliminating the modified treasury stock method and the three percent materiality provision and (c) revising the contingent share provision and the supplemental EPS data requirements. SFAS No. 128 also makes a number of changes to existing disclosure statements. The Company adopted SFAS No. 128 for the quarter ended December 31,1997. All prior periods will be restated. The following table sets forth the computation of basic and diluted net income per share:
THREE MONTHS ENDED DECEMBER 31, ---------------------- 1997 1996 ------- ------- Numerator: Net income, net income available to common stockholders and net income available to common stockholders after required conversion: $ 316 $ 20 ======= ======= Denominator: Shares used for basic net income per share calculation - weighted average shares outstanding 43,363 37,738 Effect of dilutive securities: Series C convertible preferred shares and warrants 24,234 Series B convertible preferred stock 276 Stock options 31 724 Limbex purchase transaction 1,200 Shares used for diluted net income ------- ------- per share calculation 67,628 39,938 ======= =======
No adjustment was required in calculating net income available to common stockholders after assumed conversion as there are no dividend requirements on the Company's preferred stock. Options to purchase 6,873,000 shares at a weighted average exercise price of $3.52 and 3,184,000 shares at a weighted average exercise price of $12.38 were outstanding during the three months ended December 31, 1997 and 1996, respectively, but were not included in the computation of diluted net income per share because the options' exercise price was greater than the average market price of the common shares and therefore, the effect would be anti-dilutive. Warrants to purchase 904,000 shares and 1,704,000 shares at a weighted average exercise price of $7.44 were outstanding during the three months ended December 31, 1997 and 1996, respectively, but were not included in the computation of diluted net income per share because the options' exercise price was greater than the average market price of the common shares and therefore, the effect would be anti-dilutive. Warrants to purchase 25,000 shares at a weighted average exercise price of $7.20 were outstanding during the three months ended December 31, 1997 and 1996, but were not included in the computation of diluted net income per share because the options' exercise price was greater than the average market price of the common shares and therefore, the effect would be anti-dilutive. 8 9 Approximately 1,180,000 shares issuable upon the conversion of convertible notes were not included in either period as the effect would be anti-dilutive. The Company had $25,000,000 of convertible notes outstanding at December 31, 1997 and 1996. Series C preferred stock includes 24,234,000 shares relating to the potential conversion of the Series C preferred stock and warrants based upon the conversion price at December 31, 1997 which was $1.252. However, the holders of the Series C preferred stock are contractually held to a minimum of $5.00 per share conversion price until March 1, 1998. 6. RESTRUCTURING CHARGES During September 1997, the Company implemented a restructuring plan which was designed to focus the Company on the new corporate strategy which resulted in charges totaling $11,051,000. As part of the restructuring, the net book value of the building in Columbia, Missouri was written down by $5,803,000, to $7,000,000, the Company's estimated fair market value. (This building and certain furniture and fixtures were sold during the quarter ended December 31, 1997 resulting in a net gain of $497,000.) See subsequent event footnote 8 for further discussion of business units closed or divested. The following is an analysis of the significant components of the fiscal 1997 restructuring and other charges (in thousands):
DISCONTINUANCE AND SEVERANCE WRITE-OFF CONSOLIDATION OF AND PROPERTY AND OFFICES OTHER EQUIPMENT TOTAL ------------------ --------- ------------- -------- Accrued, September 30, 1997 .. 569 4,122 100 4,791 Non-cash costs ............... -- (51) (100) (151) Cash payments ................ (95) (1,113) -- (1,208) -------- -------- -------- -------- Accrued, December 31, 1997.... $ 474 $ 2,958 $ -- $ 3,432 ======== ======== -------- ========
Quarterdeck currently expects this restructuring accrual to be utilized, primarily through cash disbursements, through the quarter ending March 31, 1999. The Company anticipates the cash effect of such disbursements to be of declining significance until this time. The following is an analysis of the significant components of the fiscal 1996 restructuring (in thousands):
DISCONTINUANCE AND SEVERANCE CONSOLIDATION AND OF OFFICES OTHER TOTAL --------------- ---------- -------- Accrued, September 30, 1997 ........... 454 90 544 Cash payments ......................... (57) (12) (69) -------- -------- -------- Accrued, December 31, 1997 ............ $ 397 $ 78 $ 475 ======== ======== ========
The remainder of this accrual primarily relates to vacant leased facilities. The leases for the facilities extend several years, however, the Company is seeking to obtain subleases for this space. 7. LEGAL PROCEEDINGS Federal and state shareholder actions were brought against the Company and one former and one current officer of the Company alleging among other things, violations of certain provisions of California and Federal securities laws relating to statements made about Quarterdeck. On December 19, 1997, the Company reached an agreement in principle to settle such actions for a total amount of $12,500,000, of which the Company will be required to pay approximately $1,905,000, with the balance of $10,595,000 to be paid under the Company's directors' and officers' insurance policy. The settlement is subject to, among other things, court approval. The Company has recorded a charge of $1,905,000 during its fiscal year ended September 30, 1997. 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 increase Random Access Memory significantly 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. Quarterdeck has filed counterclaims and intends to defend the case vigorously and to oppose any 9 10 effort to certify the claims for class resolution. No assurances can be given that the ultimate disposition of this case will not have a material adverse effect on the Company's results of operations, financial condition or liquidity. In October 1997, a complaint was filed in the United States District Court for the District of Utah on behalf of PowerQuest Corporation against the Company. The complaint alleges that the Company's partitioning software (Partition-It and Partition-It Extra Strength) violate a patent held by PowerQuest. In January 1998, PowerQuest obtained a second patent relating to partitioning and is now seeking to amend its complaint to allege infringement of that patent as well. The plaintiff seeks an injunction against distribution of Partition-It and Partition-It Extra Strength and damages. Although the Company believes the patents are invalid, there can be no assurance as to the actual outcome of this matter. The ultimate disposition of this matter could have a material adverse effect on the Company. The Company is a defendant in various other pending claims and lawsuits. Although there can be no assurances, management believes that the disposition of such matters will not have a material adverse impact on the results of operations or financial position of the Company. 8. SUBSEQUENT EVENTS On January 12, 1998, the Company completed the divestiture of the business of StarNine Technologies, Inc., the Company's Berkeley, California subsidiary specializing in Internet tools for Macintosh users, to Platinum Equity Holdings. In addition, the Company signed an outsourcing contract with The Sutherland Group, Ltd., for the Company's Clearwater, Florida consumer and corporate telesales operations. These transactions will not have a material impact on the Company's financial position or results of operations and resulted in a reduction in full time headcount by approximately 115. 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, 1997, 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. This Form 10-Q contains forward-looking statements which are made pursuant to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995. Within this Form 10-Q, words such as "believes", "anticipates", "plans", "expects", "intends", and similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying such statements. These forward-looking statements involve a number of risks and uncertainties, including the timely development and market acceptance of products and technologies, sell-through of products in the sales channel, successful integration of acquisitions, the effect of conversion of the Company's convertible preferred stock, the ability to reduce operating expenses and other factors described throughout this Form 10-Q and in the Company's other filings with the Securities and Exchange Commission. The actual results that the Company achieves may differ materially from any forward-looking statements due to such risks and uncertainties. The Company undertakes no obligations to revise or update any forward-looking statements in order to reflect events or circumstances that may arise after the date of this report. RESULTS OF OPERATIONS Net Revenues: The Company's net revenues consist of gross sales of its products, less provisions for returns and customer allowances. In the retail and corporate reseller channels, the Company's main sales vehicles, gross sales are recorded as products are shipped on order to first-tier distributors, with provisions for returns calculated on the basis of projected sell-through of new products and demonstrated sell-through experience of established products. These provisions reflect the industry's practice of often accepting returns from distributors, resellers, and retailers of products not sold through to final customers. If projected sell-through does not occur, actual returns may exceed earlier provisions, and net revenues for a period may suffer significant declines even when distributor orders for new or replacement products are meeting expectations. Net revenues for the three months ended December 31, 1997 of $20,626,000 decreased 15.4% or $3,759,000 from net revenues of $24,385,000 for the three months ended December 31, 1996. This decline reflected reduced sales for the Company's memory management, and communications products, the discontinuance during fiscal 1997 of certain non-core product lines (e.g., Internet utilities and graphic utilities)and reduced efforts to sell third party products through the Company's direct mail and telesales units. During the December 1997 quarter, a majority of the Company's revenues were generated by continuing sales of its CleanSweep and ProComm products and from new products and upgrades including RealHelp, RealHelp Extra Strength, ViruSweep 1.0 and Partition-It Extra Strength. The majority of Quarterdeck's revenues are derived from US sales, but the relative contribution from international revenues has grown, representing 24.1% and 17.0% of the Company's net revenues, for the three month periods ended December 31, 1997 and 1996, respectively. Cost of Revenues: Cost of revenues include product production, packaging, documentation and media, amortization of capitalized software costs, technical support and certain license fees paid to third parties. For the three months ended December 31,1997, cost of revenues of $4,709,000 decreased 33.2% or $2,339,000 from cost of revenues of $7,048,000 for the three months ended December 31, 1996, while declining as a percent of net revenues to 22.8% from 28.9% for the three months ended December 31, 1997 and 1996, respectively. The dollar decrease in cost of revenues was largely due to reduced sales and to improved efficiency in production and technical support 11 12 activities. The reduction as a percent of net revenues was primarily due to the consolidation of the purchasing function which allowed the Company to obtain manufacturing related volume discounts, reduced royalty expense and software amortization in the current year, continued reduction of technical support costs and continuing decreases in the manufacturing cost per unit resulting from a change in the Company's product mix to the CD-Rom format from higher cost floppy disks. Software development and purchased software costs are capitalized once technological feasibility is achieved and are generally amortized over one to three year periods, commencing upon initial product release. For the three months ended December 31, 1997 and 1996, Quarterdeck did not capitalize any internal software development, judging that costs incurred after achieving technological feasibility were immaterial. For the three months ended December 31, 1997, amortization of previously capitalized software costs of $230,000 decreased 65.3% or $432,000 from amortization of capitalized software costs of $662,000 for the three months ended December 31, 1996 due to some previously capitalized costs having been fully amortized. There were no software development costs capitalized in the December 1997 quarter. OPERATING EXPENSES Operating expenses for the three months ended December 31, 1997 of $15,815,000 decreased 6.0% or $1,008,000, from total operating expenses of $16,823,000 for the three months ended December 31, 1996, but increased as a percent of net revenues to 76.7% from 69.0% for the three months ended December 31, 1997, and 1996 respectively. This dollar decline in total operating expenses resulted primarily from the Company's restructuring, consolidation, and downsizing activities which began late in fiscal 1996. The increase as a percent of net revenues was primarily due to the reduction in net revenues for the three months ended December 31, 1997 as compared to the three months ended December 31, 1996. Research and Development: Research and development expenses consist primarily of salaries, benefits and consulting fees to support product development, including product testing and documentation. For the three months ended December 31, 1997, research and development expenses of $4,681,000 increased 13.6% or $562,000, from research and development expenses of $4,119,000 for the three months ended December 31, 1996, while increasing as a percent of net revenues to 22.7% from 16.9% for the three months ended December 31, 1997 and 1996, respectively. The increase in research and development expenses was largely due to increased internal research and development headcount and to payments to third parties for contracted product development required to support the Company's expanded helpware product development efforts. Sales and Marketing: Sales and marketing expenses consist of salaries and commissions and related costs of sales and marketing and customer service personnel as well as advertising, trade show and promotional expenses. For the three months ended December 31, 1997, sales and marketing expenses of $8,378,000 increased 7.7% or $596,000, from sales and marketing expenses of $7,782,000 for the three months ended December 31, 1996 while increasing as a percent of net revenues to 40.6% from 31.9% for the three months ended December 31, 1997 and 1996, respectively. This increase was primarily due to an increase in consulting expenses, promotional activities and packaging occurring as a result of the new strategic product releases during the December 1997 quarter. Quarterdeck believes substantial sales and marketing efforts are essential to achieve revenue growth and to maintain and enhance the Company's competitive position. Accordingly, with the continued expansion of its product lines and international operations, as well as the introduction of new and updgraded products, Quarterdeck expects the expenses associated with these efforts to continue to constitute its most significant operating expense. There can be no assurance that these sales and marketing efforts will be successful in achieving their intended results. General and Administrative: General and administrative expenses consist of salaries and related costs of support departments, overhead and facilities. For the three months ended December 31, 1997, general and administrative expenses of $2,807,000 decreased 43.0% or $2,115,000, from general and administrative expenses of $4,922,000 for the three months ended December 31, 1996, while decreasing as a percent of net revenue to 13.6% from 20.2% for the three months ended December 31, 1997 and 1996, respectively. These declines were largely due to reductions in headcount and consultants. Additionally, facility related expenses declined significantly due to the restructuring efforts late in fiscal 1996 and in fiscal 1997, as the Company closed or consolidated seven office locations, sold the Columbia, Missouri building and subleased 52,000 square feet of the Company's current office space to other tenants. Restructuring Costs: For the three months ended December 31, 1997, the Company reversed $51,000 of restructuring costs no longer required. There were no restructuring costs for the three months ended December 31, 1996. 12 13 Other income: For the three months ended December 31, 1997, net other income of $497,000 primarily represents the gain realized upon the sale of the Columbia, Missouri building on December 30, 1997. Net other income for the three months ended December 31, 1996 was zero. Interest expense: For the three months ended December 31, 1997, net interest expense of $267,000 decreased 45.6% or $224,000 from net interest expense of $491,000 for the three months ended December 31, 1996, while decreasing as a percent of net revenues to 1.3% from 2.0% for the three months ended December 31, 1997 and 1996, respectively. Net interest expense decreased primarily due to a higher interest rate paid on the Company's previous revolving line of credit which was closed in fiscal 1997 and an increase in interest income relating to higher cash balances maintained in interest bearing accounts as compared to the three months ended December 31, 1996. Additionally, the Company reduced the outstanding bank debt by $6,824,000, as compared to the December 1996 quarter, resulting in a reduced interest expense. Income Taxes: A valuation allowance was recorded for income tax expense as it relates to foreign operations to offset 100% of the Company's $33,600,000 net deferred tax asset as of December 31, 1997. The net deferred tax asset of $33,600,000 (before applying the valuation allowance) is comprised of the estimated tax effect of expected future reversing temporary differences and tax net operating losses, relating in part to charges taken for book purposes that are not deductible for federal income tax purposes until the amounts are paid in the future. Management believes that due to recent financial results it is appropriate to record a full valuation allowance until such time as it becomes more likely than not that the Company will realize some or all of the benefit of the net deferred tax asset. Trends and Uncertainties: The computer software industry is subject to rapid technological change often evidenced by new competing products, improvements in existing products and improvements and/or upgrades to operating systems. The Company depends on the successful development or acquisition and resulting sales of new products, including upgrades of existing products, to replace revenues from products introduced in prior years that have begun to experience reduced revenues or have become obsolete. If the Company's leading products, such as CleanSweep and ProComm, become outdated or are rendered obsolete as a result of improvements in operating systems, hardware or technology, or due to other competitive factors and lose market share faster than those revenues are replaced by new products or if new products or existing product upgrades are not introduced in a timely manner or do not achieve anticipated revenues the Company's operating results could be materially adversely affected. Even with normal development cycles, the market environment can change so quickly that features in certain products can become outdated soon after market introduction. These events may occur in the future and may have an adverse effect on future revenues and operating results. The Company is focusing significant efforts on evolving its core utilities and communication product lines into a set of products designed to enhance user performance, simplify system management and reduce the ongoing cost of ownership for networked personal computing. As part of this effort, the Company is developing new products, such as RealHelp, which was released in December, 1997, and adapting its current technology into these products and has made and may make strategic acquisitions and divestitures. There is no assurance these efforts will be successful. Other significant risks associated with the Company's focus on this category of products include the timing of releases in relation to competitive products, uncertainties surrounding the rate and extent of development of this new market and one-time losses and charges that may result from divestitures of non-core assets. The Company is also devoting substantial efforts to the development of software products that are designed to operate on Microsoft's Windows 95 and Windows NT. Microsoft Corporation may incorporate advanced utilities or other features in Windows 95 and/or Windows NT and/or their successors that may decrease the demand for certain of the Company's products including those under development. Should the Company not be able to timely develop and successfully market products that offer perceived value to users of these operating systems beyond that which is offered in the base operating system, future revenues would be adversely affected. Although Quarterdeck believes that its product planning and development strategies and processes will result in successful development of technology innovations in the future, there can be no assurance that the Company's software development efforts will result in successful product introductions or increased revenues. Even 13 14 with normal development cycles, the market environment can change so quickly that features in certain products can become outdated before or soon after market introduction. Quarterdeck believes that to remain competitive it is necessary to continue to invest in software development efforts while at the same time considering the acquisition and/or license of complementary software products. The Company anticipates that spending for software development and purchased software will continue as a significant expense in the future. However, because of the inherent uncertainties of software development projects and the software market in general, there can be no assurance that software development efforts or additional purchased software will result in successful product introductions or increased sales. Future competitive product releases may cause disruptions in orders for the Company's products while users and the marketplace evaluate the competitive products. The extent of the disruption in orders and the impact on future orders of the Company's products will depend on various factors that are not fully known at this time, including the level of functionality, performance and features included in the final release of these competitive products and the price thereof and the market's evaluation of competitive products compared to the then current functionality, performance, features and price of the Company's products. Quarterdeck believes that substantial sales and marketing efforts are essential to achieve revenue growth and to maintain and enhance the Company's competitive position. Accordingly, Quarterdeck expects the expenses associated with these efforts to continue to constitute its most significant operating expense. There can be no assurance that these sales and marketing efforts will be successful in achieving their intended results. The Company's pattern of revenues and earnings were affected during prior periods 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. 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 of the product. Such order delays or cancellations can cause material fluctuations in revenues from one quarter to the next. Net revenues may be materially affected favorably or adversely by these effects. Like other manufacturers of package software products, the Company is exposed to the risk of product returns from distributors and reseller 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. The Company 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 customers' inventory. The Company estimates and maintains reserves for product returns. In addition to detailed historical return rates, the Company's estimate of return reserves takes into account future product upgrades and new releases, current market conditions and customer inventories, as well as any other known factors that could impact anticipated returns. There can be no assurance that actual returns will not exceed recorded allowances. Such excess returns can result in a material adverse effect on business, operating results and financial condition. Recruitment of personnel in the computer software industry is highly competitive. The Company's success depends to a significant extent upon the performance of its executive officers and other key personnel. The Company believes its ability to attract and retain highly qualified personnel has been adversely affected by the Company's recent restructurings and financial performance. As a result, there can be no assurance that the Company will be successful in attracting and retaining such personnel. The loss of the services of key individuals or the inability to attract and retain highly qualified personnel, including developers, could have a material adverse effect on the Company. The Company's Series C Preferred Stock is convertible into shares of Common Stock. The exact number of shares of Common Stock issuable upon conversion of all of the Series C Preferred Stock cannot currently be estimated but, generally, such issuances of Common Stock will vary inversely with the market price of the Common Stock. The holders of Common Stock may be materially diluted by conversion of the Series C 14 15 Preferred Stock which dilution will depend on, among other things, the future market price of the Common Stock and the decisions by holders of shares of Series C Preferred Stock as to when to convert such shares. Each share of Series C Preferred Stock is convertible into the number of shares of Common Stock equal to the quotient of (i) $1000.00 divided by (ii) the Conversion Price. Up until March 1, 1998, the Conversion Price will be $5.00. Thereafter, subject to the maximum Conversion Price specified below, the Conversion Price will be equal to 101% of the average of the three lowest daily trading prices for the 22 consecutive trading days immediately preceding the date of conversion (the "Conversion Date"). If the market price of the Common Stock was $1.00, $2.00 or $3.00, the aggregate number of shares of Common Stock issuable upon conversion of the Series C Preferred Stock would be approximately 31,600,000, 15,800,000 or 10,500,000 shares of Common Stock, respectively. The maximum Conversion Price is $5.125 until March 31, 1999, and thereafter will be the lesser of (i) $5.125, (ii) 101% of the average daily low trade prices of the Common Stock for all trading days in March 1999, (ii) 101% of the average daily low trade prices of the Common Stock for all trading days in September 1999 and (iii) 101% of the average daily low trade prices of the Common Stock for all trading days in March 2000. To the extent the market price per share of the Common Stock is lower or higher than the examples set forth above, the Company would issue more or less shares of Common Stock than reflected in such examples, and such difference could be material. The Company's stock has experienced wide fluctuations in its stock price and stock market volatility, whether related to the stock market generally or the Company specifically. Such fluctuations, if coincident in time with conversions of Series C Preferred Stock, will impact directly the number of shares of Common Stock issuable upon conversion thereof. The terms of the Series C Preferred Stock do not provide for any limit on the number of shares of Common Stock which the Company may be required to issue in respect thereof. During fiscal 1995 and fiscal 1996, the Company consummated a number of acquisitions which broadened the Company's product portfolio and sales distribution channels. At the end of fiscal 1996 and during fiscal 1997, the Company implemented a comprehensive, corporate-wide restructuring plan to focus the Company in the utilities and communications software categories. The Company's results for fiscal 1996 and fiscal 1997 were negatively impacted by the costs of integrations, acquisitions, including severance payments and asset devaluations. Implementation of these strategic transactions could result in charges and write-downs having a material adverse effect on the Company's financial results. In addition, 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. Acquisitions may result in the Company competing with companies and in markets where the Company had not previously competed. There may also be an adverse impact on the revenues of acquired companies due to the transition of products sales and marketing and research and development activities. The Company has made a preliminary assessment of its systems and operations to ascertain the cost impact to the Company regarding the year 2000 issue. Based on such assessment, the Company believes its computer servers, customer base systems and telephone systems are either year 2000 compliant or can be upgraded to be year 2000 compliant at minimal cost. In addition, the general accounting and operations systems are under evaluation and are expected to be year 2000 compliant at minimal cost. The Company believes that the implementation of these changes will not have a material impact on the Company's results of operations or liquidity. However, there can be no assurances that the Company will not experience unanticipated negative consequences and/or material cost associated with preparing its internal systems for the year 2000 caused by undetected errors or defects in its internal systems. RECENTLY ISSUED ACCOUNTING STANDARDS Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share," is effective for financial statements issued for periods ending after December 15, 1997. SFAS No. 128 replaces Accounting Principles Board Opinion ("APB") No. 18 and simplifies the computation of earnings per share ("EPS") by replacing the presentation of primary EPS with a presentation of basic EPS. Basic EPS includes no dilution and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution from securities that could share in the earnings of the Company, similar to fully diluted EPS under APB No. 15. The Statement requires dual presentation of basic and diluted EPS by entities with complex capital structures. The Company has adopted SFAS No. 128 for the financial statements for the quarter ended December 31, 1997. SFAS No. 130, "Reporting Comprehensive Income" is effective for fiscal years beginning after December 15, 1997. SFAS No. 130 established standards for the reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general-purpose financial statements. The Statement requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. The Company is evaluating the Statement's provisions to conclude how it will present comprehensive income in its financial statements, and has not yet determined the amounts to be disclosed. The Company will adopt SPAS No. 130 effective October 1, 1998. SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" is effective for financial statements for periods beginning after December 15, 1997. SFAS No. 131 establishes standards for the way that public business enterprises report financial and descriptive information about reportable operating segments in annual financial statements and interim financial reports issued to stockholders. SFAS No. 131 supersedes SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise," but retains the requirement 15 16 to report information about major customers. The Company does not believe they will be required to make any additional disclosures in its financial statements. The Company will adopt SFAS No. 131 effective October 1, 1998. The AICPA recently issued statement of Position 97-2, "Software Revenue Recognition," (SOP 97-2) effective for transactions entered into in fiscal years beginning after December 15, 1997. The Company anticipates adopting SOP 97-2 for transactions entered into on and after October 1, 1998. While the Company is still evaluating the impact of this statement, it believes that it is in substantial compliance with the provisions thereof. In addition, the impact of SOP 97-2 will depend on terms of future transactions. FACTORS AFFECTING QUARTERLY RESULTS AND STOCK PRICE The Company's future operating results and stock price could be subject to significant fluctuations and volatility. The Company's revenues and quarterly operating results may experience significant fluctuations and be unpredictable as the result of a number of factors including, among others, introduction of new or enhanced products by the Company or its competitors, rapid technological changes in the Company's markets, seasonality of revenues, changes in operating expenses and general economic conditions. The Company's net revenues and net income (loss) have fluctuated significantly from year to year and from quarter to quarter since the Company's initial public offering in June 1991. The Company also has experienced wide fluctuations in its stock price, which may be subject to significant fluctuations in the future over a short period of time. The trading price of the Common Stock increased from approximately $3.00 in January 1995 to a high of approximately $39.00 in December 1995 to a low of approximately $1.25 in December 1997. Fluctuations may be due to factors specific to the Company, to changes in analysts' estimates or to factors affecting the computer industry or the securities markets in general. In addition, since diluted net income per share is calculated using the treasury stock method (see Note 5 of the Notes to Consolidated Unaudited Condensed Financial Statements), increases in the price of Quarterdeck's stock can have an adverse impact on the calculation of diluted net income per share in that period as more outstanding instruments are included as common shares outstanding. This and other factors, including the existence or conversion of any outstanding convertible securities, any decline in revenues or quarterly operating results, or the failure to meet market expectations, could have an immediate and significant effect on the trading price of the Common Stock in any given period. 16 17 LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents increased $3,252,000 to $26,903,000 at December 31, 1997 from $23,651,000 at September 30, 1997. Working capital, which is the excess of current assets over current liabilities, at December 31, 1997 was $17,863,000 as compared to $6,917,000 at September 30, 1997 representing an increase in working capital of $10,946,000. Operating activities: Cash used in operating activities of $2,596,000 was primarily due to a net reduction in assets and liabilities of $3,655,000 which resulted from a net reduction in other current assets of $1,879,000 and other reductions of $201,000, offset by net increases in accounts receivable and inventories and by net reductions in payables, accrued liabilities, and accrued acquisition, restructuring and other charges of $5,735,000. Additionally, $1,059,000 of cash was provided by the Company's net income of $316,000 and non cash charges of $743,000. The reduction in accounts payable and accrued liabilities was due to payments made to trade vendors and an overall decline in the level of the Company's operating expenses as a result of the execution of the restructuring plans. The reduction in accrued acquisition, restructuring and other charges was due to payments made during the execution of the fiscal 1996 and 1997 restructuring plans. The increase in accounts receivable was due to sales of newly released products for which invoices were not due for payment prior to the end of the quarter. The reduction in other current assets was largely due to cash receipts resulting from both the Series C preferred stock financing and the divestment of the Company's investment Lernout and Hauspie during fiscal 1997. Investing activities: Cash provided by investing activities of $7,008,000 was largely due the sale of the Columbia, Missouri building on December 30, 1997 which resulted in an increase of $7,700,000, which was offset by $692,000 for capital expenditures. Financing activities: Cash used in financing activities of $1,160,000 was primarily related to the principal repayment relating to the Columbia Missouri construction loan as a result of the sale of the building and payments for long term financing of $3,979,000 which was partially offset by $2,819,000 of net proceeds from the sale of Series C preferred stock and issuance of common stock. On March 28, 1996, the Company issued $25,000,000 principal amount of 6% Convertible Senior Subordinated Notes, due 2001 ("Notes"), to an institutional investor in a private placement pursuant to the terms of a Note Agreement, dated March 1, 1996. In April 1997, the Company established an asset based line of credit with Greyrock Business Credit, a division of NationsBank. The Company repaid and terminated its existing line with Bank of America with proceeds from the new line. Maximum borrowings under the new line are the lesser of $12,000,000 and the sum of 85% of eligible accounts receivable plus the value of inventory to a maximum of $2,000,000. The line can be used for general corporate purposes, including investments and acquisitions, and bears interest at prime plus 2%. The line is secured by substantially all assets of Quarterdeck. The Company is obligated to pay a minimum interest charge of $10,000 per month and comply with certain other non-financial covenants and restrictions. At December 31, 1997, the Company had $1,625,000 outstanding under the line and the ability to borrow up to a maximum amount of $10,375,000. The current term of the agreement matures on March 31, 1998. This agreement is automatically renewable for successive additional one year terms unless advance notification is provided by either party prior to the next maturity date. The Company expects that the agreement will be extended for another one year term. On August 6, 1996, the Company's Datastorm subsidiary secured construction financing from a bank of up to $5,000,000 with an interest rate equal to the bank's commercial base rate, currently prime plus 2%, secured by the newly constructed Columbia, Missouri building. The Columbia, Missouri building was sold on December 30, 1997 and the remaining balance of $3,500,000 was repaid in full on December 30, 1997. In September 1997 and between October 1997 and November 4, 1997, the Company issued 26,025 and 2,975 shares, respectively of Series C Convertible Preferred Stock, stated value $1000 per share (the "Series C Preferred Stock"), of the Company for $24,594,000 and $2,782,000, net of offering fees, respectively. On December 19, 1997, the Company reached an agreement in principle to settle the shareholder litigation for $12,500,000. The Company will be required to pay approximately $1,905,000 as part of this settlement. The Company's directors' and officers' insurance carrier will contribute $10,595,000 to the settlement. 17 18 The Company believes existing working capital and borrowing capacity under the line of credit will be sufficient to fund the Company's operations for fiscal 1998. Nevertheless, the Company may explore various financing alternatives in order to finance an expansion of the business of the Company and help provide additional working capital for operations. There is no assurance that additional financing will be available, or if available, will be available on acceptable terms. Any decision or ability to obtain financing through debt or equity investment will depend on various factors, including, among others, revenues, financial market conditions, strategic acquisition and investment opportunities, and developments in the Company's markets. The sale of additional equity securities or future conversion of any convertible debt would result in additional dilution to the Company's stockholders. The Company conducts business in various foreign currencies and is therefore subject to the transaction exposures that arise from foreign exchange rate movements between the dates that foreign currency transactions are recorded and the date that they are consummated. The Company is also subject to certain exposures arising from the translation and consolidation of the financial results of its foreign subsidiaries. There can be no assurance that actions taken to manage such exposures will continue to be successful or that future changes in currency exchange rates will not have a material impact on the Company's future operating results. The Company does not hedge either its translation risk or its economic risk. 18 19 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Federal and state shareholder actions were brought against the Company and one former and one current officer of the Company alleging among other things, violations of certain provisions of California and Federal securities laws relating to statements made about Quarterdeck. On December 19, 1997, the Company reached an agreement in principle to settle such actions for a total amount of $12,500,000, of which the Company will be required to pay approximately $1,905,000, with the balance of $10,595,000 to be paid under the Company's directors' and officers' insurance policy. The settlement is subject to, among other things, court approval. The Company has recorded a charge of $1,905,000 for its fiscal year ended September 30, 1997. 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 increase Random Access Memory significantly 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. Quarterdeck has filed counterclaims and intends to defend the case vigorously and to oppose any effort to certify the claims for class resolution. No assurances can be given that the ultimate disposition of this case will not have a material adverse effect on the Company's results of operations, financial condition or liquidity. In October 1997, a complaint was filed in the United States District Court for the District of Utah on behalf of PowerQuest Corporation against the Company. The complaint alleges that the Company's partitioning software (Partition-It) violates a patent held by PowerQuest. In January 1998, PowerQuest obtained a second patent relating to partitioning and is now seeking to amend its complaint to allege infringement of that patent as well. The plaintiff seeks an injunction against distribution of Partition-It and damages. Although the Company believes the patents are invalid, there can be no assurance as to the actual outcome of this matter. The ultimate disposition of this matter could have a material adverse effect on the Company. The Company is a defendant in various other pending claims and lawsuits. Although there can be no assurances, management believes that the disposition of such matters will not have a material adverse impact on the results of operations or financial position of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the Annual Meeting of Stockholders held on February 5, 1998, five proposals were submitted to the Company's stockholders. The Company's nominees for directors were elected and each of the other proposals were approved. A brief description of those proposals and the results of the voting are as follows: Proposal One - Election of two directors to serve for a three year term
Nominee Votes For Votes Withheld ------- --------- -------------- Howard L. Morgan 33,880,040 2,471,035 Nominee Votes For Votes Withheld ------- --------- -------------- Curtis A. Hessler 34,055,689 2,295,386
Proposal Two - Approval for the issuance of shares of Common Stock representing 20% or more of the Common Stock outstanding, which are issuable upon conversion of shares of the Company's Series C Convertible Preferred Stock issued in a private placement.
Voting Results -------------- For 14,155,473 Against 1,924,740 Abstain 281,129 Broker Non-Votes 19,989,733
19 20 Proposal Three - Approval of an amendment to the Company's Certificate of Incorporation to increase the number of shares of Common Stock authorized for issuance by the Company from 70,000,000 to 100,000,000.
Voting Results -------------- For 33,215,089 Against 2,883,941 Abstain 252,044 Broker Non-Votes 1
Proposal Four - Approval of an amendment to the Company's 1990 Stock Plan to increase the number of shares from 7,500,000 to 9,500,000.
Voting Results -------------- For 30,161,098 Against 5,444,275 Abstain 305,531 Broker Non-Votes 440,171
Proposal Five - Ratification of appointment of KPMG Peat Marwick LLP as independent auditors of the Company for the fiscal year ending September 30, 1998.
Voting Results -------------- For 35,764,947 Against 310,423 Abstain 275,705 Broker Non-Votes --
Item 5. Other Information The following table sets forth the computation of basic and diluted net income per share for the fiscal years ended September 30, 1995 through September 30, 1997. Additionally, the basic and diluted net income per share is disclosed for the years ended September 30, 1993 and 1994.
1997 1996 1995 1994 1993 -------- -------- -------- -------- -------- Numerator: Net income, net income available to common stockholders and net income available to common stockholders after required conversion: $(18,398) $(74,959) $ 11,252 Denominator: Shares used for basic net income per share calculation - weighted average shares outstanding 43,168 34,894 35,055 Effect of dilutive securities: Stock options and warrants 1,444 Shares used for diluted net ---------------------------- income per share calculation 43,168 34,894 36,499 ============================ Basic net income per share $ (0.43) $ (2.15) $ 0.32 $ (0.15) $ 0.32 Diluted net income per share $ (0.43) $ (2.15) $ 0.31 $ (0.15) $ 0.32
Options to purchase 6,091,000 shares at a weighted average exercise price of $3.89 and 6,048,000 shares at a weighted average exercise price of $9.12 and 1,988,000 shares were outstanding as of the fiscal years ended September 30, 1997, 1996 and 1995, respectively, but were not included in the computation of diluted net income per share because the options exercise price was greater than the average market price of the common shares and therefore, the effect would be anti-dilutive. Warrants to purchase 904,000 shares and 1,704,000 shares at a weighted average exercise price of $7.44 were outstanding as of the fiscal years ended September 30, 1997 and 1996 respectively, but were not included in the computation of diluted net income per share because the warrants' exercise price was greater than the average market price of the common shares and therefore, the effect would be anti-dilutive. Series B Convertible Preferred Stock in the amount of $20,000,000 was outstanding as of September 30, 1996 and was convertible into common stock on or after November 15, 1996 at a conversion price to be determined using a specified conversion formula which is based upon the future market price of the Company's common stock. During fiscal 1997, $10,000,000 of the Series B Preferred Stock was converted into 3,762,000 shares of common stock at a weighted average conversion price of $2.66. The Company repurchased all of the remaining oustanding shares and 800,000 of the related outstanding warrants of Series B Preferred Stock for $10,000,000 on September 30, 1997. Shares issuable upon conversion of Series B Convertible Preferred Stock were not included in the computation of diluted net income per share for 1996 because the effect would be anti-dilutive. Warrants to purchase 25,000 shares at a weighted average exercise price of $7.20 were outstanding as of the fiscal year ended September 30, 1997 but were not included in the computation of diluted net income per share because the warrants' exercise price was greater than the average market price of the common shares and therefore, the effect would be anti-dilutive. Series C Convertible Preferred Stock in the amount of $24,594,000, net of placement fees, was outstanding as of September 30, 1997. Each share of Series C Preferred Stock is convertible into the number of shares of Common Stock equal to the quotient of (i) $1000.00 divided by (ii) the Conversion Price. Until March 1, 1998, the Conversion Price will be $5.00. Thereafter, subject to the maximum Conversion Price specified below, the Conversion Price will be equal to 101% of the average of the three lowest daily trading prices for the 22 consecutive days immediately preceding the date of conversion (the "Conversion Date"). The maximum Conversion Price is $5.125 until March 31, 1999, and thereafter will be the lesser of (i) $5.125, (ii) 101% of the average daily low trade prices of the Common Stock for all trading days in March 1999, (iii) 101% of the average daily low trade prices of the Common Stock for all trading days in September 1999 and (iv) 101% of the average daily low trade prices of the Common Stock for all trading days in March 2000. These securities were not included in the computation of diluted net income per share because the effect would be anti-dilutive. Approximately 1,180,000 shares issuable upon the conversion of convertible notes were not included as the effect would be anti-dilutive. The Company had $25,000,000 of convertible notes outstanding at September 30, 1997 and 1996. 21 21 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 3.1 Certificate of Amendment of Certificate of Incorporation of the Company. 3.2 Certificate of Amendment of Certificate of Incorporation of the Company. 10.1 Contract For Sale of Real Estate between Datastorm Technologies, Inc., a subsidiary of the Company, and The Curators of the University of Missouri, dated December 30, 1997. 10.2 Office Lease between Datastorm Technologies, Inc., a subsidiary of the Company, and The Curators of the University of Missouri, dated December 30, 1997. 10.3 Outbound Telemarketing Exclusive Services Agreement between the Company and The Sutherland Group, Ltd., dated as of January 13, 1998.
(b) Reports on Form 8-K A Form 8-K with respect to the issuance of securities in a private placement pursuant to Regulation D was filed with the Securities and Exchange Commission on October 3, 1997. A Form 8-K with respect to the repurchase and conversion of securities that were issued pursuant to Regulation S was filed with the Securities and Exchange Commission on October 7, 1997. 22 22 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. QUARTERDECK CORPORATION (Registrant) Date: February 12, 1998 /s/ CURTIS A. HESSLER -------------------------------------- Curtis A. Hessler President and Chief Executive Officer Date: February 12, 1998 /s/ FRANK GREICO -------------------------------------- Frank Greico Sr. Vice President and Chief Financial Officer 23 EX-3.1 2 EXHIBIT 3.1 1 EXHIBIT 3.1 CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF QUARTERDECK CORPORATION QUARTERDECK CORPORATION, a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware: DOES HEREBY CERTIFY: FIRST: That at a meeting of the Board of Directors of QUARTERDECK CORPORATION, resolutions were duly adopted setting forth a proposed amendment of the Certificate of Incorporation of said corporation, declaring said amendment to be advisable and calling for consent of the stockholders at a meeting of said corporation for consideration thereof. SECOND: That pursuant to such resolution, the first paragraph of Article IV of said corporation's Certificate of Incorporation would be amended to read as follows: "The total authorized number of shares of the Corporation shall be 72,000,000 shares, consisting of 70,000,000 shares designated as Common Stock, $.001 par value, and 2,000,000 shares designated as Preferred Stock, $.001 par value." THIRD: That thereafter, pursuant to resolution of its Board of Directors, the stockholders of said corporation considered and adopted said amendment of Article IV at a duly constituted meeting thereof, at which meeting the necessary number of shares as required by statute were voted in favor of the amendment. FOURTH: That said amendment was duly adopted in accordance with the provisions of Section 242(b) of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, said QUARTERDECK CORPORATION has caused this certificate to be signed by Curtis A. Hessler, its President and Chief Executive Officer, and Bradley D. Schwartz, its Secretary, this 12th day of February, 1997. By: /s/ CURTIS A. HESSLER ----------------------------------- Curtis A. Hessler, President and Chief Executive Officer Attest: /s/ BRADLEY D. SCHWARTZ --------------------------- Bradley D. Schwartz, Secretary EX-3.2 3 EXHIBIT 3.2 1 EXHIBIT 3.2 CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF QUARTERDECK CORPORATION QUARTERDECK CORPORATION, a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware: DOES HEREBY CERTIFY: FIRST: That at a meeting of the Board of Directors of QUARTERDECK CORPORATION, resolutions were duly adopted setting forth a proposed amendment of the Certificate of Incorporation of said corporation, declaring said amendment to be advisable and calling for consent of the stockholders at a meeting of said corporation for consideration thereof. SECOND: That pursuant to such resolution, the first paragraph of Article IV of said corporation's Certificate of Incorporation would be amended to read as follows: "The total authorized number of shares of the Corporation shall be 102,000,000 shares, consisting of 100,000,000 shares designated as Common Stock, $.001 par value, and 2,000,000 shares designated as Preferred Stock, $.001 par value." THIRD: That thereafter, pursuant to resolution of its Board of Directors, the stockholders of said corporation considered and adopted said amendment of Article IV at a duly constituted meeting thereof, at which meeting the necessary number of shares as required by statute were voted in favor of the amendment. FOURTH: That said amendment was duly adopted in accordance with the provisions of Section 242(b) of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, said QUARTERDECK CORPORATION has caused this certificate to be signed by Curtis Hessler, its President, and attested by Ron Ben-Yehuda, its Secretary, this 10th day of February, 1998. By: /s/ CURTIS HESSLER ------------------------------------ Curtis Hessler, President Attest: /s/ RON BEN-YEHUDA --------------------------- Ron Ben-Yehuda, Secretary EX-10.1 4 EXHIBIT 10.1 1 EXHIBIT 10.1 CONTRACT FOR SALE OF REAL ESTATE THIS AGREEMENT, entered into this _____ day of December, 1997, by and between DATASTORM TECHNOLOGIES, INC., a Missouri corporation (hereinafter "Seller") and THE CURATORS OF THE UNIVERSITY OF MISSOURI, a public corporation of the State of Missouri (hereinafter "Buyer"). WITNESSETH: 1. Purchase and Sale. The Seller agrees to sell and the Buyer agrees to buy, upon the terms and conditions herein set out, the real estate situated at 2401 LeMone Industrial Boulevard, Boone County, Missouri, including all buildings (the "Premises"), fixtures, improvements, easements, access rights, and appurtenances thereto, as more particularly described in Exhibit A hereto which is incorporated herein by reference (collectively the "Real Property"), together with the Personal Property described on Exhibit B hereto which is incorporated herein by reference (collectively the "Personal Property"). The Real Property and the Personal Property are collectively referred to as the "Property." 2. Contracts and Leases. There are no leases or contracts affecting the Property that shall be effective as of Closing. 3. Purchase Price. The price to be paid by the Buyer for the Property at Closing is SEVEN MILLION SEVEN HUNDRED THOUSAND AND NO/100 DOLLARS ($7,700,000.00). The Purchase Price shall be allocated between the Real Property and the Personal Property as follows: $ 7,466,000 to the Real Property; and $ 234,000 to the Personal Property. The Purchase Price shall be paid to Seller at Closing in immediately available funds by wire transfer. 4. Title. Seller shall convey title to the Real Property by Special Warranty Deed free and clear of all encumbrances, but subject to easements and restrictions of record. Seller shall convey title to the Personal Property by Bill of Sale AS IS, WHERE IS, and without warranty, except in such cases where an unexpired, assignable warranty was given to Seller when it acquired such Personal Property, in which cases Seller shall assign such Personal Property warranty to Buyer. 5. Conditions Precedent to Buyer's Obligations. For a period concluding on December 22, 1997, 11:00 a.m. (the "Due Diligence Period"), Buyer shall proceed diligently to inspect the Property, review Seller's records, perform title searches, secure purchase money, and perform such other actions in anticipation of Closing as Buyer may deem necessary. Buyer shall have the right to terminate this Agreement by written notice to Seller sent within the Due Diligence Period if Buyer determines, in its sole and absolute discretion, that it is unable or 2 unwilling to proceed with the purchase of the Property. Seller shall cooperate with Buyer's Due Diligence by providing access to the Real Property at reasonable times and by permitting Buyer to review the on-premises records pertaining to the Property. In addition to satisfactory completion of Buyer's Due Diligence, the obligations of Buyer hereunder are subject to the fulfillment or satisfaction on or prior to the Closing of the following conditions: a. The representations, warranties and agreements made by Seller in this Agreement shall be true and accurate on the date of Closing with the effect as though such representations, warranties, and agreements had been made or given on or as of such date. b. All proceedings to be taken in connection with the transactions contemplated by the Agreement, and all documents incidental thereto, shall be satisfactory in form and substance to Buyer's counsel. c. The undersigned officer of the University of Missouri does not have authority to bind The Curators of the University of Missouri with respect to the obligations imposed upon the Buyer pursuant to the Agreement without the express consent of the Board of Curators of the University of Missouri. Accordingly, this Agreement shall not be binding on Buyer until formally approved by the Board of Curators of the University of Missouri. If such written consent is not delivered to Seller prior to the end of the Due Diligence Period, Buyer and Seller shall be deemed released automatically from their agreement for sale of the Property. 6. Conditions Precedent to the Obligations of Seller. The obligations of Seller hereunder are subject to the fulfillment and satisfaction on or at the Closing of the following conditions: a. Buyer's representations and warranties contained in this Agreement shall be true at and as of the Closing, as though such representations and warranties were made at and as of the Closing. b. Buyer shall have performed and complied with Buyer's obligations under this Agreement which are to be performed and complied with by Buyer prior or as of the Closing. c. Receipt, on or before 11:00 a.m. on December 22, 1997, of a duly executed resolution approved by the Curators of the University of Missouri approving this Agreement and Buyer's purchase of the Property in accordance with the terms hereof. d. Buyer and Seller shall enter into a lease of a portion of the Property from Buyer to Seller in substantially the form that is attached hereto as Exhibit C. 7. Title Insurance. Buyer may, at its expense, obtain a commitment for an owner's policy of title insurance with respect to the Real Property. Prior to the conclusion of the 2 3 Due Diligence Period, Buyer may submit to Seller written notice setting forth its objections (if any) to anything appearing in the title commitment. Within five (5) days after receipt of such written objections, Seller shall respond to Buyer in writing. If such response indicates that Seller is unable or unwilling to cure any such objections, Buyer shall have the right to terminate this Agreement by tendering written notice of its intention to do so to Seller within five (5) days after receipt of Seller's response. All title exceptions accepted by Buyer shall be deemed "Permitted Exceptions". 8. Closing. a. The closing of this transaction shall take place at Boone-Central Title Co., 601 East Broadway, Columbia, Missouri on or before December 31, 1997 at 11:00 a.m. or at such other date, time, and place as may mutually be agreed upon by the parties. b. At Closing, Seller and, where appropriate, Buyer shall execute and deliver the following documents: (i) Special Warranty Deed, in substantially the form that is attached hereto as Exhibit D, transferring and conveying to Buyer marketable, fee simple title to the Real Property, free and clear of all encumbrances, but subject to easements and restrictions of record. (ii) Bill of Sale, in substantially the form that is attached hereto as Exhibit E, transferring and conveying to Buyer good title to the Personal Property, as is where is, but free and clear of liens and security interests. (iii) Assignment of Warranties, in substantially the form that is attached hereto as Exhibit F, transferring and assigning to Buyer all right, title, claim and interest of Seller in and to warranties pertaining to the construction of the Premises on the Real Property and equipment installed therein, which have not by their terms expired. (iv) Such affidavits, other evidence of title, corporate articles, by-laws, certificates of good standing, resolutions, consents and the like from Seller and Buyer as may be required by the Title Company, on or in forms customarily used by the Title Company, in order to issue the owner's policy of title insurance as specified in Section 7 hereof. (v) A lease of the upper level (third of three) of the Premises, including a portion of the current MIS area in the middle level (second of three) of the Premises from Buyer to Seller in substantially the form of Exhibit C hereto, as contemplated by Section 6.d. hereof. 3 4 (vi) All Agreements (executed originals when available, otherwise copies) to be assigned by Seller to Buyer pursuant hereto. (vii) Copies of the most recent property tax bills, and copies of the most recent utility bills, together with evidence of payment thereof. (viii) Copies of building permits for the building and improvements comprising the Real Property, a fire marshall letter (if available), and operating permits for elevator service (if any) to the extent in the possession or under the control of Seller. c. At Closing Buyer shall deliver to Seller the Purchase Price set forth in Paragraph 3 hereof. d. Seller shall deliver possession of the Property and be prepared for Buyer's occupancy of the Premises promptly following Closing. 9. Warranties of Buyer. Buyer makes the following warranties and representations to Seller, each of which is true as of this date and shall be true as of Closing: a. Buyer is a public corporation duly organized and existing by virtue of the laws of the State of Missouri; b. Buyer has the power and authority to enter into and perform this Agreement and to carry out the transactions contemplated hereby; c. Following approval of the Board of Curators pursuant to Section 5.c. hereof, this Agreement shall constitute a valid and binding Agreement of Buyer enforceable in accordance with its terms; and d. Neither the execution or delivery of this Agreement nor the consummation of the transactions contemplated hereby violates or conflicts with any rule or regulation of The Curators of the University of Missouri or other laws, rules or regulations affecting Buyer. 10. Warranties of Seller. Seller makes the following warranties and representations to Buyer, each of which is true as of this date and shall be true as of Closing: a. Seller is a corporation duly organized and existing by virtue of the laws of the State of Missouri.; b. Following approval of the Board of Curators pursuant to Section 5.c. hereof, this Agreement shall constitute a valid and binding Agreement of Seller enforceable in accordance with its terms; and c. Seller has the power and authority to enter into this Agreement and to carry out the transactions contemplated hereby. 4 5 11. Real Estate Commission. Seller and Buyer represent to each other that they have dealt with no broker, agent or finder in connection with the sale of the Property other than CB Commercial Real Estate Group, Inc., who shall earn a commission at Closing to be paid by Seller from the Purchase Price. Each party shall defend, indemnify and hold harmless the other from and against any and all claims, demands, causes of action, costs, expenses or other liabilities (including attorneys' fees and court costs whether or not suit is instituted) incurred by the Indemnified Party arising from or pertaining to any brokerage commissions, fees, costs or other expenses that may be due or claimed by any broker, agent or finder with whom the Indemnifying Party has dealt in connection with the transactions contemplated hereunder, other than as disclosed above. 12. Insurance. Seller hereby covenants to keep all improvements located on the Real Property and all Personal Property located thereon insured on an all-risk, replacement cost basis from the date hereof until Closing. 13. Risk of Loss Until Date of Closing on Seller. All improvements now situated on the Real Property shall be delivered to Buyer at the time of Closing in as good condition as they are as of the date of this Agreement, ordinary wear and tear excepted. Provided, however, if prior to Closing any of the improvements on the Real Property are materially damaged by fire or other casualty, then Buyer shall have the option of accepting all of the insurance proceeds therefor, and proceeding with its performance under this Agreement, or declaring this Agreement to be null and void, in which case the parties shall be released from their respective obligations under this Agreement. 14. Maintenance and Alterations. Seller shall make no material alterations to the Premises without Buyer's prior written consent (not to be unreasonably withheld) nor shall Seller permit any Tenant to make alterations to the Premises without Buyer's prior written consent (not to be unreasonably withheld). Buyer may inspect the Premises not less than two days prior to Closing during normal business hours, upon reasonable notice to Seller, in order to ensure that Seller has maintained the improvements as required in Sections 13 and 14 hereof. If upon such inspection, Buyer in good faith determines that Seller has failed materially in its obligation to maintain the Premises, Buyer may make written demand on Seller that Seller make necessary repairs to fulfill its maintenance obligations. In order to be effective, such notice must be tendered to Seller not less than 48 hours prior to Closing. If within 24 hours following receipt of such notice, Seller fails to commence the necessary repairs, Buyer may enter upon the Premises, make the necessary repairs, and deduct the actual cost of such repairs (without mark up by Buyer) from the Purchase Price at Closing. 15. Removal of Equipment and Other Personal Property. Seller agrees to remove all of Seller's equipment and other items of Personal Property (other than the Personal Property described on Exhibit B hereto) from that portion of the Premises that is not leased to Seller pursuant to Section 6.d of this Agreement within 45 days following Closing. Seller will not remove any fixtures, including but not limited to light fixtures, from the Premises. 5 6 16. Survival. All obligations of Seller and Buyer which by their nature involve performance in any way after the Closing Date, or which cannot be ascertained to have been fully performed until after the Closing Date, shall survive the Closing Date. 17. Agreement Binding Upon Successors and Assigns. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto, their successors and assigns. 18. Headings. The headings in this instrument have been inserted for convenience of reference only and shall in no way modify or restrict any provision hereof, or be used to construe any of such provisions. 19. Modifications in Writing. This Agreement may not be changed or modified, either in whole or in part, except by initialing changes herein or by an agreement in writing signed by all parties hereto. 20. Prorations and Closing Costs. If unpaid as of Closing, real estate taxes for the 1997 tax year shall be paid at Closing by Seller from the Purchase Price. Costs of all utilities, including electricity, water, sewer and gas shall be borne by Seller prior to the Date of Closing and commencing as of the Date of Closing, shall be borne by Buyer. The parties shall arrange for all utility meters to be read and all accounts transferred as of midnight of the day before the Date of Closing. All expenses of the Property shall be prorated and adjusted as of midnight of the day before the Date of Closing. Buyer and Seller shall pay their own respective attorney's fees, costs and expenses. Seller shall pay for preparation of the Deed and Bill of Sale. All other costs and expenses incurred in connection with this transaction, including but not limited to, costs, expenses and fees with respect to examination of title and the obtaining of title insurance, surveys and inspections shall be paid by Buyer. 21. Notices. All notices, requests, demands, and other communications hereunder shall be deemed to have been duly given if the same shall be in writing and shall be personally delivered or sent via overnight courier or by telecopy to the address(es) or telecopy number(s) set forth below: a. If to Seller: Deirdre F. Baird Director of Real Estate and Facilities Management Quarterdeck Corporation 13160 Mindanao Way Marina del Rey, California 90292-9705 (310-309-4218) Telecopy 6 7 with a copy to: John S. Meyer, Jr., Esq. Bryan Cave LLP One Metropolitan Square 211 North Broadway, Suite 3600 St. Louis, Missouri 63102 (314-259-2020) Telecopy b. If to Buyer: Dennis P. Cesari Assistant Vice President for Management Services 225 University Hall Columbia, Missouri 65211 (573-884-4745) Telecopy with a copy to: Office of the General Counsel of the University of Missouri 227 University Hall Columbia, Missouri 65211 (573-882-0050) Telecopy 22. Entire Agreement. This Agreement, together with the Exhibits attached hereto, which are hereby incorporated by reference, constitutes the entire undertaking between the parties hereto, and supersedes any and all prior agreements, arrangements, and understandings between the parties with respect to the subject matter hereof. 23. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall constitute an original. IN WITNESS WHEREOF, said parties have executed this Agreement as of the day and year first above written. SELLER: BUYER: DATASTORM TECHNOLOGIES, INC. THE CURATORS OF THE UNIVERSITY OF MISSOURI By: /s/ Curtis A. Hessler By: /s/ Dennis P. Cesari -------------------------------- -------------------------------- Name: Name: Title: Title: 7 EX-10.2 5 EXHIBIT 10.2 1 EXHIBIT 10.2 OFFICE LEASE by and between THE CURATORS OF THE UNIVERSITY OF MISSOURI as LANDLORD and DATASTORM TECHNOLOGIES, INC. as TENANT 2401 LeMone Industrial Boulevard City of Columbia County of Boone State of Missouri 2 LEASE THIS LEASE is made and entered into as of the Effective Date described in Section 2.1 below by and between THE CURATORS OF THE UNIVERSITY OF MISSOURI, a public corporation of the State of Missouri ("Landlord") and DATASTORM TECHNOLOGIES, INC., a Missouri corporation ("Tenant"). 1. PREMISES: Landlord leases to Tenant, upon the terms and conditions herein stated, the following described premises, situated in the City of Columbia, Boone County, State of Missouri: the portions of the building located at 2401 LeMone Industrial Boulevard (the "Building") containing approximately 54,491 rentable square feet, as described on Exhibit A hereto, including all fixtures located therein, no less than 150 parking spaces, plus the three parking spaces at the entrance to the Building presently designated as reserved and the three spaces adjacent thereto, all of which shall be designated as "Reserved", (collectively, the "Reserved Spaces") (at no extra charge), all access ways, common areas and other common amenities (collectively, the "Improvements") now located on the real property (as more particularly described in Exhibit B hereto) upon which the aforesaid building is situated (the "Land"), and all of Landlord's rights, privileges, easements and appurtenances in, over and upon adjoining and adjacent public and private land, highways, roads and streets reasonably required for parking, utility service and ingress and egress to and from the Premises, including the right of ingress and egress thereto and therefrom at all times (collectively the "Appurtenances"). The Land, Improvements and Appurtenances are hereinafter collectively called the "Premises." 2. TERM; HOLDOVER AND OPTIONS: 2.1. Term. Subject to the terms hereof, this Lease shall be effective as a contract between the parties as of the last date on which it has been executed by both Landlord and Tenant on the signature page hereof (the "Effective Date"). The term of this Lease (the "Term") shall begin upon closing of Landlord's purchase of the Premises from Tenant (the "Rent Commencement Date"), and shall expire at 11:59 p.m. on March 31, 1999, subject to the provisions of Section 2.2 and 2.3 below. 2.2. Holdover. It is agreed and understood that any holding over by Tenant of the Premises after the expiration of this Lease shall operate and be construed as a tenancy from month to month at a rental amount equal to the last monthly rental amount paid under the terms of this Lease and shall be subject to all other terms and conditions of this Lease. Such tenancy may be terminated by either party upon the giving of 30 days notice in writing to the other party. 2.3. Renewal Options. Landlord hereby grants to Tenant the right, privilege and option to extend the Term for two (2) successive periods of two (2) years each under the same terms and conditions of this Lease in effect at the expiration of the initial Term or extended Term hereof, except that the rent to be paid during any extension of the Term shall be the amount(s) indicated in Section 3.2 below and the three (3) upper level executive suites (as described in Exhibit A hereto) may, at Tenant's option, be excluded from the Premises during the extended Terms. For the purpose of calculating rent due during the extended Terms, the parties agree that the aforesaid executive suites comprise 13,500 square feet of rentable space. Tenant, if it elects to exercise any 3 extension option, shall do so by giving Landlord written notice at least ninety (90) days prior to the expiration of the initial Term or pending extended Term, as the case may be. 2.4. Early Termination Rights. Tenant and Landlord shall be entitled to terminate this Lease prior to the stated expiration hereof in the following manner: 2.4.1. At any time during the second lease year, Tenant may terminate this Lease upon sixty (60) days advance written notice to Landlord and the payment within 30 days of such notice of a sum equal to three (3) months rent at the then existing monthly rental rate. Likewise, at any time during the second lease year, Landlord may terminate this Lease upon sixty (60) days advance written notice to Tenant. Such termination shall be effective no sooner than the end of the first calendar month not less than sixty (60) days after receipt of notice given by the terminating party. 2.4.2. At any time during the third lease year and each year thereafter, Tenant may terminate this Lease upon sixty (60) days advance written notice to Landlord and the payment within 30 days of such notice of a sum equal to two (2) months rent at the then existing monthly rental rate. Likewise, at any time during the third lease year and each year thereafter, Landlord may terminate this Lease upon sixty (60) days advance written notice to Tenant. Such termination shall be effective no sooner than the end of the first calendar month not less than sixty (60) days after receipt of notice given by the terminating party. 3. RENT: 3.1. Base Term Rent. Tenant shall pay Landlord as annual rent for the Premises during the initial Term, except as herein provided, the sum of $10 per rentable square foot, which the parties agree shall during the initial Term comprise 54,491 square feet, payable in equal monthly installments of Forty-Five Thousand Three Hundred Thirty-Three Dollars ($45,333) due on or before the first day of each month, at the address set forth herein for Landlord. 3.2. Renewal Term Rent. Rent for the extended Term, if any, shall be as follows: $10 per rentable square foot per annum, adjusted by the increase (if any) in the Consumer Price Index for all Urban Consumers occurring between the Rent Commencement Date and the expiration of the preceding Term. 3.3. Fractional Month. If the Rent Commencement Date is not the first day of a calendar month, the first month's rent shall be prorated for such fractional month and Tenant shall pay rent in advance for the fractional month on or prior to the Rent Commencement Date and thereafter rent (and all other payment obligations of Tenant under this Lease which are required to be paid in monthly installments) shall be paid in advance on the first day of each and every calendar month of the Term. 2 4 4. COVENANT OF QUIET ENJOYMENT AND LANDLORD WARRANTIES: 4.1. Quiet Enjoyment. Landlord covenants with Tenant to keep Tenant in quiet possession of the Premises during the Term of this Lease and any extensions hereof, provided Tenant is not in default under this Lease. 4.2. Landlord Warranties. Landlord hereby represents and warrants to Tenant as follows: (i) Landlord has full right and lawful authority to lease the Premises to Tenant; (ii) upon Landlord's approval of its purchase of the Premises no joinder or approval of another person is required with respect to Landlord's right and authority to enter into this Lease; and (iii) any approvals required by a lender or mortgagee have been obtained. 5. USE: The Premises may be used for the following purposes: the development, marketing, and wholesale and/or retail sale and/or distribution of computer software, enhancements, and related items; parking; office purposes; and all other purposes permitted by applicable law. 6. COMPLIANCE WITH LAWS: 6.1. Tenant Compliance. Tenant agrees that during the Term of this Lease, Tenant shall, in its use and occupancy of the Premises, comply with all applicable governmental regulations and laws respecting Tenant's operations, but Tenant shall have no obligation to repair, restore, replace, modify or update the Improvements comprising the Premises or any other portion of the Premises except as provided in Section 6.2 below. 6.2. Landlord Compliance. Landlord agrees that during the Term of this Lease, Landlord shall, at its cost and expense, comply with all applicable governmental regulations and laws, including, but not limited to the requirements of the Americans with Disabilities Act and all regulations issued by the U.S. Attorney General or other authorized agencies under the authority of the Americans with Disabilities Act ("ADA Laws"), relating to the physical condition of all parts of the Premises that apply to all real estate generally and not arising due to the unique nature of Tenant's specific use of the Premises. Tenant shall comply with the regulations and laws which relate to the physical condition of the Premises to the extent such requirements arise out of the unique nature of Tenant's use of the Premises. 7. ALTERATIONS AND IMPROVEMENTS: 7.1. Alterations and Fixtures. Tenant shall not make alterations, additions, or improvements to the Premises costing more than $5,000 without the consent of Landlord, which shall not be unreasonably withheld or delayed. Tenant shall have the right to select the contractor(s) to perform such work. If the alterations, additions or improvements are such that they are intended by Tenant to become a part of the Premises (a "fixture"), then the same shall not be subject to removal by Tenant. 3 5 7.2. Personal Property. Any and all signs, equipment, furniture and machinery that Tenant may place in or upon the Premises during its occupancy thereof and any addition or improvement not intended as a fixture as provided above, shall be, and remain at all times, personal property, whether affixed to the real estate or not and may be removed by Tenant at any time during the initial, renewal, extension or hold over Term hereof or within a reasonable period after the expiration of this Lease; provided, however, that Tenant shall repair at its own expense any damage done to the Premises by reason of removal of any such property. 7.3. Signage. Tenant shall not have the right to install any signs on any portion of the Premises without the prior written consent of Landlord, which consent shall not be unreasonably withheld or delayed, except that Tenant may continue to display any signs at the Premises existing prior to the date of this Lease. 8. REPAIRS AND MAINTENANCE: 8.1. Landlord Maintenance. Landlord shall be responsible for the repair, maintenance and replacement of all structural components of the Premises specifically including but not limited to, the roof, exterior walls and foundation, and shall maintain the heating, air conditioning, plumbing and electrical systems, and the utility systems serving the Premises, in as good a condition as exists on the date hereof. Landlord shall furnish janitorial services (as described in Exhibit C hereto) to the Premises of sufficient frequency and quality to maintain the Class A appearance of the Premises. Landlord shall be responsible for all capital improvements or replacements to the Premises, including, but not limited to, repaving of the parking areas. If reasonable vehicular and pedestrian access for Tenant, Tenant's tractors, trailers and trucks, or Tenant's customers to the Premises is obstructed or blocked due to weather conditions, repairs, reconstruction, or otherwise by Landlord, then to the extent the operation of Tenant's business is adversely affected, a proportionate and equitable reduction or abatement of rent shall be made until such access is re-established. 8.2. Tenant Maintenance. Except as otherwise expressly provided herein, Tenant shall be responsible for the customary and routine repair and maintenance (excluding capital improvements, replacements or alterations) of the Premises. 9. UTILITIES: Landlord agrees to provide and maintain during the Term of this Lease and any renewal, extension or holding over, the necessary mains and conduits leading to the Premises in order that water, sewage, gas, and electricity may be furnished to the Premises. The cost of all utilities, including water, gas, sewer and/or electricity, used by Tenant for any purpose in, upon or about the Premises, shall be borne by Landlord. 10. TAXES: Landlord agrees that Landlord shall pay all applicable general ad valorem real estate taxes and assessments (special or general) assessed and payable during the Term of this Lease by any competent authority on or against the Premises or any part thereof. Tenant agrees to pay only such taxes and assessments levied against personal property or trade fixtures which are owned by Tenant. 4 6 11. LANDLORD'S RIGHT OF ENTRY: 11.1. General Entry Rights. Landlord and its authorized agents may enter the Premises with reasonable prior notice during Tenant's normal business hours for the following purposes: (a) to inspect the general conditions and state of repair of the Premises; (b) to make repairs required of Landlord; and (c) to show the Premises to any bona fide prospective purchaser or mortgagee. Such entry by Landlord shall be under the supervision of Tenant. Landlord shall not interfere with, or create a hazard to, Tenant's normal business operations during such entry. In the event of an emergency condition arising within the Premises which endangers property or the safety of individuals, Landlord may enter the Premises without such notice and during all appropriate times. 11.2. Special Entry Rights. Within ninety (90) days prior to the expiration of the Term, including extensions hereof, Landlord may enter the Premises during Tenant's normal business hours to show the Premises to prospective tenants. During the final sixty (60) days of the Term, including extensions hereof, Landlord and its authorized agents may erect on, or about, the Premises its customary sign advertising the property for sale or lease, provided such sign does not interfere with or create a hazard to Tenant's normal business operations. 11.3. Impairment. Landlord acknowledges that the visibility of the Premises is critical to the successful operation of Tenant's business. Landlord agrees that during the Term of this Lease, or any renewal or extension hereof, it will not materially impair the visibility of the Premises as it exists on the date hereof. Landlord shall not alter the size or location of curb cuts or private drives that provide access to the Land without the prior written consent of Tenant. 11.4. Temporary Obstructions. In the event access to the Premises or visibility of Tenant's signage and/or windows is temporarily impaired, due to Landlord's maintenance or repairs to the Land, any improvements of which the Premises is a part, parking lots, public roadways or other ways of access to the Premises, then the rent and all other charges payable under this Lease shall be equitably adjusted, or abated, for the period of such temporary impairment. 12. PARKING: Landlord represents that Tenant shall be entitled to the use of not fewer than 150 parking spaces in the existing parking lot on the Land, plus the Reserved Spaces. During the renewal Term(s) Landlord reserves the right to designate the location of the 150 spaces in the vicinity of the northwest side of the Building. Until such designation is made, Tenant shall have access to all parking spaces. There shall be no additional charge for Tenant's parking during the initial Term or any renewal Term under this Lease. 13. INSURANCE: 13.1. Tenant Insurance. Tenant shall during the Term, at its sole cost and expense, maintain in full force commercial general liability insurance issued by one or more insurance carriers, insuring against liability for injury to or death of persons and loss of or damage to property arising out of Tenant's use and occupancy of the Premises. Such insurance shall name Landlord as an 5 7 additional insured, shall contain a contractual liability endorsement and shall provide aggregate limits of not less than $2,000,000 and per-occurrence limits of not less than $1,000,000. Tenant is not responsible for maintaining liability coverage for claims arising out of any acts or omissions of Landlord, its agents, contractors, employees or invitees. 13.2. Landlord Insurance. Landlord shall during the Term, at its sole cost and expense, maintain in full force the following insurance: 13.2.1. Commercial general liability insurance issued by one or more insurance carriers or self-insurance, insuring against liability for injury to or death of persons and loss of or damage to property arising out of any negligent act or omission of Landlord, its agents, contractors or employees. Such insurance shall name Tenant as an additional insured, shall contain a contractual liability endorsement, shall be on an "occurrence" basis and shall provide aggregate limits of not less than $2,000,000 and per-occurrence limits of not less than $1,000,000. Landlord is not responsible for maintaining liability coverage for claims arising out of any acts or omissions of Tenant, its agents, contractors, employees, or invitees. 13.2.2. "All risk" property damage insurance issued by one or more insurance carriers covering the Premises to the extent of their full replacement value exclusive of foundation and excavation costs. Tenant agrees to reimburse Landlord for such insurance premiums for the "all risk" property damage insurance within 30 days after receipt of written request therefrom from Landlord, together with a copy of the receipt evidencing payment from the insurance carrier. If such premiums shall cover a period of time prior to or after the expiration of the term of this Lease Tenant's share of such premiums shall be equitably prorated to cover only the period of time during which this Lease is in effect. 13.3. Insurance Certificates. Upon written request of either party hereto, Landlord or Tenant, as the case may be, shall deliver to the requesting party either proof of self-insurance or certificates issued by their respective insurance carriers for each policy of insurance required to be maintained hereunder. 13.4. Insuror Rating. Other than self-insurance, all insurance coverages maintained hereunder shall be issued by insurance companies rated B+XV in "Best's Insurance Guide" or better and qualified to do business in the state in which the Premises are located. 14. MUTUAL INDEMNIFICATION: Landlord hereby releases and agrees to defend, indemnify and hold harmless Tenant from and against any and all claims, actions, damages, liability and expense (including reasonable attorneys' fees and expenses) in connection with loss of life, personal injury and/or damage to property occasioned by any act or omission of Landlord, its agents, contractors, employees or invitees. The foregoing indemnification shall not be deemed a waiver of Landlord's sovereign immunity. The scope of Landlord's indemnification of Tenant shall not exceed the extent permitted by Missouri law, including under ss. 537.600, Mo. Rev. Stat. (1986). Tenant hereby releases and agrees to defend, indemnify and hold harmless Landlord from and against any and all claims, actions, damages, liability and expense (including reasonable 6 8 attorneys' fees and expenses) in connection with loss of life, personal injury and/or damage to property occasioned by any act or omission of Tenant, its agents, contractors, employees, or invitees. The provisions of this Section 14 shall survive the expiration or earlier termination of this Lease. 15. MUTUAL SUBROGATION: Landlord and Tenant hereby mutually release each other from liability for any loss such party is required to insure against hereunder for property loss or damage, including without limitation, fire, extended coverage and other property insurance policies and hereby waive their respective rights of recovery against each other for any such loss including any insurance deductible amount. Each party shall obtain any special endorsements, if required by its insurers, to evidence compliance with the aforementioned waiver. 16. DAMAGE OR DESTRUCTION: In the event that the Premises shall be damaged or destroyed by fire or other casualty and neither Landlord nor Tenant elects to terminate this Lease as hereinafter provided, Landlord shall proceed with reasonable diligence and at its sole cost and expense to rebuild and repair the Premises. 16.1. Termination Rights. Notwithstanding anything contained herein to the contrary, (i) if the Premises shall be destroyed or are damaged to such an extent that in Tenant's reasonable judgment it cannot conduct its business in the Premises in the manner conducted prior to the casualty (thereby triggering Section 16.2 below), and if said damage cannot be repaired within ninety (90) days from the date of casualty, then this Lease may be terminated by either Landlord or Tenant by giving written notice to the other within thirty (30) days after the occurrence of such casualty; or (ii) if Landlord fails to proceed diligently to complete the repairs, or should Landlord fail to complete any repairs within ninety (90) days of the date of casualty and the unrepaired damage prevents Tenant from being able to conduct its business in the Premises in the manner conducted prior to the casualty, Tenant may terminate the Lease at any time within thirty (30) days after the expiration of such ninety (90) day period. Upon Tenant's request, Landlord promptly shall provide Tenant with documentation confirming that the damage to the Premises can be repaired within said (90) ninety day period. 16.2. Discontinuation and Abatement. If so much of the Premises shall be damaged so that in Tenant's reasonable judgment it is unable to conduct its business in the Premises in the manner conducted prior to the casualty, then Tenant may discontinue the conduct of business in the Premises and all rent shall abate until the earlier to occur of (i) the date on which such damage shall be completely repaired, or (ii) the date on which Tenant resumes conducting business in the Premises. If rent abates in accordance with this Section 16.2., every other charge payable by Tenant to Landlord shall abate also. 16.3. Surrender. If the Lease is terminated in accordance with Section 16.1. hereof, Tenant shall, after promptly removing its property therefrom, surrender the Premises to Landlord, shall pay rent to the date of such destruction or damage and shall not be liable for any obligation accruing after such damage or destruction. Landlord shall promptly refund to Tenant any prepaid rental or other prepaid charges attributable to the period of time after the date of such destruction or damage. 7 9 16.4. Slight Damage. If the Premises are slightly damaged by fire or other casualty but said damage or the repair of such damage does not or will not interfere with Tenant's conduct of its business, or otherwise render the Premises or any part thereof untenantable, then Landlord shall promptly proceed to repair the damage as provided above and monthly rent shall not abate but Tenant shall continue to pay rent as provided herein. 17. CONDEMNATION: In the event the entire Premises or a substantial portion of the Premises should be taken for any public or quasi-public use under any governmental law, ordinance or regulation or by right of eminent domain or by private purchase in lieu thereof, this Lease shall terminate and expire as of the date of such taking. Tenant shall have the right to recover any damages suffered or sustained by Tenant as a result of taking only the property which belongs to Tenant and any moving expenses or other award available to Tenant, but Tenant shall have no claim or right to any portion of the amount that may be awarded as damages or paid as a result of such taking for the loss of any part of Tenant's leasehold interest. In the event that the remainder is suitable for the uses authorized herein, subject to the approval of Tenant, this Lease shall remain in full force and effect; provided, however, that rental payments hereunder shall be proportionately reduced according to the nature and extent of the deprivation to Tenant. Should Tenant elect to continue this Lease in effect, Landlord shall proceed to repair the Premises and return them to suitable condition for Tenant's continued occupancy hereunder. 18. HAZARDOUS MATERIALS: 18.1. Landlord Indemnity. Landlord hereby releases and agrees to indemnify, defend and hold harmless Tenant from and against any and all claims, actions, damages, liability and expense (including reasonable attorneys' fees and costs) arising at any time whatsoever under any and all Federal, State, and/or local laws regulations, ordinances or administrative orders, in connection with any toxic waste, hazardous materials, petroleum or petroleum by-products or underground/aboveground storage tank contamination on, under or about the Premises, except for contamination on, under or about the Premises caused by Tenant in its use of the Premises during the Term of this Lease. Landlord's obligations under this Section shall survive the expiration or earlier termination of this Lease. The foregoing indemnification shall not be deemed a waiver of Landlord's sovereign immunity. The scope of Landlord's indemnification of Tenant shall not exceed the extent permitted by Missouri law, including under ss. 537.600, Mo. Rev. Stat. (1986). 18.2. Tenant Indemnity. Tenant hereby releases and agrees to indemnify, defend and hold harmless Landlord from and against any and all claims, actions, damages, liability and expense (including reasonable attorneys' fees and costs) arising at any time whatsoever under any and all Federal, State, and/or local laws regulations, ordinances or administrative orders, in connection with any release of any toxic waste, hazardous materials, petroleum or petroleum by-products or underground or aboveground storage tank contamination on, under or about the Premises caused by Tenant in its use of the Premises during the Term of this Lease. Tenant's obligations under this Section shall survive the expiration or earlier termination of this Lease. 8 10 19. SUBORDINATION: Tenant will, upon request by Landlord, subject and subordinate this Lease to any and all mortgages and deeds of trust now existing or hereafter placed on the Land; provided, however, that such subordination shall be upon the express condition that this Lease shall be recognized by the mortgagee or trustee under the mortgage or deed of trust and that the rights of Tenant hereunder shall remain in full force and effect during the Term of this Lease so long as Tenant is not in default under this Lease. Subject to receipt of such recognition and agreement not to disturb Tenant, Tenant agrees that this Lease shall remain in full force and effect notwithstanding any default or foreclosure under any such mortgage or deed of trust. Tenant will, upon request by Landlord, execute and deliver to Landlord instrument(s) in recordable form reasonably required to give effect to the provisions of this Section. Landlord will, upon request by Tenant, cause to be executed and delivered to Tenant instrument(s) in recordable form reasonably required to effect the recognition of Tenant's rights hereunder by the holders of all such mortgages and deeds of trust whether or not Tenant has been requested to subordinate this Lease to such mortgages or deeds of trust. Tenant may record a memorandum of this Lease in the form attached hereto as Exhibit D, which Landlord shall execute at Tenant's request. 20. ASSIGNMENT AND SUBLETTING: Tenant may not assign this Lease or sublet the Premises or any interest herein without written consent of Landlord, which shall not be unreasonably withheld or delayed. Landlord may assign or convey its rights under this Lease upon written notice to Tenant. 21. LIENS: Tenant shall keep the Premises free from any liens arising out of any work performed, materials furnished or obligations incurred by or on behalf of Tenant. If, because of any act or omission of Tenant, any mechanic's lien or other lien shall be filed against Landlord or against the Premises, Tenant will protect, indemnify and save harmless Landlord from and in respect to any and all such liens. 22. TENANT DEFAULT: 22.1. Termination. Any failure on the part of Tenant to comply with any of the terms of this Lease shall, at the option of Landlord, work a termination of the Lease whereupon Landlord, its agents or attorney, shall have the right to enter the Premises and remove all persons therefrom; provided only that Landlord shall first give written notice thirty (30) days in advance of any lease termination, or such other time period required by applicable law, whichever is longer, and during said period Tenant shall have the right to commence whatever action may be necessary to correct its default, and thereafter diligently proceed to cure such default, and having done so may continue its occupancy under the terms hereof. If, however, termination occurs, Tenant shall not be liable for any obligations accruing after the date of termination. 22.2. Re-Entry. Landlord may, however, in lieu of termination, re-enter the Premises and take possession thereof, and Tenant shall remain liable for all rent and other charges to be paid by Tenant hereunder, in which event Landlord shall use its best efforts to relet the Premises for the account of Tenant for the maximum possible rental. Should Landlord relet the Premises or any portion thereof, Tenant shall be liable to Landlord, and shall pay as it becomes due, the amount of 9 11 any deficiency between the amount of rental received by Landlord and the amount which Tenant is obligated to pay hereunder. 23. LANDLORD DEFAULT. In the event Landlord shall default in the performance of any of the provisions of this Lease, Tenant shall so notify Landlord. If Landlord shall fail to correct such default within thirty (30) days after notice of such default, or if the default is of such character as to require more than thirty (30) days to correct after notice is given and Landlord does not thereafter diligently proceed to cure such default, then Tenant may either terminate this Lease and not be liable for any obligations accruing thereafter, or cure such default. Any expense for curing Landlord's default may be deducted by Tenant from the rent otherwise due, and the balance due, after such deduction, shall be a claim due Tenant by Landlord. 24. WAIVER: The failure of Landlord or Tenant to insist upon prompt and strict performance of any of the terms, conditions or undertakings of this Lease, or to exercise any right herein conferred, in any one or more instances, except as to the option to extend or renew the term, shall not be construed as a waiver of the same or any other term, condition, undertaking, right or option. 25. NOTICES: Any notices or other communications required or permitted by this Lease shall be in writing and delivered personally or by messenger or a nationally recognized overnight courier service, or alternatively, shall be sent by United States first class mail, postage prepaid, addressed to the parties hereto at the addresses as set out below, or at such other addresses as they have theretofore specified by written notice delivered in accordance herewith. If to Tenant: Deirdre F. Baird Director of Real Estate and Facilities Management Quarterdeck Corporation 13160 Mindanao Way Marina del Rey, California 90292-9705 (310-309-4218) Telecopy with a copy to: John S. Meyer, Jr., Esq. Bryan Cave LLP One Metropolitan Square 211 North Broadway, Suite 3600 St. Louis, Missouri 63102 (314-259-2020) Telecopy 10 12 If to Landlord: Dennis P. Cesari Assistant Vice President for Management Services 225 University Hall Columbia, Missouri 65211 (573-884-4745) Telecopy with a copy to: Office of the General Counsel of the University of Missouri 227 University Hall Columbia, Missouri 65211 (573-882-0050) Telecopy The effective date of any such notice or other communication shall be (a) the date of delivery of the notice, if by personal delivery, messenger or courier service, or (b) if mailed, on the date three days after deposited in the United States first class mail. The parties hereby designate the addresses set forth above as their respective notice addresses under this Lease. Either party may change its notice address, by written notice to the other party as provided above. 26. [RESERVED] 27. SURRENDER OF PREMISES: On the expiration date of the Term of this Lease, Tenant agrees to deliver to Landlord physical possession of the Premises in as good condition as the Premises are in on the Rent Commencement Date, except for ordinary wear and tear and damage by fire, the elements, other extended coverage perils, condemnation, and acts of God. 28. BINDING EFFECT: This Lease shall be binding on the parties hereto, and their heirs, assigns, successors, executors and administrators, except that no assignment of Landlord's interest shall be binding on Tenant until Tenant shall have received written notice thereof. In the event any provision of this Lease is declared or determined to be invalid under the laws governing this Lease, the remaining terms and conditions shall remain in full force and effect and shall be binding on the parties hereto. 29. BROKERS: Tenant and Landlord represent and warrant to each other that such party has not had any dealings with any realtor, broker or agent in connection with this Lease except C. B. Commercial Real Estate Group, Inc., whose commission is to be paid by Tenant from the sale proceeds upon Closing of Landlord's purchase of the Premises from Tenant. The only commission earned shall be earned on the sale price. No commission is payable with respect to this Lease. Each party agrees to defend, indemnify, and hold the other party harmless from any cost, expense or liability, including without limitation, reasonable attorney's fees, for any brokerage or finder's fees. 11 13 30. MISCELLANEOUS: Time is of the essence with respect to the obligations of Landlord and Tenant under this Lease. In any action to enforce or interpret this Lease, the prevailing party shall be entitled to recover its reasonable costs and expenses, including its attorney's fees and disbursements. This Lease, including all exhibits, addenda and other attachments hereto, sets forth the entire agreement between Landlord and Tenant regarding the leasing of the Premises. The laws of the state in which the Premises are situated shall govern the validity of this Lease, the construction of its terms, and the interpretation of the rights and obligations of Landlord and Tenant hereunder. IN WITNESS WHEREOF, the parties have executed this Lease in duplicate as of the Effective Date described in Section 2.1 hereof. LANDLORD: THE CURATORS OF THE UNIVERSITY OF MISSOURI, a public corporation of the State of Missouri By: /s/ Dennis P. Cesari --------------------------------- Date: --------------------------------- TENANT: DATASTORM TECHNOLOGIES, INC., a Missouri corporation By: /s/ Curtis A. Hessler --------------------------------- Date: --------------------------------- 12 EX-10.3 6 EXHIBIT 10.3 1 EXHIBIT 10.3 SUTHERLAND OUTBOUND TELEMARKETING EXCLUSIVE SERVICES AGREEMENT This Agreement, including the attached schedules (collectively "Agreement"), is made as of the 13th day of January, 1998 (the "Effective Date") by and between THE SUTHERLAND GROUP, LTD., a New York corporation with offices at 1160 Pittsford-Victor Road, Pittsford, New York 14534 ("SGL") and QUARTERDECK CORPORATION ("Client"), with offices at 13160 Mindanao Way, Marina del Rey, California 90292. Client's wholly-owned subsidiary, Quarterdeck Select Corporation ("QDS"), has previously provided to Client outbound telemarketing services with respect to the sale of Client's products. Client has caused QDS to sell to SGL the outbound telemarketing business and related assets of QDS pursuant to a certain asset purchase agreement intended to be dated of even date herewith between SGL and QDS (the "Asset Purchase Agreement"). Client desires to obtain, and SGL desires to provide, services in relation to the staffing and management of a Telesales and Telemarketing Program to support the sales of Client products. In light of the foregoing and in consideration of the promises exchanged herein, the parties agree as follows: 1. Scope: 1.1 SGL will provide Client, with respect to the sale of Client's products, with certain database telesales services on the terms and conditions described in this Agreement. SGL shall manage and supervise the operation of the telesales services as described herein. Staffing of the telesales services shall be at the levels determined pursuant to the Allocation of Resources set forth in Schedule "1.1". SGL will make reasonable efforts to adjust staffing levels and reallocate resources as quickly as possible whenever the commitment is adjusted according to the methodology set forth in Schedule "1.1". 1.2 SGL will be Client's sole and exclusive source of the outbound telesales and corporate telesales services for sales in the United States and Canada of all products then offered for sale under Client's tradename or trademarks, except that Client may conduct outbound telesales and corporate telesales activities from time to time on a limited scale, using its own regular employees. The total number of Client's regular employees engaged in such activities at any given time may not exceed four percent (4%) of SGL's then current staffing 1 2 levels (rounded up to the nearest whole number) for Client's telesales determined at that time pursuant to the terms of this Agreement. Notwithstanding anything contained in this Agreement to the contrary: (A) SGL acknowledges that Client markets its products through distributors, retailers, OEMs, and other resellers (collectively, "Resellers") and may continue to do so by any means. Client does not necessarily limit its Resellers' distribution rights to prevent Resellers from distributing Client products through outbound telesales or corporate telesales and that this Agreement does not require Client to do so. Provided that Client does not engage any third party specifically for the purpose of providing outbound telesales and corporate telesales services, therefore, Client will not be in violation of this Agreement merely because a Reseller markets or is authorized to market Client products via outbound telesales or corporate telesales. (B) SGL shall have a non-exclusive right to conduct outbound telesales activities and corporate telesales activities with respect to governmental entities (including responding to Requests for Proposal to governmental agencies) and educational institutions. During the period commencing on the date hereof and ending December 31, 1998 (the "first year"), this right shall be non-exclusive only in the sense that Client will have the right to use its own employees (in any number) to conduct outbound telesales activities and corporate telesales activities with respect to governmental entities (including responding to Requests for Proposal to governmental agencies) and educational institutions. If, during the first year, SGL generates Net Revenues of at least One Million Dollars ($1,000,000) (the "first year goal") from sales to governmental and educational institutions, then such right shall remain non-exclusive only in the sense indicated above. In that event, the parties shall agree upon a reasonable goal for the second year (calendar year 1999). From then on, the parties shall agree upon a new annual goal at the end of each year in which the goal is accomplished. At any time that SGL fails to meet the first year goal, second year goal or any subsequent year's goal, then its right to conduct corporate telesales and outbound telesales to governmental and educational institutions shall be non-exclusive in all respects for the remaining term of this Agreement, thus allowing Client to retain third parties to conduct outbound telesales and corporate telesales to such institutions. (C) Further, SGL acknowledges that Client may market or publish products under licenses and that such licenses will not necessarily authorize any outbound telesales or corporate telesales. Additionally, SGL acknowledges that, subject to Section 22, Client may assign or otherwise transfer a portion or all of its rights in any product and if such product is no longer sold under Client's tradename, trademarks, or those of its subsidiaries, such product shall no longer be subject to this Agreement. 1.3 SGL shall use its best efforts to market and promote the Client's products 2 3 through outbound telesales and corporate telesales channels. Best Efforts is defined as not less than is customarily applied to other SGL clients in the consumer software market and if there are no other SGL clients in the consumer software market, then as customarily applied to other SGL clients generally. 1.4 Client shall determine, in consultation with SGL, which Client products SGL will emphasize in its marketing efforts at any time. Client shall determine all of the terms under which SGL markets Client's products. Client may accept or reject any order or offer to purchase any Client products in the exercise of its sole and absolute discretion. 1.5 SGL is an independent contractor providing services to Client. 1.6 As used in this Agreement (including all schedules hereto), (i) "outbound" telesales shall mean telesales of Client's products for sales of seventy-five (75) or fewer units per sale, (ii) "corporate" telesales shall mean telesales of Client's products for sales of more than seventy-five (75) units per sale, and (iii) " telesales" does not include: (A) Telephone calls in which the sale of products is not completed, and payment or authorization of payment is not required, until after a face-to-face sales presentation by the Client ("direct sales"); (B) Telephone calls initiated by (i) any potential customer, except when in response to a call from a telesales representative, including without limitation those in response to an advertisement through any media including direct mail solicitations or (ii) a prior customer of Client ("inbound telesales"), and any reply or follow up calls to any inbound telesales call; (C) Telephone calls as the result of a solicitation of a potential customer by an SGL telesales representative and the referral of that potential customer to Client; or (D) Telephone calls soliciting transactions with any Resellers for resale or other transactions that SGL is prohibited from soliciting. For purposes of the foregoing, the number of "units" per sale is the maximum number of computers on which a copy of the software sold may be installed or from which it may be accessed. For sales of subscription based services, "units" per sale is the number of computers or users (as the case may be) authorized to utilize such service. For other types of sales, units shall be defined appropriately, as the context shall require. Sales by Client which may not be "telesales" but which (i) are made by Client directly to a customer other than a Fortune 500 customer and which follow the entry by SGL 3 4 of a product order from that customer as a result of SGL's telesales services hereunder, or (ii) are made by Client directly to a division or purchasing group of a Fortune 500 customer and which follow the entry by SGL of a product order from that same division or purchasing group as a result of SGL's telesales services hereunder, will entitle SGL to commissions as set forth in attached Schedule 4.1 hereof ("sales to SGL-seeded accounts"); provided that SGL-seeded accounts shall in no event include any customers that had obtained any Client products within eighteen (18) months before first obtaining a Client product through SGL. Notwithstanding the foregoing, SGL acknowledges and understands that it may not always be reasonably practical for Client to determine whether a customer is an SGL-seeded account; provided that Client shall reasonably cooperate with SGL in an effort to establish procedures for doing so. Nevertheless, SGL agrees that Client shall be under no obligation to undertake any measures that are not reasonably practical to determine whether an account is an SGL-seeded account. Without limiting the generality of the foregoing, SGL acknowledges that Client need not ask any question of its customers or record any information from Client's customer relating to SGL in connection with any transaction by Client involving less than Ten Thousand Dollars ($10,000). Further, Client will not be obligated to attempt to obtain such information in connection with any transaction not involving a live conversation between Client and the customer, such as any transaction mediated by any third party or any on-line transaction. 2. SGL's Responsibilities: 2.1 SGL shall provide telesales representatives, sales supervisors, administrators and program managers, all of whom shall be dedicated exclusively to providing services to Client, as well as client services managers, business analysts and other necessary personnel. All SGL personnel shall have that level of training and experience which is appropriate to the nature and special requirements of the Services described herein. The personnel assigned by SGL to the Client account shall be acceptable to Client, acting in its reasonable discretion. Personnel formerly employed by QDS shall be deemed to be acceptable to Client for so long as they continue to perform in a reasonably acceptable manner. 2.2 SGL shall provide the facilities, computer systems, training, reporting, administrative functions, all telephony equipment and systems, and other required infrastructure to perform the services described herein, except as may be the responsibility of Client as set forth in Section 3 hereof. 2.3 SGL shall comply at all times with all Federal, state and local authorities, statutes, rules and regulations applicable to its business activities and shall provide worker's compensation insurance in amounts required by applicable law. 4 5 2.4 SGL, its employees and contractors shall comply at all times with all rules and regulations, policies and practices applicable to Client's business activities which are communicated to SGL management by Client. 2.5 For a period of ninety (90) days from the Closing, SGL shall make Bonnie Sue Brandvic and Dawn Cole reasonably available at no charge to provide transition services to Quarterdeck's corporate Human Resources department in connection with Quarterdeck's HRIS system. 2.6 In no event shall SGL collect or receive funds on Client's behalf. 3. Client's Responsibilities: 3.1 Client is responsible for direct mail operations, advertising and customer awareness programs for all of Client's products. Client shall determine in the exercise of its sole and absolute discretion whether to conduct any direct mail campaigns and the extent of any advertising or customer awareness programs. 3.2 Client will be responsible for acceptance (or rejection) of customer orders, credit card verification, billing, customer service, collections, fulfillment for sales, and inbound telesales generated by the programs described at Section 3.1. 3.3 Client shall establish, and at all times maintain, an interface between the existing computer infrastructure, presently located in Buildings 400 and 410 located at 5770 Roosevelt Boulevard, Clearwater, Florida (the "Clearwater Facility") and Client's computer systems, conforming to the specifications therefor in Schedule "3.3". There may be reasons that either Party wishes to modify their respective systems and processes during the course of this Agreement. If implemented, such modifications may impact the systems and processes of the other Party as well as the interfaces between those systems. To the extent a Party wishes to modify any of its systems after the Effective Date, and if such modifications could impact the systems and processes of the other Party or the interfaces between those systems, the Party wishing to make such modifications will inform the other Party in writing of the anticipated modifications within a reasonable time prior to implementing such modification and the other Party will work with the Party wishing to make such modifications in an effort to minimize the potential for material additional costs to accommodate such modifications. The Party wishing to make such modifications shall be responsible for the cost to develop the necessary interfaces between its modified systems and the systems of the other Party. 3.4 Client will aid and assist SGL in the work of promoting the sale of Client's products and services by making commercially reasonable efforts to promptly answer any reasonable inquiries addressed to Client by SGL. SGL shall have no obligation to perform 5 6 Client's warranty or support obligations with respect to any product or service which is the subject of this Agreement. 3.5 Client will train SGL's telesales employees regarding Client's products at SGL's Clearwater facility. Client shall pay those out-of pocket travel, lodging and similar expenses incurred by Client in providing such training. Client shall provide anticipated release schedules and other information as SGL reasonably requires. Except for initial program start up, training will be accomplished via audio and video conferencing. 3.6 To permit the uninterrupted transition from QDS to SGL of telesales services to be rendered to Client hereunder, upon the reasonable request of SGL at any time, and from time to time, for a period of up to three (3) months from the effective date of this Agreement, Client shall, at Client's expense, make its MIS personnel available to SGL for assistance and training on the effective use and maintenance of (i) Client's order entry system to be used by SGL telesales representatives, (ii) the interfaces described in Section 3.3, (iii) any technology included in the assets acquired by SGL from QDS and Client, (iv) the EIS predictive dialer system, (v) the ASPECT switch, and (vi) the MITEL switch. If within three (3) months of the effective date of this Agreement, SGL shall have a full-time MIS person employed by SGL at the Clearwater Facility, then Client shall make its MIS personnel available to SGL for such assistance and training for an additional two (2) months (for a total period of up to five (5) months from the effective date of this Agreement). 3.7 The long distance telephone network services agreement previously used by QDS in providing telesales services to Client is not directly transferable to SGL. Therefore, during the term of this Agreement and solely to the extent that it is permitted to do so without incurring any cost, Client agrees to make available to SGL for purposes of SGL rendering telesales services to Client, the benefits of any of Client's long distance telephone network services agreements. SGL's payment obligation will be only for actual use by SGL at the rates set forth in the applicable long distance telephone network services agreements. 3.8 Client is a party to a software license agreement with ONYX dated June 28, 1995, pursuant to which Client has the right to use the licensed software at an unlimited number of seats. The ONYX software licenses previously used by QDS in providing telesales services to Client are not directly transferable to SGL. Therefore, during the term of this Agreement, Client agrees to maintain and make available to SGL for purposes of SGL rendering telesales services to Client, the benefits of the ONYX software license agreement at no additional cost to SGL. 3.9 Client may, at any time and from time to time, subcontract any of its responsibilities to a third party(ies) but Client shall remain fully liable for performance of Client's responsibilities according to the terms of this Agreement. 6 7 4. Fees: 4.1 Client shall pay SGL for its services and costs as described in the attached Schedule "4.1" titled, Sutherland Service Fees. 4.2 SGL shall invoice on the first (1st) day of the month in which the services are to be performed for the "Fixed Rate " component of SGL's service fees for that month and for the "Sales Commission" component of SGL's service fees for the prior month. SGL shall include with each monthly invoice to Client a summary accounting of the number of telesales reps deducted exclusively to the Client's account in the form set forth in Schedule "4.2". 4.3 The Fixed Rate component will be reconciled at the end of each month against SGL's records based on the number of telesales reps dedicated exclusively to Client's account that month, for a determination of the Fixed Rate component actually due SGL, as set forth in Schedules "1.1" and "4.1". The invoice for the next month will reflect any required adjustment. 4.4 Provided Client provides SGL with written notice of the orders shipped by Client for the month within two (2) business days of the last day of the month, the "Sales Commission" component of SGL's service fees shall be billed on the basis of orders shipped by Client less a fourteen percent (14%) reserve amount to anticipate accepted orders not paid, returns, etc. Should SGL not receive notice of the actual number of orders shipped within that time, the Sales Commission component of SGL's service fees shall be billed on the basis of orders entered by SGL into Client's system less the fourteen percent (14%) reserve amount; provided that such reserve percentage may be increased or decreased at any time based on the prior two (2) quarter's actual experience; and provided further that, if Client provides notice of the actual number of orders shipped for the past month prior to payment of that invoice being due, Client may pay on the basis of the orders shipped without being in breach of this Agreement, provided such payment is made by the date the original invoice was due. The Sales Commission component will be reconciled once each quarter against Client's records for adjustment based on accepted orders not paid, returns, etc., all as provided for the final determination of the Sales Commission component actually due SGL, as set forth in Schedule "4.1". 4.5 Commencing with the sixteenth (16th) month of this Agreement and continuing through the term of this Agreement, Client shall be entitled to take a monthly discount of One Hundred Thousand Dollars ($100,000.00) against fees otherwise due and owing to SGL during each such month. This discount is not subject to acceleration, is payable only out of fees otherwise due to SGL during the month in question and is not cumulative. 7 8 4.6 Payment shall be due to SGL within thirty (30) days of receipt of an invoice from SGL and, if not paid within that time, will bear interest from that date, until paid, at the rate of one percent (1%) per month for any part of the next 30 days and one and one-half percent (1-1/2%) per month for any time thereafter the invoice remains unpaid. 4.7 Fees due under this Agreement are payable by Client without setoff or deduction by Client, except as provided in Section 7 below. 5. Term of the Agreement: This Agreement shall be effective upon execution by both parties and will terminate on December 31, 2001, unless terminated earlier pursuant to Section 6 of this Agreement. 6. Early Termination of the Agreement: 6.1 Termination for Convenience: 6.1.1 During the First Twelve (12) Months: After the first one-hundred eighty (180) days following the Effective Date, the Client shall have the right to give notice of termination of this Agreement, with such termination becoming effective no sooner than one-hundred eighty (180) days from the effective date of the notice. 6.1.2 After the First Twelve (12) Months: After the first anniversary of the Effective Date, the Client shall have the right to give notice of termination of this Agreement, with such termination becoming effective no sooner than one-hundred twenty (120) days from the effective date of the notice (the "120 Day Notice Period"); provided that, during the last thirty (30) days of the 120 Day Notice Period, the Part A Maximum will be reduced by one-half (1/2). 6.1.3 Sole Source: Notwithstanding any contrary provision in Section 1.2, immediately upon any notice of termination of this Agreement pursuant to this Section 6.1, and for the last one hundred twenty (120) days before expiration of the term of this Agreement, Client shall no longer be restricted hereunder in any way from performing or authorizing or retaining any third party to perform outbound telesales and/or corporate telesales services for any of Client's products. 8 9 6.2 Termination for Cause 6.2.1 Termination by Client: The Client shall have the right to terminate this Agreement (i) in the event an arbitrator determines that SGL has breached this Agreement and SGL fails to cure such breach within thirty (30) days of the arbitrator's determination, or (ii) in the event it is determined under the procedures set forth below that three (3) separate "Bad Acts" have occurred during the term of this Agreement. A "Bad Act" is defined as an act of theft (including larceny, forgery, fraud or intentional wrongful conversion) by SGL or any of its employees perpetrated against the Client or one of its customers, or a "Pattern" of SGL or any of its employees making any material, untrue or misleading statements or representations as the result of a policy implemented by SGL (or the lack of an effective policy to protect against such activities) in performing outbound telesales or corporate telesales hereunder. Except as provided in the following paragraph, the determination that a Bad Act has occurred is conditioned upon Client, within ten (10) business days of Client's discovery of the occurrence of circumstances which Client alleges to be a Bad Act, giving to SGL notice thereof specifying what circumstances are alleged to have occurred. Within the First Year: The determination that a Bad Act has occurred within the first twelve (12) months of this Agreement is conditioned upon Client, within ten (10) business days of Client's discovery of the occurrence of circumstances which Client alleges to be a Bad Act, giving to SGL notice thereof specifying what circumstances are alleged to have occurred, that Client deems that such circumstances constitute a Bad Act under this Agreement, and the basis for Client's claim that such circumstances constitute such a Bad Act. For purposes of the foregoing, a "Pattern" consist of acts which occur in such numbers and within such a period of time that reasonable people would agree that those acts were not isolated or unrelated. Effect of Termination by Client: In the event this Agreement is terminated pursuant to this Section 6.2.1, in addition to any other rights and remedies Client may have, SGL acknowledges that Quarterdeck Select Corporation ("QDS") or its assignee shall have the right to terminate that certain sublease intended to be dated of even date herewith between SGL and QDS (the "Sublease"). If termination pursuant to this Section 6.2.1 occurs during the first year of the term of this Agreement, then (i) the Client will have the right to solicit for employment those persons then employed by SGL at the Clearwater facility that were formerly employees of the Client or QDS, and (ii) Client or its designee will have the right to reacquire from SGL those tangible assets originally transferred to SGL pursuant to the Asset Purchase Agreement which are still in the possession of SGL at the Clearwater facility. The repurchase price for these assets shall be equal to a percentage of $1.5 Million less amounts received by SGL, if any, 9 10 from a transfer by SGL of some portion of the acquired assets, the numerator of which is the number of days remaining (as of the date of the event giving rise to the right to reacquire the assets) in the first year of the term of this Agreement and the denominator of which is three hundred sixty-five (365). The right of Client to acquire assets shall not apply to any replacement assets. 6.2.2 Termination by SGL: SGL shall have the right to terminate this Agreement in the event (i) Client fails to make any payment due hereunder (to SGL or the escrow agent as provided in Section 7.5) within twenty (20) days after written notice of non-payment from SGL, which notice must state that SGL may terminate this Agreement if payment is not made within twenty (20) days; or (ii) an arbitrator determines that Client has breached this Agreement and Client fails to cure such breach within thirty (30) days of the arbitrator's determination. Effect of Termination by SGL: In the event this Agreement is terminated pursuant to this Section 6.2.2, in addition to any other rights and remedies SGL may have, Client acknowledges that SGL shall have the right to terminate the Sublease. 6.3 Termination Fee: If during the first year of the term of this Agreement, Client terminates this Agreement in breach of the Agreement or in any way not provided for in this Section 6, or if, during the first year of the term of this Agreement, SGL terminates this Agreement pursuant to Section 6.2.2 (after providing Client with the specified cure period) as a result of an arbitrator's decision that (i) the Client failed to pay amounts due to SGL hereunder to either SGL or escrow, or (ii) that the uncured breach of this Agreement by Client effectively deprived SGL of the benefits of this Agreement to an extent sufficient to constitute constructive termination of this Agreement by the Client in breach of this Agreement, then damages will be suffered by SGL and the parties agree that it would be impracticable or extremely difficult to ascertain with any degree of certainty the amount of damages which would be suffered by SGL in such event. Therefore, in order to avoid such difficulties, the parties hereby agree that Client shall pay SGL as a liquidated damage amount, the following termination fee (the "Termination Fee") if this Agreement terminates as provided in this Section 6.3 during the first year of the term of this Agreement. The Termination Fee shall be equal to the sum of (A) and (B) for each month during the period beginning upon such termination and ending one (1) year after the Effective Date (prorated for any partial months), where (A) is $6,065 times the minimum number of outbound telesales representatives required under Schedule "1.1" during such month, and (B) is $6,412 times the minimum number of corporate telesales representatives required under Schedule "1.1" during such month. This amount is agreed to be a reasonable estimate of the loss likely to be sustained by SGL as a result of such a breach by Client during the first year of this Agreement, and not a penalty. 10 11 7. Dispute Resolution: 7.1 Notice and Cure: Except as provided in Section 6.2.2(i), in the event of an alleged breach of this Agreement by either party, the non-breaching party shall give the breaching party notice of any alleged breach and thirty (30) days to cure. The breaching party will be deemed to have cured such breach if, within such cure period, the breaching party remedies any direct damage for which it is responsible resulting from such breach and takes such steps as are reasonable to prevent a similar future breach. For purposes of this Agreement, direct damages from any breach include, without limitation, any diminution of the value of confidential or trade secret information that is used or disclosed without authorization, and costs of cover as defined in Section 10.2. 7.2 Binding Arbitration: If an alleged breach is not cured to the non-breaching party's satisfaction, the determination of whether a breach occurred and whether the breach was cured will be resolved by a single arbitrator in Chicago, Illinois, in accordance with the Expedited Procedures of the Commercial Arbitration Rules of the American Arbitration Association (the "AAA") then in force. The arbitration shall be governed by the United States Arbitration Act, and judgment upon the award rendered by the arbitrator may be entered by any court having jurisdiction thereof. Notwithstanding the Expedited Procedures of the Commercial Arbitration Rules of the AAA, the parties agree that the AAA shall appoint the arbitrator without the parties submitting lists of requested arbitrators. In addition, the arbitrator shall be instructed to complete any hearings within thirty (30) days after his or her appointment or as soon thereafter as is reasonably possible consistent with providing each party a meaningful opportunity to conduct such discovery as is reasonably necessary and otherwise prepare its argument. The arbitrator shall grant such orders and impose such sanctions as are reasonably required to conform to the foregoing schedule. 7.3 Powers of the Arbitrator: In addition to the powers granted to an arbitrator pursuant to the rules of the American Arbitration Association, the arbitrator shall have the authority (i) to award injunctive relief where necessary, providing that the party seeking such injunctive relief provides an undertaking of sufficient amount to protect the party being enjoined and in an amount acceptable to the arbitrator, (ii) make a determination of whether a breach was a Bad Act breach as referenced in Section 6.2.1, and (iii) whether a breach was a constructive termination of this Agreement by Client as referenced in Section 6.3. Each party agrees that it shall not seek (and an arbitrator shall not have the power to provide a party with) the remedy or relief of termination of this Agreement, except as set forth in Section 6 hereof. 7.4 Intellectual Property Infringement: Notwithstanding the foregoing, any party shall have the right to seek immediate relief in State or Federal Court for claims for infringement or misappropriation of any intellectual property rights and to have all legal and factual issues relating to such claims resolved in such court. Each party agrees that it shall not seek (and a court litigating such a claim shall not 11 12 have the authority to provide a party with) the remedy or relief of termination of this Agreement, except as set forth in Section 6 hereof. 7.5 Escrow and Setoff: In the event of a dispute and during the pendency of an arbitration or litigation, SGL will continue to provide services under the terms of this Agreement, and the Client shall abide by the terms of this Agreement, except that fees which are invoiced or claimed by SGL shall, at Client's discretion, be paid either to SGL or to an independent escrow agent pending the resolution of such dispute. Failure to pay to either SGL or to the escrow agent any fee which is invoiced shall be deemed a breach of this Agreement. Any monies held by the escrow agent in the escrow fund shall be invested by the escrow agent in interest bearing federally insured accounts, and the fees of the escrow agent shall be shared equally by the parties hereto. The parties receiving funds from such escrow shall also receive the interest earned on that portion of the escrowed funds so received. Payment to the escrow agent pursuant to this paragraph shall be considered as satisfying the Client's payment obligation with respect to the escrowed amount and shall not constitute a breach of, or the release of, any claim under the Agreement. Client shall have the right to setoff any direct damages award by an arbitrator or court against fees due to SGL. This setoff can be made against amounts held in escrow or otherwise. The escrow agent shall be instructed to distribute funds in accordance with the parties' mutual written instructions or any written instructions of any arbitrator or court. Unless otherwise mutually agreed upon by the parties, the independent escrow agent may be any attorney or CPA (or law or accounting firm) regularly engaged by either party. 8. Transition Services: Except when this Agreement is terminated by SGL for the Client's failure to make payment to SGL, upon any termination or expiration of this Agreement, Client shall have the right (exercisable not less than 60 days before the termination or expiration date) to continue to engage the services of SGL for a total additional period determined by Client but not to exceed six (6) months on the same terms and conditions set forth herein, including the fees for services to be rendered by SGL during any such transition period which are to be paid at the same rate as set forth in Schedule "4.1," except (i) Schedule "1.1" will not apply during any such transition period (i.e., the amount to be paid by Client to SGL will be based on the actual number of staff requested by Client and supplied by SGL for the transition period), (ii) the discount described in Section 4.5 will not apply, and (iii) Client shall no longer be restricted hereunder in any way from performing or authorizing or retaining any third party to perform outbound telesales and/or corporate telesales services for any of Client's products. Client shall provide SGL with sixty (60) day's advance notice of the staffing levels to be employed during any transition month and the staffing levels requested by Client will never increase over the level of any prior month during the transition period. 9. Warranties: 12 13 9.1 SGL represents and warrants that the Services to be provided by SGL hereunder shall be done in a workmanlike manner and conform at all times in all material respects to the descriptions and levels of Service set forth in this Agreement. 9.2 SGL does not warrant or guarantee in any way any result from the services provided under this Agreement. Except as set forth in this Agreement, the Services to be provided by SGL to Client hereunder are provided without any warranties, express or implied, including but not limited to the warranties of merchantability and fitness for a particular purpose. 9.3 Except as provided in Section 11, Client makes no warranties whatsoever. Without limiting the generality of the foregoing, Client makes no warranties to SGL with respect to any Client product, and Client expressly disclaims any implied warranties of merchantability, fitness for a particular purpose and non-infringement. Except to the extent that Client may expressly authorize in writing, SGL shall not make or pass through any warranty on behalf of Client. 9.4 Client shall provide SGL with notice of the warranties it will offer its customers in contracts for the products being marketed hereunder ("Customer Contracts"). In the Customer Contracts, Client will negate all other warranties not specifically offered to its customers therein, and Client will include standard provisions for merger, exclusive remedies and limitation of liability as used in the consumer software market. SGL acknowledges that the Customer Contracts are typically not signed by the customer nor made available to the customer for viewing before the customer obtains the software to which such Customer Contract pertains. Although Client believes that such Customer Contracts are nevertheless enforceable under applicable law, Client makes no representations or warranty to that effect. 10. Limitation of Liability: 10.1 IN NO EVENT WILL SGL HAVE ANY LIABILITY, WHETHER BASED ON CONTRACT, TORT (INCLUDING, WITHOUT LIMITATION, NEGLIGENCE), WARRANTY OR ANY OTHER LEGAL OR EQUITABLE GROUNDS, FOR ANY LOSS OF INTEREST, PROFIT OR REVENUE BY THE CLIENT, NOR SHALL EITHER PARTY HAVE ANY LIABILITY, WHETHER BASED ON CONTRACT, TORT (INCLUDING, WITHOUT LIMITATION, NEGLIGENCE), WARRANTY OR ANY OTHER LEGAL OR EQUITABLE GROUNDS, FOR ANY CONSEQUENTIAL, INDIRECT, INCIDENTAL, SPECIAL, PUNITIVE OR EXEMPLARY DAMAGES ARISING FROM OR RELATED TO THIS AGREEMENT, EVEN IF SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH LOSSES OR DAMAGES. 10.2 Notwithstanding the foregoing, nothing in this Agreement precludes Client's right to seek direct damages in the event that SGL breaches this Agreement, including, SGL 13 14 shall be liable for Client's cost to "cover" by making in good faith and without reasonable delay any reasonable contract for services in substitution for those due from SGL, but less expenses saved by the Client in consequence of the breach of this Agreement. 10.3 The monetary liability of either party for all claims resulting from its performance or non-performance under this Agreement, regardless of the form of the action, and whether in contract, tort (including, but not limited to, negligence), warranty or other legal or equitable grounds, will be limited to Five Million Dollars ($5,000,000.00). 10.4 Notwithstanding any other provision hereof, nothing in this Section 10 shall in any way limit or exclude any right or remedy available to either party for or under, and this Section 10 shall not apply to, (i) any claims for breach or misappropriation of any trade secret, copyright, patent, trademark, or other intellectual property right, or (ii) any claim under or for breach of Sections 11 (indemnification) or 13 (confidentiality) of this Agreement. 11. Indemnification: 11.1 By Client. Client shall defend SGL against any claim that any Client product or service infringes or misappropriates any patent, trademark, copyright, or similar intellectual property rights (including without limitation, misappropriation of trade secrets) or any claim that any information contained in any telemarketing plan and other materials approved by Client is untrue or misleading when presented in a similar manner as presented by Client and shall pay any settlement of or final judgement awarded in connection with such claim, provided that SGL promptly (i) notifies Client of such claim and (ii) tenders to Client the sole control of the defense and settlement thereof. 11.2 By SGL. SGL shall defend Client against any claim that SGL has made any misrepresentations or misleading statements that are not supported by any telemarketing plans or other materials supplied by Client and shall pay any settlement of or final judgement awarded in connection with such claim, provided that Client promptly (i) notifies SGL of such claim and (ii) tenders to SGL the sole control of the defense and settlement thereof. 11.3 Limitation. Neither party shall be liable under this Section 11 in connection with any claim against the other party to the extent that such claim is based upon acts that constitute a breach of this Agreement by the other party. 14 15 12. Relationship between the Parties: The performance by SGL of its duties and obligations under this Agreement shall not be deemed to constitute a joint venture or partnership between the parties. SGL shall not negligently or knowingly misrepresent Client products or services. Client will establish in its sole discretion all terms (including but not limited to price) of any sales made through SGL. All customer orders are to be directed to Client for acceptance. Unless subsequently agreed to by the parties in a written agreement, SGL will not accept on behalf of the Client, purchase orders for Client's products, or otherwise enter into contracts for the sale or license of Client's products, nor collect payments for the sale of the products or services of Client. Nothing in this Agreement shall be construed as prohibiting or restricting the right of SGL to provide similar services to any other entity. 13. Confidentiality: 13.1 All confidential or proprietary information made available by a party to the other in document or other tangible form bearing an appropriate legend indicating its confidential or proprietary nature, or which, if initially disclosed orally or visually, is identified as confidential at the time of disclosure and a written summary thereof, also marked with such a legend is provided to the other party reasonably promptly following the initial disclosure ("Confidential Information") shall be held in confidence by the receiving party. The receiving party shall protect such Confidential Information using the same degree of care it uses to protect its own confidential or proprietary information, but in no event less care than is prudent under the circumstances. Except as is reasonably necessary to the performance of its duties and obligations or exercise of its rights under this Agreement, neither party shall use Confidential Information of the other party in any form. Each party shall be permitted to disclose relevant aspects of the other parties' Confidential Information to its officers, agents and employees to the extent that such disclosure is reasonably necessary to the performance of its duties and its obligations or exercise of its rights under this Agreement. All SGL employees assigned to Client's project team will sign SGL's standard employee non-disclosure agreement. 13.2. Confidential Information shall not include (1) information which, at the time of disclosure is in the public domain; (2) information which, after disclosure, enters the public domain except where such entry is the result of a breach of this Agreement; (3) information which, prior to disclosure hereunder, can be demonstrated by records to have already been in the recipient's possession and not subject to any obligation of confidence imposed in another agreement or relationship; or (4) information which, subsequent to disclosure hereunder, was obtained by the recipient on a non-confidential basis from a third party who has the right to disclose such information. 15 16 13.3 The obligations in Section 13.1 hereof shall not restrict any disclosure by either party that is required under applicable law, or by order of any court or government agency (provided that the disclosing party shall endeavor to give such notice to the other party as may be reasonable under the circumstances) and shall not apply with respect to information three (3) years after the termination of this Agreement. 13.4 Without limiting any of its other obligations under this Section 13, SGL will take those steps outlined in Schedule "13.4" attached hereto to create a barrier to intra-company disclosures of Client's confidential and proprietary business information. 14. Taxes: Client shall, in addition to other payments required hereunder, pay all sales, use, transfer or service taxes, whether federal or state or local, however designated, that are levied or assessed on the provision of the Services by SGL to Client or on the charges to Client under this Agreement, excluding however, income taxes that may be levied against SGL. 15. Non-Solicitation of Employees: Except as provided in Section 6.2.1, during the term of this Agreement and for a period of one (1) year after its termination, neither SGL nor Client shall knowingly solicit any full-time employee of the other with whom it has had direct contact as a result of this Agreement (or any former employee who has left the employ of the other within the prior one (1) year period), to become its employee or contractor or through any third party without the consent of the other party to this Agreement. 16. Unavoidable Delays: Neither party shall be responsible for delays in its performance under this Agreement occurring by reasons or circumstances beyond its control, including acts of civil or military authority, national emergencies, labor difficulties, fire, flood or catastrophe, acts of God, insurrection, war, riots, or failure of transportation, communication or power supply; provided that the party whose performance is delayed shall use commercially reasonable efforts to complete such performance as soon as possible. 16 17 17. Property Rights: 17.1 As between SGL and Client, Client retains all right, title and interest in and to all of Client's products. Client reserves all rights not expressly granted hereunder. Without limiting the generality of the foregoing, SGL is not authorized and agrees not to market Client's products other than through outbound telesales or corporate telesales and is not authorized and agrees not to market Client's products for resale. 17.2 All rights in any information regarding Quarterdeck's customers or prospects, including their names, addresses, telephone numbers, and customer or campaign specific purchasing patterns and preferences, shall belong exclusively to Quarterdeck, including without limitation information supplied by Quarterdeck to Sutherland and any of the following information developed or acquired by Sutherland in performing services under this Agreement: any Quarterdeck specific information, any specific information related to Quarterdeck's customers and any market-related information specific to Quarterdeck's products. Client will retain all rights to the database resulting from the telemarketing services rendered pursuant to this Agreement, including any associated reports delivered to Client by SGL as well as any data provided by Client and incorporated into the telemarketing services to be rendered by SGL. All of the foregoing material shall be considered Client Confidential Information without further action on the part of Client. This material and all other Client property shall be immediately provided to Client on termination or expiration of this Agreement. 17.3 SGL will retain all rights to the ideas, know-how, techniques, and software related to the contact management system used by SGL in rendering, or to facilitate the rendering of, the Services or the manner and method by which the Services are rendered (other than rules and regulations, policies and practices referenced in Section 2.4). This information and software shall be considered SGL property and SGL Confidential Information without further action on the part of SGL. 18. Notices: All notices, requests, and demands hereunder will be given in writing and shall be deemed to have been given if delivered in person, or via a reputable, receipted overnight courier service, or by United States mail, certified or registered, with return receipt requested, in either case addressed as follows (or to such other address as either party specifies in writing to the other): 17 18 If to Client: If to SGL: Quarterdeck Corporation The Sutherland Group, Ltd. 13160 Mindanao Way 1160 A Pittsford-Victor Road Marina del Rey, CA 90292 Pittsford, New York 14534 Attn: Sr. Vice President, Product Attn: General Manager Development and Marketing Quarterdeck Program With a copy sent to the above address, With a copy sent to: Attn: Legal Department Phillips, Lytle, Hitchcock, Blain & Huber LLP 1400 First Federal Plaza Rochester, New York 14614 Attention: Robert F. Zogas, Esq. Any notice, sent as provided above, will be deemed given upon receipt at the address provided for above. 19. Governing Law: This Agreement shall be governed and construed in accordance with the laws of the State of New York, without giving effect to conflicts of law principles. 20. Audits and Attorneys' Fees: 20.1 Subject to the last paragraph of Section 1.6, Client shall keep complete and accurate records related to its sales transactions for a period of three (3) years, unless in dispute, in which event they shall be kept until said dispute is settled. Such records shall be available during reasonable business hours at the place at which such records are customarily kept for examination by SGL and its representatives, for the purpose of verifying compliance by Client with the provisions hereof. SGL shall keep complete and accurate records related to its provision of services hereunder. SGL is not required to maintain any particular records related to its Best Efforts covenant in Section 1.3. Records relating to the amount of time worked by outbound telesales or corporate telesales representatives will be in the form of Schedule 20.1. All such records shall be kept for a period of three (3) years, unless in dispute, in which event they shall be kept until said dispute is settled. All such records shall be available during reasonable business hours at the place at which such records are customarily kept for examination by the other party and its representatives, for the purpose of verifying compliance with the provisions hereof. If any audit or examination reveals that Client has underpaid SGL by more than five percent (5%) during the period to which the audit relates, the direct and reasonable costs of such audit or examination shall be borne by Client. If any audit or examination reveals that SGL has overcharged Client by more than five percent (5%) during the period to which the audit relates, the direct and reasonable costs of such audit or examination 18 19 shall be borne by SGL. Neither party shall audit the other party's records more often than twice per year. 20.2 In addition to the foregoing, Client shall have the right to have a third party perform an audit of SGL's records, if any, related to SGL's compliance with the Best Efforts covenant in Section 1.3. Client acknowledges the confidential and proprietary nature of SGL's records concerning SGL's compliance with Section 1.3. Such records may be audited on behalf of Client upon reasonable notice subject to the following confidentiality provisions. Records to be audited shall be made available for inspection only to an independent accounting firm designated by Client, and approved by SGL (which approval shall not be unreasonably withheld), and shall be provided pursuant to procedures designed to protect the confidentiality of such information in accordance with applicable contractual and legal requirements, including the omitting of names and other identifying material from the records before they are made available for inspection if required under contract or applicable law. Client and its designated accounting firm shall provide SGL with their respective confidentiality and hold harmless agreements in a form reasonably acceptable to SGL. Such agreements shall provide, in part, that the information shall be used solely for purposes of auditing SGL's compliance with this Section 1.3, and may not be used for any other purpose, nor copied, compiled, disclosed or removed from SGL's premises. The expenses of Client (including fees and expense of the designated independent accounting firm) shall be borne by Client. 20.3 Each party shall reimburse the other party on demand for all reasonable attorneys' fees, witness fees and court costs and reasonable expenses of counsel incurred in the successful enforcement by such other party of any right or remedy hereunder. 20.4 Each party shall give the other copies of the information described in Section 20.1 as it shall reasonably request to verify the accuracy of amounts paid or invoiced hereunder without resort to a full audit pursuant to Section 20.1, at the cost of the requesting party. 21. Survival: The provisions hereof related to Payment, Warranty, Indemnification, Property Rights, Confidentiality, Transition Services, Audit and Binding Arbitration will survive any termination of this Agreement. In addition, any other terms of this Agreement which by their terms extend beyond the termination of this Agreement shall remain in effect until fulfilled. 22. Successors and Assigns: This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successors and assigns. The sale or transfer of all or substantially all of the assets or 19 20 business of a party, without the transferee expressly assuming the obligations hereunder of the transferor, will be deemed a breach of this Agreement by transferor. 23. Non-Waiver: The failure of either party to enforce at any time any of the provisions of this Agreement or to require any act of performance hereunder shall not be construed a waiver of such provisions or right to performance nor in any way to affect the validity of this Agreement or the right of either party to, thereafter, enforce each and every provision or right to performance. 24. Savings Clause: The invalidity of, or inability to enforce any particular provision of this Agreement will not affect the other provisions of this Agreement, and this Agreement will be construed in all respects as if any invalid or unenforceable provision had been omitted. 25. Captions: The paragraph headings in this Agreement have been inserted for the purpose of convenience and ready reference. They do not purport to and shall not be deemed to define, limit or extend the scope or intent of the paragraph to which they pertain. 26. Entire Agreement: This Agreement and its schedules embody the entire agreement of the parties with respect to the subject matter contained herein. There are no promises, terms, conditions, or obligations other than those contained herein. This Agreement supersedes all previous and contemporaneous communications, representations or agreements, either verbal or written, between the parties with respect to its subject matter, including, but not limited to, the Memorandum of Understanding dated November 26, 1997, and the Memorandum of Understanding dated December 12, 1997. It shall not be modified except by a written agreement dated subsequent to the date of this Agreement and signed on behalf of SGL and the Client by their respective duly authorized representatives. 20 21 IN WITNESS WHEREOF, the parties have executed this Agreement as of the Effective Date. THE SUTHERLAND GROUP, LTD. QUARTERDECK CORPORATION By: /s/ Michael J. Russo By: /s/ Frank R. Greico Name: Name: Title: Title: 21 EX-27 7 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS SEP-30-1998 OCT-01-1997 DEC-31-1997 26,903 0 20,114 10,129 1,252 40,700 17,218 10,686 52,036 22,837 25,000 0 27,376 43 (23,309) 52,036 20,626 20,626 4,709 15,815 (497) 0 267 332 16 316 0 0 0 316 0.01 0.00
-----END PRIVACY-ENHANCED MESSAGE-----